We audited the U.S. Department of Housing and Urban Development (HUD), Office of Residential Care Facilities’ (ORCF), oversight of Section 232 residential care facilities’ mortgage insurance program.  We performed this audit because HUD-insured residential care facility loan defaults were rising.  As of June 2024, 167 of the 3,670 HUD-insured Section 232 borrowers, or nearly 5 percent, defaulted on their mortgages.  These 167 loans had an unpaid principal balance of more than $1.1 billion.  Our audit objective was to assess the extent to which HUD identifies and mitigates risks in Section 232 residential care facility portfolios.

We reviewed 4 portfolios composed of 70 properties with 84 loans with a collective unpaid balance of more than $410.6 million.  A portfolio is two or more borrower entities that are under common ownership and/or common control.  HUD rated all 84 loans as troubled as of June 2024.  Our review revealed that HUD ORCF can better recognize and address risks in its portfolios.  Specifically, HUD ORCF is not promptly mitigating financial risks reported in borrowers’ audited financial statements.  The audited financial statements disclosed that (1) borrowers withdrew funds from the properties when the properties did not have available surplus cash, (2) properties had cash deficiencies, and (3) properties did not generate sufficient cash flow to pay the current debts.  HUD ORCF did not (1) receive the audited financial statements from all borrowers as required, (2) ensure that all borrowers fully developed their action plans to address risks that threaten the viability of a property, and (3) notify the Departmental Enforcement Center before the borrowers defaulted on their HUD-insured loans.  

These conditions occurred because HUD ORCF staff lacked the time to conduct the detailed analysis needed.  HUD ORCF stated that, due to the size and complexity, staff did not have the manpower to conduct the analysis required to identify whether borrowers improperly removed funds from the properties (unauthorized distributions).  In addition, the staff decreased from 61 employees in October 2024 to 38 employees in May 2025.  The average number of properties that staff managed changed from 60 - 80 to 165 - 200 properties each, which might increase the risk to the program.  HUD ORCF workload management practices led to no team having insight into an entire portfolio.  Although regulations require borrowers and operators to report risks to HUD at any time, regulations do not require borrowers and operators to develop and implement action plans to address these risks until defaults.  As of July 2025, lenders could make insurance claims for 58 of 84 loans totaling more than $329.5 million.

We recommend that HUD’s ORCF Director of Asset Management (1) work with the borrowers and lenders to develop a plan to address the issues for each of the 58 troubled loans and implement corrective action for the 58 loans, thereby protecting HUD’s investment of more than $329.5 million; (2) quantify the amount of unauthorized distributions in the portfolio with 35 loans reported by the independent public accountant on the borrowers’ audited financial statements and require the borrowers to repay the amount of unauthorized distributions or pursue enforcement of the borrowers’ regulatory agreements by a written referral to HUD’s Departmental Enforcement Center (DEC); and (3) develop and implement policies and procedures to ensure that borrowers and lenders develop and implement action plans that properly list all specific risks at a property, identify the root causes of each risk, specify the actions to address each root cause, and establish a timetable to complete each action.  

We also recommend that HUD’s ORCF Director of Asset Management (4) develop and implement policies and procedures to ensure that borrowers and lenders execute action plans that properly list all specific risks at a property, the root causes of each risk, the actions to address each root cause, and a timetable to complete each action; and (5) develop and implement policies and procedures to ensure that HUD account executives document each action plan, properly list all specific risks at a property, identify the root causes of these risks, specify the actions to address the root causes, establish timetables for completion, and document monthly progress towards completion of the actions in the Integrated Real Estate Management System (iREMS).