oversight

HUD Policies Did Not Always Ensure That HECM Borrowers Complied With Residency Requirement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-30.

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

 OFFICE OF AUDIT
 REGION 3
 PHILADELPHIA, PA




          U.S. Department of Housing and Urban
              Development, Washington, DC

      Home Equity Conversion Mortgage Program




2014-PH-0001                            SEPTEMBER 30, 2014
                                                        Issue Date: September 30, 2014

                                                        Audit Report Number: 2014-PH-0001




TO:            Kathleen A. Zadareky, Deputy Assistant Secretary for Single Family Housing,
               HU
               //signed//
FROM:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA


SUBJECT:       HUD Policies Did Not Always Ensure That HECM Borrowers Complied With
               Residency Requirements


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of HUD’s oversight of the Home Equity
Conversion Mortgage (HECM) program.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
215-430-6730.
                                            September 30, 2014
                                            HUD Policies Did Not Always Ensure That HECM
                                            Borrowers Complied With Residency Requirements




Highlights
Audit Report 2014-PH-0001


 What We Audited and Why                     What We Found

We audited the U.S. Department of           HUD policies did not always ensure that HECM
Housing and Urban Development’s             borrowers complied with residency requirements. The
(HUD) oversight of its Home Equity          audit showed that as many as 136 out of 159 borrowers
Conversion Mortgage (HECM) program          reviewed were not living in the properties associated
based on our strategic goal to improve      with their loans because they were receiving rental
the integrity of HUD’s single-family        assistance under the Voucher program for a different
insurance programs and because of           address at the same time. This condition occurred
residency issues identified in prior        because HUD’s Office of Single Family Housing did
audits of the HECM program. Our             not have controls to prevent or mitigate the problem.
objective was to determine whether          The loans for 15 of the 136 borrowers were
HUD’s Office of Single Family               independently terminated by the servicing lenders
Housing had effective controls to ensure    during the audit. The remaining 121 insured loans had
that HECM loan borrowers complied           current balances totaling more than $15.6 million and
with residency requirements when            maximum claim amounts totaling more than $19
concurrently participating in the           million. As a result, 121 insured loans should be
Housing Choice Voucher (Voucher)            declared in default and due and payable to reduce the
program.                                    potential risk of loss of about $3.4 million to HUD’s
                                            insurance fund.
 What We Recommend

We recommend that HUD (1) direct the
applicable lenders to verify borrowers’
compliance with the residency
requirement or, for each noncompliant
borrower, declare the loan due and
payable, thereby putting about $3.4
million to better use; (2) implement
controls to prevent or mitigate instances
of borrowers violating residency
requirements by concurrently
participating in the Voucher program;
and 3) update its guidance to detail the
steps that servicing lenders should take
for borrowers who fail to certify to
residency.
                            TABLE OF CONTENTS

Background and Objective                                                3

Results of Audit
      Finding: HUD Policies Did Not Always Ensure That HECM Borrowers   4
      Complied With Residency Requirements

Scope and Methodology                                                   7

Internal Controls                                                       9

Appendixes
A.    Schedule of Funds To Be Put to Better Use                         10
B.    Auditee Comments and OIG’s Evaluation                             11




                                            2
                       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. The HECM
program enables elderly homeowners to obtain income by accessing the equity in their homes.
To be eligible for a loan, the homeowner must be 62 years of age or older, have significant
equity in their home, occupy the property as a principal residence, not be delinquent on any
Federal debt, and participate in HUD-approved reverse mortgage counseling.

The borrower is not required to repay the loan as long as they continue to occupy the home as a
principal residence, maintain the property, and pay the property taxes and the mortgage
insurance premiums. The loan agreement defines “principal residence” as the dwelling where
the borrower maintains their permanent place of abode and typically spends the majority of the
calendar year. A person may have only one principal residence at any one time. The borrower
must certify to principal residency initially at closing and annually thereafter.

Servicing lenders are responsible for ensuring that borrowers meet the HECM program
requirements, including the annual certification of principal residency. The mortgage note
contains a clause stating that the lender may require immediate payment in full of all outstanding
principal and accrued interest, upon approval of an authorized representative of the HUD
Secretary, if the property ceases to be the principal residence of the borrower for reasons other
than death and the property is not the principal residence of at least one other borrower.

HUD’s Housing Choice Voucher (Voucher) program provides Federal funds to assist very low-
income families, the elderly, and the disabled to afford decent, safe, and sanitary housing in the
private market. The funds are made available to public housing agencies through HUD’s Office
of Public and Indian Housing, and the housing choice vouchers are administered locally by
public housing agencies. Each agency’s administrative plan must include a policy limiting the
number of consecutive days a family may be absent from the unit to a maximum of 180 days.
Agencies may terminate assistance if the family violates its policy on absence from a unit.

Our audit objective was to determine whether HUD’s Office of Single Family Housing had
effective controls to ensure that HECM loan borrowers complied with residency requirements
when concurrently participating in the Voucher program.




                                                3
                                     RESULTS OF AUDIT

Finding: HUD Policies Did Not Always Ensure That HECM Borrowers
Complied With Residency Requirements
HECM borrowers did not always comply with residency requirements. Contrary to
requirements, as many as 136 out of 159 borrowers reviewed were not living in the properties
associated with their loans because they were receiving rental assistance under the Voucher
program for a different address at the same time. This condition occurred because HUD’s Office
of Single Family Housing did not have controls to prevent or mitigate the problem. The loans
for 15 of the 136 borrowers were independently terminated by the servicing lenders during the
audit. The remaining 121 insured loans had current balances totaling more than $15.6 million
and maximum claim amounts totaling more than $19 million. As a result, 121 insured loans
were potentially ineligible and should be declared in default and due and payable to reduce the
potential risk of loss of about $3.4 million to the Federal Housing Administration (FHA)
insurance fund.


    Borrowers Violated HECM
    Program Residency
    Requirements

                 Contrary to requirements, as many as 136 borrowers were not living in the
                 properties for which they obtained HECM loans. According to regulations at 24
                 CFR (Code of Federal Regulations) 206.39, the property associated with the loan
                 must be the principal residence of each borrower at closing. Also, regulations at
                 24 CFR 206.211 require servicing lenders to at least annually determine whether
                 the property associated with a loan is the principal residence of at least one
                 borrower and require borrowers to certify that the property associated with the
                 loan is their principal residence. Further, regulations at 24 CFR 206.27 state that
                 the mortgage balance will be due and payable in full if the property ceases to be
                 the principal residence of a borrower for reasons other than death and the property
                 is not the principal residence of at least one other borrower.

                 We analyzed data in HUD’s Single Family Data Warehouse 1 and its Public
                 Housing Information Center 2 and identified 159 loan borrowers that were
                 possibly violating HECM program residency requirements by concurrently
                 participating in the Voucher program. Based on reviews of documents obtained
                 from servicing lenders and public housing agencies, there was substantial
                 evidence indicating that as many as 136 borrowers were not living in the

1
  HUD’s Single Family Data Warehouse system contains case-level information covering all the processes in the
mortgage insurance life cycle of FHA-insured loans.
2
  HUD uses its Public Housing Information Center database to manage its public housing programs.

                                                       4
                 properties associated with their loans because they were receiving rental
                 assistance under the Voucher program for a different address at the same time.
                 The documented overlap of the loan and the borrower’s participation in the
                 Voucher program ranged from 2 to 36 months. 3 The borrowers for 113 of the
                 loans were listed as heads-of-households in the Voucher program. The remaining
                 borrowers were listed as spouses and other adults.

                 Of the 136 borrowers that may have violated HECM program residency
                 requirements:

                      •   46 borrowers certified that they occupied the properties associated with
                          their loans as their principal residence during the overlap of participation
                          in the Voucher program,

                      •   80 borrowers did not provide occupancy certifications during the overlap 4
                          of participation in the Voucher program, and

                      •   10 borrowers certified that they did not occupy the properties associated
                          with their loans during the overlap of participation in the Voucher
                          program.

    HUD Lacked Adequate
    Controls To Prevent or Mitigate
    The Problem


                 HUD did not have control policies or procedures to prevent or mitigate instances
                 of borrowers violating HECM program residency requirements by concurrently
                 participating in the Voucher program. The loans for 15 of the 136 borrowers
                 were independently terminated 5 by the servicing lenders during the audit. The
                 remaining 121 insured loans had current balances totaling more than $15.6
                 million and maximum claim amounts totaling more than $19 million. HUD risks
                 loss to its FHA insurance fund for the current balances, which include loan
                 advances and accrued interest, servicing fees, and mortgage insurance premiums.
                 Further, HUD risks up to $3.4 million in potential future claim liabilities 6 for
                 undisbursed loan amounts and continued accrual of interest, servicing fees, and
                 mortgage insurance premiums.



3
  The audit covered the period April 2011 through March 2014.
4
  In 29 of the 80 cases, the documented overlap was less than 12 months. Therefore, occupancy certifications may
not have been due during the overlap.
5
  The 15 loans were terminated for a variety of reasons including occupancy issues and failure to pay property taxes
and insurance. Further, at least one loan was paid in full by the borrower.
6
  The $3.4 million risk for potential loss was calculated by deducting the $15.6 million total current loan balances
from the $19 million total maximum claim amounts for the 121 loans. This difference accounts for undisbursed loan
amounts as well as the potential for continued accrual of interest and fees on the outstanding loan balances.

                                                         5
          HUD’s Office of Single Family Housing needs to quickly work with the
          applicable servicing lenders to verify documentation of the borrowers’
          compliance with residency requirements for each of the 121 cases identified or for
          each noncompliant borrower, declare the loan in default and due and payable.
          Doing so would reduce the risk of loss to the FHA insurance fund because HUD
          would be relieved of potential future claim liabilities related to the undisbursed
          loan amounts as well as continued accrual of interest, servicing fees, and
          mortgage insurance premiums.

          The Office of Single Family Housing can prevent or mitigate instances of
          borrowers violating residency requirements by concurrently participating in the
          Voucher program by periodically coordinating with the Office of Public and
          Indian Housing to compare data in their respective systems. This measure will
          allow HUD to identify potential violators of the residency requirements and work
          with applicable servicing lenders to take steps to verify borrowers’ residency or
          otherwise declare loans in default and due and payable as appropriate. HUD
          should also update its guidance to provide servicing lenders steps to take when
          borrowers fail to provide annual certifications.

Recommendations

          We recommend that the Deputy Assistant Secretary for Single Family Housing

          1A.     Direct the applicable servicing lenders to verify and provide
                  documentation of the borrowers’ compliance with the residency
                  requirement for each of the 121 cases or for each noncompliant borrower,
                  declare the loan in default and due and payable, thereby putting
                  approximately $3,362,055 to better use.

          1B.     Implement controls to prevent or mitigate instances of borrowers violating
                  HECM program residency requirements by concurrently participating in
                  the Voucher program, including policies and procedures to at least
                  annually coordinate with HUD’s Office of Public Housing to match
                  borrower data in the Single Family Data Warehouse to member data in the
                  Public Housing Information Center.

          1C.     Update its guidance to detail the steps that servicing lenders should take
                  for borrowers who fail to certify at least annually that the property
                  associated with the loan is their principal residence. This includes
                  borrowers who do not provide a certification, those who do not provide
                  the certification in a timely manner, and those who certify that they no
                  longer occupy the property.




                                            6
                           SCOPE AND METHODOLOGY

We conducted the audit from March to August 2014 at our office in Philadelphia, PA. The audit
covered the period April 2011 through March 2014 but was expanded as necessary to accomplish
our objective.

To accomplish our objective, we reviewed

    •   Relevant background information on the loans and applicable regulations,
    •   HECM program requirements,
    •   Information in HUD’s Single Family Data Warehouse,
    •   Information in HUD’s Public and Indian Housing Information Center,
    •   Accurint 7 information on the borrowers and the properties associated with the loans,
    •   Loan documentation provided by the servicing lenders, and
    •   Voucher program documentation provided by public housing agencies.

We interviewed staff from HUD’s Office of Single Family Housing.

We obtained loan-level data from HUD’s Single Family Data Warehouse System as of
February 28, 2014. Additionally, we obtained information on Voucher program participants
from HUD’s Public and Indian Housing Information Center as of February 21, 2014. These data
included borrower information for 627,479 insured loans and information for 4.8 million
household members participating in the Voucher program. We matched the data from the 2
systems and identified 172 potential matches. We further analyzed the data and eliminated 13 of
the matches because the detailed borrower data did not match the detailed Voucher program
member data. For the remaining 159 matches, we requested loan documents from the servicing
lenders and Voucher program documents from the public housing agencies for the period
covering April 2011 through March 2014.

We reviewed the documents outlined above to determine whether borrowers were potentially
violating HECM program residency requirements by concurrently participating in the Voucher
program. Specifically, we reviewed loan applications, counseling letters, appraisals, loan
agreements, settlement statements, deeds of trust, and annual recertification documents for each
loan. For the Voucher program, we reviewed HUD-50058 forms 8 covering the audit period
along with inspection and landlord information. Based on this review, as many as 136 borrowers
were not living in the properties associated with their loans because they were receiving rental
assistance under the Voucher program for a different address at the same time. Of the remaining
23 borrowers, 19 borrowers were live-in aides for a family participating in the Voucher program,
3 borrowers received voucher assistance at the properties associated with their loans, and 1
borrower did not participate in the Voucher program.


7
 Accurint is a public records search tool that includes more than 37 billion public records.
8
 Form HUD-50058 is used by HUD’s Office of Public and Indian Housing to collect data on the people who
participate in subsidized housing programs.

                                                     7
For the 136 borrowers that were potentially out of compliance with HECM program
requirements, we obtained updated loan information from HUD’s Single Family Data
Warehouse and from HUD’s National Servicing Center in Oklahoma City, OK. Since the
beginning of our audit, 15 of the 136 loans cited had been independently terminated by the
servicing lenders. As of July 29, 2014, $12.7 million had been advanced to the borrowers on the
remaining 121 loans and $128,159 was available for disbursement. As of August 1, 2014, these
loans had current balances totaling $15.6 million and maximum claim amounts totaling $19
million. HUD risks loss to its FHA insurance fund for the current balances, which include loan
advances and accrued interest, servicing fees, and mortgage insurance premiums. Further, HUD
risks up to $3.4 million in potential future claim liabilities for undisbursed loan amounts and
continued accrual of interest on the outstanding balance, servicing fees, and mortgage insurance
premiums. The $3.4 million risk for potential loss was calculated by deducting the $15.6 million
total current loan balances from the $19 million total maximum claim amounts for the 121 loans.
While some of the 121 loans are currently in default, these loans represent an ongoing risk to
HUD because interest, servicing fees, and mortgage insurance premiums continue to accrue until
the loans are terminated. Also, because it is possible that the defaults on these loans may be
cured, the borrowers may have future access to additional undisbursed funds unless HUD
ensures that the servicing lenders continue to pursue the defaults.

We relied in part on computer-processed data in HUD’s Single Family Date Warehouse and
Public and Indian Housing Information Center. Although we did not perform a detailed
assessment of the reliability of the data, we performed a minimal level of testing and found the
data to be adequate for our purposes. The testing entailed matching information obtained from
the Single Family Data Warehouse and the Public and Indian Housing Information Center to
documents provided by servicing lenders and public housing agencies.

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.




                                                8
                              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 control was relevant to our audit
               objective:

               •   Compliance with laws and regulations – Policies and procedures that
                   management has implemented to reasonably ensure that the use of resources is
                   consistent with laws and regulations.

               We assessed the relevant control identified above.

               A deficiency in internal control 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 Deficiencies

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

               •   HUD lacked adequate control policies or procedures to prevent or mitigate
                   instances of borrowers violating program residency requirements by
                   concurrently participating in the Voucher program.




                                                 9
                                    APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                            Recommendation         Funds to be put
                                number             to better use 1/
                                  1A                 $3,362,055

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, implementation of our recommendation
     to direct the applicable servicing lenders to verify and provide documentation of the
     borrowers’ compliance with the residency requirement or for each noncompliant
     borrower, declare the loan in default and due and payable would reduce the risk of loss to
     the FHA insurance fund because HUD would be relieved of potential future claim
     liabilities related to undisbursed loan amounts and continued accrual of interest, servicing
     fees, and mortgage insurance premiums.




                                              10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




                         11
Comment 2




            12
                         OIG Evaluation of Auditee Comments

Comment 1   As a result of our final reporting review procedures, we adjusted the 122 cases
            cited in the draft report down to 121 cases. Accordingly, we also adjusted the
            funds to be put to better use of $3,394,206 down to $3,362,055.

Comment 2   HUD’s planned actions meet the intent of our three audit recommendations.




                                            13