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HUD Did Not Always Recover FHA Single-Family Indemnification Losses and Ensure That Indemnification Agreements Were Extended

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We audited HUD’s controls over its Federal Housing Administration (FHA) loan indemnification recovery process based on the OIG’s analysis of HUD data that indicated indemnification losses were not always recovered for FHA single-family loans.  Our objective was to determine whether HUD had adequate controls in place to monitor indemnification agreements and recover losses on FHA single-family loans.

HUD did not always bill lenders for FHA single-family loans that had an indemnification agreement and a loss to HUD.  Specifically, it did not bill lenders for any loans that were part of the Accelerated Claims Disposition (ACD) program or the Claims Without Conveyance of Title (CWCOT) program or loans that went into default before the indemnification agreement expired but were not in default on the expiration date.  There were a total of 486 loans with losses of $37.1 million from January 2004 to February 2014 that had enforceable indemnification agreements and losses to HUD but were not billed. 

In addition, HUD did not ensure that indemnification agreements were extended to 64 of 2,078 loans that were streamline refinanced.  The indemnification agreement for 21 loans contained language indicating that the agreements should have extended to loans that were streamline refinanced.  HUD incurred losses of $373,228 for 5 loans, and 16 loans had a potential loss of approximately $1 million. 

We recommend that HUD’s Office of Finance and Budget (1) initiate the billing process for 491 loans that had an enforceable indemnification agreement and (2) develop and implement policies and procedures to ensure that lenders are billed for loans that have enforceable indemnification agreements and loans that went into default before indemnification agreement expiration.  We also recommend that HUD’s Office of Single Family Housing (1) extend the indemnification agreements for 21 loans that were streamline refinanced and (2) develop policies and procedures to ensure that indemnification agreements are extended to all loans that are streamline refinanced.