We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of its Home Equity Conversion Mortgage (HECM) program based on our strategic objective to protect the integrity of housing insurance and guarantee programs and because of residency issues identified in prior audits of the HECM program.  Our objective was to determine whether HUD’s Office of Single Family Housing had effective controls to ensure that HECM loan borrowers complied with residency requirements when concurrently receiving rental assistance from its multifamily programs.

HUD policies did not always ensure that HECM borrowers complied with residency requirements.  Of the 68 loans statistically selected for review, the borrowers for as many as 67 loans did not live in the properties associated with their loans because they received rental assistance from HUD’s multifamily programs at a different address at the same time.  This condition occurred because HUD’s Office of Single Family Housing did not have controls to prevent or reduce the problem.  Of the 67 loans, 18 were independently terminated by the servicing lenders during the audit.  The remaining 49 insured loans had current balances totaling more than $7.1 million and maximum claim amounts totaling more than $8.4 million.  As a result, 49 insured loans should be declared in default and due and payable to reduce the risk of loss to HUD’s insurance fund of up to $1.3 million.  Further, the borrowers for an additional 642 insured loans also may have violated the residency requirements.  If HUD cannot confirm that these borrowers are complying with the residency requirements, these loans should also be declared in default and due and payable to reduce the risk of loss to HUD’s insurance fund of up to $14.4 million.

We recommend that HUD direct the applicable servicing lenders to verify borrowers’ compliance with the residency requirements or for each noncompliant borrower, declare the loan in default due and payable, thereby putting up to $15.7 million to better use.  Further, we recommend that HUD implement controls to prevent or reduce instances of borrowers violating residency requirements by concurrently participating in multifamily programs.