An internal government watch dog has issued a scathing report on HUD's popular FHA insurance program, saying it is doing very little to avoid losses and even less to resell foreclosed homes after they have been taken back.

The report, issued by the Department of Housing and Urban Development Office of Inspector General, puts a cloud over Clinton/Gore Adminstration boasts that its initiatives have driven homeownership in America to record highs, with more than 65 percent of families now owning their own homes.

The report hints that those initiatives, while good at getting low-income families into homes, may be powerless to keep them there.

"What happens when one of these homeowners fails to pay his mortgage?" the report questions. "Does he lose his house? Under HUD's new Loss Mitigation program, the government carries the delinquent. Claims against this program -- and consequently the FHA Insurance Fund -- are expected to skyrocket as the department's default ratio climbs."

FHA is one of the nation's oldest and most popular vehicles for helping low-income Americans into homes, providing mortgage insurance when private industry is unwilling to do so. Currently about 6.2 million homes, worth about $475 billion, are FHA insured.

The new report suggests, however, FHA may have made homeownership too easy, allowing people to buy homes without thought to how they would keep up payments in the event of job loss, health emergency, separation from spouse or other financial downturn.

In many cases, it appears, the government is accepting large losses before stepping in and foreclosing on the homes. In the first of two audits, the OIG reviewed four large servicing mortgagees, the Single Family Claims Branch, and the National Servicing and Loss Mitigation Division. It also conducted lower scale review at four small servicing mortgagees, HUD's Quality Assurance Division and at HUD's four Home Ownership Centers.

According to the analysis, the four large mortgagees reviewed serviced 1.7 million insured loans, or 27 percent of FHA's insured loan portfolio. From October 1996 through May 1999, HUD paid 18,609 loss mitigation activities. The four mortgagees were paid for 11,349 of these claims, or 61 percent, of the total claims paid.

"We identified significant weaknesses within the program that could seriously impact the program's effectiveness," the report said.

Weaknesses were identified in incentive claim payments; monitoring and oversight of servicing mortgagees; and default status reporting.

"HUD needs to initiate corrective action in these areas to ensure the program is carried out more effectively and that the mortgage insurance fund is protected against unnecessary losses," the report said.

The second audit was a follow to a Government Accounting Office review in March 1998.

The GAO had looked at FHA's Property Disposition Program and concluded it did not have adequate controls in place to oversee its Real Estate Asset Management contractors and that property conditions of foreclosed homes were deteriorating. The HUD Inspector's audit disclosed "no improvement" in the program since the GAO report.

Instead, the reports states, "Since HUD consolidated its field operation, inventory increased, sales to homeowners declined, age and condition of FHA properties deteriorated, revenue was lost, and holding costs increased. FHA continued to have poor control over its REAM contractors."

The report noted that staff shortages were caused by the reorganization. FHA management issued emergency contracts, and placed temporary, inexperienced, or untrained HUD staff in property disposition jobs.

"The effort did not overcome the problems," said the inspector report. "FHA received numerous reports of non-performance by REAMs, but took little enforcement action because it had no system to record, track, or quickly respond to these reports."

Published: October 6, 1999

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