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HUD Inspector General Warns Congress of Concerns About HECM Program

image The Department of Housing and Urban Development’s assistant inspector general warned a Congressional committee on Jan. 9 of concerns regarding FHA’s ability to handle the increase in volume it has seen over the past year.

James A. Heist, assistant inspector general for audit, testified that FHA needs to increase personnel, increase training for personnel and increase oversight of appraisal and underwriting.  The agency’s market share has grown to 12.55% of single-family home loans in fiscal 2008 from 4.12% in the prior year. In September 2008, FHA’s market share reached 21.13%, up from 6.35% in October 2007.

Heist also expressed his concern about different aspects of the HECM program.  Below are the comments made regarding the HECM program:

Another area of concern is the growing Home Equity Conversion Mortgage program. As an internal matter, in 2007, FHA’s independent auditors identified a significant deficiency in the financial statement audit that showed the program being supported by a combination of servicer-provided applications, vendor databases, modification of existing FHA legacy systems and manually performed input to the FHA’s general ledger.

From an external standpoint, we are aware that the larger loan limits can be attractive to exploiters of the elderly, whether it is by third parties or by even family members, who seek to strip equity from senior homeowners. Due to the vulnerability of the population this program serves, we are also concerned about evasions of statutory counseling requirements or even fraud by counseling entities. We are working with the Chairman and members of the Senate Committee on Aging to address some of their concerns regarding these issues.

Some HECM-related fraud activities involve flipping where an investor sells the property to an elderly straw buyer and enters into a quit claim deed with the straw buyer. The buyer applies for the HECM loan within a short time frame and the appraisal used to originate the HECM loan is then fraudulently inflated. This allows the investor to illegally divert the proceeds of the loan. Straw buyers are “recruited” in residential areas with a high rate of renters. The buyers are often unaware that they must pay property taxes and some are unaware that the cash due to them at closing has been diverted. A current investigation involves recruiting elderly homeless to live in properties victimizing these seniors who often have desperate needs.

Another activity that we currently have under investigation involves financial professionals convincing HECM borrowers to invest HECM proceeds in a financial product such as an annuity. The financial professionals receive increased fees and, in the case of annuities, the victims are unable to get access to their savings for many years or even past their projected life expectancy. We have been partnering with the AARP and other groups to foster consumer protection education awareness. We are also a key participant in the mortgage fraud task forces nationwide coordinated by the Department of Justice.

To read a copy of his testimony click the link below.

Statement of James A. Heist before the Committee on Financial Services

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