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The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General audited the Federal Housing Administration (FHA) based on the results of another audit, which found that the lender improperly filed for partial claims before completing the loan modifications and reinstating the loans.  Our audit objective was to determine whether FHA improperly paid partial claims that did not reinstate the delinquent loans.

We found that FHA improperly paid partial claims that did not reinstate their related delinquent loans.  From a sample of 87 partial claims reviewed, FHA paid 47 partial claims totaling more than $2.7 million that did not cure the loan delinquency.  By using a statistical projection, we estimated that the FHA insurance fund was unnecessarily depleted by $27.1 million in partial claims.

We recommend that the Deputy Assistant Secretary for Single Family Housing (1) take corrective action against lenders for the improper partial claims that did not reinstate the delinquent loans and have not been repaid, (2) design controls to protect the insurance fund from improper partial claims that did not reinstate the loans to put $27.1 million to better use, and (3) update program guidance, clarifying that upon application of the partial claim funds, the mortgage must be fully reinstated with no unpaid amounts.