Some reverse mortgages are perilous for the unwary


A PENDING nationwide class action settlement reveals how costly home mortgages can get, especially for unwary senior homeowners and their families.

The settlement involves a controversial form of reverse mortgage coupled with an annuity that was marketed by Transamerica Corp. and serviced by Financial Freedom Senior Funding Corp., a subsidiary of Wall Street investment banker Lehman Brothers.

Financial Freedom is the largest originator and servicer of reverse mortgages in the country.

At its extreme, the program produced transactions such as the following: A New York homeowner took out a reverse mortgage and received $58,000 in cash payouts spread over a 32-month period. She then died. When her home was sold a few months later, Financial Freedom demanded more than $765,000 as repayment under the contract terms of its reverse mortgage.

More than three-quarters of a million dollars to repay a $58,000 loan? Read it and weep.

Reverse mortgages are designed to convert homeowners' equity into spendable cash for "house rich, cash poor" seniors.

The amounts borrowed typically need not be repaid, plus interest, until after the homeowner dies, sells the house or moves out. Loans are restricted to persons 62 years or older.

Though most reverse mortgages now are insured by the Federal Housing Administration, a handful of private companies have specialized in their own custom-designed programs.

Some - especially those targeted at homes in higher-priced metropolitan areas - have contained "shared appreciation" features that cut the lender into the appreciated value of the property.

A Transamerica subsidiary, HomeFirst, offered a plan in the 1990s that contained a standard 50 percent appreciation share on top of regular interest, a mandatory annuity purchase benefiting only the lender, plus substantial other fees. HomeFirst and its portfolio of shared appreciation mortgages were acquired in 1999 by Financial Freedom, the Lehman subsidiary.

The pending settlement is intended to end a series of class action suits filed against Transamerica, Financial Freedom and annuity provider Metropolitan Life Insurance Co. All the participants in the suits and their lawyers are under a gag order mandated by the settlement, and are prohibited from discussing any aspect of the arrangements.

However, the essentials of the settlement, plus the original charges brought by aggrieved homeowners and their heirs, were available last week on the Web site of the settlement claims administrator ( Under the proposed settlement:

The defendant firms deny all allegations that they misled or defrauded elderly homeowners by persuading them to sign up for predatory mortgages carrying excessive fees and abusive terms.

A nationwide class of approximately 1,588 homeowners or their estates will receive partial repayments of some of the appreciation-sharing fees they have disputed or paid. The total settlement payouts by Financial Freedom, Transamerica and MetLife will be for $8 million. A maximum of 29 percent of that - $2.32 million - will come off the top as payment to the trial lawyers who negotiated the settlement. Roughly $5.2 million will be distributed by formula among the settlement class members, unless they opt out. Though some claimants will be eligible for large sums, the average payout will come to $3,325.

A "fairness hearing" on the settlement is scheduled for May 14 in Redwood City, Calif.

Relatives of the deceased New York reverse mortgage borrower, Lacy S. Eckhardt, have not decided whether to accept inclusion in the settlement or to keep fighting Financial Freedom Senior Funding independently.

Eckhardt's estate currently is in arbitration proceedings (the reverse mortgage contract prohibited court litigation by borrowers or their heirs) and the total demanded by the lenders for the $58,000 loan now has ballooned to $850,000, including back interest. The family estimates that it already has spent more than $100,000 in legal fees in the arbitration proceedings.

Eckhardt's children claim their mother's experience with Transamerica/Financial Freedom's reverse mortgage was particularly egregious. She was charged $40,453 for an annuity that carried no death benefits, no cash surrender value and paid her nothing during her lifetime. The sole beneficiary was the lender.

The family's complaint also charged that Eckhardt was ill at the time of signing up for the reverse mortgage, and therefore agreed to "unconscionably high" fees without professional guidance or discussions with the family.

Equally bad, according to the complaint, was the "artificially low appraisal" performed by an appraiser under contract with the lender, which "guaranteed [the lender] a profit [through the 50 percent appreciation-sharing feature] of at least $225,000 even if [Eckhardt] died the day after making the loan."

In response to the complaint, a lawyer representing the lender said Eckhardt applied for the loan of her own volition and received full disclosure of the terms.

The upshot of this case and the pending settlement for seniors and their families? If you are considering a reverse mortgage, look hard and long at the terms.

And if you spot questionable fees or appreciation-sharing, forget the whole idea.

Ken Harney's e-mail address is

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