HUD Report Card in 2 Words: Needs Improvement

HUD is struggling to make the grade, regardless of potentially valid excuses.  That’s the short version.  The longer version in today’s testimony from David A. Montoya,rnInspector General of the U.S. Department of Housingrnand Urban Development (HUD) was slightly more diplomatic. rnWhile the IG was critical of HUD’s handling of several key programs, hernsaid the agency is challenged in attempting to exercise an appropriate level ofrnoversight to prevent or mitigate fraud and waste because of its limited staff. rn</p

Over the years, Montoya said, HUD has seen a steadyrndecline in itsrnstaffing level while at the samerntime it has been called upon tornadminister an increasing number of programs. At the end of fiscal year 2012,rnHUD had just over 8,300rnstaff compared to aboutrn9,700 a decade earlier andrneven greater levels in the 1990s.  Consequently HUD has been forced to utilizernsubcontractors heavily while lacking the funds to effectively monitor them, andrnto depend on state and local agencies receiving HUD funds to conduct their ownrnoversight and due diligence. These resource constraints are being exacerbatedrnby the effects of sequestration.   </p

HUD is also negatively affected by the lack of an integratedrnfinancial system.  Thisrnimpedes its ability to generate and report the information needed to both prepare financial statements and, more importantly,rnmanage operations and to conductrnmore robust oversight and mitigate fraud, waste and abuse.</p

The IG spoke specifically about problems his office hadrnobserved with HUD’s administration of programs directed towards victims ofrndisasters, its administration of the Public and Assisted Housing Program, CommunityrnBlock Grant Programs (CDBG) and the HOME programs, and especially of variousrnfailings in the FHA program.  </p

FHA’s Mutual Mortgage Insurance (MMI)rnFund has been operating below the congressionally mandated 2 percent capitalrnratio for the last four years and current projections are that it will notrnreach the 2 percent level until 2017. rnThis means that FHA may have to use its mandatory appropriationrnauthority to supplement its reserves. rnHUD has increased premiums and taken other steps to restore the fund, whilernOIG has focused on civil fraud investigations with the Department of Justice inrnan effort to further prevent fraud, waste and abuse and return losses to thernMMI account.</p

Working with DOJ, OIG has initiated arnnumber of mortgage lender reviews in order to determine the accuracy and due diligencernof underwriters of FHA loans for the largest nationwide lenders.  Montoya said the reviews have found highrnpercentages of loans with multiple significant deficiencies that should notrnhave been underwritten.  These reviewsrnhave resulted in a total of $1.24 billion in civil settlements.  Montoya said the OIG reviews should have beenrnundertaken by HUD itself as part of its inherent program of oversight and riskrnmanagement.  </p

Auditing of lenders continues and to date, he said, the underwriting of thousands of FHA insuredrnloans has been reviewed, as has the overallrnFHArnloan origination and underwriting practices of thernselected lenders.  Resultsrnto date have been presented tornnearly all of the lenders andrnsettlement talks have begun; however,rnthe reviews are still underway.rn Given the sheer volume ofrnloans involved andrnthe high error ratesrnidentified in thernunderwriting, settlements and favorablerncourt actions may resultrnin significant recoveries by the government from eachrnof thern10 lenders.  A second initiative focusing on large lenderrncompliance is currently underway.</p

In addition to the focus on civil fraud,rnthernFHA single-family programrncontinues tornbe a major focus ofrnHUD OIG, Montoya said.    During the last twornsemiannual reporting periods, OIG issuedrn25 audits inrnthis program area reporting $325 million in questioned costs and nearly $800 million in funds tornbe put to better use. OIG also found that HUD continues to face challenges in ensuring its programs benefit eligiblernparticipants and that they are not paying improper claims.  OIG recently identified an estimated $1.06rnbillion in claims for 11,693 short sales that did not meet the criteria forrnparticipation in the program.  Anotherrnaudit found borrowers using the Home Equity Conversion Mortgage (HECM) Programrndid not always meet the programs residence requirements.</p

Finally, OIG audited HUD’s oversight of its REO managementrnand marketing program and found that HUD did not have adequate procedures inrnplace to ensure consistent and adequate enforcement of asset and field servicernmanager contracts.  </p

In comparing the FHA REO program with that of Fannie Mae andrnFreddie Mac, the Government Accountability Office (GAO) found FHA lagged bothrnenterprises in several areas.  It took 60rnpercent longer (200 versus 340 days) for FHA to dispose of a property after foreclosure,rndelays that may have cost it as much as $400 million in additional proceeds andrnincreased holding costs by $600 million.  </p

Montoya also noted that HUD has hadrnsignificant management challenges in monitoring disaster program funds.  This grows out of the limited resources for oversight,rnthe breadth of some of the programs and the length of time needed to completernthem, the ability to waive certain of its own requirements, and the lack ofrnunderstanding of the disaster grants on the part of their recipients.  </p

Montoya noted in particular OIG’srnfollow-up review of its recommendations pertaining to the State ofrnLouisiana’s Road HomernElevation Incentive program.  The initial review found that most homernowners who received grants in 2006 and 2007 to elevate their homes had not donernso and most, when interviewed, revealedrna lack of understanding about their obligations. The follow-up found that as of August 31, 2012,rnLouisiana did not have conclusive evidencernthat the $698.5 million in Community Development Block Grant (CDBG) fundsrnprovided it by HUD had been used to elevate homes.  In response, HUD’s Office of CommunityrnPlanning and Development (CPD) concurred with the State and allowed homeowners whornreceived the funds to demonstrate that they used them either to elevate orrnrehabilitate their homes, a decision with which OIG last weekrnnon-concurred.   </p

Montoya said correction of HUDsrnproblems in this area are critical given the money yet to be distributed tornvictims of Hurricane Sandy.  The greatestrnimprovement that could be made, he said, is to put a time limit on completionrnof disaster related projects.

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