Industry warned about fraudulent reverse mortgage appraisals

by Justin da Rosa02 Dec 2015
The Office of the Inspector General for the Department of Housing and Urban Development (HUD OIG) is warning the industry about inflated reverse mortgage appraisals.
 
“HUD OIG special agents have reviewed HECM refinances over the last several years and have identified indications of fraud in hundreds of HECM loans,” HUD OIG said in industry alert. “Analysis of appraisals has revealed appraised values fraudulently inflated by 60 to 100 percent or more above actual market values.”
 
The HUD watchdog said reverse mortgage refinance options are beneficial to clients, but that instances of fraudulent appraisals have been on the rise.
 
Inflated appraisals increase the risk of defaulting on the loans, which would be detrimental to originator clients who take out the loans.
 
“Investors in the secondary market are also victims of these refinancing frauds. Investors pay premiums to purchase HECMs, based on expected terms and interest rates,” the Office said. “When the borrower’s original HECM is paid off early because of a fraudulently refinanced HECM loan, investors may lose money on the investment.
 
“Early payoffs from refinancing may negatively affect the prices that investors will pay for originated HECMs.”
 
HUD OIG analyzed over 5,000 reverse refinance loans over the last few years, and found property values in certain areas had been appraised to have increase by 60-100%, while other properties in those areas appreciated a mere 3-4%.
 
The watchdog said it is continuing to analyze more properties.
 
“Underwriters should carefully scrutinize appraisals and appraisal comps on all HECM originations, and particularly on HECM refinances,” HUD OIG said. “Look for fraud indicators, such as a large increase in value over a relatively short period of time from the original HECM, changes in property descriptions, including square footage and neighborhoods, appraisal comps located relatively far from the subject property (particularly in urban areas), and the same appraisers or small group of appraisers being used by originators on refinances.”

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