The Department of Housing and Urban Development (HUD) lacks the necessary resources to address an ongoing fraud problem within its programs, David A. Montoya, inspector general of the department, told members of the House Financial Services Committee on Tuesday.
What's more, the department needs better strategies in place to battle escalating losses due to fraud, waste and abuse.
‘Achieving HUD's mission while exercising the appropriate level of oversight to prevent or mitigate fraud, waste and abuse continues to be an ambitious challenge for its limited staff,’ Montoya said in his testimony. ‘This has forced HUD to continue to rely heavily on contractors to carry out many of its programs and to expect that local and state jurisdictions and recipients of HUD funds conduct their own oversight and due diligence. This only serves to magnify the importance of having robust information systems to help HUD meet its oversight responsibilities.’
HUD had about 9,700 staff in 1992 compared to just over 8,300 in 2012, Montoya said. Yet the number of programs the department administrates, as well as the volume of activity it deals with on a daily basis, has increased substantially during the past five years. Making things all the more difficult, he said, is that many staff members have been focused on due diligence reviews of mortgage loans made by lenders in the Federal Housing Administration (FHA) program who are also subject to the National Mortgage Settlement.
What's more, the department's resource constraints have only worsened in the past year as a result of sequestration.
Montoya said his office has uncovered a variety of problems with HUD's administration of its programs. His report identifies more than $770 million in questionable costs. It also includes recommendations for putting $739.5 million in HUD funds to better use.
As an example of the challenges HUD faces, the department's 2010 review of the state of Louisiana's Road Home Elevation Program, established after Hurricane Katrina, revealed that ‘most homeowners had not elevated their homes, even though they received grants of up to $30,000 in 2006 and 2007 to pay toward the construction costs.’
‘Seventy-nine percent of the inspected homes (158 of 199 properties) were not elevated. These noncompliant homeowners received grant funds exceeding $3.8 million,’ Montoya said in the report. ‘Interviews with homeowners who had not elevated their homes revealed a lack of understanding about the obligations set out in the grant agreements.’
A follow-up review earlier this year revealed that ‘a total of 24,042 homeowners had not elevated their homes, were non-compliant, were non-responsive or did not provide sufficient documentation to support that they had elevated their homes. Therefore, the state did not have conclusive evidence that the $698.5 million in CDBG Disaster Recovery funds had been used to elevate homes.’
Montoya's testimony points to the difficulties HUD faces in tracking disaster relief funds as they are disbursed through state channels.
Montoya also addressed the shortfalls in managing the FHA's Mutual Mortgage Insurance (MMI) Fund, which has also been ravaged by fraud in recent years. ‘Our results to date have shown high percentage of loans reviewed containing multiple significant deficiencies that should not have been underwritten,’ Montoya said. ‘The reviews completed to date have resulted in a total of $1.24 billion in civil settlements for alleged violations of the False Claim Acts and for failure to fully comply with FHA requirements. The loan level reviews my office has been conducting, and which have resulted in large civil fraud settlements with major lenders, is a responsibility we would expect HUD to be doing itself as part of its inherent program oversight and risk management.’
Montoya said for the past four years, the MMI fund has failed to meet its legislatively mandated 2% capital ratio and, as of November last year, had reached a ‘negative economic value of $16.3 billion.’
‘Based on current projections, the capital ratio will not reach the 2% capital ratio until 2017, marking eight years below the 2% threshold,’ Montoya said, adding that the FHA, for the first time in its history, may need a government bailout in order to supplement its reserves.
He also added that HUD has been working with the Office of the Inspector General (OIG) to take steps to stem losses in the MMI fund. Auditing of lenders continues, and to date, 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, he said.
Results of these audits have been presented to nearly all of the lenders, he added, and settlement talks have begun. Settlements and favorable court actions may result in significant recoveries, he said. In addition, a second initiative focusing on large lender compliance is currently under way.
The FHA single-family program also continues to be a major focus of the OIG, Montoya explained. During the last two semiannual reporting periods, the OIG undertook 25 audits of the program, covering about $325 million in questionable costs and nearly $800 million that may have been misused.
In addition, the OIG reviews uncovered that HUD continues to face challenges in ensuring its programs benefit eligible participants. For example, the 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 program did not always meet residence requirements.
What's more, the OIG found through an audit that HUD did not have adequate procedures in place to ensure consistent enforcement of asset and field service manager contracts in its real estate-owned (REO) management and marketing program.
In comparing the FHA REO program with that of Fannie Mae and Freddie Mac, the Government Accountability Office found that it took 60% longer (200 versus 340 days) for FHA to liquidate a property after foreclosure. These delays that may have cost HUD as much as $400 million in additional proceeds and increased holding costs by as much as $600 million, Montoya said in his testimony.
For a full transcript, click here.