HUD’s Inspector General Issues Warning For Reverse Mortgage Lenders

Seniors, aged 62 years old and older, have the right to get involved in a Home Equity Conversion Mortgage, more commonly called a reverse mortgage. Homeowners get to stay in their homes and yet they benefit from a loan against their equity, without having to make monthly payments on it.

Using the value of equity in a home in the form of a reverse mortgage has become popular with millions of seniors who need money for daily living, or for long term care in a nursing home.

However, the appraisal conducted on behalf of the lender at the inception of the reverse mortgage may have been too high, possibly ‘way too high. Apparently this has happened often enough that HUD’s Inspector General chose to issue a warning to reverse mortgage lenders and appraisers in November 2015, which reads, in significant part:
“While the Department of Housing and Urban Development - Office of Inspector General (HUD OIG) recognizes that there are times when Home Equity Conversion Mortgages (HECM) refinances are beneficial to consumers, HUD OIG is issuing this industry alert to warn lenders, originators, and sponsors that the OIG has identified instances of fraudulent appraisals being used to increase HECM loan amounts in order to qualify senior borrowers for HECM refinancing. HUD OIG special agents have reviewed HECM refinances over the last several years and have identified indications of fraud in hundreds of HECM loans. Analysis of appraisals has revealed appraised values fraudulently inflated by 60 to 100 percent or more above actual market values.”

I sat up and took notice when I realized this is just another variation on the theme of residential mortgage fraud that caused the national financial crisis of 2008 – 2010. Who among us would EVER want to go down that road again, or even veer off onto that road accidentally?
“OIG intends to investigate and refer for prosecution unscrupulous appraisers, loan officers, originating lenders, and sponsor lenders that sponsor this activity.”

Not only are seniors and their heirs harmed when appraisals are made in excess of a home’s market value, but now the lenders and appraisers face legal repercussions, too. It’s a bad situation for everyone concerned, including the general public.

The number of aging homeowners who want to stay in their homes, but didn’t plan ahead for sufficient retirement income is growing every day. It is not a problem that’s going away anytime soon, so we can probably look forward to more schemes to “help” them, which is how reverse mortgages are still marketed.

And, sadly, most people who are attracted to reverse mortgages are fiscally naïve. They don’t realize the consequences to themselves and to their heirs, all of whom may the house to unscrupulous lenders.