Inspector General Concerned About Reverse Mortgage Fraud

image Several trade groups and the Office of the Inspector General appeared Thursday before a House Financial Services Subcommittee on Oversight and Investigations where they called for more resources to ensure HUD program’s presence in the mortgage market remains.

According to a testimony from HUD, the Federal Housing Administration has seen dramatic changes in its business.  It has gone from less than 3% market share a few years ago to approximately 30% of the single family mortgage market today.

As part of the 2010 Budget, HUD is launching an expanded initiative designed to improve its ability to combat mortgage fraud, teach consumers how to avoid predatory practices and enhance oversight of FHA approved lenders.  For FY 2009, as of May 31 HUD referred 543 cases of suspected fraud to the Office of the Inspector General (OIG), according to the departments testimony

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During the OIG’s testimony, Kenneth Donohue, Inspector General for HUD, said he remained concerned about FHA’s ability and capacity to oversee the newly generated business and requested FHA receive more resources to handle the increase of volume.

Donohue also expressed concern that the increase in demand for FHA programs is having collateral implications for the integrity of the Government National Mortgage Association (Ginnie Mae) mortgage-backed securities.  He added, “HUD too needs to consider the downstream risks to investors and financial institutions of Ginnie Mae’s eventual securitization of Home Equity Conversion Mortgage (HECM) Single-Family loans”.

The OIG added that FHA reverse mortgages present a new and potentially vulnerable area for fraud perpetrators, especially due to the vulnerability of the population the program serves.  The following represent some of the types of schemes that the OIG is encountering: 

  • Flipping – the perpetrator creates a fake mortgage company and ‘lends’ funds to the borrower (no money changes hands, no loan is given, but a mortgage is filed). The subject refinances the borrower into a HECM. At closing the title company pays all outstanding debt including the fraud perpetrators’ fake mortgage and the perpetrator walks away with the payoff.
  • Recruitment – Some HECM-related fraud activities involve an investor who 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.
  • Annuity – Another activity that we currently have under investigation involves financial professionals fraudulently convincing HECM borrowers to invest HECM proceeds in a financial product, such as an annuity, in an improper way. 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.
  • Unauthorized Recipient – Individuals, often family members, may keep HECM payments after the authorized recipient dies or permanently leaves the residence.
    Onerous Fee Payments/Consumer Fraud – Just this last week, an OIG investigation led to an indictment in Maryland as a result of our participation in a local Elders Task Force. An elderly woman complained that her former health insurance representative stole approximately $200,000 from her HECM by convincing her she needed to pay him a fee to process her loan application and to repay him the reverse mortgage loan amount. He told the victim she had to repay the loan by writing personal checks to him and she paid from funds received as well as from her retirement annuity and from cash advances on her credit card. We are currently in the process of identifying more reverse mortgage victims.

Donahue added that HECM loans represent a significant investment by FHA, with considerable recent increases. The chart below shows a 253% increase in the dollar amount of HECM loans from 2004 through 2008:

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The OIG plans to work with the Office of the Comptroller of the Currency who is also concerned about reverse mortgages and believes particular attention needs to be paid to whether to impose additional requirements with respect to escrows of taxes and insurance.

The Comptroller thinks it would be a major step for HUD to issue guidelines addressing the escrow issue and the OIG is concerned about HUD’s exposure on taxes and insurance on HECMs and that escrow may not be sufficient to support these fees.

Statement of Kenneth M. Donohue Inspector General of HUD

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  • Can anyone explain to me how you invest in an annuity in an improper way? That seems like a blanket statement with very little meat to the explanation.

    Yes, I can understand keeping seniors out of variable annuities due to market risk, but the equity indexed or fixed products with good solid companies don’t do any of the things these people claim.

    It is my belief and the proof is in their words, that the feds make ‘chicken little’ statements these day to get the public to allow them to increase their regulatory power.

  • Like any tool, an annuity can be used improperly, just as not everyone should use an RM.
    **First of all an immediate annuity (IA)(fixed or variable) could be inappropriate if the annuitant(s) need more than the monthly payments or are afraid of insufficient funds for a long-term care situation, etc. (or, need I state it, money for the kids or grandkids). Also, last time I checked, the tenure provision would provide a HIGHER monthly payout. And, from a cash flow standpoint, tax brackets need to be checked as a portion of IA payments are taxable. (Of course, the IA has lifetime payout options and may continue paying in some situations where tenure would have stopped.)
    **A deferred annuity (TDA), likewise, could “tie up” money as stated above. (Usually the liquidity is 10% per year, non-cumulative, with full access in about seven years.) Usually, this is appropriate for “extra money” where no long-term need is anticipated for the premium amount invested
    **A rated IA (meaning medical underwriting) could be more appropriate in some instances, when health is an issue, and could beat tenure.
    ** A Reversionary Annuity (RA) is not available in all states and is used only in specific circumstances.
    –Annuities are wonderful tools, just like RMs, when used properly.

  • Amazing, we just saw a decade of Fannie Mae and other government agency promoting sub-prime lending that filled trillions of dollars of Mortgage Backed Securities, and they are now worried about Reverse Mortgage fraud? Sounds like the the imates are running the crazy house.

  • Unfortunately we have the same dishonest loan officers who would steal from their own parents, getting into the reverse mortgage business. I have been originating reverse mortgages for 13 years and some of the stories I hear from seniors make me sick!! One of the big offenders are the online or telemarketing originators. The untruths they tell the Senior, just to get the loan is dispicable!! I think all reverse mortgage applications should be done face to face to perhaps eliminate some of this fraud.

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