HUD Did Not Always Provide Adequate Oversight of Its Section 203(k) Rehabilitation Loan Mortgage Insurance Program

We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of its Section 203(k) Rehabilitation Loan Mortgage Insurance program as part of the activities in our fiscal year 2014 annual audit plan.  Our audit objective was to determine whether HUD had adequate oversight of its Section 203(k) program. HUD needs to improve its monitoring of lenders for compliance with the Section 203(k) program requirements because lenders did not always ensure that (1) borrowers or contractors obtained required building permits to rehabilitate properties and (2) contractors were licensed or certified to perform rehabilitation work.  In addition, lenders did not always ensure that contractors’ cost estimates contained clear descriptions of the proposed repairs to determine eligibility for the Streamlined (k) program.  As a result, HUD lacked assurance of the soundness of the repairs, thus potentially impacting the safety of the borrowers and increasing the risk to the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund by more than $1.2 million. Further, HUD did not always ensure that (1) loan-to-value ratios were correctly calculated when determining borrowers’ monthly mortgage insurance premiums and (2) lenders properly entered borrowers’ loan information into FHA Connection.  As a result, HUD lacked assurance that it (1) properly managed the risk to FHA’s Mutual Mortgage Insurance Fund and (2) protected the interests of borrowers due to the overpayment of mortgage insurance.  We estimate that nearly 28,000 borrowers had overpaid their premiums by more than $3.2 million as of December 31, 2014, and will continue to overpay their premiums by more than $1.9 million over the next year. We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require lenders to (1) support or indemnify HUD for any future losses on the 40 loans with estimated losses totaling more than $1.2 million and (2) support or reimburse HUD for the actual losses incurred on two loans totaling $83,322.  We also recommend that HUD (1) strengthen its controls over Section 203(k) program requirements, (2) adjust the formula for calculating the loan-to-value ratio, (3) determine the overpaid mortgage insurance premiums for loans with incorrect loan-to-value ratios, and (4) credit the accounts of active borrowers who overpaid their mortgage insurance premiums and refund overpaid premiums to borrowers for terminated loans.