An audit from the U.S. Department of Housing and Urban Development (HUD)’s Office of Inspector General (OIG) found that more than 1,200 reverse mortgage borrowers could exhaust funds set aside to pay property taxes and insurance years earlier than expected, potentially exposing HUD to hundreds of millions of dollars in losses.
The audit, released May 5, examined the effectiveness of the Home Equity Conversion Mortgage (HECM) program’s Life Expectancy Set Aside (LESA) accounts, which are required for certain financially vulnerable reverse mortgage borrowers to cover property taxes, hazard insurance and flood insurance.
Auditors found HUD underestimated how quickly these costs would rise, causing some LESA accounts to deplete faster than projected.
The OIG estimated that 1,237 HECM borrowers will need to begin paying property charges out of pocket because their LESA funds will run out in “significantly less time than HUD estimated they would last.”
Auditors warned that borrowers who cannot make these payments could default on their reverse mortgages, resulting in projected losses to HUD of as much as $258 million.
The audit reviewed a universe of 1,462 active HECM loans originated between 2018 and 2022 that showed signs of early LESA depletion. From a sample of 80 loans, auditors found that 72 either had fully depleted LESA balances or were projected to run out an average of six years sooner than HUD estimated.
Of these loans, 25 LESA accounts had already been exhausted at the time of the audit, while 47 were on track for accelerated depletion.
The report said rising property taxes and insurance premiums were a major factor. Although HUD’s formula includes a 120% multiplier intended to account for future increases, auditors found 31 of the 72 affected borrowers experienced increases beyond these projections.
Examples cited in the report included a California borrower whose annual property taxes and insurance costs rose from $2,103 in 2021 to $12,262 in 2024 — a 483% increase. A Texas borrower’s costs climbed from $2,362 in 2020 to $8,012 in 2024, up 239%.
Auditors also criticized HUD for relying on life expectancy tables dating back to the late 1970s and early ’80s, and for failing to periodically review whether LESA calculations remained effective.
The OIG recommended that HUD’s Office of Single Family Housing periodically evaluate the LESA formula and monitor whether active LESA accounts are depleting at accelerated rates.
HUD officials agreed to evaluate the current formula but disputed several of the audit’s conclusions, including the projected $258 million loss estimate.
In its response, HUD said depleted LESA balances do not necessarily lead to borrower defaults, noting that 90% of current HECM borrowers with depleted LESA balances had not reported tax or insurance defaults as of February 2026.
HUD also argued the OIG overstated projected losses by applying a 72.3% loss rate. According to HUD’s Office of Risk Management, average loss rates were 33.2% for HECM real estate-owned properties and 26.9% for HECM note sales.
The audit noted that HUD currently holds 41,002 HECMs with LESA accounts in its portfolio.
Separately, the National Reverse Mortgage Lenders Association (NRMLA) said it plans to form a working group to gather additional data and develop recommendations for HUD to consider as it evaluates potential improvements to LESA calculations.
Sarah Wolak reported and wrote this article with drafting assistance from HousingWire Automation, an editorial tool that helps transform announcements and industry data into HousingWire-style news coverage.
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