The Department of Housing and Urban Development is investigating claims of fraud in the reverse-mortgage industry, an agency official said.

HUD began this week to examine reports that companies are charging senior citizens to provide them with information about reverse mortgages, said Parker Deal, director of quality assurance for the agency. HUD provides that information for free.

The probe, coming just as the fledgling reverse-mortgage industry gains momentum, could be a serious blow to the highly touted product.

"One alternative that HUD and Fannie Mae have discussed is to stop doing the program," said one source close to agencies. "They don't want anyone to get hurt."

Reverse mortgages allow older homeowners to tap into home equity without selling their residence or incurring monthly payments. The reverse mortgage will, for example, allow the borrower to pay for at-home medical care rather than moving into a nursing home.

The American Association of Retired Persons has even endorsed the product, and provides a list of lenders qualified to make these loans to its members.

"If HUD finds that someone is abusing the product, it would be contrary to the spirit of the whole program," said Terrance G. Hodel, president of North American Mortgage Co., Santa Rosa, Calif.

According to one reverse-mortgage servicer, senior citizens were charged as much as 8.5% of the loan's value to receive information on these loans from a brokerage house, then encouraged to put the equity from their home into risky annuities.

"Sometimes, these (homeowners) didn't even know they were taking out a reverse mortgage," the servicer said.

Sacramento, Calif.-based Patriot Inc., formerly known as American Trust, is reportedly under investigation for such practices. HUD could not confirm or deny those reports.

HUD does not know how many borrowers may have paid referral fees, Mr. Deal said, but all the loans being investigated are part of the FHA program. Approximately 20,000 such loans have been guaranteed since the program's inception in 1989.

The investigation was sparked originally by complaints filed with the AARP, a representative of the group said.

At least one reverse-mortgage servicer said it had been aware of the problem since mid-December, when it instructed its correspondents to refuse loans referred from certain companies. The company also notified HUD of the problem then, the servicer said.

Mortgage lenders were upset to learn that there may be fraud in the already slow-to-grow program.

"HUD's investigation could scare some (potential borrowers) away" from reverse mortgages, said Mark Korell, president of Norwest Mortgage Inc.'s lenders and investor services group. "But there is a good product out there."

Mortgage industry observers expect the market for reverse mortgages to grow significantly in the next few years.

"The potential for reverse-mortgage loans is immense," according to a recent report from SMR Research, Budd Lake, N.J. It found that more than 23 million American homes are owned free of debt, most of them by older people.

HUD will be mounting an aggressive campaign to let older homeowners know that reverse mortgage information is available free of charge, an agency spokesman said.

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