A warning has been issued about the use of fraudulent appraisals on the refinance of government-insured reverse mortgages.
The bogus valuation reports are allegedly being utilized to enable the refinance of home-equity conversion mortgages.
Residential property values are being fraudulently inflated by between 60 percent and 100 percent on the HECM transactions.
The warning was issued to mortgage lenders, originators and sponsors by the Department of Housing and Urban Development Office of Inspector General.
The OIG says investigations by its special agents over the last several years uncovered the fraud.
Originators, who benefit from origination fees on the refinances, are utilizing
just a small group of appraisers who earn fees for producing inflated appraisals.
HECMs are insured by the Federal Housing Administration, which has to pay bigger claims when over-valued properties backing the reverse mortgages are foreclosed.
In addition, when the original loans are refinanced — investors in the loans lose interest that was expected to be earned for a longer period. This will impair future prices investors are will to pay on HECMs.
“This reduction may affect profits of originating lenders,” the report said. “While lenders have done no-, or low-, cost origination fees in the past, they may now increase origination fees to senior borrowers to make up for lost income on the back end of the mortgage — sales to the secondary market.”
The OIG is directing underwriters to
carefully scrutinize appraisals and appraisal comparables on all HECM originations — especially refinances. Red flags include high appreciation over a short period of time, changes in property descriptions and the use of distant comparable properties.
Another flag is the use of the same appraisers on HECM refinances.
