Written by Elenita Layugan, as originally published in The Reverse Review.

 

In August, HUD’s Office of the Inspector General released a final review of the agency’s management of the HECM program. The report declared that HUD policies did not always ensure that borrowers complied with residency requirements. A large percentage of borrowers did not live in the properties associated with their loans, according to the review, and some borrowers were receiving rental assistance from HUD’s multifamily program at a different address at the same time.

Although the report has a greater impact on those who service HECM loans, there are lessons to be learned for originators too. Audits always involve a review of the loan application, so it is prudent to exercise due diligence on every loan you handle.

To ensure compliance with the loan’s owner occupancy requirements, here are important reminders for reverse originators:

  1. The credit report should confirm the owner’s occupancy of the subject property. If there are address variations, obtain a letter of explanation for these and make sure the explanation is reasonable. If you need further confirmation, you should request copies of most recent utility bills (cable bill, telephone bill, etc.) to check that services are provided to the subject property address.
  2. Note the presence of more than one open mortgage on a borrower’s credit report. If this exists, review the Continuation Sheet/Residential Loan Application of the 1009 and match each mortgage to the properties listed. If there was no additional property listed, speak with the borrower and inquire about the additional mortgage listed in the credit report. Furthermore, obtain property tax and homeowner’s insurance information on all additional properties since monthly payment amounts for these are included in Financial Assessment. If the borrower was only a co-signer on the mortgage, it should still be included in Financial Assessment, unless the third party is able to provide documentation to show that he/she has made timely mortgage payments for the past 12 months.
  3. The address on all documentation should be consistent with the subject property address, so review all W-2s, paystubs, tax returns, bank statements, etc. If there is any discrepancy, ask the borrower for a letter of explanation. Copies of utility bills, as mentioned above, can help confirm owner occupancy.
  4. On the appraisal report, instead of flipping right away to page 2, where the value is indicated, take time to read the entire report and make note of the “subject” section on page 1. With the exclusion of a HECM for Purchase transaction, the “owner” box should always be checked for “occupant” in this section.
  5. If the borrower provided you with a copy of a driver’s license to prove date of birth, make sure it is unexpired and reflects the subject property address.
  6. The Internet is a wealthy source of verification tools, so use sites such as 411.com, yellowbook.com and switchboard.com to employ address and phone searches.
  7. On a HECM for Purchase, if the borrower is retaining a current primary residence as a rental or second home, obtain a disposition letter for the property being retained and a motivation letter for the property being purchased. Make sure both explanations are sufficient and reasonable.
  8. On a HECM for Purchase that involves a borrower with an existing FHA loan, ensure that that loan is paid off, because FHA will generally not insure two loans for a borrower at one time. There are very specific exceptions to this rule. If these exceptions apply to your borrower, make sure to obtain all sufficient documentation, per the exception.
  9. Lastly, review the borrower’s Homeowner’s Insurance Policy. A standard policy on a primary residence should always reflect coverage for dwelling, personal property, loss of use and liability protection. If the policy presented to you is a dwelling fire insurance policy only, consider that a red flag because policies like this are generally acquired on rental or investment properties where personal possessions do not need to be insured.