WORLD PROPERTY CHANNEL ®

I don't know about you, but my blood pressure starts to creep up every time I hear of a new real estate-related scam.

Reverse mortgages are the latest bait.  Most of the media, print and electronic, are giving it little attention and exposure.

The coming scandal is expected to surpass even the dirty subprime mortgage outrages of 2006 to 2009.  The taxpayer, you and me, are still paying for that con job.

Lenders, as in the subprime mess, are holding the trigger again on the reverse mortgage scam.  They are hiring insurance agents to pull off the con because insurance agents supposedly can sweet-talk the "elderly" better than younger agents.

 All perfectly legal, but not morally correct in many instances, according to the obscure National Reverse Mortgage Lenders Association and the federal Housing and Urban Development which, apparently, has just awakened to the total taxpayer cost of the scheme.

Good ol' lumbering HUD.  The bureaucrats will be asking the Congress for $798 million to cover a little-known, little-publicized fast-depleting insurance fund called the FHA Insurance Fund.  It has been around since 1990.

The Fund, you see, pays lenders when they have to sell a house after the owner dies, or when the owner has no heirs to take over the property.

Here is how it works:

Take a hypothetical owner, who has to be 62 or older to begin with, and had about $90,000 equity in a home with a market value of $100,000 in say 2005. 

The homeowner asks the lender for a loan of $90,000.  In return, he turns over the property's deed to the lender, giving the lender full ownership in the home. The homeowner pays nothing more to the lender and lives mortgage-free until his death.

The hypothetical homeowner dies in 2009.  His estimated home's market value now is at $75,000, not $100,000 as it was in 2005 - but an estimated $50,000 in fees and commissions, which weren't fully explained to the homeowner - now bring the total owed on the house to $140,000.

That's the immoral part of the entire scheme.

When the bank goes to sell the property, the lender knows he is not going to receive more than $75,000, the current market value of the home.  That's where the FHA Insurance Fund kicks in.

The fund will pay the lender the difference between the new sales price and the original $90,000 loan, plus fees and commissions.

So, If the property sold for $75,000, the lender will collect another check from the FHA for $65,000.  That makes the lender "whole" again - even though he and the insurance agent have silently collected $50,000 in fees and commissions over a four-year period.

And get this -- under the current laws, the lender can be reimbursed by the FHA Insurance Fund even when the homeowner is still alive.

That happens when the balance owed on the mortgage reaches 98 percent of the original loan.  In this hypothetical case, that would be $88,200 on the $90,000 loan.

FHA payouts to lenders soared to $1.36 billion by May of this year.  That compares with $128,753 in 1993, according to Yonkers, NY-based Consumers Union, parent of Consumer Reports magazine.  The publication has investigated 500,000 recorded reverse mortgages over the past 20 years.

Reverse mortgages taken over by the FHA Fund shot up to $381 BILLION by 2008, up from $81 MILLION in 2003.

What can be done about lessening the pain to the taxpayer in this sort of deal?  Very little, say most the industry experts.

The reason:  More than 50 million Americans will be 62 or older by 2010, according the last federal Census.  And more than 80 percent own their homes.  The estimated equity in those homes is $4 TRILLION.

Many of those retired Baby Boomers will want to take cash out of their home to pay for any number of things. That's the "American Way."

The vehicle to do that will be Reverse Mortgages.

Wouldn't you go after a potential lucrative market like that, if you were an entrepreneur?

Of course you would. And that's what all the hype and type you are seeing on the Tube and in print these days is all about.

A sweet deal for the lender?  You bet.  Even the American and Sicilian Mafia families would salivate at a scheme like that.

But I don't like it one iota.

And that's the way I see it - for now.

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