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Single-Family Housing: Progress Made, but Opportunities Exist to Improve HUD's Oversight of FHA Lenders

GAO-05-13 Published: Nov 12, 2004. Publicly Released: Nov 12, 2004.
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Highlights

Every year, the Department of Housing and Urban Development (HUD), through its Federal Housing Administration (FHA), insures billions of dollars in home mortgage loans made by private lenders. Oversight of lenders has historically been a challenge for HUD. In January 2003, GAO reported that, due in part to poor lender oversight, HUD's single-family mortgage insurance programs remained a high-risk area. This report examines (1) how well HUD follows its guidance when granting lenders direct endorsement authority (the ability to underwrite loans and determine their eligibility for FHA mortgage insurance without HUD's prior review), (2) the extent to which HUD uses a risk-based approach when monitoring FHA lenders, and (3) the extent to which HUD holds accountable lenders that it identifies as not complying with its performance requirements.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Housing and Urban Development To improve HUD's oversight of FHA mortgage lenders, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to ensure that the homeownership centers are following the guidance for granting direct endorsement authority.
Closed – Implemented
In May 2005, HUD issued updated instructions for the four homeownership centers to use when granting direct endorsement authority to lenders. These instructions state, among other things, that (1) lenders will be granted direct endorsement authority when they have successfully underwritten and processed 15 test cases within a twelve consecutive month period; and (2) that a lender is to be notified in writing that they cannot submit cases for at least 180 days if they have submitted 30 cases and have not met the standards.
Department of Housing and Urban Development To improve HUD's oversight of FHA mortgage lenders, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to track lender reviews to distinguish between desk and on-site reviews.
Closed – Implemented
In January 2005, HUD reported that it had modified its lender tracking system to distinguish between desk and on-site reviews.
Department of Housing and Urban Development To improve HUD's oversight of FHA mortgage lenders, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to enhance FHA's information system to ensure that the first 30 loans made by new direct endorsement lenders are reviewed as required.
Closed – Implemented
In April 2006, HUD published release notes outlining changes to FHA Connection and the Computerized Homes Underwriting Management System (CHUMS) that allow its homeownership centers to better establish a lender's review rate through the added Review Rules function. The Review Rules function, which is used by HUD's homeownership centers to set the review rate for direct endorsement lenders doing business within their geographic area, was added to the FHA Connection for authorized HUD personnel, effective April 17, 2006. Among other things, this function enables the homeownership centers to set the number of loans to be reviewed in the "Review 1 in X" field and the number of successive loans to be reviewed in the "Review Next X" field. Further, the number of loans that have already been reviewed also appears in the system. By adding the Review Rules function to this FHA information system, HUD has helped to ensure that the first 30 loans made by new direct endorsement lenders are reviewed as required.
Department of Housing and Urban Development To improve HUD's oversight of FHA mortgage lenders, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to expeditiously complete efforts to revise the technical review rating system so that the ratings better reflect the risks that different underwriting errors pose to the FHA insurance fund.
Closed – Implemented
In February 2005, HUD published a mortgage letter outlining changes in the ratings and codes used in connection with its technical review process for FHA single-family mortgages. The new ratings will be effective for mortgages reviewed and rated after January 1, 2005. Under the new system, underwriting will no longer be rated Good, Fair, or Poor. Instead, mortgages will be rated either Acceptable or Unacceptable in two categories: Mortgage Credit Underwriting and Valuation Underwriting. For mortgages rated Acceptable, the overall decision to approve the mortgage is considered sound and the level of risk acceptable, but there may be deficiencies noted that HUD expects the lender to address in future submissions for insurance endorsement. A rating of Unacceptable means that the mortgage exhibits such serious violations of FHA requirements and, therefore, poses such a level of risk to the Department that it should not have been approved. A mortgage rated as Unacceptable will require the lender to explain the decision to approve the mortgage and may result in a request to indemnify the Department against loss. According to HUD, it expects that this revised rating system will accurately reflect the risk level associated with recently insured mortgages while at the same time significantly reduce the number of unwarranted Poor ratings.
Department of Housing and Urban Development To improve HUD's oversight of FHA mortgage lenders, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to develop and implement guidance specifying the conditions under which a homeownership center must suspend a lender's direct endorsement authority.
Closed – Implemented
On January 31, 2005, HUD issued standards for withdrawing and restoring direct endorsement authority. In addition to outlining circumstances under which direct endorsement authority may be withdrawn, the updated procedures described certain conditions under which withdrawal of direct endorsement authority would be mandatory. Specifically, any lender's branch office that has had 20 percent or more of its reviewed cases rated "unacceptable" under the new technical review rating system for at least two consecutive quarters will have its direct endorsement authority withdrawn.

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Topics

AccountabilityEligibility determinationsMonitoringMortgage loansMortgage protection insuranceNoncompliancePerformance measuresQuality assuranceRisk managementPolicies and procedures