HUD may have paid more than $1B in false claims

September 19, 2012

The U.S. government may have paid hundreds of millions of dollars in mortgage aid to struggling homeowners who did not qualify for that help, a new report found.

The inspector general for the Department of Housing and Urban Development said the agency did not adequately enforce standards for its Preforeclosure Sale Program, which uses government aid to cover the shortfall for troubled homeowners who must sell their home for less than they owe on their mortgages. The program ran from September 2010 to August 2011, paying more than $1.7 billion in claims on nearly 20,000 homes.

To qualify, the homeowner must have faced an “unavoidable” financial crisis, been living in the home and proved that they did not have sufficient income to make monthly payments. But the inspector general examined 80 random cases and found 61 failed to meet the criteria.

Based on its sample, the investigators estimated that HUD may have paid more than $1 billion in claims for 11,693 sales that did not qualify for participation in the program.

“HUD did not have adequate controls to enforce the program requirements, and the requirements were not well written,” wrote the inspector general in the audit. “As a result, the FHA insurance fund may have taken unnecessary losses.”

“The figures calculated in this audit do not represent a direct loss to the FHA but are based on an extrapolation of the original data sample,” HUD said in a statement. “In fact, absent the short sale option, many of the loans would have gone into foreclosure resulting in a more costly conveyance claim to the FHA.”

Despite the mismanagement of the program, the final cost to the Federal Housing Administration insurance fund will probably be less than the amount erroneously paid in claims, according to the audit.

“It is reasonable to assume that at least some of these loans could have been processed differently and would have instead gone to foreclosure and become conveyance claims,” the audit said. “However, it is also reasonable to assume that at least some of these loans would have resulted in no claim or reduced claims due to alternative loss mitigation procedures.”

In nearly all of the cases reviewed, expenses claimed by the homeowner exceeded those verified by the lender. Lenders, in many instances, obtained bank statements but did not reconcile them with expenses claimed by the homeowner.

The housing agency paid claims to a dozen borrowers who did not occupy the properties they defaulted on, and it gave money to four homeowners who had at least $5,000 in cash assets.

To prevent similar cases in the future, the inspector general recommended that the housing agency strengthen its oversight and educate lenders on the proper use of the program. Auditors also suggested that HUD require lenders to reimburse the FHA insurance fund for six of the improper claims, totaling $360,760.

Brady Dennis contributed to this report.

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