Single-Family Housing:

Stronger Oversight of FHA Lenders Could Reduce HUD's Insurance Risk

RCED-00-112: Published: Apr 28, 2000. Publicly Released: Jun 26, 2000.

Additional Materials:

Contact:

Thomas J. McCool
(202) 512-3000
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

Pursuant to a congressional request, GAO provided information on the Department of Housing and Urban Development's (HUD) oversight of lenders participating in its Federal Housing Administration's (FHA) mortgage insurance programs for single-family homes, focusing on: (1) how HUD ensures that lenders granted direct endorsement authority by FHA are qualified to receive such authority; (2) the extent to which HUD focuses on high-risk lenders in monitoring the lenders participating in FHA's mortgage insurance programs; and (3) the extent to which HUD holding lenders are accountable for poor performance.

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

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In November 2000, HUD's Office of Single Family Program Development issued standards for granting lenders direct endorsement and monitoring lender performance. The standards stipulate that HUD's homeownership centers may suspend a lender's direct endorsement authority based on a written request or referral from a center's Quality Assurance Division. The standards also state that the centers may suspend the direct endorsement authority of any lender (1) that is identified with continued evidence of fraud, (2) that has a "poor" performance percentage that is in excess of 20 percent for more than 90 days after being placed on 100 percent review status, or (3) that has a claim and default rate that exceeds both the national rate and 250 percent of the field office rate.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of FHA mortgage lenders, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing-Federal Housing Commissioner to strengthen its enforcement efforts by clarifying and implementing guidelines for identifying lenders whose direct endorsement authority should be suspended.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: HUD made its governmental technical monitors responsible for tracking the performance of technical review contractors against performance standards in the contracts. In addition, HUD approved a revised Statement of Work (SOW) for its technical review contracts that spells out quality control procedures for both the contractor and for HUD. The procedures require that at a minimum, the contractor review 10 percent of all cases it completes each month. The reviews are to be done by an underwriter not involved in the original review of the cases. The contractor must provide HUD with a monthly list of all cases reviewed and, for each review, a statement by the reviewer as to whether he or she agrees or disagrees with the rating given by the original reviewer. The procedures also require that HUD randomly select and conduct in-depth quality assurance reviews of at least five percent of all the cases completed by the contractor each month. Finally, the procedures establish acceptable levels of performance that the contractor must meet each month, and specify the monetary damages that HUD will assess against the contractor if it fails to achieve this level of performance. According to HUD, as of June 2001, the Philadelphia and Santa Ana homeownership centers have already awarded new technical review contracts that contain the revised SOW, and the Atlanta and Denver centers will pursue contracts with the revised SOW as soon as their existing contracts expire.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of FHA mortgage lenders, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing-Federal Housing Commissioner to more effectively monitor lenders' performance by tracking the performance of contractors conducting technical reviews against performance standards in the contracts and taking appropriate actions against contractors whose performance is not acceptable.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: In November 2000, HUD's Office of Single Family Program Development issued standards for granting lenders direct endorsement authority and monitoring lender performance that instructs the homeownership centers to conduct, upon granting a lender direct endorsement authority, post-endorsement technical reviews of the lender's files at the 100 percent level for the first 6 months or 50 cases, whichever comes first.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of FHA mortgage lenders, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing-Federal Housing Commissioner to more effectively monitor lenders' performance by complying with guidance to perform technical reviews of all the FHA-insured loans that are made by lenders that are newly granted direct endorsement authority.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: On September 30, 2001, HUD contracted with Deloitte and Touche to develop an algorithm that will enable FHA to select loans for review on the basis of risk factors. The algorithm should be completed by June 30, 2002. Funding for programming the algorithm into HUD's Computerized Home Underwriting System will be proposed for the fiscal year 2003 budget. In February 2004, HUD implemented the algorithm in its Computerized Homes Underwriting Management Systems that provides a risk-based statistical process to automatically select cases for technical review. The algorithm makes selections based on loan characteristics and risk data related to endorsement activity. Factors in the algorithm include calculated risk, risk thresholds, and review percentages. Some of the weighted loan characteristics used in the risk factor calculation include the back-end ratio and loan to value ratio.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of FHA mortgage lenders, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing-Federal Housing Commissioner to more effectively monitor lenders' performance by developing procedures and enhancing FHA's management information systems to identify and select, for technical reviews, loans and lenders within each homeownership center's jurisdiction that pose a high insurance risk to HUD.

    Agency Affected: Department of Housing and Urban Development

  5. Status: Closed - Implemented

    Comments: During the last quarter of fiscal year 2000, HUD implemented new procedures for targeting lenders for quarterly on-site reviews. To identify the potential list of lenders for review, the procedures first require that each homeownership center develops a list of the 200 lenders with the highest loan default and claim rates in the center. The procedures then require that each center add the following to this list: the names of 203(k) lenders targeted by the center based on loan defaults; Title I lenders targeted by each center based on loan volume, fraudulent activities, borrower complaints, or referrals by HUD's Inspector general or others; "random" lenders identified by HUD headquarters at the beginning of each fiscal year; and any lenders showing a 100 percent increase in loan originations over a 12-month period. The centers must use the resulting lists to target lenders for on-site reviews. The centers are required to document their targeting decisions, and the lists of targeted lenders must be approved by the center directors. The centers are also required to provide HUD headquarters with a monthly status report detailing the progress of their targeted reviews.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of FHA mortgage lenders, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing-Federal Housing Commissioner to more effectively monitor lenders' performance by developing procedures to identify and prioritize high-risk lenders for lender reviews and ensuring that the homeownership centers consistently apply these procedures.

    Agency Affected: Department of Housing and Urban Development

  6. Status: Closed - Implemented

    Comments: In November 2000, HUD's Office of Single-Family Program Development issued standards for granting lenders direct endorsement authority and monitoring lender performance. The standards state that, in order to receive direct endorsement authority, a lender must submit 15 consecutive loan cases that are rated "good" or "fair" by HUD's homeownership centers. The standards also require that the centers (1) maintain a file, for every lender that requests direct endorsement authority, containing all correspondence and including copies of all underwriting reports prepared by the centers on loan cases submitted by the lenders; and (2) enter the results of all reviews into FHA's automated Underwriting Report System.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of FHA mortgage lenders, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing-Federal Housing Commissioner to improve the process for granting lenders direct endorsement authority by developing specific standards for overall acceptable performance in preclosing reviews and ensuring that the homeownership centers comply with these standards.

    Agency Affected: Department of Housing and Urban Development

  7. Status: Closed - Implemented

    Comments: On December 17, 2004, HUD published an interim rule that revised FHA's Credit Watch Termination Initiative. As of January 18, 2005, HUD will review, on an ongoing basis, the number of defaults and claims on mortgages originated, underwritten, or both, by each mortgagee in the geographic area served by a HUD field office. Under the interim rule, HUD may notify a mortgagee that its direct endorsement approval will terminate 60 days after notice is given, if the mortgagee had a rate of defaults and claims on insured mortgages underwritten in an area which exceeded 200 percent of the normal rate and exceeded the national default and claim rate for insured mortgages. If a mortgagee's direct endorsement approval is terminated, it may not underwrite single-family insured mortgages for the area(s) identified in the termination notice.

    Recommendation: In addition, once the legal basis of the Credit Watch program is resolved, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing-Federal Housing Commissioner, to revise the Credit Watch program's regulations to cover lenders that underwrite FHA-insured loans with excessive default and claim rates as well as those lenders that originate such loans.

    Agency Affected: Department of Housing and Urban Development

 

Explore the full database of GAO's Open Recommendations »

Oct 7, 2014

Aug 1, 2014

Mar 31, 2014

Mar 27, 2014

Mar 18, 2014

Feb 6, 2014

Jan 30, 2014

Jan 28, 2014

Oct 22, 2013

Looking for more? Browse all our products here