oversight

Evaluation of Home Equity Conversion Mortgage Loan Payments Made After Death of Borrower

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-08-17.

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

    U. S. Department of Housing and Urban Development 
                                 
         Office of Inspector General for Investigation 
                                 
            Inspections and Evaluations Division 
                               
                               




                               
Evaluation of Home Equity Conversion Mortgage Loan Payments 
                Made After Death of Borrower 
                               
                         August 17, 2011 
                          IED‐11‐004R
                                      Executive Summary
The Office of Inspector General (OIG), Inspections and Evaluations Division, conducts
independent, objective examinations of U.S. Department of Housing and Urban Development
(HUD) activities, programs, operations, and organizational issues.

A HUD OIG query of the HUD Single Family Data Warehouse (SFDW) disclosed that servicers
of home equity conversion mortgages (HECM) were making payments to borrowers after the
borrowers’ date of death. Therefore, the Inspections and Evaluations Division conducted a
review to validate the HECM data and determine whether such payments resulted in a financial
loss to HUD.

The HECM program allows elderly homeowners to convert the equity in their homes to cover
monthly or unforeseen expenses by means of obtaining scheduled monthly payments,
unscheduled loan advances, or unscheduled line of credit advances. While the loan is active,
disbursements made by the HECM servicers are added to the outstanding balance, along with
interest and other applicable fees, up to the calculated limit based on the borrowers’ age and the
property value. The borrower does not make payments as in a conventional loan, and certain
conditions must occur to make the loan due and payable to the holder of the mortgage, such as
the death of the borrower. The loan must be repaid to the lender by sale of the property or other
means or to HUD in the case of a loan assignment. When the proceeds from the sale of the
property are insufficient to pay off the loan balance, the lender will file a claim for the difference
between the proceeds from the sale of the property and the outstanding balance up to the
maximum claim amount.

HECM servicers are responsible for recording payments made on HECM loans in HUD’s
Insurance Accounting Collection System (IACS) and for notifying HUD when the borrower has
died. The loan payment data are transferred to HUD’s SFDW monthly.

Our review found that scheduled payments were not made after the date of death of the borrower
but were incorrectly recorded in HUD IACS by the lenders. Additionally, loan proceeds from
the sale of property and claims paid by HUD were not credited to the HECM loan balances in a
timely manner, resulting in inaccurate information being reported in SFDW and unreliable
financial data being used by HUD. While we noted a few instances in which unscheduled
advance payments were made after the death of the borrower, which resulted in overstated
claims paid by HUD, we do not believe this is a systemic problem.

During our review, we also noted instances in which HECM loan servicing files contained
indications of suspicious or potentially fraudulent transactions; however, there was no evidence
that such matters were referred to HUD for further action. Lender officials stated that HUD’s
guidance in this area was too broad and that specific fraud indicators should be included in any
future guidance.

We believe the timely reconciliation of HECM loan payment data by lenders and a more
comprehensive policy of detecting and reporting fraud will benefit the HECM program.


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We provided a draft copy of the report to the Acting Assistant Secretary of Single Family
Housing – Federal Housing Commissioner on June 23, 2011. The Acting Deputy Assistant
Secretary for Single Family Housing in a memorandum dated August 11, 2011, concurred with
our observations and recommendations. Until such time as the Home Equity Reverse Mortgage
Information Technology (HERMIT) system goes into effect in December 2012, the Office of
Single Family Housing will provide instructions to servicers related to stopping payments in
IACs after a borrower’s death and entering sales proceeds and other payoff transactions in IACs.
The recommendations remain open pending verification of corrective actions taken. The
complete text of the Office of Single Family Housing response is included in Appendix A to this
report.




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                                                         Table of Contents
Introduction ......................................................................................................................................5

Scope and Methodology ..................................................................................................................7

Observations

     1. Servicers Did Not Reconcile HECM Payment Records in a Timely Manner. ....................8

     2. The HECM Program Would Benefit From Enhanced Fraud Detection Guidance ............10

Recommendations ..........................................................................................................................12

Comments and OIG Response .......................................................................................................13

Appendix A – HUD’s Office Single Family Housing’s Comments ..............................................14




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                                        Introduction
Legal Authority

The Housing and Community Development Act of 1987 (Public Law 100-242) established a
Federal mortgage insurance program, Section 255 of the National Housing Act, to insure home
equity conversion mortgages (HECM). Pursuant to the Act of 1987, the U.S. Department of
Housing and Urban Development (HUD) was authorized to insure 2,500 HECMs, which were
allocated among the 10 HUD regions in proportion to their share of the Nation’s elderly
homeowners. The regional offices then distributed the loan reservation authority among lenders
using a random drawing. The Omnibus Budget Reconciliation Act of 1990 (Public Law 101-58)
increased HUD’s insurance authority to 25,000 HECMs, and the reservation distribution system
was terminated. All Federal Housing Administration (FHA)-approved lenders are now eligible
to participate in the HECM program.

HECM Program

The Servicing and Loss Mitigation Branch within HUD’s Office of Single Family Housing
provides the oversight of lender servicing of FHA-insured HECM loans. The HECM program
insures reverse mortgages and allows elderly homeowners to convert the equity in their home
into monthly streams of income, lines of credit or both. Loan proceeds in a HECM are paid out
according to a payment plan. Unlike a traditional residential mortgage, a reverse mortgage is
repaid in one payment after the death of the borrower or when the borrower sells the home or no
longer occupies the property as a principal residence. The HECM is a nonrecourse loan, which
means that the borrower or his or her estate will never owe more than the loan balance or the
value of the property, whichever is less, and no assets other than the home must be used to repay
the debt.

Payment Plans

The borrower may choose from among the following five different payment plans for as long as
he or she maintains the property as a principal residence:




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    No.           Payment plan                                   Description
     1               Tenure              The borrower receives fixed monthly payments from the
                                         lender.
     2                 Term              The borrower receives fixed monthly payments for a term of
                                         months selected by the borrower.
     3             Line of credit        The borrower makes withdrawals at times and in amounts of
                                         the borrower’s choosing.
     4           Modified tenure         The borrower combines a tenure payment plan with a line of
                                         credit. The borrower sets aside a portion of the principal
                                         limit as a line of credit from which to draw at times and in
                                         amounts of the borrower’s choosing and receives the rest in
                                         equal monthly payments.
     5            Modified term          The borrower combines a term plan with a line of credit.
                                         The borrower sets aside a portion of the principal limit as a
                                         line of credit from which to draw at times and in amounts of
                                         the borrower’s choosing and receives the rest in equal
                                         monthly payments for a term of months selected by the
                                         borrower.

At closing, the borrower elects the method by which he or she will initially receive payments.
The borrower may change the method of payment by notifying the lender. Payments may be
electronically transferred to a savings or checking account held jointly by all borrowers, except
as otherwise provided by joint instructions from all borrowers. Payments may also be made by
mailing a check payable to all borrowers named on the mortgage and note or as otherwise
provided by joint instructions from all borrowers (a power of attorney may create instructions for
either form of payment). The lender is obligated to make monthly payments to the borrower on
the first business day of the month. The lender is obligated to make line of credit payments
within 5 business days of receiving the request. Payments made via electronic funds transfer
must be made on these dates. Payments made through the mail must be postmarked by these
dates. The lender must pay a late charge of 10 percent of the amount of the payment due to the
borrower if the payment is not made by the due date.

If the lender is unable to make payments to the borrower, HUD will assume responsibility for
making payments until the lender is able to resume. If the lender will not be able to make any
future payments, HUD will request that the lender assign the mortgage to HUD, which will then
make payments for the remainder of the mortgage.

Eligibility

Eligible borrowers are persons 62 years of age or older. Eligible properties are one-unit
dwellings, including units in condominiums. Borrowers should own their properties free and
clear or have liens not exceeding the principal limit.

The principal limit is the amount that the borrower may receive from a reverse mortgage and is
based on the age of the youngest borrower, the expected average mortgage interest rate, and the
maximum claim amount.


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                                Scope and Methodology
To understand the Section 255 HECM program, we reviewed the legislative history, public law,
and HUD regulations provided in 24 CFR (Code of Federal Regulations) Part 206. We reviewed
HECM program requirements outlined in HUD Handbook 4235.1 and HECM servicing
requirements included in HUD Handbook 4330.1, REV-5. We also researched applicable
mortgagee letters and fraud referral requirements outlined in HUD Handbook 4060.1, REV-2.
We interviewed various employees of HUD’s Office of Single Family Housing and employees
of selected HECM loan servicers to gain a better understanding of the interactions between the
servicers and HUD.

HECM payment data are recorded by the lenders in the HUD Insurance Accounting Collection
System (IACS). These data are then manually transferred every month by a HUD contractor to
the Single Family Data Warehouse (SFDW).

HUD OIG performed a query of SFDW to determine whether payments were made to borrowers
after their date of death. The resulting data indicated that for 1,998 HECM loans, 1 or more
payments were made to borrowers after their date of death. Of these loans, HUD paid insurance
claims in 26 cases. We judgmentally selected 16 of the 26 claims (or 62 percent) to determine
whether payments were made after death of the borrower and were included in claims submitted
to HUD. One of the loans was dropped from the sample (decreasing the sample size to 15)
because data in SFDW did not correctly identify the existence of a living coborrower. We
augmented our sample by adding 14 loans with no claims to validate the payment data. These
additional loans were chosen based on whether they had large scheduled loan payments or
scheduled payments that extended over the longest durations.

Staff from HUD’s Servicing and Loss Mitigation Branch assisted us in our review by obtaining
loan servicing files from the lenders and the HUD contractor, C&L Service Corporation, which
services HECM loans assigned to HUD.

We conducted the evaluation in accordance with the Quality Standards for Inspections adopted
by the Council of the Inspector General on Integrity and Efficiency.




                                              7
                                              Observations

Observation 1 - Servicers Did Not Reconcile HECM Payment Records in a
Timely Manner

We sampled 29 loans and determined that the servicers did not reconcile loan balances for 20 of
the loans to HUD IACS in a timely manner. As a result, loan balances were incorrectly
overstated in SDFW, which receives data from IACS monthly. Scheduled payments that were
not disbursed to borrowers were recorded in IACS, and credits were not recorded for sales
proceeds and HUD claim payments. Had the servicers updated their loan balances to HUD
IACS in a timely manner, the current unpaid loan balances in SFDW would not have been
overstated. Discussions with HUD program employees indicated that it was common in the
industry for servicers not to reconcile their loan balances with HUD IACS in a timely manner.
Accurate HECM loan balances are critical because loans with active FHA insurance or those that
have been assigned to HUD are tracked by HUD and used to project the HECM loan guarantee
liabilities.

Scheduled Loan Advances Continued in HUD IACS After Date of Death

HUD Handbook 4330.1, REV-5, section 13-30, requires that when all of the borrowers on a
HECM loan have died, the loan becomes due and payable. Further, section 13-33 provides that
the lender must issue a repayment letter and discontinue payments to the borrowers.

Once a scheduled loan advance payment is started in HUD IACS, the system will continuously
generate a new monthly payment until a termination code is manually entered to stop it. We
noted that for 9 of the 20 loans that were not reconciled, the servicers failed to enter a stop
disbursement code into the HUD system when they received notification of the borrower’s death.
For five of the nine loans, although the servicers did not make disbursements, these payments
continued to be reported in HUD IACS for an average of 13 months. The servicers eventually
stopped recording the payments in the HUD system and made corrections by reversing the
original entries. For the other four loans, scheduled loan advance payments were still being
reported in HUD IACS, and no reversals or reconciliations had been made.

                                                     Were          Number of 1
                  Scheduled      Start date of    payments         unreconciled
FHA case no.       monthly         monthly        stopped in      payments as of       Overstated
                  payments        payments          IACS?            3-01-11            amount
    Loan A         $ 425.00             6/2/08       Yes                23              $ 9,775.00
    Loan B          8,000.00            3/2/09       Yes                 6               48,000.00
    Loan C          1,009.44           10/1/09       Yes                17               17,160.48
    Loan D            645.00           12/1/08        No2               28               18,079.04

1
  During some months, payments were stopped and then started again. Totals represent the unreconciled number of
months.
2
  As of March 1, 2011, payments were not being made to the borrower but were still being recorded in HUD IACS.

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The default manager for the lender that serviced three of the four loans noted above stated that
the lender was unaware that it had to enter a stop disbursement code in HUD IACS to stop a
scheduled payment after notification of the death of a borrower.

Credits Decreasing Unpaid Loan Balances Were Not Recorded by Servicers

HECM loan servicers are responsible for recording the receipt of proceeds derived from the sale
of a property and claims paid by HUD in HUD IACS. When we compared the loan histories in
SFDW (derived from the HUD IACS data) to the servicers’ records for the 20 loans that were
not reconciled, we noted that in 11 cases, proceeds from the sale of properties or claims paid by
HUD were not recorded. The failure to record credits for these proceeds resulted in an
overstatement of more than $1 million in the unpaid loan balances reported in SFDW, as shown
below.


        FHA case No.                Overstated amount             FHA insurance status
          Loan E                       $ 88,465                         Active
           Loan F                        176,297                        Active
           Loan G                         30,308                        Active
           Loan H                        114,492                       Assigned
           Loan I                         21,443                        Active
           Loan J                         75,817                       Assigned
           Loan K                        214,947                        Active
           Loan L                         38,880                        Active
           Loan M                         83,698                        Active
           Loan N                         91,223                       Assigned
           Loan O                        105,211                        Active
                       Total         $ 1,040,781


We spoke with the Portfolio Analysis Director within HUD’s Office of Housing, who stated that
without the accurate recording of loan payments in HUD IACS and the timely reconciliation by
HECM servicers of the unpaid loan balances, HUD would not have an accurate accounting to
forecast HECM loan guarantee liabilities.

Staff at HUD’s National Servicing Center informed us that HUD was working with the HECM
lending community to reconcile the HECM unpaid loan balances to HUD IACS before the
implementation of a new accounting system called the Home Equity Reverse Mortgage
Insurance Technology (HERMIT) system. HERMIT is scheduled to begin operating in
September 2011. We were also informed that HUD plans to include information on its Web site
explaining the need to enter a stop disbursement code in HUD IACS to stop the system from
creating scheduled loan advances after death of the borrower.




                                                9
Observation 2 – The HECM Program Would Benefit From Enhanced Fraud
Detection Guidance
HECM loan servicing files for 6 of the 29 loans sampled contained indicators of suspicious or
potentially fraudulent transactions which were not followed up by the servicer or referred to
HUD in compliance with HUD Handbook 4060.1, REV-2, chapter 7. Pursuant to paragraph 7-
3(J) of this chapter, findings of fraud or other serious violations must be immediately referred in
writing (along with any supporting documentation) to the HUD Quality Assurance Division
Director in the corresponding Home Ownership Center jurisdiction. In lieu of submitting a paper
report, lenders must use the lender reporting feature in the Neighborhood Watch Early Warning
System.

Examples of indicators of suspicious transactions noted in the loan servicing files included
requests for unscheduled loan advances made by a power of attorney holder (POA) after the
borrowers’ death, requests for unscheduled payments containing borrower signatures that were
different from earlier loan documents, and payments of unscheduled loan advances requested by
an individual other than the authorized borrower.

Unscheduled Payments Were Requested by POAs

For two loans, we found that requests for unscheduled advances were made by POAs after the
borrowers’ death. In two of these cases, HUD paid claims which included the unscheduled
advance payments. We did not find documentation indicating that the servicers followed up on
the suspicious activities or referred the matters to HUD.

Loan Number 1

This HECM was closed on November 5, 2007, by the borrower’s POA. The borrower died on
November 8, 2007. An unscheduled line of credit payment request of $62,188 was received by
the servicer on November 13, 2007. An FHA insurance claim totaling $3,682 was paid out by
HUD to the holder of the loan to make up the shortfall when the property was sold. The claim
was overstated since the servicer included in the loan balance the unscheduled line of credit
advance made by the servicer after the borrower’s death. The current lender was unable to locate
the previous servicer’s files. Since this unscheduled payment was requested 5 days after the date
of death, we believe this suspicious activity should have been referred to HUD.

Loan Number 2

The borrower’s POA requested and received a $5,000 unscheduled line of credit advance in
2008, although the borrower had died 5 months earlier. According to the prior servicer’s notes,
the POA called on two separate occasions about a month after having received this $5,000
unscheduled advance, requesting a transfer of the remaining loan balance of approximately
$60,000 from scheduled monthly payments to an unscheduled line of credit. The prior servicer
had become aware of the borrower’s death and stopped the requested transfer to an unscheduled
line of credit. Since the POA requested and received a prior unscheduled advance payment of
$5,000 after the death of the borrower and also attempted to change the method of payment

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enabling access to a larger withdrawal of available loan funds, the servicer should have referred
the suspicious activities to HUD. We were unable to find documentation in the servicer’s
records indicating that it followed up on this matter.

Different Signatures Were Used on Loan Documents

For the following three loans, we noted that the borrowers’ signatures on requests for HECM
loan payments appeared to be different from signatures evident on earlier loan documents.

Loan Number 3

A request for an unscheduled loan advance of $25,000 was made to the servicer in a letter, dated
February 8, 2008. The payment was made by the servicer on February 12, 2008, just 4 days
before the borrower’s death on February 16, 2008. On March 3, 2008, an unscheduled line of
credit advance was requested using the borrower’s signature for the remaining loan balance of
$15,000. This request also informed the servicer that the borrower’s old checking account was
closed and the funds should be deposited into a new account. We noted that the borrower’s
signature on each of the two requests was different from that on earlier loan and payment
documents. The servicer did not pay the $15,000 because it learned of the borrower’s death on
March 7, 2008. Due to the suspicious circumstances, the servicer should have referred this
matter to HUD.

Loan Number 4

The loan was closed on August 17, 2007. An unscheduled line of credit advance for $68,494
was requested on September 11, 2007, and paid on September 13, 2007. The borrower’s
signature on the line of credit request differed from the signature on the mortgage note. The
borrower died on September 17, 2007. While the servicer’s correspondence log indicated that
the borrower seemed confused about the HECM transaction process, there was no evidence in
the files that the servicer questioned the transaction or made a referral to HUD.

Loan Number 5

A $10,000 line of credit payment was requested on June 7, 2007, one day before the borrower’s
death on June 8, 2007. The borrower’s signature on the line of credit request form differed from
the signature on the deed of trust document, dated October 23, 2006. There was no evidence in
the files that the servicer questioned the transaction or made a referral to HUD.

Unscheduled Payments Were Requested by Other Than the Borrower

In another case, an individual other than the borrower requested unscheduled line of credit
advances after the borrower’s death.

Loan Number 6



                                                11
The borrower died on February 6, 2008. An unscheduled line of credit request for $9,900 was
received by the servicer on February 7, 2008, and an additional request for $9,900 was received
on February 14, 2008. Since the borrower could not have made the requests, the servicer should
have followed up on this matter or made a referral to HUD.

Based on the number of instances of suspicious activity noted in our small sample of HECM
loans, we followed up with the Office of Single Family Housing to obtain a report showing the
volume of HECM referrals made by lenders. The report indicated that over the last 2 years, only
11 instances of HECM fraud were referred by lenders using the Neighborhood Watch Early
Warning System.

Executives from two of the lenders that serviced the majority of the loans reported in this
observation stated that the fraud referral guidance in HUD Handbook 4060.1, REV-2, was too
broad in scope. The lack of specific guidance might offer one explanation as to why there had
been so few lender HECM fraud referrals.


                                       Recommendations
The timely reconciliation of HECM loan payment data by lenders and a comprehensive policy of
detecting and reporting fraud will benefit the HECM program.

In this regard, we recommend that the Office of Single Family Housing

     1. Communicate to HECM servicers that they must manually enter a stop disbursement
        code into HUD IACS to stop the system from creating scheduled loan advances after
        the death of the borrower and ensure that loan balances are reconciled to HUD IACS in
        a timely manner.

     2. Provide detailed guidance for servicers to assist in the detection and reporting of
         suspected HECM fraud. This detailed guidance should, at a minimum, include

                  a. Verifying that the borrower is still alive when a POA requests a change of
                     payment method from scheduled to unscheduled line of credit advances
                     and reporting all instances of unscheduled payment requests made by
                     POAs after death of the borrower to HUD in compliance with HUD
                     Handbook 4060.1, REV-2.

                  b. Matching the borrower’s signature on written requests for unscheduled
                     loan payments to prior loan documents signed by the borrower. In cases
                     in which the discrepancies are not resolved with the borrower or
                     borrower’s representative, the servicer should refer the suspicious activity
                     to HUD.

                  c. Verifying that any request for an unscheduled payment is not dated after a
                     borrower’s death and later included in the claim submitted to HUD.

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                             Comments and OIG Response
We provided a draft copy of the report to the Acting Assistant Secretary of Single Family
Housing – Federal Housing Commissioner on June 23, 2011. The Acting Deputy Assistant
Secretary for Single Family Housing in a memorandum dated August 11, 2011, concurred with
our observations and recommendations (Appendix A). Until such time as the Home Equity
Reverse Mortgage Information Technology (HERMIT) system goes into effect in December
2012, the Office of Single Family Housing will provide instructions (via a Mortgagee letter) to
servicers related to stopping payments in IACs after a borrower’s death and entering sales
proceeds and other payoff transactions in IACs. The recommendations remain open pending
verification of corrective actions taken. OIG will follow-up with the Office of Single Family
Housing to determine the status of the corrective actions taken.




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Appendix A – HUD’s Office of Single Family Housing’s Comments




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