The Federal Housing Administration must guide mortgage servicers on how to address the rising number of senior citizens who are defaulting on their federally insured reverse mortgages, according to a report by the Department of Housing and Urban Development's inspector general.

HUD auditors have discovered that four servicers are holding 13,000 FHA-insured home equity conversion mortgages on which the borrowers had technically defaulted by not paying the real estate taxes and insurance on their homes.

The defaulted loans had a maximum claim amount of more than $2.5 billion, according to the 19-page audit released Aug. 25.

The servicers continue to service these home equity conversion mortgages, paying taxes and insurance for the borrowers totaling $35 million but without informing HUD, the report said.

"If HUD does not take action, additional payments will occur in the next 12 months," the auditors said. Two of the servicers told the auditors they are waiting for HUD to issue guidance on how to handle the defaulted loans.

FHA officials said they are drafting new guidance that will instruct servicers to contact defaulted borrowers and "require specific actions to bring the loan into compliance with the terms of the mortgage," an FHA official said in a written response to the audit report.

The Obama administration requested a $250 million subsidy this year for the reverse mortgage program. HUD Secretary Shaun Donovan testified before Congress this year that the program needed long-term reforms and the agency could raise premiums or adjust the home equity conversion program's loan-to-value limits.

FHA said it intends to modify its systems to track and monitor defaulted home equity conversions on which servicers are advancing funds.

More defaulted loans may be found since the unreported defaults were obtained from just four of the 16 home equity conversion servicers nationwide, the auditors said.

HUD stopped collecting reports on such defaults in April 2009. At that time, reported home equity conversion defaults totaled 7,000, the report said.

The auditors estimated that the 12,958 defaulted mortgages held by the four largest servicers and the 7,673 defaulted home equity conversions known to HUD could produce losses of $1.47 billion to the FHA insurance fund if the loans end up in foreclosure and the properties have to be sold.

The home equity conversion program lets homeowners obtain income tapping the equity in their homes.

During fiscal year 2009, about 83% of home equity conversion borrowers withdrew their credit lines as lump sums once the loan closed. So the borrowers have no additional funds to draw on, and payment of taxes and insurance by the servicer would cause the loans immediately to exceed the principal limit and be in default.

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