oversight

HUD Did Not Always Ensure Thats FHA Lenders Complied with Federal Requirements Regarding Home Equity Conversion Mortgages

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                  Issue Date
                                                                           September 29, 2008
                                                                  Audit Report Number:
                                                                           2008-CH-0001




TO:        Brian Montgomery, Assistant Secretary for Housing-Federal Housing
            Commissioner, H


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT:   HUD Did Not Always Ensure That FHA Lenders Complied with Federal
             Requirements Regarding Home Equity Conversion Mortgages

                                   HIGHLIGHTS

 What We Audited and Why

            We audited the U.S. Department of Housing and Urban Development’s (HUD)
            oversight of the Federal Housing Administration (FHA)-insured home equity
            conversion mortgages (HECM) program. We initiated the audit as part of the
            activities in our 2008 annual audit plan. Our audit objective was to assess
            elements of HUD’s oversight of the HECM program. This is the first of two audit
            reports regarding the HECM program and focuses on lender notification of
            borrower deaths and payment of debenture interest.

 What We Found

            HUD did not ensure that FHA lenders reported borrowers’ death in accordance
            with federal requirements. For the 31 loans reviewed, HUD’s contractor failed to
            provide documentation to support that FHA lenders notified HUD of borrowers’
            deaths in writing. Further, the lenders failed to notify the contractor of borrowers’
            deaths for 11 of the 31 loans and for 13 loans, did not report in a timely manner
            the dates of borrowers’ death.
           HUD failed to pay debenture interest on HECM loans. For 13 of the 30 loans in
           which HUD paid claims during the period March 1, 2006, through February 29,
           2008, it did not pay debenture interest to the lenders in accordance with federal
           requirements.

           As a result, HUD could not be assured that FHA lenders appropriately met HUD’s
           time requirements for initiating the foreclosure process or for recording the deeds-
           in-lieu to take possession of the property, which impacts the amount of the
           lenders’ insurance claims. Additionally, as a result of HUD’s failure to pay
           lenders debenture interest on HECM loans from the loans’ due date to the claim
           payment date, it owes lenders debenture interest on HECM loans.

What We Recommend

           We recommend that the Assistant Secretary for Housing-Federal Housing
           Commissioner require that HUD’s Office of Single Family Housing improve its
           existing procedures and controls to ensure that lenders follow HUD’s
           requirements for servicing HECM loans and implement adequate procedures and
           controls to ensure that the Office of Single Family Housing complies with federal
           requirements in the administration of the HECM program, including the proper
           payment of claims, and curtail interest payments to the appropriate lenders for the
           loans identified in this audit report that HUD determines failed to meet all of its
           time requirements.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.


Auditee’s Response

           We provided the results of the servicing deficiencies to HUD’s Office of Single
           Family Housing’s staff during the audit. We also provided the discussion draft
           audit report to HUD’s staff during the audit. We conducted an exit conference
           with HUD’s Office of Single Family Housing on September 16, 2008.

           We asked HUD to provide written comments on our discussion draft audit report
           by September 26, 2008. As of noon Eastern Time on September 29, 2008, HUD’s
           Office of Single Family Housing had not provided written comments to the
           discussion draft report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                           4

Results of Audit
    Finding 1: HUD’s Contractor Did Not Always Ensure That FHA Lenders
               Reported Borrowers’ Deaths in Accordance with HUD’s Requirements    5

    Finding 2: HUD Did Not Pay Debenture Interest on HECM Loans                    7

Scope and Methodology                                                              9

Internal Controls                                                                 10

Appendixes
   A. Federal Requirements                                                        12
   B. Schedule of Borrowers’ Dates of Death Not Reported to HUD or Reported
      in an Untimely Manner                                                       15




                                           3
                      BACKGROUND AND OBJECTIVE

The Housing and Community Development Act of 1987 (1987 Act) established a federal
mortgage insurance program (Section 255 of the National Housing Act) to insure home equity
conversion mortgages (HECM) or reverse mortgages. Pursuant to the 1987 Act, the U.S.
Department of Housing and Urban Development’s (HUD) Federal Housing Administration
(FHA) was authorized to insure 2,500 HECM loans and allocate them among the 10 regional
offices in proportion to each region’s share of the nation’s elderly homeowners. In 1990, the
Omnibus Budget Reconciliation Act increased HUD’s insurance authority to 25,000 mortgages
and terminated the reservation system, allowing all FHA-approved lenders to participate in the
HECM program.

The purpose of HUD’s HECM program is to enable elderly homeowners to stay in their homes
while using some of their accumulated equity. The program allows borrowers that are 62 years
of age of older to obtain an insured reverse mortgage (a mortgage that converts equity into
income). Because elderly homeowners can be vulnerable to fraudulent practices, the program
requires that participants receive counseling from a HUD-approved mortgage counseling agency
before applying for a HECM. FHA insures the HECM loans to protect lenders against a loss if
amounts withdrawn under the loan exceed the value of the property when the property is sold.

Our audit objective was to assess elements of HUD’s oversight of the HECM program. This is
the first of two audit reports regarding the HECM program and focuses on lender notification of
borrower deaths and payment of debenture interest.




                                               4
                                 RESULTS OF AUDIT

Finding 1: HUD’s Contractor Did Not Always Ensure That FHA
   Lenders Reported Borrowers’ Deaths in Accordance with HUD’s
                           Requirements
HUD’s HECM servicing contractor did not always ensure that lenders reported borrowers’
deaths in accordance with HUD’s requirements. For the 31 loans reviewed, the contractor lacked
documentation to support that lenders notified HUD of borrowers’ deaths in writing for all 31
loans. Further, the FHA lenders failed to notify the contractor of borrowers’ deaths for 11 of the
31 loans and for 13 loans, did not report in a timely manner the dates of borrowers’ deaths. The
problems occurred because HUD’s procedures and controls for monitoring its contractor did not
ensure that FHA lenders complied with HUD’s requirements. As a result, HUD could not be
assured that FHA lenders appropriately met HUD’s time requirements for initiating the
foreclosure process or for recording the deeds-in-lieu to take possession of the property, which
impacts the amount of the lenders’ insurance claims.


 FHA Lenders Did Not Comply
 with HUD’s Requirements
 Regarding the Reporting of
 Borrowers’ Deaths

               Using the universe of 203,232 HECM loans endorsed by HUD between March 1,
               2006, and February 29, 2008, 3,967 loans were identified as having borrowers as
               who were potentially deceased. Of the 3,967 loans, we statistically selected 35 to
               review for compliance with HUD’s requirements. Of the 35 loans, we verified
               the borrowers’ deaths for 31 loans and determined that the borrowers for the
               remaining four loans were not deceased; therefore, we excluded the four loans
               from our review.

               For the 31 loans reviewed, HUD’s contractor did not provide documentation to
               show that FHA lenders notified HUD in writing of the dates of death for the
               borrowers. When we contacted the FHA lenders to try to obtain the notification
               documentation, we obtained notification letters for 9 of the 31 borrowers. In
               reviewing the notification letters provided, we identified discrepancies between
               the dates of the notification letters, which were usually faxed from the lenders and
               the dates that HUD’s contractor stated that it received notification letters for 5 of
               9 borrowers.

               Further, the lenders failed to notify the contractor of borrowers’ deaths for 11 of
               the 31 loans and for 13 loans, did not report the dates of borrowers’ deaths within
               60-days as required by HUD. The number of days that elapsed before the FHA


                                                 5
           lenders notified the contractor ranged from 30 to 174 days beyond HUD’s 60-day
           requirement. One lender disbursed a line of credit drawdown in the amount of
           $1,000 to a borrower (FHA loan # 093-6071405) after his date of death (see
           appendix D).

HUD Needs to Improve Its
Existing Procedures and
Controls

           HUD’s Office of Single Family Housing needs to improve its existing procedures
           and controls for monitoring its contractor to ensure that FHA lenders comply with
           HUD’s requirements. According to the Director of HUD’s Servicing Division,
           the contractor relied on the FHA lenders to notify it via letter or telephone when
           borrowers died. She said that her office was not aware that it should keep up with
           this information since it had no effect on the loan. Therefore, if a lender informed
           the contractor of a borrower’s death, the contractor sometimes entered this
           information into the comments section in its computer system. However, there
           was no specific field in the database in which to record the information. The
           Director also said that she would look into changing this process.

           As a result of HUD’s contractor’s failure to ensure that FHA lenders reported
           borrowers’ deaths, HUD could not be assured that the lenders appropriately met
           their time requirements for initiating the foreclosure process or recording the
           deeds-in-lieu to take possession of the property, which impacts the amount of the
           lenders’ insurance claims (see finding 2) and results in HUD either underpaying
           or overpaying claims. These loans had not yet been sent to claims, if warranted.

Recommendation

           We recommend that the Assistant Secretary for Housing-Federal Housing
           Commissioner require the Office of Single Family Housing to

           1A.    Improve its existing procedures and controls for monitoring its contractor
                  to ensure that FHA lenders comply with HUD’s time requirements.




                                            6
Finding 2: HUD Did Not Pay Debenture Interest on HECM Loans
HUD failed pay to debenture interest on HECM loans. For 13 of the 30 loans for which HUD
paid claims between March 1, 2006, and February 29, 2008, it did not pay debenture interest to
the FHA lenders from the due date, date of mortgagors’ deaths, or extended property vacancy to
the date the claim was paid as required by HUD’s regulations or from the date the lender obtains
good marketable title of the property as required by federal requirements. This problem occurred
because HUD lacked adequate procedures and controls to ensure that it complied with its own
requirements and federal regulations in the proper administration of its HECM program. As a
result of HUD’s failure to pay lenders debenture interest on HECM loans from the loans’ due
date to the claim payment date, it owes lenders debenture interest on HECM loans.


 HUD Failed to Pay Debenture
 Interest on HECM Loans

              Using the universe of 203,232 HECM loans endorsed by HUD between March 1,
              2006, and February 29, 2008, we identified 30 loans for which HUD paid claims.
              We reviewed all 30 loans for compliance with HUD’s requirements. As of
              September 26, 2008, 17 of the 30 loans were assigned to HUD, and the remaining
              13 were not. Lenders have the option of assigning loans to HUD when they reach
              98 percent of the maximum claim amount.

              HUD did not always pay debenture interest on HECM loans. For all 13 loans that
              were not assigned to HUD, it did not pay debenture interest from the due date to
              the date the claim was paid in accordance with Mortgagee Letter 2003-22 or in
              accordance with federal requirements, the date the lender obtains good marketable
              title to the property.

 HUD Lacked Adequate
 Procedures and Controls

              HUD lacked adequate procedures and controls to ensure that it complied with its
              own and other federal requirements in the proper administration of its HECM
              program. According to the Chief of HUD’s Single Family Claims Branch, the
              payment of debenture interest had not been curtailed on any of the loans for which
              HUD paid claims for the untimely reporting of borrowers’ deaths or for not
              initiating foreclosure in a timely manner because HUD had not paid lenders
              debenture interest for those items. It had only paid debenture interest from the
              date the claims were submitted to HUD to the date the claims were paid. The
              Chief of the Single Family Claims Branch said that HUD had always underpaid
              the lenders. She further stated that she had recently participated in several
              meetings with various HUD management staff to discuss how they would handle
              this situation and create policies.


                                               7
          As a result of HUD’s failure to pay lenders debenture interest on HECM loans
          from the loans’ due date to the claim payment date, it owes lenders debenture
          interest on HECM loans. Further, the contractor’s failure to ensure that lenders
          reported borrowers’ deaths (see finding 1) diminished HUD’s ability to curtail
          lenders’ debenture interest payments due to noncompliance if the lenders were to
          seek repayment.

          Since HUD had not fully developed procedures as of August 2008 for calculating
          debenture interest and recording and validating borrowers’ dates of death, and
          other pertinent dates such as determinations of extended property vacancies or
          other circumstances that would make the loans due, we could not determine the
          amount of debenture interest owed to the lenders.

Recommendations

          We recommend that the Assistant Secretary for Housing-Federal Housing
          Commissioner require of the Office of Single Family Housing to

          2A.     Implement adequate procedures and controls to ensure that it complies
                  with federal regulations in the administration of its HECM program,
                  including the proper payment of claims.

          2B.     Curtail interest payments to the appropriate lenders for the loans identified
                  in this audit report that HUD determines failed to meet all of its time
                  requirements.




                                            8
                        SCOPE AND METHODOLOGY

Our audit work was performed at HUD’s headquarters, the Chicago regional office, and the
Columbus and Detroit field offices. The review covered the period March 1, 2006, through
February 29, 2008. We expanded the review as necessary.

To accomplish our audit, we researched and reviewed applicable HUD handbooks, regulations,
mortgagee letters, and other reports and policies related to the program. We also conducted
interviews with HUD’s staff and its contractor.

Using HUD’s system, we identified 203,232 HECM loans that were endorsed by HUD during
the period March 1, 2006, through February 29, 2008. The total maximum claim amount insured
by HUD for the 203,232 loans was nearly $47 billion (the maximum dollar amount that HUD
will pay on a claim for insurance benefits).

With the assistance of an Office of Inspector General (OIG) computer audit specialist, we
compared the borrowers’ Social Security numbers for the 203,232 loans by a deceased database
provider. Of the 203,232 loans, we identified 6,109 borrowers and 2,946 coborrowers as
potentially being deceased. When we compared information maintained in HUD’s Single
Family Data Warehouse system, we determined that 5,919 of the 6,109 deceased borrowers (97
percent) and 2,737 of the 2,946 deceased coborrowers (93 percent) were not reported as being
deceased in HUD’s system. In reducing the duplicates in our data, we identified that deceased
borrowers and coborrowers overlapped resulting in 3,810 deceased borrowers. We further
determined that of the 2,737 coborrowers that were deceased, 157 of the loans also had deceased
borrowers; however, the loans were still active, and were not previously identified. Therefore,
we statistically selected 35 of the 3,967 (3,810 plus 157) loans for review.

For the 35 loans, we verified the borrowers’ deceased status by reviewing the lenders’ and
HUD’s contractor’s documentation, in addition to reviewing information contained in the same
databases most of the lenders used. We also telephoned and mailed confirmation letters to the
borrowers’ residences. Of the 35 loans, we determined that borrowers for four of the loans were
not deceased, thus reducing the number of loans reviewed to 31.

Additionally, of the total universe of 203,232 loans, we determined that HUD paid claims on 30
loans. Therefore, we reviewed all 30 loans for compliance with HUD’s requirements.

We performed the audit work in accordance with generally accepted government auditing
standards.




                                               9
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit objective:

              •       Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data - Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with laws and regulations - Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources - Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls identified above.

              A significant weakness exists if internal controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.




                                               10
Significant Weakness


            Based on our audit, we believe the following item is a significant weakness:

            •    HUD’s Office of Single Family Housing lacked adequate procedures and
                 controls for monitoring lenders for compliance with HUD’s requirements
                 regarding the HECM program (see findings 1 and 2).




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                                       APPENDIXES

Appendix A

                           FEDERAL REQUIREMENTS

Mortgagee Letter 2003-22 states when a borrower dies and the property is not the principal
residence of at least one surviving borrower, the HECM balance becomes due and payable in
full. The lender is required to notify HUD. This notice must also occur as soon as possible
following the death but no longer than 60 days from the date of the borrower’s death. This
notice must be in writing; must provide the case number, the borrower’s name, the property
address and the date of death; and may be delivered via facsimile or letter. The notice must be
delivered to HUD’s HECM servicing contractor.

Mortgagee Letter 2003-22 states that with respect to a HECM mortgage that is foreclosed as a
result of the death of the borrower, the “due date” is the date that HUD is notified of the
borrower’s death (notification date). Lenders are entitled to receive interest at the debenture rate
from the due date (notification date) to the date the claim is paid as provided by 24 CFR (Code of
Federal Regulations) 206.125(d).

Also when a borrower dies and the property is not the principal residence of at least one
surviving borrower, the HECM mortgage balance becomes due and payable in full. The
mortgagee is required to notify HUD (see 24 CFR 206.27(c)(1)). This notice must occur as soon
as possible following the death but no later than 60 days from the date of the borrower’s death.

HUD Handbook 4330.1, REV-5, paragraph 9-3(A)(1), states that if the mortgage is in default
and the property has been determined to be vacant or abandoned, foreclosure must be initiated
(or a deed in lieu of foreclosure must be recorded) within nine months after date of default or
within the latter of 120 days after the date the property became vacant, is discovered vacant, or
should have been discovered vacant. Section 13-22 states that the lender must provide a written
certification for the borrower’s signature to the borrower annually. Although written
certification may be useful in determining the borrower’s occupancy status, other supplemental
measures may be needed to effectively determine the date of death to meet the six-month
requirement for first legal action. Lenders may consider subscribing to one of several
commercial resources that offer a monthly match of loan files against a Social Security database
of death records.

HUD’s regulations at 24 CFR 206.125(d) state that the lender shall commence foreclosure of the
mortgage within six months of giving notice to the borrower that the mortgage is due and
payable or six months from the date of the borrower’s death, if applicable, or within such
additional time as may be approved by the Secretary of HUD.

HUD’s regulations 24 CFR 203.402(k)(2) state that when a claim for insurance benefits is being
paid without conveyance of title to the Federal Housing Commissioner in accordance with 24


                                                12
CFR 203.368 and was endorsed for insurance on or before January 23, 2004, an amount
equivalent to the sum of

(A) The debenture interest that would have been earned, as of the date the lender or a party other
than the borrower acquires good marketable title to the mortgaged property, on an amount equal
to the amount by which an insurance claim determined in accordance with 24 CFR 203.401(a)
exceeds the amount of the actual claim being paid in debentures; plus

(B) The debenture interest that would have been earned from the date the lender or a party other
than the lender acquires good marketable title to the mortgaged property to the date when
payment of the claim is made on the portion of the insurance benefits paid in cash if such portion
had been paid in debentures, except that if the lender fails to meet any of the applicable
requirements of 24 CFR 203.355, 203.356, and 203.368(i)(3) and (5) within the specified time
and in a manner satisfactory to the Federal Housing Commissioner (or within such further time
as the Commissioner may approve in writing), the interest allowance in such cash payment shall
be computed only to the date on which the particular required action should have been taken or
to which it was extended.

HUD’s regulations at 24 CFR 203.410 state that for conveyed properties, claims without
conveyance, preforeclosure sales in which the property is conveyed to the Federal Housing
Commissioner, or instances in which the lender or other party acquires title to the property under
the claim without conveyance procedure or the preforeclosure sale procedure, debenture shall be
dated
(2) If issued on or after September 2, 1964, and a certificate of claim is not issued, as of the date
of default as defined in this part.

(c) Notwithstanding paragraph (a) of this section, in connection with conveyed properties and
claims without conveyance, debentures issued as reimbursement for expenditures made by a
lender after the date of default shall be dated as of the date the expenditure is actually made by
the lender.

HUD’s regulations at 24 CFR 206.129(d)(1) state that the due date means the date when the
mortgagee notifies the Secretary of HUD under 24 CFR 206.27(c)(1) that the mortgage became
due and payable or, if applicable, the date the Secretary granted approval under 24 CFR
206.27(c)(2) for the mortgage to become due and payable. Section (d)(2) state the claim shall
include the following items: (d)(2)(iii) an amount equal to the interest allowance which would
have been earned from the due date to the date when payment of the claim is made.

HUD Handbook 4330.4, section 3-2, states that the lender must comply with the following time
requirements when submitting a claim involving an assigned mortgage which is in default.
Failure to comply will result in curtailment of debenture interest to the date the action should
have been taken or to the date to which it was extended by HUD.

Section 3-13(a)(4) of the handbook states debenture interest on the net claims amount (excluding
mortgage interest) from the date of assignment to the date of payment unless such interest is
curtailed because of the lender’s failure to meet the time requirements identified in section 3-2.



                                                 13
HUD Handbook 4235.1, REV-1, section 8-2(b)(3), states that the mortgage cannot be due and
payable due to the death of the borrower (with no surviving borrower maintaining the property as
a principal residence).

Section 8-3 of the handbook states that the lender must notify the local HUD office having
jurisdiction over the property when the lender is preparing to assign the property to HUD and file
a claim for insurance benefits. The local HUD office must be notified at least 30 days but not
more than 60 days before the anticipated date of recording the assignment to HUD. The lender
notifies HUD of its intent to assign the mortgage.




                                               14
Appendix B

 BORROWERS’ DATES OF DEATH NOT REPORTED TO HUD
      OR REPORTED IN AN UNTIMELY MANNER

                                                        Borrower’s date of
                                Date contractor        death reported by the       Date
              Case number        was notified                 lenders           differences
               042-7947882        Oct. 9, 2007             July 10, 2007            91
                                                        Feb. 2, 2007, Apr. 3,
              042-7968915*       Aug. 17, 2007                  2007               136
               044-4296050        Feb. 8, 2008             July 10, 2007           213
               048-4429572        July 28, 2007             Jan. 7, 2007           202
               061-3057573        Feb. 8, 2008             Sept. 7, 2007           154
               093-6044690       Apr. 13, 2007             Nov. 18, 2006           146
               151-8012441       Feb. 15, 2008             July 21, 2007           209
               251-3220314       Apr. 17, 2008             Aug. 11, 2007           250
               292-4715189       Aug. 31, 2007              June 2, 2007            90
               371-3596469       May 25, 2007              Nov. 15, 2006           191
               374-4573519        Oct. 20, 2007            May 28, 2007            145
               541-7334817        Oct. 11, 2006            Feb. 19, 2006           234
               541-7403124        May 1, 2007              Oct. 23, 2006           190
               043-7323610        Not notified              May 9, 2007            N/A
               043-7365321        Not notified             Dec. 27, 2006           N/A
               048-4379397        Not notified              May 3, 2007            N/A
               048-4446462        Not notified             Aug. 29, 2007           N/A
               093-6040790        Not notified             Aug. 31, 2007           N/A
               093-6071405        Not notified             Feb. 10, 2007           N/A
               137-3521533        Not notified              May 9, 2007            N/A
              197-3558643**       Not notified          Active/not deceased        N/A
               249-5040544        Not notified              July 4, 2007           N/A
               249-5066180        Not notified             Aug. 22, 2007           N/A
               431-4171144        Not notified             Apr. 13, 2006           N/A

Legend:
          •   *The lender had identified two different dates for the borrower’s date of death.
          •   **The lender reported that the borrower was still alive; however, we confirmed that the
              borrower was deceased.




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