The Federal Housing Administration (FHA) needs to provide guidance to servicers to address an increasing number of seniors who are defaulting on their federally insured reverse mortgages, according to the Department of Housing and Urban Development's Office of Inspector General (HUD IG) .
HUD IG auditors discovered that four servicers are holding 1,300 FHA-insured home equity conversion mortgages (HECMs) where the borrowers had technically defaulted by not paying the real estate taxes and insurance on their homes.
The servicers continue to service these HECMs, paying taxes and insurance for the borrowers totaling $35 million - but without informing HUD, according to the office of inspector general (OIG) report. "If HUD does not take action, additional payments will occur in the next 12 months," the audit report says.
Two of the servicers told the IG auditors they are waiting for HUD to issue guidance on how to handle the defaulted loans.
FHA officials said they had a special training session for HECM servicers in 2009 to address the problem and are drafting new guidance.
The guidance will instruct servicers to contact defaulted borrowers and "require specific actions to bring the loan into compliance with the terms of the mortgage," a FHA official said in a written response to the HUD IG audit report.
FHA also intends to modify its systems to track and monitor defaulted HECMs where servicers are advancing funds.
HUD stopped collecting reports on HECM defaults in April 2009, according to the HUD IG. At the time, reported HECM defaults totaled 7,000.
The OIG auditors estimate the 1,300 defaulted mortgages held by the four largest HECM servicers and the 7,000 defaulted HECMs known to HUD could result in a loss of $1.47 billion to the FHA insurance fund if the loans end up in foreclosure and the properties are sold.