By Nick Penzenstadler and Jeff Kelly Lowenstein | USA TODAY
In a stealth aftershock of the Great Recession, nearly 100,000 loans that allowed senior citizens to tap into their home equity have failed, blindsiding elderly borrowers and their families and dragging down property values in their neighborhoods.
In many cases, the worst toll has fallen on those ill-equipped to shoulder it: urban African Americans, many of whom worked for most of their lives, then found themselves struggling in retirement.
Alarming reports from federal investigators five years ago led the Department of Housing and Urban Development to initiate a series of changes to protect seniors. USA TODAY’s review of government foreclosure data found a generation of families fell through the cracks and continue to suffer from reverse mortgage loans written a decade ago.
These elderly homeowners were wooed into borrowing money through the special program by attractive sales pitches or a dire need for cash – or both. When they missed a paperwork deadline or fell behind on taxes or insurance, lenders moved swiftly to foreclose on the home. Those foreclosures wiped out hard-earned generational wealth built in the decades since the Fair Housing Act of 1968.
Leroy Roebuck, 86, rode the bus his entire career to a nearby curtain manufacturer. When he needed to make home repairs, he turned to reverse mortgages after seeing an ad on television.
Ten years ago, he forgot to renew his homeowners insurance, which cost about $2,000 a year. Including fees and penalties, his loan servicer says he now owes more than $20,000.
Roebuck’s first foreclosure notice came in the mail six years ago, and he is still fighting to hold on to the brick walk-up he bought from his parents in 1970, living in it through a special health exemption to foreclosure.
“I told my son, ‘Never. They ain’t gonna take this house,’ ” Roebuck said. “I’ll go to the deep blue sea, they’re not going to take this house.”
Elderly homeowners and their adult children told similar stories in big city neighborhoods across the USA.
Borrowers living near the poverty line in pockets of Chicago, Baltimore, Miami, Detroit, Philadelphia and Jacksonville, Florida, are among the hardest hit, according to a first-of-its-kind analysis of more than 1.3 million loan records. USA TODAY worked in partnership with with Grand Valley State University, with support from the McGraw Center for Business Journalism.
Consumer advocates said the analysis supports what they have complained about for years – that unscrupulous lenders targeted lower-income, black neighborhoods and encouraged elderly homeowners to borrow money while glossing over the risks and requirements.
USA TODAY found that reverse mortgages end in foreclosure six times more often in predominantly black neighborhoods than in neighborhoods that are 80% white.
Even comparing only poorer areas, black neighborhoods fare worse. In ZIP codes where most residents make less than $40,000, the analysis found reverse mortgage foreclosure rates were six times higher in black neighborhoods than in white ones.
The foreclosure disparity resembles a more familiar scenario from the late 2000s, when subprime lenders targeted specific neighborhoods with risky loans doomed to fail, according to the nation’s lead reverse mortgage researcher.
Stephanie Moulton, associate professor of public policy at Ohio State University, said cash-strapped minority borrowers were easy targets for “bad apple” reverse mortgage lenders capitalizing on a market shunned by traditional lenders.
“These areas had demand, and they couldn’t access credit any other way,” she said.
In hundreds of reverse mortgage default cases reviewed by USA TODAY, the homeowners’ original financial needs were basic, the kinds of challenges – house repairs and medical bills – that those with easier access to credit and more disposable income can weather with a second traditional mortgage or home equity loan.
Brokers desperate to replace income lost from the real estate crash with new commissions didn’t wait around for homeowners to come in seeking reverse mortgages, either. They went to where they knew people needed money and sometimes walked door-to-door, targeting houses with decaying roofs or leaky windows. Door hangers advertised a “tax-free” benefit for seniors.
Cherelle Parker, a councilwoman on Philadelphia’s north side, called reverse mortgages a scourge on her community that has put unnecessary financial and emotional strain on seniors. Not only has the area weathered more foreclosures, but the damage cuts deeper.
“Now that asset, that equity, is being drained out of some of the most vulnerable communities in America,” Parker said. “We’ve asked: Why was Philadelphia so targeted to get this loan product? … America should pay attention.”
The broader public also pays a steep price. Reverse mortgages are insured by a Federal Housing Administration fund, which is in the red more than $13.6 billion because of an increase in claims paid out to reverse mortgage lenders since the recession.
Federal regulators and industry leaders cautioned that numbers alone tell only part of the story, since many foreclosures result from the natural end of reverse mortgages: the homeowner’s death. The average term of a reverse mortgage is about seven years, and if a family member is not willing or able to repay the loan, lenders push the property through foreclosure.
Regulators said actual evictions of seniors are rare. There’s no way to verify that, though, since HUD, the top government regulator of Home Equity Conversion Mortgage loans, does not sign off on evictions – or even count them.
A foreclosure is a failure, no matter the trigger, said Sandy Jolley, a California consumer advocate and whistleblower who helped the government secure an $89 million penalty against reverse mortgage companies two years ago.
“For HUD or anyone else to say that people dying and foreclosure is the natural end to a reverse mortgage is ridiculous,” Jolley said. “No consumer gets into one of these thinking, ‘Eventually my home will go into foreclosure.’ All foreclosures are unnecessary, and this increase indicates a failure of the program to deliver on its promise.”
How reverse mortgages work
Reverse mortgages were invented in 1961 by a Maine lender trying to help a widow hold on to her home. The concept was piloted by the Reagan administration and exploded in popularity in the 2000s as a way for seniors to “age in place.”
They work like this: Lenders appraise the value of a house and allow homeowners to borrow back money against that market value.
Borrowers can stop making monthly mortgage payments, and they can stay put for life, so long as they maintain the home and pay property taxes and insurance. For years, reverse mortgages required no credit check and government-mandated financial counseling can be as easy as a 20-minute phone call.
At the end – a move out, death or default – the bank calls the loan due, to be paid back either by the sale of the home or an heir or homeowner repaying the loan money. Lenders and their investors make their money through origination fees that can top $15,000 with fees and mortgage insurance, and by charging interest on the loan balance.
For many homeowners, reverse mortgages are relatively safe, because the borrower is insulated from ever owing more than the initial appraised value of their home.
Problems emerged in the wake of “full-draw” loans in the late 2000s, when reverse mortgage lenders issued a lump sum to a borrower. Sales picked up as Americans began struggling financially and property values eroded.
Since reverse mortgages assume the home will continue to appreciate, loan balances in some cases ballooned well past the market value of a post-recession home. Inflated appraisals also played a role.
Leroy Roebuck’s home was appraised at $112,000 in 2008. That allowed him to take out up to $83,000 in equity. By the time he was solicited for a second reverse mortgage, an appraiser said it was worth $241,000, allowing him up to $163,000 more. He borrowed $102,000 in all.
The 104-year-old house near Temple University is worth far less today, about $165,000.
At the National Reverse Mortgage Lenders Association, President and CEO Peter Bell said ideal borrowers didn’t always match up with those targeted.
“We’re paying for an era where people were borrowing to survive,” Bell said. “We now look for people that are comfortable in their retirement with a plan and resources to maintain their basic obligations – but could use a little extra help for a particular need or quality of life.”
Foreclosures siphon life from struggling neighborhoods
The scar reverse mortgage failures leave on neighborhoods can be seen on a drive through Chicago’s South Side with longtime resident and community organizer Pat DeBonnett. A cluster of six ZIP codes together have endured more than 1,000 reverse mortgage foreclosures over the past five years – higher than many entire states. Boarded up homes and empty parcels followed.
DeBonnett points out blocks in the Roseland area as “absolutely devastated.”
Yale and 113th fits that description. In the 60628 ZIP code, it is the epicenter of the reverse mortgage foreclosure crisis, where more homes have been seized than anywhere else in the nation.
The house at the end of the block that abuts train tracks is intact, but many others along the leafy green street are either boarded up or vacant.
Empty single-family and bungalow-style houses dot many of the blocks in neighboring Pullman, a comparatively prosperous neighborhood that is home to the A. Philip Randolph Pullman Porter Museum. Named for the fabled labor leader, the museum honors black workers’ contributions to American history.
About 13,000 seniors live in the 60628, where lenders wrote about 760 reverse mortgages at the height of the program, through 2009. The loan origination rate – about 57 per 1,000 senior residents – is more than five times the national average. The foreclosure rate is even worse: more than nine times the average.
After foreclosing on a reverse mortgage, the Cook County Chancery Court taps people such as private attorney Gerald Nordgren to investigate who might have a claim to the house or be interested in buying it. For many family members, a conversation with Nordgren is the first they learn their parents signed reverse mortgage documents a decade ago.
“Adult children that have been trying to take care of their mother or father or both get the idea that ‘When mom or dad passes, I’m going to have a little inheritance or get this place on the market,’ ” Nordgren said. “Then the death happens and … here comes the foreclosure.”
That’s what happened to Lori Frazier, whose father, Charles, died at 88 of a heart attack in the family home a few miles west of Roseland, in Beverly. At that point, in December 2017, an unpaid $4,351 property tax bill led to the default.
Frazier tried to negotiate with the lender. Then her mother, Osie, died last May.
The loan servicer, Celink, filed a foreclosure lawsuit on the three-bedroom 1920s brick home. It had been in the family since 1974, after Osie came north from Mississippi and met Charles in Chicago.
Celink told Frazier in February that she could buy the house by paying off the loan’s balance: $209,053, including fees and interest. Frazier and her brother said it’s far more than they can afford to pay.
The impending loss of the house she grew up in weighs on Frazier, her children and grandchildren. Until the foreclosure is finalized, they have access to retrieve belongings.
As she packed, Frazier relived memories of a home filled with jazz music, playing in the cul-de-sac with children from other young families and sneaking out at night to visit her high school boyfriend.
Her older daughter, Antoni, shares her mother’s ache. As she tried on one of her grandmother’s winter coats at the house on a brisk morning in February, she recalled annual block picnics and holiday celebrations.
“It’s devastating to hear that no one can save it; all those years and everything they worked for,” she said. “They were retired and living on a pension. What happened?”
The Frazier family foreclosure is not happening in a vacuum. Each foreclosure depresses home values within about 600 feet by 1%, according to a study in 2006 in the journal Housing Studies. As foreclosures mount, the study says, that figure compounds.
Five foreclosures in a few city blocks means a 5% loss for every neighbor.
Grieving spouses face eviction
Patricia Blair moved back into her family home in 2004 and helped care for her mother, purchasing it three years later when her mother moved to a senior facility.
The row home on Lehigh Avenue is in a neighborhood that’s 94% African American.
In 2010, when brokers from Consumer Credit Counseling visited the North Philadelphia home Blair then shared with her husband, Richard was 62 and she was 60 – below the federal threshold to qualify for a reverse mortgage. So they could receive the $35,000 loan, her name was taken off the title, and she became what’s known in the industry as a “non-borrowing spouse.”
When Richard died in 2016, Reverse Mortgage Solutions – the lender – launched a foreclosure action by suing Blair.
Widows not on the title must meet various deadlines – at 90 and 120 days after the death – to provide their loan companies with death certificates and other documents.
Blair sent in paperwork she thought solved the problem. She discovered she had missed one document – changing the deed to her name within 90 days – months later after a foreclosure notice arrived in her mailbox.
Blair is meticulous about her life, paying her bills on time, keeping her house impeccably neat. She has organized every scrap of paperwork tied to her reverse mortgage into handbags she’s lugged with her to Philadelphia’s downtown courthouse.
She said she can’t understand why she needs to move out. Just thinking about it makes her sob.
“Even though my husband didn’t have a will, I know the facts: I’m his wife of 40 years,” Blair said. “How do you think I don’t deserve to be here?”
After battling for almost four years with the help of two attorneys, Blair has given up. Now 69, she plans to move to an apartment this year.
Blair’s situation is not as unusual as it may sound.
Even when both husband and wife are old enough to qualify, reverse mortgage lenders often advise them to remove the younger spouse from loans and titles. Federal rules allow people to take out more money if they are older based on actuarial tables showing they have fewer years left to live.
A higher loan balance means higher closing costs and a bigger commission for brokers.
In response to a lawsuit filed by AARP, the federal government took action in 2014 to protect surviving spouses by giving them additional time if their names were not on the loans.
That doesn’t include those such as Blair whose loans predate that solution, adding to the spike in foreclosures of loans issued at the height of the recession.
Nearly 50 homes in Blair’s neighborhood had reverse mortgages that failed in the past five years. That puts her area in the top 1% of all ZIP codes nationwide with at least one foreclosure.
Bell, the National Reverse Mortgage Lending Association president, said lenders would prefer to extend the deadlines for older borrowers but fear violating HUD guidelines. The federal agency is considering that action.
“No matter how heinous or heartbreaking the case, it’s not our call. There’s no wiggle room,” said Leslie Flynn, a senior vice president at Reverse Mortgage Solutions, a lender. “It takes a toll on employees.”
Sales pitches targeted seniors
For years, reverse mortgage companies have blitzed daytime television with trusted celebrity pitchmen, including Fred Thompson, Henry Winkler and Robert Wagner.
Ads aired primarily on daytime syndicated programs such as “M*A*S*H” and game shows such as “Wheel of Fortune,” inviting seniors to “call now” to the 800 number on screen.
Winkler worked for One Reverse Mortgage, an online bank under the Quicken Loans umbrella. In one television spot, he told viewers if they “call now,” they would receive a free magnifying glass to read the fine print of their reverse mortgage.
Like the others, he doesn’t disclose that he’s a paid pitchman, not a satisfied consumer. Winkler, through his publicist, declined to comment.
Marketing pitches for reverse mortgages also came right to seniors’ doorsteps through mailers, door hangers and door-to-door salesmen.
They offered to “eliminate monthly payments permanently” with “a risk-free way of being able to access home equity” – neither of which is true, according to the Consumer Financial Protection Bureau. “Always retain ownership,” “remain in your home as long as you wish” and “you can’t be forced to leave” were other frequent hooks, according to investigations by federal regulators.
Phyllis Sharp, 78, found a hanger from Maryland-based All Financial Services on her doorknob in 2011. The same hanger seemed to adorn every front door in her South Philadelphia neighborhood, she said.
As a retired college pastry chef, Sharp felt pinched financially. She was attracted to the seemingly risk-free solution, using the $56,000 loan to pay off the $33,000 she owed on her traditional mortgage and do some repairs, including new windows. Today, her dispute is more complex than most: Sharp said she never received an $18,000 installment check the lender said it sent her.
Sharp’s daughter, Monique, suspects her mother’s predominantly black and gentrifying neighborhood was targeted by the lenders because its home values were rising.
“This (home) is something you got on your own, and now somebody is coming and trying to take your hard work away,” she said. “It’s malicious.”
10 questions to ask about reverse mortgages
Experts suggest seniors and their family members have an open discussion about these topics before they apply for a reverse mortgage. Here is a downloadable guide to help start those conversations.
Representatives from All Financial Services did not respond to written questions for this report.
A 750-member class-action suit in 2011 accused Urban Financial Group of targeting African American women homeowners with deceptive marketing and unfavorable loan rates in some West and South Side neighborhoods of Chicago.
The homeowners’ law firm hired a statistician, who found that, in one year, 70% of Urban Financial loans in Chicago went to areas that were at least 80% African American. From 2001 to 2009, the company wrote more than half of its reverse mortgages in ZIP codes that were 80% black, according to USA TODAY’s analysis.
The suit alleged brokers targeted the minority homeowners for the “mortgage products and overpriced home repair work that they did not need or cannot afford” to capitalize on elderly widows unaccustomed to both the home’s finances and home repair.
The lead plaintiff in the class-action suit was an 85-year-old widow. She took out a $181,800 reverse mortgage with high interest and more than $12,700 in closing costs, fees and premiums. Normal closing costs for loans of other types range from 2% to 6% – or as low as $3,600 in her case.
Urban signed a settlement agreement in 2013 denying all wrongdoing and paying borrowers $672,000.
Corporate upheaval has marked reverse market
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. But, the HUD data shows, the number and percentage of loans to residents of black neighborhoods accelerated. 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.
The company routinely sent out 10,000-piece direct mail campaigns that blanketed the St. Louis metro area, Teal said. He said his company did not target specific neighborhoods or races.
“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.”
As loan activity spiked in 2009, a wave of complaints about marketing and servicing prompted the Obama administration and state authorities to crack down.
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.”
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That didn’t solve the problems. Four years later, the bureau put out a consumer alert about continued deceptive marketing, and in 2016, 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.
Small issues snowball for senior
Leroy Roebuck’s loan is held by Reverse Mortgage Solutions, but his experience follows the twists and turns in the industry.
When Roebuck forgot to pay his insurance bill in 2010 and it cascaded into a foreclosure proceeding, Bank of America was his lender. Responding to the missed payment, the bank took out its own insurance policy for $5,000 on the home and added the bill to his loan balance.
Bank of America announced it was leaving the market in 2011, and the next year, it transferred Roebuck’s loan to Champion Mortgage, a lending division of Texas-based Nationstar. After that transfer, Roebuck’s tab mysteriously snowballed to $11,000. It hit $17,000 by 2014. Champion Mortgage attributed the increase to unpaid taxes, insurance and various “costs and counsel fees.”
That final bump triggered the foreclosure.
Roebuck entered a city-run diversion program to try to negotiate a proposed repayment plan – which was rejected by the lenders. The loan was transferred to Reverse Mortgage Solutions the following year. That company tacked on more fees, making his tab nearly $20,000.
A Reverse Mortgage Solutions spokesman declined to answer a series of written questions for this report.
Even as Roebuck struggled, those in charge of Reverse Mortgage Solutions continued to profit. The Tampa-based lender has been led by four CEOs since 2016, many of whom reaped huge corporate bonuses even as the company foundered.
Anthony Renzi, president and CEO of Walter Investment Management, received a compensation package of $5 million in 2016 for four months of work, while the company’s stock slid 62% largely because of corporate debt and a long string of financial loses that earned it the “worst performing company” label from a business journal.
By then, with the help of another low-cost community attorney, Roebuck, partially blind and arthritic, had received a health deferment of his foreclosure. He has filed both Chapter 7 and 13 bankruptcy and lives in the home year-to-year, at the mercy of a judge continuing to rule in his favor.
“This is like a nightmare, man,” he said.
This report was supported by The McGraw Center for Business Journalism at the Newmark Graduate School of Journalism at the City University of New York. Jeff Kelly Lowenstein is an assistant professor of multimedia journalism at Grand Valley State University. He formerly was a lecturer at Columbia College Chicago and was a database and investigative editor at Hoy Chicago. His students, Allison Donahue, Jamie Fleury and Shirley Keys, contributed to this report.
This article originally appeared on USA TODAY: Seniors were sold a risk-free retirement with reverse mortgages. Now they face foreclosure.