HUD is struggling to make the grade, regardless of potentially valid excuses.  That's the short version.  The longer version in today's testimony from David A. Montoya, Inspector General of the U.S. Department of Housing and Urban Development (HUD) was slightly more diplomatic.  While the IG was critical of HUD's handling of several key programs, he said the agency is challenged in attempting to exercise an appropriate level of oversight to prevent or mitigate fraud and waste because of its limited staff. 

Over the years, Montoya said, HUD has seen a steady decline in its staffing level while at the same time it has been called upon to administer an increasing number of programs. At the end of fiscal year 2012, HUD had just over 8,300 staff compared to about 9,700 a decade earlier and even greater levels in the 1990s.  Consequently HUD has been forced to utilize subcontractors heavily while lacking the funds to effectively monitor them, and to depend on state and local agencies receiving HUD funds to conduct their own oversight and due diligence. These resource constraints are being exacerbated by the effects of sequestration.   

HUD is also negatively affected by the lack of an integrated financial system.  This impedes its ability to generate and report the information needed to both prepare financial statements and, more importantly, manage operations and to conduct more robust oversight and mitigate fraud, waste and abuse.

The IG spoke specifically about problems his office had observed with HUD's administration of programs directed towards victims of disasters, its administration of the Public and Assisted Housing Program, Community Block Grant Programs (CDBG) and the HOME programs, and especially of various failings in the FHA program.  

FHA's Mutual Mortgage Insurance (MMI) Fund has been operating below the congressionally mandated 2 percent capital ratio for the last four years and current projections are that it will not reach the 2 percent level until 2017.  This means that FHA may have to use its mandatory appropriation authority to supplement its reserves.  HUD has increased premiums and taken other steps to restore the fund, while OIG has focused on civil fraud investigations with the Department of Justice in an effort to further prevent fraud, waste and abuse and return losses to the MMI account.

Working with DOJ, OIG has initiated a number of mortgage lender reviews in order to determine the accuracy and due diligence of underwriters of FHA loans for the largest nationwide lenders.  Montoya said the reviews have found high percentages of loans with multiple significant deficiencies that should not have been underwritten.  These reviews have resulted in a total of $1.24 billion in civil settlements.  Montoya said the OIG reviews should have been undertaken by HUD itself as part of its inherent program of oversight and risk management. 

Auditing of lenders continues and to date, he said, the underwriting of thousands of FHA insured loans has been reviewed, as has the overall FHA loan origination and underwriting practices of the selected lenders.  Results to date have been presented to nearly all of the lenders and settlement talks have begun; however, the reviews are still underway.  Given the sheer volume of loans involved and the high error rates identified in the underwriting, settlements and favorable court actions may result in significant recoveries by the government from each of the 10 lenders.  A second initiative focusing on large lender compliance is currently underway.

In addition to the focus on civil fraud, the FHA single-family program continues to be a major focus of HUD OIG, Montoya said.    During the last two semiannual reporting periods, OIG issued 25 audits in this program area reporting $325 million in questioned costs and nearly $800 million in funds to be put to better use. OIG also found that HUD continues to face challenges in ensuring its programs benefit eligible participants and that they are not paying improper claims.  OIG recently identified an estimated $1.06 billion in claims for 11,693 short sales that did not meet the criteria for participation in the program.  Another audit found borrowers using the Home Equity Conversion Mortgage (HECM) Program did not always meet the programs residence requirements.

Finally, OIG audited HUD's oversight of its REO management and marketing program and found that HUD did not have adequate procedures in place to ensure consistent and adequate enforcement of asset and field service manager contracts. 

In comparing the FHA REO program with that of Fannie Mae and Freddie Mac, the Government Accountability Office (GAO) found FHA lagged both enterprises in several areas.  It took 60 percent longer (200 versus 340 days) for FHA to dispose of a property after foreclosure, delays that may have cost it as much as $400 million in additional proceeds and increased holding costs by $600 million.  

Montoya also noted that HUD has had significant management challenges in monitoring disaster program funds.  This grows out of the limited resources for oversight, the breadth of some of the programs and the length of time needed to complete them, the ability to waive certain of its own requirements, and the lack of understanding of the disaster grants on the part of their recipients. 

Montoya noted in particular OIG's follow-up review of its recommendations pertaining to the State of Louisiana's Road Home Elevation Incentive program.  The initial review found that most home owners who received grants in 2006 and 2007 to elevate their homes had not done so and most, when interviewed, revealed a lack of understanding about their obligations. The follow-up found that as of August 31, 2012, Louisiana did not have conclusive evidence that the $698.5 million in Community Development Block Grant (CDBG) funds provided it by HUD had been used to elevate homes.  In response, HUD's Office of Community Planning and Development (CPD) concurred with the State and allowed homeowners who received the funds to demonstrate that they used them either to elevate or rehabilitate their homes, a decision with which OIG last week non-concurred.   

Montoya said correction of HUDs problems in this area are critical given the money yet to be distributed to victims of Hurricane Sandy.  The greatest improvement that could be made, he said, is to put a time limit on completion of disaster related projects.