Reverse Mortgages, Michael Hild, Live Well Financial, an Arrest and a Brilliant Scheme
Below this summary you will find articles and additional reading related to the Hild arrest. In short, Michael Hild was charged with a variety of frauds related to a reverse mortgage scheme. Constructed as a reverse mortgage, to be explained below, Hild lent people money and he then borrowed money and/or secured investments against the collateralized properties by overvaluing the properties for his investors. What makes this so interesting, however, is that in the context of reverse mortgages and cash advance/fast-cash/reverse loans, it was both clever and quite simple. The loans themselves are quite legal, albeit in our view somewhat egregious. It was not illegal until he overvalued the collateral.
Cooking his books for investors meant, in the simplest terms, playing with the spreads between actual fair market value and perceived value of the collateralized instrument, which in the case of reverse mortgages is property. In the case of fast cash or what are sometimes referred to as MCA loans, the collateralized instruments are receivables. Both types of loans, from our perspective, are potentially dangerous to a Borrower, who in both cases is generally cash poor, has a poor credit rating, not enough income or for some other reason cannot obtain a bank loan. Both types of loans generally have the added twist of significant fees drawn on the initial principal draw and then added to the principal calculation, which means that the fees are also valued when the respective lenders start calculating interest against the borrowers. Again, this is all quite legal, unfortunately.
Moreover, if the lenders are using the collateral to obtain other lines of credit, obtain additional investments or to purchase securities, they are getting the benefit of the loans multiple times, sometimes triple-dipping. We hope that the Hild arrest, and an explanation of the framework by which the entire scheme was constructed, will help us provide readers with an understanding of the dangers of entering into reverse mortgages and high interest rate cash advance loans and of investing in companies that engage in these types of loans, absent a clear understanding of the pitfalls.
We note that we have seen far too many people exploited. Reverse mortgages and cash advance/fast-cash loans (or reverse loans) provide the borrowers with money and the lenders with interest, initial fees and then a method of calculating interest accumulated on those fees and then obtaining a benefit of borrowing against inflated valuations – a triple dip. It’s all legal until the valuations are inflated. The spreads between truth and fiction are malleable and the ability of many of these lenders to defraud is remarkably easy. Hild would not have been caught had the valuations not at some point crossed the line from believable to unimaginable.
Under most reverse mortgages, the borrower (the “Borrower”) is typically elderly and cash poor but owns a home. Often the Borrower does not have family or does not qualify for Medicaid. The reverse mortgage lender (the “Lender”) offers a solution for a homeowner who is cash poor, namely instant access to cash. Many Borrowers of reverse mortgages are vulnerable to all manner of schemes. Typically, the Lender comes offering the Borrower money in exchange for value. In many cases the associated fees and other things, including exorbitant interest rates are not disclosed or clearly enumerated for someone who is not savvy. The Lender will first have the home appraised and then provide the Borrower capital with which to live, on some formula of the value of the home versus life expectancy, generally giving the Borrower somewhere between 20% and 40% of the appraised value of the home.
It should be noted, most appraisals are conducted for these purposes on the lowest end of the spectrum, to benefit the Lender to the detriment of the Borrower. The Lender will generally also take substantial fees up front, sometimes as much as 10% on the actual home’s value. In some cases, the Lender deposits a lump sum into the Borrower’s bank account and in other cases, the Lender provides loans in tranches or multiple deposits which can generate multiple fees. The backing or collateral for those loans is the value of the home; and the interest on the loans can be as high as any state will allow. In many cases, the lender will add all kinds of service fees which can increase that interest rate exponentially but because they are not characterized as interest, they are not deemed usurious. Again, this is all legal.
The financial hopes of the Lender is that the Borrower will live a short time and die without heirs and beneficiaries to come and sell the home and repay the loan and interest and fees that have accrued. In that case, the Lender takes possession of the home at a significant discount. The Lender can also gain possession of the home if the person becomes sick requiring a lengthy stay in a hospital or rehabilitation facility. The Borrower’s family, heirs or assigns can have as long as one year to sell a home after the Borrower dies or gets sick but during that time the loan is still increasing with interest and fees. The ultimate payoff amount includes interest and fees that grow exponentially each year.
Often, the Lender of reverse mortgages severely under-values the home to the Borrower, convincing someone with, for example, a property work $450K to accept a $250-300K valuation. In the best scenario, the borrower may get $80K-$100K on the house. We have seen a borrower who got $35K for his home after being told that there was a problem with his credit worthiness.
The difference in value of the home between the low end of the appraisal and the high end of the appraisal spectrum can be as much as $200K for a house valued at $450K and in the Michael Hild case, he was showing his investors a portfolio at the highest range of the spectrum, even so much as inflating the value well beyond that. In addition Hild was investing in properties for his own personal portfolio using the money of investors in the fund, an easy play really, when you look at the valuation spreads.
Michael Hild was inflating the value of his portfolio to convince investors, securities dealers and legitimate lending institutions to provide him and his partners/officers greater sums of working capital. He was using that capital to increase his lending portfolio (of reverse mortgages) and then using that increase to induce greater investment and at the same time adding significantly to his personal portfolio. Given the malleability of his market, what was believable had wide parameters.
We will follow this story. We caution our readers against loans taking loans against homes or receivables without the strict and cautious review of an attorney who understands these instruments. They can be addictive as a means of easy cash, until they aren’t. And the money made by Lenders who are successful both in the reverse mortgage and in the cash advance/fast cash (MCA) space is almost inconceivable. And to reiterate, it is legal.
Live Well Financial CEO Michael Hild accused of orchestrating $140 million fraud scheme that led to lender’s collapse