The Cold Hard Truth - We Asked The HECM Fraud Unit Questions & They Answered!
Wednesday, 03 March 2010 08:43
An interview with Kenneth M. Donohue of The HECM Fraud Unit
Inspector General Kenneth M. Donohue of the HECM Fraud Unit has taken the time to answer questions regarding the cold hard truth surrounding the sensitive issue of fraud and how it can affect our industry.
I asked direct questions and I got back direct answers. This is exactly what our industry needs right now.
It’s well worth reading, its well worth heeding…
I would like to start with a brief statement about our organization and our work. The Department of Housing and Urban Development Office of Inspector General (HUD OIG) is established to provide independent and objective reporting to the Secretary, Congress, and the American people through its audit and investigative activities. We are charged specifically with identifying and combating waste, fraud, mismanagement and abuse in the administration of HUD’s programs and operations including, among others, the Federal Housing Administration.
The HUD OIG’s goal is to ensure that the billions of taxpayers' dollars appropriated by Congress for HUD programs along with the FHA’s insurance premiums are used efficiently and effectively.
The housing and mortgage crises over the last few years resulted in HUD and its programs being placed front and center in dealing with the complex issues created from this critical economic situation. The HUD OIG’s Office of Investigation has increased the number of open single-family mortgage fraud criminal investigations by 82%. Together with the FBI, we now have more than 1,500 criminal investigations involving mortgage fraud. The HUD OIG is actively investigating HECM fraud cases involving literally dozens of targets, hundreds of loans and some big names in the industry.
We continue to be leaders in investigating mortgage fraud. In December 2008, HUD-OIG and the FBI partnered to form the National Mortgage Fraud Team (NMFT). Working closely with the National Mortgage Fraud Team, the Financial Crimes Enforcement Network (FinCEN), the United States Secret Service, and numerous other federal and state law enforcement partners, the NMFT has established more than 70 regional working groups and task forces around the country. The NMFT allows our agencies to bring together their resources, including HUD’s FHA databases, FBI Intelligence and FinCEN data, in order to identify mortgage fraud trends and fraud schemes, create investigation target packages, and provide field agent support.
HUD-OIG has also taken a leading role in the interagency Financial Fraud Enforcement Task Force established by President Obama’s November 17, 2009 executive order, and in the Task Force’s Mortgage Fraud Working Group.
1. What are the most common types of fraud taking place right now in the Reverse Mortgage market place?
Current HECM fraud schemes range from false statements regarding occupancy of the subject premises, to straw senior borrowers, to grossly over-inflated appraisals. These frauds run the gamut -- from crimes involving single loans to organized criminal enterprises churning dozens of HECM loans.
The most common schemes that our agents are encountering involve straw buyer senior schemes. Typically, fraudsters purchase low cost, often uninhabitable homes, and flip those properties to unsuspecting seniors. They then often convince seniors that the homes are free, through special (and non-existent) HUD or American Association of Retired Persons (AARP) programs as part of the federal government’s rescue programs. Once the senior is signed up, the property is quitclaimed to the senior and paperwork is drawn up for the senior to take a HECM against the newly-owned property. Of course, this fraud also involves an inflated appraisal, sometimes as much as 1,000% of the true fair market value. To justify the increased appraised value, fraudsters may do some cosmetic repairs to the home, and then file a lien against the property for an amount equal to the expected HECM net proceeds. When the HECM loan is closed, the fraudsters pocket their ill-gotten gains and leave the senior in a home, sometimes with no heat or air conditioning or working plumbing.
A new variation of this scheme involves the HECM for purchase program. Rather than quitclaiming the deed to a senior, fraudsters will “sell” the home to the senior, again at a grossly over-inflated price based on a fraudulent appraisal. The fraudster will typically create bogus down payment documents for the senior as part of the purchase scheme. As in the traditional HECM straw senior scheme, the fraudsters can walk away with tremendous profits and the senior and HUD are left to suffer the losses.
Our agents and auditors are actively pursuing these schemers as it is critical to the vulnerable segment of our population and the American taxpayer for us to protect the integrity of the HECM program and the FHA insurance fund.
2. Other than the above, what should we be looking for in the future?
You can expect that HUD OIG will continue to work with federal, state and local law enforcement partners throughout the country to combat HECM program frauds. Our fiscal year 2010 overall investigative priorities include specifically focusing on the HECM program and frauds committed against senior citizens.
Agents are working closely with the Conference of State Bank Supervisors to coordinate multi-state and multi-jurisdiction reviews, audits and investigations of HECM lenders. We will also take a close look this year at HECM appraisals to determine if HECM appraisals, even appraisals on otherwise legitimate HECM loans, have been overstated.
In addition, we are working closely with HUD and the Senate Committee on Aging to improve legislative program requirements in order to close any loopholes that may allow such frauds to occur.
We would very much like to enlist and encourage your assistance in providing leads on fraudulent activities identified by your members and readers. You can report these to our HUD OIG Hotline at 1-800-347-3735.
3. The issue of cross selling is certainly the most sensitive subject in the reverse mortgage industry. How do we monitor this while still sending the message to financial professionals that cross selling of financial products is in fact illegal?
The Housing and Economic Recovery Act of 2008 (HERA) added new protections for seniors to prevent lenders and other parties from pressuring or requiring them to purchase certain inappropriate financial products with the proceeds of the reverse mortgage or as a condition of eligibility for the reverse mortgage. Financial professionals have an obligation to put the senior’s best interests first.
However, we continue to receive complaints that lenders are requiring seniors to purchase some of these products, and we actively investigate each complaint. In addition to pursuing possible criminal charges, we will refer the lenders, if appropriate, to the HUD-run Mortgagee Review Board for administrative sanctions.
And again, we are working with HUD staff and the Senate Committee on Aging to strengthen the rules on the cross selling of products and to increase criminal sanctions for the parties involved.
4. Do you think it would be proper for our industry to develop “suitability standards” and if so would your unit want to be involved in creating them?
We worked closely with HUD in drafting new departmental guidance for the counseling of seniors on reverse mortgages. We would encourage the industry to develop its own ethics and product standards to assist in the education and protection of seniors.
To this end, the industry needs to develop, administer and enforce ethical standards for the organizations and individuals who market reverse mortgages to such a highly vulnerable population.
HUD OIG has proactively spoken to industry groups about the abuses we are finding in this program. We would welcome the opportunity to review and comment on proposed industry standards from our fraud prevention vantage point.
5. What can we expect from the HECM Fraud Unit? Are you here to observe and react? Or be proactive in the development of policies and procedures?
Both. HUD-OIG has assigned Assistant Special Agent in Charge Michael H. Stolworthy to the FBI/HUD-OIG National Mortgage Fraud Team. ASAC Stolworthy and a HUD-OIG analyst work closely with agents and analysts from the FBI and FinCEN and other law enforcement partners to identify mortgage fraud schemes and create investigation-targeting packages. We also have agents and auditors working in more than 70 mortgage fraud task forces and working groups throughout the country.
As I stated earlier, we have worked proactively with HUD staff and Congress to ensure that proposed regulations, policies and procedures work in the best interest of the reverse mortgage program and to protect senior participants within the confines of what is the appropriate role of an Office of Inspector General.
6. Does the HECM Fraud Unit have specific goals they are working towards and is there a distinct timeline associated with those points?
Our goal, of course, is to reduce the incidence of mortgage fraud involving HECMs and frauds against seniors. We also are working collectively with other national organizations on reducing fraud and on identifying bad players in the mortgage industry. There is no distinct timeline associated with our efforts to combat these frauds. We have committed significant investigative and audit resources to combating these frauds and will continue to do so for the foreseeable future.
7. What percentage of your time is spent focusing on just the Reverse Mortgage industry?
The percentage of time varies among our regions and our agents. We have several large-scale investigations throughout the country involving HECM frauds. Agents and auditors working on these investigations spent most of their time working these cases. The National Mortgage Fraud Team agents and analysts currently are spending approximately 25% of their time focusing on issues relating to HECMs.
In addition to on-going investigations, we also examine the financial and reporting soundness of the reverse mortgage program through the annual FHA financial statement audit. Our past audits have made several recommendations to the FHA Commissioner to improve FHA reverse mortgage systems that are in the process of development and implementation for FY 2010.
“The housing and mortgage crises over the last few years resulted in HUD and its programs being placed front and center in dealing with the complex issues created from this critical economic situation. The HUD OIG’s Office of Investigation has increased the number of open single-family mortgage fraud criminal investigations by 82%. Together with the FBI, we now have more than 1,500 criminal investigations involving mortgage fraud. The HUD OIG is actively investigating HECM fraud cases involving literally dozens of targets, hundreds of loans and some big names in the industry.” I truly feel the Inspector General was being very politically correct in his choice of words and I appreciate it. But the cold hard truth is that the mortgage industry, over the last few years, has created an incredible amount of damage, hurt and pain to itself and the public. Wall Street and Main Street no longer trust the mortgage industry and that mistrust is very well deserved.
Now, that being said, I have a real problem with the media blaming the very hard working men and women who make a living originating, processing and closing loans. The blame needs to be aimed at Wall Street and the national players who created the market and sold these absurd programs knowing it would lead to a disastrous end; but that’s an entirely different subject for another time.
Right now the Reverse Mortgage industry stands at a crossroads. Decreasing of the principal loan limit, increasing MIP premiums and continued decreasing property values all make it harder and harder to make a living. I stand by the claim that we are the noblest part of the mortgage industry and I know all of you reading this agree. We will continue to help the seniors of this nation.
So, to all of the great people in the reverse mortgage industry let’s keep fighting the good fight. And to anyone thinking of entering this great industry remember, HUD OIG is watching you along with every one of us!
Let’s get out there and help as many seniors as we can.
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