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FHA Lenders Approving Ineligible Borrowers

Study examines borrowers with unpaid taxes

June 27, 2012

By staff

A government study found that some consumers who received government-insured mortgages were ineligible due to unpaid income taxes. Foreclosure rates are more than double on such borrowers. The report indicated that mortgagees already have the tools they need to identify ineligible borrowers and recommended changes to government lending policies.

The Federal Housing Administration insured 6,327 mortgages for $1.44 billion to borrowers who benefited from the 2009 American Recovery and Reinvestment Act and had unpaid federal tax debt.

First-Time Homebuyer Credits created through the act were claimed by 3,815 of the FHA borrowers for $27.4 million.

Those findings were reported by the Government Accountability Office, which studied FHA and Internal Revenue Service data to determine who benefited from the programs and what challenges FHA faces in preventing ineligible tax debtors from receiving mortgage insurance.

While there was no outstanding tax-debt requirements for those taking advantage of the tax credit, FHA mortgage insurance is prohibited for taxpayers who have delinquent taxes unless they repay the debt or are in a valid repayment agreement with the IRS.

Based on a sampling of FHA borrowers for whom complete data was available, GAO found that five-out-eight of the borrowers were ineligible for FHA mortgage insurance because they had unpaid tax debt and were not in valid repayment agreements at the time of their loans.

"In addition, GAO found that Recovery Act borrowers with unpaid taxes had foreclosure rates two to three times greater than borrowers without unpaid taxes, which potentially represents an increased risk to FHA," the report said.

FHA documentation shortcomings were partly responsible for the violations, as were policy misinterpretations by FHA mortgagees.

Although lenders are authorized to obtain tax debt information through the IRS Form 4506, which is already a required document, such a process is not addressed in FHA policy.

Requiring lenders to obtain reliable tax debt information from the IRS on FHA loans could help prevent ineligible tax debtors from obtaining FHA mortgage insurance, according to the GAO.

"Further, FHA's policies requiring lenders to investigate whether tax liens indicate unresolved tax debt are unclear and may be misinterpreted," the report said. "The lenders GAO spoke with believed they were in compliance with FHA's policies when they provided FHA-insured loans to applicants with tax liens and no repayment agreements, but FHA officials indicated otherwise."

The GAO recommends that the Secretary of the Department of Housing and Urban Development should direct the Federal Housing Commissioner to consult with the IRS and develop written policies that require mortgagees to collect and evaluate IRS documentation that would enable them to identify ineligible applicants with unpaid federal taxes.

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