Reverse-Mortgage Safety Nets Are Running Out Years Early

HUD's Office of Inspector General⧉ -- HUD's independent statutory watchdog, distinct from the housing office it audits -- found that an estimated 1,237 borrowers in the Home Equity Conversion Mortgage (HECM) program, the federally insured reverse mortgage that lets homeowners 62 and older convert home equity into cash, are watching their built-in safety net run dry years before the government's own math said it would.▸ That safety net is the Life Expectancy Set-Aside, or LESA: for borrowers HUD's own screening flagged as financially vulnerable, the lender sets aside part of the loan to pay property taxes and insurance directly, for as long as the borrower is expected to live. When it runs out, the borrower has 30 days' notice before those bills become their own -- and missing them triggers default on the loan that holds their home.

OIG didn't audit the whole HECM portfolio.▸ It built a targeted universe: 1,462 active loans with fully funded LESAs, closed between 2018 and 2022, worth $357 million in combined maximum claim amount, that already showed signs of running down faster than projected. From that universe, auditors pulled a statistically representative sample of 80 loans and opened the files -- payment histories, tax and insurance records, the original LESA calculation itself. Seventy-two of the 80 -- 90% -- had LESAs that were either already fully depleted or on track to run out an average of six years before HUD's own formula estimated. Projected across the full universe, that rate implies 1,237 borrowers headed for the same cliff.

HUD's LESA formula isn't naive about rising costs -- it already applies a 120 percent multiplier to a borrower's current property tax and insurance bill, banking a 20% cushion against future increases.▸ That cushion wasn't close to enough for a third of the deficient loans: 31 of the 72 borrowers with problem LESAs saw their property charges rise by an average of 192%, concentrated in California, Florida, Colorado, Texas, and Arizona -- states where property values, and the taxes and insurance premiums tied to them, climbed hardest in exactly this window. One California borrower's combined tax-and-insurance bill went from $2,103 in 2021 to $12,262 by 2024 -- a 483% increase, more than 24 times the buffer HUD's formula assumed.

The deeper problem, per OIG, is that nobody at HUD was watching.▸ HUD's LESA formula calculates a borrower's life expectancy using the U.S. Decennial Life Table for 1979-1981 -- published in August 1985 by the Department of Health and Human Services, and never swapped out for a newer table even as HHS has updated the underlying tables several times since. HUD periodically checks HECMs that have already defaulted or foreclosed for portfolio-wide risk patterns, OIG found, but never built a process to check active LESAs against their own depletion timeline -- there simply was no requirement to look. Auditors separately flagged 27 of the 80 sampled loans for a rounding step in the age calculation that HUD's own Handbook 4000.1 governs -- a finding HUD's housing office disputes as reasonable practice rather than an error (below).

OIG's single recommendation is procedural: have the Deputy Assistant Secretary for Single Family Housing periodically evaluate whether the LESA formula still works and whether active accounts are depleting early.▸ In its written reply -- reprinted in full in Appendix B -- Single Family Housing agreed to do that evaluation, without attaching a target date.

It's the dollar figure the two sides can't agree on.▸ OIG converted depleted LESAs into a dollar loss using a 72.3% loss rate, pulled from HUD's own Single Family Acquired Management System records covering 1,144 properties. Single Family's Office of Risk Management countered with its own numbers -- a 33.2% loss rate for foreclosed properties HUD later resells, and 26.9% for note sales -- both less than half of OIG's figure, and both grounds for calling the $258 million estimate overstated. OIG's rebuttal, also in the report: the Risk Management figures leave out foreclosure and holding costs -- acquisition, repairs, taxes, maintenance, sales expenses -- that its own SAMS data captured.

Run OIG's $258 million through Single Family's own disputed numbers instead of its own, and the range moves a lot: applying the 33.2% rate scales the estimate to roughly $118 million; the 26.9% rate brings it to roughly $96 million -- as low as 37% of OIG's figure, using inputs HUD's own risk office supplied.▸ Neither office published a recalculation using the other's rate; this is the arithmetic each side's own cited number implies. Single Family went further than disputing the rate: it cited HUD data as of February 28, 2026 showing that 90% of non-terminated HECM borrowers with an already-depleted LESA balance had not reported a tax-and-insurance default -- its evidence that a drained LESA doesn't automatically mean a lost loan, whatever the eventual dollar exposure turns out to be.

OIG's 1,462-loan universe was deliberately narrow -- loans already flagged as running more than 10% ahead of HUD's projected depletion schedule.▸ HUD's current LESA portfolio holds 41,002 HECMs -- about 28 times the size of the group OIG sampled from -- and every one of those loans was built on the same 1985-vintage life table and the same 20% cushion that failed a third of the deficient loans in this sample. OIG's own framing: as property taxes and insurance keep climbing, more of that larger pool will hit the same wall, on the same formula nobody's required to recheck. Nothing in HUD's response commits to fixing the formula itself -- only to evaluating whether it needs fixing, with no completion date yet on record.