oversight

                                                      U.S. Department of Housing and Urban Development
                                                      Office of Inspector General, Region VI
                                                      819 Taylor Street, Suite 13A09
                                                      Fort Worth, Texas 76102

                                                      (817) 978-9309 FAX (817) 978-9316
                                                       http://www.hud.gov/offices/oig/
                                                      OIG Fraud Hotline 1-800-347-3735



September 17, 2010                                    MEMORANDUM NO:
                                                      2010-FW-1805

MEMORANDUM FOR:              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: Financial Freedom Senior Funding Corporation, Irvine, CA, Improperly Funded
         One Ineligible HECM Loan


                                        INTRODUCTION

While performing an internal audit 1 of the U. S. Department of Housing and Urban
Development’s (HUD) Home Equity Conversion Mortgage (HECM) program, we noted one
HECM loan underwritten by Financial Freedom Senior Funding Corporation, (Financial
Freedom) of Irvine, CA, that was improperly insured as the property had several years of
deferred property taxes, which is a violation of the HECM regulations.

                                METHODOLOGY AND SCOPE

As part of our internal audit, we selected a random sample of deferred HECM loans in the
general Dallas/Fort Worth, TX, area for review. We interviewed 9 borrowers regarding their
experience with their HECM loan and reviewed 11 lender files to determine servicer efforts to
resolve unpaid taxes and insurance with borrowers. We used Lexis Nexis and property records
to assist in determining eligibility, status of property taxes, and approximate value of the
properties of the selected loans.

We conducted our audit from December 2009 through June 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, 2008, through December 31, 2009. We expanded the scope as necessary to
accomplish our objective.




1
    Audit Report No. 2010-FW-0003, “HUD Was Not Tracking Almost 13,000 Defaulted HECM Loans With
    Maximum Claim Amounts of Potentially More Than $2.5 Billion,” issued on August 25, 2010.
                                           BACKGROUND

The HECM program enables homeowners to obtain income by accessing the equity in their
homes. To be eligible for a HECM loan, 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. However, the servicer may
file a claim with HUD for the property when the loan principal reaches 98 percent of the maximum
claim amount.

HUD regulations also require that properties be free and clear of all liens other than the Federal
Housing Administration (FHA) HECM mortgage. 2 In addition, HECM regulations prohibit the
borrower from participating in a real estate tax deferral program and do not permit any liens to
be recorded against the property unless such liens are subordinate to the insured mortgage and
any second mortgage held by the HUD Secretary. 3


                                       RESULTS OF REVIEW

Financial Freedom improperly originated 1 4 of the 11 HECM loans reviewed because the
property did not meet program requirements. Neither Financial Freedom’s loan correspondent,
1ST AA Reverse Mortgage, Inc., nor the title company found that the property had property tax
deferments totaling $14,285 covering approximately 20 years. As neither the originating lender
nor the borrower had paid the taxes before the loan closed, HECM regulations were not
followed, and the loan should not have been FHA insured. As of February 28, 2010, the loan’s
unpaid principal balance was $74,906, and the maximum claim amount was $77,900.


                                       RECOMMENDATION

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

1A. Require Financial Freedom to indemnify HUD for HECM loan number 491-8453315, with
    a principal balance of $74,906.




2
    24 CFR (Code of Federal Regulations) 203.32
3
    24 CFR 206.27
4
    HECM loan number 491-8453315

                                                  2
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                          3
Comment 1




            4
                                OIG Evaluation of Auditee Comments

Comment 1

Financial Freedom Acquisition, LLC 5 disagreed that Financial Freedom improperly originated
the HECM loan. It contended that it is a standard industry practice that before a loan is
originated a lender identifies whether or not there are any delinquent or deferred taxes only if a
lien is filed on the property. In this case, the title company identified one tax lien for $9,539.80
and paid it off at closing. Additional taxes for $14,285 owed to the Dallas School District were
not recorded as a lien on the property and could not be identified prior to the mortgage
origination. Attachments provided with the response are not included as they included
nondisclosable personal information.

OIG disagrees with the auditee response. Both HUD’s Single Family Mortgage Insurance and
HUD’s Home Equity Conversion Mortgage requirements 6 state that for a mortgage to be eligible
for insurance there cannot be restrictions on conveyance. Additionally, HECM requirements
state that the property must be “freely marketable.” The State of Texas has a tax deferral
program that allows a homeowner who is 65 or older or a disabled person to defer payment of
property taxes on the person's residence homestead until he or she no longer owns or occupies
the home as a residence. However, a deferral merely postpones when the taxes must be paid.
Generally, once the homeowner dies or no longer occupies the residence, all accrued taxes,
penalties, and interest must be paid. Further, on the 181st day, the entire amount becomes
delinquent and the taxing unit can pursue foreclosure. In addition, a lien may not be filed, as
property taxes do not have to be delinquent when a deferral affidavit is submitted. For this loan,
the outstanding deferred school district taxes were a restriction on the conveyance and prohibited
the home from being freely marketable; thus, the loan was not eligible for insurance.




5
    According to Financial Freedom Acquisition, on March 19, 2009, it acquired certain assets of Financial
    Freedom Senior Funding, including the servicing rights with respect to loan number 491-8453315.
6
    24 CFR 203.41(b) and 206.45

                                                        5