Regardless of political affiliation, Americans can all agree that when our elderly grandparents or parents turn to someone for financial help, we want that someone to be trustworthy. Unfortunately, there are many companies ready to take advantage of the elderly. Steve Mnuchin, President-elect Donald Trump’s nominee for secretary of the treasury, led one company from 2009 to 2015 accused of doing so—OneWest, and its reverse mortgage subsidiary, Financial Freedom. While under Mnuchin’s leadership, Financial Freedom was accused of taking advantage of seniors who were in dire financial straits. The secretary of the treasury is one of the nation’s most important economic positions and plays a major role in ensuring that the U.S. economy is prosperous. It requires a person who is trustworthy and has the best interests of all Americans at heart. Based on the record of Financial Freedom, it is unclear whether Mnuchin meets these qualifications.
This column looks at some evidence from Financial Freedom’s record, highlighting specific examples of unfair practices within the context of other accusations directed at Mnuchin’s businesses. First, it briefly explains how reverse mortgages work, as well as some of the benefits and drawbacks they have for consumers. It then recounts some of the controversy involving OneWest and Financial Freedom, as well as particular examples of what appear to be unfair practices.
How reverse mortgages work
Reverse mortgages are an important tool for cash-strapped seniors but can be harmful if a lender does not act responsibly. A reverse mortgage allows a borrower to convert home equity into a line of credit, a monthly payout, or a lump sum of cash. When structured fairly, a reverse mortgage can help ensure that seniors have enough cash to meet their basic needs and to live independently.
In order to qualify for a reverse mortgage, the borrower must be 62 years old or older, and the home in question must be the borrower’s primary residence. The borrower must also have either fully paid any previous mortgages on the home or be able to pay the mortgage off from the proceeds of the reverse mortgage loan. Consumers are not required to pay back the loan while they or their spouse are living, but they are required to continue paying property insurance, taxes, and for general home maintenance.
These products are very appealing to house-rich, cash-poor elderly people because the loan typically comes due only upon the death of the borrower, and the borrower’s family can either pay what is owed or convey the home to the lender as repayment. The market for these products has grown considerably in recent decades as an increasing number of Americans have approached their retirement with low savings and, in some cases, a lack of confidence in their ability to support themselves. When marketed properly and regulated effectively, reverse mortgages can provide income to these households, as well as help lower the elderly poverty rate.
However, reverse mortgages can also be harmful due to unfair practices by lenders and servicers. Many consumers who obtain reverse mortgages lack accurate information and have a low level of bargaining power with the provider. Sometimes, they do not understand that they are responsible for continuing to pay taxes and insurance for the property. Reverse mortgages can also can have high fees and put homeowners at greater risk of losing their home because of the higher costs for meeting loan obligations. These products can be sold to seniors who might be better served by a cheaper alternative such as a home equity line of credit or by refinancing an existing mortgage. When elderly couples apply for reverse mortgages, some lenders have also been known to convince younger partners to leave their names off the loans. This results in the loans coming due at the time the borrowing spouses die. Until a rule change, the widowed spouses then faced either difficult negotiations with the lender, paying off the loans, or losing their homes.
An aggressive foreclosure record
A lot has recently been written about Treasury Secretary nominee Mnuchin. The former Goldman Sachs partner, hedge fund manager, movie producer, and bank executive profited from a favorable deal with taxpayers that backstopped his bank OneWest’s losses when it foreclosed on a large number of customers. OneWest foreclosed on approximately 36,000 homeowners in California alone.
OneWest has not been subject to an enforcement action, but serious allegations of wrongdoing have been made about the company. A leaked Office of the Attorney General of California memorandum from 2013 contains allegations of repeated misconduct in OneWest’s foreclosure process, including rushing delinquent homeowners out of their homes in violation of notice and waiting period requirements, forging loan documents, and violating foreclosure auction rules. Mnuchin’s spokesperson rejected the allegations, saying, “Memos like this belong in the garbage, not the news.”
OneWest’s reverse mortgage subsidiary, Financial Freedom, has received less media attention but has drawn criticism from consumers, government entities, and investors alike.
According to the California Reinvestment Coalition, or CRC, Financial Freedom—with Mnuchin at the helm—was responsible for 39 percent of foreclosures on reverse mortgages insured by the Federal Housing Administration, or FHA, from April 2009 to April 2016. The reverse mortgage market largely consists of FHA-insured reverse mortgages. While Financial Freedom no longer originates reverse mortgages, CRC estimated that it serviced around 17 percent of the reverse mortgage market in 2015. In short, Financial Freedom’s share of total foreclosures was significantly disproportionate to its market share.
Consumer advocacy organizations such as the CRC and the National Consumer Law Center have documented a pattern of Financial Freedom denying its customers fair loss-mitigation options or relief to help them save their homes. They have also exposed instances in which the company foreclosed in error. Financial Freedom’s approach appears to track some problematic aspects of reverse mortgage servicing practice that, while legal, can still seriously harm elderly customers.
Mnuchin has not yet commented on Financial Freedom’s practices or any investigations, but OneWest, Financial Freedom’s parent company, has defended the company, telling CNN, “the vast majority of criticisms of our servicing practices are really criticisms of the regulations governing how we are required to service [government]-insured reverse mortgages.”
To be sure, federal regulations are currently not strong enough to protect all reverse mortgage consumers from abuse. However, the regulations provide companies with sufficient flexibility to do right by consumers. For instance, the U.S. Department of Housing and Urban Development, or HUD, guidelines on reverse mortgages have long allowed, but do not always require, servicers to provide homeowners with repayment plans when they are behind on taxes and insurance and at risk of losing their home. Financial Freedom, however, has frequently decided not to offer homeowners repayment plans to catch up on taxes and insurances, even when doing so would save their home. This decision may have been legal under HUD’s rules but was certainly not in the interest of elderly borrowers.
Below are some individual stories highlighting Financial Freedom’s servicing practices.
Only press coverage stopped the eviction of a 103-year-old grandmother on a technicality
A North Texas CBS affiliate reported on 103-year-old Myrtle Lewis, who obtained a reverse mortgage in 2003 and consistently met her interest obligations to Financial Freedom and its predecessor. Despite this, Financial Freedom gave her little warning and quickly initiated a foreclosure action after she accidentally allowed her insurance to lapse for one month in violation of the loan agreement. Mnuchin’s bank continued its action even after Lewis realized her mistake and reinstated the insurance. Lewis’ granddaughter Akelia Hurd told local media, “Honestly, it’s so evil … real evil … leave my grandmom alone, just leave her alone.” It was only after significant media attention that Financial Freedom ended its foreclosure action. The bank’s representative stated to the news channel that it was abiding by all legal requirements in its dealings with Lewis.
92-year-old widow evicted for 27-cent shortfall
The National Consumer Law Center reported the case of 92-year-old widow O. L. of Lakeland, Florida, who lived in her home for more than 40 years and has physical ailments, as well as difficulty seeing. Financial Freedom moved to foreclose on the basis that she did not maintain insurance on the loan for a short period of time. O. L. had mistakenly made a payment that was 30 cents short. Due to her limited vision, she then failed to properly read the remaining bill and paid just 3 cents to her owing balance. Financial Freedom foreclosed based upon the 27-cent delinquency and did not work with the homeowner to correct the obviously minor imbalance. OneWest declined comment to Politico regarding the incident.
Foreclosure actions that defy common sense
ProPublica reported that Freedom Financial wrongfully began foreclosure proceedings against John Yang—an 80-year-old Korean immigrant who lives and owned a small business in Florida—in 2015 on the basis that he violated the terms of his reverse mortgage by not living in his home. The bank claimed it had sent him forms to verify he was living in his home and that he never sent them back. Yang denied nonoccupancy and provided evidence that he resided at the property. Financial Freedom dispatched an agent to give him legal notification of the foreclosure at the same address on which it was foreclosing for lack of occupancy. After Yang enlisted the help of an attorney, the bank eventually halted its foreclosure action and has not made further comment.
In addition to instances of poor consumer practices, Financial Freedom’s financial management practices have drawn negative attention from some government officials and investors. The reverse mortgage company is the subject of an open HUD Office of Inspector General investigation. Bloomberg reports that the investigation is related to the company’s accounting practices. HUD has not yet shared information with the public about the investigation.
Bloomberg also reported that Financial Freedom overestimated the amount it would receive from the FHA for insurance claims by approximately $230 million. CIT, the parent company of OneWest and Financial Freedom, discovered this shortfall after it had already purchased the bank. CIT is reportedly trying to sell the Financial Freedom unit.
Conclusion
During the time that Mnuchin spent managing Financial Freedom’s reverse mortgage businesses, the company appears to have acted aggressively toward customers when there were more favorable, decent options available under law. The homeowner stories included above and the concerns expressed by consumer advocates raise questions about Mnuchin’s commitment to the well-being of American families, and these incidents should be further investigated to determine if there were any illegalities. Cabinet nominees and government officials ought to be held to a higher standard than is typically seen on Wall Street, as they are the keepers of the public’s trust and are appointed to serve the public’s interest. They are not appointed on the basis of their ability to maximize their own profits at the expense of elderly Americans.
Colin McArthur is a Legal Fellow at the Center for American Progress. Sarah Edelman is the Director of Housing Policy at the Center.