As reverse mortgages exploded in popularity from 2001 to 2009, three lenders originated a third of the new loans – nearly 200,000 in all.
Since then, Bank of America and Wells Fargo have exited the market and the second largest lender, Financial Freedom, faced massive federal penalties related to false reverse mortgage insurance claims as it was sold to other banks.
In their wake, the market began to fragment. The top two lenders – California-based American Advisors Group and One Reverse Mortgage – together account for about one in five new loans.
Around 1997, something else had started to shift. Until then, residents in African American ZIP codes had received fewer than 200 reverse mortgages per year. Throughout the 2000s, they took on the loans at two to three times their share of the population.
Small-volume lenders such as Best Mortgage Services in Detroit and Gateway Reverse Mortgage Group in St. Louis wrote 81% and 63% of their loans respectively in neighborhoods that are predominantly black.
The figures surprised Jonathan Teal, former owner of Gateway. He folded the company in 2011 in the wake of the Dodd-Frank Act, which he said overregulated lending.
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“We weren‘t cold-calling anyone; we’d contact whoever responded to our mail.” Teal said. “Of course, I would prefer larger, higher-value homes, but . you take what you can get.”
Six states issued penalties against one lender, American Advisors Group, claiming deceptive marketing and fraud in direct-mail solicitation that posed as official government correspondence, marked “Notice of Government Benefits.”
In 2011, the Consumer Financial Protection Bureau directed all reverse mortgage advertisers to disclose that the loans must be repaid after death or a move-out and aren’t a “government benefit” or “risk free.”
We want to hear about your experience with reverse mortgages, especially ones that ended in foreclosure or eviction.
That didn’t solve the problems. Four years later, the bureau put out a consumer alert about continued , it fined three companies $790,000: American Advisors, Aegean Financial and Reverse Mortgage Solutions.
Reverse Mortgage Solutions ramped up its sales pitch to seniors with a false sense of urgency, according to the government. One call script told potential customers they needed to sign by the end of the day, or the company would “turn your file down and you will miss out on a tremendous money-saving opportunity.”
In the wake of sanctions on advertising, as well as improved underwriting and a financial assessment tool, fewer seniors take out reverse mortgages. At its peak toward the end of the past decade, 114,000 loans were written. By last year, that had dropped to less than 50,000.
Like the allowances for widows in 2014, many of the changes did nothing to protect the thousands of homeowners who already had paid millions to the lenders who wrote their loans. And many do little to stop the aggressive servicing of those loans that can push seniors closer to foreclosure.
The three companies accepted the CFPB penalties without admitting wrongdoing. In a statement after the penalty, American Advisors Group committed to comply with federal advertising.
The parent company of Reverse Mortgage Solutions, Ditech Holding, filed for Chapter 11 bankruptcy this February for the second time in 14 months. In April, Ditech asked that loan foreclosures be allowed to continue during the bankruptcy proceeding, and a judge agreed.