Loan plans result in reversal of fortune

Homeowners who took out reverse mortgages now face foreclosure

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 struggled in retirement.

Alarming reports from federal investigators five years ago led the Department of Housing and Urban Development to initiate changes to protect seniors. USA TODAY’s review of government foreclosure data found a generation of families fell through the cracks, suffering from reverse mortgage loans written a decade ago.

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 Philadelphia 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.”

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 partnered 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: 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 far worse.

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 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.

“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 special Federal Housing Administration fund, which is in the red more than $13.6 billion because of an increase of 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.

“No consumer gets into one of these thinking, ‘Eventually my home will go into foreclosure,’ ” Jolley said. “All foreclosures are unnecessary, and this increase indicates a failure of the program to deliver on its promise.”

Reverse mortgages were invented in 1961 by a Maine lender trying to help a widow hold on to her home. The concept 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 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, even today, government-mandated financial counseling can be 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.

For many homeowners, reverse mortgages are relatively safe, because the borrower is insulated from ever owing more than the initial appraised value of the 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.

Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, 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 ... but could use a little extra help for a particular need or quality of life.”

Six ZIP codes clustered on Chicago’s South Side 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.

About 13,000 seniors live in the 60628, the epicenter of the crisis, 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.

“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.”

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 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.