Homeownership

The 203 (k) Home Rehabilitation Mortgage Insurance Program was established to help promote the rehabilitation and repair of housing stock through a program that combines, in one insured mortgage, the funds needed to purchase and rehabilitate a single-family home. The loans are made by banks and other private lenders from their own funds and are insured by the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA). Reports of waste, fraud, and abuse in the 203 (k) program have raised serious concerns about HUD's management. GAO was asked to determine the risk posed by the 203(k) program to FHA's insurance fund relative to the 203 (b) program; (2) HUD's efforts to correct program deficiencies identified by HUD's Inspector General and others; and (3) weaknesses, if any, in HUD's oversight of the 203 (k) program and the extent to which lenders are complying with HUD's underwriting guidelines for making program loans. GAO found that the 203(k) loan program is more risky than HUD's largest single-family loan program--the 203(b) program--because it combines the risk of a traditional mortgage with the risk of a construction loan.

GAO noted that: (1) the 203(k) loan program is more risky than HUD's largest single-family loan program--the 203(b) program--because it combines the risk of a traditional mortgage with the risk of a construction loan; (2) for loans endorsed from fiscal years (FY) 1994 through 1996, the claim rate for loans made under the 203(k) program is almost double that of loans made under the 203(b) program; (3) HUD projects that while loans made under the 203(b) program in FY 1994 through FY 1998 will make money for the Mutual Mortgage Insurance Fund, it projects that 203(k) loans will cost the General Insurance Fund--that is, claims and other costs will exceed premiums and other income by over $25 million; (4) this cost represents approximately .7 percent of the total amount insured by the program, as of the end of FY 1998; (5) HUD stated that it finds this loss rate to be expected for a home rehabilitation program; (6) despite the recognized risk associated with the 203(k) program and the potential for mounting losses to the General Insurance Fund, HUD has done little to address the problems identified by its Inspector General and others; (7) in the past 4 years, reports by HUD's management, HUD's Inspector General, and others have repeatedly cited that it is highly vulnerable to waste, fraud, and abuse; (8) although HUD's management has, for the most part, agreed with the findings as reported, it has done little to address the problems; (9) the most recent study of the program--completed by outside contractors--found that the Department had done little to address the long term viability of the program and recommended that HUD radically redesign or eliminate it; (10) HUD is not adequately overseeing key aspects of the 203(k) program; (11) with respect to lenders, HUD's Homeownership Centers do not adequately ensure that lenders are complying with the program's guidelines; (12) at the four Homeownership Centers, GAO found that 203(k) loans were not targeted for review to ensure that the lenders are properly administering them; (13) in one center, HUD management made a conscious decision not to review 203(k) loans because it lacked trained staff; (14) HUD does not properly train and monitor 203(k) home inspectors and consultants, who are responsible for designing and overseeing the home rehabilitation process; (15) GAO also found cases in which the agency failed to address consultants' abuses or incompetence; and (16) HUD still does not adequately ensure that nonprofit organizations comply with HUD guidelines for participating in the program.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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