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Performance and Accountability Series:



January 2003:



Major Management Challenges and Program Risks:



Department of Housing and Urban Development:



GAO-03-103:



A Glance at the Agency Covered in This Report:

The Department of Housing and Urban Developmentís complex and diverse 

mission is to promote:

* adequate and affordable housing by making homeownership more 

accessible and less expensive;

* the development of affordable and decent rental housing for low-
income 

families;

* economic opportunity by supporting community and economic development 

efforts, including strengthening and expanding community partnerships, 

providing capital to create and retain jobs, and improving economic 

conditions in distressed communities; and

* a suitable living environment, free from discrimination, by enforcing 

fair housing laws and educating lenders, landlords, and tenants in 

complying with the laws.



The Department of Housing and Urban Developmentís Budgetary and Staff 

Resources



[See PDF for image]



a Budgetary resources include new budget authority (BA) and unobligated 

balances of previous BA. Budgetary resources exclude unobligated 
balances 

from the FHA-Mutual Mortgage and Cooperative Housing Insurance Funds, 

FHA-General and Special Risk Insurance Funds and Guarantees of 
Mortgage-

Backed Securities Liquidating Accounts.

b Budget and staff resources are actuals for FY 1998-2001. FY 2002 are 

estimates from the FY 2003 budget, which are the latest publicly 

available figures on a consistent basis as of January 2003. Actuals for 

FY 2002 will be contained in the Presidentís FY 2004 budget to be 

released 

in February 2003.

Source: Budget of the United States Government.



[End of figure]



This Series:



This report is part of a special GAO series, first issued in 1999 

and 

updated in 2001, entitled the Performance and Accountability Series: 

Major 

Management Challenges and Program Risks. The 2003 Performance and 

Accountability Series contains separate reports covering each cabinet 

department, most major independent agencies, and the U.S. Postal 

Service. 

The series also includes a governmentwide perspective on 

transforming the 

way the government does business in order to meet 21st century 

challenges 

and address long-term fiscal needs. The companion 2003 High-Risk 

Series: 

An Update identifies areas at high risk due to either their 

greater 

vulnerabilities to waste, fraud, abuse, and mismanagement or major 

challenges 

associated with their economy, efficiency, or effectiveness. A list 

of all 

of the reports in this series is included at the end of this report.



GAO Highlights:



Highlights of GAO-03-103, a report to Congress included as part of 

GAOís 

Performance and Accountability Series



Why GAO Did This Report:



In its 2001 performance and accountability report on the U.S. 

Department 

of Housing and Urban Development (HUD), GAO identified two of 

HUDís major 

program areasósingle-family mortgage insurance and rental 

housing 

assistanceóas high risk. GAO also reported that HUD faced major 

management 

challenges concerning its human capital and programmatic and 

financial 

management information systems.   The information GAO presents 

in this 

report is intended to help to sustain congressional attention 

and a 

departmental focus on continuing to make progress in addressing 

these 

challenges and ultimately overcoming them. 



What GAO Found:



HUD has made progress since January 2001 in addressing 

identified 

weaknesses in its high-risk program areas and management 

challenges 

but significant challenges remain.  GAO is maintaining the 

departmentís 

single-family mortgage insurance and rental housing assistance 

program 

areas as high risk at this time. In the single-family mortgage 

insurance program, HUD has, among other things, developed new 

processes 

to review lenders and appraisers and implemented new incentives 

to improve 

the performance of its property disposition contractors.  

However, many of 

HUDís strategies for resolving problems in its high-risk program 

areas 

represent new initiatives in early stages of implementation, and 

evidence 

shows that significant problems remain.  In its rental housing 

assistance 

programs, HUD estimates that rental subsidy overpaymentsósome $2 

billion 

out of $19 billion in assistance in fiscal year 2000óare greater 

than 

previously estimated; implementation of a new assessment system 

for public 

housing agencies has been delayed; and correcting housing 

quality 

violations remains problematic.  HUD is in the early stages of 

developing 

a strategic human capital planning approach and has not yet 

developed a 

comprehensive plan to resolve serious, long-standing 

programmatic and 

financial management information system deficiencies.  

GAO is retaining 

human capital and programmatic and financial management 

information systems 

as major management challenges.  In addition, GAO is 

designating 

acquisitions management as a new major management challenge 

because of 

HUDís extensive and growing reliance on contractors, as 

well as 

identified weaknesses in monitoring and oversight of these 

contractors, 

managing and training its acquisitions workforce, and 

developing 

information systems that support contracting. These management 

challenges 

cut across HUDís program areas and contribute to GAOís 

high-risk 

designations.  



What Remains to Be Done:



HUD needs to

*	improve management and oversight of its single-

family mortgage 

insurance programs, to reduce risk of losses from loan 

defaults or fraud;

*	ensure that its rental housing assistance programs 

operate 

effectively and efficiently, specifically ensuring that 

subsidy payments 

are accurate, subsidy recipients are eligible, assisted 

housing meets 

quality standards, and contractors perform as expected; 

and 

*	resolve issues concerning its programmatic and 

financial management 

information systems, human capital, and acquisitions 

management.



www.gao.gov/cgi-bin/getrpt?GAO-03-103.



To view the full report, click on the link above.

For more information, contact Thomas J. McCool at (202) 

512-8678 or 

mccoolt@gao.gov.



Transmittal Letter:



Major Performance and Accountability Challenges:



GAO Contacts:



Related GAO Products:



Performance and Accountability and High-Risk Series:



This is a work of the U.S. Government and is not subject 

to copyright 

protection in the United States. It may be reproduced and 

distributed 

in its entirety without further permission from GAO. It 

may contain 

copyrighted graphics, images or other materials. Permission 

from the 

copyright holder may be necessary should you wish to 

reproduce 

copyrighted materials separately from GAOís product.



Transmittal Letter January 2003:



The President of the Senate

The Speaker of the House of Representatives:



This report addresses the major management challenges and program risks 

facing the U.S. Department of Housing and Urban Development (HUD) as it 

works to carry out its multiple and highly diverse missions. The report 

discusses the actions that HUD has taken and that are under way to 

address the challenges GAO identified in its Performance and 

Accountability Series 2 years ago. Also, GAO summarizes the challenges 

that remain, new ones that have emerged, and further actions that GAO 

believes are needed.



This analysis should help the new Congress and the administration carry 

out their oversight responsibilities for HUD, helping to improve 

government for the benefit of the American people. For additional 

information about this report, please contact Thomas J. McCool, 

Managing Director, Financial Markets and Community Investment, at (202) 

512-8678 or at mccoolt@gao.gov.



David M. Walker

Comptroller General 

of the United States:



Signed by David M. Walker



[End of section]



Major Performance and Accountability Challenges:



The Congress has long been concerned with management problems at HUD. 

Over time, these have included an inefficient organizational structure, 

inadequate human capital planning, and outdated and inefficient 

information technology, as well as overlapping, complicated, and poorly 

designed programs. At one time, the Congress was considering 

dismantling HUD and transferring its programs to other 

agencies.[Footnote 1] In recent years, HUD has undertaken various 

management reform initiatives to address these deficiencies, a task 

made difficult by the fact that the agency has a complex and diverse 

mission and must work through thousands of intermediaries to deliver 

its programs. As we have reported in recent years, HUD has made 

progress toward overhauling its operations. The current leadership 

faces the challenge of sustaining this progress in order to achieve the 

departmentís goal of becoming a high-performing agency. As part of 

efforts to address management challenges across the government, the 

Office of Management and Budget presented the Presidentís Management 

Agenda for fiscal year 2002. In addition to the governmentwide 

initiatives, the agenda includes agency-specific initiatives to address 

the most significant management challenges. For HUD, the agenda 

includes initiatives related in part to the departmentís high-risk 

areas and management challenges identified by GAO: improving the 

performance of housing intermediaries, reducing overpaid rent 

subsidies, improving risk management at the Federal Housing 

Administration (FHA), and strengthening program controls.[Footnote 2]



In our January 2001 report on HUDís management challenges and program 

risks,[Footnote 3] we reported that HUD had made credible progress in 

addressing some of its long-standing management deficiencies. For 

example, HUD had completed its first physical inspections and financial 

assessments of the inventory of assisted and insured multifamily 

housing properties to assess the condition of these properties; taken 

steps to develop an information technology (IT) investment management 

process to improve and strengthen the selection, control, and 

evaluation of IT projects; and piloted a new resource estimation and 

allocation process to determine appropriate staffing levels. 

Recognizing the progress HUD had made, and consistent with our criteria 

for determining high risk, we redefined and reduced the number of HUD 

programs deemed to be high risk. Specifically, because of the actions 

HUD took to improve management controls, we concluded that community 

planning and development programs were no longer at high risk. However, 

because significant weaknesses persisted in two major program areas--

single-family mortgage insurance programs and rental housing assistance 

programs--we retained their high-risk designations. Additionally, we 

identified as major management challenges HUDís (1) programmatic and 

financial management information systems and (2) human capital 

management.



Since January 2001, HUD has made efforts to address weaknesses in its 

high-risk and management challenge areas. In the single-family mortgage 

insurance programs, HUD has developed new processes to review lenders 

and appraisers and has implemented new incentives to improve the 

performance of its single-family property disposition contractors. HUD 

has also initiated a new effort to reduce rental housing assistance 

overpayments. To improve its programmatic and financial management 

information systems, HUD has deployed a new general ledger, improved 

interfaces with legacy systems, and developed an IT investment 

management program and a project management training program.[Footnote 

4] To help address its human capital weaknesses, HUD has completed its 

resource estimation and allocation process for determining appropriate 

staffing levels and has begun a work measurement process to further 

refine its resource allocation.



While we recognize HUDís progress, serious weaknesses remain in HUDís 

high-risk programs, and some of its strategies for addressing these 

problems are new initiatives that are in the early stages of 

implementation. Consequently, we are maintaining the departmentís 

single-family mortgage insurance and rental housing assistance program 

areas as high risk at this time. For example, the single-family 

mortgage insurance programs remain a high-risk area because of 

continued weaknesses in the mortgage insurance process, evidence of 

fraud, and the variety of management challenges HUD faces in 

implementing corrective actions. Rental housing assistance also remains 

a high-risk area because of evidence that overpayments due to errors in 

determining rental assistance amounts are greater than previously 

estimated, challenges in ensuring compliance with housing quality 

standards, and delays in implementing a new assessment system for 

public housing authorities. Programmatic and financial management 

information systems and human capital are still major management 

challenges. In addition, we are designating acquisitions management as 

a new management challenge because of the agencyís extensive and 

growing reliance on contractors and third parties and deficiencies in 

HUDís contractor monitoring and oversight, management of the 

acquisitions workforce, and information systems that support 

acquisitions.



Reduce the Risk of Losses in HUDís Single-Family Mortgage Insurance 

Programs:



HUDís FHA administers programs aimed at making mortgage financing more 

accessible to homebuyers, particularly low-income and first-time 

homebuyers. To expand homeownership, FHA insures private lenders 

against nearly all losses on mortgages that finance single-family 

homes, managing about $500 billion in insured single-family 

mortgages.[Footnote 5] FHAís insurance programs are dependent on the 

actions of third parties--private lenders who make the loans, 

appraisers contracted by those lenders, and contractors who manage the 

property that FHA acquires when the borrower defaults on the mortgage 

(fig. 1). While FHA insures lenders against nearly all losses resulting 

from foreclosed loans, it relies on the lenders to underwrite the loans 

and determine borrowersí eligibility for FHA mortgage insurance. The 

loan amount that FHA can insure is based, in part, on the appraised 

value of the home. The appraisal (1) determines the propertyís 

eligibility for mortgage insurance on the basis of its condition and 

location and (2) estimates the value of the property for mortgage 

insurance purposes. The appraiser is required to identify any visible 

deficiencies impairing the safety, sanitation, structural soundness, 

and continued marketability of the property and to assess the 

propertyís compliance with FHAís other minimum property standards. 

Lenders making FHA-insured loans are required to select appraisers from 

FHAís roster of state-licensed or -certified appraisers.



Figure 1: HUD and Third-Party Roles in FHAís Single-Family Mortgage 

Insurance Process:



[See PDF for image]



[End of figure]



Because of weaknesses in FHAís processes and oversight, ineligible 

buyers sometimes fraudulently obtain loans or foreclosed properties, or 

loans are made on properties actually worth less than the loan amount, 

increasing the risk of default and losses. Every year, thousands of 

borrowers default on their FHA insured single-family mortgage loans. 

When borrowers default, lenders may foreclose on the properties for 

which the loans were secured, file claims against the FHA insurance 

program, and convey the properties to HUD. HUD contracts with 

management and marketing contractors to secure, maintain, and sell the 

foreclosed properties. Further, if the properties are not properly 

secured and maintained in a timely fashion, their condition can 

deteriorate, resulting in lower sales prices and limiting FHAís ability 

to recover its costs.



In January 2001 we reported that HUD and FHA had made considerable 

progress in streamlining operations and making FHAís single-family 

mortgage insurance programs more efficient.[Footnote 6] However, we 

also reported that significant deficiencies remained and that because 

of the value of the insurance programs, the variety of management 

challenges FHA faces, and FHAís potential liability under these 

programs, FHAís single-family mortgage insurance programs maintained 

their high-risk designation. On the basis of our work and that of 

others, we said that HUD needed to:



* further improve the management and monitoring of lenders, appraisers, 

and property disposition contractors,



* ensure that sufficient staff are available and have the skills needed 

to carry out FHAís mission, and:



* improve programmatic and financial management information systems.



Need to Improve the Management and Monitoring of Lenders, Appraisers, 

and Property Disposition Contractors:



Since 2001, HUD has taken steps to improve its single-family mortgage 

insurance operations, including overseeing lenders and appraisers. As 

part of the Presidentís Management Agenda, HUD is working to reduce the 

risk of loss to FHAís insurance fund by holding lenders accountable for 

the performance of brokers and appraisers and is including plans to 

eliminate most, if not all, falsely inflated appraisals by 2004, taking 

strong action when fraud is found in the program. More specifically, 

the following steps have been taken:



* HUD has developed the Lender Assessment Subsystem (LASS), a Web-based 

system that receives; collects; assesses; and scores financial, 

compliance, and performance-related information from 7,500 FHA-

approved lenders to help HUD identify and measure the risk posed by 

lenders to the insured portfolio. LASS replaces a manual process and 

allows lenders to electronically submit annual audited financial 

statements and program compliance information. HUD issued regulations 

on August 15, 2002, which according to the department, requires that 

lenders use LASS to submit their annual financial and compliance data, 

beginning with those lenders having a September 2002 fiscal year end. 

These first submissions were due to HUD December 31, 2002.



* In response to our recommendations,[Footnote 7] HUD is revising the 

Credit Watch Programís regulations to cover lenders that underwrite 

FHA-insured loans and have excessive default and claim rates, as well 

as lenders that originate such loans.[Footnote 8] In addition, the 

department is developing procedures and enhancing FHAís management 

information systems to identify and select for technical reviews loans 

and lenders that pose a high risk of financial loss to FHA.



* HUD has initiated the Single Family Appraiser Subsystem (SASS) to 

review the quality of real estate appraisals. Among other things, HUD 

has assigned approved appraisers to perform independent reviews of FHA 

appraisals, and has had its Real Estate Assessment Center (REAC) 

administer FHA appraiser testing. However, according to HUD, the 

process as originally designed proved to be an inefficient means for 

identifying poorly performing appraisers. The process resulted in a 

high volume of automated reviews that identified only minor problems 

and did not identify patterns of problems with appraisers. In fiscal 

year 2001, SASS cost HUD about $20 million and resulted in the removal 

of 23 appraisers. To address these concerns, HUD revised the process to 

include focusing on appraisers rather than appraisals and moving the 

function from REAC to the Office of Single Family Housing where staff 

would have the expertise to review appraiser performance. Appraiser 

reviews are based on known risk factors, such as an appraiserís 

association with mortgages with high default and claim rates, 

rehabilitation loans, and foreclosed properties. According to HUD, the 

new targeted system resulted in the removal of 97 appraisers in fiscal 

year 2002 at a cost of about $300,000.



* Based on our recommendation,[Footnote 9] HUD developed incentives and 

penalties to encourage the management and marketing contractors to 

reduce the number of properties that are in the inventory longer than 6 

months. For example, the department now includes the selling of aged 

properties in its performance evaluation of contractors. Generally, the 

less time a property is in HUDís inventory, the less cost HUD bears. 

HUD told us that the percentage of aged inventory decreased from 8.4 

percent to 6 percent between fiscal year 2001 and fiscal year 2002.



* As part of the Presidentís Management Agenda, HUD is working to 

improve FHAís risk management and to increase amounts FHA recovers from 

defaulted loans and foreclosed properties. Specifically, in fiscal year 

2002 HUD initiated a demonstration program using mortgage loan purchase 

and sale authority granted under the National Housing Act, as 

amended,[Footnote 10] known as the 601 Accelerated Claim Disposition 

Program. The intent of the demonstration project is to reduce 

foreclosure claim losses by paying claims on loans considered most at 

risk of foreclosure early in the default cycle and selling them to 

private sector joint venture partners. On October 31, 2002, HUD awarded 

Salomon Brothers Realty Corporation a 70 percent equity interest in a 

joint venture to acquire, service, and dispose of 5,100 nonperforming 

loans. According to HUD, these partnerships will help to restructure 

mortgage notes to improve performance, accelerate the claims process, 

and increase recoveries to the FHA fund and the department will 

evaluate this demonstration project as it develops plans for subsequent 

asset disposition demonstrations and permanent program implementation.



* In response to recommendations we made in June 1999 concerning 

problems with the 203(k) Home Rehabilitation Loan Program, since 

January 2001 HUD has taken actions to address weaknesses in insuring 

home renovation loans.[Footnote 11] HUD developed specific procedures 

for identifying high-risk 203(k) lenders and targeting them for annual 

monitoring, issued guidance that set new standards and procedures for 

consultantsí participation in the 203(k) program, and issued guidance 

that set uniform standards for nonprofit agency participation and re-

certification in all FHA activities. HUD issued regulations during 2002 

to remove nonperforming 203(k) consultants and nonperforming nonprofit 

organizations from the list of approved participants.



Although these improvements are under way, GAO and HUDís Inspector 

General have continued to identify problem areas that increase FHAís 

risk in its single-family mortgage insurance programs. More 

specifically, the problem areas are as follows:



* In its latest semiannual report, HUDís Inspector General stated that 

fraud in the origination of mortgages for single-family properties 

continued to be the most pervasive problem uncovered by its 

investigations.[Footnote 12] The Inspector General noted that a joint 

investigation with the Federal Bureau of Investigation uncovered a 20-

person property-flipping scheme in Chicago, Illinois, that resulted in 

21 indictments and convictions and 12 jail sentences. The report added 

that the use of fraudulent documentation to qualify borrowers for FHA-

insured mortgages had led to criminal indictments and convictions in 

several other communities.



* LASS is not yet calculating key financial indicators to determine 

lendersí soundness and risk exposure as planned. Implementation of the 

system has been delayed because the Office of Single Family Housing 

does not yet have the technical capacity to support the function. HUD 

is working to develop the electronic environment within the Office of 

Single Family Housing to support the LASS function. HUD reports that 

the LASS will be modified during fiscal year 2003.



* In June 2001, the Inspector General reported that HUDís Philadelphia 

Homeownership Center needed to strengthen its monitoring of management 

and marketing contractors and its existing follow-up procedures to 

ensure that significant and recurring performance deficiencies were 

reported and more closely monitored and tracked.[Footnote 13] As a 

result of these deficiencies, contractor performance problems were not 

corrected and subjected HUD to the higher risks associated with poor 

property conditions. According to HUD, it is taking corrective actions 

to address the Inspector Generalís concerns, including using a new 

performance evaluation tool and taking action against one contractor. 

HUDís reviews have indicated the need to better incorporate the results 

of property inspections in assessments of contractor performance, and 

the department is exploring options to use this information more 

effectively.



* In September 2001, we testified that the 203(k) program requires 

continued management attention and further improvements in 

oversight.[Footnote 14] We had recommended that HUD improve its process 

for identifying underwriting violations, notifying lenders of 

violations, and imposing penalties. HUD agreed that lenders with poor 

underwriting practices should be targeted for enforcement actions and 

is in the process of hiring a contractor to assess the results of its 

desk reviews of 203(k) lenders and develop criteria for evaluating the 

risks associated with these lenders.



* In April 2002,[Footnote 15] we reported that FHAís foreclosure 

process could be improved if FHA adopted a process more like that used 

by other entities to reduce the time properties were not actively 

managed. With a revised process, FHA could better ensure that 

properties did not deteriorate and could recoup more of its losses when 

the house was sold. We reported that FHAís foreclosure procedures (1) 

prevented the timely initiation of critical property maintenance and 

marketing of the kind practiced by the other organizations, (2) could 

delay conveyance to FHAís management and marketing contractors because 

of the time-consuming procedures necessary to perform maintenance that 

exceeded established cost ceilings, and (3) resulted in disputes 

between FHA servicers and management and marketing contractors after 

the property was conveyed. We recommended that HUD establish unified 

property custody--a method in which a single entity is responsible for 

custody of a property after foreclosure through the sale to a new 

homeowner--as a priority for FHA and that HUD determine the method for 

unified custody that best ensures FHA borrowers continuing benefits 

from loss mitigation and homeowner protections under state and federal 

laws, provides appropriate incentives for limiting the time and expense 

of acquiring and selling properties, and ensures that properties are 

maintained to the benefit of the FHA insurance fund and communities. 

HUD agreed with these recommendations and has considered proposals to 

streamline FHAís foreclosure procedures, including issuing updated 

guidance and policy to address the title approval process. However, HUD 

has not revised its approach for accepting properties after foreclosure 

as recommended due to concerns about the potential negative impact on 

former homeowners and tenants and because statutory authority would 

have to be amended, according to HUD. We continue to believe that 

unified property custody would provide the most effective means for 

acquiring and selling FHA foreclosed properties and, as we stated in 

our April report, if this requires additional statutory authority, the 

HUD Secretary should seek it.



Ensure Sufficient Staff with Needed Skills:



HUD has substantially reorganized its single-family function in recent 

years, reducing the programís staffing levels and significantly 

changing the nature of the jobs performed by HUDís single-family staff. 

This situation has presented HUD with a continuing challenge to ensure 

that it has adequate staff with the right skills to perform their jobs 

effectively. We have found that staffing problems and skill imbalances 

have contributed to weaknesses in the single-family mortgage insurance 

programs.



For example, we reported in July 2001 that while HUDís four 

homeownership centers had improved their services, staffing imbalances 

had hampered the centersí operations.[Footnote 16] While HUD envisioned 

leaving about a third of the centersí staff in field offices, nearly 

half remained in 71 field offices across the country. In addition, the 

deployment of staff across the centers was not consistent with their 

workload. As a result, all four centers were having difficulty 

supervising and making effective use of the staff in field offices, and 

the Philadelphia center, which had the largest workload, had fewer 

staff than two of the other centers. These imbalances existed because 

HUD had assigned staff to the centers without performing a systematic 

workload analysis and did not require staff to relocate from the field 

to the centers as workloads shifted. Furthermore, as the centers 

struggled to use their staff effectively, new initiatives, such as 

fraud prevention efforts, have increased the centersí workload. To make 

more effective use of their staff, the centers would like to eventually 

move many field office positions to the centers as existing field staff 

members leave or retire. According to HUD, the homeownership centers 

are using the departmentís recently completed resource studies and 

other workload information to adjust staffing plans at the centers.



Improve Programmatic and Financial Management Information Systems:



As we reported in October 2001, FHAís single-family information systems 

do not adequately support the centersí efforts to oversee lenders and 

contractors.[Footnote 17] Given the multibillion-dollar insurance risk 

that FHA assumes annually, it is critical that the information systems 

help the agency carry out its responsibilities efficiently and 

effectively. FHAís homeownership centers use more than 20 different 

information systems to oversee the work of lenders and contractors, and 

homeownership center staff have developed specialized databases to 

improve their ability to meet their responsibilities. As a result, 

center staff must collect information from many different sources to 

identify high-risk lenders for review and to identify and investigate 

potential fraud cases. This situation creates a greater risk of error 

and increases the likelihood that these problems will go unnoticed. In 

addition, FHAís single-family information systems do not readily 

provide information that the centers need to monitor the performance of 

management and marketing contractors. For example, the homeownership 

centersí systems do not generate the reports needed to monitor these 

contractorsí sale of properties under special programs that allow 

police officers and teachers to purchase HUD-owned homes in certain 

neighborhoods at a discount. HUDís Inspector General identified 

evidence of potential fraud in these programs, causing HUD to suspend 

the programs for 120 days.[Footnote 18] According to HUD, FHA will 

undertake a new single-family integration project in 2003 to re-

engineer and integrate systems to address data needs of staff and 

modernize its technical environment. The project will take several 

years to complete.



In the audit of FHAís fiscal year 2001 financial statements,[Footnote 

19] the independent auditors reported a material weakness related to 

the financial management systems[Footnote 20]--that FHAís information 

systems need to more effectively support its business processes. 

According to the audit report, FHA is still conducting its day-to-day 

business with legacy systems, which results in staff manually 

processing and analyzing some financial transactions. The report 

specifically noted that key systems, including the Single Family 

Acquired Asset Management System and the Single Family Mortgage Notes 

System, are maintained in local databases that are not integrated with 

FHA financial management processes. This lack of integration increases 

the level of manual processing needed and reduces both the overall 

reliability of data and the efficiency of FHA personnel. Because of 

this lack of integration, FHA is unable to manage financial 

transactions in accordance with the Federal Financial Management 

Improvement Act (FFMIA). FHA has taken steps to begin addressing these 

problems, but the solutions are long term. For example, FHA implemented 

a new general ledger on October 1, 2002, and plans to develop an 

integrated financial management system over a 5-year period.



Increase Efficiency and Effectiveness of Rental Housing Assistance 

Programs:



HUD encourages the development of affordable rental housing through a 

wide range of incentives and assistance. Specifically, it provides (1) 

mortgage insurance through FHA for the construction and rehabilitation 

of multifamily developments; (2) grants for the development of housing 

for the elderly, persons with disabilities, and public housing; (3) 

project-based rental assistance to owners of insured and uninsured 

multifamily projects; (4) operating subsidies to public housing 

authorities to help finance the operations and maintenance costs of 

housing projects; and (5) tenant-based vouchers for eligible households 

to use in securing privately-owned housing. HUD is responsible for 

ensuring that the insured and assisted properties remain in good 

physical and financial condition, and that households receiving rental 

assistance meet eligibility requirements and receive the proper amount 

of assistance.



As it does in its single-family programs, HUD relies extensively on 

third parties to carry out the rental housing assistance programs, 

including public housing authorities, state housing finance agencies, 

lenders, appraisers, landlords and property management contractors (see 

table 1). HUD, through FHA, has about $55 billion in insured 

multifamily mortgages-in-force and manages about $7 billion in capital 

grants for housing for the elderly and persons with disabilities. HUDís 

rental housing assistance programs are administered by about 4,500 

housing agencies[Footnote 21] as well as under contracts covering about 

22,000 privately owned properties.[Footnote 22] In fiscal year 2001, 

HUD provided about $19 billion in rental subsidies to make housing 

affordable for an estimated 5 million households. Despite the magnitude 

of the assistance it provides, HUD is able to serve fewer than half of 

those who are eligible for assisted housing. Ensuring that proper 

subsidies are paid is necessary to maximize the number of families that 

can be served.



Table 1: HUD Programs That Support Affordable Rental Housing:



Program: Multifamily Mortgage Insurance: about $55 billion for about 

14,700 mortgages;[A] foreclosed property inventory of about $750 

million, with estimated annual expenditures to manage and maintain of 

about $214 million in FY 2001; about $2.2 billion in mortgage notes 

being serviced.; What third party participants do: * Lender loans money 

to developer.; * Developer constructs, purchases, or rehabilitates 

affordable multifamily housing.; * If borrower defaults on loan,

* lender forecloses on property or conveys note to HUD, and; 

* lender conveys property to HUD for disposition.; What HUD does: 

* Insures lenders against risk of developer defaulting on loan.; 

* Inspects construction.

 * Pays claim to lender.

 * Services the note to restore to financial soundness or forecloses.; 

* Assigns property to property management contractor to maintain until 

sold..



Program: Housing for the Elderly/Disabled (Section 202/811): funding 

commitments of about $800 million per year as of the end of fiscal year 

2001, with about $4 billion in unexpended obligated funds, about $2.8 

billion in unobligated, unexpended balances; about $7.8 billion in 

remaining balances from direct loans under the pre-1992 program.; What 

third party participants do: * Sponsor applies for grant for 

construction or rehabilitation.; * Owner constructs project.; * 

Inspectors monitor progress of construction.; * Sponsor/owner must 

comply with use agreements.; What HUD does: * Reviews and approves 

grant.

; * Inspects throughout construction and contracts with inspectors for 

assistance.; * Monitors throughout term of use agreement..



Program: Section 8 Project-based Rental Assistance (administered by HUD 

staff and Section 8 contract administrators): work directly with about 

22,000 property owners and agents; about $7 billion spent on 1.3 

million units in fiscal year 2001.; What third party participants do: * 

Landlord/property manager determines eligibility of applicants to 

reside in assisted units.; * Landlord/property manager rents units to 

eligible low-income tenants (including elderly or handicapped tenants) 

who pay rent equal to 30 percent of their income or a minimum flat rent 

of $25.; * Landlord/property manager verifies tenant income and submits 

request for payments to HUD or contract administrators.; * Contract 

administrator manages Section 8 contracts, submits bills to HUD, and 

inspects properties.; What HUD does: * Pays landlord the difference 

between the fair market rent and the tenantís portion of the rent.; * 

Inspects properties to ensure they meet HUDís housing quality 

standards.



; * Contracts with contract administrators to manage the Section 8 

project-based program in some areas..



Program: Section 8 Housing Choice Voucher (administered by public 

housing agencies): about $9.5 billion obligated in subsidies for about 

1.97 million units in fiscal year 2001.; What third party participants 

do: * Public housing agencies allot vouchers to eligible households.; * 

Eligible households find privately owned housing willing to accept 

vouchers.[B]; What HUD does: * Allots vouchers to local public housing 

agencies.; * Pays public housing agencies the difference between the 

fair market rent and the tenantís portion of the rent.; * Regulates and 

monitors PHA performance..



Program: Public Housing (administered by public housing agencies): in 

fiscal year 2001, about $3.2 billion spent in operating subsidies and 

$3 billion spent in modernization to support about 3,200 public housing 

agencies that manage about 1.2 million public housing units.; What 

third party participants do: * Public housing agencies rent housing 

units they own to eligible low-income tenants (including elderly and 

handicapped) for rent equal to 30 percent of their income (or a minimum 

rent up to $50) or a flat rent.; What HUD does: * Pays public housing 

agencies to develop, maintain, and rehabilitate units.; * Provides 

public housing agencies with funds to cover the difference between 

operating costs and the tenantsí rent.; * Inspects properties to ensure 

they meet uniform physical condition standards..



Source: GAO and HUD.



Note: GAO presentation of HUD programs.



[A] Some of these loans are for health care facilities.



[B] In some markets, households with vouchers are unable to find 

eligible units at rates they can afford and are unable to use the 

vouchers.



[End of table]



In January 2001, we reported that HUD faced considerable management 

challenges in closing the gap between the number of households needing 

assistance and those that receive it, as well as in ensuring that 

assisted housing complies with HUD standards. We noted that HUDís 

rental housing programs were still high risk because of their size and 

complexity and because improving the management of these programs would 

allow HUD to provide assisted housing to more low-income households. 

More specifically, we said that HUD had not yet ensured that:



* existing housing subsidies are received only by eligible households, 

and households receive no more than the amounts to which they are 

entitled;



* housing providers receiving assistance from HUD comply with HUDís 

quality standards for housing that is decent, safe, sanitary, and in 

good repair; and:



* its human capital management supported efforts to correct program 

weaknesses.



Reduce Overpayments and Errors in Determining Rental Assistance:



Errors in determining rental assistance amounts can increase the 

governmentís assistance payments, reduce the number of families who may 

be assisted, and result in ineligible families retaining subsidized 

units. In HUDís consolidated financial statement audit reports since 

fiscal year 1995, HUDís Inspector General has reported as a material 

internal control weakness that HUD needs to improve its efforts to 

ensure it is paying correct rental assistance. Table 2 presents the 

rental program expenditures and excess rental assistance HUD estimates 

it paid for fiscal years 1996 through 2001.



Table 2: Estimated Excess Rental Assistance, Fiscal Years 1996-2001:



Dollars in millions.



1996; Estimated excess	rental payments[B]: $538[C]; 

Program	expenditures: $19,257; 

Percentage of excess assistance: 2.8%.



1997; Estimated excess	rental payments[B]: $804; 

Program	expenditures: $18,069; 

Percentage of excess assistance: 4.4%.



1998; Estimated excess	rental payments[B]: $857; 

Program	expenditures: $18,600; 

Percentage of excess assistance: 4.6%.



1999; Estimated excess	rental payments[B]: $935; 

Program	expenditures: $18,606; 

Percentage of excess assistance: 5.0%.



2000; Estimated excess	rental payments[B]: $617[D]; 

Program expenditures: $18,883;  Percentage of excess assistance: 3.3%.



2001; Estimated excess	rental payments[B]: 									

$2,013[E]; Program expenditures: $18.883																	[F] 	; 

Percentage of excess assistance: 10.7%.



Source: HUD.



Note: HUD data reported in annual audited financial statements.



[A] The estimated excess rental assistance is reported in footnotes to 

HUDís annual consolidated financial statements for fiscal years ending 

September 30 of each year; however, the estimates are computed from 

data for the preceding calendar year.



[B] These estimates result from unreported tenant income, unless 

otherwise noted.



[C] In the audit of HUDís fiscal year 1996 consolidated financial 

statements, HUDís Inspector General concluded that the $538 million 

estimate of excess rental assistance was understated because HUD did 

not include Supplemental Security Income (SSI) in the computer 

matching. In addition, the Inspector General expressed concern about 

the completeness of HUDís tenant databases. HUD reported to us that 

subsequent analysis shows that underreported SSI income had a nominal 

effect on the estimate of excess rental assistance.



[D] In the fiscal year 2000 financial statement audit, the Inspector 

General also reported that HUD completed a separate quality control 

review of rent determination errors made by public housing agencies, 

owners, and agents responsible for program administration. This study 

estimated about $1.3 billion in overpayment errors or about 6.6 percent 

of total rental assistance. This methodology was incorporated in the 

analysis done for the fiscal year 2001 financial statement audit report 

that resulted in the higher error estimate. The $617 million relates to 

unreported tenant income.



[E] The fiscal year 2001 estimated error increased because of a change 

in HUDís methodology for calculating rental assistance errors to more 

accurately capture the full extent of such errors. The new methodology 

includes an estimate of the amount of errors in rent determinations 

made by project owners/agents, as discussed below, which was not 

included in previous yearsí estimates.



[F] HUD reported results using fiscal year 2000 program expenditures.



[End of table]



To capture the full extent of errors made in rental assistance 

determinations, HUD has expanded the scope of its error measurement 

methodology since January 2001. The expanded methodology covers the 

three primary types of rental assistance program errors--(1) incorrect 

reporting of income by tenants;[Footnote 23] (2) mistakes by public 

housing agencies, owners, and renting agents in calculating income and 

rent amounts; and (3) mistakes made by public housing agencies, owners, 

and renting agents in completing appropriate paperwork and billing HUD 

for rental assistance. The error measurement methodology used for 

fiscal year 2000 included the first two of the three primary types of 

rental assistance errors, and starting in 2003 HUD intends to measure 

and report on all three types of primary errors annually. As table 2 

shows, HUDís latest estimate is that it paid a total of about $2.013 

billion in excess assistance as a result of tenants underreporting or 

failing to report their income and because of errors made by program 

administrators in calculating rent subsidies.



In 2001, HUD initiated the Rental Housing Integrity Improvement 

Project, which is designed to address the causes of the errors and 

improper payments and ensure that only eligible people receive 

subsidies and that the subsidies are properly calculated. This 

initiative is also one of HUDís Presidentís Management Agenda items. 

HUDís goal is to reduce the error rate by 50 percent by the end of 2005 

by improving the way incomes are verified and reducing errors in 

calculating subsidies. Both the Office of Housing and the Office of 

Public and Indian Housing have designed program fact sheets for use by 

tenants, public housing agencies, owners, landlords/renting agents, and 

HUD staff that explain HUDís requirements for reporting income and 

determining subsidies. HUD is testing a process for automating the rent 

calculations, which will help to ensure that no program requirements 

are overlooked, and is also considering options to simplify the program 

rules. Finally, the Office of Housing and the Office of Public and 

Indian Housing have developed quality control programs and redeployed 

and trained staff to focus on reducing errors.



HUDís efforts to reduce rental assistance overpayments face significant 

challenges and the results may not be known for several years. For 

example, in order to identify unreported income before rental subsidies 

are provided, HUD is trying to gain access to the National Directory of 

New Hires,[Footnote 24] maintained by the Department of Health and 

Human Services. However, because accessing this data will require 

legislation, HUD estimates that it may take two years or more to gain 

access to this database. In the interim, the Office of Public and 

Indian Housing is pursuing an initiative to use state wage data to 

verify income. According to HUD, one agreement was signed with the 

state of Texas in October 2002 and cooperative agreements are being 

discussed with five other states. Even with access to the National 

Directory of New Hires and sharing agreements with states, privacy 

concerns may limit the use of such data, particularly by private owners 

and lenders who calculate the rental assistance amounts.



HUDís Inspector General has reported that some of the information 

systems containing tenant data that is necessary to calculate rents and 

analyze rental assistance payments contain inaccurate or incomplete 

data that may affect the departmentís ability to reduce overpayments. 

The current income verification process uses two HUD data sources for 

tenant information--the Tenant Rental Assistance Certification System 

(TRACS) for Section 8 project-based renters and the Multifamily Tenant 

Characteristics System (MTCS) for public housing renters.[Footnote 25] 

In a September 2000 report, HUDís Inspector General stated that TRACS 

contained inaccurate data that decreased the effectiveness of HUDís 

error calculation efforts.[Footnote 26] In HUDís fiscal year 2001 

consolidated financial statements audit report, the Inspector General 

stated that about 50 percent of the Section 8 contracts in TRACS 

contained inaccurate rent rates and that HUD lacked written procedures 

that specified when or by whom TRACS should be updated after a rent 

rate change.[Footnote 27] The Inspector General recommended that HUD 

ensure that planned actions to upgrade TRACS are completed and that 

TRACS data are useful and cost-efficient. Otherwise, the department 

should discard TRACS and investigate alternative systems. According to 

HUD, it has developed a rent module in the Real Estate Management 

System, which tracks information on HUDís multifamily portfolio, to 

maintain rent data for the multifamily housing portfolio effective 

January 2003. The Inspector General also reported that, as of December 

2001, approximately half of the housing authorities had not reported 

household data to MTCS. As of December 2002, 94 percent of public 

housing agencies are accessing MTCS, according to HUD.



Assure Housing Quality Standards:



Since January 2001, HUD has continued to respond to our recommendations 

on its efforts to manage the quality of assisted and insured rental 

housing. HUD has undertaken initiatives to improve its oversight and 

ensure that housing providers receiving assistance comply with HUDís 

quality standards for housing that is decent, safe, sanitary, and in 

good repair. Specifically:



* Since January 2001, HUD has taken a number of steps to respond to 

recommendations we made in July 2000 concerning the reliability of 

inspection scores.[Footnote 28] Since these actions were implemented, 

the percentage of inspections that failed to meet REACís standards has 

continued to decrease,[Footnote 29] demonstrating REACís progress in 

ensuring the accuracy and reliability of its physical inspection 

scores. For example, according to data provided by HUD for fiscal year 

2001, REAC staff accompanied contract inspectors on 1,616 inspections 

and found that less than 8.3 percent of the inspections did not meet 

REACís standards, compared with 12 percent when we reported the problem 

in July 2000.



* In our June 2001 report on HUDís efforts to address physical problems 

at multifamily properties in substandard condition, we noted that HUD 

could not verify that repairs at substandard properties had been 

made.[Footnote 30] In response to our recommendations, HUD has taken 

steps to ensure that owners of properties in substandard condition 

correct all physical deficiencies at their properties. For example, HUD 

hired a contractor to verify that repairs had been made at properties 

where the owners had certified that repairs were completed. HUD 

officials also noted that effective November 1, 2002, the Departmental 

Enforcement Center is required to meet directly with the owners of 

properties that receive low inspection scores and pursue specific steps 

to ensure the owner improves property conditions. If the owner does not 

make the necessary improvements, the center will take immediate 

enforcement action, which could include taking control of the property.



* In our March 2002 report, we found that HUD was still testing and 

revising its new Public Housing Assessment System (PHAS), but had begun 

to use the results to designate certain housing agencies as ďtroubledĒ 

and to assign them to recovery centers to receive technical and other 

assistance to correct their problems.[Footnote 31] Poor-quality units 

are one such problem. We reported that, as of December 2001, HUD had 

designated as troubled 21 of about 3,200 agencies that manage public 

housing units. Since that time, HUD has designated a total of 84 public 

housing agencies as troubled through September 2002.



* In December 1999, HUD implemented a new system assigning risk levels 

to public housing agencies. One component is an assessment of housing 

quality. HUD field offices use these risk assessments to plan their 

monitoring strategies and target their monitoring resources. In March 

2002, we recommended that HUD revise its risk assessment system to 

automatically classify all troubled housing agencies as high risk, 

which was not previously being done. According to HUD, the system has 

been modified to make this classification, and the department held 

training sessions in June 2002 for field office staff on the 

modifications.



* HUD also relies on its Section 8 Management Assessment Program 

(SEMAP) to evaluate the performance of public housing agencies that 

administer Section 8 tenant-based rental assistance--including an 

evaluation of housing quality. Under the Presidentís Management Agenda, 

one of HUDís goals is to use the program to continue improving its 

oversight capability and the performance of housing agencies that 

administer tenant-based Section 8 programs. According to HUD, SEMAP was 

revised in November 2001 to provide field offices with better 

assistance in implementing the program.



Although these are positive steps, some have not yet been finalized, 

and the impact of recent organizational realignments on HUDís progress 

in monitoring and ensuring the quality of assisted and insured housing 

remains unclear. Further, our work and that of the HUD Inspector 

General indicates that ensuring compliance with housing quality 

standards remains a serious challenge. Following are examples of 

housing quality standards compliance challenges:



* In January 2001 we reported that despite the preponderance of 

satisfactory physical inspection scores for multifamily and public 

housing properties, inspectors cited a substantial number of properties 

for life threatening health and safety problems. Our analysis of HUD 

property data indicates that this situation has not significantly 

changed in the last 2 years. For fiscal year 2002, about 91 percent of 

multifamily and public housing properties received satisfactory 

inspection scores, but about half of these properties also had life 

threatening health and safety problems at the time of their 

inspection.[Footnote 32] According to HUDís analysis of the data by 

unit level, about 24 percent of multifamily units and 20 percent of 

public housing units had life threatening health and safety problems.



* In May 2002, HUDís Inspector General reported that public housing 

authorities were either not correcting, or not correcting in a timely 

manner, life threatening health and safety violations identified during 

REACís physical inspections.[Footnote 33] Specifically, only 16 percent 

of the deficiencies the Inspector General selected for review had been 

corrected within the required time frame. The Inspector General also 

noted that the monitoring methods local HUD offices used to ensure that 

authorities corrected identified deficiencies were inconsistent and 

ineffective. Because the deficiencies were not being corrected, many 

public housing residents were forced to live in unsafe or unsanitary 

conditions--or both--for extended periods of time. According to HUD, 

the Office of Public and Indian Housing has issued guidance for fiscal 

year 2003 that requires field staff to conduct spot check reviews of 

repairs when they make site visits to public housing agencies.



* In our March 2002 report,[Footnote 34] we found that HUD had 

designated 21 of about 3,200 public housing agencies as troubled as of 

December 2001. However, our analysis showed that other public housing 

agencies could have received the same designation if PHAS, which is 

HUDís new system for assessing and managing the performance of housing 

agencies, had been fully implemented in fiscal year 2001. As many as 90 

agencies could have been designated as troubled overall, and another 

442 designated as troubled in at least one area, in part because of the 

poor quality of their housing units. As of September 2002, although HUD 

finalized the system, HUD had still not fully implemented PHAS to use 

the results in designating housing agencies as troubled. Until the 

system is fully implemented, we cannot assess how effective PHAS will 

be in identifying and providing for the correction of long-standing 

problems at public housing agencies.



As part of a series of organizational realignments, HUD revised REACís 

responsibilities to shift some programs to the Office of Housing and 

change the organizational structure so that REAC reports through the 

Office of Public and Indian Housing. According to HUD officials, this 

realignment and reorganization was completed in October 2002, with some 

administrative decisions concerning the personnel actions needed to 

effect the realignments yet to be made. As we stated in July 2002, the 

creation of REAC was a positive development that yielded real results; 

while the Secretary has the prerogative to align the organization as he 

sees fit, consistent with his vision and management style, it is 

important that progress made to date in improving the condition and 

oversight of HUDís inventory not be jeopardized.[Footnote 35] 

Regardless of how REAC is aligned, HUD must continue to make progress 

improving the physical condition of public and assisted multifamily 

housing properties. While it is too soon to evaluate the effect of the 

organizational changes, ultimately the success or failure will be 

viewed in that light.



Effectively Address Human Capital Issues:



Our work, and that of HUDís Inspector General, has highlighted the 

importance of human capital management in correcting weaknesses in 

rental assistance programs. Examples of human capital issues are as 

follows:



* Our work and that of the HUD Inspector General identified mismatches 

between workload and staffing in HUDís public housing program. We 

reported in July 2002 that HUDís public housing directors believed they 

did not have adequate field office staff to provide effective 

assistance to the public housing agencies for which they were 

responsible.[Footnote 36] At the same time, HUDís Inspector General 

found that staff at HUDís specialized centers, established to deal with 

troubled public housing agencies, were often underemployed. 

Specifically, the two Troubled Agency Recovery Centers (TARC) had 

expected to assist some 575 troubled agencies but because PHAS 

implementation was delayed, the expected workload had not materialized. 

Meanwhile, HUDís field offices were using their limited resources to 

assist the agencies that might have been designated as troubled if PHAS 

were implemented. According to HUD, it now assigns staff from the TARCs 

as needed to the field offices to help with the workload. HUD told us 

it was considering making the field offices formally responsible for 

troubled agencies and permanently moving all TARC staff to the field 

offices, essentially disbanding the recovery centers. To address this 

issue, in December 2002, HUD officials stated that a restructuring plan 

has been developed to consolidate the Office of Troubled Agency 

Recovery into the Field Operations to create a new Office of Field 

Operations to improve coordination with field offices and oversight of 

public housing agencies.



* In our July 2002 report we noted that because of their heavy 

workloads, the staff of some field offices could not implement 

processes and procedures for reviewing and monitoring underwriting of 

insured multifamily loans. We found that workloads in some offices 

often exceeded HUDís standard. To address this issue, HUD told us the 

department would shift the workload among field offices as needed.



* Our reviews of contracts in HUDís Office of Multifamily Housing and 

of improper payments associated with some of those contracts indicates 

that weaknesses exist in both monitoring and management of contracts, 

partly because of staffing issues.[Footnote 37] As discussed in more 

detail under the acquisitions management challenge section, we found 

that HUDís monitoring of its multifamily contractors was not systematic 

and was generally remote. Staff reported to us that the workload and 

wide dispersion of properties makes it difficult to conduct site visits 

as often as is required or as often as staff believe is necessary. 

Monitoring is generally conducted based on where staff are located or 

after a significant contractor performance problem has been identified. 

To help compensate for its inability to do more on-site monitoring, HUD 

contracted with a firm to conduct on-site inspections of multifamily 

properties it is responsible for managing. However, staff report they 

are unable to routinely follow up on identified deficiencies for the 

same reasons.



Address Departmentís Crosscutting Management Challenges:



Three crosscutting management challenges affect HUDís operations and 

contribute to placing the single-family mortgage insurance and rental 

housing assistance program areas at high risk. Two of these challenges-

-improving programmatic and financial management information systems 

and human capital management--are long-standing issues that both we and 

HUDís Inspector General have reported for several years. Because of 

HUDís heavy and ever-increasing reliance on third parties operating 

under contractual arrangements and weaknesses in HUDís acquisitions 

management, we believe acquisitions management is also a management 

challenge that the department needs to address.



Improve Programmatic and Financial Management Information Systems:



Both we and HUDís Inspector General have reported on weaknesses related 

to HUDís programmatic and financial management information systems for 

many years. For example, in audits of HUDís consolidated financial 

statements, the Inspector General has identified numerous material 

internal control weaknesses. Most of these weaknesses are long-standing 

and are the result of inadequate financial systems that do not meet the 

departmentís needs. In these audits for the past several years, HUDís 

Inspector General has stated that the most critical need faced by HUD 

in improving its financial management control environment is to 

complete the development of adequate systems. The weaknesses in HUDís 

systems impede its financial management, program effectiveness, and 

oversight functions. Accordingly, developing a plan to substantially 

improve programmatic and financial management information systems to 

meet the departmentís needs and comply with federal financial system 

requirements is crucial to HUDís effort to successfully address its 

high-risk program areas.



Since January 2001, HUD has continued its efforts to improve its 

programmatic and financial management systems and management of its IT. 

According to HUD, its focus has been on stabilizing and enhancing its 

existing financial management systems structure, and the department has 

deferred action on planning the next generation of core financial 

management systems. HUD is planning to complete a feasibility study to 

determine the most cost-effective solution to address its long-standing 

financial management systems issues, although no date has yet been set 

for completion of the study. Specific improvements to HUDís financial 

and programmatic information systems include the following:



* As of October 2002, FHA deployed a new general ledger module and 

improved interfaces with its legacy systems. This deployment makes 

progress toward responding to one of FHAís material internal control 

weaknesses. These improvements are expected to eliminate much of the 

manual processing of transactions previously required to generate 

consolidated financial statement data for HUD. The new module is 

consistent with federal government accounting principles and provides 

for automated monthly interfaces with HUDís current general ledger.



* FHA is also taking steps to improve funds control, which the 

Inspector General also reported as a material weakness, by providing 

managers with additional training, updating outdated funds control 

policies, and enhancing existing funds control systems. FHA intends to 

implement a new subsidiary ledger system that, among other things, is 

intended to redesign the funds control process. The first phase of 

implementation occurred in October 2002, with full implementation 

targeted for fiscal year 2006. The new process is intended to improve 

FHAís monitoring and control of budgetary resources and reduce manual 

analyses and reconciliations.



* HUD established an investment management program to select, control, 

and evaluate IT investments. Since fiscal year 2000, HUD has routinely 

assessed and scored proposed projects against departmentwide project 

selection criteria and used the process to select IT projects. Also, 

HUD has been conducting quarterly in-process reviews of all IT projects 

to determine whether the projects are achieving the approved 

objectives, milestones, and budget targets. HUD has ordered corrections 

to projects that fall short of the targets, reallocated project 

funding, and stopped projects that were not making sufficient progress 

or were not being properly managed based on risk. In January 2002, HUD 

completed a pilot postimplementation review of a project and has 

scheduled reviews for projects starting in October 2002. According to 

the Director of IT Investment Management, HUD intends to accelerate the 

number of postimplementation reviews until they are conducted routinely 

on all implemented projects.



In addition, HUD has undertaken several efforts--some still ongoing--to 

address governmentwide initiatives under the Presidentís Management 

Agenda to (1) improve financial performance, (2) expand electronic 

government (e-government), and (3) improve budget and performance 

integration. For example, to improve financial management, the 

department is seeking to further reduce the number of noncompliant 

systems from 17 to 14 in fiscal year 2003, with full compliance with 

federal financial standards by 2006, and is developing a blueprint to 

reduce overpayments of rent subsidies. To help further the e-government 

initiative, HUD has, among other things, conducted an e-government 

assessment to identify current, short-term, and long-term e-government 

opportunities. Finally, to address the budget and performance 

integration initiative, the department has developed a plan to 

integrate budgeting, planning, and evaluation, and is working to 

further integrate performance and budget information in the fiscal year 

2004 budget. HUD also developed an IT investment management program and 

a project management training program that has trained 150 IT project 

managers and had planned to make the training program Web-based by 

September 2002.



While the continuing efforts are encouraging, we remain concerned that 

HUDís programmatic and financial management information systems do not 

today fully support its programs--including its single-family mortgage 

insurance and rental housing assistance programs--and do not ensure 

effective financial management of those programs. The following are 

examples of these programmatic and financial management concerns:



* As discussed in more detail earlier, to oversee lenders, including 

identifying high-risk lenders, and investigate potential fraud cases in 

HUDís single-family mortgage insurance programs, staff at the 

departmentís homeownership centers must collect and manually compile 

information from multiple systems and sources. Working manually creates 

a greater risk of error and increases the likelihood that problems will 

go unnoticed.



* As we reported in July 2002,[Footnote 38] HUDís system for tracking 

the status of multifamily loan applications does not reliably record 

and track several key steps in the accelerated approval process. As a 

consequence, HUD field staff must develop and maintain spreadsheets and 

other informal systems to monitor the status of HUDís actions.



* As we reported in November 2002,[Footnote 39] HUDís contracting 

information systems do not effectively support acquisitions management. 

The departmentís centralized contracting management information system 

does not contain reliable data and its financial management information 

systems do not readily provide complete and consistent obligation and 

expenditure information on contracting activities. To address this 

issue, HUD plans to implement data verification procedures and provide 

data quality training to staff during fiscal year 2003.



* Finally, in September 2001, we reported that HUDís processes for 

acquiring software were immature and could be characterized as ad hoc, 

sometimes chaotic, and not repeatable across projects.[Footnote 40] 

These weaknesses can lead to systems that do not meet the information 

needs of management and staff, do not provide support for needed 

programs and operations, and cost more and take longer than expected to 

complete. HUD agreed to strengthen its software acquisitions process 

and, according to the Deputy Secretary, the department has prepared a 

strategy and plan to improve its acquisitions of software projects.



Financial Management Deficiencies Remain:



HUD and FHA financial management information systems remain major 

concerns. In February 2002, for the eleventh year in a row, HUDís 

Inspector General cited the lack of an integrated financial management 

system in compliance with federal financial system requirements as a 

material weakness in its audit of the departmentís financial 

statements. Although HUD obtained an unqualified opinion for its fiscal 

year 2000 consolidated financial statements, after the Inspector 

General issued a disclaimer on HUDís fiscal year 1999 financial 

statements, the department relied on extensive ad hoc analyses and 

manual reconciliations to develop account balances and the necessary 

disclosures.[Footnote 41] HUD also received an unqualified audit 

opinion for fiscal year 2001, but the department again relied on 

extraordinary manual efforts to prepare its financial statements. This 

manual work was necessary because HUDís and FHAís financial management 

systems cannot perform these functions. While an unqualified opinion is 

an important milestone in financial management, the ultimate objective 

is to have information systems and controls in place to provide 

accurate, timely, and useful information to manage agencies on a day-

to-day basis. HUD does not yet have systems that meet these financial 

management goals.



The audit report on HUDís fiscal year 2001 consolidated financial 

statements identified a total of five material internal control 

weaknesses. Three weaknesses, most of which are long-standing issues, 

related to HUD and two related specifically to FHA.[Footnote 42] The 

Inspector General found that HUD needed to (1) complete improvements to 

its financial systems, (2) improve its oversight and monitoring of 

housing assistance determinations, and (3) ensure that rental 

assistance is based on correct tenant income. The audit report also 

identified nine additional reportable conditions,[Footnote 43] 

including computer security issues.



In the audit report on HUDís consolidated financial statements, the 

Inspector General also reported that HUD did not substantially comply 

with FFMIA for fiscal year 2001. FFMIA requires agencies to put in 

place financial management systems that substantially comply with 

federal financial management systemsí requirements and with applicable 

accounting standards and that allow transactions to be processed in 

accordance with the United States Standard General Ledger. The 

Inspector General reported noncompliance in all three areas.



In its fiscal year 2001 Accountability Report, HUD specifically 

reported that 17 of its 57 financial management systems did not 

materially conform to federal requirements, an increase from the 11 

reported in the fiscal year 2000 Accountability Report.[Footnote 44] 

HUD noted several financial management system deficiencies, including 

several system interfaces that were not automated and that, therefore, 

required staff to do manual analyses and reprocessing and make 

additional entries to compile complete agencywide financial results. 

Further, HUD reported that its systems did not provide adequate funds 

control, limited the departmentís ability to ensure the propriety of 

Section 8 rental assistance payments, and did not fully support efforts 

to identify quickly any funds remaining on expired Section 8 contracts. 

Additionally, weaknesses in controls over HUDís financial management 

systems--both generally and for specific applications--increased the 

risk of unauthorized access and manipulation of applications and data 

on these systems.



In a separate report, HUDís Inspector General reported on deficiencies 

in HUDís information security. The Inspector General reported that 

while HUD has improved some aspects of its Information Systems Security 

program, significant weaknesses persist.[Footnote 45] Specifically, 

delays in the implementation of corrective actions and tasks designed 

to strengthen the program continue to put critical data and resources 

at risk. As a result, progress toward strengthening the program has 

been hampered and the program remains immature and not fully effective 

in ensuring the integrity, confidentiality, and authenticity of 

information and information systems supporting departmental operations 

and assets. In response to this report, the Deputy Secretary said HUD 

currently has four contract initiatives under way that will have a 

direct bearing on the Inspector Generalís audit findings. These 

contract initiatives cover incident response service; policy 

development; training for all HUD staff and collocated contractor 

staff; and security plans, reviews and threat assessments for 17 

mission critical systems.



In the audit report on FHAís fiscal year 2001 financial statements, the 

independent auditors reported two material weaknesses that specifically 

affect FHAís financial management. The auditors concluded that FHA 

needs to (1) enhance its information technology systems to more 

effectively support FHAís business processes and (2) improve its 

controls over budget execution and funds control. The independent 

auditors reported that FHAís inability to significantly update its 

system environment adversely affects internal controls related to 

accounting and reporting financial activities. The auditors also said 

that FHA does not have financial systems that are capable of fully 

monitoring and controlling budgetary resources. FHA reported that 

weaknesses in its budget execution and funds control areas contributed 

to an Anti-Deficiency Act violation in fiscal year 2000 in the amount 

of $7.3 million, which required a supplemental appropriation from 

Congress.[Footnote 46] The weaknesses in its financial management 

systems also increased the risk of noncompliance with applicable 

federal accounting standards.[Footnote 47] According to HUD, the 

implementation of the new FHA General Ledger in October 2002 put in 

place the core system for beginning to address funds control issues. In 

addition, as part of a departmentwide effort, FHA is in the process of 

updating its funds control plans.



Address Critical Human Capital Issues:



Like other federal agencies, HUD has historically not strategically 

managed its human capital. In our January 2001 report, we noted that 

the reorganizations that took place as part of HUDís 2020 Management 

Reform Plan had resulted in imbalances in workload at several specialty 

centers and in some of the field offices. Managers we surveyed reported 

that training and staff skills had generally improved, but also thought 

that training should be increased. HUDís human capital challenges can 

be seen as part of a broader pattern of human capital shortcomings that 

have eroded mission capabilities across the federal government. (See 

our high-risk series update for a discussion of human capital as a 

governmentwide high-risk area.[Footnote 48]):



HUDís most significant workforce planning to date has been its Resource 

Estimation and Allocation Process (REAP) study, which was completed in 

December 2001. On an office-by-office basis, the REAP study looked at 

the number of staff on board and assigned a staff ceiling--the number 

of staff needed for that office based on the work the office was 

currently performing--and calculated the resources required to do that 

work. In support and validation of REAP, HUD has implemented a workload 

measurement system that captures the type of work HUD employees and 

contractors perform and the time required to do it. While the results 

of the REAP study suggested an increase in the number of full-time 

equivalent positions--from 9,531 to 10,600--HUD did not request the 

higher number of staff in its fiscal year 2003 budget submission. 

According to a HUD official, the workload measurement system was not 

fully implemented when the budget went to the Congress and HUD was 

still redeploying existing staff. However, HUD told us that the 

redeployment has been completed and that the Assistant Secretary for 

Administration and Director of Personnel are now focused on hiring and 

orientation strategies to support an increase in staffing levels.



HUD has also analyzed data on staff retirement eligibility by office, 

position, and grade level. Among its findings is that, by August 2003, 

half of its workforce in General Schedule Grades 9-15 will be eligible 

to retire. According to HUD officials, in light of the pending 

retirements and because the department has done little outside hiring 

in more than 10 years, HUD needs to undertake a large-scale recruiting 

and hiring effort. HUD is considering the potential retirements in its 

hiring strategies by including an emphasis on recruiting midcareer 

employees. HUD expects to complete a 5-year strategic plan in early 

2003.



Since 2001, HUD has realigned some of its organizational activities and 

centers, reassigning staff to address staffing needs in program areas. 

For example, the community builder position, which was created to help 

local communities more effectively access HUD programs, was abolished 

and these individuals were transferred to other positions in program 

offices where HUD identified a more critical need. Of the approximately 

300 positions redeployed, HUD reports that the staff were reassigned 

from the Office of Field Policy Management to other programs in field 

offices as shown in Table 3.



Table 3: HUD Staff Redeployed from Field Policy Management to Program 

Offices:



Number of staff: 97; Program office: Office of Housing (74 to 

multifamily, 23 to single family).



Number of staff: 92; Program office: Office of Public and Indian 

Housing.



Number of staff: 73; Program office: Office of Community Planning and 

Development.



Number of staff: 34; Program office: Office of Fair Housing and Equal 

Opportunity.



Source: HUD.



[End of table]



HUD has also undertaken additional human capital planning activities to 

respond to the Presidentís Management Agenda. In addition to 

redeploying staff to mission-critical positions, HUD has taken steps 

to:



* reduce management layers and the ratio of supervisors to staff,



* develop an intern program (The department told us it met the goal of 

hiring and training at least 200 interns in the summer of 2002.),



* identify core competencies for major offices, and:



* develop training opportunities and career paths to support staff 

development.



HUD has also convened a Human Capital Steering Committee to organize 

these initiatives.



While these efforts are important first steps toward strategic human 

capital management, additional workforce planning steps are necessary. 

Missing from HUDís workforce planning are elements that we believe are 

essential, including analyses of what the work staff should be doing 

now and in the future and the knowledge, skills, and abilities needed 

to do this work; the appropriate staff deployment across the 

organization; and strategies for identifying and filling workforce 

gaps. A comprehensive workforce plan would allow HUD to better manage 

its current staff and plan for the departmentís future needs. In July 

2002, we recommended that HUD develop a comprehensive strategic 

workforce plan that is aligned with the departmentís strategic plan and 

contains the elements outlined above. Lacking these elements, HUD is 

not as prepared as it could be to address its human capital challenges 

and to recruit and hire the staff needed to pursue its mission. HUD 

officials report that they are in the process of developing a statement 

of work to hire a contractor to complete a comprehensive workforce 

planning study.



In December 2002,[Footnote 49] HUDís Inspector General also reported 

that although the department had made significant progress in 

implementing its resource estimation process, it lacked a comprehensive 

strategic plan that defines how the data from the studies will be used 

to justify and allocate its human capital resources among its operating 

components. The Inspector General observed that this may limit HUDís 

effectiveness in helping manage its human capital resources.



HUDís lack of a comprehensive workforce plan has affected the agencyís 

performance in several program areas, including the following:



* In the single-family homeownership centers, staffing imbalances have 

hampered center operations, and deployment of staff is not consistent 

with the centersí workload. As a result, all four centers have had 

difficulty supervising and making effective use of the staff in field 

offices. Further, HUD has transferred two key functions--overseeing 

appraisers and assessing lenders--from the REAC to the Office of Single 

Family Housing. While the Office of Single Family Housing has received 

authorization for the positions it needs to carry out these functions, 

it has not filled all of the positions. According to officials from the 

office, the shortages have increased the existing staffís workloads.



* We also reported that training at the homeownership centers was 

inadequate, as HUD had not developed a standard training curriculum for 

center staff. We recommended that HUD assess the centersí workforce, 

develop a plan for locating center staff where they are needed, and 

deploy the staff effectively; develop a training curriculum for center 

staff; and develop a strategic human capital management plan for the 

homeownership centers that considers all areas of human capital 

management. HUD has made some progress in these areas, but the 

recommendations remain open.



* In July 2002,[Footnote 50] we reported that some managers and staff 

in the Office of Public and Indian Housing found that the lack of 

workforce planning made it difficult to accomplish several mission-

related activities and provide service to customers. The workforce 

planning issue of greatest concern to office managers and staff was 

insufficient staff. Directors of several public housing and Native 

American program field offices--which were staffed at less than 90 

percent of the recommended staffing level at the time--said that they 

lacked the staff to provide the level of oversight and technical 

assistance that the housing agencies need. Although the field office 

directors we interviewed said that they were meeting the goal of using 

risk assessment techniques to focus oversight efforts, they lacked a 

standard method of assigning levels of oversight based on risk. 

According to field office directors, the staffing shortages were 

exacerbated by skills gaps and uncertainties about what work should be 

done and the best mix of staff knowledge, skills, and abilities to do 

it. According to HUD, the Office of Public and Indian Housing will 

continue to review workload and consult field staff on ways to improve 

program implementation and monitoring efforts. Additionally, HUD 

officials told us they are developing training to address a perceived 

skills gap, but noted that financial support for travel funds and 

supplies is necessary to fully implement the training program.



* HUDís Inspector General also found that some areas were plagued by 

human capital difficulties. An August 2001 review of HUDís Troubled 

Agency Recovery Center in Memphis revealed that the center was unable 

to fully and effectively utilize its staff.[Footnote 51] In addition, 

in April 2002, the Inspector General reported that staff resources at 

HUDís Seattle Technical Assessment Center were underutilized, that 

opportunities for employee misconduct existed, and similar problems 

could exist at the Chicago Center.[Footnote 52] HUD agreed with these 

findings and has taken steps to address the Inspector Generalís 

recommendations, including increasing the number of housing agencies 

assigned to the Memphis Center and planning to reassign much of the 

Seattle and Chicago staff to other positions in the Office of Public 

and Indian Housing or in REAC where they will be more effectively 

utilized.



In November 2002,[Footnote 53] we reported that HUD does not 

strategically manage its acquisitions workforce to ensure that staff 

responsible for managing and oversight of its contracts have the 

appropriate workload, skills, and training that would enable them to 

effectively perform their jobs, as discussed in more detail in the 

following section.



Actions Needed to Improve Acquisitions Management:



As HUD downsized its staff in the 1990s--from about 13,500 people to 

around 9,000 today--the scope of its mission and the needs of the 

people it serves did not decrease.[Footnote 54] As a result, HUD came 

to rely more and more on private contractors to help carry out its 

mission. HUDís contracting commitments between fiscal years 1997 and 

2000 increased by about 62 percent--from about $786 million to almost 

$1.3 billion (in 2001 constant dollars)--and HUD expects this trend to 

continue. HUDís contractors are an integral part of program delivery 

and other vital functions, and HUD has estimated that the size of its 

contractor workforce may nearly equal its own. Contractors are 

responsible for key portions of HUDís single-family insurance program 

and its rental housing assistance programs--areas that we consider high 

risk. For example, contractors are responsible for managing and 

disposing of HUDís inventory of single-family and multifamily 

properties--properties that have a combined value of about $3 billion 

(as of September 30, 2001).



In October 2001,[Footnote 55] we concluded that acquisitions management 

was one of the significant challenges facing HUD in its attempts to 

sustain the progress of its management reform and move toward its goal 

of becoming a high-performing organization. Most recently, in November 

of 2002, we concluded that weaknesses in acquisitions management 

limited HUDís ability to prevent, identify, and hold its contractors 

accountable.[Footnote 56]



In response to criticisms and as part of its recent management reform 

initiatives, HUD has taken actions to improve its acquisitions 

management. These actions include the following:



* hiring a Chief Procurement Officer,



* creating full-time technical positions at the program level with 

responsibility for monitoring contractorsí performance,



* instituting a certification training program and supplementary on-

line training on the federal contracting process as implemented at HUD,



* establishing and upgrading an agencywide contracting management 

information system to help consolidate contracting data and integrate 

it with HUDís financial systems, and:



* creating a Contract Management Review Board to improve procurement 

planning and contract administration.



While HUD has initiated these actions, our work shows that the agency 

still faces significant challenges in acquisitions management. Taken 

together, these weaknesses limit HUDís ability to readily prevent, 

identify, and address contractor performance problems. As a result, HUD 

cannot yet ensure that it fulfills its mission and maintains the 

financial integrity of its programs.



The department and, in particular, its multifamily housing program, 

does not employ certain processes and practices that could facilitate 

effective monitoring and ensure contractors are held 

accountable.[Footnote 57]HUDís monitoring of its contractors is not 

systematic and is largely remote. Specifically, HUDís monitoring does 

not consistently include the use of contract monitoring plans, risk-

based strategies, or the tracking of contractor performance--which 

would be helpful in the administration of such plans and 

strategies.[Footnote 58] According to a GAO survey, only 23 percent of 

HUDís government technical representatives who are responsible for 

contract oversight use a contract administration plan, which the Office 

of Federal Procurement Policy describes as essential to good contract 

administration. Instead, HUDís monitoring techniques consist mainly of 

reviews of progress reports and invoices, phone calls, and E-mails. 

When on-site visits are conducted, they do not occur as often as HUD 

guidance specifies, and HUD staff reported their workload and scarce 

travel resources limit their ability to follow up on identified 

problems.[Footnote 59] Without a systematic approach to oversight and 

adequate on-site monitoring, the departmentís ability to identify and 

correct contractor performance problems and hold contractors 

accountable is reduced. The resulting vulnerability limits HUDís 

ability to assure that it is receiving the services for which it pays.



Our review of HUDís files and disbursements indicates that its 

oversight processes have not identified instances in which contractors 

were not performing as expected. For example, HUDís files indicated 

that problems often surfaced either incidentally or were discovered by 

people outside HUD. Problems are not identified through routine 

monitoring performed by the program staff responsible for a particular 

function. For example, a contracting officer identified situations 

where a contractor was purchasing items for properties after HUD had 

already sold them. Also, our review of disbursements by one of HUDís 

property disposition contractors identified cases in which the 

contractor bypassed HUD controls by (1) alleging that construction 

renovations were emergencies, thus not requiring multiple bids, and (2) 

splitting renovations into multiple projects to stay below the $50,000 

threshold that requires HUD approval.[Footnote 60] In one of the cases, 

HUD paid $227,500 to have 15,000 square feet of concrete replaced; 

however, we determined that only about one-third of the work HUD paid 

for was actually performed.[Footnote 61] HUDís Inspector General and 

GAOís Office of Special Investigations are investigating these cases.



In addition, HUD has not taken steps to ensure that individuals 

responsible for managing and monitoring contracts are given appropriate 

workloads or that staff have acquired the skills and training needed to 

effectively perform their jobs. While a recent resource allocation 

study characterized HUDís Office of Chief Procurement Officer as an 

organization ďin crisis,Ē HUD has not yet addressed the workload 

disparities raised in that study. Further, while HUD has undertaken a 

workforce planning effort for the entire department, HUD has not 

assessed the skills and capabilities of its acquisitions 

workforce.[Footnote 62] In addition, according to HUDís records, over 

half of the staff that is directly responsible for monitoring 

contractor performance has not received the required training. Managers 

in HUDís procurement office were not aware that staff were serving in 

that capacity without the required training.



Finally, HUDís programmatic and financial management information 

systems do not readily provide accurate and consistent data to support 

its acquisitions workforce in their efforts to manage and monitor 

contracts. For example, the departmentís centralized contracting 

management information system does not contain reliable data on the 

number of active contracts, the expected cost of the contracts, or the 

types of goods and services acquired. In addition, HUDís financial 

management information systems do not readily provide complete and 

consistent obligation and expenditure information for HUDís overall 

contracting activities or for individual contracts. To compensate for a 

lack of information, HUD staff overseeing contracts have developed 

informal or ďcuffĒ systems--personal spreadsheets to fulfill their job 

responsibilities. However, these informal systems are not subject to 

HUDís policies, procedures, or internal controls to ensure that the 

information maintained in them--and used by HUDís acquisitions 

workforce--is accurate. In addition, the programmatic and financial 

management information systems do not provide HUD managers with 

accurate and timely information needed to oversee the departmentís 

contracting activities, make informed decisions about the use of HUDís 

resources, and ensure accountability in the departmentís programs.



While some of these deficiencies are long-standing and will likely 

require years to resolve, HUD can take immediate steps to address 

certain acquisitions management deficiencies. For example, in our 

November 2002 report on HUDís acquisitions management, we recommended 

that HUD implement a systematic approach to monitoring contracts, 

address planning and training requirements for its acquisitions 

workforce, and take steps to improve the accuracy and usefulness of its 

centralized contracting information system. HUD generally agreed with 

these recommendations and has initiated steps to address these concerns 

including emphasizing the importance of monitoring plans in training, 

increasing oversight of procurements done by multifamily property 

management contractors, and increasing the staff resources devoted to 

contract award and administration.



[End of section]



GAO Contacts:



Subject(s) covered in this report: Reduce risk of losses in HUDís 

single-family mortgage insurance program; ; Increase efficiency and 

effectiveness of rental housing assistance programs; ; Address critical 

human capital issues; ; Actions needed to improve acquisition 

management; Contact person: David G. Wood, Director; Financial Markets 

and Community Investment; (202) 512-8678; wooddg@gao.gov.



Subject(s) covered in this report: Improve programmatic and financial 

management information systems; Contact person: Joel C. Willemssen, 

Managing Director; Information Technology; (202) 512-6408; 

willemssenj@gao.gov; ; Linda M. Calbom, Director; Financial Management 

and Assurance; (202) 512-9508; calboml@gao.gov.



[End of section]



Related GAO Products:



HUD Management: HUDís High-Risk Program Areas and Management 

Challenges. GAO-02-869T. Washington, D.C.: July 24, 2002.



Federal Housing Assistance: Comparing the Characteristics and Costs of 

Housing Programs. GAO-02-76. Washington, D.C.: January 31, 2002.



HUD Management: Progress Made on Management Reforms, but Challenges 

Remain. GAO-02-45. Washington, D.C.: October 31, 2001.



Federal Housing Programs: What They Cost and What They Provide. GAO-01-

901R. Washington, D.C.: July 18, 2001.



Department of Housing and Urban Development: Status of Achieving Key 

Outcomes and Addressing Major Management Challenges. GAO-01-833. 

Washington, D.C.: July 6, 2001.



High-Risk Series: An Update. GAO-01-263. Washington D.C.: January 2001.



Major Management Challenges and Program Risks: Department of Housing 

and Urban Development. GAO-01-248. Washington, D.C.: January 2001.



Reduce Risk of Losses in HUDís Single-Family Mortgage Insurance 

Program:



Mortgage Financing: Actuarial Soundness of the Federal Housing 

Administrationís Mutual Mortgage Insurance Fund. GAO-02-671T. 

Washington, D.C.: April 24, 2002.



Single-Family Housing: Opportunities to Improve Federal Foreclosure and 

Property Sale Processes. GAO-02-305. Washington, D.C.: April 17, 2002.



Single-Family Housing: Current Information Systems Do Not Fully Support 

the Business Processes at HUDís Homeownership Centers. GAO-02-44. 

Washington, D.C.: October 24, 2001.



Homeownership: Problems Persist With HUDís 203(k) Home Rehabilitation 

Mortgage Insurance Program. GAO-01-1124T. Washington, D.C.: September 

10, 2001.



Single-Family Housing: Better Strategic Human Capital Management Needed 

at HUDís Homeownership Centers. GAO-01-590. Washington, D.C.: July 26, 

2001.



Mortgage Financing: Actuarial Soundness of the Federal Housing 

Administrationís Mutual Mortgage Insurance Fund. GAO-01-527T. 

Washington, D.C.: March 20, 2001.



Mortgage Financing: FHAís Fund Has Grown, but Options for Drawing on 

the Fund Have Uncertain Outcomes. GAO-01-460. Washington, 

D.C.: February 28, 2001.



Increase Efficiency and Effectiveness of Rental Housing Assistance 

Programs:



Multifamily Housing: Improvements Needed in HUDís Oversight of Lenders 

That Underwrite FHA-Insured Loans. GAO-02-680. Washington, D.C.: July 

19, 2002.



Public Housing: HUD and Public Housing Agenciesí Experiences with 

Fiscal Year 2000 Plan Requirements. GAO-02-572. Washington, D.C.: May 

31, 2002.



Public Housing: New Assessment System Holds Potential for Evaluating 

Performance. GAO-02-282. Washington, D.C.: March 15, 2002.



Homelessness: Improving Program Coordination and Client Access to 

Programs. GAO-02-485T. Washington, D.C.: March 6, 2002.



Multifamily Housing Finance: Funding FHAís Subsidized Credit Programs. 

GAO-02-323R. Washington, D.C.: February 1, 2002.



Multifamily Housing: Issues Related to Mark-to-Market Program 

Reauthorization. GAO-01-800. Washington, D.C.: July 11, 2001.



HUD Multifamily Housing: Improved Follow-up Needed to Ensure That 

Physical Problems Are Corrected. GAO-01-668. Washington, D.C.: June 

21, 2001.



Multifamily Housing: Issues Related to Mark-to-Market Program 

Reauthorization. GAO-01-871T. Washington, D.C.: June 19, 2001.



Improve Programmatic and Financial Management Information Systems, 

Human Capital, and Acquisition Management:



HUD Management: Actions Needed to Improve Acquisition Management. GAO-

03-157. Washington, D.C.: November 15, 2002.



Financial Management: Strategies to Address Improper Payments at HUD, 

Education, and Other Federal Agencies. GAO-03-167T. Washington, D.C.: 

October 3, 2002.



HUD Human Capital Management: Comprehensive Strategic Workforce 

Planning Needed. GAO-02-839. Washington, D.C.: July 24, 2002.



HUD Information Systems: Immature Software Acquisition Capability 

Increases Project Risks. GAO-01-962. Washington, D.C.: September 14, 

2001.



[End of section]



Performance and Accountability and High-Risk Series:



Major Management Challenges and Program Risks: A Governmentwide 

Perspective. GAO-03-95.



Major Management Challenges and Program Risks: Department of 

Agriculture. GAO-03-96.



Major Management Challenges and Program Risks: Department of Commerce. 

GAO-03-97.



Major Management Challenges and Program Risks: Department of Defense. 

GAO-03-98.



Major Management Challenges and Program Risks: Department of Education. 

GAO-03-99.



Major Management Challenges and Program Risks: Department of Energy. 

GAO-03-100.



Major Management Challenges and Program Risks: Department of Health and 

Human Services. GAO-03-101.



Major Management Challenges and Program Risks: Department of Homeland 

Security. GAO-03-102.



Major Management Challenges and Program Risks: Department of Housing 

and Urban Development. GAO-03-103.



Major Management Challenges and Program Risks: Department of the 

Interior. GAO-03-104.



Major Management Challenges and Program Risks: Department of Justice. 

GAO-03-105.



Major Management Challenges and Program Risks: Department of Labor. 

GAO-03-106.



Major Management Challenges and Program Risks: Department of State. 

GAO-03-107.



Major Management Challenges and Program Risks: Department of 

Transportation. GAO-03-108.



Major Management Challenges and Program Risks: Department of the 

Treasury. GAO-03-109.



Major Management Challenges and Program Risks: Department of Veterans 

Affairs. GAO-03-110.



Major Management Challenges and Program Risks: U.S. Agency for 

International Development. GAO-03-111.



Major Management Challenges and Program Risks: Environmental Protection 

Agency. GAO-03-112.



Major Management Challenges and Program Risks: Federal Emergency 

Management Agency. GAO-03-113.



Major Management Challenges and Program Risks: National Aeronautics and 

Space Administration. GAO-03-114.



Major Management Challenges and Program Risks: Office of Personnel 

Management. GAO-03-115.



Major Management Challenges and Program Risks: Small Business 

Administration. GAO-03-116.



Major Management Challenges and Program Risks: Social Security 

Administration. GAO-03-117.



Major Management Challenges and Program Risks: U.S. Postal Service. 

GAO-03-118.



High-Risk Series: An Update. GAO-03-119.



High-Risk Series: Strategic Human Capital Management. GAO-03-120.



High-Risk Series: Protecting Information Systems Supporting the Federal 

Government and the Nationís Critical Infrastructures. GAO-03-121.



High-Risk Series: Federal Real Property. GAO-03-122.



FOOTNOTES



[1] U.S. General Accounting Office, Housing and Urban Development: 

Potential Implications of Legislation Proposing to Dismantle HUD, GAO/

RCED-97-36 (Washington, D.C.: Feb. 21, 1997).



[2] The last initiative, reducing meaningless compliance burdens, 

concerns the consolidated plan process in HUDís Office of Community 

Planning and Development. This report does not discuss this initiative 

because it does not relate to HUDís program areas that we consider at 

high risk or to management challenges we have identified.



[3] U.S. General Accounting Office, Major Management Challenges and 

Program Risks: Department of Housing and Urban Development, GAO-01-248 

(Washington, D.C.: January 2001).



[4] A legacy system generally refers to an old or outdated computer 

system that remains in use even after more modern technology has been 

installed.



[5] This is the value of single-family insurance-in-force as of 

September 30, 2001. FHA endorsed 1,067,000 single-family mortgage loans 

through about 7,500 approved lenders in fiscal year 2001, including 

loans for refinancing.



[6] GAO-01-248.



[7] U.S. General Accounting Office, Single-Family Housing: Stronger 

Oversight of FHA Lenders Could Reduce HUDís Insurance Risk, GAO/RCED-

00-112 (Washington, D.C.:

Apr. 28, 2000).



[8] Credit Watch is a program that enables FHA to analyze trends in 

claim and default data by lender and impose sanctions on problem 

lenders, including terminating their loan origination authority.



[9] U.S. General Accounting Office, Single-Family Housing: Stronger 

Measures Needed to Encourage Better Performance by Management and 

Marketing Contractors, GAO/RCED-00-117 (Washington, D.C.: May 12, 

2000).



[10] Section 204 of the National Housing Act, as amended by section 601 

of the HUD Appropriations Act of Fiscal Year 1999.



[11] U.S. General Accounting Office, Homeownership: Problems Persist 

with HUDís 203(k) Home Rehabilitation Loan Program, GAO/RCED-99-124 

(Washington, D.C.: June 14, 1999).



[12] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Semi-annual Report to the Congress for the period 

ending September 30, 2002 (Washington, D.C.).



[13] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Audit Memorandum: Philadelphia Homeownership Center 

Single-Family Disposition Activities, 2001-PH-0803 (Washington, D.C.: 

June 2001). Responsibility for FHAís single-family insurance loan 

processing and property management is assigned to four homeownership 

centers located in Atlanta, Denver, Philadelphia, and Santa Ana 

(California).



[14] U.S. General Accounting Office, Homeownership: Problems Persist 

with HUDís 203(k) Home Rehabilitation Loan Program, GAO-01-1124T 

(Washington, D.C.: Sept. 10, 2001).



[15] U.S. General Accounting Office, Single-Family Housing: 

Opportunities to Improve Federal Foreclosure and Property Sale 

Processes, GAO-02-305 (Washington, D.C.: Apr. 17, 2002).



[16] U.S. General Accounting Office, Single-Family Housing: Better 

Strategic Human Capital Management Needed at HUDís Homeownership 

Centers, GAO-01-590 (Washington, D.C.: July 26, 2001).



[17] U.S. General Accounting Office, Single-Family Housing: Current 

Information Systems Do Not Support the Business Processes at HUDís 

Homeownership Centers, GAO-02-44 (Washington, D.C.: Oct. 24, 2001).



[18] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Review of Officer/Teacher Next Door Program, 2002-

DE-0802 (Denver, CO: Mar. 12, 2002).



[19] To complete the FHA audit, HUDís Inspector General contracted with 

the independent certified public accounting firm of KPMG. Department of 

Housing and Urban Development, Office of Inspector General, Federal 

Housing Administration Audit of Financial Statements Fiscal Years 2001 

and 2000, 2002-FO-0002 (Washington, D.C.: Feb. 22, 2002).



[20] A material weakness is a condition in which the design of one or 

more of the internal control components does not reduce, to a 

relatively low level, the risk that errors or irregularities, in 

amounts that would be material to the financial statements, may occur 

and not be detected promptly by employees in the normal course of 

performing their duties.



[21] Housing agencies may administer public housing or Section 8 

tenant-based assistance (housing vouchers) or both.



[22] The assistance provided under these contracts is called Section 8 

project-based assistance.



[23] Until 2000, HUDís methodology focused on incorrect reporting of 

income by tenants by matching the income amount tenants reported to HUD 

with data obtained from the Internal Revenue Service and the Social 

Security Administration.



[24] The directory includes centralized sources of state wage, 

unemployment insurance, and new hires data for all 50 states.



[25] HUD reports that MTCS is now known as PIC-50058.



[26] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Housing Subsidy Payments: Office of Housing, 00-KC-

103-0002 (Kansas City, MO: Sept. 29, 2000).



[27] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Audit of U.S. Department of Housing and Urban 

Development Financial Statements for Fiscal Years 2001 and 2000, 2002-

FO-0003 (Washington, D.C.: Feb. 27, 2002).



[28] U.S. General Accounting Office, HUD Housing Portfolios: HUD has 

Strengthened Physical Inspections but Needs to Resolve Concerns About 

their Reliability, GAO/RCED-00-168 (Washington, D.C.: July 25, 2000).



[29] HUDís REAC is responsible for assessing whether properties in the 

agencyís public and assisted multifamily housing programs comply with 

standards for safety, cleanliness, and good repair. Contractors 

certified by REAC inspect projects for compliance with HUD standards.



[30] U.S. General Accounting Office, HUD Multifamily Housing: Improved 

Followup Needed to Ensure that Physical Problems are Corrected, GAO-01-

668 (Washington, D.C.: June 21, 2001).



[31] U.S. General Accounting Office, Public Housing: New Assessment 

System Holds Potential for Evaluating Performance, GAO-02-282 

(Washington, D.C.: Mar. 15, 2002).



[32] Inspection data for fiscal year 2002 is for the period through 

September 2002 for public housing and through June 2002 for multifamily 

housing.



[33] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Multi-location Review of HUDís Utilization of the 

Public Housing Assessment System, 2002-PH-0001 (Washington, D.C.: May 

2002).



[34] GAO-02-282.



[35] U.S. General Accounting Office, HUD Management: HUDís High-Risk 

Program Areas and Management Challenges, GAO-02-869T (Washington D.C.: 

July 24, 2002).



[36] U.S. General Accounting Office, HUD Human Capital Management: 

Comprehensive Strategic Workforce Planning Needed, GAO-02-839 

(Washington D.C.: July 24, 2002).



[37] U.S. General Accounting Office, HUD Management: Actions Needed to 

Improve Acquisition Management, GAO-03-157 (Washington, D.C.: Nov. 15, 

2002); and U.S. General Accounting Office, Financial Management: 

Strategies to Address Improper Payments at HUD, Education, and Other 

Federal Agencies, GAO-03-167T (Washington, D.C.: Oct. 3, 2002).



[38] U.S. General Accounting Office, Multifamily Housing: Improvements 

Needed in HUDís Oversight of Lenders That Underwrite FHA-Insured Loans, 

GAO-02-680 (Washington, D.C.: July 19, 2002).



[39] GAO-03-157.



[40] U.S. General Accounting Office, HUD Information Systems: Immature 

Software Acquisition Capability Increases Project Risk, GAO-01-962 

(Washington, D.C.: Sept. 14, 2001).



[41] Due to problems experienced in converting to a new system, the 

Inspector General was unable to issue an opinion on HUDís fiscal year 

1999 consolidated financial statements. HUD could not prepare auditable 

financial statements and related disclosures in time to allow the 

Inspector General to complete the audit within statutory time frames.



[42] The two FHA material weaknesses, which have contributed to our 

high-risk designation for HUDís single-family mortgage insurance 

programs, are discussed in the single-family mortgage insurance section 

of this report. Two of HUDís material weaknesses specifically relate to 

rental assistance determination and payment processes, which have 

contributed to our high-risk designation for HUDís rental housing 

assistance programs, as discussed in the rental housing assistance 

section of this report.



[43] Reportable conditions are matters coming to the attention of the 

auditors that, in their judgment, should be communicated to management 

because they represent significant deficiencies in the design or 

operation of internal control that could adversely affect the 

organizationís ability to meet the objectives of reliable financial 

reporting and compliance with applicable laws and regulations.



[44] HUD stated that the number of noncompliant FHA systems increased 

largely as a result of applying revised criteria from the Office of 

Management and Budget.



[45] Office of Inspector General, Department of Housing and Urban 

Development, Annual Evaluation of HUDís Information Security Program, 

2003-DP-0801 (Washington, D.C.: Oct. 30, 2002).



[46] The Antideficiency Act (31 U.S.C. 1341) provides that unless 

otherwise authorized by law, no officer or employee of the United 

States may obligate or expend funds in excess of amounts appropriated 

by law or before such funds are appropriated.



[47] Statement of Federal Financial Accounting Standards Number 7, 

ďAccounting for Revenue and Other Financing Sources and Concepts for 

Reconciling Budgetary and Financial Accounting.Ē



[48] U.S. General Accounting Office, High Risk Series: An Update, GAO-

03-119 (Washington, D.C.: January 2003).



[49] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Assessment of HUDís Progress in Implementing the 

Resource Estimation and Allocation Process (REAP) and Total Estimation 

and Allocation Mechanism(TEAM) Components of its Human Resource 

Management System, 2003-PH-0801 (Philadelphia, PA: Dec. 3, 2002)



[50] GAO-02-839.



[51] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Troubled Agency Recovery Center, Memphis, Tennessee, 

2001-AT-0002 (Atlanta, GA: Aug. 17, 2001).



[52] U.S. Department of Housing and Urban Development, Office of 

Inspector General, Audit Memorandum on the Staffing Resources of the 

Real Estate Assessment Centerís Tenant Assessment Subsystem, Seattle 

Technical Assistance Center, 2002-SE-0801 (Seattle, WA: Apr. 23, 2002).



[53] GAO-03-157.



[54] These staff levels include only staff assigned to HUDís program 

offices and do not include full-time equivalents assigned to HUDís 

Office of Inspector General, working capital fund, and the Office of 

Federal Housing Enterprise Oversight.



[55] U.S. General Accounting Office, HUD Management: Progress Made on 

Management Reforms, but Challenges Remain. GAO-02-45 (Washington, D.C.: 

Oct. 31, 2001).



[56] GAO-03-157.



[57] We have defined monitoring as an internal control function that is 

performed continually and is ingrained in the agencyís operations. It 

includes regular management and supervisory activities, comparisons, 

reconciliations, and other actions people take in performing their 

duties. U.S. General Accounting Office, Standards for Internal Control 

in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: 

November 1999).



[58] For example, the Office of Federal Procurement Policyís Guide to 

Best Practices for Contract Administration recommends the use of a 

contract administration plan for good contract administration. 

According to the Guide, this plan should specify the performance 

outputs and describe the methodology used to conduct inspections of 

those outputs. Further, HUDís Acquisition Regulation and Procurement 

Policies and Procedures Handbook specify various monitoring tools that 

HUD staff may use to monitor contractor performance, such as a quality 

assurance plan, a contractorís work plan and schedule of performance, 

or progress reports.



[59] A HUD handbook indicates that quarterly inspections are to occur, 

but the specific sections in the handbook that are to discuss those 

inspections have not yet been developed.



[60] U.S. General Accounting Office, Financial Management: Strategies 

to Address Improper Payments at HUD, Education and Other Federal 

Agencies, GAO-03-167T (Washington, D.C.: Oct. 3, 2002).



[61] GAO-03-157.



[62] In July 2002,we reported that HUD has undertaken some workforce 

planning and has determined how many staff it needs to meet its current 

workload, but it does not have a comprehensive strategic workforce plan 

to guide its recruiting, hiring, and other key human capital efforts. 

GAO-02-839.



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