Home Equity Conversion Mortgage (HECM) Reverse Mortgage Fraud to Watch For

Here is an alert out today about Home Equity Conversion Mortgage (HECM) fraud. The HECM program, which allows seniors age 62 and older to withdraw some of the equity in their homes, is the only reverse mortgage program insured by the U.S. government (through the FHA).

“The most troubling aspect of HECM fraud is that it takes advantage of senior citizens who have worked hard over their entire lives to own their homes,” said Financial Crimes Enforcement Network (FinCEN) Director James H. Freis, Jr. “To combat these frauds head-on, FinCEN is working closely with HUD’s Inspector General (U.S. Department of Housing and Urban Development’s Office of Inspector General) and the Secret Service (Department of Homeland Security) to proactively identify hot-spots of suspected HECM and other mortgage fraud activity and directly provide to law enforcement a more defined battleground to direct their resources.”

As the popularity of the HECM program has grown, now accounting for nearly 100 percent of the reverse mortgage market, public reports of financial crimes against seniors involving the FHA program have become more prevalent. In this advisory, FinCEN highlights the new trends and schemes that law enforcement and HUD officials have identified involving thefts from seniors by family members, loan officers, and others as well as the use of unsuspecting seniors in property flipping and other HECM-related fraud schemes, and requests that financial institutions use certain key words within the Suspicious Activity Report (SAR) narrative section to assist law enforcement in identifying and prosecuting these crimes.

Among the trends and schemes reported in the guidance:

  • Cross Selling: involves the theft of a senior’s HECM loan proceeds through cross selling of financial products in violation of HUD rules.
  • Cash-out Theft: involves the theft of reverse mortgage proceeds by individuals who the senior trusts, including family members, care takers, and loan officers.
  • Property Flipping: involves a straw buyer transferring ownership of a typically low-value or problem property to an unsuspecting senior without going through a mortgage sale. Fraudsters instruct the straw senior to complete paperwork for a HECM loan against the property, using an overstated appraisal, or assume the identity of the senior to do so themselves.
  • Fake Down Payments: involves the HECM for Purchase program, which allows seniors to purchase homes using HECMs. Many HECM originators stopped accepting HECM applications from seniors who did not have a seasoned title as a result of the previously discussed property flipping scheme. To get around the new lender rules, fraudsters have started “selling” low-value properties to seniors. Using bogus gifts or fraudulent paperwork, fraudsters create the appearance of a large down payment by the senior to purchase the property. The senior is then instructed to take out a HECM loan on the existing home, based on an overstated appraisal, to complete the purchase of the low-value property.
  • Distressed Non-senior Mortgagors: Distressed mortgagors under the age of 62 may ask senior parents, other family members, or friends to take a HECM loan for them. In some cases, distressed mortgagors will submit fraudulent paperwork to take out the loan and receive the HECM loan proceeds directly.
  • Power of Attorney: involves a perpetrator who may use a power of attorney for the senior to apply for and close HECM loans without the full knowledge or participation of the victim.

More HECM Red Flags to Watch For

  • A senior communicates to the financial institution that he or she has invested HECM loan proceeds in an annuity or other financial product.
  • A senior completes a HECM, but deposits little to no funds into his or her bank account.
  • A senior takes HECM loan proceeds in a lump sum at closing. As noted earlier, seniors have the option of taking HECM loan proceeds at closing in a lump sum, a line of credit, an annuity, or a combination thereof. Fraudsters generally are not interested in a line of credit or an annuity.
  • A financial institution’s loan officer deposits or withdraws large amounts of cash or large dollar checks in a manner inconsistent with his income or duties at the institution. The loan officer also may be co-endorsing checks for large amounts and depositing them into business or personal accounts, possibly at another financial institution.
  • A HECM borrower withdraws large amounts of cash or has unusual spending activity. The unusual activity may involve purchases associated with a cross-selling fraud scheme
  • A senior homeowner says that he or she received the house free from a special government program. Fraudsters often convince unsuspecting straw seniors that new government programs provide free houses to qualifying seniors.
  • An appraisal uses comparable sales that are outdated or outside of the property’s neighborhood.
  • A senior’s credit report is inconsistent with information provided in the senior’s HECM loan application.
  • A distressed mortgagor quit claim deeds his/her property to parents or other seniors who then take out HECM loans to repay the underlying mortgages.
  • HECM loan proceeds are not deposited into the senior’s bank account and/or are used to pay off an existing mortgage in the name of someone other than the senior.
  • Monthly statements and other paperwork associated with the HECM loan are not sent to the senior’s address.

Assistance for Consumers

Financial institutions are encouraged to have their customers report HECM fraud, and any other type of FHA fraud, to the HUD OIG Hotline, http://www.hud.gov/offices/oig/hotline/index.cfm, 1-800-347-3735, hotline@HUDOIG.gov.


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