A new report released by the U.S. Department of Housing and Urban Development (HUD) Office of the Inspector General this week revealed that the Home Equity Conversion Mortgage (HECM) program may have controls lacking to ensure adequate flood insurance, noting guidance issues on the topic between regulations and the reverse mortgage sections of the Single Family Housing 4000.1 handbook.
While the broader takeaway as it relates to the forward mortgage programs at FHA revolves around OIG’s statement that approximately 31,500 FHA-insured loans did not maintain the required flood insurance coverage in 2020, the HECM program does get dedicated attention to avoid potential issues on this topic in the future.
Guidance differences between regulations, handbook
Differences between regulations and the handbook are at the heart of OIG’s findings related to the reverse mortgage program.
“The regulation (24 CFR 206.45(c)(3)) allowed for the same three calculations as the statute,” the OIG report reads. “The handbook allowed for the lesser of two calculations: (1) an amount at least equal to either the outstanding balance of the mortgage or (2) the maximum amount of NFIP insurance available with respect to the property.”
The handbook did not include any provision “to calculate the minimum insurance coverage amount based on replacement costs,” the report reads, nor did it instruct the reverse mortgage servicer on an affected loan on how that entity should determine any discerned replacement cost.
“Further, it did not state whether the insurance amount should be set based on the unpaid amount at the beginning of the policy period or at the end,” the report goes on to say. “Because HECM loans’ unpaid balances increase over time, the policy amount will be sufficient throughout the policy term only if it is set based on the scheduled value at the end of the term.”
In an appendix on the full document, the OIG included the relevant regulation: 24 CFR Part 206, Home Equity Conversion Mortgage Insurance Subpart A section 206.45: Eligible Properties. It also included the relevant section of the HECM Handbook 4235.1, 3-4. Eligible Properties subsection H, “Requirements for maintaining flood insurance coverage.”
Report recommendations
OIG makes four recommendations to the FHA Deputy Assistant Secretary for Single Family Housing Julienne Joseph, three of which are squarely aimed at shoring up the highlighted issues on the forward mortgage side of FHA, and one that is dedicated specifically to reverse.
“Consult with the Office of General Counsel to review the language in the statutes, regulations, and handbooks and if warranted, make adjustments to the HECM handbook to ensure consistency with the statute and regulation,” reads the HECM recommendation.
Lenders should also be required to “provide evidence of sufficient flood insurance or execute indemnification agreements for the 21 loans in our statistical sample that did not have sufficient flood insurance at the time of our audit to put nearly $1.1 million to better use,” and to develop “a control to detect loans that did not maintain the required flood insurance to put $1.5 billion to better use by avoiding potential future costs to the FHA insurance fund from inadequately insured properties.”
Similarly, the Office of General Counsel should be consulted to shore up any differences between forward mortgage regulations and that program’s accompanying handbook as well, the report says.
Find specific reporting about the broader forward mortgage findings at HousingWire by mortgage reporter Maria Volkova. Read the HUD OIG audit report.
Recent HECM OIG activity, change in administrations
Earlier this month, the HUD OIG issued a new fraud bulletin aimed at informing the public about reverse mortgage scams, a revision to a previous bulletin that noted increased interest in the product category due to the ongoing economic impacts of the COVID-19 coronavirus pandemic. That bulletin describes for people that reverse mortgages are legitimate products offered under the FHA’s HECM program, but that certain bad actors may seek to scam a senior out of money under the guise of offering a reverse mortgage on their home.
One month prior to the inauguration of President Joe Biden, the HUD OIG under the Trump administration released a report which stated that even with noted improvements in the financial standing of the HECM book of business in recent years, losses in that portion of the Mutual Mortgage Insurance (MMI) Fund continued to “undermine” the fund’s stability, exposing “weaknesses” in HUD’s internal control mechanisms.
To mitigate these risks, enhanced reverse mortgage lender oversight is required and cast the HECM program as an ongoing “major challenge” for the Department which would require additional action beyond the scope of the Trump administration’s term in office, the report read. It also echoed a point made in that year’s Annual Report to Congress, which said that the HECM program was continually subsidized by the forward mortgage portfolio, a contention that reverse mortgage industry analysts disagreed with due to their own analyses of the forward and HECM books of business.
The 2021 Annual Report to Congress revealed that the reverse mortgage portfolio had reached positive territory for the first time since 2015. Other indications by Biden administration officials from earlier that year point to a difference of opinion with their predecessors regarding the general health and direction of the HECM program.
“We are aware of our previous Deputy Secretary’s comments to RMD about the Home Equity Conversion Mortgage program,” a HUD spokesperson told RMD in 2021, referring to an interview conducted with Former Deputy HUD Secretary Brian Montgomery. “Mr. Montgomery’s perspective on the program from his time at HUD certainly provides his opinion of the program, but are not what we would characterize as ‘ongoing dialogue’ about the HECM program under the Biden Administration.”
