Some reverse-mortgage schemes seem immoral
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WASHINGTON — Consider this exceptional financing opportunity for your home: The lender gives you $58,000 in cash over a 32-month period. When your home is sold a few months later, you owe the lender more than $765,000.
Sound like a nightmare? It's not. It's an actual mortgage transaction that a subsidiary of the prominent Wall Street firm of Lehman Brothers insists is legal, fair and precisely what the borrower requested.
Lehman's subsidiary, Financial Freedom Senior Funding Corp., is demanding that huge payout from the estate of Lacy S. Eckhardt, a widow who signed up for a reverse mortgage in April 1998. Eckhardt died in December 2000. When her children sold her home the following spring, they were stunned to receive a "Final Loan Payoff Demand" of $765,112.13 from Financial Freedom, based in Irvine, Calif.
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How could that be? Welcome to the world of reverse mortgages, where poorly advised seniors — and their heirs — can lose tens of thousands of dollars almost overnight.
Eckhardt's daughter, Catharine Earhardt, recalls that "we knew that she had taken out a reverse mortgage, but we had no idea of the details. When we read the (loan) documents (after her death), we were horrified."
Reverse mortgages are designed to produce income for seniors by converting home ownership equity into spendable cash. The amounts borrowed, plus interest and fees, typically need not be repaid until after the homeowner dies, sells the property or moves out.
Some reverse mortgages contain equity-sharing or appreciation-sharing features designed to cut the lender into a portion of the appreciated value of the home at the time of sale. In Eckhardt's case, the appreciation-sharing percentage was unusually generous — 50 percent to the lender. The loan terms also required Eckhardt to purchase an annuity that would not pay her a cent until 2012. Assuming she was still alive, the annuity would then pay $1,816 per month, in place of payments from the lender.
Eckhardt paid $40,453 up front for the annuity, but it carried no death benefit or cash surrender value. At the time she applied for the loan, Eckhardt was 69 and in chronically poor health with frequent hospitalizations, according to her family.
In a complaint filed in Westchester County, New York, Eckhardt's estate claims that she was misled into applying for a mortgage with "unconscionably high" costs, without counseling or legal guidance. The complaint also alleges that she received an "artificially low appraisal," which when combined with the appreciation-sharing feature, allowed the lender to be "guaranteed a profit of at least $225,500 even if (Eckhardt) died the day after making the loan," according to the complaint.
The appraisal arranged by the lender valued the property at $980,000. Two appraisals paid for by Eckhardt's estate put the market value around $1.425 million at the time of the loan. The estate sold the home in May 2001 for $2.2 million — more than double the reverse mortgage appraisal value. A local realty agent said that the $980,000 value placed on the home was so low "there would have been a buyers' stampede" if it had been listed for sale.
The Eckhardt complaint entered a mandatory arbitration proceeding, now under way.
In defense of the $765,000 payout demand a lawyer for Financial Freedom said Eckhardt applied for the loan of her own volition and received full disclosure of the terms. James Mahoney, CEO of Financial Freedom and co-chairman of the National Reverse Mortgage Lenders Association, noted that Eckhardt's loan was originally made by Transamerica Home First, whose assets were acquired by Financial Freedom. A major class-action suit against Transamerica Home First has been filed in California, alleging predatory lending practices in connection with loans similar to Eckhardt's. That case is scheduled for trial in September.
The Lehman Brothers connection is significant. Lehman acquired control of Financial Freedom two years ago. The Wall Street investment bank pools high-return loans such as Eckhardt's into multimillion-dollar bonds, and sells pieces to private investors.
Financial Freedom says it no longer makes appreciation-share reverse mortgages like Eckhardt's. But substantial numbers of them still exist nationwide. Given the high rates of home appreciation over the past five years, giant payoffs even larger than Eckhardt's are ticking time bombs in high-cost markets around the country.
Fannie Mae, the giant home-loan investor, once funded appreciation-share reverse mortgages, but stopped when confronted with the prospect of embarrassingly high early payoffs harmful to seniors and their heirs.
Kenneth Harney's e-mail address is kenharney@aol.com.