oversight

HUD Was Not Tracking Almost 13,000 Defaulted HECM Loans With Maximum Claim Amounts of Potentially More Than $2.5 Billion

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-08-25.

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

                                                                                 Issue Date
                                                                                          August 25, 2010
                                                                                 Audit Report Number
                                                                                              2010-FW-0003




TO:             Vicki B. Bott, Deputy Assistant Secretary for Single Family Housing, HU

                //signed//
FROM:           Gerald R. Kirkland
                Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: HUD Was Not Tracking Almost 13,000 Defaulted HECM Loans With
           Maximum Claim Amounts of Potentially More Than $2.5 Billion


                                              HIGHLIGHTS

    What We Audited and Why

                  We performed an internal audit of the U. S. Department of Housing and Urban
                  Development’s (HUD) Home Equity Conversion Mortgage (HECM) program
                  because we found that an increasing number of borrowers had not paid taxes or
                  homeowners insurance premiums as required, thus placing the loan in default 1.
                  Also, we noted that HUD had granted foreclosure deferrals routinely on defaulted
                  loans, but it had no formal procedures. Our audit objective was to determine
                  whether HUD’s adoption and reversal of an informal foreclosure deferral policy
                  for HECM loans that defaulted due to nonpayment of taxes and insurance had a
                  negative effect on the HECM program.


    What We Found

                  HUD’s informal foreclosure deferral policy and its reversal had a negative effect
                  on the universe of HECM loans and loan servicers (servicers). After cancelling

1
     HECM program regulations do not use the term “default.” However, HUD used the term to describe 7,673
     loans where the borrowers had not paid their taxes and insurance in accordance with their mortgages’
     provisions. Thus, we used the term to describe all of the loans where the borrowers did not pay their taxes and
     insurance. “Default” is defined as failure to meet the terms of the loan agreement.
           its informal policy, HUD did not issue guidance to servicers advising them of
           what actions to take regarding defaulted loans. Thus, servicers continued to
           service the loans and paid the taxes and insurance for the borrowers, but they did
           not notify HUD. As a result, four servicers contacted were holding almost 13,000
           defaulted loans with a maximum claim amount of more than $2.5 billion, and two
           of the four servicers said they were awaiting HUD guidance on how to handle
           them. Further, the servicers had paid taxes and insurance premiums totaling more
           than $35 million for these 12,958 borrowers and, if HUD does not take action,
           additional payments will occur in the next 12 months.

           HUD also could not identify the deferred or defaulted loans in the Single Family
           Data Warehouse and did not track the number of borrowers who were unable to
           pay their property taxes or insurance premiums. As a result, HUD did not know
           how many loans had principal amounts increasing because the servicer had added
           payments for taxes and insurance to the loan amount. Since unreported defaulted
           loans were only obtained from 4 of a total of 16 HECM servicers nationwide,
           more defaulted loans may exist. Further, as HUD could not track these loans, it
           did not know the potential claim amount. In the event of foreclosure of the 7,673
           loans for which HUD was aware and 12,958 loans of which it was not aware,
           HUD could lose an estimated $1.4 billion upon sale of the properties.


What We Recommend

           We recommend that HUD’s Deputy Assistant Secretary for Single Family
           Housing (1) discontinue the practice of deferring foreclosure due to nonpayment of
           taxes and insurance which will result in an estimated $35 million in funds being put
           to better use; (2) issue formal guidance to servicers regarding loans currently in
           default due to nonpayment of property taxes and insurance, including requiring the
           servicers to foreclose if the borrowers do not pay the delinquent taxes and insurance;
           (3) develop and implement a plan to minimize the risk of future defaults due to
           nonpayment of taxes and insurance; and (4) develop a tracking and reporting system,
           including making modifications to the Single Family Data Warehouse, to ensure that
           HUD can track the defaulted loans and the amounts paid for the borrowers.

Auditee’s Response

           We provided a draft report to HUD on July 6, 2010, and requested its written
           comments by August 5, 2010. We held an exit conference with HUD on July 20,
           2010 and HUD requested an extension to respond until August 12, 2010. On
           August 17, 2010, we received HUD’s written response which generally agreed
           with the finding. The complete text of the response, along with our evaluation of
           it, can be found in appendix B. HUD also provided a presentation from servicer
           training as an attachment. As it was not formal HUD policy, we have not
           included this report, but a copy is available upon request.

                                             2
                          TABLE OF CONTENTS

Background and Objective                                                  4

Results of Audit
      Finding: HUD Was Not Tracking Almost 13,000 Defaulted HECM Loans    6
               With Maximum Claim Amounts of Potentially More Than $2.5
               Billion

Scope and Methodology                                                     13

Internal Controls                                                         14

Appendixes
   A. Schedule Funds To Be Put to Better Use                              15
   B. Auditee Comments and OIG’s Evaluation                               16




                                          3
                          BACKGROUND AND OBJECTIVE

The U. S. Department of Housing and Urban Development (HUD) provides reverse mortgage
insurance through the Home Equity Conversion Mortgage (HECM) program. Before fiscal year
2009, the HECM program was part of the General Insurance Fund. The Federal Housing
Administration (FHA) Modernization Act within the Housing and Economic Recovery Act of
2008 moved all new HECM program endorsements to the Mutual Mortgage Insurance Fund 2,
effective in fiscal year 2009. For fiscal year 2010, HUD’s request for $800 million in additional
funding for the HECM program was denied by Congress. HUD responded by decreasing the
principal loan limits for borrowers by 10 percent. For fiscal year 2011, HUD requested an
additional $250 million.

The HECM program enables homeowners to obtain income by accessing the equity in their
homes. To be eligible for a HECM, homeowners must be 62 years of age or older, have
significant equity in their home, and have received HUD-approved reverse mortgage counseling
to learn about the program. There are no minimum income or credit requirements. A HECM
loan provides homeowners with cash payments or credit lines. The maximum amount they can
receive is determined by the borrowers’ age, interest rate, and value of their home or HUD’s loan
limits, whichever is less. The loan is secured by the home’s equity. Borrowers are not required
to repay the loans as long as the borrower continues to live in the home, maintains the property,
and pays the property taxes and homeowners insurance premiums. The HECM loan servicer
(servicer)3 is required to ensure that the borrower continues to meet the requirements.

In the event that the borrower fails to pay property taxes, to prevent a tax foreclosure, the servicer
will pay the property tax and add the amount to the loan principal. The servicer will also pay for
property insurance if the borrower fails to pay to keep the property insured. 4 If the borrower’s
principal has not reached the principal limit,5 the amount of the tax and insurance payment is
considered a distribution of the loan amount. If payments of property taxes or insurance result in
the loan balance exceeding the principal limit, the borrower is in default of the mortgage terms.
During fiscal year 2009, approximately 83 percent of HECM borrowers withdrew their credit line as
a lump sum at loan closing; thus, the borrowers had no additional funds available to draw on in
future years and payment of taxes and insurance by the servicer would cause the loans to
immediately exceed the principal limit and be in default.

Servicers may assign HECM loans to HUD when the principal, interest, and servicing fees for the
loan reaches 98 percent of the maximum claim amount. At that time, HUD pays the servicer for the

2
    The Mutual Mortgage Insurance Fund was authorized by Section 203(b) of the National Housing Act of 1934.
    Borrowers who obtain FHA insured mortgages on their single-family homes pay premiums into the fund.
    Deposits into the fund are then used to pay claims to lenders if borrowers default on their FHA insured
    mortgages.
3
    The originating lender may or may not service the loan after closing.
4
    24 CFR (Code of Federal Regulations) 206.205(c). If the mortgagor fails to pay the property charges in a
    timely manner and has not elected to have the mortgagee make the payments, the mortgagee may make the
    payment for the mortgagor and charge the mortgagor's account.
5
    Principal limit is the maximum amount that can be advanced to the borrower based on the borrower’s age and the
    value of the house.
                                                         4
loan out of the appropriate insurance fund, and HUD takes over servicing the loan. The mortgage
terms also require that the mortgage be due and payable, upon approval of the HUD Secretary, if the
borrower does not pay the taxes and insurance. HECM regulations require the servicers to notify
HUD whenever the mortgage is due and payable due to a tax and insurance default. 6 The servicer
can also assign a mortgage to FHA when the borrower requested a payment which exceeded the
difference between the maximum claim amount and the loan balance. However, the servicer may
not assign such a loan to FHA if the loan is due and payable. However, assignment can occur if the
servicer has not informed FHA of a taxes and insurance default or if FHA has been informed but
denied approval for the loan to be due and payable.

Our audit objective was to determine whether HUD’s adoption and reversal of an informal
foreclosure deferral policy for HECM loans that defaulted due to nonpayment of taxes and
insurance had a negative effect on the HECM program.




6
    24 CFR 206.125. The mortgagee shall notify the Secretary whenever the mortgage is due and payable under the
    conditions stated in Sec. 206.27(c)(1), or one of the conditions stated in Sec. 206.27(c)(2) has occurred. 24CFR
    206.27(c)(2) states the mortgage shall state that the mortgage balance shall be due and payable in full, upon
    approval of the Secretary, if …an obligation of the mortgagor under the mortgage is not performed.

                                                         5
                                       RESULTS OF AUDIT

Finding: HUD Was Not Tracking Almost 13,000 Defaulted HECM
         Loans with Maximum Claim Amounts of Potentially More
         Than $2.5 Billion
HUD’s informal foreclosure deferral policy and its reversal had a negative effect on the universe of
HECM loans and the servicers. After cancelling its informal policy, HUD did not issue guidance to
HECM loan servicers advising them of what actions to take regarding loans in default due to
nonpayment of taxes and insurance.7 Thus, the servicers continued to service the loans and paid the
taxes and insurance for the borrowers but did not notify HUD. As a result, four servicers contacted
indicated that they were holding almost 13,000 of these defaulted loans with a maximum claim
amount of more than $2.5 billion, and two of the four servicers said they were awaiting HUD
guidance on how to handle them. Further, the servicers had paid taxes and insurance premiums
totaling more than $35 million for these 12,958 borrowers, and if HUD does not take action,
additional payments will occur in the next 12 months.

Additionally, since HUD lacked critical information, it could not track or assist troubled borrowers
who had not gone into default, and it did not know the extent of those borrowers who had gone into
default.



     HUD Previously Allowed
     Deferrals for Tax and
     Insurance Defaults

                   Before April 30, 2009, to preserve the property from tax foreclosure, the HECM
                   servicer paid the taxes and added the tax payment to the principal amount above
                   the borrowers’ principal limit. The servicer notified HUD that the loan was due
                   and payable, and HUD granted a deferral 8 rather than foreclose. HUD routinely
                   deferred foreclosure through an informal policy 9 because it indicated that it was
                   unwilling to foreclose on senior citizen borrowers. HUD tracked these loans
                   outside the Single Family Data Warehouse. As of April 30, 2009, HUD was
                   tracking 7,673 loans 10 with a maximum claim amount of approximately $1.1
                   billion.



7
      HECM borrowers agreed to pay taxes and insurance on their properties, and if they are not paid, the borrower
      has not met the terms of the mortgage provisions. 24 CFR 206.27
8
      Due and payable loans are subject to foreclosure. HUD gives the servicer permission to not foreclose or
      foreclosure is deferred.
9
      HUD’s policy was issued via e-mail. HUD was unable to provide a copy.
10
      The Single Family Data Warehouse does not currently track these loans. The database maintained by HUD was
      an Excel spreadsheet outside HUD systems, based on loans reported to HUD by the servicers.
                                                         6
 HUD Stopped Deferring
 Foreclosure for Tax and
 Insurance Default

                  On May 20, 2009, HUD sent HECM servicers an e-mail informing them that
                  HUD would not accept foreclosure deferral requests after April 30, 2009, for
                  loans in default due to nonpayment of taxes and insurance. Although the
                  servicers are required to report the defaulted loans, HUD’s unclear direction was
                  apparently interpreted by servicers as waiving this reporting requirement. While
                  HUD claimed that it was developing policy, it had not given the servicers
                  procedures for handling these loans.


 Servicers Were Holding
 Defaulted Loans

                  We contacted four servicers and obtained lists of loans in default due to unpaid
                  property taxes and insurance. The four servicers reported that they were holding
                  almost 13,000 loans with a maximum claim amount of more than $2.5 billion.
                  For these 13,000 loans, the servicers paid the taxes and insurance and added that
                  amount to the principal balance. For all of these loans, the borrower’s failure to
                  pay the taxes and insurance placed the loan in default as the mortgage provisions
                  had not been met. Since the loans were in default, the servicers were required to
                  report the defaults to HUD and with HUD’s approval proceed to foreclosure. As
                  previously stated, HUD had not provided guidance, and the servicers indicated
                  that they were awaiting further instruction from HUD. HUD was not aware of
                  these loans, but upon our advising it of the loans, a HUD supervisor stated that
                  she was not surprised by the number of defaulted loans being held by servicers
                  due to nonpayment of taxes and insurance.

 Unpaid Tax and Insurance
 Amounts Exceeded $35 million

                  Since the borrowers did not pay their taxes and insurance as required, the four
                  servicers of the more than 13,000 loans paid more than $35 million from May
                  2009 through March 2010 to cover unpaid amounts. Payment of the taxes and
                  insurance by the servicers ultimately increases the potential claims that HUD will
                  have to pay. The number of deferred loans grew 173 11 percent from May 2009 to
                  March 2010. If the trend continues, the number of deferred foreclosures due to
                  nonpayment of taxes and insurance, the amount of tax and insurance payments

11
     Before May 2009, the four servicers contacted had reported 7,509 of the total of 7,673 defaulted loans reported
     to HUD; however, they had not reported 12,958 defaulted loans during the period May 2009 to March 2010.
     Thus, they had a total of 20,467 deferred loans (12,958+7,509=20,467) which represented a 173 percent
     increase for the period (20,467 / 7,509=2.725 - 1= 1.725 or 173 percent).
                                                          7
                  made by servicers, and the corresponding risk to the Mutual Mortgage Insurance
                  Fund should be expected to similarly increase. It is imperative that HUD
                  promptly issue guidance to the servicers including directing them to foreclose, if
                  necessary, to avoid payment of an additional $35 million in property taxes and
                  insurance by servicers in the next year.


 Cost to HUD Could Not Be
 Measured as HUD Had No
 Tracking Mechanism

                  HUD could not easily track the number of loans on which the borrowers had not
                  paid their property taxes and insurance. Specifically, HUD could not identify
                  deferred or defaulted loans in the Single Family Data Warehouse, did not track
                  the number of borrowers who were unable to pay their property taxes or insurance
                  premiums, and did not know how many loans had principal amounts increasing
                  because payments for taxes and insurance had been added to the loan amount.
                  Unless the Single Family Data Warehouse or other appropriate single family data
                  base is modified to adapt unused data fields to accommodate HECM-specific
                  data, HUD cannot track the deferred or defaulted loans. Further, HUD could not
                  track or assist troubled borrowers whose loans had property tax or insurance paid
                  for them. In addition, HUD did not have the information it needed for its
                  evaluations, forecasts, or projections for future program needs. If HUD had this
                  data, it might be able to improve the program to ensure that borrowers have the
                  ability to pay their taxes and insurance and better evaluate the program. If not
                  addressed, the problem will increase as the HECM program grows.

     HUD Was Aware of the Issue
     and Was Concerned

                  HUD obtained an actuarial analysis of the HECM loans in the Mutual Mortgage
                  Insurance Fund for fiscal year 2009.12 The report, dated October 12, 2009,
                  concluded that there were sufficient capital resources to meet the anticipated
                  liabilities associated with the HECM portion of the Mutual Mortgage Insurance
                  Fund. To assess the adequacy of the current and future capital resources needed to
                  meet estimated cash outflow requirements, the contractor used historical HECM
                  loan data reported by HUD through June 30, 2009. However, the analysis did not
                  include the loans on which HUD had deferred foreclosure due to nonpayment of
                  taxes or insurance or the 12,958 defaulted loans of which HUD was not aware.
                  While some of the 12,958 loans were not in default at the time of the analysis, at
                  least the 7,673 that HUD was tracking as of April 30, 2009, were in default but were
                  not included in the analysis. It is unknown what effect these loans would have had


12
      “An Actuarial Analysis of FHA Home Equity Conversion Mortgage Loans In the Mutual Mortgage Insurance
      Fund Fiscal Year 2009”
                                                      8
                  on the outcome of the analysis, but given the rate of increase of the defaults, the
                  conclusion of the analysis at this point may be questionable.

                  HUD was concerned by the defaults as expressed by HUD’s Deputy Assistant
                  Secretary for Single Family Housing as recently as May 2010. In reference to
                  HUD’s request for $250 million to support the HECM program for fiscal year
                  2011, she noted that “the program was designed to be self-sustaining without
                  congressional appropriations, and that is proving untenable.” 13 She further stated
                  that without the appropriation, HUD will have to look at ways to make the
                  program self-sustaining while at the same time exploring ways to resolve
                  longstanding problems such as nonpayment of taxes and insurance. Regarding
                  the taxes and insurance, she stated, “I think there’s a balance [needed] to give
                  seniors enough time to figure out how to pay or sell the property and find
                  alternative living arrangements,” adding that “hopefully within 30 days we can
                  talk more specifically” about the government’s intent. She further stated, “Some
                  finite amount of time will be set [after which] someone has to take the financial
                  risk.”

                  A June 19, 2010 article in The Washington Post stated that the Deputy Assistant
                  Secretary said that, “. . . new guidance this summer will emphasize a ‘curative
                  approach’ that allows seniors to ‘develop a plan to repay past tax and insurance
                  delinquencies.’"

                  HUD’s Director of Portfolio Analysis, Office of Evaluation, stated that his office
                  had previously prepared an analysis of the tax and insurance issue. 14 The analysis
                  identified several concerns, including

                      •    “Adding T & I [taxes and insurance] to the loan balance after reaching the
                           principal limit will significantly reduce recoveries and increase total
                           losses.”
                      •    “Allowing deferrals will create an incentive to other borrowers not to pay
                           the T & I [taxes and insurance], which will further increase HUD’s risk
                           exposure.”
                      •    “The current additional cost associated with the deferral of calling a loan
                           due and payable and adding the tax and insurance to the loan balance is
                           not captured in the audited HECM cash-flow model. As more deferrals
                           occur, the total loss will quickly become material.”

                  The analysis included a detailed risk analysis that considered the overall loss
                  associated with the deferral of tax and insurance payments, using various models
                  to obtain the net present value of future claims and premiums and their impact on
                  the cash-flow model. The risk was measured in terms of the additional claim and
                  premium amounts from deferrals. The analysis was based on 11,272 loans. Since

13
     Reverse Mortgage Daily May, 18, 2010
14
     We did not verify the accuracy of the analysis, and HUD was unable to confirm the source of the data used in
     the analysis.
                                                         9
                   the number of loans is now more than 20,000, the estimated losses would be
                   significantly higher if current data were used. The analysis concluded that

                       1. In cases in which the property value exceeds the loan balance at the time
                          of property disposition (114 loans), there is no net loss when deferring and
                          calling the loan due and payable and allowing the servicers to add tax and
                          insurance payments to the loan balance.

                       2. In cases in which a loss occurs if the decision to call the loan due and
                          payable is deferred (293 loans), the net loss is approximately $3 million.

                       3. In cases in which a loss occurs regardless of calling the loan due and
                          payable, but the amount of loss is significantly greater at the time of loan
                          termination (10,865 loans), the net loss is $60 million.

                   In addition, the Office of the Comptroller of the Currency 15 was also concerned
                   about this growing area and believed that particular attention needed to be paid to
                   whether to impose additional requirements with respect to escrows of taxes and
                   insurance.

                   Although HUD was not aware of how many loans the four servicers were holding, it
                   was not surprised and anticipated that more loans will go into default for
                   nonpayment of taxes and insurance. In May 2009, HUD stated that it was working
                   on policy with the National Reverse Lenders Mortgage Association.16 HUD stated
                   that the policy discussed various ways to address this issue, including 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. However, more than a year later, HUD had not issued formal policy.


     HUD May Lose an Estimated
     $1.47 Billion on the 20,631
     Defaulted Loans


                   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. Unfortunately,
                   implementation of future policies will not resolve the pending claims that may
                   have to be paid on the loans currently in default. The maximum claim amount for
                   the 20,631 loans that defaulted for nonpayment of taxes and insurance was more
                   than $3.68 billion. Using HUD’s 2009 fiscal year-to-date loss severity rate of 60

15
      The Comptroller of the Currency is a bureau of the U. S. Department of the Treasury.
16
      According to the National Reverse Lenders Mortgage Association, it serves as an educational resource, policy
      advocate and public affairs center for reverse mortgage lenders and related professionals.
                                                         10
                  percent, supported by the Actuarial Review of the FHA Mutual Mortgage Fund for
                  Fiscal Year 2009, the estimated loss on the loans is $2.21 billion. However, using
                  the more conservative average loss amount per home of $71,536 17 on the sale of
                  HECM foreclosed-upon properties from October 1, 2008, to February 22, 2010,
                  HUD can expect to lose at least $1.47 billion in the event of foreclosure. Of
                  further concern is that since the payment of taxes and insurance by the servicers
                  causes the loans to reach the maximum principal balance faster, coupled with the
                  increase in the number of new HECM loans, the number of defaulted loans could
                  increase significantly.

     Conclusion


                  Because HUD did not issue guidance to HECM loan servicers, the servicers
                  continued to pay the taxes and insurance for the borrowers. As a result, four
                  servicers contacted indicated that they were holding almost 13,000 of these
                  defaulted loans, of which HUD was not aware, with a maximum claim amount of
                  more than $2.5 billion. Since the borrowers did not pay more than $35 million in
                  taxes and property insurance for these loans as specified in the mortgages, the
                  12,958 loans were in default. Further, since HUD lacked critical information, it
                  could not track or assist troubled borrowers who had not gone into default, and it
                  did not know the extent of those borrowers who had gone into default.

                  Although HUD expressed concern about the defaults and the extent of the
                  problems, it had not yet issued any formal guidance to servicers directing them
                  how to address the nonpayment of taxes and insurance or implemented
                  procedures to minimize the risk of future occurrences. It is imperative that HUD
                  take prompt actions to resolve these matters in order to avoid payment of an
                  additional $35 million in property taxes and insurance by servicers in the next
                  year, and to reduce the potential claims that may have to be paid from the Mutual
                  Mortgage Insurance Fund, which could be at least $1.47 billion for the 20,631
                  loans that were in default as of March 2010.


     Recommendations


                  We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing

                  1A. Inform the servicers to discontinue the practice of holding the loans and
                      continuing to pay the taxes and insurance which will result in an estimated
                      $35,494,896 in funds being put to better use during the next 12 months.



17
      According to HUD, $71,536 is the average loss from property sells of foreclosed HECM loans from October 1,
      2008, through February 22, 2010.
                                                        11
1B. Issue formal guidance to servicers regarding loans currently due and payable
    as a result of nonpayment of property taxes and insurance, including requiring
    the servicers to foreclose.

1C. Develop and implement a plan to minimize the risk of future defaults due to
    nonpayment of taxes and insurance.

1D. Develop a tracking and reporting system, including making modifications to
    the Single Family Data Warehouse or other appropriate data base, to ensure
    that HUD can track the deferred and defaulted loans and the amounts the
    servicers paid for taxes and insurance on these loans.




                                12
                        SCOPE AND METHODOLOGY

To accomplish our objective, we

   •   Obtained and reviewed background information on HECM loans, applicable regulations,
       and legal documents.
   •   Interviewed HUD single-family program staff and various individuals at four HECM
       servicers.
   •   Obtained, reviewed, and analyzed reports and other documents to determine existing
       treatment of HECM loans by servicers and HUD.
   •   Obtained from HUD an electronic file of deferred HECM loans previously reported to
       HUD as of April 30, 2009. Tested the reliability of data by matching the loan number to
       HUD’s Single Family Data Warehouse to ensure that they were FHA HECM loans. A
       match was also performed on Social Security numbers to ensure that they were valid
       numbers. The HECM loan number data in the file was determined to be generally
       reliable. We did not perform reliability tests on the data in the Single Family Data
       Warehouse.
   •   Obtained separate electronic data listings from four servicers of HECM loans in default
       due to nonpayment of taxes and insurance that had not been reported to HUD from
       May 1, 2009, to March 3, 2010. The servicers’ data also provided the amount that they
       had paid in taxes and insurance for each defaulted loan. A match was performed to the
       Single Family Data Warehouse to ensure that these were FHA HECM loans. The HECM
       loan account number information was determined to be generally reliable. We did not
       test the reliability of the tax and insurance amounts the servicers paid because HUD does
       not have a system to track the tax and insurance amounts and no single system existed to
       allow tracking of these individual payment amounts.

We conducted our audit from December 2009 through April 2010 at our office in Fort Worth,
TX, and at various homes in the general Dallas/Fort Worth, TX, area. Our audit period was
January 1, 2007, through December 31, 2008. We expanded the scope as necessary to
accomplish our objective.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                              13
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to:

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

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls

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

                  •   HECM program operations, policy, and procedures;
                  •   Relevance and reliability of HECM information; and
                  •   Compliance with applicable HECM laws and regulations.

               We assessed the relevant controls identified above.

               A deficiency in internal controls exists when the design or operation of a control
               does not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Weaknesses


               Based on our review, we believe that the following items are significant deficiencies:

                  •   HUD had not issued formal policy to the servicers regarding procedures for
                      HECM loans in default due to unpaid property taxes and insurance (finding).
                  •   HUD (1) could not identify deferred loans in the Single Family Data
                      Warehouse or other appropriate system, (2) did not track the number of
                      borrowers who were unable to pay their property taxes or insurance

                                                14
premiums, and (3) did not know how many loans had principal amounts
increasing because payments for taxes and insurance had been added to the
loan (finding).




                         15
                                              APPENDIXES

Appendix A

                                SCHEDULE OF
                        FUNDS TO BE PUT TO BETTER USE

                                     Recommendation            Funds to be put
                                            number             to better use 1/

                                                      1A          $35,494,896




1/   Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if
     an Office of Inspector General (OIG) recommendation is implemented. These amounts include reductions in
     outlays, deobligation of funds, withdrawal of interest, costs not incurred by implementing recommended
     improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that
     are specifically identified. In this instance, the amount represents what was paid in taxes and insurance on the
     12,958 HECM loans reported by the four servicers from May 1, 2009 to March 3, 2010. These are loans that
     the servicers had been holding since HUD reversed its informal deferral policy, almost 1 year ago. If HUD
     takes action on these loans by issuing policies and procedures and foreclosing on the loans, the servicers will
     avoid paying at least $35,494,896 in taxes and/or insurance in the next 12 months.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1
Comment 2




                         17
Comment 3




Comment 4




Comment 5




            OIG Evaluation of Auditee Comments




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                            OIG Evaluation of Auditee Comments

Comment 1
HUD requested we change the title of the report. We did not change it to HUD’s language, but
we did make a minor modification.

Comment 2
HUD stated it was aware of a small percentage of loans in default but that it had provided
guidance to servicers who directly contacted it or who attended servicer training in June 2009.
Although HUD stated there is only a small percentage loans in default, the loans held by the 4 of
the 16 servicers nationwide totaled more than $2.5 billion. Having those loans go to claim will
have a negative impact on the applicable insurance fund and they may even impact the
program’s ability to be self sustaining. Further, HUD may have been aware that servicers were
holding loans, but it did not know how many loans the servicers were holding. Finally, HUD’s
method of providing guidance was not formal and was not effective as the servicers indicated
they were holding loans because HUD had not provided guidance.

Comment 3
HUD stated it was tracking loans approved for deferral through SMART, but HUD’s response
did not address the 13,000 loans that had not been reported to it by the servicers. HUD also did
not address whether or not it can track loans of troubled borrowers or determine the amount that
servicers have advanced for taxes and insurance payments.

Comment 4
HUD stated it was developing formal policy to prevent future defaults and to provide direction to
servicers concerning these types of defaulted loans. We acknowledge HUD’s actions; however,
as HUD has been developing policy for more than a year, HUD needs to expedite this policy to
prevent this issue from continuing.

Comment 5
HUD provided a list of planned action it would take, but HUD stated that it would not end the
payment of taxes and insurance recommended by OIG. We did not recommend that servicers
discontinue the payment of taxes and insurance. Rather, we recommended that HUD inform the
servicers to discontinue the practice of holding loans and continuing to pay taxes and insurance,
which would result in the payment taxes and insurance several years after default. We
acknowledge HUD’s other proposed actions as they address the recommendations.




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