HUD OIG takes stock of past and lingering reverse mortgage issues

The U.S. Department of Housing and Urban Development (HUD)’s Office of the Inspector General (OIG) released a semiannual report to Congress this week, designed to offer more robust perspectives on the Department’s audits, evaluations and investigations for the period of October 1, 2021 through March 31, 2022 including reverse mortgage issues which have arisen during that period.

The report details various actions that the OIG has taken across a wide variety of HUD programs, up to and including the Home Equity Conversion Mortgage (HECM) program as sponsored by the Federal Housing Administration (FHA).

These include the implementation of actions related to reverse mortgage occupancy requirements; defining risk that taxpayers were exposed to as a result of insufficient flood insurance on HECM proprerties; establishing the 2022 HECM lending limit and resolving outstanding issues.

Reverse mortgage occupancy, housing investigations and audit

Within the office of audit, HUD’s OIG found that one reverse mortgage-related issue stemmed from a lack of corrective actions taken when the Department determined that HECM borrowers did not always comply with the loan’s principal residency requirements.

“OIG completed a corrective action verification (CAV) of recommendations from four prior [HECM] audit reports,” the OIG report reads. “The CAV was initiated because one of HUD’s top management challenges is to protect the FHA Mutual Mortgage Insurance (MMI) Fund. The prior audits determined that HUD lacked controls to prevent HECM borrowers from violating principal residency requirements.”

CAV objectives were to discern whether or not HUD implemented “adequate corrective actions” in response to recommendations from audit reports issued in 2012 through 2015, all of which had to do with issues related to the residency requirements. Recommendations ranged in those reports from preventing borrowers from having multiple HECM loans; to prevent borrowers from renting their properties to housing choice voucher program participants; to prevent HECM borrowers from also receiving assistance via the housing choice voucher program; and to prevent HECM borrowers from receiving simultaneous multi-family program assistance, respectively.

“OIG found that HUD implemented the agreed-upon corrective action for one recommendation, did not implement the ongoing corrective action for one recommendation, and did not implement corrective actions for two recommendations,” the report reads.

In the initial report on this matter published in December 2021, the only recommendation that HUD is said to have issued action on was in preventing borrowers from having multiple HECM loans, according to a review of the report. The failure on three other recommendations is of concern because of additional risk those issues could pose to the MMI Fund, the report read.

According to the results of an audit of HUD housing programs, OIG generated five key program results and identified nearly $7 billion of funds which can be “put to better use,” the report reads. None of the costs associated with HUD’s housing programs are being actively questioned by OIG after the auditing process.

As a result of investigations, 8 administrative or civil actions were taken. Investigations also resulted in 11 instances of either convictions, pleas or “pretrial diversions,” the report explains. Nearly $9.3 million of funds have also been recovered, according to report statistics.

HECM flood insurance, 4000.1 handbook

The report also reiterated a finding published earlier this year by the OIG, in which the HECM program may have controls lacking to ensure adequate flood insurance, noting guidance issues on the topic between regulations and the reverse mortgage sections of the Single Family Housing 4000.1 handbook.

While the broader takeaway as it relates to the forward mortgage programs at FHA revolves around OIG’s statement that approximately 31,500 FHA-insured loans did not maintain the required flood insurance coverage in 2020, the HECM program does get dedicated attention to avoid potential issues on this topic in the future.

At the time, OIG recommended that HUD “consult with the Office of General Counsel to review the language in the statutes, regulations, and handbooks and if warranted, make adjustments to the HECM handbook to ensure consistency with the statute and regulation.”

HUD announced a series of draft changes to the HECM portion of the Single Family Handbook last September. The review period for the draft changes was ultimately delayed until the end of January, at which point a working group for the National Reverse Mortgage Lenders Association (NRMLA) overseen by Elly Johnson, co-chair of the association’s HUD Issues Committee, finalized the association’s comments to the Department after an in-depth review.

Recent OIG action

Earlier this year, the HUD OIG issued a new fraud bulletin aimed at informing the public about reverse mortgage scams, a revision to a previous bulletin that noted increased interest in the product category due to the ongoing economic impacts of the COVID-19 coronavirus pandemic. That bulletin describes for people that reverse mortgages are legitimate products offered under the FHA’s HECM program, but that certain bad actors may seek to scam a senior out of money under the guise of offering a reverse mortgage on their home.

In December 2020, the HUD OIG under the Trump administration released a report which stated that even with noted improvements in the financial standing of the HECM book of business in recent years, losses in that portion of the Mutual Mortgage Insurance (MMI) Fund continued to “undermine” the fund’s stability, exposing “weaknesses” in HUD’s internal control mechanisms.

To mitigate these risks, enhanced reverse mortgage lender oversight is required and cast the HECM program as an ongoing “major challenge” for the Department which would require additional action beyond the scope of the Trump administration’s term in office, the report read.

It also echoed a point made in that year’s Annual Report to Congress, which said that the HECM program was continually subsidized by the forward mortgage portfolio, a contention that reverse mortgage industry analysts disagreed with due to their own analyses of the forward and HECM books of business.

However, the 2021 Annual Report to Congress revealed that the reverse mortgage portfolio had reached positive territory for the first time since 2015, largely due to unprecedented levels of home price appreciation experienced during the pandemic period. Other indications by Biden administration officials from earlier that year point to a difference of opinion with their predecessors regarding the general health and direction of the HECM program.

Read the new Semiannual HUD OIG Report.

HUD OIG takes stock of past and lingering reverse mortgage issues

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