The Department of Housing and Urban Development’s Office of Inspector General (HUD-OIG) issued a bulletin this week to warn reverse mortgage lenders and other industry stakeholders of potential appraisal fraud as it applies to refinancing Home Equity Conversion Mortgages (HECMs).
Specifically, the industry warns reverse lenders, originators and sponsors that the OIG has identified instances of fraudulent appraisals being used to increase HECM loan amounts in order to qualify senior borrowers for HECM refinancing.
In supporting its claims, the HUD-OIG says it has analyzed over 5,000 HECM refinances over the last several years, with an initial analysis showing that a small group of reverse mortgage originators is responsible for a large percentage of potentially fraudulent HECM refis, generally within relatively small geographic areas.
Seemingly unexplained, large increases in appraised values in a relatively short period of time triggered concerns for the government watchdog, which said that its preliminary investigations have revealed instances where HECM appraisers claimed property values have increased by 60% to 100%, while other properties in the area are appreciating only 3% to 4%.
HUD-OIG has conducted initial investigations of several HECM originators who refinanced HECM loans using overstated appraisals, the agency said in the bulletin issued Monday. The watchdog also identified sponsors connected to “large groups of the fraudulent mortgages.”
The Federal Housing Administration pays “inflated” insurance claims when fraudulently over-valued properties are foreclosed, thus increasing losses to the FHA’s insurance fund. Also harmed are investors in the secondary markets who pay premiums to purchase HECMs, based on expected terms and interest rates.
“When the borrower’s original HECM is paid off early because of a fraudulently refinanced HECm loan, investors may lose money on the investment,” HUD-OIG writes in the bulletin. “Early payoffs from refinancing may negatively affect the prices that investors will pay for orientated HECMs.”
To account for possible losses from refis, HUD-OIG says investors may reduce the premiums they will pay when purchasing HECMs—a reduction that may affect the profit margins of originating lenders.
As part of its investigation, HUD-OIG will be working with forensic appraisal services to further analyze “hundreds of HECM to HECM refinances” and HECM original loans to determine if further scrutiny is needed. Additionally, the agency said the FHA is adopting a system to evaluate the quality of appraisals at the time of endorsement in order to catch these issues earlier.
In the meantime, the federal watchdog is calling for underwriters to carefully scrutinize appraisals and appraisal comps on all HECM originations.
HUD-OIG is also pressing underwriters to look for fraud indicators such as large increase in home value over a relatively short period of time from the original HECM; changes in property descriptions, including square footage and neighborhoods; appraisal comps located relatively far from the subject property; and the same appraisers or small group of appraisers being used by originators on refinances.
View the HUD-OIG bulletin.
Written by Jason Oliva