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The U.S. Department of Housing Urban Development (HUD), Office of Inspector General audited HUD to determine whether it identified and collected outstanding partial claims out of surplus proceeds from nonconveyance foreclosures.  We initiated this audit because we learned while doing unrelated audit work that a trustee attorney held surplus proceeds from two nonconveyance foreclosures and HUD had not claimed these funds to offset earlier partial claims it had paid for the properties.

HUD did not always identify and collect partial claims out of surplus proceeds from nonconveyance foreclosures.  Of the 81 foreclosures reviewed, 32 had nearly $768,000 in surplus proceeds that HUD did not recover.  As a result, HUD’s insurance fund did not receive the benefit of nearly $6.8 million, various third parties benefited at HUD’s expense, and the unclaimed funds sat dormant with the custodians.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing (1) pursue the collection of $5.7 million in surplus proceeds that HUD is entitled to reclaim from 2017 loan terminations, (2) implement a policy to require servicers to send surplus proceeds notifications to HUD’s national loan-servicing contractor and establish procedures to improve HUD’s surplus proceeds collection efforts, and (3) redesign the partial claim program to eliminate its weaknesses to put $6.8 million to better use.