Last month, the Federal Housing Administration released its Annual Report to Congress, revealing its concerns about the reverse mortgage program and its continued drain the Mutual Mortgage Insurance Fund.

While inflated appraisals were recently pinpointed as a contributing factor – and steps were taken to keep those in check – there may be another problem at play: occupancy issues.

When a reverse mortgage borrower vacates the property for 12 consecutive months – either because they’ve decided to move or they’ve passed away – the loan is called due and payable.

Borrowers must sign a form every year to confirm their occupancy, but without anyone physically verifying that it is, in fact, the borrower signing the form, there’s bound to be fraud.

Mike Branson, CEO of All Reverse Mortgage, said he thinks occupancy issues are alarmingly common.

All Reverse has been publishing a blog of a number of years answering public questions about reverse mortgages. Branson said they often get questions from people about non-borrowers living in a property that has a reverse mortgage.

“We field these questions almost daily,” he said. “They come up all the time.”

Branson said in some cases, the questions are from people who have a family member living in the property after the borrower has passed away. In other cases, it’s a neighbor complaining that a property with a reverse mortgage has been rented out and is falling into disrepair.

But as long as the occupant is signing that certificate every year with the borrower’s name, the loan remains in good standing – and on FHA’s books.

“I believe this is a bombshell,” said Shannon Hicks, president of Reverse Focus, whose video on HECM World recently drew attention to the scope of the issue.

“But interestingly, it’s not the bombshell that has influenced the recent program changes, those are all based on actuarial projections,” Hicks said. “But when it comes to realized claims on FHA’s insurance fund, this is a big hit…I would be surprised if FHA didn’t have the widespread abuse by non-occupied borrowers on its radar.”

While the FHA hasn’t taken steps to address this issue, it does appear to be aware of the problem.

On a call with reporters last month, FHA Commissioner Brian Montgomery said the agency is concerned about non-borrowing spouses who may also be unlawfully residing in the property after the borrower passes away.

“One thing we feel strongly about – and we will have announcement on this soon – is we need a proper inventory of the occupants in those homes for HECMs, those [originated in] 2014 and earlier,” Montgomery said. “We want to do our level best to get a proper accounting of who is living in the home.”

As of now, the current system for tracking occupants includes the singing of a Certificate of Occupancy, which is sent by the servicer around the anniversary of the loan’s closing.

Gail Balettie, senior VP at reverse mortgage servicer Celink, said they give borrowers 30 days to sign and return the form.

“It’s a simple one-page form and it has to have language on it prescribed by HUD, which essentially is a warning that it’s a criminal offence to make a willfully false statement or misrepresentation to any department or agency of the U.S. government,” Balettie said.

If the first form is not returned on time, a second one is sent, and if that’s not returned, the servicer moves into action with a call campaign and a property inspection, according to the company.

“The property inspection vendor is going to knock on the door and attempt to verify the identity of the person living in the property,” Balletie said. “If they don’t answer the door, the inspector will observe whether or not the property appears to be occupied – if it contains personal belongings and furniture and if the utilities are on, and that’s what gives us a clue.”

Balletie said the vast majority of borrowers certify their occupancy without incident and that the biggest reason for default on a HECM is the death of the last remaining borrower.

But what about the potential for those certificates to be falsified by an unlawful inhabitant?

“We’ve pretty much done everything we can possibly think to do by incorporating the door knocks and the actual physical inspection of the property at the point where the borrower isn’t responding,” Balletie said. “I wish there was something else we could do.”