Reverse Mortgage Fraud & the False Claims Act
Reverse mortgage fraud is on the rise, and taxpayers are paying the bill. How?
A reverse mortgage is a type of home equity loan available only to elderly borrowers who have a large amount of equity in their homes. Essentially, the borrower cashes out the equity by taking a loan, usually paid to the borrower in a lump sum by a lender. The borrower puts up his or her home as collateral, and the borrower must repay the loan once he or she moves, sells the home, or passes away. (Usually, the borrower’s estate sells the home and uses the proceeds to pay off the loan).
Contrary to popular belief, it is possible for a borrower to default on a reverse mortgage. This is because the terms of the loan require the borrower to stay current on property taxes and insurance. If the borrower fails to pay taxes or insurance, he or she places the collateral at risk and the lender is allowed to foreclose the loan and seize the house.
Most importantly, reverse mortgages are insured by the federal government through the Federal Housing Administration or FHA. If a reverse mortgage loan defaults, and the lender cannot recover the full value of the loan by way of foreclosure proceedings, the lender can submit an insurance claim to the federal government to cover its losses, including interest dating back to the date of default.
The federal government has enacted a variety of regulations to ensure that lenders act quickly and take steps to minimize the government’s potential losses in the event of a default. For example, federal regulations require the lender to obtain an appraisal within 30 days of the date a reverse mortgage comes due, whether by default or otherwise. 24 CFR 206.125(b). The appraisal allows the government to determine the market value of the collateral and to assess its options.
Likewise, once a reverse mortgage is in default, the lender must, within six months, take first legal action towards foreclosure. 24 CFR 206.129. These measures are intended to protect the government by requiring lenders to act promptly. The lender cannot simply sit back, for months or years, and then file an insurance claim with the government, expecting to receive all of the back interest that has accrued.
Reverse mortgage lenders or servicers who fail to follow federal regulations and then submit insurance claims to the government, claiming that the regulations were in fact followed, commit a fraud against the government.
In fact, the federal government recently collected more than $29 million against a reverse mortgage servicer, Walter Investment Management Corp. for committing fraud against the government in connection with the servicing of reverse mortgages. A link to the Department of Justice press release can be found by clicking here.
If you know about reverse mortgage fraud, contact our attorneys for a free consultation.