An internal audit by the U.S. Department of Housing and Urban Development's (HUD) Office of the Inspector General (OIG) has revealed that HUD was not tracking almost 13,000 defaulted reverse mortgages. The resultant claim amounts against HUD could top more than $2.5 billion.
The audit was triggered by the OIG's finding that more and more borrowers had not paid taxes or homeowners insurance premiums as required by the Home Equity Conversion Mortgage (HECM) program. The failure to pay taxes or insurance places HECM loans into default status. The OIG says HUD routinely granted foreclosure deferrals on defaulted HECM loans but that it had no formal procedures.
‘We found that HUD's informal foreclosure deferral policy and its reversal had a negative effect on the universe of HECM loans and loan servicers,’ the OIG says in a summary on its website.
After canceling its informal policy, HUD failed to issue guidance to servicers on how to proceed with the defaulted loans. Four servicers contacted by the OIG were holding almost 13,000 defaulted HECM loans with total claims amounts of more than $2.5 billion. Two of the servicers told the OIG they were awaiting HUD guidance.
The OIG reports that the servicers had paid taxes and insurance premiums totaling more than $35 million for these 12,958 borrowers, adding that absent any action from HUD, additional payments will continue.
There are 12 other HECM servicers nationwide from which the OIG did not obtain unreported defaulted-loan information.
The OIG says HUD could not identify the deferred or defaulted loans in its data system and that as a result, HUD did not know how many loans had principal amounts increasing because the servicer had added payments for taxes and insurance to the loan amount.
‘[M]ore defaulted loans may exist,’ the OIG write-up states. ‘Further, as HUD could not track these loans, it did not know the potential claim amount. In the event of foreclosure of the 7,673 loans for which HUD was aware and 12,958 loans of which it was not aware, HUD could lose an estimated $1.4 billion upon sale of the properties.’
The OIG recommends that HUD discontinue the practice of deferring foreclosure due to nonpayment of tax and insurance; issue formal guidance to servicers about loans in default because of nonpayment of taxes and insurance; develop and implement a plan to minimize the risk of similar defaults in the future; and develop a tracking and reporting system.