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Testimony:



Before the Subcommittee on Housing and Transportation, Committee on 

Banking: U.S. Senate:



For Release on Delivery Expected at 2:30 p.m. Wednesday

July 24, 2002



HUD Management: HUDís High-Risk Program Areas and Management 
Challenges:



Statement of Stanley J. Czerwinski

Director, Physical Infrastructure:



GAO-02-869T:



Mr. Chairman and Members of the Subcommittee:



We are pleased to be here today to discuss the high-risk program areas 

and management challenges facing the Department of Housing and Urban 

Development (HUD). HUDís programs affect the lives of millions of 

Americans. HUD makes housing more affordable for about 4.8 million low-

income households by insuring loans for owners of multifamily rental 

housing and providing rental assistance. It helps to revitalize 

Americaís communities by assisting over 4,000 localities through its 

community development programs. It encourages homeownership by 

providing mortgage insurance for about 7 million homeowners who 

otherwise might not have been able to qualify for loans--managing about 

$500 billion in insured mortgages and $604 billion in guarantees of 

mortgage-backed securities. To accomplish its missions, HUD relies on 

the performance and integrity of thousands of mortgage lenders, 

contractors, property owners, public housing agencies, communities, and 

others to administer its programs. Effective oversight and strong 

management are critical to ensure that HUDís reliance on these third 

parties results in the effective and efficient stewardship of federal 

funds and the accomplishment of the Departmentís mission and program 

goals.



For many years, HUD has been the subject of criticism for management 

and oversight weaknesses that have made its programs vulnerable to 

fraud, waste, abuse, and mismanagement. In 1997, HUD undertook the 2020 

Management Reform Plan, a complex and wide-ranging effort designed to, 

among other things, refocus HUDís mission, strengthen accountability, 

and eliminate fraud, waste, abuse and mismanagement from its programs. 

In January 2001, we recognized the credible progress that HUD had made 

in improving its management and operations, and we reduced the number 

of HUD program areas deemed to be high risk to two of its major program 

areas--single-family mortgage insurance and rental housing 

assistance.[Footnote 1] These program areas comprise about two-thirds 

of HUDís budget. The current Administration has placed improving HUDís 

management among its highest priorities and has set a goal to remove 

the high-risk designation from all HUD programs by 2005. This is 

therefore an appropriate time to review HUDís progress toward 

addressing these high-risk program areas and the challenges it faces in 

sustaining the progress that has been made as HUD moves toward its goal 

to become a high-performing agency that provides quality service to its 

customers.



My testimony today discusses the major management challenges we see 

facing HUD, as well as the progress HUD has made over the past few 

years addressing its challenges, and the steps it is continuing to take 

to address them. First, my testimony discusses the challenges HUD faces 

improving accountability and control over its high-risk program areas. 

Second, it addresses the challenges that HUD faces that cut across all 

its program areas--especially its efforts to improve accountability and 

control over its high-risk program areas--in the areas of (1) managing 

human capital, (2) managing acquisitions, and (3) improving 

programmatic and financial management information systems. My testimony 

today draws on a body of work, including recent reports we have issued 

on various HUD programs, our work on HUDís human capital management 

that is being released today at this hearing,[Footnote 2] our 

assessment of HUDís strategic and performance plans, and a series of 

assignments we have ongoing at the request of this Subcommittee. It 

also draws on work we have done on management reform initiatives and 

performance-based organizations across both the federal and private 

sectors.



In summary:



* HUDís single-family mortgage insurance and its rental housing 

assistance program areas are at high risk of waste, fraud, abuse, and 

mismanagement. In January 2001 we reported that, while HUD had made 

credible progress addressing its management deficiencies, significant 

weaknesses in these two program areas remained--areas comprising about 

two-thirds of the departmentís budget. To correct weaknesses in its 

single-family mortgage insurance programs, we reported that HUD needed 

to improve, among other things, its oversight of lenders and 

appraisers. To ensure the integrity of its rental housing assistance 

programs, HUD needed to take actions, including ensuring that providers 

of rental housing maintain housing that is in decent, safe, and 

sanitary condition. The Presidentís Management Agenda contains 

initiatives to address these and other weaknesses; and HUD has 

developed plans, including goals and timetables, for taking action on 

them. In addition to our ongoing reviews of HUDís programs, we plan to 

review these plans and monitor HUDís progress in the months ahead. We 

will report on the results of our review in January 2003, when we will 

assess HUDís progress as part of our Performance and Accountability and 

High-Risk Series update.



* Human capital management--and the need for a strategic approach to 

managing HUDís staff--is the most pressing crosscutting management 

challenge facing HUD. HUD downsized its staff from about 13,500 to 

9,000 over the last decade, and its human capital challenges are 

exacerbated by demographics that suggest that by August 2003, about 

half of its professional workforce will be eligible to retire. HUD has 

begun the initial stages of workforce planning; it has completed its 

resource estimation and allocation process, which estimates the staff 

needed to handle the current workload in each office, and a detailed 

analysis of HUDís potential staff losses due to retirement. However, 

the Department does not have a comprehensive workforce plan. Elements 

that we have reported are necessary for comprehensive workforce 

planning--but are missing from HUDís workforce planning--include, among 

other things, an analysis of what work its staff should be doing; the 

knowledge, skills, and abilities needed by staff to do this work; the 

appropriate staff deployment across the organization, and strategies 

for identifying and filling gaps. Without more comprehensive workforce 

planning, HUD is not as prepared as it could be to recruit and hire 

staff needed to pursue its mission.



* Effective acquisition management is of increasing importance because, 

as HUD downsized its staff, it relied more and more on outside 

contractors to accomplish its mission. Over a 4-year period HUDís 

spending on outside contracting increased about 62 percent, and HUD 

officials have estimated that the total number of contractor staff 

assisting in delivering HUD services may nearly equal its own. HUD has 

made progress in the past few years improving its acquisition 

management practices; but it faces the challenge of ensuring that, 

where it relies on contractors to perform its mission, it will hold 

these contractors accountable for results. Successfully meeting that 

challenge affects the successful delivery of HUDís programs, the 

effective deployment of its staff, and its ability to ensure the 

integrity of its single-family and rental housing assistance programs. 

Holding contractors accountable for results requires processes and 

practices in place to effectively monitor contractorsí performance, an 

acquisition workforce with the right workload, training and tools to 

carry out its mission, and programmatic and financial management 

information systems that support HUDís efforts to ensure accountability 

in its acquisitions.



* Responsive programmatic and financial management information systems 

are critical to HUDís ability to meet its mission, deliver key 

services, and establish sufficient management control over its programs 

and operations. Concerns about the weaknesses in HUDís programmatic and 

financial management information systems are not new--we first reported 

some of HUDís current problems in 1984--and our recent work shows that 

these weaknesses continue to adversely impact the Departmentís ability 

to monitor and effectively ensure the integrity of its single-family 

mortgage insurance and rental assistance programs. For example, to 

oversee lenders in HUDís single-family mortgage insurance program, 

staff at the Departmentís homeownership centers must collect and 

manually compile information from multiple systems to target high-risk 

lenders--increasing the likelihood that problems will go unnoticed. In 

addition, concerns about the ability of HUDís financial management 

systems to effectively support the timely preparation and audit of the 

departmentís annual financial statements are long-standing; and as of 

today, HUD is still in the early stages of developing a plan for 

resolving them. 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 efforts to successfully address its 

high-risk program areas.



HUDís High-Risk Areas: The Single-Family Mortgage Insurance and Rental 

Housing Assistance Programs:



HUDís single-family mortgage insurance and its rental housing 

assistance program areas, comprising nearly two thirds of the 

Departmentís budget, are at high risk of waste, fraud, abuse, and 

mismanagement.[Footnote 3] In January 2001, we reported that, various 

factors, including a strong economy, had resulted in the accumulation 

of capital reserves of about $16.6 billion on HUDís Federal Housing 

Administration (FHA)-insured home loans. However we also reported that 

FHA lost about $1.9 billion during fiscal year 2000 on the sale of 

foreclosed homes that it had insured. In addition, we found other 

problems with HUDís management of its single-family program. For 

example, HUD was experiencing significant problems with the performance 

of contractors responsible for maintaining and selling the single-

family properties HUD acquires through foreclosure. We found most of 

these contractors had trouble securing and maintaining properties in 

proper condition--and HUD eventually terminated the contractor 

responsible for about 40 percent of the properties. If HUDís acquired 

properties are not properly secured and maintained, they can contribute 

to a neighborhoodís decay, particularly as they age.



Figure 1: Conditions of Foreclosed HUD Single-Family Houses:



[See PDF for image]



Source: GAO photographs taken during site visits to 16 single-family 

properties.



[End of figure]



Overall, we identified several opportunities wherein HUD could 

strengthen FHAís single-family mortgage insurance program, including 

strengthening the integrity of the single-family loan origination 

process, promoting better monitoring of lenders, appraisers, and 

contractors, and implementing effective human capital policies to 

ensure that sufficient staff with the right skills are available to 

carry out FHAís mission.



For HUDís rental housing assistance programs, we noted that HUD 

continued to face challenges in ensuring that only eligible families 

occupy housing units; that those families are paying the correct rents; 

and that providers of rental housing maintain housing that is in 

decent, safe, and sanitary condition. More recently, we have reported 

that HUDís field offices frequently did not follow the Departmentís 

procedures for ensuring that owners of HUD-assisted multifamily 

properties are correcting physical deficiencies identified in 

inspections by HUDís Real Estate Assessment Center (REAC). Our analysis 

focused on approximately 500 properties that REAC determined were in 

substandard condition and that HUDís field offices subsequently 

classified as repaired. On the basis of our site visits to a sample of 

these properties, we estimated that for about half of the properties 

covered by our analysis, at least 25 percent of the deficiencies that 

REAC classified as ďmajorĒ or ďsevereĒ had not been corrected. This 

problem occurred because HUD staff were classifying the properties as 

repaired, without obtaining required repair plans and certifications of 

repairs from the owners and because some owners and managers reported 

completing repairs that had not been made.[Footnote 4]



Figure 2: Conditions Found at Public Housing Properties:



[See PDF for image]



Source: GAO photographs taken during site visits to five housing 

authorities.



[End of figure]



Overall, our January 2001 report concluded that, to address this high-

risk area, HUD must continue its efforts to develop adequate 

information systems that ensure that (1) correct rental housing 

subsidies are paid and (2) complete actions on our recommendations 

aimed at improving the quality of contractorsí physical inspections of 

the condition of public and multifamily housing.



HUD has been addressing its high-risk challenges and the 

recommendations of our earlier reports. HUDís 2020 Management Reform 

Plan resulted in major changes throughout the Department as it worked 

to resolve its management challenges. In reviewing the progress of the 

plan in October 2001, we noted that some of HUDís initiatives were 

achieved relatively quickly and are producing results.[Footnote 5] For 

example, the consolidation of some of its oversight and processing 

functions into several new centers--as part of HUDís efforts to 

consolidate and streamline its operations--had perhaps been the most 

successful. The new REAC enabled HUD to complete the first physical and 

financial assessments of its assisted housing inventory, while HUD 

reported that the creation of its Departmental Enforcement Center 

resulted in the restoration of 41,344 housing units to decent, safe, 

and sanitary conditions in fiscal year 2000, compared with 968 in 

fiscal year 1999. Other efforts to improve the efficiency of HUDís 

operations and improving accountability, met with more limited success, 

and were hampered by inefficient distribution of staff and workload, a 

lack of resources for program monitoring, problems with contractor 

performance and its oversight of contractors, and weaknesses in 

programmatic and financial management information systems.



The current administration took office in January 2001, saying it was 

dedicated to maintaining HUDís progress, and placing improved 

management among the Departmentís highest priorities. Eighteen months 

ago, Secretary Martinez came before this Committee and said:



ďMy first priority will be for HUD to continue to put its own house in 

order, so we have the institutional fortitude to provide the housing 

and community renewal opportunities needed by so many families and so 

many neighborhoods. The Department of Housing and Urban Development 

must be healthy itself, if we are to deal with the challenges before 

us. And while former HUD Secretaries Kemp, Cisneros, and Cuomo have 

built a foundation for strength, there are a great many areas of 

institutional weakness that must be addressed. GAO and the HUD Office 

of Inspector General have identified similar program and management 

areas needing the most improvement, including: the Federal Housing 

Administrationís single family mortgage insurance risk; the impact and 

continuing evolution of HUDís 2020 management reform effort; and the 

failure to integrate financial and information systems.Ē:



According to HUDís most recent performance plan, the Department is 

using our reports and those of its Inspector General as a ďroadmapĒ for 

making management improvements. In August 2001, the Administration 

unveiled the Presidentís Management Agenda, including a set of HUD-

specific initiatives to strengthen management of HUDís programs by, 

among other things, improving FHAís management of risks throughout the 

mortgage insurance process, improving the performance of public housing 

agencies and providers of multifamily housing, and reducing overpaid 

rent subsidies. The plan contained specific goals and timetables to, 

for example, eliminate most if not all fraud in the appraisal process, 

increase the percentage of HUD-assisted public housing units meeting 

physical standards, and reduce overpayment of rent subsidies by at 

least one-half. The plan also establishes a goal of removing our high-

risk designation from all HUD programs by 2005.



To further its efforts to improve its management, HUD also recently 

undertook a series of organizational realignments. According to HUD, 

these efforts are designed to streamline its organization, establish 

clear lines of responsibility and reporting, and more effectively 

administer its programs. One of the more prominent realignments 

involved moving HUDís REAC, responsible for physical and financial 

inspections of public housing and assisted multifamily properties. The 

REAC, which formerly reported to the Deputy Secretary, now reports to 

the Assistant Secretary for Public and Indian Housing. In addition, the 

Departmentís Enforcement Center, which formerly reported to the Deputy 

Secretary, now reports to HUDís General Counsel. Similarly, the Chief 

Procurement Officer, which formerly reported to the Deputy Secretary, 

now reports to the Assistant Secretary for Administration. In addition, 

regional directors in the field have been given additional discretion 

to redeploy staff to address workload imbalances. According to HUD 

officials, to more effectively administer HUDís programs, other centers 

and offices are being studied for elimination or consolidation.



As I discussed earlier, clearly the creation of the REAC and the 

Enforcement Center, to name two, were positive developments that 

yielded real results.[Footnote 6] And, it is worth noting that at the 

time HUD established these centers, it did so because it believed that 

the Office of Public and Indian Housing and the Office of Housing--the 

offices within HUD that were originally responsible for these 

activities--were not effectively carrying out these functions. The 

Secretary, as the leader of his organization, has the prerogative to 

align the organization as he sees fit, consistent with his vision and 

management style. But it is important that the progress made to date 

not be jeopardized. For example, regardless of how REAC is aligned, HUD 

must continue to make progress improving the physical condition of 

public and assisted multifamily housing properties. Ultimately the 

success or failure of any organizational decision will be viewed in 

that light.



We are now beginning to address these realignment issues as we assess 

the progress HUD and other federal agencies have made as part our 

Performance and Accountability and High-Risk Series. In making our 

determination of high risk at HUD and other federal agencies, we will 

consider the corrective measures that agencies have planned or have 

underway to resolve their management challenges, as well as the status 

and effectiveness of these actions. Some of the key factors we will 

consider in making our high-risk determination at HUD include the 

extent to which HUD has demonstrated commitment to resolving its 

management deficiencies, strengthened controls to address its 

management deficiencies, proposed appropriate corrective action plans 

for its remaining management challenges, implemented effective 

solutions that will be substantially completed in the near term, and 

implemented solutions that get to the root cause of its management 

deficiencies.



We will review the current status of HUDís single-family mortgage 

insurance and its rental housing assistance program areas and the 

actions taken to address weaknesses. At that time, the agency must have 

demonstrated concrete results, with a clear path toward addressing any 

remaining problems. To conduct our assessment of high risk, we will 

review, among other things, HUDís strategic plans, annual performance 

plans and reports, accountability reports, and audited financial 

statements. This information will be supplemented by relevant GAO 

reports, Inspector General reports, and other independent analysis. 

Finally, the ultimate determination will be based on the independent 

and objective judgment of GAO analysts.



HUD Faces Crosscutting Management Challenges:



As HUD works to improve accountability and control over its high-risk 

program areas, it will find that it faces several issues that cut 

across its efforts to improve its programs. I would like to turn now to 

these management challenges and discuss with you, HUDís progress and 

challenges in the areas of (1) human capital management, (2) 

acquisition management, and (3) programmatic and financial management 

information systems. Successfully addressing these challenges will help 

determine whether HUD can sustain the progress of its management reform 

efforts, address its high-risk program areas, and make progress toward 

its goal of becoming a high-performing organization.



Human Capital Is the Most Pressing Management Challenge Facing HUD:



Human capital permeates virtually every effort to improve HUDís 

programs, including its ability to oversee the performance of housing 

authorities and property owners, acquire needed systems, and 

successfully execute and monitor contracts. Insufficient staffing and 

inefficient distribution of workload affects HUDís ability to operate 

efficiently and ensure the accountability of its programs. It increases 

HUDís need to hire contractors to perform activities and affects its 

ability to oversee contractors and hold them accountable for 

performance. HUD has the opportunity to develop a strategic human 

capital management approach to ensure that the Department has the right 

staff in the right numbers with the right skills in the right places 

and that HUD can continue to meet its mission and goals in the future 

as large numbers of experienced employees retire. As we have previously 

reported,[Footnote 7] a comprehensive workforce plan should be linked 

to the accomplishment of an agencyís mission and include the following 

elements:



* the kind of work its staff should be doing now and in the future;



* the knowledge, skills, and abilities needed by staff to do this work;



* the capabilities and developmental needs of the current staff;



* the appropriate staff deployment across the organization;



* any gaps that exist in knowledge, skills, and abilities; and:



* an approach for filling the gaps in the knowledge, skills, and 

abilities of staff through recruiting and hiring.



While HUD has begun to do workforce planning by identifying the 

resources required to do its current work, the Department does not have 

a comprehensive workforce plan. HUDís most significant workforce 

planning activity to date has been its Resource Estimation Allocation 

Process (REAP). The purpose of REAP was to systematically estimate the 

number of employees HUD needs to do its work based on its current 

workload and operations and HUD used the results to estimate staffing 

level ceilings for the Departmentís fiscal year 2003 proposed budget. 

HUDís workforce planning effort is currently focused on responding to 

major human capital deficiencies that the Office of Management and 

Budget identified in a 2001 evaluation conducted as part of the 

Presidentís Management Agenda. This effort is focused on specific 

initiatives, such as reducing the number of HUD managers and 

supervisors, and does not consider many of the elements that we have 

endorsed as necessary for comprehensive workforce planning.



In the absence of a comprehensive workforce plan, HUD faces myriad 

human capital challenges ensuring that it has the right mix of staff 

with the requisite knowledge, skills, and abilities appropriately 

deployed across its organization. In July 2001, we reported that HUDís 

Homeownership Centers, responsible for carrying out FHAís single family 

mortgage insurance program, faced staffing and workload imbalances and 

lacked an adequately standardized training curriculum. It also faced 

skill mix difficulties--for example, managers at the Centers said that 

it was a challenge for their staff to shift from performing insurance 

endorsements and property disposition activities to monitoring 

contractors that now do this work for HUD. In our survey of HUD 

managers for our January 2001 report, over 70 percent stated that staff 

training needed to be increased in the areas of information systems, 

technical skills and other areas.



Without a comprehensive workforce plan, the Department will not be as 

prepared as it could be to recruit and hire staff needed to pursue its 

mission. During the 1990s, HUD underwent considerable downsizing, 

reducing its staff from around 13,500 to about 9,000 by March 1998. The 

need to recruit and hire is exacerbated by the upcoming wave of 

potential retirements that HUD faces. More than 80 percent of HUDís 

workforce is in the core professional grades--GS 9 through 15; and, by 

August 2003, half of this workforce will be eligible to retire. HUD has 

done little outside hiring in the last decade and some vacant positions 

have gone unfilled while others have been filled through lateral 

transfers, promotions, or the upward mobility of administrative staff 

into professional positions. HUD is delegating more hiring authority to 

its regional directors and has established an internship program that 

may help address some staffing shortages. However, the internship 

program is in the early stage of its development and does not address 

the needs for hiring at the mid-level ranks of government that could be 

disproportionately affected by the impending wave of potential 

retirements.



Acquisition Management Challenges Remain:



A second crosscutting challenge area for HUD is its management of 

acquisitions. As you know, Mr. Chairman, by design HUD relies on the 

performance and integrity of thousands of intermediaries such as 

mortgage lenders and public housing agencies to fulfill its mission. 

But as HUD has downsized its own staff over the past few years, its 

reliance on private contractors has increased substantially. This 

reliance, as measured by contracting obligations, grew by more than 62 

percent from fiscal year 1997 to fiscal year 2000; and HUD officials 

have estimated that the total number of contractor staff assisting in 

delivering HUD services may nearly equal its own. As a result, 

effective management of acquisitions is crucial to HUDís success in 

meeting its mission and addressing its high-risk single-family mortgage 

insurance and rental housing assistance program areas. Ineffective 

oversight of contractors adversely effects HUDís ability to carry out 

its mission and to deliver key services and exposes HUDís programs to 

the additional risk of fraud, waste, abuse, and mismanagement. HUD 

faces the challenge of ensuring that, where it relies on contractors to 

perform its mission, it will hold these contractors accountable for 

results. Holding contractors accountable for results requires processes 

and practices in place to effectively monitor contractorsí performance, 

an acquisition workforce with the right workload, training and tools to 

carry out its mission, and programmatic and financial management 

information systems that support HUDís efforts to ensure accountability 

in its acquisitions.



HUD has undertaken a number of actions over the past few years to (1) 

improve the processes and practices in place to effectively monitor 

contractorsí performance, (2) improve the training and professional 

development of it acquisition workforce, and (3) improve its 

contracting information systems. While progress has been made, our 

recent and ongoing work suggests that HUD is still experiencing 

difficulties in each of these areas and thus faces continued challenges 

in its ability to hold contractors accountable for results. For 

example:



* to improve monitoring, HUD provided guidance to its employees to 

incorporate more systematic methods into its monitoring efforts, 

including the use of risk-based assessments to focus HUD staff efforts. 

In fiscal year 2000--around $600 million of the almost $1.3 billion in 

contracts were for contracts supporting HUDís single-family and 

multifamily housing programs. On the single-family side, we have 

reported numerous problems over the past few years in HUDís oversight 

of its contractors handling the marketing and management of HUDís 

single-family properties,[Footnote 8] as well as those performing 

oversight of lenders and appraisers.[Footnote 9] More recently we have 

been examining property management contracts in HUDís multifamily 

housing program. From our ongoing work, it appears that few of the 

staff overseeing HUDís multifamily housing program property management 

contracts use monitoring plans or employ risk-based strategies to 

determine the necessary level and frequency of monitoring. We have 

observed that oversight and monitoring of contractors are largely 

remote--consisting mainly of E-mails, telephone calls, and reviews of 

contractorsí progress reports--and site visits to properties by HUD 

staff do not occur routinely. Our ongoing work indicates that, absent a 

systematic approach to monitoring and with a limited amount of on-site 

monitoring occurring, HUDís ability to effectively monitor contractorsí 

performance and identify and correct problems may be limited.



* to improve the training and professional development of its 

acquisition workforce, among other things, HUD created full-time 

government technical representatives (GTR)[Footnote 10] to help oversee 

contracts, provided this staff with new training, and required that 

their training and qualifications be formally certified. However, HUDís 

progress in strategically managing its acquisition workforce has been 

slow. For example, we recently learned that HUD managers were not aware 

of 143 staff members who were performing the GTR function and had not 

received the appropriate training. Our work suggests that HUDís 

training records are poorly maintained, making it difficult for its 

managers to know which staff have received training and thus where to 

focus scarce resources. HUD has not yet used the results of its REAP 

study to remedy disparities that it has identified in the contracting 

workload within the Office of the Chief Procurement Officer, and a plan 

to identify critical skills and career paths for its acquisition 

workforce has been in draft for over 2 years. Like HUDís overall human 

capital challenges, HUDís ability to hold its contractors accountable 

for performance depends, in no small part, on its success in building 

an acquisition workforce with the right workload, training, and tools 

to carry out HUDís mission.



* to improve its contracting information systems HUD implemented a 

single system--HUDís Procurement System--to track contract 

obligations, milestones, and contractor performance. However our 

ongoing work suggests that this system does not adequately support 

HUDís managers or acquisition workforce because the data it contains 

are not complete, accurate, or consistent. As a result, Mr. Chairman, 

staff overseeing contractors in HUDís multifamily program reported 

relying primarily on spreadsheets and other informal systems they have 

created and maintained in order to monitor contract milestones and task 

orders. These informal systems are not subject to HUDís internal 

controls, audits, information security protocols, or other standards 

and thus expose HUDís contract activity to internal control weaknesses 

and the potential for waste, fraud, abuse, and mismanagement. In 

addition, HUD managers do not have reliable information on the number 

of active contracts it is managing or the amount of funds that have 

been obligated for them, and cannot readily determine how much money 

HUD has spent overall on its contracting activities. Finally, 

performance data that would assist in evaluating contractor performance 

is not systematically tracked in HUDís Procurement System, although the 

system allows such activity. HUDís ability to manage and monitor its 

acquisition activities is limited by weaknesses in its programmatic and 

financial management information systems, which are needed to ensure 

accountability in its acquisitions.



At this Subcommitteeís request, Mr. Chairman, we are continuing our 

work on HUDís acquisition management and will be reporting to you on 

the results of this work in September 2002. We are examining potential 

improper payments at HUD, including in its multifamily housing 

acquisition activities, and will be issuing our report on this subject 

later this year.



Programmatic and Financial Management Information Systems Challenges 

Are of Long-standing and Continuing Concern:



Finally, Mr. Chairman, the effectiveness of HUDís programmatic and 

financial management information systems continue to raise concerns. 

Responsive programmatic and financial management information systems 

are critical to HUDís ability to meet its mission, deliver key 

services, and establish sufficient management control over its programs 

and operations. As our work has shown, ineffective programmatic and 

financial management information systems adversely impact HUDís 

programs and operations and its staffís ability to effectively monitor 

its programs, recipients, and contractors. They also limit HUDís 

ability to collect accurate information to report on program results 

and effectively manage its operations. Concerns about the ability of 

HUDís financial management systems to effectively support the timely 

preparation and audit of the departmentís annual financial statements 

are long-standing, and as of today, HUD is still in the early stages of 

developing a plan for resolving them. Accordingly, developing a plan to 

acquire and implement programmatic and financial management information 

systems that meet the Departmentís needs and comply with federal 

financial system requirements is crucial to HUDís efforts to 

successfully address its high-risk program areas.



Mr. Chairman, concerns about the effectiveness of HUDís programmatic 

and financial management information systems are not new. We have 

reported that HUD lacks the programmatic and financial management 

information systems necessary to ensure accountability over its 

programs since 1984. This February, 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. HUD is aware that its programmatic and financial 

management information systems pose serious challenges and has taken 

steps to address them. For example, HUD has undertaken extensive 

efforts to modernize both HUDís and FHAís programmatic and financial 

management information systems, improve financial reporting, institute 

a more rigorous planning and review process over its information 

technology capital investments, and bring FHAís systems into compliance 

with federal financial systems requirements. HUD is preparing to obtain 

contractor assistance to help analyze its current status and develop 

plans for improving the Departmentís financial management systems and 

providing the needed support to its programs.



Our recent work and that of the Departmentís Inspector General has 

shown however, that despite efforts to improve its programmatic and 

financial management information systems, serious challenges still 

exist. HUDís systems do not today fully support its programs--including 

its single-family mortgage insurance and rental assistance programs--

nor effectively support the timely preparation and audit of the 

Departmentís annual financial statements. For example:



* To oversee lenders in HUDís single-family mortgage insurance program, 

staff at the Departmentís homeownership centers must collect and 

manually compile information from multiple systems and sources in order 

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

potential fraud cases. As we reported in October 2001, this creates a 

greater risk of error and increases the likelihood that problems will 

go unnoticed.[Footnote 11]



* To review and approve applications for mortgage insurance on 

multifamily properties, HUD uses, in some cases, an expedited process 

where lenders, rather than HUD, underwrite the loans. However, our 

ongoing work on HUDís Multifamily Accelerated Processing program 

suggests that HUDís system for tracking the status of multifamily loan 

applications does not allow it to reliably track and record several key 

processing steps in the accelerated approval process. As a consequence, 

HUD field staff develop and maintain spreadsheets and other informal 

systems to monitor the status of HUDís actions.



* HUDís efforts to ensure that only eligible families occupy housing 

units and that those families pay the correct rents--a key component of 

its strategy to address its high-risk program areas--were, according to 

HUDís Inspector General, impeded by limitations in its information 

systems. In particular, the Inspector General reported that the lack of 

complete, current, consistent information on tenants and rents limited 

HUDís ability to effectively conduct computerized income matching--a 

strategy that has been used to identify and deter tenants who 

underreport their incomes and to address some of the causes of the 

estimated $2 billion in overpayments and errors on rent subsidy 

calculations. For this and other reasons, the Inspector General raised 

concerns about the effectiveness of HUDís income matching 

program.[Footnote 12]



* HUD continues--due in large part to deficiencies in its financial 

management systems--to rely on extensive ad hoc analyses and special 

projects to develop account balances and necessary disclosures for the 

Departmentís annual financial statements, according to HUDís Inspector 

General. These extensive efforts indicate that HUDís financial 

management systems cannot currently provide the day-to-day information 

needed by its managers to effectively manage and monitor the 

departmentís programs.



* HUD needs high-quality software for the systems it uses to support 

its financial management needs as well as its single-family mortgage, 

rental housing assistance, and other program needs. In September 2001, 

we reported that HUDís success or failure in acquiring software depends 

largely on specific individuals, rather than on well-defined and 

disciplined software acquisition management practices. Until this is 

strengthened, HUD is exposed to a higher risk that software intensive 

acquisition projects will not consistently meet mission requirements, 

perform as intended, or be delivered on schedule and within 

budget.[Footnote 13]



Mr. Chairman, we are continuing to review HUDís progress in improving 

its financial management systems and plan to report to you on these 

issues by December 2002.



In conclusion, Mr. Chairman, HUDís management reform efforts over the 

past few years resulted in major changes throughout the Department as 

it worked to resolve its management challenges. HUD has been moving 

forward over the past few years and has made credible progress, and the 

current administration has reaffirmed an emphasis on and commitment to 

improving management at the Department. However, despite this progress 

and renewed commitment, HUD still faces considerable challenges in 

ensuring that its continuing management reform efforts will amount to 

the sustainable improvements in performance needed to resolve 

weaknesses in its high-risk program areas. Successfully addressing the 

crosscutting challenges in the areas of human capital, acquisition 

management, and programmatic and financial management information 

systems can help determine whether HUD can sustain the progress it has 

made, meet its challenges, and make progress toward its goal of 

becoming a high-performing organization.



This concludes my prepared statement. I will be happy to respond to any 

questions you or the other members of the Subcommittee may have.



Contacts and Acknowledgements:



For further contacts regarding this testimony, please contact Stanley 

J. Czerwinski at (202) 512-2834. Individuals making key contributions 

to this testimony included Amy Bevan, Jeannie Bryant, Susan Campbell, 

Steve Cohen, Debra David, Colin Fallon, David Gill, Deborah Knorr, John 

McGrail, and Phillip McIntyre:



Related GAO Products:



HUD Human Capital Management: Comprehensive Strategic Workforce 

Planning Needed (GAO-02-839, July 24, 2002).



Public Housing: HUD and Public Housing Agenciesí Experiences with 

Fiscal Year 2000 Plan Requirements (GAO-02-572, May 31, 2002).



Mortgage Financing: Actuarial Soundness of the Federal Housing 

Administrationís Mutual Mortgage Insurance Fund (GAO-02-671T, 

Apr. 24, 2002).



Single-Family Housing: Opportunities to Improve Federal Foreclosure and 

Property Sale Processes (GAO-02-305, Apr. 17, 2002).



Public Housing: New Assessment System Holds Potential for Evaluating 

Performance (GAO-02-282, Mar. 15, 2002).



Homelessness: Improving Program Coordination and Client Access to 

Programs (GAO-02-485T, Mar. 6, 2002).



Multifamily Housing Finance: Funding FHAís Subsidized Credit Programs 

(GAO-02-323R, Feb. 1, 2002).



Federal Housing Assistance: Comparing the Characteristics and Costs of 

Housing Programs (GAO-02-76, Jan. 31, 2002).



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

the Business Processes at HUDís Homeownership Centers 

(GAO-02-44, Oct. 24, 2001).



HUD Management: Progress Made on Management Reforms, but Challenges 

Remain (GAO-02-45, Oct. 31, 2001).



HUD Information Systems: Immature Software Acquisition Capability 

Increases Project Risks (GAO-01-962, Sept. 14, 2001).



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

Mortgage Insurance Program (GAO-01-1124T, Sept. 10, 2001).



Single-Family Housing: Better Strategic Human Capital Management Needed 

at HUDís Homeownership Centers (GAO-01-590, July 26, 2001).



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

901R, July 18, 2001).



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

Reauthorization (GAO-01-800, July 11, 2001).



Department of Housing and Urban Development: Status of Achieving Key 

Outcomes and Addressing Major Management Challenges 

(GAO-01-833, July 6, 2001).



HUD Inspector General: Actions Needed to Strengthen Management and 

Oversight of Operation Safe Home (GAO-01-794, June 29, 2001).



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

Physical Problems Are Corrected (GAO-01-668, June 21, 2001).



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

Reauthorization (GAO-01-871T, June 19, 2001).



Mortgage Financing: Actuarial Soundness of the Federal Housing 

Administrationís Mutual Mortgage Insurance Fund (GAO-01-527T, Mar. 20, 

2001).



Mortgage Financing: Actuarial Soundness of the Federal Housing 

Administrationís Mutual Mortgage Insurance Fund (GAO-01-526T, Mar. 19, 

2001).



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

the Fund Have Uncertain Outcomes (GAO-01-460, Feb. 28, 2001).



Major Management Challenges and Program Risks: Department of Housing 

and Urban Development (GAO-01-248, Jan. 2001).



FOOTNOTES



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

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

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



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

Comprehensive Strategic Workforce Planning Needed, GAO-02-839 

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



[3] GAO-01-248.



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

Follow-up Needed to Ensure That Physical Problems Are Corrected, 

GAO-01-668 (Washington, D.C.: June 21, 2001).



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

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

Oct. 31, 2001).



[6] HUDís 2020 Management Reform Plan created several new centers to 

consolidate, among other things, HUDís single family mortgage insurance 

activities, Section 8 program financial management support, and the 

processing, reviewing, and awarding of categorical and formula grants 

for the Office of Public and Indian Housing. These centers were 

discussed in greater detail in our October 2001 report.



[7] GAO-02-45. 



[8] 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). 



[9] 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); U.S. General Accounting 

Office, Single Family Housing: Weaknesses in HUDís Oversight of the FHA 

Appraisal Process, GAO/RCED-99-72 (Washington, D.C.: Apr. 16, 1999).



[10] The government technical representative acts as the Contracting 

Officerís representative concerning the technical and performance 

aspects of a contract. He or she is responsible for ensuring that the 

contractor is using the most efficient and cost effective methods and 

is also the principal judge of contractor performance, including the 

quality and timeliness of work and products.



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

Information Systems Do Not Fully Support the Business Processes at 

HUDís Homeownership Centers, 

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



[12] Office of Inspector General, Audit of U.S. Department of Housing 

and Urban Development (HUD) Financial Statements for Fiscal Years 2001 

and 2000, 2002-FO-0003 (Washington D.C.: Feb. 27, 2002).



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

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

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