We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of Federal Housing Administration (FHA)-insured loans originated with borrower-financed downpayment assistance. The audit was initiated based on the results from three HUD, Office of Inspector General (OIG) audits, which determined that lenders allowed FHA borrowers to finance their own downpayments through an increase in their mortgage interest rate as part of programs administered through housing finance agencies. Our audit objective was to determine whether HUD had adequate controls to ensure that FHA-insured loans with downpayment assistance complied with HUD requirements.
HUD failed to adequately oversee more than $16.1 billion in FHA loans that may have been originated with borrower-financed downpayment assistance to ensure compliance with HUD requirements, putting the FHA Mutual Mortgage Insurance Fund at unnecessary risk. Between October 1, 2015 and September 30, 2016, HUD guaranteed nearly $12.9 billion in FHA loans that may contain questionable downpayment assistance. While governmental entities are not prohibited sources of downpayment assistance, the assistance provided through these programs did not comply with HUD requirements. FHA borrowers were required to obtain a premium interest rate and, therefore, repaid the assistance through higher mortgage payments and fees. Despite the prohibition against similar seller-funded programs, HUD’s requirements appeared to have enabled the growth of these questionable programs. In addition, HUD did not adequately track these types of loans and review the funding structure of these programs. Despite concerns raised by OIG, HUD failed to protect FHA borrowers against the higher monthly mortgage payments and higher fees imposed on them, which increased the risks to the FHA Insurance Fund in the event of default.
We recommend that HUD (1) reconsider its position on questioned borrower-financed downpayment assistance programs, (2) develop and implement policies and procedures to review loans with downpayment assistance, (3) develop requirements for lenders to review downpayment assistance programs, (4) require lenders to obtain a borrower certification that details borrower participation, (5) ensure that lenders enter all downpayment assistance data into FHA Connection, and (6) implement data fields where lenders would be required to enter specific downpayment assistance information.