By Charles Duhigg
Erika Baker was 67 years old, divorced and worried about her job when a saleswoman showed up at her door in late 2006.
A reverse mortgage, the saleswoman explained, would give Baker instant access to hundreds of thousands of dollars tied up in the value of her home. Such a loan, typically available only to homeowners in their 60s and older, would not have to be repaid until Baker moved out, the saleswoman said.
And if she never moved, the loan would be settled by selling her house after she died. "Your Home Pays You Cash!" read a brochure the saleswoman left behind.
Baker, who lives just outside San Diego, jumped at the offer, borrowing a little more than $200,000 through a company called Senior American Funding.
Then the problems began. The saleswoman pressured her to put the proceeds of the loan into complex investments that put her money out of reach, Baker said. She received only about $33,000 in cash, far less than she needed for her final years.
"I thought this was a safe way to make sure I'd never run out of money," Baker said. "Then everything became so confusing. No matter where I turned for help, it seemed like things got worse."
As the United States has become an older nation, reverse mortgages have grown into a $20 billion-a-year industry, with elderly homeowners taking out more than 132,000 such loans in 2007, an increase of more than 270 percent from two years earlier.
In surveys, many borrowers say reverse mortgages have improved their lives and provided the money they needed for retirement.
But hundreds of people who have sought reverse mortgages — in lawsuits, surveys and conversations with elder-care advocates — have complained about high-pressure or unethical sales tactics they say steered them toward loans with very high fees. Some say they were tricked into putting proceeds of their loans into unprofitable investments, while sales agents pocketed rich commissions.
"Every scam artist is getting into this business," said Prescott Cole, an elder-care advocate who has worked with numerous reverse-mortgage borrowers. "Because reverse mortgages are so complicated and give you money up front, years can pass before a senior realizes they've lost everything."
Reverse-mortgage lenders and brokers dispute those accusations, noting that the loans are heavily regulated and have helped hundreds of thousands of people.
"For a lot of elderly people, their only real asset is their house," said Peter Bell, president of the National Reverse Mortgage Lenders Association, a trade group. "A reverse mortgage is one of the few ways someone can access wealth that's otherwise out of reach, while still living in their house for as long as they want."
However, some borrowers find their wealth is still out of grasp, even after they have sought a reverse mortgage.
For example, Senior American Funding, the company that sold Baker her loan, has been sued three times in the past 13 months by clients who said they were misled. (Two of those cases were settled out of court for undisclosed sums. The third, filed by Baker in California state court last month, is pending.)
The company, which is licensed in 16 states, has originated mortgages worth more than $100 million since 2004.
"We never pressure clients," said one of the company's founders, Matthew Copley. "We just try to make sure they know about their options."
However, a former sales agent, Hani Shenoda, and an agent who still works at the company who spoke on the condition of anonymity because of fear of retribution, said in interviews that managers at Senior American Funding encouraged them to pressure older homeowners into unwise loans and investments. The company disputes that.
On Tuesday, after being contacted by a reporter, Senior American Funding announced it would no longer sell combinations of loans and investments like the one Baker bought.
"When we make mistakes, we address them as responsibly as we can," Copley said.
In the kitchen of the home, where Baker displays watercolors of dolphins and flowers she has painted, the saleswoman recommended a loan of $218,900, with a variable interest rate initially set at 6.57 percent.
Because reverse mortgages do not require borrowers to make immediate repayments, the interest charges are added to the debt every day, and the total amount owed grows over time. The saleswoman did not explain that within 10 years, Baker's $218,900 loan could grow to as much as $400,000, Baker said. That debt would be paid by selling the house when she moved out or died.
The saleswoman also did not emphasize the high fees, Baker said. The loan's fees cost her $17,100 — almost 8 percent of the total loan — which was paid out of the proceeds as soon as the loan closed.
After the reverse mortgage closed, Baker used the proceeds to pay off a $68,000 traditional mortgage on her home, and she put about $33,000 into various savings accounts.
The remaining $100,000 was used to purchase, at the saleswoman's urging, two deferred annuities — complex contracts that offer monthly income in exchange for a large lump-sum payment.
Those annuities prohibited Baker from gaining access to most of her funds for seven years unless she paid a stiff penalty.
Moreover, the annuities were likely to cost her money rather than pay her. Based on recent payout data for similar products, she will probably earn about $520 a month from her annuities for the rest of her life. Baker's mortgage debt is increasing by about $600 a month as the interest compounds on the money she used to purchase those annuities.
Last month, Baker sued Senior American Funding, accusing it of fraud and elder abuse.
Copley, the Senior American Funding co-founder, defended the company's actions and said Baker consented to every transaction.
However, Copley conceded that Baker was given documents with inaccurate numbers and that sales agents, including him, at the time did not fully understand the products they were selling her.
By Charles Duhigg
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