The loans were often marketed aggressively, especially before the housing collapse. Financial Freedom commercials featured celebrity pitchman James Garner. Sometimes, lenders encouraged a borrower to remove a spouse under the age of 62 from the home’s title, setting the stage for a potential foreclosure on an elderly widow or widower when the borrower died, according to 2012 report by the Consumer Financial Protection Bureau.

“The reverse mortgage is an icky business,” said Christopher Whalen, head of research at Kroll Bond Rating Agency in New York, noting that big banks like Wells Fargo & Co. stopped selling the product in recent years.

Financial Freedom was part of Pasadena, California-based IndyMac Bancorp, one of the most reckless lenders in the housing bubble a decade ago. IndyMac collapsed and was seized by the Federal Deposit Insurance Corp. in 2008.

Buying IndyMac

Enter Mnuchin, 53, a former Goldman Sachs Group Inc. executive who later ran a hedge fund and financed Hollywood blockbusters. He led a team of investors, including George Soros and John Paulson, that bought the remains of IndyMac in 2009 with the help of billions of dollars’ worth of government incentives.

Mnuchin renamed the bank OneWest. He slowed reverse-mortgage lending and completely stopped making new loans in 2011. From then on, Financial Freedom operated as a servicer, working on behalf of investors like Fannie Mae that owned the loans. 

Financial Freedom would collect on loans when they came due, often in the event of a death, and foreclose if necessary. It has carried out 16,220 foreclosures since 2009, or about 39 percent of the country’s reverse-mortgage foreclosures, according to HUD data obtained by the California Reinvestment Coalition, a nonprofit group that monitors banks.

An early alarm about Financial Freedom’s practices sounded in 2013, when Matthew A. McDonald, an executive at another servicer, Walter Investment Management Corp., filed a whistle-blower complaint claiming his Tampa, Florida-based employer was bilking the government of tens of millions of dollars. 

Curtailed Interest

Here’s how the scheme worked, according to McDonald: The loans are backed by insurance from the Federal Housing Administration, an arm of HUD. If a loan comes due, servicers must meet deadlines to complete tasks like getting an appraisal and starting the foreclosure process. If they miss the deadlines, they aren’t entitled to earn interest from the FHA while waiting for the agency to pay its claim, a process that can take years. In industry parlance, the interest payments are “curtailed.”