HUD Watchdog Sees Increase in Appraisal Fraud for Reverse Mortgages

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

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  • Why is the OIG “leaking” findings rather than cease and desist orders? If this is truly fraud, why aren’t arrests being made? Is the warning more ploy than notice of action? Is the OIG trying to get lower appraisal amounts on HECMs across the board?

    To review 5,000 HECM to HECM refinances would mean looking over at least 12 months of such closings. If this is actually Traditional HECMs, why not call it what it is?

    If this is an appraisal issue, why are originators being looked into before the appraisers who made the invalid appraisals? If the originators are somehow involved in the appraisal process in “so many” transactions, is that not a finding that the current AMC structure is terribly faulty? HUD now holds the ability to change the structure at will. So do it.

    How are HMBS investors really harmed unless the average active period of these HECMs are significantly shorter than the life of the overall cohort of HECMs endorsed in the same fiscal years? What is at risk is the premium and nothing more. Yet every effort should be made to secure the value of those premiums unless fraud was involved.

    To sum it up: “OIG, go after appraisers producing fraudulent values along with all other participants.” Such action would be far more effective and its news will travel much quicker and reach far deeper into appraiser and originator psyches.

  • RMAdvisor brings up many good points, why is a great question!

    We have had a complete overhaul of our procedures for ordering appraisals. Lenders and brokers can’t go direct anymore. The main purpose of this major change was to eliminate fraud and personal contact with the appraiser by the lender.

    I say, what is the motive for an appraisal firm to commit fraud or the national appraisal exchange we are required to go through?

    Is HUD-OIG saying the underwriters are allowing appraisals with over stated values to go through the approval, funding and securitization process?

    I don’t know, in my opinion I question the rational behind this entire movement but who am I to say. As I said in the beginning of my comment, RMAdvisor pointed out some excellent points in his or her comment. We all need to stay on this and follow it all the way through.

    I thank Jason Oliva John Yedinek for putting out this article, I hope RMD will do follow up articles on this subject.

    John A. Smaldone

    This is the expressed opinion of John A. Smaldone only and does not represent an opinion of Willow Bend Mortgage or any of their affiliates.

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