Homeownership:

Problems Persist With HUD's 203(k) Home Rehabilitation Loan Program

RCED-99-124: Published: Jun 14, 1999. Publicly Released: Jul 1, 1999.

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Pursuant to a congressional request, GAO reviewed the Department of Housing and Urban Development's (HUD) management of its 203(k) Home Rehabilitation Mortgage Insurance program, focusing on: (1) the risk the 203(k) program poses to the Federal Housing Administration's (FHA) insurance fund relative to the 203(b) program; (2) HUD's efforts to correct program deficiencies identified by HUD's Inspector General and others; and (3) weaknesses, if any, in HUD's oversight of the 203(k) program and the extent to which lenders are complying with HUD's underwriting guidelines for making program loans.

GAO noted that: (1) the 203(k) loan program is more risky than HUD's largest single-family loan program--the 203(b) program--because it combines the risk of a traditional mortgage with the risk of a construction loan; (2) for loans endorsed from fiscal years (FY) 1994 through 1996, the claim rate for loans made under the 203(k) program is almost double that of loans made under the 203(b) program; (3) HUD projects that while loans made under the 203(b) program in FY 1994 through FY 1998 will make money for the Mutual Mortgage Insurance Fund, it projects that 203(k) loans will cost the General Insurance Fund--that is, claims and other costs will exceed premiums and other income by over $25 million; (4) this cost represents approximately .7 percent of the total amount insured by the program, as of the end of FY 1998; (5) HUD stated that it finds this loss rate to be expected for a home rehabilitation program; (6) despite the recognized risk associated with the 203(k) program and the potential for mounting losses to the General Insurance Fund, HUD has done little to address the problems identified by its Inspector General and others; (7) in the past 4 years, reports by HUD's management, HUD's Inspector General, and others have repeatedly cited that it is highly vulnerable to waste, fraud, and abuse; (8) although HUD's management has, for the most part, agreed with the findings as reported, it has done little to address the problems; (9) the most recent study of the program--completed by outside contractors--found that the Department had done little to address the long term viability of the program and recommended that HUD radically redesign or eliminate it; (10) HUD is not adequately overseeing key aspects of the 203(k) program; (11) with respect to lenders, HUD's Homeownership Centers do not adequately ensure that lenders are complying with the program's guidelines; (12) at the four Homeownership Centers, GAO found that 203(k) loans were not targeted for review to ensure that the lenders are properly administering them; (13) in one center, HUD management made a conscious decision not to review 203(k) loans because it lacked trained staff; (14) HUD does not properly train and monitor 203(k) home inspectors and consultants, who are responsible for designing and overseeing the home rehabilitation process; (15) GAO also found cases in which the agency failed to address consultants' abuses or incompetence; and (16) HUD still does not adequately ensure that nonprofit organizations comply with HUD guidelines for participating in the program.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: According to HUD's Deputy Director of Single Family Housing, HUD has implemented procedures to improve its oversight of 203(K) lenders, including (1) reviewing all loans originated by non-profit groups, (2) a minimum of 10 percent of all 203(K) loans are targeted for technical reviews, (3) loan underwriting ratings are now sent to lending institutions on a quarterly basis rather than semiannually, and (4) the Office of Single Family awarded a contract in September 2001 to develop a model that will help identify high-risk loan originations and target technical reviews of these riskier loans. This model will be complete in July 2002.

    Recommendation: In order to provide the necessary management and oversight of the 203(k) program, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing--Federal Housing Commissioner to improve the post-endorsement technical review to identify lenders' underwriting violations before the program incurs losses as a result of poor underwriting. Lenders should also be notified immediately of underwriting violations and be required to rectify the violation or risk losing HUD's insurance on the loan.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: On May 30, 2000, the Director of HUD's Office of Lender Activities and Program Compliance issued new procedures to all of its Homeownership Centers for targeting high-risk lenders for HUD monitoring. Specifically, the memorandum provides specific procedures for identifying high-risk 203(k) lenders and instructs the Homeownership Centers to target these lenders for annual monitoring by HUD's Quality Assurance Division. The Centers have been instructed to select high-risk 203(k) lenders in September 2000 for reviews to be conducted throughout fiscal year 2001.

    Recommendation: In order to provide the necessary management and oversight of the 203(k) program, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing--Federal Housing Commissioner to target high-risk 203(k) lenders for routine Quality Assurance Reviews to minimize the risks that these lenders pose to the General Insurance Fund.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: On July 26, 2000, HUD issued Mortgagee Letter 00-25 that sets new standards and procedures for 203(k) consultants' participation in the 203(k) program. Specifically, it requires that all consultants wishing to participate in the 203(k) program must re-apply for placement on the 203(k) Consultant Roster. It also requires the prospective consultants to meet minimum criteria and to provide various forms of evidence to support their ability to function as a 203(k) consultant, as well as requiring all prospective consultants to pass a formal examination to demonstrate their level of knowledge.

    Recommendation: In order to provide the necessary management and oversight of the 203(k) program, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing--Federal Housing Commissioner to establish strict criteria to ensure that consultants/inspectors are well versed in residential construction/rehabilitation and cost estimating to protect the interests of the borrower.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: On March 3, 2000, HUD issued Mortgagee Letter 00-8 which sets uniform standards for non-profit agencies participation and recertification in all FHA activities. Specifically, the letter requires non-profit agencies to complete a formal application process and to be recertified every 2 years. The letter also makes provisions for periodic reviews of the non-profit agencies by HUD to ensure their compliance with FHA activities.

    Recommendation: In order to provide the necessary management and oversight of the 203(k) program, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing--Federal Housing Commissioner to establish strict criteria for qualifying and recertifying nonprofit organizations for their continued participation in the program to ensure they have the resources and the expertise to rehabilitate properties.

    Agency Affected: Department of Housing and Urban Development

 

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