We conducted an audit on the effectiveness of the U.S. Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage (HECM) program’s Life Expectancy Set Asides (LESA).  The LESA is a set aside portion of the HECM mortgage that makes property tax, hazard insurance, and flood insurance payments on behalf of certain financially vulnerable borrowers.  While not guaranteed, the LESA funds are intended to last for the full duration of the borrower’s life expectancy.  We initiated this audit because of recent federal reporting on rising nationwide property tax and hazard insurance costs, paid for by LESA funds.  Our audit objective was to determine whether LESAs were meeting the intent of the program for financially vulnerable borrowers.

We found an estimated 1,237 HECM borrowers will need to begin making property charge payments out of pocket because their LESAs will deplete in significantly less time than HUD estimated they would last. This occurred because HUD did not evaluate whether LESA calculations were effective or whether LESAs would be available for the borrowers’ estimated life expectancy.  If borrowers cannot make these property charge payments out of pocket, their HECM loans would default, resulting in a projected loss of $258 million to HUD.