GAO Report Criticizes HUD

The Government Accounting Office recently executed the annual performance audit of the U.S. Department of Housing and Urban Development’s oversight of Federal Housing Administration-approved lenders.

In analyzing how well HUD follows its guidance, the auditors found HUDs four regional homeownership centers have not been consistent when granting lenders direct endorsement authority.

Lenders desiring the ability to underwrite and approve FHA loans without HUDs prior review must submit, within a one-year probationary period, at least 15 mortgage loans for HUD to assess performance as “good” or “fair,” including the last 5 consecutive loans. Out of the 49 lenders approved for direct endorsement authority between Oct. 1, 2003, to April 30, 2004, HUDs homeownership centers granted authority to seven mortgagees who did not submit the loans required for assessment.

The audit also found that HUD has limited its ability to suspend or terminate poorly performing lenders from the FHA program. Between fiscal year 2003 and the first half of 2004, HUDs homeownership centers suspended seven of the 2,900 direct endorsed lenders.

The GAO noted HUD has terminated the loan origination authority of 262 lender branch offices and has recently proposed changes to make its Credit Watch program more effective as a means of sanctioning lenders responsible for high rates of defaults and insurance claims. However, the auditors highlighted that the Mortgagee Review Board can take over a year to enforce action against program-violating lenders and extended periods of time have “allowed nine lenders to continue making FHA-insured loans for over a year without being held accountable for their violations.”

The auditors also examined the extent to which HUD uses a risk-based approach when monitoring FHA lenders and found limitations on the effectiveness of its monitoring tools. The Office said the rating system HUD uses when performing technical reviews, also known as desk audits or off-site evaluations of the underwriting quality of FHA-insured loans, does not reflect detected underwriting errors that pose greater risk to the insurance fund. The technical review reports do not help HUD identify loans that have a high probability of default or claim and loans susceptible to fraud, according to the Office.

In the fiscal year 2003 and the first half of fiscal year 2004, HUD generally reviewed those lenders that met its targeting criteria, but its reports do not distinguish whether the review is conducted off-site or on-site at the lenders office, which easily permits the review of more loans. The auditors’ manual search of records reportedly showed that 70 of the 910 lender reviews conducted by HUD in fiscal year 2003 were off-site.

In an October commentary letter to the GAO, Federal Housing Commissioner John C. Weicher reportedly agreed that HUD would update its guidance for granting direct endorsement authority and ensure that the homeownership centers consistently applied the requirements to grant such authority.

Additionally, HUD stated that its lender tracking system had been modified to distinguish between desk and on-site reviews, noted that it was aware of the limitations of its information system, and that it was pursuing system enhancements to ensure the required review of loans made by new direct endorsement lenders.

The Commissioner also stated that HUD was “in the final phase of implementing a new technical review rating system, to be completed by January 2005.”