HUD Fails to Track Almost 13,000 Defaulted HECM Loans says OIG Report

For the last few years, the number of Home Equity Conversion Mortgages (HECM) in default from a failure to pay taxes and insurance has been hot topic for debate at events around the country. Estimates from industry experts typically put the number around 10,000, but a new report from the Department of Housing and Urban Development’s Office of Inspector General says there are nearly 13,000 such loans.

During its investigation into the program, the OIG found that HUD failed to track 12,958 HECMs with a max claim amount of more than $2.5 billion that are in default due to failure to pay taxes and insurance.

According to the report, HUD routinely granted foreclosure deferrals because it was unwilling to foreclose on senior citizen borrowers, but the agency had no formal procedures. In May 2009, HUD alerted servicers that it would not accept foreclosure deferral requests after April 30, 2009, for loans in default due to nonpayment of taxes and insurance.

While HUD claimed it was developing a policy, it had not given servicers procedures for handling the loans. As a result, servicers held the loans and paid borrower’s taxes and insurance premiums totaling more than $35 million. Additionally, from March 2009 to March 2010, the number of deferred loans increased 173 percent.

While HUD said it was not aware of the loans, a supervisor said she was not surprised by the number of defaulted loans being held by servicers due to nonpayment of taxes and insurance. The OIG estimates that the sale of HECM foreclosures upon properties from October 1, 2008, to February 22, 2010, could cost HUD at least $1.47 billion.

“Given that the portfolio of defaulted loans had increased significantly, coupled with the rapid rise in the number of new HECM loans, it is crucial that HUD act swiftly to issue guidance on how to resolve the loans currently in default and implement policies to reduce or prevent future occurrences,” said the OIG.

In response to the report, HUD said it’s developing formal policy guidance that addresses the prevention of future defaults. It’s also drafting instructions to servicers on the actions that must be taken to address the existing portfolio of defaulted or deferral loans. According to HUD, there are various ways to address the issue, which includes possibly establishing a minimum income or credit level to ensure that the borrowers have the funds for house expenses or setting aside funds at loan origination for these expenses.