HUD Audit Finds Reverse Mortgage Borrowers Violated Residency Rules

Approximately 86% of borrowers under the Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage program (HECM) who were also enrolled in a rental assistance program did not meet reverse mortgage residency requirements, according to an audit by HUD’s Inspector General.

Federal regulators found the loans to be out of compliance when looking at a sample size of 159 borrowers who were both reverse mortgage borrowers and enrollees in the federal rental assistance program.

As many as 136 out of 159 HECM borrowers were not living in the properties associated with their reverse mortgages because they were receiving rental assistance under a federal voucher program for a different address at the same time, according to findings published last week by the Office of the Inspector General (OIG) of the Department of Housing and Urban Development (HUD).

In conducting the investigation, OIG’s objective was to determine whether HUD’s Office of Single-Family Housing had effective controls in place to ensure that HECM borrowers complied with the loan’s residency requirements when concurrently participating in the Housing Choice Voucher program.

The Voucher program provides federal funds to assist low-income families, the elderly and the disabled to afford “decent, safe and sanitary housing” in the private market, according to the OIG report. These funds are made available to public housing agencies through HUD’s Office of Public and Indian Housing, and the vouchers are administered by public housing agencies.

Of the 136 borrowers, loans for 15 of them were independently terminated by the servicing lenders during the audit. The remaining 121 insured loans had current balances totaling more than $15.6 million and maximum claim amounts amassing more than $19 million.

The HECM guidelines state that a lender, upon approval of an authorized representative of the HUD Secretary, may require immediate payment in full of all outstanding principal and accrued interest if the property ceases to be the principal residence of the borrower for any reason other than death, and if the property is not the principal residence of at least one other borrower.

“As a result, 121 insured loans should be declared in default and due and payable to reduce the potential risk of loss of about $3.4 million to HUD’s insurance fund,” the report states.

Of the 136 borrowers who may have violated the HECM primary residency requirements, 46 borrowers certified that they occupied the properties associated with their loans as their principal residence during the overlap of participation in the Voucher program.

Meanwhile, 80 borrowers did not provide occupancy certifications during the overlap of participation in the program, while 10 borrowers certified that they did not occupy the properties associated with their loans during the overlap of participation.

The sample size of 159 borrowers was derived from loan-level data from HUD’s Single Family Data Warehouse System, as well as information on Voucher program participants from HUD’s Public and Indian Housing Information Center as of February 21, 2014.

Investigators then cross-checked the two systems, looking for information that matched Voucher program member data and individuals with HECM loans. Based on this review process, the researchers identified as many as 136 borrowers who may have potentially been living in the properties other than the ones associated with their loans.

However, investigators may have failed to include multi-unit homes in their audit or instances where a reverse mortgage borrower took in a renter, sources tell RMD.

For example, under this scenario a HECM borrower occupies one unit of a two-unit residence—making them compliant with the reverse mortgage—while also renting out the other remaining unit to a tenant, thus allowing them to take advantage of the renter assistance program.

Concluding its investigation, the OIG claims that HUD did not have the control policies or procedures to prevent or mitigate the instances where borrowers violated HECM principal residency guidelines by simultaneously participating in the Voucher program.

“HUD’s Office of Single Family Housing needs to quickly work with the applicable servicing lenders to verify documentation of the borrowers’ compliance with residency requirements for each of the 121 cases identified or for each noncompliant borrower, declare the loan in default or due and payable.”

Aside from implementing the proper policies to reduce further losses and program risk, OIG suggested HUD update its guidance to detail the steps that servicing lenders should take for borrowers who fail to certify at least annually that the property associated with the loan is their principal residence. This includes borrowers who do not provide a certification, those who do not provide the certification in a timely manner and those who certify that they no longer occupy the property.

Acknowledging the report’s discoveries, HUD is already taking steps to improving its guidelines.

“The Office of Single Family Asset Management will work with the Office of Public Housing to determine the best way to cross-check our respective tracking systems to identify HECM borrowers receiving Section 8 vouchers,” stated HUD Deputy Assistant Secretary for Single Family Housing Kathleen Zadareky in a written statement.

The Office of Single Family Asset Management plans to issue a Mortgagee in fiscal year 2015 that will provide guidance for loans that become due and payable for failure to comply with the terms of the mortgage.

HUD declined to comment further.

View the HUD-OIG report.

Written by Jason Oliva

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