Rethinking the New Homebuyers Tax Credit

The government’s $8,000 tax credit to new homebuyers has been under a lot of scrutiny in recent months. The tax credit was designed to help stimulate the housing market and lead to increased home ownership. To that end, it has been extremely successful. However, abuses within the system appear to have also been quite high. While the reverse mortgage industry found itself under scrutiny for what appear to be under about a dozen complaints, the federal government has started 167 criminal investigations and 107,000 civil investigations into possible fraud. Of the 1.4 million people who claimed the over 10 billion dollars in tax credits in 2008-2009, 60% had incomes under $50,000– leading to questions as to whether they could even afford a home.

The new homebuyer tax credit has certainly had many positive effects. Of the 1.4 million home sales, 350,000 to 400,000 were estimated to be a direct result of the credit’s availability. That accounts for 25-30% of the eligible home sales. In some areas, real estate agents have reported that up to 70% of their clients were considering buying a home as a direct result of the tax credit. With sales of existing homes at their highest level in two years, many are attributing the strong numbers to the tax credit, which expires November 30. Sales increased 9.4% in September according to the National Association of Realtors.

So which is it? It seems that the tax credit likely has had a positive effect on the market. However, the rock-bottom prices and increased inventory have also likely contributed to many first-time buyers choosing to enter the market. The increase in first-time homebuyers is a good sign for the real estate industry, but it is still a disconcerting one. If 60% of the 1.4 million people who claimed the tax credit from 2008-2009 had incomes of under $50,000, could they really afford to own a home? Will we see another foreclosure crisis within the mortgage industry down the line as these homebuyers are faced with rising rates or declining incomes? The answer to these questions remains to be seen.

While the pros of the tax credit may outweigh the cons, with the damage to the real estate industry wiping out the savings of many throughout the country, if the credit is extended, it should be done so with caution. While the image of every American owning a home is a promising one, the government has an obligation to ensure that those owning homes can actually afford to do so. Otherwise, history is at risk of repeating itself.

Sources: The New York Times: Home Tax Credit Audit Shows Abuses
The New York Times: Tax Credit Lifts Home Sales to Two-Year High
The Associated Press: Northeast Home Resales Post 11 Pct Annual Increase

Wall Street Journal Publishes Front Page Article on Website on Reverse Mortgage Fraud

This morning the Wall Street Journal published an article on reverse mortgage fraud on the front page of their website. It is likely the article will make it into tomorrow’s print edition. The article focuses on the allegedly growing number of reverse mortgage scams, but a closer look at the cases in the article indicates that they appear to be more cases of elder abuse than problems with the reverse mortgage program.

In the case that leads off the article, the borrower was defrauded by the title agent, who defrauded 10 borrowers by taking their money and never giving it to the lender. The title agent, Garry Martin, pleaded guilty to stealing $5 million from over 50 borrowers in mortgage-related frauds. But as the perpetrator of the fraud was a title agent, not indicating a problem with the product at large.

The other two cases mentioned were examples of elder abuse or simple fraud. In one, the son took the mother’s payments. In another, the son took out a reverse mortgage in the name of a deceased mother. He even gave the funeral director an incorrect social security number and birthdate so that the death certificate could not be found by those with the correct information. In both of these cases, the fraud extended far beyond a reverse mortgage.

Reverse mortgages have a lot of protection built in to protect borrowers from fraud, and loan officers in most states and specifically trained in order to discover and prevent fraud. Fraud occurs with almost any financial product, but 29 suspected fraud cases out of 165,000 reverse mortgage loans still indicates a pretty safe product- with fraud only occuring at a rate of 0.02% of the time.

More information is also available at reverse mortgage fraud and scams.

Insurance Against Financial Fraud/Swindling

Reverse Mortgage Daily wrote a blog post today focusing on the case of a man in Minnesota who pleaded guilty to swindling his mother and was sentenced to the maximum thirty days in jail and five years of probation. Amongst the ways the man swindled his mother was through a reverse mortgage, and the writer wondered if there was a way to protect seniors from such crimes without harming the reverse mortgage industry.

I think the answer is yes.

Every year there are several stories of individuals who have been swindled out of their life savings. We could protect those individuals without harming the reverse mortgage industry by allowing them to buy insurance that would protect their life’s savings if someone has been convicted of defrauding or swindling them, allowing them to replace a portion of the money they have lost and ensuring that they still have money to live on in their old age.

Private companies and/or states could offer insurance against swindling/financial fraud. The insurance could be either mandatory or optional, and could taken out by the policy holder at any point throughout their life. In the same way the FDIC ensures up to $100,000 of each individual’s money in case of a bank failure, the financial fraud insurance would serve to protect an individual’s life savings against instances of swindling, theft, or fraud. While the policy would not necessarily be unlimited, policies of even up to $100,000 could do a lot to ensure that individual’s life savings are protected. Although cases of fraud are not incredibly common, they can be catastrophic to the individuals involved when they do occur. These policies would benefit those involved in something like the Madoff scandal as well.

The only way to collect on the insurance policy would be to show that an individual and/or corporation had been convicted of swindling the policy holder. In this case, the guilty plea from the son would be sufficient to guarantee the mother her pay out. If such insurance existed and the mother was able to collect on it, she would be left with more than the eighty dollars currently remaining in her bank account.

Correction: The man was sentenced to thirty days in jail, not thirty years.

Power of Attorney: What you need to know

The last time we talked about power of attorney was during the fraud series and how to safeguard seniors from friends and family that may take out a reverse mortgage without the borrower’s knowledge. But here are some facts that will be helpful for you to know when using a Power of Attorney.

Power of Attorney can only be used for 2 reasons. First, when the customer cannot sign the loans due to physical or mental inability. In this situation, a doctor’s note must be obtained stating that the borrower cannot sign due to either mental or physical inability. The note must also state the date that the borrower came into their care and their debilitating condition. In this case the borrower does not need to complete HECM counseling and the POA must attend on the borrower’s hehalf.

The second reason a power of attorney can be used if it is more convenient for the power of attorney to sign because the borrower chooses not to deal with the process. In this case, the borrower must complete the HECM counseling themselves and sign both the HECM counseling certificate and loan application. It is only a total of 5 signatures, and the POA may sign the rest of the documents. It is also reccommended that the POA attend the HECM counseling as well.

And if you have not noticed, we launched our new site this afternoon. Like the new look?

Reverse Mortgage Fraud Part 3: And The Verdict Is…

Protect your identity. Fraud rates are increasing.

We knew that the mortgage fraud was occurring. We imagined the number was increasing, but we never knew by how much… until now. The Philadelphia Inquirer published a story today noting that mortgage fraud increased by 26% in 2008 vs. 2007. Application fraud accounted for 61% of the reported incidents. The article specifically cites identity theft as being a source of fraud in reverse mortgage applications, allowing applicants to appear older (or perhaps younger) than they might otherwise be for the purpose of securing a better loan.

While these numbers include more than just reverse mortgages, they help provide factual support to the conclusion that mortgage fraud is more prevalent now than it was during the real estate boom. Both lenders and mortgagors should use caution to make sure they do not become another statistic. The growing marketplace means more avenues are available to those wishing to commit mortgage fraud–regardless of which kind of mortgage the mortgagor wishes to take out.

Reverse Mortgage Fraud Part 2: The Power of Attorney

Yesterday we discusssed the potential for reverse mortgage fraud through questionable occupancy. Today, we will discuss a far more serious type of reverse mortgage fraud– fraud through power of attorney.

The power of attorney is when an individual is legally authorized to act for another individual with trust and confidence. However, this can pose a problem in the case of reverse mortgages if the homeowner did not want to take out the reverse mortgage or if the money from the reverse mortgage is funneled improperly, amongst other things.

While it is important for both seniors and lenders to be on guard against this type of reverse mortgage fraud, it is particularly easy for lenders to take action. Lenders should make sure that the person who gave power of attorney really gave it, as it is something that can be forged. The person who is taking out the reverse mortgage should also still have an understanding of what it is they are doing. Brokers generally recommend writing letters of explanation containing the reasons behind a power of attorney to help answer any questions that others might have and prevent the process from being held up unnecessarily. An investigation into the circumstances can often uncover whether the power of attorney is legitimate or fraudulent.

Seniors should do their best to educate themselves and know the facts behind a reverse mortgage. They should make sure that it is clear to whomever holds power of attorney, as well as their broker, whether or not they consent to the reverse mortgage.

Reverse Mortgage Fraud Part One: Empty Chairs and Empty Tables

an empty home

As the recession worsens and people become more desperate, reverse mortgage fraud has increased. The type of fraud I am speaking of is not being commited by lenders but by “homeowners”.

In Florida, a lender recently reported declining 15 reverse mortgages due to “questionable occupancy [characteristics].” In other words, they did not believe that the senior lived in the home they were taking out a mortgage on. The firm now requires interior photos of the home complete with dishes, blankets, and food to prove that the homeowner actually resides there.

Between an appraisal and photographs of the home, with adequate due diligence this should be an easy type of fraud for lenders to watch out for and effectively thwart. Seniors should also be aware that they may be asked for proof of occupancy when they apply for a reverse mortgage as a safeguard against fraud.

Stay tuned tomorrow for the second article in our fraud series: Power of Attorney Fraud