oversight

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

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-08-21.

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

    U.S. Department of Housing and
  Urban Development, Washington, DC
          Home Equity Conversion Mortgage Program




Office of Audit, Region 3      Audit Report Number: 2015-PH-0004
Philadelphia, PA                                  August 21, 2015
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.
                   Audit Report Number: 2015-PH-0004
                   Date: August 21, 2015

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




Highlights

What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of its
Home Equity Conversion Mortgage (HECM) program based on our strategic objective to protect
the integrity of housing insurance and guarantee programs and because of residency issues
identified in prior audits of the HECM program. Our 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 receiving rental assistance from its
multifamily programs.

What We Found
HUD policies did not always ensure that HECM borrowers complied with residency
requirements. Of the 68 loans statistically selected for review, the borrowers for as many as 67
loans did not live in the properties associated with their loans because they received rental
assistance from HUD’s multifamily programs at 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 reduce the problem. Of the 67 loans, 18 were independently terminated by the
servicing lenders during the audit. The remaining 49 insured loans had current balances totaling
more than $7.1 million and maximum claim amounts totaling more than $8.4 million. As a
result, 49 insured loans should be declared in default and due and payable to reduce the risk of
loss to HUD’s insurance fund of up to $1.3 million. Further, the borrowers for an additional 642
insured loans also may have violated the residency requirements. If HUD cannot confirm that
these borrowers are complying with the residency requirements, these loans should also be
declared in default and due and payable to reduce the risk of loss to HUD’s insurance fund of up
to $14.4 million.

What We Recommend
We recommend that HUD direct the applicable servicing lenders to verify borrowers’
compliance with the residency requirements or for each noncompliant borrower, declare the loan
in default due and payable, thereby putting up to $15.7 million to better use. Further, we
recommend that HUD implement controls to prevent or reduce instances of borrowers violating
residency requirements by concurrently participating in multifamily programs.
Table of Contents
Background and Objective......................................................................................3

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

Scope and Methodology ...........................................................................................8

Internal Controls ....................................................................................................11

Followup on Prior Audits ......................................................................................12

Appendixes ..............................................................................................................13
         A. Schedule of Funds To Be Put to Better Use ............................................................ 13

         B. Auditee Comments and OIG’s Evaluation ............................................................. 14




                                                              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, homeowners 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.

Borrowers are 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
borrowers maintain their permanent place of abode and typically spend 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 Office of Multifamily Housing Programs provides project-based rental assistance to help
families afford decent, safe, and sanitary housing. Under its programs, Federal funds are paid to
multifamily project owners on behalf of tenants to keep the amount that tenants pay for rent
affordable. The assistance is tied to the property, which means that the rental subsidy does not
follow tenants if they move to another property. One of the key eligibility requirements for the
multifamily rental assistance programs is that the rental unit for which a family applies must be
the family’s only residence. Further, project owners may establish rules stating when tenants
may be terminated from the HUD programs due to extended absence or abandonment of the 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 receiving rental assistance from its multifamily programs.




                                                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, the borrowers for as many as 67 of the 68 loans reviewed did not live in the
properties associated with their loans because they received rental assistance under multifamily
programs 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 reduce the problem. Of the
67 loans, 18 were independently terminated by the servicing lenders during the audit. The
remaining 49 insured loans had current balances totaling more than $7.1 million and maximum
claim amounts totaling more than $8.4 million. As a result, 49 insured loans were potentially
ineligible and should be declared in default and due and payable to reduce the risk of loss to the
Federal Housing Administration (FHA) insurance fund of up to $1.3 million. Further, the
borrowers for an additional 642 insured loans also may have violated the residency requirements.
If HUD cannot confirm that these borrowers are complying with the residency requirements,
these loans should also be declared in default and due and payable to reduce the risk of loss to its
insurance fund of up to $14.4 million.

Borrowers Violated HECM Program Residency Requirements
Contrary to requirements, the borrowers for as many as 67 loans did not live 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 Tenant Rental Assistance
Certification System 2 and identified 946 loans for which borrowers may have violated HECM
program residency requirements by concurrently participating in multifamily programs. We
statistically selected 68 of the loans for review. Based on reviews of documents obtained from



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 Tenant Rental Assistance Certification System database to manage its multifamily rental assistance
programs.




                                                         4
servicing lenders and multifamily projects, there was substantial evidence indicating that the
borrowers for as many as 67 loans did not live in the properties associated with their loans
because they received rental assistance under multifamily programs for a different address at the
same time. The documented overlap of the loan and the borrower’s participation in multifamily
programs ranged from 4 to 36 months. 3 The borrowers for 65 of the 67 loans were listed as
heads of household in multifamily programs. The remaining two loans each had two borrowers
who were listed as heads of household, co-heads of household, or spouses in multifamily
programs.

Of the 67 loans for which borrowers may have violated HECM program residency requirements,

        •    The borrowers for 18 loans certified that they occupied the properties associated with
             their loans as their principal residence during the overlap of participation in
             multifamily programs,

        •    The borrowers for 36 loans did not provide occupancy certifications during the
             overlap 4 of participation in multifamily programs, and

        •    The borrowers for 13 loans certified that they did not occupy the properties associated
             with their loans.

While they had a HECM loan, the borrowers for these 67 loans received rental assistance for a
different address through various multifamily programs. Specifically, the borrowers for 53 loans
participated in the Section 8 project-based assistance program, and the borrowers for 11 loans
participated in the Section 202 Supportive Housing for the Elderly program. The borrowers for
the remaining three loans participated in the Section 811, Section 236, and Rent Supplement
programs.

HUD Lacked Adequate Controls To Prevent or Reduce the Problem
HUD did not have control policies or procedures to prevent or reduce instances of borrowers
violating HECM program residency requirements by concurrently participating in multifamily
programs. However, in response to a prior audit, HUD was updating 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. 5 Those borrowers include
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. While this
measure would not prevent instances of borrowers violating residency requirements, it could
reduce the problem by removing some noncompliant borrowers. Borrowers who continue to




3
  The audit covered the period November 2011 through October 2014.
4
  In 18 of the 67 cases, the documented overlap was less than 12 months. Therefore, occupancy certifications may
not have been due during the overlap.
5
  See the Followup on Prior Audits section for additional information.




                                                        5
certify that they occupy the properties associated with their loans would not be impacted by the
updated guidance. To further protect its FHA insurance fund, HUD needs to implement controls
to identify instances of borrowers violating residency requirements by concurrently participating
in multifamily programs.

Conclusion
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 cases identified or for each noncompliant borrower, declare the loan in default and
due and payable. Of the 67 loans, 18 were independently terminated by the servicing lenders
during the audit. The remaining 49 insured loans had current balances totaling more than $7.1
million and maximum claim amounts totaling more than $8.4 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 $1.3 million in
potential future claim liabilities 6 for undisbursed loan amounts and continued accrual of interest,
servicing fees, and mortgage insurance premiums.

Further, because we identified issues in 67 of the 68 loans reviewed, we believe that the
borrowers for the loans not selected as part of our statistical sample also may have violated the
residency requirements. HUD needs to work with the applicable servicing lenders to verify
documentation of the borrowers’ compliance with the residency requirements for 642 7 additional
loans or for each noncompliant borrower, declare the loan in default and due and payable to
reduce the risk of loss of up to $14.4 million to its insurance fund. 8 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 reduce instances of borrowers violating
residency requirements by concurrently participating in multifamily programs by periodically
coordinating with the Office of Multifamily Housing Programs 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.




6
  The $1.3 million risk for potential loss was calculated by deducting the $7.1 million total current loan balances
from the $8.4 million total maximum claim amounts for the 49 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.
7
  We statistically selected 68 loans for review from the 946 loans identified through data analysis. Of the 878 loans
not selected for review, 236 were terminated during the audit. The remaining 642 loans represent an ongoing risk to
HUD’s insurance fund.
8
  The $14.4 million risk for loss was calculated by deducting the $83.7 million total current loan balances from the
$98.1 million total maximum claim amounts for the 642 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.




                                                          6
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
              borrower’s compliance with the residency requirements for each of the 49 cases
              identified during our review of statistically sampled loans or for each
              noncompliant borrower, declare the loan in default and due and payable, thereby
              putting up to $1,317,749 to better use.

       1B.    Direct the applicable servicing lenders to verify and provide documentation of the
              borrower’s compliance with the residency requirements for each of the additional
              642 loans identified as potentially out of compliance or for each noncompliant
              borrower, declare the loan in default and due and payable, thereby putting up to
              $14,431,528 to better use.

       1C.    Implement controls to prevent or reduce instances of borrowers violating HECM
              program residency requirements by concurrently participating in multifamily
              programs, including policies and procedures to at least annually coordinate with
              HUD’s Office of Multifamily Housing Programs to match borrower data in the
              Single Family Data Warehouse to member data in the Tenant Rental Assistance
              Certification System.




                                               7
Scope and Methodology
We conducted the audit from October 2014 to June 2015 at our office in Philadelphia, PA. The
audit covered the period November 2011 through October 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 Office of Multifamily Housing Programs’ Tenant Rental
           Assistance Certification System,
       •   Accurint 9 information on the borrowers and the properties associated with the loans as
           needed,
       •   Loan documentation provided by the servicing lenders, and
       •   Multifamily programs documentation provided by multifamily projects.

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

For this audit, we compared Social Security numbers of borrowers for 899,402 endorsed HECM
loans to more than 2.7 million participant Social Security numbers in the subsidized multifamily
housing program data found in HUD’s Tenant Rental Assistance Certification System. This
comparison identified 1,027 potential matches. We performed additional data analysis on these
matches and identified 972 unique matches in which we believe (1) the borrower was the same
person as the household member shown in the multifamily housing program data, (2) the
borrower was not listed as a live-in attendant in the multifamily housing program data, (3) the
address for the HECM property did not match the rental property address for the multifamily
program, and (4) there was an overlap in which the borrower had an active HECM loan while
receiving rental assistance during the period November 2011 through October 2014. These 972
matches represent 946 HECM loans. We statistically selected 68 of the 946 loans for review.
We reviewed documentation from the relevant lenders and multifamily projects for each of the
loans selected.

We reviewed the documents outlined above to determine whether borrowers potentially violated
HECM program residency requirements by concurrently participating in multifamily programs.
Specifically, we reviewed loan applications, counseling letters, appraisals, loan agreements,
settlement statements, deeds of trust, and annual recertification documents for each loan. For the




9
    Accurint is a public records search tool that includes more than 45 billion public and proprietary records.




                                                             8
multifamily programs, we reviewed the forms HUD-50059 and HUD-50059a 10 covering the
audit period, along with inspection and lease information. Based on this review, the borrowers
for as many as 67 loans did not live in the properties associated with their loans because they
received rental assistance under multifamily programs for a different address at the same time.
The remaining loan was found to comply with the residency requirements.

For the 67 loans that were potentially out of compliance with HECM program requirements, we
obtained updated loan information from HUD’s Single Family Data Warehouse. Since the
beginning of our audit, 18 of the 67 loans cited had been terminated by the servicing lenders. As
of May 31, 2015, the remaining 49 loans had current balances totaling more than $7.1 million
and maximum claim amounts totaling more than $8.4 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 $1.3 million in
potential future claim liabilities for undisbursed loan amounts and continued accrual of interest
on the outstanding balances, servicing fees, and mortgage insurance premiums. The $1.3 million
risk for loss was calculated by deducting the $7.1 million total current loan balances from the
$8.4 million total maximum claim amounts for the 49 loans. While some of the 49 loans were 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 could be cured, the borrowers could have access to
additional undisbursed funds unless HUD ensures that the servicing lenders continue to pursue
the defaults.

Because we identified issues in 67 of the 68 loans reviewed, we believe that the borrowers for
the remaining 878 loans not selected as part of our statistical sample also may have violated the
residency requirements. Of the 878 loans, 236 had been terminated since the beginning of our
audit. As of May 31, 2015, the remaining 642 insured loans had current balances totaling more
than $83.7 million and maximum claim amounts totaling more than $98.1 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 $14.4
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
$14.4 million risk for potential loss was calculated by deducting the $83.7 million total current
loan balances from the $98.1 million total maximum claim amounts for the 642 loans. While
some of the 642 loans were 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 could be cured, the
borrowers could have access to additional undisbursed funds unless HUD ensures that the
servicing lenders continue to pursue the defaults.




10
  Forms HUD-50059 and HUD-50059a are used by HUD’s Office of Multifamily Housing Programs to collect data
on the people who participate in multifamily programs.




                                                    9
We relied in part on computer-processed data in HUD’s Single Family Data Warehouse and
Tenant Rental Assistance Certification System. 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 Tenant Rental Assistance Certification System to
documents provided by servicing lenders and multifamily projects.

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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                10
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 Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   HUD lacked adequate control policies or procedures to prevent or reduce instances of
    borrowers violating program residency requirements by concurrently participating in
    multifamily programs.




                                                  11
Followup on Prior Audits
U.S. Department of Housing and Urban Development, Washington, DC, Home Equity
Conversion Mortgage Program; Audit Report 2014-PH-0001; Issued September 30, 2014
The following recommendation was still open at the time of this report: 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. HUD agreed to
update its guidance by issuing a mortgagee letter by August 30, 2015.




                                               12
Appendixes

Appendix A


                        Schedule of Funds To Be Put to Better Use
                          Recommendation Funds to be put
                              number          to better use 1/
                                   1A              $ 1,317,749
                                   1B              14,431,528
                                 Total             $15,749,277


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 requirements 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.




                                              13
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                              14
                       OIG Evaluation of Auditee Comments


Comment 1   HUD’s planned actions meet the intent of our audit recommendations 1A and 1B.




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