Reverse Mortgages: FHA Needs to Improve Monitoring and Oversight of Loan Outcomes and Servicing

Reverse mortgages allow seniors to convert part of their home equity into payments from a lender while still living in their homes. Most reverse mortgages are made under FHA's HECM program, which insures lenders against losses on these loans. HECMs terminate when a borrower repays or refinances the loan or the loan becomes due because the borrower died, moved, or defaulted. Defaults occur when borrowers fail to meet mortgage conditions such as paying property taxes. These borrowers risk foreclosure and loss of their homes. FHA allows HECM servicers to offer borrowers foreclosure prevention options. Most HECM servicers are supervised by CFPB. GAO was asked to review HECM loan outcomes and servicing and related federal oversight efforts. Among other objectives, this report examines (1) what FHA data show about HECM terminations and the use of foreclosure prevention options, (2) the extent to which FHA assesses and monitors the HECM portfolio, and (3) the extent to which FHA and CFPB oversee HECM servicers. GAO analyzed FHA loan data and FHA and CFPB documents on HECM servicer oversight. GAO also interviewed agency officials, the five largest HECM servicers (representing 99 percent of the market), and legal aid groups representing HECM borrowers.

The vast majority of reverse mortgages are made under the Federal Housing Administration's (FHA) Home Equity Conversion Mortgage (HECM) program. In recent years, a growing percentage of HECMs insured by FHA have ended because borrowers defaulted on their loans. While death of the borrower is the most commonly reported reason why HECMs terminate, the percentage of terminations due to borrower defaults increased from 2 percent in fiscal year 2014 to 18 percent in fiscal year 2018 (see figure). Most HECM defaults are due to borrowers not meeting occupancy requirements or failing to pay property charges, such as property taxes or homeowners insurance. Since 2015, FHA has allowed HECM servicers to put borrowers who are behind on property charges onto repayment plans to help prevent foreclosures, but as of fiscal year-end 2018, only about 22 percent of these borrowers had received this option.

FHA's monitoring, performance assessment, and reporting for the HECM program have weaknesses. FHA loan data do not currently capture the reason for about 30 percent of HECM terminations (see figure). FHA also has not established comprehensive performance indicators for the HECM portfolio and has not regularly tracked key performance metrics, such as reasons for HECM terminations and the number of distressed borrowers who have received foreclosure prevention options. Additionally, FHA has not developed internal reports to comprehensively monitor patterns and trends in loan outcomes. As a result, FHA does not know how well the HECM program is serving its purpose of helping meet the financial needs of elderly homeowners.

FHA has not conducted on-site reviews of HECM servicers since fiscal year 2013 and has not benefited from oversight efforts by the Consumer Financial Protection Bureau (CFPB). FHA officials said they planned to resume the reviews in fiscal year 2020, starting with three servicers that account for most of the market. However, as of August 2019, FHA had not developed updated review procedures and did not have a risk-based method for prioritizing reviews. CFPB conducts examinations of reverse mortgage servicers but does not provide the results to FHA because the agencies do not have an agreement for sharing confidential supervisory information. Without better oversight and information sharing, FHA lacks assurance that servicers are following requirements, including those designed to help protect borrowers.

GAO makes eight recommendations to FHA to, among other things, improve its monitoring and assessment of the HECM portfolio and oversight of HECM servicers, and one recommendation to CFPB to share HECM servicer examination information with FHA. FHA and CFPB generally agreed with the recommendations.

The aging of the U.S. population, the large share of seniors’ wealth held  in home equity, and the preference of many older adults to age in place  underscore the importance of knowing more about reverse mortgages  and the role they play for some senior homeowners. A reverse mortgage  is a type of loan that allows eligible seniors to convert part of their home  equity into payments from a lender while still living in their homes.  Congress authorized the Department of Housing and Urban Development  (HUD) to insure reverse mortgages to help meet the financial needs of  elderly homeowners. The vast majority of reverse mortgages are made  under the Home Equity Conversion Mortgage (HECM) program  administered by HUD’s Federal Housing Administration (FHA). HECMs  are originated and serviced by private FHA-approved lenders and  servicers. FHA insures these entities against losses on the loans and  charges borrowers premiums to help cover the potential cost of insurance  claims. While not involved in administering the HECM program, the  Consumer Financial Protection Bureau (CFPB) collects consumer  complaints about reverse mortgages and supervises nonbank  (nondepository institution) reverse mortgage lenders and servicers for  compliance with, and enforces violations of, federal consumer financial  protection laws.

Reverse mortgage servicing involves a range of activities, such as  making payments to borrowers, providing monthly account statements,  monitoring loan balances, and responding to borrower inquiries. If a  borrower falls behind on property charges (for example, taxes and  homeowners insurance), servicers must generally temporarily pay them  on the borrower’s behalf (referred to in this report as servicer advances)  but may ultimately initiate foreclosure proceedings if the borrower does  not catch up. In recent years, FHA has made program changes allowing  servicers to offer foreclosure prevention options—options for distressed  HECM borrowers to help delay or avoid foreclosure.

HECMs terminate—that is, the loan balance is paid off and the loan  ends—for a variety of reasons. For example, borrowers may choose to  repay the loan or refinance into a new HECM. Additionally, events such  as the borrower dying, moving, or defaulting—that is, not meeting  mortgage conditions—result in the loan becoming “due and payable.” In  some cases, generally when a borrower defaults, the lender may  foreclose on the borrower to obtain title to the property and sell the home  to satisfy the debt. In these circumstances, the borrower may end up  being displaced from his or her home. Consumer advocacy organizations  have expressed concerns about an observed increase in HECM  foreclosures and servicing problems.

You asked us to review HECM loan outcomes and servicing and related  federal oversight efforts. This report examines (1) what FHA data show  about HECM terminations, servicer advances, and the use of foreclosure  prevention options; (2) FHA’s assessment and monitoring of HECM  portfolio performance, servicer advances, and foreclosure prevention  options; (3) FHA’s and CFPB’s oversight of HECM servicers; (4) how  FHA and CFPB collect, analyze, and respond to consumer complaints  about HECMs; and (5) how and why the market for HECMs has changed  in recent years.

To address the first and second objectives, we analyzed FHA data to  determine the number of and reasons for HECM terminations in fiscal  years 2014 through 2018. We also analyzed FHA data on servicer  advances for unpaid property charges and other costs for HECMs in a  due and payable status. Additionally, we analyzed information from FHA  on HECM borrowers approved for selected foreclosure prevention  options. To assess the reliability of FHA’s data, we reviewed FHA  documentation, performed electronic testing on the data to check for  missing values and obvious errors, corroborated the data with other  available sources (such as published FHA reports), and interviewed  agency officials and FHA’s data system contractor about interpreting data  fields. We determined the data were sufficiently reliable for characterizing  loan terminations, servicer advances, and use of foreclosure prevention  options in the HECM program. We also reviewed FHA data and reports  and interviewed FHA officials to determine how the agency monitors and  analyzes the HECM portfolio, including the use of any performance  indicators or program evaluations. We compared FHA’s practices against  leading practices for assessing program performance, federal internal  control standards, and Office of Management and Budget (OMB) policies  and procedures on managing federal credit programs (OMB Circular A- 129).

To address the third objective, we reviewed FHA and CFPB policies and  procedures for overseeing HECM servicers and interviewed agency  officials with oversight responsibilities. We reviewed completed  examinations of HECM servicers to determine the extent to which the  agencies have assessed and taken steps to enforce compliance with  servicing and consumer protection requirements. We compared FHA’s  oversight of HECM servicers to relevant parts of OMB Circular A-129.  Additionally, we interviewed FHA and CFPB officials to determine the  extent to which the agencies collaborate and share information on  oversight of HECM servicers. We compared their efforts to approaches  federal agencies use to enhance collaboration toward joint goals that we  identified in prior work.

To address the fourth objective, we analyzed all reverse mortgage  consumer complaints received by CFPB through its Consumer Complaint  Database from calendar years 2015 through 2018 to determine the  number of complaints by year, state, submission method (for example,  internet, phone, or email), and company. We also analyzed a random  generalizable sample of 100 reverse mortgage consumer complaints to  identify patterns in consumer-described issues about reverse mortgages.  We determined the CFPB data were sufficiently reliable for the analysis  we conducted by reviewing CFPB documentation, performing electronic  testing of the data, and interviewing CFPB officials about our  interpretation of data fields. To determine the extent to which FHA  collects and analyzes complaints, we reviewed the nearly 105,000  HECM-related calls received by the National Servicing Center from  calendar years 2015 through 2018. We also reviewed the 147 HECM- related calls received by the FHA Resource Center during the same time.  However, we did not perform an analysis on these data similar to that  conducted on the CFPB data because of limitations in how the data were  collected. For example, data did not include information on whether the  call was a complaint or inquiry, and a large majority of the data did not  include information on who the caller was (e.g., a borrower, servicer, or  lender). Additionally, we reviewed CFPB and FHA policies and  procedures for collecting and addressing consumer complaints and for  incorporating consumer complaints into their oversight of HECM  servicers. Further, we interviewed officials from both agencies to better  understand their complaint processes. We compared CFPB’s and FHA’s  efforts against federal internal control standards and against criteria we  developed previously on leveraging related agency resources.

To address the fifth objective, we analyzed FHA data from calendar years  1989 (the start of the HECM program) through 2018 to identify trends in  the volume of HECM originations. Additionally, using FHA and Census  Bureau data, we calculated HECM take-up rates—the ratio of new HECM  originations to senior homeowners—from calendar years 2000 through  2017 to measure the extent to which senior homeowners participate in  the program. We also developed an econometric model using FHA,  Census Bureau, and other data to examine the relationship between  HECM take-up rates and a number of explanatory variables. We also  reviewed relevant research and interviewed academic and HUD  economists about other factors (for example, consumers’ perception of  reverse mortgages) that are difficult to directly include in the model but  that may influence HECM take-up rates. Appendix I contains a more  detailed description of our objectives, scope, and methodology. Appendix  II contains a description and results of our econometric model of factors  associated with HECM take-up rates.

We conducted this performance audit from July 2018 to September 2019  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

A reverse mortgage is a nonrecourse loan against home equity that does  not require mortgage payments as long as the borrower meets certain  conditions. In contrast to traditional forward mortgages, reverse  mortgages typically are “rising debt, falling equity” loans (see fig. 1). As  the borrower receives payments from the lender, the lender adds the  principal and interest to the loan balance, reducing the borrower’s home  equity. Also unlike traditional forward mortgages, reverse mortgages have  no fixed term.

Prospective borrowers must meet a number of requirements to be eligible  for a HECM (see sidebar). The amount of money a borrower can receive  from a HECM—called the principal limit—depends on three things: (1) the  age of the youngest borrower or eligible nonborrowing spouse, (2) the  lesser of the appraised value of the home or the FHA mortgage limit as of  the date of loan closing (for calendar year 2019, $726,525), and (3) the  expected average interest rate.

The borrower can receive funds in a variety of ways—for example, as  monthly payments, a line of credit, a combination of the two, or a single  lump sum. A large majority of borrowers choose the line of credit option.  The interest rate lenders charge is typically an adjustable rate, although  the lump sum option can be chosen at a fixed interest rate. session given by a HECM counselor  approved by the Department of Housing  and Urban Development (HUD)  make timely payment of ongoing property  charges (e.g., taxes and insurance)

HECMs that are due and payable because the borrower has not paid  property charges, met occupancy requirements, or maintained the home.

HECM borrowers (or their heirs) satisfy the debt by (1) paying the loan  balance using their own funds, (2) selling the home and using the  proceeds to pay off the loan balance, (3) providing a deed-in-lieu of  foreclosure (which transfers title for the property to the lender to satisfy  the debt), or (4) selling the home for at least the lesser of the loan  balance or 95 percent of the property’s appraised value (also known as a  short sale). According to FHA regulations, the borrowers or their heirs  generally have 30 days after being notified that the loan is due and  payable to satisfy the debt or bring the loan out of due and payable  status. Servicers generally have 6 months to take first legal action to  initiate foreclosure from the date that they, as applicable, notified, should  have notified, or received approval from FHA that the HECM is due and  payable. According to FHA regulations, the borrower is generally allowed  to correct the condition that resulted in the due and payable loan status  and reinstate the loan, even after foreclosure proceedings have begun.  Figure 2 illustrates the reasons why HECMs terminate and how borrowers  typically satisfy the debt under various termination scenarios.

If the servicer experiences a loss because the loan balance exceeds the  recovery from selling the property, the lender can file a claim with FHA for  the difference. Additionally, when the loan balance reaches 98 percent of  the maximum claim amount (the lesser of the appraised value of the  home at origination or FHA’s loan limit), the lender can “assign” the loan  to FHA and file a claim for the full amount of the loan balance, up to the  maximum claim amount. Lenders can only assign HECMs in good  standing to FHA (that is, assignments can only be for HECMs not in a due  and payable status). FHA continues to service the assigned loans using a  contractor until the loans become due, either due to the death of the  borrower or for other reasons. Additionally, the FHA insurance  guarantees borrowers will be able to access their loan funds, even if the  loan balance exceeds the current value of the home or if the lender  experiences financial difficulty. Further, if the borrower or heir sells the  home to repay the loan, he or she will not be responsible for any loan  amount above the value of the home.

As of the end of fiscal year 2018, FHA had insured over 1 million HECMs.  According to FHA data, these include an active HECM portfolio of  approximately 551,000 loans serviced by various FHA-approved  servicers, 79,000 FHA-assigned loans serviced by an FHA contractor,  and about 468,000 terminated loans (see fig. 3). HECM terminations have  exceeded new originations every year since fiscal year 2016, and the  number of HECMs assigned to FHA has grown substantially since fiscal  year 2014.

As of the end of fiscal year 2018, FHA’s total insurance-in-force for  HECMs (total insured mortgage balances outstanding) was roughly $100  billion. HECMs are held in two FHA insurance funds. HECMs originated  prior to fiscal year 2009 are in the General Insurance and Special Risk  Insurance Fund (roughly 27 percent of all HECMs), and those originated  in fiscal year 2009 and later are in the Mutual Mortgage Insurance Fund  (roughly 73 percent of all HECMs). When the post-2008 HECM portfolio  became part of FHA’s Mutual Mortgage Insurance Fund, it also was  included in the fund’s capital ratio assessment and became subject to  annual actuarial reviews. As we found in a November 2017 report,  subjecting HECMs to the annual actuarial review requirements has  improved the transparency of the program’s financial condition and has  highlighted the financial risks of the HECM portfolio to FHA.

According to FHA, the financial performance of the HECM portfolio has  been historically volatile, largely due to uncertainty in future home prices,  interest rates, and other factors. In recent years, FHA has responded with  several policy changes to help strengthen the portfolio’s financial  performance and mitigate risks. Because FHA’s projected losses on  HECMs depend on factors such as maximum claim amount, the length of  time the borrower stays in the home, changes in home prices, and  interest rates, most of FHA’s policy changes have been aimed at better  aligning expected revenues (charging borrowers premiums) with  expected costs (cash outflows due to paying insurance claims). For  example, FHA has made changes to insurance premiums and principal  limits, the most recent of which took effect in fiscal year 2018. Effective  in fiscal year 2019, FHA also revised property appraisal practices for new  HECMs to guard against inflated property valuations. According to  agency officials, FHA made this change to address appraisal bias  concerns identified in research by an economist in HUD’s Office of Policy  Development and Research.

The HECM market includes various participants. After a lender originates  a HECM, the loan must be serviced until it terminates. HECM lenders and  servicers must be FHA-approved and can be the same entity but often  are not. HECM lenders often sell the mortgage to another entity, which  FHA refers to as an investor, and this entity has the right to enforce the  mortgage agreement. HECM servicers are typically third parties that  contract with lenders or investors but do not have ownership in the loans  they service. As previously discussed, HECM servicers perform a number  of functions, such as making payments to the borrowers and providing  monthly account statements. Servicers also must monitor borrower  compliance with various mortgage conditions and, if necessary, communicate with borrowers about any violation of these conditions  (defaults) and, as appropriate, ways they can avoid being foreclosed on.  HECM servicers also transfer up-front and annual insurance premiums to  FHA each month and file claims with FHA for losses on insured HECMs.  In carrying out these duties, servicers are responsible for complying with  various requirements, including FHA regulations, policies, and  procedures, as well as federal consumer financial laws.

Historically, commercial banks, thrifts, and credit unions were the primary  lenders and servicers of mortgage loans. Following the 2007–2009  financial crisis and subsequent revisions to regulatory bank capital  requirements, banks reevaluated the benefits and costs of being in the  mortgage lending market, as well as retaining mortgages and the right to  service them. Since the financial crisis, some banks have exited or  reduced their mortgage lending and servicing businesses. This  development, among others, created an opportunity for nonbank  servicers to increase their presence in the mortgage market. Nonbank  issuers such as mortgage originators and servicers are not subject to the  same comprehensive federal safety and soundness standards as banks.  While banks offer a variety of financial products to consumers, nonbank  servicers are generally involved only in mortgage-related activities and do  not take deposits from consumers.

Almost all HECMs are originated, owned, and serviced by nonbank  entities:

Lenders. According to FHA, in fiscal year 2018, 54 lenders originated  HECMs, including 49 nonbank entities and five banks.

Investors. As of the end of fiscal year 2018, six investors (all nonbank  entities) and the Federal National Mortgage Association (Fannie Mae)  owned roughly 92 percent of the privately owned (non-FHA-assigned)  HECM portfolio, while the remaining 8 percent was owned by a  mixture of bank and nonbank entities.

Servicers. Five nonbank entities serviced over 99 percent of the  privately owned HECM portfolio as of the end of fiscal year 2018. As  previously noted, FHA has a contractor (also a nonbank entity) that  services FHA-assigned HECMs.

Federal Entities Involved in Reverse Mortgage Oversight

A number of federal agencies have roles in overseeing the reverse  mortgage market, including the following:

FHA. Insures HECMs and administers the HECM program, including  issuing program regulations and enforcing program requirements.  FHA supplements regulations through additional policies, procedures,  and other written communications for the HECM program. For  example, FHA officials said the agency utilizes its Single Family  Housing Handbook, HECM handbook, and mortgagee letters to  communicate changes about the HECM program. In 2013,  Congress enacted a law that allowed FHA to make changes to HECM  program requirements by notice or mortgagee letter in addition to  regulation. Since then, FHA has made several policy changes to the  HECM program through mortgagee letters.

CFPB. Supervises nonbank reverse mortgage lenders and servicers  for compliance with, and enforces violations of, federal consumer  financial protection laws. CFPB can also issue regulations under the  federal consumer protection laws addressed specifically to protecting  consumers considering reverse mortgages. Additionally, CFPB  examines entities for compliance with federal consumer financial laws  to obtain information about an institution’s compliance management  systems and procedures and to detect and assess risks to consumers  and markets. Further, CFPB collects consumer complaints regarding  consumer financial products or services (including reverse mortgages)  and educates consumers about their rights under federal consumer  financial protection laws.

Federal depository institution regulators. These regulators monitor  compliance with relevant laws and regulations, such as provisions of  the Federal Trade Commission Act and the Truth in Lending Act,  primarily through periodic examinations, for federally regulated  lenders that originate HECMs.

Consumer Protections and Foreclosure Prevention Options

Several features and requirements of the HECM program provide  consumer protections to borrowers. For example, borrowers must  undergo preloan counseling, the program limits costs and fees lenders  can charge, and lenders must provide certain disclosures. In addition,  FHA has made several changes to the HECM program in recent years to  help borrowers who have defaulted due to unpaid property charges. As  previously discussed, if a HECM borrower does not pay his or her  property charges, FHA regulations generally require the servicer to pay  the property charges on the borrower’s behalf to help avoid a tax  foreclosure by the local authority and protect the investor’s and FHA’s  interest in the home. FHA regulations also allow servicers to charge  certain fees once a loan is called due and payable. These are typically  amounts related to attorney or trustee fees, property preservation, and  appraisal fees during the foreclosure process. The payments and fees  that servicers make on behalf of borrowers—referred to as servicer  advances in this report—are added to the loan balance and accrue  interest.

In 2010, HUD’s Office of Inspector General reported that HUD was not  tracking borrower defaults or servicer advances for the HECM program  and made several recommendations to FHA. To address these  recommendations, FHA took several steps. For example, in 2011, FHA  stopped the practice of allowing servicers to defer foreclosing on loans  that were in default due to unpaid property changes and issued a  mortgagee letter addressing how to handle these loans. Additionally, in  September 2012, FHA announced the launch of a new data system for  the HECM program, the Home Equity Reverse Mortgage Information  Technology (HERMIT) system which would be used starting in October  2012. With this new system, FHA combined former legacy systems that  had been used to collect insurance premiums, service FHA-assigned  loans, and process claims. According to FHA, adopting the HERMIT  system allowed FHA to better monitor and track the HECM portfolio in  real time and to automate insurance claim processing.

Finally, FHA modified program features to help minimize potential  borrower defaults and help strengthen borrower eligibility requirements.  For example, in 2013, FHA reduced the amount of equity borrowers could  generally withdraw during the first year from 100 to 60 percent of the  principal limit. According to FHA, this change was designed to  encourage borrowers to access their equity slowly over time rather than  all at once to reduce risks to borrowers and FHA’s insurance fund. In  2015, the financial requirements for HECMs changed to include a  financial assessment of the prospective borrower prior to loan approval.

FHA began requiring HECM lenders to look at the prospective borrower’s  credit history, income, assets, and financial obligations. Based on the  results of the financial assessment, the lender may require a set-aside for  the payment of property charges.

Additionally, FHA made several program changes to help distressed  HECM borrowers by allowing servicers to offer options to help borrowers  delay or in some cases avoid foreclosure if they are behind on paying  property charges. These foreclosure prevention options include  repayment plans, at-risk extensions, and extensions for low-balance  arrearage, as described later in this report. FHA also has taken steps to  help nonborrowing spouses stay in their homes after a borrowing spouse  dies by deferring repayment of the HECM as long as the nonborrowing  spouse fulfills certain conditions. In these cases, the servicer can assign  the HECM to FHA under what FHA refers to as the mortgagee optional  election assignment process.

HECM Defaults Have Increased, and Use of Foreclosure Prevention Options Is Limited or Unknown Death of the Borrower Is the Most Common Reason for HECM Terminations, but Defaults Have Increased in Recent Years

Our analysis of FHA data found that about 272,155 HECMs terminated  from fiscal years 2014 through 2018. Over that period, the number of  terminations rose from about 24,000 in fiscal year 2014 to a peak of  roughly 82,000 in fiscal year 2016, before declining to about 60,000 in  fiscal year 2018, as previously shown in figure 3.

As shown in figure 4, death of the borrower was the most common  reported reason for HECM terminations, followed by borrower defaults.

The relative size of each termination category varied from fiscal years  2014 through 2018, with borrower defaults accounting for an increasing  proportion of terminations in recent years. In fiscal year 2018, borrower  defaults made up 18 percent of terminations.

Specific results for all major termination categories over the 5-year period  were as follows:    Death. About 34 percent of terminations (approximately 87,000 loans)  were due to the death of the borrower. Borrower deaths ranged from  roughly 29 percent to 40 percent of annual terminations over the 5- year period.    Default. About 15 percent of terminations (approximately 40,000  loans) were due to borrower defaults. As discussed in appendix IV,  this percentage varied widely by location and was highest in Michigan  (36 percent) and lowest in the District of Columbia (1 percent). About  29,000 defaults were for noncompliance with occupancy or residency  requirements, about 11,000 were for nonpayment of property charges,  and about 200 were for not keeping the property in good repair. The  borrowers of these loans likely lost their homes through foreclosure or  a deed-in-lieu of foreclosure. However, it is possible that some of  these borrowers would have ultimately lost their homes even if they  had not taken out a HECM. For example, as noted in CFPB’s 2012  report to Congress on reverse mortgages, some borrowers may have  taken out a HECM to help pay off their traditional mortgage rather  than as a way to pay for everyday expenses. In these cases, the  money borrowers received from their HECMs may have helped them  temporarily but may ultimately have been prolonging an unsustainable  financial situation. In addition, some borrowers who did not meet  occupancy or residency requirements may have permanently moved  out of their homes—for example, to assisted living or nursing home  facilities.

Borrower defaults as a percentage of annual HECM terminations grew  from 2 percent of terminations in fiscal year 2014 to 18 percent in  fiscal year 2018. Noncompliance with occupancy requirements was  the primary cause of defaults each year, but unpaid property charges  represented a growing share. From fiscal years 2014 through 2018,  property charge defaults as a percentage of all defaults grew from 26  percent to 45 percent, and property charge defaults as a percentage  of all terminations grew from less than 1 percent to 8 percent.

Loan balance repaid. About 9 percent of terminations (approximately  23,000 loans) were due to the borrower repaying the loan balance.  This category accounted for a declining share of terminations over the  5-year period, falling from 24 percent in fiscal year 2014 to 4 percent  in 2018.

Refinanced. About 8 percent of terminations (about 20,000 loans)  were due to the borrower refinancing into a new HECM. This category  remained relatively stable over the 5-year period, accounting for about  5 percent to 10 percent of terminations each year.

Borrower moved or conveyed title. About 3 percent of terminations  (approximately 8,000 loans) were due to the borrower either moving  or conveying title to the property to someone else. The percentage of  terminations in this category declined from 6 percent in fiscal year  2014 to 2 percent in fiscal year 2018.

Unknown. For about 30 percent of terminations (roughly 78,000  loans), we were unable to readily determine a termination reason from  FHA’s data. Over the 5-year period, this category accounted for over  25 percent of terminations each year and reached a high of 39  percent in fiscal year 2018. We discuss challenges related to  determining termination reasons later in this report.

HECM Servicers Advanced Almost $3 Billion on Behalf of Borrowers for Unpaid Property Charges or Other Costs

For HECMs that terminated in fiscal years 2014 through 2018, servicers  advanced almost $3 billion on behalf of borrowers for unpaid property  charges or various other costs that are charged once a loan becomes due  and payable. The advances increased from $508 million in fiscal year  2014 to a peak of $731 million in fiscal year 2016, before declining to  $453 million in fiscal year 2018 (see fig. 5). This pattern aligns with the  overall trend in terminations, which also peaked in fiscal year 2016. Over  the 5-year period, advances for property charges made up 58 percent of  the total. The remaining 42 percent consisted of advances for other costs,  many of them foreclosure-related, such as attorney fees and appraisal  costs.

From fiscal years 2014 through 2018, HECM servicers advanced a total  of $567 million on behalf of living borrowers who defaulted on their  HECMs due to unpaid property charges. For these loans, the median  advance was $7,007.

About One-Quarter of HECM Borrowers with Overdue Property Charges Received Repayment Plans, and Use of Other Foreclosure Prevention Options Is Limited or Unknown

From April 2015 (the effective date of FHA’s current repayment plan  policy) through the end of fiscal year 2018, 22 percent of HECM  borrowers with overdue property charges had received repayment plans,  and FHA’s information on the use of other foreclosure prevention options  was limited. As previously noted, property charge defaults and issues  surrounding nonborrowing spouses not being included on the mortgage  have been long-standing problems in the HECM program. Since 2015,  FHA has made program changes to allow servicers to offer different types  of foreclosure prevention options to distressed HECM borrowers and  nonborrowing spouses of deceased borrowers (see table 1). These  options can help delay and, in some cases, avoid foreclosure.

According to officials from HUD’s Office of General Counsel, HUD does  not have the statutory authority to require servicers to provide HECM  borrowers foreclosure prevention options. Our analysis of FHA data  found that servicers’ use of selected foreclosure prevention options for  HECM borrowers was limited or that FHA did not have readily available  information to assess the extent of use, as follows:  Mortgagee optional election assignments. According to information  generated by FHA, HECM servicers submitted 1,445 requests for  mortgagee optional election assignments from June 2015 (when FHA  made this option available) through September 30, 2018 (see table 2). In  total, FHA approved roughly 70 percent (1,013) of the requests and  denied the remaining 30 percent (432).

According to FHA officials, the top two reasons for denying mortgagee  optional election assignments were HECM servicers not meeting the  deadline for electing to pursue the assignment and not meeting the  deadline to initiate the assignment. FHA officials told us the third most  common reason for denial was a nonborrowing spouse not submitting  evidence of marketable title to the property or the legal right to remain in  the property for life within required time frames. With respect to the 432  denials, FHA provided information indicating that as of May 31, 2019, 79  percent (342) of the associated loans had not terminated; 14 percent (62  loans) terminated because the loan balance had been paid off; and the  remaining 7 percent ended in foreclosure (22 loans), deed-in-lieu of  foreclosure (four loans), or short sale (two loans).

Estimating the universe of HECMs potentially eligible for mortgagee  optional election assignments is difficult because nonborrowing spouses  were not listed on loan documentation for HECMs originated prior to  August 4, 2014. As a result, FHA does not know how many eligible  nonborrowing spouses could have, but did not, apply for the mortgagee  optional election assignment, or how many are potentially eligible to apply  for it in the future. FHA officials told us they have relied on an industry  association and HECM servicers to estimate how many nonborrowing  spouses may be associated with pre-August 2014 HECMs.

FHA officials told us they sent letters to borrowers with FHA-assigned  HECMs that were originated prior to August 4, 2014, to inform them of the  mortgagee optional election process and ask them to self-identify whether  there was a nonborrowing spouse associated with their loan. FHA officials  also noted they were drafting a similar letter for servicers to send to  borrowers with HECMs not assigned to FHA. As of August 2019, the  servicer letter was still in draft form, pending completion of an ongoing  internal review of FHA’s mortgagee optional election assignment  processes and the related time frames. FHA officials said once the  ongoing review is complete, they anticipated that FHA would issue a new  mortgagee letter with revised time frames that would afford both HECM  servicers and borrowers more time to meet FHA requirements for  mortgagee optional election assignments.

Repayment plans. Our analysis of FHA data showed that 22 percent of  borrowers with property charge defaults were granted a repayment plan  from April 2015 (the effective date of FHA’s current repayment plan  policy) through the end of fiscal year 2018. All five legal aid organizations  we interviewed said the availability of repayment plans was a top  concern. For example, for some of their clients, repayment plans were  unavailable because the borrowers did not meet certain financial  requirements. In contrast, representatives of the top five HECM servicers  told us they generally do offer repayment plans when feasible to help  borrowers delay or avoid foreclosure. Servicers we interviewed noted that  while repayment plans can delay or avoid foreclosure, they are rarely  successful in the long-run and borrowers in such plans often miss  payments. Servicers said the same reasons that typically contribute to  initial defaults also explain why repayment plans are rarely successful.  For example, borrowers on limited incomes may struggle to pay  increasing property tax and insurance costs or may fall behind on  property charges when the death of a spouse reduces their income.

At-risk extensions. Our analysis of FHA data found that from April 2015  (the effective date of FHA’s at-risk extension policy) through the end of  fiscal year 2018, about 2 percent of borrowers with property charge  defaults received an at-risk extension. To grant an at-risk extension, FHA  requires HECM servicers to provide valid documentation that the  youngest living borrower is at least 80 years of age and has critical  circumstances such as a terminal illness, long-term physical disability, or  a unique occupancy need (for example, terminal illness of family member  living in the home). Representatives from one legal aid organization told  us that some HECM servicers have straightforward requirements for the  documentation borrowers must submit to obtain an at-risk extension,  while others do not. Representatives from another legal aid organization  said that meeting FHA’s annual renewal requirement for at-risk  extensions was challenging for some borrowers because they have to  submit documentation to HECM servicers every year as they age and  continue to struggle with serious health issues or disabilities.

Low-balance extensions. FHA officials told us they do not track how  often HECM servicers use the option to delay calling a loan due and  payable if the borrower has unpaid property charges of less than $2,000.  Our analysis of FHA data on servicer advances found that approximately  8,800 HECMs that terminated in fiscal years 2014 through 2018 had  unpaid property charges of less than $2,000 at the time of termination.  Some of these HECMs may have been eligible for a low-balance  extension when they terminated. Representatives from one legal aid  organization said they represented a HECM borrower who was at risk of  foreclosure for having 27 cents in unpaid property charges. HECM  servicers told us they use the low-balance extension option to varying  degrees. For example, representatives from one servicer said the servicer  follows instructions from the entity that owns the HECM and, in some  cases, the owners of the loan do not want to offer the low-balance  extension to the borrower. In these cases the servicer calls the loan due  and payable for any amount in unpaid property charges and initiates the  foreclosure process in accordance with FHA regulations. Another HECM  servicer told us it tries to use the low-balance extension every time a  borrower owes less than $2,000 in unpaid property charges.

Weaknesses Exist in HECM Termination Data, Performance Assessment, and Portfolio Monitoring FHA Lacks Comprehensive Data on Reasons for HECM Terminations

Since fiscal year 2013, FHA has used the HERMIT system to collect data  on the servicing of HECMs, but the system does not contain  comprehensive and accurate data about the reasons why HECMs  terminate, a key servicing event. According to the HERMIT User Guide,  servicers should provide a reason in HERMIT when they terminate a  HECM. However, as noted previously in figure 4, for about 30 percent of  HECM terminations from fiscal years 2014 through 2018 (roughly 78,000  loans), we were unable to determine the reason for termination.  Specifically, for these loans we could not identify in HERMIT any  associated borrower death or default, or evidence that the borrower  repaid, refinanced, moved, or conveyed title. Instead, these loans were  coded as terminating for “other reasons” or coded based on how the debt  was satisfied rather than an actual termination reason.

The HERMIT User Guide provides a list of termination codes available in  the system, but the list and guide have shortcomings that limit analysis of  HECM terminations. First, the list includes codes servicers can use to  indicate that a loan terminated for “other reasons,” but the guide does not  specify what these other reasons are. However, servicers have been  using the “other reasons” code increasingly over the past 5 years. We  asked servicers how they used the “other reasons” code and found  inconsistency in and uncertainty about its use. For example, servicers’  responses ranged from not using it at all, to using it when they did not  intend to file an insurance claim with FHA, to not being sure under what  circumstances they used it.

Second, the list of termination codes consists of both reasons for  termination and descriptions of how the debt was satisfied. As a result,  the final status code of some loans in HERMIT shows only the way in  which the debt was satisfied—for instance, a deed-in-lieu of foreclosure,  foreclosure, or short sale. These codes could apply to terminations  resulting from the borrower dying, defaulting, or moving and do not  ultimately provide a specific reason for loan termination.

FHA officials were unaware of any proxy variables that we could use to  help identify the underlying termination reasons for these loans. The  officials said the termination reasons are available on an individual loan  basis in the HERMIT system but not in an extractable form. As  discussed later in this report, FHA does not regularly track and report on  HECM termination reasons, due partly to this system limitation.

The limitations in FHA’s data are inconsistent with federal internal control  standards, which require agencies to use quality information to achieve  their objectives. To meet this internal control standard, agencies can  obtain relevant data that are reasonably free from error and bias and  evaluate sources of data for reliability. FHA’s annual report to Congress  states that the HECM program helps seniors remain in their homes and  age in place. However, without comprehensive and accurate data on  HECM terminations, FHA does not have a full understanding of loan  outcomes—information FHA and Congress need in order to know how  well the HECM program and FHA’s policies are working to help seniors  age in place.

FHA’s Performance Assessment Has Limitations

While FHA has taken steps to improve the performance of the HECM  program in recent years, it has not incorporated key elements of  performance assessment into its management of the program. We have  previously reported that a program performance assessment contains  three key elements: program goals, performance metrics, and program  evaluations. Performance assessment can provide important  information about whether, and why, a program is working well or not.  Additionally, OMB Circular A-129 states that agencies must establish  appropriate performance indicators for federal credit programs, such as  the HECM program, and that such indicators should be reviewed  periodically. It states further that agency management structures should  clearly delineate accountability and responsibility for defining performance  indicators and monitoring and assessing program performance.

We found limitations in FHA’s performance assessment of the HECM  program, specifically a lack of performance indicators and recent program  evaluations:  Lack of HECM performance indicators. According to HUD’s strategic  plan for fiscal years 2018–2022 and the agency’s most recent annual  performance report, the HECM program falls under the strategic goal of  advancing economic opportunity and the strategic objective of supporting  fair, sustainable homeownership and financial viability. The strategic  plan and annual performance report include some strategies for achieving  this objective, such as modernizing FHA underwriting guidelines, lending  standards, and servicing protocols to serve the needs of borrowers,  protect taxpayers, and ensure the sustainability of FHA’s program.  However, none of the six performance indicators associated with this  strategic objective and discussed in the strategic plan or corresponding  performance report are HECM-specific. Four of the indicators focus on  FHA-insured forward mortgages. Another indicator focuses on  construction of manufactured housing. The remaining indicator— maintaining a capital reserve ratio for FHA’s Mutual Mortgage Insurance  Fund that meets or exceeds the statutory minimum requirement— encompasses both forward mortgages and HECMs but does not provide  specific information about HECM loan outcomes, risk factors, or loan  characteristics.

Additionally, FHA’s annual reports to Congress on the financial status of  the insurance fund contain multiple tables of HECM data but limited  information on loan outcomes. For example, among other things, the  fiscal year 2018 report provides the number of new HECM originations,  the average age of new borrowers, the amount of HECM insurance  claims paid, and estimates of the HECM portfolio’s capital position.  However, the report does not include other information that would provide  insight into loan outcomes, such as the percentage of HECM terminations  due to borrower defaults, the proportion of active HECMs with delinquent  property charges, or the percentage of distressed HECM borrowers who  have received foreclosure prevention options.

Limited program evaluations. The last comprehensive evaluations of  the HECM program were done in 2000 and 1995. Officials said they  were in the planning phase for a new evaluation of the HECM program  but had not set a start date and did not expect the evaluation to include  an analysis of reasons for HECM terminations or the use of foreclosure  prevention options for borrowers in default. Instead, the officials told us  the evaluation would focus on the impact of an FHA policy change  implemented in 2015 that requires prospective HECM borrowers to  undergo a financial assessment to evaluate their ability to pay ongoing  property charges. While financial assessments could help reduce tax and  insurance defaults, and ultimately foreclosures, they only apply to new  HECMs issued on or after the effective date of the policy (April 27, 2015)  and are not relevant to other HECMs within the portfolio. Therefore, for  most of the HECM portfolio, an equally important consideration is the  impact of FHA’s policy changes that created foreclosure prevention  options for distressed borrowers. As previously noted, borrower defaults  have accounted for an increasing proportion of terminations in recent  years, and in fiscal year 2018, borrower defaults made up 18 percent of  terminations. Expanding the program evaluation to include the impact of  foreclosure prevention options would provide a more complete picture of  how well FHA is reducing defaults in the HECM portfolio and helping  HECM borrowers.

FHA officials acknowledged the need for more performance assessment  of the HECM program. The officials said their recent focus has been on  financial aspects of the program, in particular losses associated with  insurance claims. According to the FHA Commissioner, a key challenge  for the HECM program is that FHA has historically administered it without  a designated program head. The 2000 program evaluation noted that  lenders and servicers found it frustrating that FHA did not have one  person with responsibility for the HECM program. Further, the 2000  program evaluation noted that the division of responsibility for the  program fell across many offices and that it was hard to find senior  managers with a sense of ownership for the HECM program. In January  2019, an economist from HUD’s Office of Policy Development and  Research transferred to the Office of Housing (which includes FHA) to  serve as a Senior Advisor to the Deputy Assistant Secretary for Single  Family Programs, with a focus on the HECM program.

Without more comprehensive performance indicators and program  evaluations, FHA lacks information that could be useful for monitoring the  effects of recent policy changes and may be missing evidence of the  need for further program improvements. Additionally, in the absence of  performance indicators and reporting, FHA and Congress lack insight into  how well the HECM program is helping senior homeowners.

FHA’s Internal Reporting and Analysis for the HECM Portfolio Have Shortcomings

According to OMB Circular A-129, agencies must have monitoring,  analysis, and reporting mechanisms in place to provide a clear  understanding of a program’s performance. The circular says these  mechanisms should be sufficiently flexible to perform any analysis  needed to respond to developing issues in the loan portfolio. However,  we found shortcomings in FHA’s internal reporting. We also found that  FHA had not analyzed the implications of its foreclosure prioritization  process for FHA-assigned loans.

Internal reporting for the HECM program is limited. Although FHA  adopted the HERMIT system to improve oversight of the HECM portfolio,  it has not used program data to regularly report key loan performance  information—for example, HECM termination reasons, servicer advances,  and use of foreclosure prevention options. FHA officials said they have  been more focused on the analysis and reporting of claims and other  financial data for the HECM program. However, according to OMB  Circular A-129, effective reporting provides accurate, timely information  on program performance, early warnings of issues that may arise, and  analytics to drive decision-making.

FHA has generated some reports from HERMIT to help oversee the  HECM portfolio, but it has been slow to develop regular and  comprehensive reporting mechanisms. FHA officials told us that while  data on defaults and use of foreclosure prevention options have generally  been available in HERMIT since 2015, FHA was unable to obtain reports  on these topics until the summer of 2018 because of contract funding  limitations. FHA officials said that starting in September 2018, FHA began  receiving regular reports from its HERMIT system contractor on issues  such as HECMs assigned to FHA; HECM origination, assignment, and  termination activity by month; summary information on the number and  dollar amount of HECMs originated each year; and HECMs with a default  date. Additionally, around the same time, FHA requested and received ad  hoc reports (one-time reports created for specific purposes) from the  contractor that included spreadsheets of all active HECMs with a  repayment plan and all active HECMs for which there was an identified  nonborrowing spouse.

FHA officials said the purpose of the reports generated from HERMIT is  to help FHA better manage HECM program performance. However, our  review of these regular and ad hoc reports found that many are lists of  loans that meet certain criteria and do not provide summary statistics that  could be used to readily identify patterns or trends in metrics, such as the  number of or reasons for HECM terminations or use of different  foreclosure prevention options. The reports require additional analysis to  generate meaningful management information. According to OMB  Circular A-129, graphics, tables, and trend analysis that compare  performance over time and against expectations and other information  can provide critical context for understanding program performance.

Further, the circular says dashboards (easy-to-comprehend summaries of  key quantitative and qualitative information) and watch lists are tools that  can help all levels of the organization receive appropriate information to  inform proactive portfolio management and ensure program decisions are  informed by robust analytics.

FHA’s lack of analysis and internal reporting on HECM termination  reasons hampered the agency’s ability to respond to a 2017 Freedom of  Information Act request about the number of and reasons for HECM  foreclosures. FHA’s response contained data showing that over 99  percent of HECM foreclosures occurring from April 2009 through  December 2016 resulted from the death of the borrower. However, FHA  officials told us they subsequently looked more closely into the issue and  redid the analysis using more reliable and updated information from  January 2013 through December 2017. The revised analysis showed that  61 percent of foreclosures over that period were due to borrower deaths,  37 percent were due to borrower defaults, and 2 percent were due to  conveyance of title. If FHA had regular and meaningful management  information about HECM terminations, it could have initially responded to  the 2017 request with more reliable information.

FHA officials told us that HERMIT is an accounting system to process  HECM claims and has limitations as a broader portfolio monitoring tool.  However, our analysis of HERMIT data and reports generated by FHA’s  HERMIT contractor suggest that the system can be used for this broader  purpose. Without more robust program analysis and internal reporting,  FHA is not well positioned to detect and respond to any emerging issues  and trends in the HECM portfolio. As previously discussed, these trends  include growing numbers of HECMs entering default and an increasing  number of loans being assigned to FHA.

FHA has not evaluated its foreclosure prioritization process for FHA- assigned HECMs. As previously noted, FHA-assigned loans are a  growing part of the HECM portfolio. According to FHA officials, the  agency generally does not foreclose on borrowers whose HECMs have  been assigned to FHA and who are in default due to unpaid property  charges. According to FHA, the properties associated with these loans  are typically occupied. FHA officials said the agency prioritizes processing  foreclosures on assigned HECMs for which the property is vacant  (because the borrower passed away, for example). FHA officials said that  prioritizing foreclosure processing for those loans and delays by the  Department of Justice in completing those foreclosures has effectively  resulted in few foreclosures on assigned loans with property charge  defaults. However, FHA regulations state that servicers generally must  initiate foreclosure within 6 months of calling a loan due and payable due  to a death or default (if the borrower or heirs have not yet paid the debt  off).

FHA’s prioritization of processing vacant properties for foreclosure and  generally not foreclosing on FHA-assigned HECMs with a property  charge default raises issues and potential risks that FHA has not fully  analyzed. First, defaulted borrowers whose loans are privately owned  (that is, have not been assigned to FHA) face a greater risk of foreclosure  than defaulted borrowers with FHA-assigned loans. According to a  representative from one HECM servicer we interviewed, FHA’s practice is  unfair because it treats HECM borrowers inconsistently. Second, FHA’s  foreclosure prioritization processing may create a financial incentive for  HECM borrowers with assigned loans to not pay their property charges,  which, in turn, can have negative financial consequences for FHA,  localities, and taxpayers. For example, because FHA does not foreclose  on assigned loans in tax and insurance default, FHA advances tax and  insurance payments on behalf of the borrower and adds them to the loan  balance to secure and maintain its first-lien position on the mortgaged  property. This makes it more likely that the loan balance will increase to  a point that it exceeds the value of the home. When the borrower dies or  vacates such a property, FHA may not be able to recoup the loan balance  in a foreclosure sale, resulting in a loss to the insurance fund.

As of August 2019, FHA had not evaluated the various risks of generally  not foreclosing on assigned HECMs with property charge defaults. As a  result, FHA does not know how its process for prioritizing foreclosures for  assigned loans affects the HECM portfolio, HECM borrowers,  neighborhoods, and FHA’s insurance fund.

FHA’s Oversight of Servicers and Collaboration on Oversight between FHA and CFPB Are Limited FHA Has Not Performed On-Site Reviews of HECM Servicers for More Than 5 Years and Lacks Current Review Procedures

FHA’s oversight of HECM servicers is limited. FHA requires HECM  servicers, among other things, to inform borrowers of their loan status,  including any conditions resulting in a loan becoming due and payable; to  notify struggling borrowers of the availability of housing counseling and  foreclosure prevention options; to inform surviving nonborrowing spouses  of conditions and requirements for the deferral period; and to manage the  transfer of loan servicing from one entity to another. These requirements  are identified in FHA regulations, handbooks, and mortgagee letters. If  properly implemented, these requirements can help ensure that HECM  borrowers and nonborrowing spouses are aware of their mortgage  responsibilities, options for resolving situations that can result in  foreclosure, and who to contact with loan servicing questions. FHA  officials said they maintain communication with HECM servicers,  including through an industry working group, about their compliance with  FHA requirements. The officials also noted that FHA conducts reviews of  due and payable requests and insurance claims, which can include  checks for some of the requirements discussed above. However, FHA  has not performed comprehensive on-site reviews of HECM servicers’  compliance with program requirements since fiscal year 2013 and does  not have current procedures for conducting these reviews.

The lack of on-site reviews of HECM servicers is inconsistent with OMB  requirements for managing federal credit programs. OMB Circular A- 129 states that agencies should conduct on-site lender and servicer  reviews biennially where possible and annually for lenders and servicers  with substantial loan volumes or those with other risk indicators such as  deterioration in their credit portfolio, default rates above acceptable levels,  or an abnormally high number of reduced or rejected claims. The purpose  of these reviews is to evaluate and enforce lender and servicer  performance and identify any noncompliance with program requirements.  The circular encourages agencies to develop a risk-rating system for  lenders and servicers to help establish priorities for on-site reviews and to  monitor the effectiveness of required corrective actions. The circular also  says that agencies should summarize review findings in written reports  with recommended corrective actions.

FHA previously conducted on-site reviews of HECM servicers. However,  according to agency data, FHA has not performed on-site reviews since  fiscal year 2013. From fiscal years 2010 through 2013, FHA’s Quality  Assurance Division (a component of the Office of Lender Activities and  Program Compliance) conducted 14 on-site reviews of HECM servicers  (see table 3). These reviews examined compliance with FHA servicing  requirements and included detailed reviews of samples of loans.

FHA provided us three examples of HECM servicing reviews conducted  in fiscal year 2013. While not representative of all reviews, the three  reviews identified multiple violations of FHA requirements, as follows:

Quality control plans. Two of the three reviews found that the  servicers’ quality control plans—an internal control mechanism to help  ensure compliance with FHA requirements—were missing required  elements. For example, one review found that the servicer’s plan  lacked 13 required elements, including those intended to ensure  compliance with fair lending laws and immediate reporting of fraud or  other serious violations. Another review found deficiencies with the  servicer’s plan, including in the areas of customer service, servicing  transfers, and fees and charges.

Communication with borrowers. In these same two reviews, FHA  found that the servicers did not always provide borrowers with a  designated contact person or timely and accurate information about  their loan status. For both servicers, FHA’s reviews of files for a  sample of active loans found no evidence that the servicer had  provided the borrower a contact person to handle inquiries. FHA  requires servicers to designate for borrowers a contact person  knowledgeable about servicing and provide the name of the person  annually and whenever the contact person changes. Additionally, both  reviews found that the servicers’ annual loan statements to borrowers  were missing critical information, such as the net principal limit (total  loan funds available), and that the servicers did not provide borrowers  with statements after every loan disbursement, as required.

Filing claims. In two of the three reviews, FHA found deficiencies in  the servicers’ filing of insurance claims. For example, in one review,  FHA identified multiple cases where the servicer submitted claims that  were greater than the amounts warranted, including excess attorney  and appraisal fees, property preservation and protection expenses,  and interest costs. In another review, FHA found numerous instances  where the servicer missed various deadlines—including for submitting  claims, commencing foreclosure, and obtaining appraisals—and  therefore was not entitled to the full claim amounts it received.

Loan disbursements. One of the three reviews found numerous  instances in which the servicer did not respond to borrowers’ requests  for payment plan changes within the required time frame of 5  business days, and therefore did not make timely loan disbursements  to borrowers.

FHA required these servicers to take corrective actions, including  updating quality control plans, revising policies and procedures,  reimbursing FHA for unwarranted claim amounts, indemnifying FHA for  losses on a loan, and paying late charges to borrowers who did not  receive timely loan disbursements. FHA has the option of referring  violations of FHA requirements to HUD’s Mortgagee Review Board, which  can take administrative actions such as issuing letters of reprimand,  suspending or withdrawing approval to participate in FHA programs,  entering into settlement agreements to bring an entity into compliance,  and imposing civil money penalties. FHA officials said they had not  referred any HECM servicers to the board as a result of findings from on- site reviews.

According to FHA’s current Director of the Quality Assurance Division,  under previous leadership, the division suspended on-site reviews of  HECM servicers after fiscal year 2016 because of servicers’ concerns  about the clarity and consistency with which FHA was conducting the  reviews and applying enforcement remedies. He said the Quality  Assurance Division had intended to revise its guidance for conducting the  reviews and then resume them, but the effort had stalled during a change  in leadership. The current Director said he was not aware that HECM  servicing reviews had been suspended until the fall of 2017, when the  division began targeting on-site reviews for fiscal year 2018, and noticed  that HECM servicers were not included in the prior year’s targeting  methodology.

The lack of recent HECM servicer reviews is problematic for a number of  reasons. First, as previously noted, the number of HECM borrowers  defaulting on their loans has grown in recent years. As a result, knowing  whether servicers are providing borrowers with accurate and timely  communications about their mortgage obligations and the status of their  loans has become increasingly critical. Second, FHA has recently made  program changes and implemented foreclosure prevention options, such  as at-risk extensions and mortgagee optional election assignments, to  help struggling borrowers and nonborrowing spouses delay or avoid  foreclosure. But FHA does not know how effectively servicers inform  borrowers of these options and use these tools due to its lack of  oversight. Third, as discussed earlier, the majority of HECM servicers are  nonbank entities that may pose risks because they are not subject to the  same comprehensive federal safety and soundness regulations as banks  and rely on funding sources, such as lines of credit, that may be less  stable than deposits.

The Director of the Quality Assurance Division said FHA plans to begin  conducting HECM servicer reviews in fiscal year 2020 but will first need to  revise its procedures for reviewing HECM servicers, which were last  updated in 2009. However, the Director told us the division decided not to  develop criteria for selecting HECM servicers for review. Instead, he said  FHA plans to review all HECM servicers with significant portfolios at least  once every 3 years, starting with the three servicers that account for 96  percent of the HECM portfolio.

While FHA’s plan to review HECM servicers with significant portfolios  captures one aspect of portfolio risk (loan volume), it does not account for  other risk indicators that OMB Circular A-129 says agencies should  consider. The circular also encourages agencies to develop risk-rating  systems that incorporate these indicators. While the current HECM  servicing market is dominated by a small number of companies, the ability  to prioritize on-site reviews based on risk ratings will be important if the  market becomes less concentrated in the future. Additionally, some  HECM servicers may warrant review more frequently than once every 3  years if their business volume or performance poses substantial risks to  FHA or to borrowers. FHA’s plans do not account for these contingencies.

CFPB Conducts Oversight of Reverse Mortgage Servicers, but It Has Not Completed Steps to Share Examination Results with FHA

CFPB oversees reverse mortgage servicers through examinations  designed, among other things, to identify whether servicers engage in  acts or practices that violate federal consumer financial laws. CFPB  issued its Reverse Mortgage Examination Procedures in 2016 and began  conducting examinations in 2017. CFPB’s procedures include reviewing  servicers’ compliance with the Real Estate Settlement Procedures Act of  1974 and its implementing regulations (which, among other things,  contain requirements for notifying borrowers of servicing transfers,  responding to borrowers’ written information requests and notices of  error, and disclosures relating to force-placed insurance); the Truth In  Lending Act and its implementing regulations (which impose requirements  on servicers governing the use of late fees and delinquency charges,  provisions for payoff statements, and disclosures regarding rate changes  for adjustable-rate mortgages); and other consumer protection laws.

Additionally, CFPB’s procedures include a review of whether a HECM  servicer is following selected elements of FHA’s HECM program  requirements. For example, CFPB’s examiners are directed to determine  whether information provided to the borrowers about life expectancy set- aside accounts (an FHA requirement) is clear, prominent, and readily  understandable, and whether the borrower incurred penalties or  unnecessary charges in the event the servicer failed to make  disbursements of set-aside funds for insurance, taxes, and other charges  with respect to the property in a timely manner. CFPB examiners also are  directed to determine whether the servicer referred a HECM to  foreclosure improperly after the death of a borrower, such as when an  eligible nonborrowing spouse still occupies the home. If CFPB’s reverse  mortgage examinations identify violations, CFPB may require the  examined entity to take corrective actions, which are recorded in the  examination results as matters requiring attention.

CFPB examinations of reverse mortgage servicers have found  deficiencies in monitoring of servicing actions, compliance with consumer  protection laws, and communications with consumers. For example,  CFPB reported in the March 2019 edition of its Supervisory Highlights  that one or more reverse mortgage servicing examinations found cases  where the servicer did not provide the heirs of deceased borrowers a  complete list of the documents needed to evaluate their case for a  foreclosure extension. (Extensions can give heirs additional time to sell  or purchase the property and delay or avoid foreclosure.) As a result, in  some instances, one or more servicers foreclosed rather than seeking a  foreclosure extension from FHA. According to CFPB, in response to the  examinations, one or more servicers planned to improve communications  with borrowers’ heirs, including specifying the documents needed for a  foreclosure extension and the relevant deadlines. CFPB officials said they  plan to continue examining reverse mortgage servicers.

In addition to conducting examinations and issuing matters requiring  attention, CFPB officials said the bureau has other options—including  issuing warning letters and taking enforcement actions—to stop unlawful  practices or promote future compliance by supervised entities. Warning  letters advise companies that certain practices may violate federal  consumer financial law. Enforcement actions are legal actions against  an entity initiated through federal district court or by an administrative  adjudication proceeding. CFPB officials told us the bureau had not  issued any warning letters or enforcement actions against HECM  servicers as of August 2019.

While CFPB has examined reverse mortgage servicers and plans to  continue doing so, CFPB officials said the bureau and FHA do not have  an agreement in place to share supervisory information, which inhibits  sharing of examination results. Information-sharing agreements may  address topics such as what and how information will be shared and  handling of sensitive information. CFPB officials said that an agreement  with FHA would be needed to ensure that supervisory information in the  bureau’s examinations is kept confidential. Under the Dodd-Frank Wall  Street Reform and Consumer Protection Act, CFPB must share results of  the examination of a supervised entity with another federal agency that  has jurisdiction over that entity, provided that CFPB received from the  agency reasonable assurances as to the confidentiality of the information  disclosed.

In addition, in previously issued work, we noted that interagency  collaboration can serve a number of purposes, including, among other  things, policy development, oversight and monitoring, and information  sharing and communication.

CFPB officials said CFPB and FHA had taken initial steps in 2017 toward  developing an information-sharing agreement. However, as of August  2019, an information-sharing agreement had not been completed. CFPB  officials told us there were existing ways for the two agencies to share  examination findings, but that an information-sharing agreement would  facilitate the process. CFPB officials said developing information- sharing agreements can be a lengthy process and that both agencies had  other competing priorities. However, because of the limited information  sharing between CFPB and FHA, FHA is not benefiting from oversight  findings about servicers it could rely on to help implement the HECM  program. Having this information is particularly important given that FHA  does not comprehensively review HECM servicers itself and CFPB’s  examinations address a number of FHA requirements. Access to CFPB’s  examination results could enhance FHA’s oversight of HECM servicers  and potentially help it respond to consumer protection issues facing  HECM borrowers.

CFPB Collects and Analyzes Consumer Complaints on Reverse Mortgages, but FHA Does Not Use All Available Data CFPB Has Received About 3,600 Reverse Mortgage Complaints since 2011

CFPB collects, analyzes, and reports on consumer complaints related to  reverse mortgages. The bureau began collecting reverse mortgage  consumer complaints in December 2011 and has collected about 3,600  complaints since then. CFPB collects complaints through an online  forum on its website called the Consumer Complaint Database, as well as  via email, mail, phone, fax, or referral from another agency. CFPB’s  authority to collect complaints comes from the Dodd-Frank Wall Street  Reform and Consumer Protection Act, which states that one of the bureau’s primary functions is collecting, investigating, and responding to  consumer complaints.

CFPB officials told us the bureau uses consumer complaints as part of its  criteria for selecting entities to examine, including reverse mortgage  servicers, and to inform its educational publications. For example, in June  2015, CFPB released a report on reverse mortgage advertising and  consumer risks. In August 2017, CFPB released an issue brief on the  costs and risks of using a reverse mortgage to delay collecting Social  Security benefits.

In February 2015, CFPB issued a report on reverse mortgage consumer  complaints it received from December 2011 through December 2014.  CFPB found that consumer complaints indicated frustration and confusion  over the terms and requirements of reverse mortgages. CFPB also found  that many complaints were about problems with loan servicing. For  example, some consumers complained that they were at risk of  foreclosure due to nonpayment of property taxes or homeowners  insurance and that they faced obstacles when trying to prevent a  foreclosure. CFPB officials told us they did not currently have plans to  publish additional reports on reverse mortgage complaints, but that CFPB  would continue to produce educational materials on reverse mortgages  and internally review the data on a routine basis.

For this report, we performed a high-level analysis of roughly 2,500  reverse mortgage complaints received by CFPB from calendar years  2015 through 2018. We analyzed patterns in the number of complaints  by year, state, submission method, and company.

By year. Complaint volumes varied across the 4 years, with the most  complaints received in 2016 and the least received in 2018 (see table  4).

By state. The states with the most complaints were California  (accounting for 16 percent of reverse mortgage complaints), Florida  (11 percent), New York (8 percent), and Texas (7 percent). These  states are among the most populous, and three of them (California,  Florida, and Texas) also had the greatest numbers of HECMs.

By submission method. A majority of reverse mortgage complaints  (56 percent) were submitted through CFPB’s website. The remaining  complaints were submitted through referrals to CFPB from other  agencies (22 percent), by phone (12 percent), by postal mail (7  percent), and by fax (3 percent). Compared to the percentage of all  types of mortgage complaints filed during the 4-year period, the  percentage of reverse mortgage complaints filed through the website  (56 percent) was lower than the corresponding percentage for  complaints about all types of mortgages (67 percent). Representatives  from legal aid organizations representing HECM borrowers said that  reverse mortgage consumers may be less likely to file a complaint  through a website because of limitations sometimes related to aging— for example, lack of internet access or computer skills. Additionally,  representatives from three of the five organizations said seniors may  suffer from health or capacity issues, such as hearing, vision, or  memory loss, that may make it difficult for them to file or follow up on  a complaint. For these reasons, seniors may not be submitting  complaints through CFPB’s website and seniors’ complaints about  reverse mortgages may be underreported in general.

By company. Companies that were the subject of reverse mortgage  complaints included both lenders and servicers. From 2015 through  2018, five companies were the subject of more than 100 complaints  each, ranging from a low of 116 to a high of 506. Together, these five  companies accounted for 61 percent (1,509) of the reverse mortgage  complaints CFPB received. Additionally, one company received the  most complaints in 4 out of the 5 years reviewed.

We also conducted a more detailed analysis of a random, generalizable  sample of 100 consumer complaint narratives from among the 2,472 total  reverse mortgage complaints CFPB received in calendar years 2015  through 2018. The purpose of this analysis was to identify patterns in  consumer-described issues about reverse mortgages. We created issue  categories by reading the consumer narratives. Figure 6 shows the  estimated percentage of reverse mortgage complaints received by CFPB  over the 4-year period by consumer-described issue categories, based on  our sample of 100 complaint narratives.

Among the largest consumer-described issue categories were  foreclosures; poor communication from lenders or servicers; problems at  loan origination; estate management; and unfair interest rates, fees, or  costs.

Being at risk of foreclosure or in foreclosure. The largest  consumer-described issue category (47 percent) involved consumers  (or someone complaining on behalf of the consumer) who said they  were at risk of foreclosure or in the foreclosure process. For  example, some consumers said they or the borrower they represent  had received a notice of default, were in due and payable status, or  were at risk of foreclosure. Some consumers sought help in  preventing foreclosure or felt they were wrongly being foreclosed on.  In 16 of the 47 complaints about being at risk of or in foreclosure,  consumers also cited concerns about property taxes, insurance, or  other property charges.

Poor communication on a servicing or lending issue. The second  largest consumer-described issue category (42 percent) involved  complaints about poor communication on a reverse mortgage  servicing or lending issue. These complaints included concerns about  a lack of communication or communications that were unclear or  unresponsive to the consumer’s needs. Complaints in this category  often overlapped with those about being at risk of or in foreclosure.  For example, some of these complaints included consumers’  concerns that they had not received information about the status of or  reason for a possible foreclosure from their servicer or did not get  responses to their inquiries.

Loan origination issues. The third largest complaint category  involved problems occurring at loan origination (29 percent). These  complaints included consumers’ concerns that the amount of funds  available from their reverse mortgage was less than expected or that  interest rates or fees were not disclosed or explained to them. The  complaints also included cases where the adult children of borrowers  said they felt the lender took advantage of their parents.

Estate-management issues. Twenty-seven percent of consumer  complaints were about estate management issues. Complaints  involving estate-management were often submitted by deceased  borrowers’ families or heirs. In some cases, heirs said that they were  unable to get information about the status of the reverse mortgage. In  other cases, the heirs said that because of the reverse mortgage, they  were at risk of losing the home, which was also their place of  residence.

Unfair interest rates, fees, or costs. Twenty-seven percent of  consumer complaints were about being charged higher-than-expected  costs, fees, or interest. For example, in a few complaints, consumers  said that their servicers required them to pay for insurance products  (for example, flood insurance) that they felt were not needed.

According to CFPB officials, the bureau (1) refers consumer complaints  about financial products and services to the companies the complaints  are about or other federal regulators with supervisory jurisdiction over  those companies or (2) makes complaint information available to other  federal agencies with jurisdiction over the relevant product or service.

CFPB officials said the bureau does not currently refer reverse mortgage  complaints to FHA; however, they told us reverse mortgage complaints  are available to FHA through CFPB’s public website and through a secure  portal FHA can access that has more data available than on the public  website.

FHA Does Not Analyze Data on Consumer Complaints to Help Inform HECM Program Policies

FHA collects and records inquiries and complaints about HECMs and, as  previously mentioned, has access to CFPB data on reverse mortgage  complaints. However, FHA does not use its inquiry and complaint data to  help inform HECM program policies and oversight, and the way data are  collected does not produce quality information for these purposes.  Additionally, FHA has not leveraged CFPB’s complaint data for HECM  program oversight. Federal internal control standards state that agencies  should use quality information to achieve the entity’s objectives, including  using relevant data from reliable internal and external sources.  Additionally, in prior work we identified practices to enhance collaboration  across agencies, including leveraging agency resources.

According to agency officials, FHA’s two main methods for collecting  customer inquiries and complaints are hotlines operated by the agency’s  National Servicing Center and the FHA Resource Center. Historically,  the National Servicing Center was FHA’s primary method for collecting  inquiries and complaints about the HECM program. From calendar  years 2015 through 2018, the National Servicing Center received about  105,000 HECM-related calls. During this same period, the FHA Resource  Center received 147 HECM-related calls. In April 2019, the FHA  Resource Center became the primary entity for collecting, recording, and  responding to all HECM-related calls. FHA officials told us they  transferred these responsibilities from the National Servicing Center to  the FHA Resource Center to help improve call management.

While this change could help improve customer service, it would not fully  resolve limitations we found in FHA’s approach to collecting and  recording HECM inquiries and complaints that diminish the usefulness of  the information for program oversight. These limitations include the  following:  Information is not suitable for thematic analysis. Both the National  Servicing Center and the FHA Resource Center do not collect call  information in a way that would allow FHA to readily analyze the data  for themes. For example, both centers do not reliably differentiate  between inquiries and complaints—a potentially important distinction  for determining appropriate agency-level responses (for example,  creating informational materials to address frequently asked questions  from borrowers or investigating problematic servicing practices after  repeated complaints). Additionally, while both the centers collect data  on the reason for calls, neither did so in a systematic way that would  allow FHA to readily determine how frequently issues are being  raised. For example, neither centers’ data systems contained  standardized categories or menus with options for recording reasons  for calls. As a result, the FHA Resource Center’s data from 2015  through 2018 contained more than 100 separate reasons for 147  HECM-related calls. Some of the reasons the center recorded were  too specific (for example, a property address or a case number) to be  useful for identifying themes, while others were so similar that they do  not provide meaningful distinctions (but could be combined into fewer,  potentially more useful categories). We noted similar limitations in  the National Servicing Center’s data, which included ambiguous call  reasons such as “history” and “documents,” and categories that could  be collapsed, which hinders thematic analysis.

Customer type is not recorded. The National Servicing Center,  which received the large majority of HECM-related calls to FHA, did  not record information on the type of customer that made the call.  National Servicing Center guidance for staff says customers include  borrowers, nonprofit organizations, government entities, real estate  brokers and agents, title companies, attorneys, lenders and servicers,  and HUD employees, but its data system does not include these  categories. Information on customer type could be useful in  identifying issues facing different populations of callers and could help  FHA tailor strategies for addressing their concerns. In contrast, the  FHA Resource Center’s data system does include categories for  customer type for the smaller number of HECM-related inquiries and  complaints it received. Because the FHA Resource Center’s system is  now FHA’s primary repository for new HECM-related calls, information  on customer type should be available for future inquiries and  complaints. However, this information is not available for the bulk of  HECM-related calls FHA received in prior years.

FHA officials said the agency uses customer complaint and inquiry data  to improve customer service. For example, FHA officials said the National  Servicing Center monitors calls on a daily basis to ensure that prompt  responses are provided. Similarly, FHA officials said they review call data  monthly to identify training needs of servicers or contractors and potential  process changes to improve customer experience with the call process.  However, FHA does not analyze data for other purposes that could  enhance program oversight, such as determining which HECM servicers  and lenders receive the most complaints, targeting entities for on-site  reviews, or identifying topics that may need additional borrower  education.

FHA also does not use CFPB’s consumer complaint data to inform  management and oversight of the HECM program, even though some of  the information could be useful to the agency. For example, according to  CFPB’s complaint data for 2015 through 2018, approximately 6 percent of  reverse mortgage complaints were about FHA’s servicing contractor. FHA  officials said they do not review CFPB’s complaint data because they  believe the data are too limited to be useful and because they have  concerns about CFPB’s controls over data integrity. However, as our  analysis shows, CFPB’s data can be used to identify consumer  concerns—such as difficulties avoiding or navigating foreclosure or  problems communicating with servicers—that may merit additional  attention by FHA. Additionally, CFPB’s Office of Inspector General  recently reviewed CFPB’s management controls for the Consumer  Complaint Database and did not identify major data integrity issues that  would preclude use of the data for general oversight purposes.  Periodically analyzing CFPB consumer complaint data and internally  collected consumer complaint data could help FHA to detect and respond  to consumer protection issues regarding HECMs.

Housing Market Conditions, Exit of Large Bank Lenders, and Policy Changes Help Explain the Decline in Reverse Mortgages since 2010

Since 2000, the take-up rate—the ratio of HECM originations to eligible  senior homeowners—has been limited (see fig. 7). This rate, which  provides an indication of how popular HECMs are among the population  of senior homeowners, has not reached 1 percent and has fallen in recent  years. In addition, since calendar year 2010, the volume of HECM  originations has declined and is about half of what originations had been  at their peak. For example, in calendar years 2007–2009, more than  100,000 new HECMs were originated each year, compared with roughly  42,000 in calendar year 2018.

The relatively high homeownership rate and low retirement savings of  U.S. seniors suggest that reverse mortgages could be a way for many  older Americans to tap their home equity and supplement retirement  income. However, the popularity of reverse mortgages has declined in  recent years for a number of possible reasons. We developed an  econometric model to examine the relationship between HECM take-up  rates and a number of explanatory variables. For additional information  and detailed results from our econometric model of factors associated  with HECM take-up rates, see appendix II. Among other factors, our  model results indicate that house price changes, home equity, and prior  use of other home equity lending products were statistically significant (at  the 1 percent level) in explaining the decrease in HECM take-up rates  since 2010.

Changes in house prices. The decline in take-up rates may reflect  lower house prices, which have limited the number of households with  sufficient home equity (as a percentage of home value) to benefit from  a HECM. Our model estimated that, controlling for other factors, take- up rates were higher when house price growth was large and there  was a history of house price volatility compared to either relatively low  house price appreciation or stable house prices. This result is  consistent with senior homeowners using reverse mortgages to insure  against house price declines. For example, researchers have noted  that in states where house prices are volatile and the current level is  above the long-term norm, seniors anticipate future reductions in  house prices and lock in their home equity gains by obtaining a  reverse mortgage.

Home equity and prior home equity borrowing. Additionally, we  found that controlling for other factors, take-up rates were higher  where home equity (house value minus any mortgage debt) was high.  In these cases, senior homeowners tap into their high home equity to  help supplement income with proceeds from the HECM. Further, we  found that among seniors who had previously used other home equity  lending products, such as home equity loans, take-up rates were high.

This result is consistent with seniors using HECMs to pay off these  loans.

Academics and industry experts have also noted possible reasons why  the popularity of reverse mortgages is limited. For example, senior  homeowners can tap their home equity by other means, such as home  equity loans, home equity lines of credit, and cash-out refinancing.  Some of these options may be less expensive than reverse mortgages.  Seniors can also downsize––sell their current home and buy or rent a  less expensive one—and keep the difference to supplement retirement  savings. Seniors have other ways to supplement their retirement income  and age in place—for example, one academic noted that some seniors  rent out rooms in their homes, potentially using online marketplaces such  as Airbnb. Additionally, our literature review and interviews with  academics identified other factors that have may have contributed to  limited interest in reverse mortgages, including the following:

Exit of large bank lenders. As previously noted, banks, thrifts, and  credit unions were historically the primary lenders and servicers of  mortgage loans. Following the 2007–2009 financial crisis and  subsequent revisions to regulatory bank capital requirements, banks  reevaluated the benefits and costs of being in the mortgage lending  market, as well as retaining mortgages and the right to service them.  Today, the reverse mortgage market is dominated by a relatively  small number of nonbank entities. The exit of large, well-known  lenders, such as Bank of America and Wells Fargo, from the HECM  market created opportunities for smaller nonbank lenders to enter the  market. According to an academic we spoke with, in addition to  new capital requirements, large banks may have exited the market  partly out of concern that they risked damage to their reputations if  they foreclosed on seniors who defaulted on their HECMs.  Additionally, a 2018 survey of lenders found a variety of reasons why  lenders have stopped originating HECMs, including potential  reputation risk and concerns about HECMs being a distraction from  their forward mortgage business. Although the HECM market is  currently served by several nonbank lenders, their smaller scale,  limited access to capital, and limited name recognition may limit their  ability to reach more potential borrowers.

FHA policy changes to the HECM program. FHA has made several  policy changes in recent years to help stabilize the financial  performance of the HECM portfolio and strengthen financial criteria for  HECM borrowers. Although many of the HECM policy changes  introduced since 2010 were intended to minimize program losses,  they also may have reduced take-up rates. For example, in 2010 FHA  reduced the amount of money a borrower can get from a HECM.  Some academics we interviewed said reductions in the loan amounts  that borrowers can receive likely reduced demand for HECMs. In  2015, FHA changed financial requirements for HECMs to include a  financial assessment of the prospective borrower prior to loan  approval. Some academics said these changes made other home  equity extraction options that already had similar requirements more  competitive with HECMs.

Consumers’ misunderstanding and product complexity. A 2013  survey of U.S. homeowners aged 58 and older revealed a lack of  knowledge of reverse mortgages. The survey found that awareness of reverse mortgages is high, but knowledge of mortgage terms is  limited. Additionally, the survey found that respondents perceived  reverse mortgages to be fairly complex.

Consumers’ perception of the product. Academics we spoke with  told us that consumers’ negative perception of reverse mortgages  likely has a negative influence on take-up rates. For example, three  academics elaborated that consumers build their perception of the  product based on the industry’s marketing and advertising, which  includes television commercials with celebrity spokespeople that may  appeal to individuals facing economic hardship. Additionally, a 2016  survey of Americans aged 55 to 75 found that many respondents had  reservations about reverse mortgages, including that they are often  considered a financial tool of last resort. For example, only 27  percent of survey respondents stated that, in general, it was better to  use a reverse mortgage earlier in retirement as opposed to using it as  a last resort.

Relatively high origination costs and fees. HECMs also may be  unpopular with borrowers because they can be more expensive than  other home equity lending products, such as home equity lines of  credit. For example, HECM borrowers are charged various fees,  such as the up-front insurance premiums that FHA charges as  compensation for its insurance guarantee and origination fees lenders  charge. The up-front insurance premium is 2 percent of the  mortgage’s maximum claim amount. Also, for origination fees, lenders  can charge the greater of $2,500 or 2 percent of the first $200,000 of  the mortgage’s maximum claim amount plus 1 percent of the  maximum claim amount over $200,000. However, origination fees are  currently capped at $6,000. Further, because borrowers do not make  monthly payments on the loans, the interest will accumulate over time,  and compounding the interest, the loan balance can rise quickly.

Seniors’ attitudes toward debt and desire to leave a bequest.

Some academics have noted that seniors tend to be financially  conservative and avoid debt in old age––behavior driven by their  desire to leave a bequest or save for emergency expenses or long- term care costs. For example, academics have noted that some  impediments to home equity extraction are behavioral and have to do  with seniors’ long-held values, beliefs, and attitudes, such as to  maximize wealth transfer to heirs by leaving a bequest. As a result,  they may be reluctant to take out a HECM, even if it could help pay for  some future expenses.

HECMs allow seniors to tap a portion of their home equity to supplement  their retirement income, but these loans can present risks to borrowers  and their spouses. The growing number of borrowers who have defaulted  on their HECMs and faced foreclosure in recent years highlights the  importance of monitoring loan outcomes and overseeing loan servicing  policies and practices in the HECM program. FHA has taken some steps  to enhance the data it receives from servicers and has created  foreclosure prevention options for distressed borrowers. However, FHA  could significantly improve its monitoring of loan outcomes and oversight  of servicing in the HECM program in the following areas:

FHA’s lack of comprehensive termination data limits understanding of  the reasons why HECMs end, how the debt is satisfied, and how well  the program is helping seniors age in place. By, for example, updating  and providing more guidance to servicers on how to record  termination reasons, FHA could improve the completeness and  accuracy of HECM termination data.

FHA has not effectively assessed the performance of the HECM  program. By establishing performance indicators and periodically  assessing them, FHA could better oversee the program and  communicate information on program performance to Congress.

Further, FHA could use the performance data to help make informed  decisions about any needed program changes in the future.

FHA’s internal monitoring and reporting on loan outcomes has been  limited. Adopting analytic tools could better position FHA to evaluate  loan outcomes and help ensure senior officials have information  needed to make key decisions.

FHA has not fully analyzed the implications of how it prioritizes  foreclosures for assigned HECMs. FHA’s current process generally  results in no foreclosures on assigned loans with property charge  defaults. Analyzing the implications of this process could help FHA  optimize how it services assigned loans.

Because FHA does not currently perform on-site reviews of HECM  servicers, it lacks assurance that servicers are complying with rules  and program requirements. While FHA plans to begin reviewing  HECM servicers in fiscal year 2020, its plan does not include  development of a risk-rating system to prioritize reviews and identify  servicers that should be reviewed more frequently.

CFPB does not share the results of its examinations of HECM  servicers with FHA, in part because the two agencies have not  completed a formal information-sharing agreement. Sharing these  results could aid FHA’s oversight of HECM servicers by providing  additional information about the servicers’ performance and  operations.

FHA’s collection and use of consumer complaint data could be  improved. More organized collection of complaints and better  monitoring of internal and external complaint data could help FHA  detect and respond to emerging consumer protection issues regarding  HECMs.

By addressing these issues, FHA could help ensure that the HECM  program achieves program goals, effectively oversees servicers, and  provides appropriate borrower protections.

We are making a total of nine recommendations, eight to FHA and one to  CFPB:  The FHA Commissioner should take steps to improve the quality and  accuracy of HECM termination data. These steps may include updating  the termination reasons in the HERMIT system or updating the HERMIT  User Guide to more clearly instruct servicers how to record termination  reasons. (Recommendation 1)

The FHA Commissioner should establish, periodically review, and report  on performance indicators for the HECM program—such as the  percentage of terminations due to borrower defaults, the proportion of  active HECMs with delinquent property charges, the amount of servicer  advances, and the percentage of distressed borrowers who have  received foreclosure prevention options—and examine the impact of  foreclosure prevention options in the forthcoming HECM program  evaluation. (Recommendation 2)

The FHA Commissioner should develop analytic tools, such as  dashboards or watch lists, to better monitor outcomes for the HECM  portfolio, such as reasons for HECM terminations, defaults, use of  foreclosure prevention options, or advances paid by servicers on behalf of  HECM borrowers. (Recommendation 3)

The FHA Commissioner should evaluate FHA’s foreclosure prioritization  process for FHA-assigned loans. Such an analysis should include the  implications that the process may have for HECM borrowers,  neighborhoods, and FHA’s insurance fund. (Recommendation 4)

The FHA Commissioner should develop and implement procedures for  conducting on-site reviews of HECM servicers, including a risk-rating  system for prioritizing and determining the frequency of reviews.  (Recommendation 5)

The FHA Commissioner should work with CFPB to complete an  agreement for sharing the results of CFPB examinations of HECM  servicers with FHA. (Recommendation 6)

The CFPB Director should work with FHA to complete an agreement for  sharing the results of CFPB examinations of HECM servicers with FHA.  (Recommendation 7)

The FHA Commissioner should collect and record consumer inquiries and  complaints in a manner that facilitates analysis of the type and frequency  of the issues raised. (Recommendation 8)

The FHA Commissioner should periodically analyze available internal and  external consumer complaint data about reverse mortgages to help  inform management and oversight of the HECM program.  (Recommendation 9)

We provided HUD and CFPB with a draft of this report for review and  comment. HUD provided written comments, which are reproduced in  appendix V, that communicate FHA’s response to the report. CFPB’s  written comments are reproduced in appendix VI.

CFPB said that it did not object to our recommendation to complete an  agreement for sharing the results of CFPB examinations of HECM  servicers with FHA (recommendation 7) and that it would work to  complete such an agreement with FHA.

FHA agreed with six of our eight recommendations and neither agreed  nor disagreed with the remaining two.

Recommendation 1. FHA agreed with our recommendation to  improve HECM termination data and said it would convene a working  group to update the HERMIT system and User Guide and develop  clear directions for HECM servicers to record termination reasons in  HERMIT.

Recommendation 2. Regarding our recommendation on HECM  performance indicators and program evaluation, FHA agreed that  periodic review and reporting of HECM performance indicators is  critically important and said it would work to expand its reporting to  include the level of foreclosure prevention activity. However, FHA  added that there were no HECM metrics for early default or  delinquency rates, as those measures are linked to the amortizing  nature of forward mortgages. We agree that early default and  delinquency rates are not suitable metrics for HECMs, and our draft  report did not suggest that they are. Our report focuses on metrics  that would be pertinent to HECMs and that would provide additional  insight into HECM loan performance. These include the percentage of  HECM terminations due to borrower defaults, the proportion of active  HECMs with delinquent property charges, and the amount of funds  servicers have advanced on behalf of borrowers. We revised the  recommendation in our final report to more specifically describe the  types of performance indicators that FHA should establish and report  on. In addition, FHA disagreed with a statement in our draft report that  its evaluation of the HECM program has been limited. FHA said it  engages in robust HECM program evaluation and cited an example  that led to recent changes in FHA’s appraisal practices for HECMs.  While our draft report described the change in FHA’s appraisal  practices, we updated our final report to include reference to the FHA  study that prompted the appraisal change. However, we maintain that  FHA’s evaluation of the HECM program has been limited because the  last comprehensive program evaluation was completed 19 years ago  and FHA has not assessed the impact of HECM foreclosure  prevention options.

Recommendations 3 and 4. FHA agreed with our recommendations  to develop analytic tools for monitoring HECM loan outcomes and to  evaluate its foreclosure prioritization process for FHA-assigned loans.  Regarding the latter, FHA said that it is evaluating alternative  disposition options to reduce the number of loans that must go  through foreclosure and that it would take steps to evaluate the impact  of its prioritization process to assist in future decision-making.

Recommendation 5. FHA agreed with our recommendation to  develop and implement procedures for conducting on-site reviews of  HECM servicers, including a risk-rating system for prioritizing and  determining the frequency of reviews. As noted in our draft report,  FHA said it is in the process of updating procedures for on-site  reviews and plans to implement them in fiscal year 2020. FHA  disagreed with a statement in our draft report that FHA’s oversight of  HECM servicers is limited. FHA said the HECM servicing community  is small, which allows the agency to maintain regular communication  with HECM servicers, including through training sessions and industry  working group meetings. Our draft report acknowledged FHA’s  communications with servicers, but these activities are not a  substitute for in-depth compliance reviews of servicers’ operations. As  our draft report stated, FHA has not conducted on-site HECM servicer  reviews since fiscal year 2013. Given the 5-year lapse in FHA’s use of  this key oversight tool, we maintain that FHA’s oversight of HECM  servicers has been limited.

Recommendation 9. FHA agreed with our recommendation to  periodically analyze internal and external consumer complaint data  about reverse mortgages. FHA said it is expanding its data and  reporting capabilities as part of an information technology  modernization initiative. FHA also said that routing consumer inquiries  through the FHA Resource Center should improve data collection and  analysis.

FHA did not explicitly agree or disagree with our recommendations to  work with CFPB to complete an agreement for sharing examination  results and to collect and record consumer inquiries and complaints in a  manner that facilitates analysis (recommendations 6 and 8, respectively).  FHA said it would explore opportunities to coordinate with CFPB where  appropriate. FHA also said that routing inquiries through the FHA  Resource Center would help identify common issues, track servicer  performance, and inform policy decisions. Fully implementing our  recommendations will help ensure that FHA has the information it needs  to effectively oversee the HECM program.

We are sending copies of this report to the Secretary of the Department  of Housing and Urban Development, the Director of the Consumer  Financial Protection Bureau, appropriate congressional committees, and  other interested parties. In addition, the report is available at no charge on  the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or CackleyA@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix VII.

Appendix I: Objectives, Scope, and Methodology

This report examines issues related to reverse mortgages made under  the Home Equity Conversion Mortgage (HECM) program administered by  the Department of Housing and Urban Development’s (HUD) Federal  Housing Administration (FHA). The Consumer Financial Protection  Bureau (CFPB) also plays a role in overseeing reverse mortgages,  including HECMs. Our objectives were to examine (1) what FHA data  show about HECM terminations, servicer advances, and the use of  foreclosure prevention options; (2) FHA’s assessment and monitoring of  HECM portfolio performance, servicer advances, and foreclosure  prevention options; (3) FHA’s and CFPB’s oversight of HECM servicers;  (4) how FHA and CFPB collect, analyze, and respond to consumer  complaints about HECMs; and (5) how and why the market for HECMs  has changed in recent years.

To address all of our objectives, we reviewed relevant laws, regulations,  and requirements, such as HECM authorizing legislation, the Reverse  Mortgage Stabilization Act of 2013, FHA regulations, and mortgagee  letters governing the HECM program. We also interviewed FHA and  CFPB officials and staff from other relevant HUD offices such as the  Office of Policy Development and Research and the Office of General  Counsel. We reviewed FHA’s annual reports to Congress on the financial  status of the Mutual Mortgage Insurance Fund, actuarial reports on the  HECM portfolio, and FHA’s annual management reports. We also  reviewed our prior reports and reports by HUD’s Office of Inspector  General about the HECM program.

Additionally, we identified the largest HECM servicers using FHA data on  the number of loans serviced as of the end of fiscal year 2018. We found  that five companies serviced more than 99 percent of the HECM portfolio  (excluding loans assigned to FHA, which are serviced by an FHA  contractor) as of the end of fiscal year 2018. We developed a  questionnaire to solicit information applicable to our objectives from these  five servicers. We took steps to verify the information gathered in the  questionnaire. We reviewed responses for completeness and held  teleconferences with each HECM servicer to discuss, clarify, and amend  responses. Where possible, we corroborated servicers’ responses with  information or analysis from other sources, such as our analysis of FHA  loan-level data or FHA documents. We use summary statements and  illustrative examples from these questionnaires and our interviews with  the five servicers throughout the report.

We also interviewed representatives from five legal aid organizations  representing HECM borrowers in the states of California, Florida, New  York, Texas, and Washington. We selected these states because they  had the highest number of HECM originations in the past decade and  because they provided some geographic diversity; the five states span  the West (California), Northwest (Washington), Northeast (New York),  Southeast (Florida), and South (Texas). We selected the specific legal aid  organizations within those states because they represented a large  number of HECM borrowers, according to organization representatives.  We conducted semistructured interviews with organization  representatives that included questions on the top consumer protection  issues facing HECM borrowers, how recent HECM program changes may  have helped borrowers delay or avoid foreclosure, and characteristics of  HECM borrowers that may affect their ability to file consumer complaints.  We use summary statements and illustrative examples from these  interviews throughout the report.

HECM Terminations, Servicer Advances, and Foreclosure Prevention Options

To address the first objective, we analyzed FHA data to determine the  number of and reasons for HECM terminations, the amounts of servicer  advances, and the number of borrowers approved for selected  foreclosure prevention options (for example, repayment plans). We used  data from the Home Equity Reverse Mortgage Information Technology  (HERMIT) system, which FHA adopted in fiscal year 2013. FHA provided  us a HERMIT case detail table from its Single Family Data Warehouse  that contained loan-level information as of the end of fiscal year 2018. We  separately obtained several ad hoc HERMIT reports from FHA’s HERMIT  system contractor, as described below. For some of our analyses, we  merged data from the ad hoc reports with data from the case detail table  using the unique FHA case number for each HECM. Unless otherwise  noted, we analyzed data for the 5-year period spanning fiscal years  2014–2018.

We assessed the reliability of data from the HERMIT system by reviewing  FHA documentation about the data system and data elements. For  example, we reviewed the HERMIT User Guide and notes on HERMIT  system updates. Additionally, we interviewed FHA and contractor staff  knowledgeable about the HERMIT system and data to discuss  interpretations of data fields and trends we observed in our analyses. We  also conducted electronic testing, including checks for duplicate loans,  outliers, missing data fields, and erroneous values. Where appropriate,  we removed from our analyses any loans missing an endorsement  (insurance approval) date as well as cases with erroneous values. When  possible, we corroborated our analyses with external reports such as  FHA’s annual reports to Congress, management reports, and production  reports. Based on these steps, we determined the data we used from the  HERMIT system were sufficiently reliable for summarizing trends and  generating descriptive statistics for HECM terminations, servicer  advances, and selected foreclosure prevention options over the 5-year  period.

We analyzed FHA loan-level data from the HERMIT system to determine  the total number of terminated HECMs and reasons for terminations by  fiscal year. We first identified terminations occurring in fiscal years 2014– 2018 using data fields for case status and termination date (see table 5).

We then removed any terminated loans that had previously been  assigned to FHA (16,008) using the data field that records the date FHA  accepted assignment of the loan. We removed these loans because FHA  officials told us the agency generally does not foreclose on FHA-assigned  HECMs that default and keeping them in the analysis would have resulted  in understating the proportion of terminations stemming from defaults.  Accordingly, the denominator for our terminations analysis was 256,147  loans (272,155 total terminations minus the 16,008 loans previously  assigned to FHA).

We then identified the reported termination reasons for the 256,147 loans.  We analyzed loan-level data from the HERMIT system to identify the  number of loans that fell into various termination reason categories. To  identify terminations stemming from a HECM becoming due and payable,  we used data from two reports that we obtained from FHA’s HERMIT  system contractor: the Default Key Dates Report and the Due and  Payable Delinquency Report. From these reports, we identified the  number of terminations due to a borrower’s death, conveyance of title,  default due to unpaid property charges, default due to failure to meet  occupancy or residency requirements, and default due to failure to keep  the home in good repair. To identify terminations stemming from  repayment, refinancing, moving, or other (undetermined) reasons, we  used information on case substatus from the HERMIT case detail table  from the Single Family Data Warehouse. Our undetermined reasons  category included loans for which the case substatus either was labeled  “terminate-other” or showed how the debt was satisfied (such as through  a deed-in-lieu of foreclosure, foreclosure, or short sale) rather than  providing a termination reason. For the full results of our terminations  analysis, see appendix III.

We analyzed servicer advances to HECM borrowers using data from an  ad hoc HERMIT report we requested from FHA’s HERMIT system  contractor. We analyzed the data to determine the amounts and types of  servicer advances in fiscal years 2014 through 2018 for terminated  HECMs. We distinguished between servicer advances for unpaid property charges and servicer advances for other costs. Examples of the latter are  attorney, trustee, and appraisal fees typically incurred during the  foreclosure process. For each year and for the 5-year period as a whole,  we calculated total servicer advances and the amount and percentage of  advances for property charges and for other costs.

Additionally, we distinguished between servicer advances for unpaid  property charges before and after a HECM borrower’s death using the  date of death of the last surviving borrower in HERMIT. This allowed us  to determine the amount of servicer advances for unpaid property  charges on behalf of living borrowers. We calculated the total amount of  these advances over the 5-year period as well as the mean, median, and  25th and 75th percentile values. We also calculated the number and  percentage of loans for which property charge advances on behalf of  living borrowers were less than $2,000 (the threshold for one of FHA’s  foreclosure prevention options).

We analyzed data from HERMIT on the use of selected foreclosure  prevention options—repayment plans and at-risk extensions—for  borrowers who defaulted because of unpaid property charges. We  analyzed data from April 2015 (the effective date of FHA’s current  repayment plan and at-risk extension policies) through fiscal year 2018.  To conduct the analysis of repayment plans, we used the HERMIT Due  and Payable Delinquency Report noted previously, which includes data  fields for loan default status and the dates borrowers were approved for a  repayment plan. We calculated the percentage of borrowers with property  charge defaults who were approved for repayment plans during the  period examined. To conduct the analysis of at-risk extensions, we  requested an ad hoc report from FHA’s HERMIT system contractor  showing whether and when borrowers had been approved for at-risk  extensions and appended it to the default status within the Due and  Payable Delinquency Report using FHA case numbers. We calculated the  percentage of borrowers with property charge defaults who were  approved for at-risk extensions during the period examined.

We also reviewed and summarized information that FHA provided us  from HERMIT on nonborrowing spouses who applied for mortgagee  optional election assignments from June 2015 (the effective date of FHA’s  mortgagee optional election assignment policy) through fiscal year 2018.  FHA provided information on the number of requested, approved, and  denied mortgagee optional election assignments during that period. We  also reviewed documentation from FHA and interviewed agency officials  about the mortgagee optional election assignment process and reasons  for denials. For the denied mortgagee optional election assignments, we  reviewed information that FHA provided us from HERMIT on the current  status of the associated loans as of May 31, 2019. For example, for the  denied mortgagee optional election assignments, FHA determined  whether the loan had been terminated as of that date. For those that had  terminated, we summarized whether the debt was paid off or whether the  debt was satisfied because of a foreclosure, deed-in-lieu of foreclosure,  or short sale.

Performance Assessment and HECM Portfolio Monitoring

To address the second objective, we reviewed agency reports and  interviewed agency officials to determine how the agency assesses the  performance of the HECM program, including the use of any performance  indicators or program evaluations. For example, we reviewed HUD’s  strategic plan for fiscal years 2018–2022 and its most recent annual  performance report to identify any goals and performance indicators  related to the HECM program. Additionally, we reviewed program  evaluations completed for the HECM program. We also interviewed FHA  and HUD Office of Policy Development and Research officials about  previous program evaluations and HUD’s plans for forthcoming  evaluations of the HECM program. We compared FHA’s practices against  leading practices identified in our previous work on assessing program  performance and against Office of Management and Budget (OMB)  policies and procedures on managing federal credit programs (OMB  Circular A-129).

Additionally, we reviewed FHA documents and interviewed FHA officials  concerning the agency’s internal reporting and analysis of the HECM  portfolio. For example, we reviewed examples of regular and ad hoc  reports FHA received from its HERMIT system contractor. These internal  reports contained information on HECM origination, assignment, and  termination activity and HECM defaults. We interviewed FHA officials to  understand the purpose of the reports, when they were developed, and  how agency management uses them. We compared FHA’s internal  reporting practices to OMB Circular A-129 on reporting mechanisms and  formats for federal credit programs.

To address the third objective, we reviewed FHA and CFPB policies and  procedures for overseeing HECM servicers and interviewed agency staff  with oversight responsibilities. To assess the extent to which FHA  oversees HECM servicers’ compliance with servicing requirements, we  requested information on the number of on-site monitoring reviews of  HECM servicers that FHA completed from fiscal years 2010 through  2019. We also reviewed corrective actions FHA can take to address  noncompliance. We reviewed and summarized a nongeneralizable  sample of three reports from on-site servicer reviews FHA conducted in  fiscal year 2013, the most recent year in which FHA had completed a  review. Additionally, we interviewed the director of FHA’s Quality  Assurance Division, which is responsible for conducting on-site reviews of  FHA-approved lenders and servicers, about the division’s past practices  for reviewing HECM servicers and plans for future reviews. We compared  FHA’s practices and plans to criteria in OMB Circular A-129 regarding the  frequency, targeting methodology, and other aspects of on-site lender  and servicer reviews. Further, we interviewed FHA officials about the  extent of information sharing between FHA and CFPB on HECM servicer  oversight.

To examine CFPB’s oversight of HECM servicers, we reviewed CFPB’s  reverse mortgage examination procedures and the examinations  completed under those procedures as of fiscal year 2018. We also  reviewed CFPB’s methodology for selecting reverse mortgage servicers  for examination and documentation on its plans for future examinations.  We reviewed CFPB’s examination findings and corrective actions as of  August 2019. We interviewed CFPB officials about the examination  process and agency efforts to share examination results with FHA. We  reviewed statutes and regulations related to CFPB’s authority to share the  results of its examinations, and we compared CFPB’s information-sharing  efforts with FHA against practices for interagency collaboration we  identified in previous work.

To address our fourth objective, we analyzed CFPB data on reverse  mortgage consumer complaints from the bureau’s online website, called  the Consumer Complaint Database. The database includes information  provided by consumers on their location (state), the company they are  complaining about, and the nature of their complaint. For example,  consumers can submit narratives describing their complaints about  reverse mortgage lenders or servicers. Because CFPB had published an  analysis of reverse mortgage consumer complaints using data from  calendar years 2011 through 2014, we analyzed reverse mortgage  complaints and narratives received by the bureau from calendar years  2015 through 2018.

We analyzed all 2,472 complaints filed in those 4 years to determine the  number of complaints by year, state, submission method (for example,  internet, phone, or email), and company. For the analysis by submission  method, we compared the results to those for complaints about all types  of mortgages filed during the same period.

To identify patterns in consumer-described issues about reverse  mortgages, we reviewed a generalizable sample of 100 complaint  narratives and categorized these complaints by topic. For this analysis,  two independent reviewers read the complaints and categorized them into  predetermined topics based on their content. We used nine complaint  issue topics, including complaints where the consumer (or someone  complaining on behalf of the consumer) said he or she (1) was at risk of  foreclosure or in foreclosure; (2) was charged unfair interest rates, fees,  or costs; (3) experienced problems after the loan was transferred to a  new servicer; (4) had issues with, or defaulted as a result of, property  taxes, insurance, or other property charges; (5) experienced poor  communication on a servicing or lending issue; (6) had an issue involving  occupancy requirements; (7) had concerns or issues involving the  management of the estate after the borrower died or left the property; (8)  had difficulties gaining approval for a mortgagee optional election  assignment or recognition of a nonborrowing spouse; or (9) experienced  problems during loan origination. If a complaint narrative in our sample  did not contain enough information or was not clear enough to determine  a complaint topic, we replaced it with another randomly selected  complaint narrative. In cases where the two reviewers categorized a  complaint differently, a third independent analyst read the complaint  narrative and adjudicated the difference to place the complaint in a topic  category. We calculated confidence intervals for these categories at the  95 percent confidence level.

We determined that the CFPB data were sufficiently reliable for the  purposes described above by reviewing CFPB documentation and reports  from CFPB’s Office of Inspector General on CFPB’s consumer complaint  database and by interviewing CFPB officials about our interpretation of  data fields. Also, we interviewed CFPB officials about their collection,  analysis, and use of the consumer complaint data.

To determine the extent to which FHA collects consumer inquiries and  complaints about HECMs, we reviewed the HECM-related calls received  by FHA’s National Servicing Center and the FHA Resource Center from  calendar years 2015 through 2018. We calculated the total number of  HECM-related calls each center received over that period. The data from  both centers included fields to capture a description of the issue raised by  the caller. However, unlike CFPB’s consumer complaint data, the  information in the issue description was recorded by FHA customer  service staff (rather than the complainants themselves) and did not  differentiate between inquiries and complaints. We determined there was  not enough information in these descriptions to perform an analysis  similar to the one we performed on CFPB’s consumer complaints. Both  the National Servicing Center and the FHA Resource Center record the  reasons for calls. However, neither entity records this information in a  consistent or standardized way that would allow for analysis. For  example, the data we reviewed from the National Servicing Center  included about 100 reasons.

Additionally, we reviewed CFPB and FHA policies and procedures for  collecting and addressing consumer complaints and interviewed officials  on how consumer complaints were incorporated into their oversight of  HECM servicers. We interviewed officials from both agencies about their  collection and use of customer complaint data. We also interviewed  CFPB and FHA officials about the extent to which they share consumer  complaint data or access and use the other agency’s data. Finally, we  compared CFPB’s and FHA’s efforts against federal internal control  standards for using quality information and against approaches we  identified in prior work for enhancing collaboration across agencies.

HECM Market, Originations, and Take-Up Rates

To address our fifth objective, we analyzed FHA data on HECM  originations from calendar years 1989 through 2018 to identify any trends  in HECM program activity. Additionally, using FHA and Census Bureau  data, we calculated HECM take-up rates—the ratio of HECM originations  to eligible senior homeowners—from calendar years 2000 through  2017. We also developed an econometric model to examine, to the  extent possible, factors affecting HECM take-up rates from calendar  years 2000 through 2016 (the last year we could include in the model due  to data constraints). Following the existing research literature, we  hypothesized that HECM loan originations could be affected by several  demand- and supply-related factors that could be represented by  demographic and socioeconomic characteristics, housing market  conditions, and product features. Accordingly, our model used a variety of  data from FHA, the Census Bureau, the Federal Housing Finance  Agency, and other sources. For a detailed description of our econometric  model—including the model specification, factors used, data sources, and  results—and a list of selected studies we consulted to develop the model,  see appendix II.

We also reviewed relevant literature and interviewed academic and HUD  economists about FHA policy changes and behavioral and structural  factors (for example, consumers’ perception of reverse mortgages) that  we could not account for in our econometric model but that may influence  HECM take-up rates. These individuals included three academic  economists who have conducted extensive research on reverse  mortgages and economists from FHA and HUD’s Office of Policy  Development and Research. We present summary information about  these factors in this report.

We conducted this performance audit from July 2018 to September 2019  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Description of and Results for GAO’s Econometric Model of Home Equity Conversion Mortgage Take-Up Rates

We developed an econometric model to examine, to the extent possible,  factors associated with Home Equity Conversion Mortgage (HECM) take- up rates—the ratio of HECM originations to eligible senior homeowners— using data from calendar year 2000 through 2016. Take-up rates provide  an indication of how popular HECMs are among the population of senior  homeowners. A number of factors may have affected the take-up rates  over this period. For instance, it has been asserted that demand for  HECMs would be high for elderly people that are house-rich but cash- poor, but behavioral factors such as their desire to leave a bequest could  limit demand. Also, the limited number of large, well-known lenders could  constrain supply of HECMs. Furthermore, several FHA policy changes to  the HECM program may have affected the number of loan originations.  Following the existing literature, we hypothesized that HECM loan  originations could be affected by several demand- and supply-related  factors that could be represented by demographic and socioeconomic  characteristics, housing market conditions, product features, program  policy changes, and behavioral and structural factors.

The general specification of the model we used, which is a quasi-reduced  form of the net effect of demand and supply factors on HECM take-up  rates, is as follows:  Yit = θ + α + γ + Xit β + εit.

Y is the dependent variable, the take-up rate, representing the ratio of  HECM originations to eligible senior homeowners in state (i) in year (t).  An eligible senior homeowner is an owner-occupied householder aged 65  or older.

Both α and γ control, respectively, for state-specific (but time-invariant)  and year-specific (but state-invariant) observable and unobserved factors.

They help to minimize omitted variable bias that could be caused by  excluding time-invariant or state-invariant variables. The latter, which are  year fixed-effects (that is, variables that change over time but are  constant across the states), would pick up average differences in take-up  rates over the years. These factors would include changes in HECM  program policies and market conditions over time, such as the exit of  large, well-known HECM lenders or investors. In general, using the year  fixed-effects precluded the estimation of the impact of variables that are  state-invariant (for example, interest rates).The state fixed-effects are  used to control for average differences in take-up rates across the states  (that is, variables that differ across the states but are constant over time).  These effects would include regulatory variations across states.

The vector X captures measured variables represented by demographic  and socioeconomic characteristics, housing market conditions, and  product features that vary across states and over time. Given that the  time-invariant and state-invariant factors would be accounted for by the  state fixed-effects and year fixed-effects, respectively, the measured  variables capture how changes in these variables within states (that is,  over time) could affect take-up rates. θ is the constant term.  ε, the regression error term, represents random and other unobserved  factors that could vary across the states and over time, such as random  changes in risk behavior of HECM borrowers and lenders. It also captures  errors due to misspecification and measurement.

The data sources for our analysis are as follows:

Census Bureau. The data include demographic, socioeconomic, and  housing characteristics in geographic areas. The data are from the  Integrated Public Use Microdata Series National Historical  Geographic Information System (IPUMS NHGIS) for 2000; 1-year  American Community Survey data from the American FactFinder for  2005–2009, and 1-year American Community Survey data from  IPUMS NHGIS for 2010–2016. We interpolated the data for 2001– 2004 using all data available for the other years: 2000 and 2005– 2016. All the data are for seniors aged 65 years or older and at the  state level.

Federal Housing Finance Agency. House price indexes at the state  level, 2000–2016.

Federal Reserve Bank of New York Consumer Credit  Panel/Equifax: Mortgage debt balances of seniors 62 years or  older, state level, 2003–2016.

Survey of Consumer Finances: Triennial data on family net worth,  national level, 2000–2016.

Federal Reserve Bank of St. Louis’s Federal Reserve Economic  Data.

Consumer price index for all urban consumers, national level,  2000–2016.

Effective federal funds rate, national level, 2000–2016.

Federal Housing Administration (FHA). HECM loan-level data from  the Single Family Data Warehouse, available yearly, 2000–2017. The  data include when the loan was endorsed by FHA, property location,  appraised home value, and maximum claim amount.

Factors That Could Affect HECM Take-Up Rates

The list of potential explanatory variables we used in the model is  provided below. The data are measured at the state level and are  available from 2000 through 2016 (unless indicated otherwise). Also, the  variables are for senior householders, aged 65 or older (unless indicated  otherwise). All monetary values are in 2016 dollars using the Consumer  Price Index for All Urban Consumers. The data sources are indicated in  brackets (see the data sources above for details).

Demographic and socioeconomic characteristics [Census  Bureau].

Fraction 75 years or older in occupied housing units.

Fraction of senior householders who are married or those who are  unmarried females.

Fraction of individuals 65 years or older with high school  education or some college education, or with college, graduate, or  professional degree.

Fraction in the labor force: the ratio of the labor force (the  employed and the unemployed) to civilian noninstitutionalized  adult population (65 years or older).

Median household income (natural logarithm).

Ratio of family net worth of individuals 65 years or older to house  value. Net worth is measured as the difference between families’  gross assets and liabilities using triennial data at the national level  . House value is measured as  the ratio of aggregate house value to number of owner-occupied  housing units.

House price changes :  o  House price growth: 5-year intervals prior to the  observation.  o  House price volatility: standard deviation of annual house  price percent change in the 5 years prior to the  observation.

Effective federal funds rate (percent). [Federal Reserve Bank of

Home equity per senior homeowner (natural logarithm), 1-year  lag. Home equity is measured as the aggregate house value of  owner-occupied housing units minus total mortgage debt. Total  mortgage debt comprises aggregate mortgage, home equity loan,  and home equity line of credit balances of individuals 62 or older  (2003–2016). [Census Bureau; Federal Reserve Bank of New  York/Equifax]

Ratio of individuals aged 62 or older with home equity loan to  senior homeowners, 1-year lag (2003–2016). [Federal Reserve  Bank of New York/Equifax; Census Bureau]

Ratio of individuals aged 62 or older with home equity line of credit  to senior homeowners, 1-year lag (2003–2016). [Federal  Reserve Bank of New York/Equifax; Census Bureau]

Fraction of owner-occupied housing units with ratio of selected  monthly housing costs to household income greater than or equal  to 35 percent.

FHA loan limit: proportion of HECM loans in a state and year for  which the appraised home value is more than the maximum claim  amount; that is, the FHA loan limit is binding. The maximum claim  amount equals the minimum of the appraised home value and the  FHA loan limit.

Although we did not directly include other variables that could affect  HECM take-up rates in our model partly due to lack of data, we included  year fixed-effects and state-fixed effects to minimize omitted variables  problem associated with state-invariant variables and time-invariant  variables, respectively. These included several FHA policy changes to the  HECM program and behavioral and structural factors, as discussed  earlier in this report.

We used a state as the geographic area instead of a smaller area, such  as ZIP code. The data on HECM originations are available at the  household (or family) level from FHA. However, the factors used in the  model (demographic and socioeconomic characteristics and housing  market conditions) are generally available at the state level or at the ZIP  code level from the Census Bureau and other sources. There are  advantages and disadvantages to using state-level or ZIP-code-level  data. Given the low HECM take-up rates (see fig. 7 earlier in this report),  using ZIP-code data would generally imply very low, if not zero, take-up  rates across a large number of ZIP codes, which would make it harder to  identify effects from our model. Also, not all of the data for the factors  used in the model are available for every ZIP code with a HECM  origination—including the home equity extraction variables—which would  lead to exclusion of some areas, resulting in potential sample-selection  bias. On the other hand, using ZIP code-level data could allow for more  heterogeneity in certain states, and certain variables such as house price  changes when measured at the ZIP code level could be closer to what  the homeowner experiences. We decided to use state-level data because  of our concern for potential sample-selection bias and the quality of data  at the ZIP code level, although using state-level data could limit  heterogeneity in the data across geographic areas.

Description of Estimation Methodology and Results

We estimated panel data of state-year observations of the model  specified above using fixed-effects estimation. Because of data  limitations with some of the key variables—home equity and home equity  extraction via loans or lines of credit—and because we used a 1-year lag  of these variables, we estimated the model from 2004 through 2016. We  also excluded the District of Columbia, which was an outlier, with a take- up rate that was 4.5 times the national average. The list of the variables  we used and the estimation results are provided in tables 6 and 7,  respectively, at the end of this appendix. The standard fixed-effects  estimates are reported in column 1 (the base model) of table 7. We also  report fixed-effects estimates that account for spatial and temporal  dependence in columns 2 through 4—column 2 estimates the base  model, column 3 excludes the variables for home equity extraction from  the base model, and column 4 excludes the year fixed-effects from the  base model. We focused on these estimates because spatial correlations  may be present as states are likely to be subject to both observable and  unobservable common disturbances, and failure to account for these  would yield inconsistent estimates of the standard errors.

Factors Associated with HECM Take-Up Rates

Our econometric estimates indicated that several demographic and  socioeconomic characteristics and housing conditions are associated with  take-up rates, using data across states from 2004 through 2016. The  results discussed below, which are based primarily on the estimates in  column 2 of table 7, are statistically significant at the 10, 5, or 1 percent  levels or lower. Because the fixed-effects technique controls for the  effects of both observable and unobservable factors that vary across  states (but are time-invariant), the estimates of the measured effects are  for only within-state variations and the results are interpreted accordingly.

House price changes. The interaction term for house price growth  and house price volatility is positive and significant at the 1 percent  level. This implies that within states, take-up rates were higher when  house price growth was large and when there was a history of house  price volatility compared to either relatively low house price  appreciation or stable house prices. This result is consistent with  senior homeowners using reverse mortgages to insure against house  price declines, which is supported by the positive and significant  effects of the house price volatility by itself. On the other hand, the  weak significance of house price growth by itself (at the 10 percent  level) provides only modest support for senior homeowners using  reverse mortgages purely to extract home equity.

Home equity. Within states, take-up rates were higher when home  equity of senior homeowners was high, significant at the 1 percent  level.

Fractions of senior homeowners with a home equity loan or  home equity line of credit. Within states, take-up rates were higher  when the fractions of senior homeowners with a home equity loan or  home equity line of credit were high, significant at the 1 percent and  10 percent levels, respectively. Because these loans were  outstanding as of the prior year, it is likely that borrowers used  HECMs to pay them off.

Fraction of owner-occupied housing units with ratio of housing  costs to household income greater than or equal to 35 percent.  Within states, take-up rates were higher when the ratio of housing  costs to household income was high, significant at the 1 percent level.

Fractions of seniors with high school or college education. Within  states, take-up rates were higher when the fractions of seniors with  high school or college education were high, significant at the 1  percent and 10 percent levels, respectively.

Median household income. Within states, take-up rates were higher  when incomes of senior households were high, significant at the 5  percent level.

Fraction of senior households who were married. Within states,  take-up rates were lower when the fraction of married senior  households was high, significant at the 10 percent level.

Fraction of homes in states with binding FHA loan limit. Although  the effect was generally not statistically significant, the effect of the  FHA loan limit on take-up rates was negative.

Robustness Tests, Caveats, and Limitations of Our Econometric Analysis

We estimated other specifications of our model to test the robustness and  reasonableness of our results. The alternative specifications, described  below, yielded estimates similar to those of our original model.

We estimated the model excluding the variables for home equity loans  and home equity lines of credit, which are alternative channels of  home equity extraction, because they could be endogenous (see  column 3 of table 7).

We estimated the model excluding the year fixed-effects (see column  4 of table 7).

We estimated the model using the number of senior housing units  (instead of senior homeowners) within a state to normalize the  number of HECMs in order to account for nonhomeowners who might  become homeowners.

We note the following caveats and limitations of our study:

We were not able to include some factors that could affect HECM  take-up rates, including FHA program policy changes and behavioral  and structural factors previously discussed in this report.

Some of our estimates could be different if we used areas smaller  than a state as the units of observation, such as ZIP codes or  counties.

The estimates represent the average effects for all states and for all  periods we analyzed, but the effects could differ for specific states or  specific periods. Our analysis pertains to the period that we analyzed  and may not be generalizable to other periods.

To help develop our HECM take-up rate model, we consulted the  following studies.  1.  Banks, James, Richard Blundell, Zoe Oldfield, and James P. Smith.  “Housing Price Volatility and Downsizing in Later Life.” National  Bureau of Economic Research Working Paper 13496. Cambridge,  Mass.: National Bureau of Economic Research, October 2007.  Accessed April 30, 2019. http://www.nber.org/papers/w13496.  2.  Chatterjee, Swarn. “Reverse Mortgage Participation in the United  States: Evidence from a National Study.” International Journal of  Financial Studies, vol. 4, no. 5 (2016): pp. 1–10.  3.  Consumer Financial Protection Bureau. Reverse Mortgages: Report  to Congress. Washington, D.C.: June 28, 2012.  4.  Davidoff, Thomas. Reverse Mortgage Demographics and Collateral  Performance. February 25, 2014. Accessed November 19, 2018.  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2399942.  5.  Davidoff, Thomas. “Supply Constraints Are Not Valid Instrumental  Variables for Home Prices Because They Are Correlated With Many  Demand Factors.” Critical Finance Review, vol. 5, no. 2 (2016): pp.  177–206.  6.  Davidoff, Thomas, Patrick Gerhard, and Thomas Post. Reverse  Mortgages: What Homeowners (Don’t) Know and How It Matters.  October 24, 2016. Accessed November 19, 2018,  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2528944.  7.  Driscoll, John C., and Aart C. Kraay. “Consistent Covariance Matrix  Estimation with Spatially Dependent Panel Data.” Review of  Economics and Statistics, vol. 80 (1998): pp. 549–560.  8.  Golding, Edward, and Laurie Goodman, “To Better Assess the Risk of  FHA Programs, Separate Reverse and Forward Mortgages.” Urban  Wire (blog), Urban Institute. November 29, 2017. Accessed August  14, 2019. https://www.urban.org/urban-wire/better-assess-risk-fha- programs-separate-reverse-and-forward-mortgages.  9.  Goodman, Laurie, Karan Kaul, and Jun Zhu. What the 2016 Survey of  Consumer Finances Tells Us about Senior Homeowners. Washington,  D.C.: Urban Institute, November 2017.  10. Haurin, Donald, Chao Ma, Stephanie Moulton, Maximilian Schmeiser,  Jason Seligman, and Wei Shi. “Spatial Variation in Reverse  Mortgages Usage: House Price Dynamics and Consumer Selection.”  Journal of Real Estate Finance and Economics, vol. 53 (2016): pp.  392–417.  11. Integrated Financial Engineering, Inc. “Appendix E: HECM Demand  Model” in HECM Demand Model Actuarial Review of the Federal  Housing Administration Mutual Mortgage Insurance Fund HECM  Loans For Fiscal Year 2015. Prepared at the request of the  Department of Housing and Urban Development. November 16, 2015.  12. Kaul, Karan, and Laurie Goodman. Seniors’ Access to Home Equity:  Identifying Existing Mechanisms and Impediments to Broader  Adoption. Washington, D.C.: Urban Institute, February 2017.  13. Lucas, Deborah. “Hacking Reverse Mortgages.” (Working paper,  October 26, 2015). Accessed June 14, 2019.  http://mitsloan.mit.edu/shared/ods/documents/?DocumentID=4596.  14. Mayer, Christopher J., and Katerina V. Simons. “Reverse Mortgages  and the Liquidity of Housing Wealth.” Journal of the American Real  Estate and Urban Economics Association, vol. 22, no. 2 (1994): pp.  235–255.  15. Mummolo, Jonathan, and Erik Peterson. “Improving the Interpretation  of Fixed Effects Regression Results.” Political Science Research and  Methods, vol. 6 (2018): pp. 1–7.  16. Moulton, Stephanie, Donald R. Haurin, and Wei Shi. “An Analysis of  Default Risk in the Home Equity Conversion Mortgage (HECM)  Program.” Journal of Urban Economics, vol. 90 (2015): pp. 17–34.  17. Moulton, Stephanie, Cazilia Loibl, and Donald Haurin. “Reverse  Mortgage Motivations and Outcomes: Insights from Survey Data.”  Cityscape: A Journal of Policy Development and Research, vol. 19,  no. 1 (2017): pp. 73–97.  18. Moulton, Stephanie, Samuel Dodini, Donald Haurin, and Maximilian  Schmeiser. “Seniors’ Home Equity Extraction: Credit Constraints and  Borrowing Channels.” May 20, 2019. Accessed August 12, 2019.  https://ssrn.com/abstract=2727204.  19. Nakajima, Makoto, and Irina A. Telyukova. “Reverse Mortgage Loans:  A Quantitative Analysis.” The Journal of Finance, vol. 72, no. 2  (2017): pp. 911–949.  20. Redfoot, Donald L., Ken Scholen, and S. Kathi Brown. Reverse  Mortgages: Niche Product or Mainstream Solution? Report on the  2006 AARP National Survey of Reverse Mortgage Shoppers.  Washington, D.C.: December 2007.  21. Shan, Hui. “Reversing the Trend: The Recent Expansion of the  Reverse Mortgage Market.” Real Estate Economics, vol. 39, no. 4  (2011): pp. 743–768.  22. Warshawsky, Mark J. “Retire on the House: The Possible Use of  Reverse Mortgages to Enhance Retirement Security.” The Journal of  Retirement, vol. 5, no. 3 (2018): pp. 10–31.

Appendix III: Reported Home Equity Conversion Mortgage Termination Reasons

Appendix IV: Reported Home Equity Conversion Mortgage Terminations and Defaults

Appendix V: Comments from the Department of Housing and Urban Development

Appendix VI: Comments from the Consumer Financial Protection Bureau

Appendix VII: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Steve Westley (Assistant  Director), Beth Faraguna (Analyst in Charge), Steven Campbell, William  Chatlos, Holly Hobbs, John Karikari, Matthew Levie, Risto Laboski, Marc  Molino, Jennifer Schwartz, Tyler Spunaugle, and Khristi Wilkins made key  contributions to this report.

Reverse mortgages allow seniors to convert part of their home equity into payments from a lender while still living in their homes. Seniors run the risk of defaulting and losing their homes if they don’t continue to pay taxes and meet other conditions.

Defaults increased from 2% of loan terminations in 2014 to 18% in 2018, mostly due to borrowers failing to meet occupancy requirements or pay taxes or insurance.

The Federal Housing Administration could do a better job evaluating the performance of its reverse mortgage program and overseeing the companies that service the loans. We made 9 recommendations to improve FHA’s oversight of the program.