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HUD cracks down on fraudulent reverse mortgage appraisals

The government on Monday signaled that it plans to investigate fraud in the reverse mortgage industry after uncovering cases where  appraisers have grossly exaggerated the value of homes.

Special agents with the U.S. Department of Housing and Urban Development’s Office of Inspector General have reviewed roughly 5,000 reverse loans over several years, and found hundreds of cases of fraud when seniors refinanced a reverse mortgage, HUD said in an industry alert.

HUD oversees the Federal Housing Administration (FHA), which insures almost all reverse mortgages through its Home Equity Conversion Mortgage (HECM) program.  

Home values were inflated by as much as 60 percent to 100 percent in areas where the values may have otherwise increased by 3 percent to 4 percent, HUD said. This provided an incentive for the owners, who must be 62 years or older, to refinance.

HUD said the potential victims are the FHA, which must pay inflated insurance claims when the overvalued properties are foreclosed. It also potentially hurts investors in the secondary market, who pay a premium to purchase HECMs and stand to lose money if the loans are refinanced and paid off early, HUD said.

HUD said that the appraisers stand to gain from added fees, and lenders and originators were also able to increase their profits. HUD said a preliminary investigation found that a small number of appraisers were responsible for a large percentage of the bad loans, and it occurred in narrow geographical areas.

The agency said it was working with a forensic appraiser to evaluate a sampling of loans to determine if a wider investigation is needed. 


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