Single-Family Housing

Every year, the Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), insures billions of dollars in home mortgage loans made by private lenders. During fiscal year 1999, FHA insured 1.3 million mortgages valued at about $124 billion. Recent cases of mortgage fraud across the country have raised concerns about HUD's oversight of these lenders. This report provides information on HUD's oversight of lenders participating in FHA's mortgage insurance programs for single-family homes. Among other things, GAO found that 12 of 36 lenders had received 4 or more "poor" ratings from HUD's homeownership centers for their last 15 preclosing reviews. In addition, the homeownership centers' monitoring of lenders does not adequately focus on the lenders and loans that pose the greatest insurance risks to HUD. GAO summarized this report in testimony before Congress; see: Single-Family Housing: Stronger Oversight of FHA Lenders Could Reduce HUD's Insurance Risk, by Stanley J. Czerwinski, Associate Director for Housing and Community Development Issues, before the Permanent Subcommittee on Investigations, Senate Committee on Governmental Affairs. GAO/T-RCED-00-213, June 29 (nine pages).

GAO noted that: (1) HUD's process for granting FHA-approved lenders direct endorsement authority provides limited assurance that lenders receiving this authority are qualified; (2) according to HUD's guidance, FHA-approved lenders seeking direct endorsement authority must demonstrate acceptable performance in underwriting at least 15 mortgage loans, which undergo evaluations, known as preclosing reviews, by HUD's homeownership centers; (3) however, the guidance does not define what would constitute overall acceptable performance on the 15 loans; (4) in the 6 months prior to GAO's 1999 visits, the centers granted direct endorsement authority to a total of 36 lenders; (5) overall, 12 of the 36 lenders had received 4 or more poor ratings from the centers for their last 15 preclosing reviews; (6) contrary to HUD's guidance, the homeownership centers' monitoring of lenders does not adequately focus on the lenders and loans that pose the greatest insurance risks to HUD; (7) on-site evaluations of lenders' operations--known as lender reviews--are one of HUD's primary tools for assessing the quality of lenders' mortgage-lending practices; (8) HUD's guidance states that 85 percent of the lender reviews should be targeted at high-risk lenders; (9) however, the homeownership centers have often not reviewed the lenders that they consider to be the highest risk; (10) HUD has not taken sufficient steps to hold lenders accountable for poor performance and program violations; (11) although HUD's guidance allows the homeownership centers to suspend the direct endorsement authority of lenders that fail to comply with FHA's underwriting requirements, the centers have made limited use of this ability; (12) on the basis of GAO's analysis, if HUD had reviewed all of the lenders' fiscal year (FY) 1999 loans, the percentage of poor ratings could have been expected to exceed 30 percent; (13) of these lenders, 131 made 10 or more FHA-insured loans in FY 1999; (14) as of October 1, 1999, HUD's homeownership centers had not suspended the direct endorsement authority of any of the 131 lenders GAO identified; (15) in May 1999, HUD's headquarters implemented its Credit Watch program to terminate the loan origination authority of lenders with excessive defaults and insurance claims on FHA-insured mortgages; (16) however, because the program's regulations pertain only to the lenders that originated the troubled loans, HUD does not always hold accountable lenders that underwrote and approved the loans; and (17) according to HUD, the program's regulations did not permit HUD to take enforcement actions against these lenders.

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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