Are "Contingent Interest" Reverse Mortgages A Scam?

In South Florida, a reader of The Miami Herald's Action Line recently wrote in:

• As the personal representative for an elderly friend's estate we had to pay $321,000 to pay off a 10-year-old $60,000 reverse mortgage. The culprit? A clause titled ''contingent interest,'' which gave the mortgage company 50 percent of the appreciation in property value over the term of the note. The property appraised at $125,000 in 1996 and at $430,000 in 2006. In addition to the hefty interest and fees, the mortgage company got a further $152,000 under the clause. Please warn your readers.

For Action Line's response:

• This is why we stressed the importance of doing your homework. Fortunately, these equity-sharing or appreciation-sharing clauses are no longer used, according to Bronwyn Belling, AARP's Washington-based reverse mortgage expert. Only a handful of lenders offered reverse mortgages that included them but ''some of these loans are still out there,'' and Florida had a higher proportion of them, she said.

• A class-action suit filed on behalf of Californian seniors who had taken out Transamerica Homefirst's ''Lifetime'' reverse mortgages, which contained such terms, was settled in 2003 with an $8 million award to the plaintiffs.

• Belling warns, however, that with the high demand for reverse mortgages, new variations on contingent-interest loans are beginning to emerge. Counseling -- provided for free -- is required when applying for a federally backed Home Equity Conversion Loan, or HECM, but only California makes counseling mandatory for all types of reverse mortgages. About 90 percent of reverse mortgage loans are HECMs, which have ''lots more consumer protection'' built into them, Belling said. AARP-trained and -tested counselors can be located online at www.hecmresources.org/network.cfm. All local HECM counselors can be located by calling, toll-free, 800-569-4287. ''Getting the free counseling is the best step,'' Belling said, to preventing shocks like this.

For the Action Line column, see When shopping for reverse mortgages, counseling's crucial (no longer available online - courtesy of The Miami Herald).

Go here for other posts on problems relating to reverse mortgages. zebra