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Eleanor Fernandes got a reverse mortgage in 2008 to convert the basement of her home in Papaikou, just north of Hilo, into a sewing room where she could pursue her long-time passion for making quilts and feathered hats.

But three years later, her hurricane insurance provider told her mortgage servicer that she had not paid her premium. That led the servicer, which requires homeowners to protect their property, to buy insurance on her behalf – but at a rate eight times what she had been paying, according to her attorney.

Soon, the much higher insurance payments helped drain what was left of her mortgage proceeds and the servicer, James B. Nutter & Co., advanced her an additional amount to cover the cost. She was in default, and in 2013, Nutter foreclosed. After many twists and turns, the case still has not been resolved.

Fernandes, 82, is one of a growing number of Americans whose reverse mortgages – aggressively marketed in the 2000s as a risk-free way to live on a house’s equity – have faced foreclosure because they failed to pay insurance or property tax.

Some states and class-action lawsuits, including one that started in Hawaii, have alleged that what’s happening to some homeowners is unfair.

Government investigators and private lawyers found that the insurance companies that got business from mortgage servicers when a borrowers’ insurance lapsed were paying out losses that were an unusually low percentage of the premiums they collected — an indication that consumers were getting a raw deal. (None of these actions name Nutter.)

They discovered that these “force-placed insurance” providers sometimes paid kickbacks to mortgage companies in return for their business, driving the costs beyond what a homeowner should have to pay.

But the judge in Fernandes’ case, Peter Kubota, has blocked her efforts to examine whether Nutter got commissions from the hurricane insurer, Lloyd’s of London, according to her attorney, Will Rosdil. Judges cannot speak publicly about their current cases, so Kubota could not talk to Civil Beat, court spokeswoman Jan Kagehiro said.

Nutter did not respond to a request to comment for this story. But in court filings, the company points out that it is required by the U.S. Department of Housing and Urban Development, which insures reverse mortgages, to foreclose when borrowers fail to pay for items such as insurance — and that Fernandes fell behind not long after she took out the loan. It submitted to the court notices in which it informed Fernandes that it was force-placing insurance, that it could be more expensive and that it would cancel the policy if she found coverage on her own.

The company said that Fernandes has produced no evidence of fraud, and that none occurred.

But Rosdil says that if he were allowed to seek evidence of the insurer paying commissions to Nutter, it could reveal a violation of state law and protect her from foreclosure. Though she has since moved into a nursing home, she wants to leave the house to a nephew who has helped her out over the years, mowing the lawn and doing repairs.

“They’ve been foreclosing on her for nine years,” Rosdil said. “She wanted to keep the house in the family.”

To make matters worse, Rosdil said, when Hurricane Lane in 2018 caused water to pour through Fernandes’ basement, destroying her sewing room, the insurer denied the claim.

A Promise Of Low-Risk Cash

Fernandes cannot recall the circumstances of how she found out about reverse mortgages and decided to get one, Rosdil said.

What is known is that reverse mortgages were aggressively marketed in the 2000s. Daytime TV ads featured well-known personalities such as Fred Thompson, Henry Winkler and Robert Wagner. Recent ads have .

A found that lenders on the mainland inundated low-income, mostly Black neighborhoods with door hangers. Reverse mortgages, which allow homeowners to stop making mortgage payments and instead receive cash against the market value of the house, appealed to older residents who wanted to stay in their homes. Some who chose reverse mortgages might not have qualified for other financing methods, such as equity lines of credit. The investigation found that nearly 100,000 of these loans were unraveling, “blindsiding elderly borrowers and their families.”

Fernandes’ brother, who lived next door, built the house and gave it to Eleanor and her sister after another brother died. Eleanor, born and raised on the Big Island, had never married or had children.

The Rev. Clyde Phillips has known Fernandes and her family since he was a teenager. When Eleanor’s sister died in 2006, Phillips happened to be on the Big Island on vacation from his assignment in the Philippines, and officiated at the sister’s funeral.

He recalls Fernandes’ kindness to his mother, who could no longer drive. The two would make road trips to Kona or Volcano, maybe stopping for some comfort food at Don’s Grill in Hilo. Every year, Fernandes would send Phillips one of her famous fruit cakes. He learned to keep it in the refrigerator for awhile before eating it so the alcohol could settle in and make it even more delicious.

When Phillips’ mother traveled to New York for heart bypass surgery, Fernandes went with her. Fernandes has always been deeply religious, he said, regularly attending the Catholic church just down the road from her house and once making a pilgrimage to Fatima, Portugal.

Fernandes was always lively and outgoing. But anxiety over losing her house, as well as back pain, changed her, Phillips said. Money was also tight, and Phillips helped Fernandes qualify for Medicaid and food stamps.

“I think it overwhelmed her,” he said of the foreclosure. “I think she was beginning to get confused a little bit … It took a lot of energy from her.” She started acting anxious and depressed and, when he moved back from the Philippines in 2015, “it was a different Eleanor.”

Homeowners with reverse mortgages have increasingly run into trouble because of falling behind on items such as property taxes and insurance.

According to , the share of reverse mortgages that ended because of the homeowner defaulting increased from 2% in 2014 to 18% just four years later. Most of the defaults, the GAO said, could be attributed to the borrower no longer living in the home or failing to pay items such as property taxes or insurance.

These charges can pose more of a problem in reverse mortgages because elderly borrowers are often on fixed incomes. In conventional “forward” mortgages, such charges are dwarfed by the outstanding balance and so rarely cause a default. Reverse mortgage borrowers also may be losing mastery of their finances because of cognitive difficulties.

“It might be capacity issues,” said Dan O’Meara, an attorney with the Legal Aid Society of Hawaii, a Department of Housing and Urban Development-approved reverse mortgage counselor. “It might just be that some people don’t keep track of their finances” – if, for instance, a spouse who always took care of those things dies.

“It’s complicated,” he said. “People get sideways for manini amounts … So many people, when they’re having trouble they don’t even open their mail.”

A bill in 2016 would have created new requirements for written notice that a servicer had force-placed insurance. In written testimony, O’Meara pointed out that borrowers may ignore notices because they look like junk mail. Servicers often change, he said, and notices may come from unknown companies.

He pointed out that force-placed insurance is a problem because it’s so much more expensive. One woman wrote the Legislature to say that she lost her house to foreclosure because of force-placed insurance.

But the bill, opposed by banks and mortgage lenders, failed.

O’Meara said Legal Aid can often help fix reverse mortgage problems, but “if they don’t hit our radar, there’s nothing we can do about it.”

Even if expensive insurance doesn’t lead to a foreclosure, it eats into the money available to the often elderly homeowner, said Odette Williamson, a staff attorney for the National Consumer Law Center.

“That’s just less money they have to live on,” Williamson said.

Some States Crack Down On Unfair Practices

Other states have investigated force-placed insurance and put in place reforms to counter perceived unfairness.

In New York, for instance, new regulations required notices before a servicer force-placed insurance, prohibited the coverage from exceeding the last known amount and barred insurers from paying commissions to servicers, according to . New York was responding to consumer advocates who said force-placed insurers had much lower loss ratios than other insurers. In hearings, state officials pointed out that commissions could be driving up premiums.

New York’s settlements with four insurers led to civil penalties of $25 million, and rates went down.

Regulators in California and Florida, after investigating some force-placed insurer’s low loss ratios, required them to reduce their rates – as much as 35% in California and 22% in Florida. Florida also barred the payment of commissions.

The federal Consumer Financial Protection Bureau teamed up with state regulators to reach settlements with servicers after finding, among other things, violations related to force-placed insurance.

In recent years, “there has been an eruption of cases against reverse mortgage servicers for wrongfully force placing flood insurance,” according to a publication by the National Consumer Law Center. Many involve homeowners who did have coverage, but not in amounts the servicer considered adequate. The more expensive force-placed insurance drove some into foreclosure, according to NCLC.

Lawsuits alleged breach of state laws barring unfair practices, including some that contended that the mortgage servicer got kickbacks from the force-placed insurer.

One of these, Wieck v. CIT Group, started in Hawaii. It alleged that a mortgage servicer force-placed insurance for Julia Wieck, a Lahaina resident then in her late 70s, at an annual premium of $10,000. The high charges eventually sent Wieck’s loan into default and led CIT Group to foreclose.

Wieck, who later found insurance for just $600 a year, alleged that the premiums were so high because the insurance company was paying commissions to her mortgage servicer. The servicer, she said, got a percentage of the total premium and therefore had an incentive to go with the highest cost.

U.S. District Court Judge Michael Seabright ruled in 2018 that Wieck’s breach-of-contract claim against CIT Group was not preempted by federal law.

“The mortgage permits CIT to do what is ‘necessary’ to protect its interest in the property (i.e., force place hurricane insurance) but not to misrepresent material facts when doing so,” he wrote.

The case was combined with a similar action in New Jersey, which settled in 2020 for $8.5 million. The plaintiffs identified almost 40,000 members of the class who were charged for force-placed insurance between 2012 and 2018.

Several other class action lawsuits against other mortgage servicers and insurance companies have led to similar results. Others, however, have been dismissed, according to a review by the National Consumer Law Center.

The insurance companies have argued that the higher price is justified. They say they take on a servicer’s entire portfolio without doing underwriting for each policy, increasing their risk. And the policies tend to be issued in places that have higher risk because of their location – on the coast, for instance – or in neighborhoods with high foreclosure rates.

A Fateful Call From The Mortgage Company

Fernandes’ case began one day in 2011, when she got a call from Nutter. Her hurricane insurance premium of $336 had not been paid, the representative told her.

That couldn’t be right, Fernandes told the Nutter rep, according to the company’s log. She was sure she had paid and was “very concerned” that records showed otherwise.

When Nutter called back two weeks later, Fernandes kept insisting she had paid. But she told the representative to go ahead and cover the premium out of the remaining proceeds of her reverse mortgage, according to Rosdil.

Instead, Nutter “force-placed” hurricane insurance with a different carrier – at eight times the rate, or $5,696 per year, Rosdil said.

The much more expensive hurricane coverage eventually drew down the remaining money available to Fernandes through her reverse mortgage, and then some. Nutter advanced her almost $3,000, putting her loan in default, Rosdil said, and leaving Fernandes broke.

“Eleanor, whose income was only $838.00 per month, could never repay the debt,” Rosdil wrote in a letter to the court.

In court filings, Nutter has said it tried repeatedly to get Fernandes back on track. At one point, the company said, Fernandes signed and returned a repayment plan, but then did not make any payments.

Nutter first filed for foreclosure in 2013, but a judge dismissed it because the company did not act in time. A second filing, in 2016, ended in a summary judgment against Fernandes when she failed to respond, but another judge vacated it, finding that Fernandes lacked capacity. But the original foreclosure proceeding was allowed to continue.

Rosdil said that Kubota has denied several of his motions to see the Nutter files that would show its communications with the insurance company and the arrangements between the two. He believes that the Hawaii federal judge’s decision in the Wieck case, the class-action lawsuit that netted $8.5 million for plaintiffs, established that if the insurance company had paid commissions to the mortgage servicer, the foreclosure against Fernandes would be void.

Jim Bickerton, a Honolulu attorney who represented Wieck, said an examination of the arrangement between mortgage servicer and insurer could indeed help Fernandes’ case.

“If they drove the balance down to zero … that’s absolutely a defense, if they unlawfully did so,” he said.

Fernandes now owes $20,000 in delinquent premiums for the insurance. In addition, Rosdil argues that she should not be on the hook for interest costs after Nutter failed to appeal a judge’s decision that it did not act quickly enough several years ago. That would reduce the total amount she owes on the reverse mortgage from about $375,000 to $275,000 and make it more feasible that her nephew could eventually pay off the debt and buy the house.

Rosdil has now filed a motion to disqualify the judge, Kubota, alleging that he failed to examine the evidence and showed a bias against Fernandes. Another judge will consider that motion.

Rosdil said the whole thing could have been avoided if Nutter had simply paid the much cheaper insurance premium from her loan proceeds back in 2011.

“All they had to do is what she asked them to,” he said.