Stronger Internal Controls Over HUD Single-Family Mortgage Insurance Programs Would Discourage Fraud

RCED-85-4: Published: May 13, 1985. Publicly Released: May 13, 1985.

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Pursuant to a congressional request, GAO reviewed the Department of Housing and Urban Development's (HUD) home loan insurance approval procedures under the single-family mortgage insurance program.

GAO found that: (1) since 1934, HUD single-family mortgage insurance programs have insured about 14 million loans, of which about 6 percent have failed; (2) HUD relies on lenders to obtain and verify information bearing on loan risks and does not independently verify credit information; (3) weak internal controls may have contributed to the success of a fraudulent housing scheme in Camden, New Jersey; and (4) unlike HUD, the Veterans Administration (VA) independently verifies credit information in its mortgage insurance programs and attempts to determine why borrowers default shortly after loan origination. In addition, GAO found that HUD: (1) is implementing the Direct Endorsement Program, which is assigned to simplify and expedite the loan origination process by granting lenders the authority to issue HUD insurance commitments without prior HUD approval; and (2) will monitor direct endorsement lending to rate lenders' performance, but will not collect information pertaining to loan defaults or independently verify credit information submitted by lenders.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: HUD established procedures to verify appraisals involving investor-owned properties that were previously owned by HUD. GAO suggested that it also, as much as possible, should verify investor-owned properties not previously owned by HUD since they are also subject to fraudulent practices. In June 1986, HUD agreed to do so when possible.

    Recommendation: The Secretary of Housing and Urban Development should revise its insurance commitment procedures to independently verify appraisals involving investor-owned properties if the investor had recently purchased the property.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: In accordance with this recommendation, HUD instructed its field personnel to ensure themselves that credit reports showing no prior credit history are an accurate statement of the borrower's credit history.

    Recommendation: The Secretary of Housing and Urban Development should revise its insurance procedures to independently verify credit reports that show no credit history.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: Subsequent to the GAO report, HUD improved its targeting of reviews of its mortgagee origination practices. Attention is now focused on lenders with high claim/default rates, high incidence of early defaults, and a high volume of business. More attention will be placed on programmatic problems, early defaults, investor issues, and processing deficiences.

    Recommendation: The Secretary of Housing and Urban Development should revise its insurance commitment procedures to verify, by sampling, data submitted by lenders.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: Subsequent to the GAO report, HUD took several measures to improve its monitoring system. It implemented a system to identify mortgagees with high default rates; a system to monitor early defaults by office, mortgagee, and mortgager; instructed field staff to determine reasons for loans defaulting; and instructed its monitoring division to target lenders with high and early default rates.

    Recommendation: The Secretary of Housing and Urban Development should develop a monitoring procedure to identify mortgages that default within a specified time after loan origination so that alleged fraudulent loan practices, such as those being investigated in Camden, New Jersey, are identified and evaluated. As appropriate, modifications should be made either to the local or national insurance practices.

    Agency Affected: Department of Housing and Urban Development

  5. Status: Closed - Not Implemented

    Comments: In March 1986, VA stopped issuing Certificates of Reasonable Value if there is no VA buyer. Therefore, this recommendation is no longer applicable.

    Recommendation: The Secretary of Housing and Urban Development should revise its insurance commitment procedures to ensure that VA property appraisal data are included as part of the file documentation when HUD uses it in making the insurance commitments.

    Agency Affected: Department of Housing and Urban Development

 

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