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We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of servicers’ use of loss mitigation programs.  The audit was initiated in response to an Office of Inspector General preaudit analysis of HUD data, which determined that servicers may not always evaluate borrowers with delinquent mortgages for loss mitigation.  Our audit objective was to determine whether HUD had adequate controls to ensure that servicers of single-family Federal Housing Administration (FHA)-insured loans engaged in loss mitigation as required. 

HUD did not have adequate controls to ensure that servicers of single-family FHA-insured loans properly engaged in loss mitigation.  More specifically, HUD did not adequately review claim loans that did not have loss mitigation default status codes reported to HUD by servicers.  From January 1, 2014, to December 31, 2016, there were 14,763 claim loans that indicated servicers did not engage in loss mitigation, and HUD reviewed only 194 (1.3 percent) of these loans.  Also, a review of 90 statistically sampled claims that closed from January 1, 2012, to December 31, 2015, determined that 26 had significant servicing deficiencies.  This condition occurred because HUD did not emphasize identifying or targeting these types of loans for review.  This lack of oversight may have put borrowers in default at risk of not being able to avoid foreclosure by using HUD’s loss mitigation program and resulted in an increased overall risk to the program of a projected $120.9 million for losses in which servicers did not properly engage in loss mitigation.

We recommend that HUD (1) revise its policies and procedures to emphasize increased controls toward claim loans for which no loss mitigation evaluation occurred, resulting in a projected $120.9 million in funds to be put to better use; (2) develop and implement policies and procedures to ensure that the Office of Lender Activities and Program Compliance and the Office of Single Family Asset Management communicate the results of servicing reviews to each other; (3) implement policies and procedures to reinforce guidance to ensure that servicers accurately report the status of loans to HUD; (4) require indemnification for the 26 loans that had significant servicing deficiencies, resulting in $1.7 million in questioned costs; (5) reinforce guidance to servicers to ensure that they engage in loss mitigation as required; and (6) require the servicers with deficiencies to revise their procedures to ensure that they comply with the requirements.