Federal Bureau Of Investigation
Criminal Intelligence Section
Department Of Housing And Urban
Development/Office Of Inspector General
Criminal Investigative Division
24 March 2009
Home Equity Conversion Mortgages
An HECM is a reverse mortgage loan product insured by the Federal Housing Authority (FHA). While other reverse mortgage loan products exist, the HECM is the most well-known and widely available. It enables eligible homeowners to access the equity in their homes by providing funds (in many instances in a lump sum payment) without incurring a monthly payment burden during their lifetime in the home. To be eligible for an HECM, a borrower must be 62 years or older, own their own property (or have a small mortgage balance), occupy their property as their primary residence, and participate in HECM counseling. There are no income, credit, or employment qualifications required of the borrower, and no repayment is required if the property is the borrower’s primary residence. Closing costs may be financed in the mortgage loan. The homeowner is responsible for property taxes, insurance, maintenance, utilities, fuel, and other expenses.
FBI and Department of Housing and Urban Development-Office of Inspector General (HUD-OIG) reporting indicate that unscrupulous loan officers, mortgage companies, investors, loan counselors, appraisers, builders, developers, and real estate agents are exploiting Home Equity Conversion Mortgages (HECMs)—also known as reverse mortgages—to defraud senior citizens. They recruit seniors through local churches, investment seminars, and television, radio, billboard, and mailer advertisements, and commit the fraud primarily through equity theft, foreclosure rescue, and investment schemes.1 HECM-related fraud is occurring in every region of the United States, and reverse mortgage schemes have the potential to increase substantially as demand for these products rises in demographically dense senior citizen jurisdictions.
Equity Theft Schemes
Equity theft schemes are the most common method used by mortgage fraud perpetrators to exploit HECMs. Perpetrators––often with the aid of straw buyers––execute a scheme designed to withdraw false equity from properties. They typically identify foreclosed, distressed, or abandoned properties (or buyers) using information contained within county deed records. Perpetrators purchase the properties using straw buyers who commit occupancy fraud by fraudulently stating they will be using the property as their primary residence. They then recruit seniors to "purchase" the properties from the straw buyers by transferring the property deeds to the seniors with no exchange of money. After the seniors have occupied the property for at least 60 days, the perpetrators arrange for the seniors to obtain HECMS, and––with the aid of a fraudulently inflated appraisal––encourage them to request lump sum disbursements of the equity.2 The perpetrators, often in collusion with the settlement attorney, abscond with all of the equity at closing.
Foreclosure Rescue Schemes
Free Homes for Seniors and False Equity
Some senior citizens are recruited through advertisements for "free homes" and willingly participate in these schemes. The appraisals are generally inflated. The seniors get to live in the homes as long as they pay taxes, insurance, and upkeep. Banks do not realize there is a problem until the end of the term when the seniors die or move out. At this time, any losses to the banks due to the false equity is passed from the lenders to the FHA, which pays the shortfall to the lenders out of money collected from mortgage insurance premiums.
Foreclosure rescue schemes are used by mortgage fraud perpetrators to attract senior citizens who are in jeopardy of losing their homes to foreclosure, with the promise that their reverse mortgage programs will prevent this from occurring.3 Senior citizens are enticed by originators, investment representatives, or financial relief consultants and are initially led to believe they are obtaining a reverse mortgage. They are subsequently informed that they do not qualify for the reverse mortgage program, but that they do qualify for another mortgage loan type that they offer. The perpetrators then locate an investor willing to act as a straw buyer; order fraudulent home repairs; complete an inflated appraisal; and obtain a forward mortgage subsequently transferring the property away from the seniors and pocketing the equity. The seniors are often notified by the investor/owner to either repurchase the home at a higher price or find alternative living arrangements.4
Investment schemes are similar to equity theft schemes and are used by mortgage fraud perpetrators to steal the HECM loan proceeds under the guise of investing it in an annuity, real estate, or other investment product. The perpetrators of this scheme are often affiliated with the originator of the HECM loan and cross-sell the investment product to the victim.
According to HUD, the number of HECM loan originations insured by the Federal Housing Administration rose from 7,923 in fiscal year (FY) 1999 to 112,013 in FY 2008, representing an increase of more than 1,300 percent.5 HUD-OIG anticipates that the number of HECM originations will rise significantly in 2009 due in part to an increase in HECM loan limits from $362,790 to $625,500.6 The increasing senior victim population –– currently worth $4 trillion in home equity and estimated to grow by 10,000 people per day through 2011 –– coupled with program vulnerabilities, such as the lack of income, credit, or employment qualifications, creates significant opportunities for fraud perpetrators.7 These factors may lead to an increase in multiple frauds, including misrepresentations of the borrower’s permanent residence, age, and competency; identity theft; fraudulently inflated appraisals; fraudulent deeds; forged payoffs of pre-existing liens and mortgages; loans arranged by children or other third parties without the consent or knowledge of the borrower; the creation of fictitious liens; forged powers of attorney; and misappropriation of proceeds.
Additionally, as of January 2009, a provision in the Housing and Economic Recovery Act provides the option for seniors to purchase a home and obtain an HECM in one transaction. This has the potential to increase reverse mortgage frauds as the perpetrators will not need to conduct additional forward mortgage transactions. The ongoing mortgage and financial crisis may also tempt many senior homeowners to obtain HECMs as a means to offset their dwindling retirement savings.
This intelligence bulletin was jointly prepared by the Criminal Intelligence Section of the FBI and HUD-OIG.
1 Additional schemes associated with reverse mortgages include sales of unsuitable financial products; broker conversion; misrepresentation of the borrower's permanent residence, age and competency; identity theft; inflated collateralized value; land record/deed forgery; forged payoffs of pre-existing liens and mortgages; loans arranged by children or other third parties without the consent of the senior borrower; forged power of attorney; settlement agent fraud and scams charging excessive fees for otherwise free reverse mortgage information.
2 The appraisals are typically inflated by arranging for cosmetic repairs to the property or documenting repairs that were never performed.
3 Fraudulent foreclosure rescue/reverse mortgage programs are often advertised as "turn around mortgages," "foreclosure reversals “and” foreclosure rescue programs."
4 Seniors are advised that the proceeds from the transaction will pay the mortgage payments, insurance, and taxes, and that in a given amount of time (60 days to one year) the senior could repurchase the property. Industry personnel are aware that if a property goes into default the first year it raises a “red flag” to regulators who will scrutinize the associated transactions.
5 U.S. Department of Housing and Urban Development, Office of Single Family Program Development, telephone interview by the author, 15 March 2009.
6 U.S. Department of Housing and Urban Development, FHA Reverse Mortgages (HECMs) For Consumers, URL://www.hud.gov/offices/hsg/sfh/hecm/hecmabou.cfm, accessed on 15 March 2009.
7 Interthinx for the Mortgage Banker’s Association. “Fraud in Reverse Mortgages.” MBA Reverse Mortgage Conference, Hyatt Regency Miami Convention Center, Miami, Florida. 2 October 2008.
Fraud Target: Senior Citizens