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We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of Federal Housing Administration (FHA)-insured loans in Flint, MI.  We conducted the audit based on recent news reports that identified high levels of lead contamination and because HUD had insured loans on properties in Flint that closed after the City of Flint began using the Flint River as its water source in April 2014, including 144 loans with unpaid balances totaling $11.2 million that were endorsed after the health department first declared a public health emergency on October 1, 2015.  Our audit objective was to determine whether HUD ensured that properties in Flint, MI, that were approved for FHA mortgage insurance had a continuing and sufficient supply of safe and potable water.

HUD did not ensure that lenders verified that properties in Flint, MI, that were approved for FHA mortgage insurance had a continuing and sufficient supply of safe and potable water.  Specifically, 11 of the 17 files reviewed did not contain evidence of water testing to show that the water was safe, and subsequent testing performed by the State of Michigan showed that at least 4 of the 11 properties had lead and copper levels above the Environmental Protection Agency’s action levels.  This condition occurred because HUD’s existing controls were not designed to specifically detect whether the loan files contained evidence of water testing.  The issues identified represent an ongoing safety concern.  Further, HUD and homeowners also face an increased risk of loss if property values decrease due to the water safety issues, and homeowners may not have sufficient resources needed to attain and maintain safe water. 

We recommend that HUD direct the applicable lenders to provide evidence showing that the properties had a safe and potable water source at the time the loans closed and were endorsed, or, if the lenders cannot provide this evidence, direct them to perform water testing and any necessary remediation to ensure that the properties currently have a safe and potable water source, or indemnify HUD against any future loss, thereby putting up to $10.8 million to better use.  We also recommend that HUD take appropriate administrative action against the parties involved for any cases where they did not take appropriate steps to ensure that properties in Flint, MI, had a safe and potable water source, and improve its controls to ensure that it does not insure additional loans in Flint for properties that do not have a safe and potable water source.