Rosy scenarios are misleading

Overly optimistic projections about increasing home values and low interest rates can cause disappointments down the road for families.

"Reverse-mortgage ads promise that seniors will still be able to pass on the equity in their homes to their heirs, but what they fail to mention is that there's a good chance there won't be any equity left," says Prescott Cole, senior staff attorney at California Advocates for Nursing Home Reform.

Case in point: Brett and Cathy Palmer of La Verne, Calif., received a notice from Wilmington Savings Fund Society Bank shortly after Cathy's mother, Joyce Taylor, died in November 2007. The notice stated that the balance was due on Taylor's reverse mortgage. Taylor had taken a total advance of just more than $77,000 since the loan had been issued in 1993, but fees, interest, and other charges drove up the amount due to about $588,000.

The Palmers eventually offered to pay $430,000 to keep the home, but the bank took possession of the property in April 2009. "There's no question that my mother-in-law never would have applied for this loan if she'd realized it could mean the bank would end up with her house instead of us," Brett Palmer says.

Wilmington Savings Fund Society did not originally market the reverse mortgage to Taylor and now only serves as the loan's servicer, says Stephanie A. Heist, a vice president and spokeswoman.

Julia Wysong, coordinator of Financial Abuse Specialist Team, a community-service group in Ventura County, Calif., says, "Loan officers show borrowers an amortization form that projects what the value of the home will be over the next 15 or 20 years. But when they want to make a sale, I've seen them use figures that present a misleadingly optimistic picture, such as assuming that your home will appreciate at an annual rate of 8 percent or that your interest rate will remain the same throughout the life of the loan, which is especially unrealistic now when the most likely future direction for adjustable interest rates is up."

The amount of money involved in the loans makes borrowers ripe targets for potentially shady schemes.

Miguel and Laura Posada, both now in their mid-80s, were living comfortably in retirement in 2005 near Sacramento, Calif., on pension income and retirement savings in a modest home they owned free and clear. They responded to a direct-mail solicitation from a mortgage broker, who persuaded them to take out a reverse mortgage.

According to their attorney, Mark A. Redmond, the broker, Felix Rivera, was employed by U.S. Financial Mortgage, a lender in Roseville, Calif., and he convinced the Posadas that they needed the cash from a reverse mortgage to purchase deferred annuities and that he knew an attorney who would "prequalify" them to receive health-care benefits from Medi-Cal, California's Medicaid program.

The Posadas' complaint, which was filed in California Superior Court, states that the annuities paid an interest rate of 3.5 percent, less than the 6 percent interest they were being charged on the reverse mortgage. Though they could withdraw 10 percent of the money invested in the annuities per year, they would not have penalty-free access to the full amount until Miguel was 95 and Laura was 98.