T United States General Accounting Office 3 GAO * Report to the Congress February 1990 FINANCIAL AUDIT Federal Housing Administration Fund’s 1988 Financial Statements GAO/AFMD-90-36 GAO United States General Accounting Office Washington, D.C. 20548 Comptroller General of the United States B-206207 February 9,199O To the President of the Senate and the Speaker of the House of Representatives This report presents the results of our audit of the Federal Housing Administration Fund’s consolidated financial statements as of Septem- ber 30, 1988. Reports on the Fund’s internal accounting controls and on its compliance with laws and regulations are also provided. As a result of the 1988 financial audit, the Federal Housing Administra- tion (FHA) adjusted its financial statements from a loss of $858 million to a loss of $4.2 billion, which reduced its government equity to a cumula- tive deficit of $2.9 billion. The 1988 losses resulted from rising defaults in economically stressed regions, sales of foreclosed properties at less than carrying values, the failure of several large coinsurers, and pro- gram fraud and abuse. The full extent of losses attributable to program fraud and abuse through September 30,1988, is not yet known. We and Price Waterhouse have declined to express an opinion on WA’S 1988 financial statements because of an inability to ascertain the extent of losses due to fraud and abuse and because of the lack of an accurate inventory of foreclosed property. We are also concerned about large potential future losses in FHA’SGeneral Insurance (GI) Fund. The audit also revealed serious internal accounting control weaknesses in third- party monitoring, financial management systems, insurance program design, controls over cost and claims settlement, and the performance of basic accounting functions. In addition, the audit showed that FHA did not fully comply with the Debt Collection Act of 1982. The Federal Housing Administration (FHA) was established in 1934 Background under authority granted to the President by the National Housing Act (Public Law 73-479) and became in 1948 a wholly owned government corporation for purposes of the Government Corporation Control Act (GCCA).FHA and its functions were transferred to the U.S. Department of Housing and Urban Development (HUD) in 1965. The GCCAnow provides that the Secretary of HUD, when carrying out the duties and powers related to the F’HA Fund, is subject to the provisions of the GCCA.~ The basic purpose of FHA programs is to encourage improvements in housing standards and conditions, provide an adequate home financing system ’ Herein, the FHA Fund. and the Secretary’s administration of it, will be referred to simply as FHA. Page 1 GAO/AFMD-90-M Federal Housing Administration E-206207 through mortgage insurance, and exert a stabilizing influence on the mortgage market. To carry out this purpose, the Secretary of HUD administers FHAthrough four separate funds for its various mortgage insurance programs. As of September 30, 1988, FHA had $303 billion of insurance-in-force. Under the provisions of 31 USC. 9105, we are required to audit FHAat least once every 3 years. We were unable to perform an audit of FHA'S fiscal year 1981 financial statements due to significant accounting and reporting changes needed (GAO/AFMD-~~-~~,June 10, 1983). In 1985, we terminated our audit work on FHA’Sfiscal year 1984 financial statements due to numerous deficiencies in FHA’Saccounting systems and financial records and changes in agency systems and staff. Since 1984, FHA has made a number of improvements in agency systems, staffing, and man- agement, which we considered sufficient, to permit an audit of its state- ment of financial position as of September 30, 1987. To fulfill our audit responsibility, we contracted with the independent The 1987 and 1988 certified public accounting firm of Price Waterhouse to conduct financial Audits audits of FHA for 1987 and 1988. Due to the magnitude of accounting and reporting changes needed, as noted in prior year audits, it was not practical to audit FXA’Sconsolidated statements of operations and cash flows for the year ended September 30,1987. For these reasons, it was deemed necessary to restrict the scope of Price Waterhouse’s work to the audit of FHA’SSeptember 30, 1987, statement of financial position to establish opening balances, and we did not require reports on internal accounting controls and compliance with laws and regulations (GAO/ AFMD893, May 12, 1989). However, these reports are presented as part of the consolidated financial statement audit for fiscal year 1988. We determined the scope of the audit work, monitored its progress at all key points, reviewed the working papers of the certified public accountant, and performed other procedures as we deemed necessary. The audits were conducted in accordance with generally accepted gov- ernment auditing standards, except for the previously discussed scope restriction on the 1987 audit. Price Waterhouse has disclaimed expressing an opinion on FHA'S 1988 Disclaimer of Opinion and 1987 financial statements because it was unable to ascertain the amount of potential losses involved in alleged improper diversions of property sales proceeds by certain private closing agents contracted by Page 2 GAO/AFMD#X% Federal Housing Administration B-206207 HUD to sell HUD-owned properties and other alleged improprieties and because FHA did not maintain an accurate inventory of foreclosed properties. We concur with Price Waterhouse’s disclaimer. As of September 30, 1988, FHA had $3.1 billion of foreclosed property held for sale ($2.5 billion in 1987) less an estimated allowance for losses of $1.4 billion ($1.1 billion in 1987). The alleged diversions resulted, in part, from internal accounting control weaknesses involving HuD’s inability to properly monitor both the collection and the prompt deposit of property sales proceeds. As of September 15, 1989, the amount of the losses that will ultimately be incurred because of the alleged diversions had not been determined. Further, the amount of losses applicable to FHA’S1988 and 1987 financial statements is not ascertainable and could have a significant impact on FHA’s financial position, results of opera- tions, and cash flows. HUDinvestigations into this matter are currently pending. Price Waterhouse’s audit of FHA’Sfinancial statements also disclosed a material uncertainty with respect to FHA’SGeneral Insurance (GI) Fund, which has incurred substantial losses due to the default of several coin- suring lenders. Because of insufficient levels of capital required of coin- suring lenders and the lack of FHAprogram monitoring, additional losses may result. A provision of $960 million has been recorded in the 1988 consolidated statement of operations for the amount of estimated losses resulting from existing and probable defaults in the multifamily coinsur- ance programs. An additional provision of $275 million has also been recorded for probable defaults of FHA-insured hospital mortgages, based upon unfavorable financial conditions involving several hospital mort- gages. HUD’Sactuary has determined that, in the aggregate, the GI Fund premiums are insufficient to cover its losses, and the Fund must depend on borrowings from the U.S. Treasury and appropriations to sustain its operations. However, given the probability that additional losses will take place, FHA cannot presently estimate the amount of premium defi- ciency or the level of support it will ultimately require from the 1J.S. Treasury. Additionally, Price Waterhouse’s report emphasized that FHA’SMutual Mortgage Insurance (MMI) Fund is operated as a mutual fund and is required to be “actuarially sound,” so that over the life of the fund, pre- miums are sufficient to pay claims and expenses. The MMIFund, FDA’S largest, with $229 billion of a total $303 billion of insurance-in-force, incurred 1988 losses of $1.4 billion, reducing its equity to $1.8 billion as Page 3 GAO/AFMD-90-36 Federal Housing Administration B-206207 of September 30, 1988. Despite this current loss, HUD'S actuary has esti- mated that future revenue will exceed future claims and expenses for the MMI Fund. However, actuarial studies are currently underway to determine whether there are structural or design weaknesses in the MMI fund that could cause material losses. The 1988 unaudited financial statement amounts released by FHA and reported to the U.S. Treasury in December 1988 disclosed a loss of $858 million for all four FHA funds. During the audit, Price Waterhouse proposed, and FHA recorded, over 100 adjustments to correct FHA'S accounts which, in the aggregate, reduced government equity by $3.4 billion and resulted in a cumulative deficit of $2.9 billion. The $3.4 bil- lion of audit adjustments were primarily the result of net increases in accruals for claims not yet reported. FXA must report to the U.S. Trea- sury financial results for the fiscal year ended September 30 by Decem- ber 31 of each year, requiring estimates of incurred but not reported and probable future claims Audit work by Price Waterhouse disclosed the need to report additional claims based upon actual experience and the recognition of losses at the time of default rather than at the time of foreclosure-an average lag of 15 months. The report by Price Waterhouse on internal accounting controls dis- Serious Internal closed six conditions believed to be material weaknesses and made a Accounting Control number of suggestions to address those weaknesses. Those weaknesses Weaknesses Exist are as follows: l Monitoring of underwriting, property management, and collection of property sales proceeds delegated to private sector third parties is ineffective. . Financial management systems do not provide timely and accurate information on programs, nor do they hold managers accountable for program results and effectiveness. l Structural or design flaws exist in the multifamily coinsurance program, due to insufficient levels of capital required of coinsuring lenders, and in the hospital mortgage insurance program, due to uncoordinated under- writing practices. l The system for foreclosed property inventory cannot account for acquired properties and their value, and the cash management system does not ensure that proceeds collected by third parties on sales of fore- closed property are promptly deposited in FHA'S Treasury accounts. Page 4 GAO/AFMD9@36 Federal Housing Administration 5206207 l Controls over cost are inadequate, multifamily insurance claims benefits are not being paid promptly, and controls are inadequate to detect mis- representations by mortgagees and lenders. l Routine and basic accounting functions, such as reconciling accounts to supporting records, providing support to justify payments, controlling funds held on behalf of others, and properly recording transactions, are not being performed. Most of these fundamental accounting and financial reporting problems Problems Are are the same ones that GAO and the HUD Inspector General have been Longstanding reporting since the early 1980s. HUD has not been diligent in correcting problems cited by auditors or in its own Federal Managers’ Financial Integrity Act (FMFIA) reports. While HUD staff members responsible for FHA activities have generally responded to GAO and Inspector General recommendations and to the weaknesses disclosed in the FMFIA reports, resolution of the findings has often been delayed and some findings have not been addressed at all. In addition, in some cases, there were no follow-up reviews to determine if proposed procedures had, in fact, resolved the cited problems. For example, HUD'S 1987 and 1988 FMFIA reports disclosed that inade- quate controls existed which provided the potential for private closing agents to manipulate or otherwise take funds for their own use or to delay the transfer of such funds to HUD. This same weakness was noted during the 1988 audit. Subsequently, a private closing agent, known as “Robin HUD," admitted to embezzling $5.5 million of HUD funds during this period. These weaknesses, findings with which we concur based upon our review of the auditors’ working papers, are discussed in detail in the accompanying report on internal accounting controls. The report by Price Waterhouse on compliance with laws and regula- Noncompliance With tions disclosed an instance of noncompliance, which could impact FHA'S the Debt Collection ability to effectively collect money it is owed. FHAdid not fully imple- Act ment the Debt Collection Act of 1982 because it failed to take collection action after foreclosed property was acquired. The noncompliance with the Debt Collection Act of 1982, a finding with which we concur based upon (1) our review of the auditors’ working papers and (2) the actions that should be taken to fully implement the act, are discussed in detail in the accompanying report on compliance with laws and regulations. In Page 5 GAO/AFMD-SW6 Federal Housing Administration 5206207 addition, the report notes that there are a number of investigations cur- rently underway regarding alleged improprieties in HUD'S administration of FHA. These investigations may reveal other violations of laws and regulations. During the course of its examination, Price Waterhouse also identified several matters which, although not material to the consolidated finan- cial statements, are being communicated for FHA'S consideration in a sep- arate management letter. FHA’Saccounting and financial management problems are long-standing Current FHA and well-documented. Correction of these problems will require multi- Initiatives year solutions and a long-term commitment by top management. The new management at HUD has started to address various deficiencies to strengthen FHA, which include: . announcing that the Secretary will appoint a Chief Financial Officer at HUD and a Controller at FHA; . establishing a task force to gather data, assess problems, and develop an action plan with milestones addressing the improvements needed in accounting and financial management systems; . increasing monitoring and enforcement activities of private sector third parties; . redirecting FHA’Saccounting and computer systems to generate timely and accurate data for financial and program management; . performing an independent actuarial analysis of the MMI and GI Funds; . reviewing controls over programs, particularly where abuses have occurred, to correct weaknesses or terminate ineffective programs; . publishing annual audited financial statements; and . implementing recommendations resulting from audits. There are a number of serious financial management problems at FHA Conclusions which contribute to its losses. These problems are exemplified in the lack of monitoring of responsibilities delegated to private sector third parties; the poor quality of financial information available to manage- ment; the weak financial management systems and internal control pro- cedures; design flaws in the multifamily coinsurance and hospital mortgage insurance programs; the substandard performance of essential accounting functions; and management’s inattention to weaknesses iden- tified by GAO, the Inspector General, and FHA'S own FMFIA reports. Page 6 GAO/AFMD-96-36 Federal Housing Administration B-206207 As a result of these financial management problems, FHAis susceptible to mismanagement and the unnecessary risk that fraud and abuse will occur and not be detected. Such conditions also impede management from assessing the level of risk arising from normal insurance opera- tions. Accurate and timely financial information for each program and location is essential to effectively manage MA’s insurance programs. It is because FHA has begun to prepare financial statements and, most importantly, that these statements have been independently audited, that the magnitude of FHA'S problems is becoming evident. Annual audits of financial statements would provide the Congress and the pub- lic an objective assessment of management’s performance. Additionally, financial reporting can provide a measurement tool for effective con- gressional oversight. We believe that the initiatives discussed above, if properly implemented, should address the problems cited in this report. We recommend that the Congress, through its appropriation, authoriza- Recommendation to tion, and oversight committees, hold annual hearings on the actions of the Congress FHAto ensure that FHA resolves the financial management problems identified, including evaluating its systems, correcting the material weaknesses identified, and ensuring that similar problems do not occur in the future. To assist in its oversight role, we believe the Congress should require the Secretary to provide audited financial statements, reports on internal accounting controls and compliance, and manage- ment’s report required by the Federal Managers’ Financial Integrity Act. We are sending copies of this report to the Director of the Office of Man- agement and Budget; the Secretary of the Treasury; the Secretary of the Department of Housing and Urban Development; HUD'S Assistant Secre- tary for Housing, who serves as the Federal Housing Commissioner; and HUD'S Assistant Secretary for Administration. Charles A. Bowsher Comptroller General of the United States Page 7 GAO/AFMD90-36 Federal Housing Administration Contents Letter 1 Independent Auditors’ 10 Report Auditors’ Report on 13 Internal Accounting Controls Auditors’ Report on 26 Compliance With Laws and Regulations Financial Statements 29 Consolidated Statement of Financial Position 29 Consolidated Statement of Operations and Government 30 Equity (Deficiency) Consolidated Statement of Cash Flows 31 Notes to Consolidated Financial Statements 32 Supplemental 48 Information Consolidating Statement of Financial Position 48 Consolidating Statement of Operations and Government 49 Equity (Deficiency) Consolidating Statement of Cash Flows 50 Abbreviations CMHI Cooperative Management Housing Insurance FHA Federal Housing Administration GI General Insurance GCCA Government Corporation Control Act HUD Housing and Urban Development MM1 Mutual Mortgage Insurance SRI Special Risk Insurance Page 8 GAO/AFMD!#O-36 Federal Housing Administration Page 9 GAO/AFMD-9@36 Federal Housing Administration Independent Auditors’ Report Price Viterhouse To the Comptroller General of the United States and the Secretary of Housing and Urban Development We were engaged to audit the accompanying consolidated statements of financial position of the Federal Housing Administration (FHA), a fund of the Department of Housing and Urban Development (HUD), as of September 30, 1988 and 1987, and the related consolidated statements of operations and government equity (deficiency), and of cash flows for the fiscal year ended September 30, 1988. These financial statements are the responsibility of FHA’s management. Allegations have been made about improper diversions of property sales proceeds by certain private closing agents contracted by HUD to sell HUD- owned property. This property is reported in the FHA financial statements. The alleged diversions resulted, in part, from internal control weaknesses involving HUD’s inability to properly monitor the collection and prompt deposit of property sales proceeds, or to maintain an accurate inventory of foreclosed properties. The Inspector General has estimated that such improper diversions may lead to substantial losses, but to date, the amount of the losses that will ultimately be incurred by HUD has not been determined, nor is HUD able to ascertain how much, if any, of these losses are already reflected in the 1988 financial statements. Further, ongoing investigations into this matter have not yet been completed. There are a number of other investigations currently being conducted about other alleged improprieties involving HUD’s administration of FHA. These investigations could reveal violations of laws and regulations, but to date, a final determination about such violations has not been made. We have been unable to apply other auditing procedures to satisfy ourselves regarding the alleged improper diversions of property sales proceeds or the extent to which the inventory of foreclose-d property reflected in the accompanying financial statements may be misstated, nor were we able to determine the possible impact on the financial statements of other investigations currently being conducted. These matters could have a significant impact on FHA’s financial position, results of operations and cash flows. As discussed in Note 8, FHA’s General Insurance (GI) Fund has incurred substantial losses primarily relating to its multifamily coinsurance programs, and to a lesser degree, to its insurance of hospital mortgages. In September 1988, the Government National Mortgage Association (GNMA), a government corporation operated by HUD which guarantees securities backed by FHA- Page 10 GAO/AFMMW6 Federal Housing Administration Independent Auditors’ Report To the Comptroller General of the United States and the Secretary of Housing and Urban Development Page 2 coinsured multifamily mortgages, declared a major FHA lender/coinsurer in default of its GNMA obligations. Subsequent to September 1988, GNMA similarly declared three more large FHA lender/coinsurers in default. Because FHA insures the mortgages underlying the GNMA securities, substantially all losses relating to these defaulted lender/coinsurers will be borne by FHA. A provision of $960 miIlion has been recorded in the fiscal year 1988 consolidated statement of operations for estimated losses resulting from these and other probable defaults in the multifamily coinsurance programs. However, because of weaknesses in the multifamily coinsurance programs involving required levels of capital and coinsurer monitoring, it is possible that more lender/coinsurers will default and cause substantial additional losses in the GI Fund. Also, a provision of $275 million has been recorded in the consolidated statement of operations for probable defaults of FHA-insured hospital mortgages. Even a limited number of defaults of these large mortgages could place a serious financial burden on the GI Fund, and could render the hospital insurance premiums insufficient to cover related losses. HUD’s actuary has determined that, in the aggregate, the GI Fund’s premiums are insufficient to cover its losses, and the Fund is dependent on the U.S. Treasury and on budget appropriations to sustain its operations. However, given the probability that additional losses will take place, FHA cannot presently estimate the degree of its premium insufficiency or the level of support it will ultimately require from Treasury. The accompanying financial statements do not include any adjustments for these uncertainties which, if known, could be material in relation to FHA’s financial position and results of operations. As discussed in Note 1, FHA comprises four major activities, the MMI, CMHI, GI. and SRI Funds. The MM1 and CMHI Funds are operated as mutual insurance funds and are required to be “actuarially sound”. The largest FHA activity is the MM1 Fund, a fund which insures single family home mortgages and which comprises $228.5 billion of FHA’s $303.4 billion of insurance in force. Although the MM1 Fund incurred, on an accrual basis, losses of $1.4 billion for fiscal year 1988, it still reports government equity of $1.8 billion. Despite its current losses, HUD’s actuary has estimated that the MM1 Fund’s future revenue will exceed its future expenses. However, there are studies currently underway to determine whether there are structural weaknessesin the MM1 Fund that must be addressed. For fiscal year 1988, the CMHI Fund, FHA’s smallest activity, paid no claims, reported an excess of revenues over expenses, and showed positive government equity. The GI and SRI Funds are not mutual insurance funds, have no requirement that they be actuarially sound, and contain programs that have had continuing losses. Neither the GI Fund’s nor the SRI Fund’s premiums are sufficient to cover their losses leaving them dependent on the U.S. Treasury and on budget appropriations to sustain their operations. Page 11 GAO/AFMD-90-36 Federal Housing Administration Independent Auditors’ Report To the Comptroller General of the United States and the Secretary of Housing and Urban Development Page 3 In our report dated August 12, 1988 except for Note 4, for which the date was November 15, 1988, we expressed an opinion that the consolidated statement of financial position at September 30, 1987 presented fairly the financial position of the Federal Housing Administration in conformity with generally accepted accounting principles. However, the allegations about the diversion of property sales proceeds, possible misstatements of the inventory of foreclosed properties, and the unknown outcome of other investigations referred to in the second paragraph of this report may have affected FHA’s financial position at September 30, 1987. Accordingly, with respect to the September 30, 1987 consolidated statement of financial position, our report as presented herein, is different from that previously issued. HUD has not yet determined (1) the extent of the diversion of properry sales proceeds, (2) the extent to which foreclosed property reflected in the accompanying financial statements may be misstated, or (3) the effect that the outcome of other investigations might have on FHA’s financial statements. Nor were we able to satisfy ourselves about the effect of these matters, which could have a significant impact on the accompanying financial statements. Therefore the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the accompanying financial statements. We were engaged for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of FHA’s major activities. For the rezons described in the preceding paragraph, we are unable to, and do not, express an opinion on whether the consolidating information is fairly stated, in all material respects, in relation to the consolidated financial statements taken as a whole. September 15, 1989, except as to Note 14, which is as of December 20, 1989 Page 12 GAO/~90-36 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Price Whter?wuse 0 To the Comptroller General of the United States and the Secretary of Housing and Urban Development We were engaged to audit the consolidated financial statements of the Federal Housing Administration (FI-LA), a fund of the Department of Housing and Urban Development (HUD), as of and for the year ended September 30, 1988, and have issued our report thereon dated September 15, 1989, except as to Note 14 to those financial statements, which is as of December 20, 1989. In planning and performing our audit of PI-IA’s financial statements for the year ended September 30, 1988, we considered its internal control structure in order to determine our auditing procedures. The management of FHA is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal control policies and procedures. The objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that (1) obligations and costs are in compliance with applicable laws, (2) funds, property, and assets are safeguarded against waste, loss, and unauthorized use or misappropriation, and (3) assets, liabilities, revenues, and expenses applicable to operations are properly recorded and accounted for to permit the preparation of reliable financial reports and to maintain accountability over the entity’s assets. Because of inherent limitations in any internal control structure, errors or irregularities may nevertheless occur and not be detected. Also, projection of any evaluation of the structure to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate. For purposes of this report, we have classified the significant policies and procedures relative to FHA’s internal control structure in the following categories: 0 General Ledger and Treasury Operations 0 Financial Reporting 0 Notes Receivable 0 Property Held for Sale 0 Claims Processing 0 Insurance-in-Force 0 Premiums, Premium Refunds, and Distributive Shares Page 13 GAO/AFMD-90-36 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 2 0 Field Office Operations 0 Actuarial Branch Operations 0 Administration and Other For all the categories listed above, we obtained an understanding of the design of relevant policies and procedures, determined whether they have been placed in operation, and assessedcontrol risk. We noted certain matters involving the internal control structure and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the entity’s ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. A material weakness is a reportable condition in which the design or operation of specific elements of the internal control structure do not reduce to a relatively low level the risk that errors or irregularities, in amounts that would be material in relation to the financial statements being audited, may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We consider the following reportable conditions to be material weaknesses. MONITORING OF DELEGATED FUNCTIONS $M TBE Many of HUD’s’ important functions, including certain underwriting functions, property management, and collection of property sale proceeds, have been delegated to third parties. However, despite the importance of these delegated functions and the inherent need to closely watch over them, we found that HUD oversight and monitoring has not always been effective and must be improved to ensure delegated functions are carried out in the government’s best interest. The delegated functions in which we noted deficiencies can be broadly categorized in three ways. First is delegated underwriting whereby HUD allows certain eligible lenders to write FI-IA mortgage insurance without prior HUD approval. The largest and perhaps best known program for delegated underwriting is the direct endorsement of single family mortgage insurance by ’ Hereinafter when HUD is referred to it pertains to HUD’s administration of FHA activities. Page 14 GAO/AFMIMO-36 Federal Housing Administration Auditors’ Report on Intermd Accounting Controls Report on Internal Controls Page 3 FI-L4 approved lenders (generally known as “mortgagees”). Second is the delegation of property management functions to third party agents. These agents are commonly known as Area Management Brokers (AMBs) who, on behalf of HUD, maintain, manage and sell properties that the FHA Fund obtained in foreclosure. And third is the delegation of property sale closing responsibilities to private closing agents. Among the private closing agents’ most important, and from HUD’s standpoint most risky, functions is collecting property sale proceeds and depositing them in HUD’s account at the U.S. Treasury. Each of these areas had instances of flawed, deficient, or lackluster monitoring and oversight. Deficiencies in monitoring sales closing agents are discussed on page 9 of this report. With regard to monitoring of mortgagees to whom underwriting has been delegated, HUD, on behalf of FI-L4, uses headquarters and regional staff to perform some oversight functions and to periodically conduct field reviews of selected mortgagees. However, their functions are often too narrow, rely on information of questionable veracity, and are not well coordinated. Moreover, field reviews generally focus on the same mortgagees year after year, and there are indications that they do not identify the causes of excessive insurance losses; specifically they do not always identify mortgagees and/or appraisers who have repeatedly overvalued properties. The system used to monitor mortgage defaults does not have up to date default information, does not always identify defaults that have been cured, and has shown differences of 100,000 cases or more with another system that summarizes similar information. Furthermore, there is little coordination of the oversight and monitoring functions being performed by various parts of HUD. For example GNMA has its own monitoring and field review system, yet rarely shares its findings and information with FHA. The result of the problems with mortgagee monitoring is a function that is, in an agency-wide sense, disjointed and which leaves unclear what an acceptable level of defaults and insurance losses is or should be. HUD has been similarly deficient in monitoring area management brokers. Some AMBs have been allowed to manage excessive numbers of properties. In one instance a broker was managing over 1,ooOproperties; well in excess of the HUD-mandated limit of 100. AlIowing a concentration of property management responsibilities to too few brokers unnecessarily exposes HUD to excessive losses should one or more of the large brokers decide to abuse HUD rules. This risk is further exacerbated by the fact that AMBs are paid a fee based on total properties they manage, and thus they have little incentive to promptly sell properties. In other instances, AMBs were allowed to incur expenses well in excess of HUD limits, yet they were still reimbursed for them. Property inspections to ensure repairs and maintenance were properly performed on AMB managed properties were also less than that required by HUD policy. Failure to perform either of these important monitoring functions at an acceptable level could cause HUD to incur improper or Page 15 GAO/AFMD90-36 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 4 0 unreasonably high property expenses, or could lead to property being sold at less than its full value because it was inadequately maintained. The causes of oversight and monitoring deficiencies result in part from a lack of appreciation of the financial impact of poor underwriting and of the need to closely coordinate all oversight activities. This is perhaps best exemplified by the fact field monitoring is largely case-based. There is a focus on the number of cases that have defaulted or have led to claims, but not so much on the dollar losses caused by those defaults and claims or on the causes of those losses, or on how they might be minimized in the future. AMB and private closing agent oversight suffered, at least partially, from a lack of experienced staff to handle the large number of foreclosed properties that came to HUD in economically distressed regions. But there was apparently no contingency plan to provide additional resources to those regions requiring them. Resolving the deficiencies in oversight and monitoring will require a concerted effort on the part the agency. Therefore we suggest that the Secretary establish a task force comprised of individuals from the Office of Housing, Office of Administration, Government National Mortgage Association, and from the regions to: (1) identify and assessinformation currently gathered by the various HUD groups about mortgagees to whom underwriting has been delegated to determine whether it is adequate, timely and useful, (2) identify other information that might be needed to effect better monitoring, (3) assess all field monitoring functions to determine whether they are frequent enough, are properly identifying the causes for insurance losses and are effective in resolving problems that have caused persistent losses, (4) establish formal means of communicating review findings among the HUD groups, (5) establish a method of monitoring findings from field reviews and their subsequent resolution, and (6) develop, at least conceptually, an informational data base which can be used by all HUD groups involved with mortgagee oversight functions. With respect to oversight of area management brokers, the Secretary should reiterate to the regions HUD’s policy regarding limitations on the number of properties individual brokers can manage, and require explanations and take appropriate remedial action where this policy was not followed. The Secretary should further initiate a study of regional staff capabilities to determine whether experience and staffing levels are proper in light of responsibilities and determine whether additional travel funds are needed to allow regions to properly carry out oversight and property inspection duties. Page 16 GAO/AFMD-90-36 Federal Housing Administration Audited Report on Intmnal Accounting Controls Report on Internal Controls Page 5 4CCOUNTABIL TY MUST BE ALIGNED WlTH While some of FHA’s losses are attributable to specific shortcomings in particular procedures or processes,in a broader sense not holding responsible managers or personnel accountable for their actions provides a better explanation of how FHA’s problems took place. It is difficult to bold anyone accountable in the organization when financial information is not available to do so. At present, managers do not know which programs are self sustaining and which are not because there are no program level financial statements or other reporting mechanisms that routinely produce information about program financial results and effectiveness. Decisions affecting staffing and administrative support for FHA operations are apparently made without regard to their financial impact on the FHA fund. And finally, financial systems which are presumably the basis for measuring how well FHA activities are carried out, have not adequately considered the needs of the managers who operate the FHA programs and who are accountable for them. Financial statements and other iinancial information are periodically produced only for each of FI-IA’s four major activities (i.e., the MMI, GI, SRI and CMHI Funds). However, HUD cannot accurately and promptly determine financial results on a program-by-program or region-by-region basis, and thus there is a lack of information about program and region effectiveness. The significance of this is that losses can only be attributed to major activities and CaMOt be pinpointed with any degree of precision to a particular program or region. The four major activities encompass some 40 active mortgage insurance programs, each with its own unique purpose and each with unique financial attributes as well. It may be that some of these programs are or should be financially sound while others should not, but the absence of sufficiently detailed financial information prevents making this determination. This lack of accountability also prevents identifying the causes for losses and, therefore, it cannot be determined whether excessive losses are caused by external conditions or simply by mismanagement. The manner in which staffing and administrative decisions relative to the operation of FHA are made provides another example of a split between responsibility and accountability. Salary and administrative expenditures incurred to operate the FHA programs are administered through a separate, appropriated fund, and management of this fund rests with a group separate from that which operates FHA. In many respects, the salary and expense fund is operated like an entity ail its own rather than as a support function for the operation of the various HUD programs. There are indications of decisions being made to reduce salary and administrative expense that may have caused problems in the FHA Fund. For example, some of the regions have indicated that pressures to make staffing cuts, which may have provided Page 17 GAO/AFMD90-36 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 6 salary expense savings on the one hand, may have also reduced the number of staff available to perform oversight and monitoring functions on the other. Similarly, restrictions on travel funds to produce small savings, may have prevented regional personnel from taking trips needed to conduct a sufficient number of property inspections. Decisions like this which lead to small savings in one fund but which may cause substantial losses in another, in our view, constitute a fundamental flaw in the management of the agency. In effect, the salary and administrative function has the responsibility to provide staff support and resources to operate FHA properly, but is not accountable for losses that would result in another fund from inadequate staff support or from providing insufficient resources. There are instances where accounting systems have been developed which do not adequately address the needs of program managers. In some instances two systems with overlapping functions were implemented -- one for the group administering the program and another for the group performing finance and accounting functions. Furthermore, systems used by program managers are often case-based. That is, they contain information about the number of defaults or the number of properties on hand but little or no information on the dollar value of those cases. Some accounting systems that are used to report financial information and prepare financial statements, are not also used for program accountability. For example, systems with financial and accounting information on single family mortgages held by FI-L4 and on property owned by FI-L4 are not always used by program managers because their information needs were not appropriately addressed. Rather than integrate the accounting and programmatic needs, separate duplicate systems were implemented. To provide for proper accountability, factionalism that causes systems to be less than fully useful or which leads to the development of redundant systems must be eliminated. Individuals responsible for program accountability must be an integral part of financial and accounting systems development efforts because those systems are, after all, intended to provide a measure of program effectiveness. The situations just discussed provide examples of how divisions between those responsible for program success and those responsible for financial reporting ultimately lead to inadequate accountability, or worse, mismanagement. Without any real steps to address and correct organizational issues that may have created these problems, they cannot finally be resolved. Moreover, without some consideration of changes in the way PI-IA is fundamentally managed, accountability problems could again occur. We therefore suggest that the Secretary initiate a thorough study of HUD’s organization, and of its present and future information needs with the objective of determining how the agency can best be run to efficiently and effectively fulfill its mission. Page 18 GAO/AFMD9@36 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 7 dt SOME GENERAL INWRAIWE I’ROGRAMS PI-IA’s multifamily coinsurance programs and its hospital mortgage insurance programs recorded significant loss provisions during 1988 of $960 miIIion and $275 million, respectively. These losses related, at least in part, to flaws in way the programs were structured and administered. In the case of the multifamily coinsurance programs, the flaws related to insufficient levels of capital required of coinsuring lenders, to other deficiencies in quantitative controls designed to reduce portfolio risk, and to inadequate qualitative controls notably involving ongoing monitoring of coinsuring lenders. The hospital mortgage insurance flaws pertain to a division of responsibility between the department performing underwriting functions, the Department of Health and Human Setices (HI-IS), and the department which bears insurance losses resulting from poor underwriting, HUD. The multifamily coinsurance and hospital mortgage insurance programs are operated through FHA’s General Insurance (GI) Fund, a fund which, as of September 30. 1988, had negative equity of some S3.1 billion. Under the multifamily coinsurance programs, various loan functions are delegated to eligible lenders including underwriting, servicing, management and property disposition functions. The lenders then “coinsure” approximately 20% of the mortgage amount thereby assuming responsibility for a portion of any insurance losses resulting from defaulted mortgages. Because so many of HUD’s functions are delegated for these programs, there is a particular need for proper quantitative controls, in the form of sound capital and leverage requirements, and effective qualitative controls, involving sufficient monitoring of program participants. Both GAO and OMB recognize the need for these types of controls. GAO’s standards define internal controls as “...methods and procedures adopted by management to ensure..that resources are safeguarded against fraud, waste, and misuse...” Similarly, Oh4B requires the establishment of an appropriate level of “financial and other management controls.” In applying these standards to the coinsurance programs, we believe they necessitate that: (1) capital requirements be established at such a level that coinsuring lenders will be induced to make sound loans; (2) criteria be established that will deter the concentration of loans (and thus risk) among too few lenders; and (3) that delegated responsibilities be continually and thoroughly monitored. The importance of these controls becomes apparent when bearing in mind that if coinsurers mismanage their 20% risk, that means they have mismanaged HUD’s 80% risk as well. During 1988,the combination of insufficient capital requirements, concentration of risk among a few large coinsuring lenders and the lack of an effective monitoring function led to loss levels that neither present lender capital requirements nor any other as yet imagined capital requirement would have Page 19 GAO/A.FMD-99-36 Federal Housing Administration Auditory’ Report on Internal Accounting Controls Report on Internal Controls Page 8 been sufficient to cover, much less protect FHA from excessive losses. Furthermore, other quantitative controls that might have mitigated the losses were also missing. For example, there might have existed an overriding leverage limitation which would have begun to curtail the incentive for volume inherent in FHA’s liberal capital accumulation formula, and which probably would have limited the concentration among a few large lenders. But because no such control existed, FI-L4 suffered severe losses when a large coinsuring lender with a disproportionate share of the programs’ coinsured mortgages defaulted. Without a reasonable leverage limitation or a large enough capital requirement, the temptation to expand an increasingly lucrative revenue stream in relation to capital-at-risk can be expected to become overwhelming. If there is also an absence of adequate surveillance and monitoring (as we found to be the case), the temptation to grow, without regard to the quality of that growth is unbounded. Such circumstances constitute a fundamental program flaw, the responsibility for which cannot be delegated, nor can it be blamed entirely on the existence of fraud. FI-L4’s hospital insurance program contains flaws of an organizational nature. Insurance in this program is not initiated by HUD. Instead, hospitals apply to HHS for mortgage insurance, who effectively make decisions about which mortgages should be insured, and HUD later provides that insurance. HHS is responsible for reviewing the underwriting of these loans, and is also primarily responsible for subsequent loan monitoring. Despite the fact that HHS determines which loans should be insured, it is HUD that has the risk of default, pays insurance claims and bears any losses. After claims are paid, HUD assumes added responsibility to perform loan seticing functions for defaulted hospital mortgages, since they are typically assigned to HUD rather than being foreclosed upon. The division of the underwriting and insuring activities effectively cuts the link between responsibility, which presumably belongs to HHS because of its involvement with the underwriting, and accountability which belongs to HUD because it reports resultant losses. We understand that HUD has assessedcapital deficiencies and shortcomings in monitoring for its multifamily coinsurance programs and will shortly be making program revisions to address these issues. These changes, if properly administered, should go a long way toward resolving the programs’ structural flaws and we encourage their quick implementation. With respect to hospital mortgage insurance, we believe a decision must be made about which organization, HI-IS or HUD, should assume m responsibility. Once this decision is made, all mortgage insurance functions should be shifted to the responsible agency and staff necessary to conduct both insurance and finance functions should be hired and trained. Page 20 GAO/AFMO-90-M Federal Housing Administration Auditmu Report on Internal Accounting Controla Report on Internal Controls Page 9 AND-B MUST BE IMI’~ Apart from directly monitoring those individuals to whom property management and sales functions have been delegated, HUD’s own internal property and cash management systems and procedures are weak and require improvement. HUD has not done enough, through the use of its own systems, to ensure that proceeds collected by third parties are promptly deposited in FI-L4’s Treasury account, nor does HUD have enough information to allow for proper accountability over the management, maintenance and sale of foreclosed single-family properties. There are widely varying amounts, depending upon which system or set of records is used, on the number of properties FI-L4 owns at any given time with the result that managers do not know, with precision, how much property they are responsible for or how much that property is really worth. HUD has followed the policy of accepting sales packages and of recording sales before sales proceeds are actually deposited in its Treasury account. Follow-up of case-by-casesituations where sales have been processed but where no cash has been received has been inconsistent across regions. Indeed, reports of sales for which proceeds have not yet been located contain over 8.000 cases, some dating back to 1983. One region, in particular, was so deficient in this regard that a private closing agent was allegedly able to embezzle a sizable amount of sale proceeds without prompt detection. This shortcoming provides a partial explanation of why embezzlements of the magnitude seen can take place yet not be detected for a long period of time. The reason this is only a partial explanation is that there are other controls HUD might have used, as fundamental as reconciling a monthly bank statement, which also would have detected missing cash. For example, if one were to note that a wire transfer or other promised deposits never in fact made it into their bank account, they would presumably seek an explanation and look for the missing funds. HUD has the ability to perform a similar reconciliation each month, albeit on a much larger scale, yet it has not consistently done so. And differences of as much as $6.2 million have remained unreconciled and unexplained. Shortcomings in the cash management and control process are further hampered by weaknesses in the automated systems used to manage and account for FHA-owned foreclosed properties. Two separate systems are currently used to do so, one by the office of housing and another by the office of finance and administration. Apart from the complexities and redundancy introduced by using two systems to perform similar functions, the system used by the office of housing, the groupreallyresponsiblefor propertymanagement and sales contains little or no dollar information (i.e., it has information only on the number of properties). Property transactions do not become dollarized Page 21 GAO/AFMD-9@26 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 10 until they pass to the finance part of HUD. Furthermore, the two systems routinely show large differences in the number of properties FHA owns at any given time, and only recently have attempts been made to try to explain these differences. Collectively the problems with the property systems cause uncertainties about the number and dollar value of the properties FHA actually owns, leave questions about how property can be properly managed and sold with no information about its true value, and further exacerbates the cash management problems should properties not picked up by either system be sold without HUD’s knowledge. The cash management problems resulted, in our view, from a lack of appreciation for the need to closely control cash transactions, particularly those that have been delegated. Insufficient management emphasis on the need to perform very basic Treasury reconciliation functions thoroughly and timely was also a contributing factor. However proper control was also constrained by a split between responsibility for cash and property management functions and accountability over them. Moreover, the use of case level information by those primarily responsible for property management, and then later dollarizing property transactions when another group needed to report property transactions constitutes an unjustifiable split between those responsible for property management and sales and those whose job it is to report this information. We understand that HUD is now implementing a new automated system which will eliminate the two redundant property systems and which will facilitate better cash control and more timely reconciliation to Treasury information. However, this new system will not be fully operational for several more months, and we believe that HUD must take some near term action to address the problems that still exist in cash and property management. Therefore, until the new system is fully operational we suggest that the Secretary direct FHA management to: (1) Perform a complete physical inventory, perhaps on a region by region basis, of FHA-owned single family properties. This will allow HUD to identify properties which should be in its inventory but are not, and will also facilitate the identification of properties which may have been sold without I-IUD’s knowledge. Furthermore, obtaining an accurate property inventory is essential to ensuring that the new system will contain accurate property information; (2) Prepare a report on a quarterly basis of property held in inventory for longer than one year. The regional offices should then research each case to determine if the identified property has really been sold but not reported as such to HUD or, absent that, they should identify the problems causing the identified properties to remain in inventory for an excessively long period of time; and (3) Require headquarters management to prepare a monthly summary of properties sold for which no proceeds have been received, together with a summary actions being taken to recoup missing cash. Page 22 GAO/AFMD-90-26 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 11 Our review of the HUD’s multifamily claim payments process indicated that multifamily claims for insurance benefits are not being paid in a timely manner and that the existing claim review and examination process is inadequate in detecting misrepresentations by mortgagees/lenders. Both GAO and OMB require that internal controls provide reasonable assurance that government resources are protected from fraud, waste and mismanagement. With respect to payment delays there is a significant backlog of claims cases awaiting final settlement and payment. These are cases where the mortgagee has complied with all HUD filing requirements and for which legal clearance has been received from the Office of General Counsel but which have simply not been paid because of delays in final processing. Since the delays in processing are due to reasons not controllable by mortgagees, HUD has to pay interest on the claim. We have estimated that HUD has incurred additional interest costs ranging from $6 to $10 million as a result of these delays. The inadequacies in claim review process pertain to the fact that HUD does not verify all fiscal data provided by mortgagees with the claim submission. For example, we noted an instance where a mortgagee failed to disclose information about a special escrow account when submitting the claim for insurance benefits. As a result, the claims examiners failed to reduce the claim amount by the remaining balance in this escrow account and the claim was eventually overpaid by some $2.8 million. Delays in processing claims were caused by insufficient staffing levels, which were not quickly addressed and which caused the backlog of cases awaiting settlement to build to unacceptable levels. Shortcomings in the claims examination process were caused by a lack of diligence in verifying all submitted information. In the interest of saving time, some claim examiners did not verify all claim financial data to supporting documents submitted by mortgagees. Some steps have been taken to address the staff shortages that caused the claim backlog. HUD is seeking to hire ten additional accountants to augment the claim payment staff and there have been organizational realignments to ensure better supervisory control over the process. In addition outside help is being sought to bolster the claims examination function. However, over the longer term, this problem can only be eliminated with improved financial information at the individual program level which would indicate (1) impending defaults which may require allocating more resources to the claim examination and payment functions, (2) excessive interest cost being incurred, and (3) unusual increases in claims costs relative to insurance in force. Page 23 GAO/AFMD-!%36 Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 12 0 BOU’I’INE ACCOUNTING F-IJ-NCrrONS NOT BEING PEFWO- Any operation the size of FHA has a number of routine accounting functions that must be continually performed to ensure that financial statements and other financial reports are accurately produced. Routine accounting functions include very basic procedures - reconciling accounts to supporting records, diligent record keeping, controlling funds held on behalf of others, and making sure transactions are properly recorded -- to name just a few. The need to perform these procedures would appear obvious and further, GAO’s policy and procedures manual specifically requires that they be performed. However, HUD staff who perform FHA accounting functions have been deficient in performing many of these functions, and our audit identified nearly 100 adjustments that were necessary to correct resultant errors. More specifically, we noted that: -- Documentation supporting several account balances was missing or incomplete. Among the many unsupported balances, for example, there was inadequate support for $10.8 million of interest payable balances and for S1.l million of accounts payable to the public. -- Reconciliations of general ledger balances to supporting records were not performed timely, and in some cases not at all. Virtually every account in the financial statements had transactions that were neither reconciled nor explained. -- There was very poor accountability of distributive share payments. -Payments were made without proper support or justification. In some cases payments were made with no evidence that the individuals receiving them had, in fact, insured their mortgages through PHA -- Forbearance agreements, agreements which restructure the terms of defaulted mortgages in the interest of providing some sort of work out, were not properly recorded in the loan system, thus misreporting mortgagor account balances. - Escrow accounts maintained by HUD to fund repairs on properties financed by HUD mortgages were not properly accounted for. Account balances shown by the banks holding the funds, recorded in the PHA’s records, and reported to mortgagors on the yearly statement all differed without explanation. It is unclear why these functions have not been performed. There was not enough emphasis placed on properly performing them in prior years, and now errors emanating from the past, and old, unexplained transactions have built Page 24 GAO/AFMD&XM Federal Housing Administration Auditors’ Report on Internal Accounting Controls Report on Internal Controls Page 13 up and will be difficult to correct. There was a similar lack of emphasis, in our view, on financial and accounting matters and on financial statements in general, and it is for this reason that we believe problems in performing very basic and fundamental accounting functions have persisted. NormaIly shortcomings in some accounting functions would not necessarily cause significant problems, but because these shortcomings were so pervasive in FHA’s case, they could cause material misstatements in financial reports. Moreover, in certain cases significant adjustments had to be made to reflect a more accurate situation. Performance of these procedures should be a continuous process, and attention to them should not just be devoted in anticipation of a financial audit. To correct these problems, responsibilities for performing accounting functions must be firmly established. Supervisory reviews should then be initiated to ensure accounting functions are properly performed and on a timely basis. Year-end closing procedures should be enhanced to include developing specific requirements for the year end close out, with a subsequent supervisory review of the closing process to ensure all closing procedures have been properly carried out. All this should be done before financial reports are released to other Federal Agencies or to the public. * l * * l Our consideration of the internal control structure would not necessarily disclose all matters in the structure that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. We also noted other matters involving the internal control structure and its operation that we have reported to FHA’s management in a separate letter. This report is intended for the information of the Congress, the U.S. General Accounting Office and the management of the Department of Housing and Urban Development. This restriction is not intended to limit the distribution of this report, which is a matter of public record. September 15, 1989 Page 25 GAO/AFMD-90.36 Federal Housing Administration Auditors’ Report on Compliance With Laws and Regulations 0th~ of Governmn: Sewes Telen3w2022960800 180' K Slree! lu W WasMglo: DC 20006 Bite Ibterhouse 0 To the Comptroller General of the United States and the Secretary of Housing and Urban Development We were engaged to audit the consolidated financial statements of the Federal Housing Administration (FHA), a fund of the Department of Housing and Urban Development (HUD), as of and for the year ended September 30, 1988, and have issued our report thereon dated September 15, 1989, except as to Note 14 to those financial statements, which is as of December 20, 1989. Compliance with laws and regulations applicable to FHA is the responsibility of FHA’s management. We performed tests of FHA’s compliance with certain provisions of applicable laws and regulations. However, our objective was not to provide an opinion on overall compliance with such provisions. Material instances of noncompliance are failures to follow requirements, or violations of prohibitions, contained in applicable laws and regulations that cause us to conclude that the aggregation of the misstatements resulting from those failures or violations is material to the financial statements. While the following instance of noncompliance may not necessarily be material to the financial statements, it is, nevertheless, reported herein because it could significantly impact FHA’s ability to effectively collect money it is owed. ULD PURSUE FULL IMPLEMENTATION OF EBT COJJ,ECTlON Aa During fiscal year 1988, FHA did not achieve full implementation of the Debt Collection Act of 1982 (Public Law 97-365) with respect to how it applies collection procedures to claims emanating from FHA-insured mortgage defaults. When FHA-insured mortgages default, claim payments are made for the unpaid principal balance plus any costs (principally unpaid interest) incurred by the insured mortgagee between the time of default and foreclosure. In most cases, the claim payment made by FHA exceeds the amount recovered when the foreclosed property is subsequently sold. However, the shortfall between claim payment and the amount ultimately recovered is not recorded in the accounting records as a claim of the U.S. Government, and thus very few collection efforts are made against mortgagors. Page 26 GAO/AFMD-90-36 Federal Housing Administration Auditors’ Report on Compliance With Laws and Regulations Report on Compliance with Laws and Regulations Page 2 The Debt Collection Act requires that the head of an executive or legislative agency “shall try to collect a claim of the United States Government for money or property arising out of the activities of, or referred to, the agency.” Claims are defined by the Act as including “amounts owing on account of loans nsured o uanteed by the government and other amounts due the kovemme~t” (emphasis added). The Act further stipulates the types of collection procedures that should be applied to such claims including, among other things, administrative offset (such as against IRS refunds), assessing interest and penalties on delinquent amounts, and the use of collection agencies. It has been HUD’s general practice to effectively forgive the debt by not taking collection action after the foreclosed property is acquired. For example, HUD has not required mortgagees to obtain deficiency judgments in all cases, nor has HUD pursued such judgments on its own. We have been informed that HUD has initiated a new policy of pursuing deficiency judgments in certain circumstances, and where they are allowed to do so by applicable state law. To fully implement the Debt Collection Act, HUD should record the debts as claims in appropriate claims files and document any subsequent decisions to terminate collection action and forgive the debts. Where deficiency judgments have been obtained, the claims should be established as receivables in FHA’s accounting records and the collection actions authorized by the Act should be taken. This may entail developing systemic means of accounting for numerous claims, but we encourage HUD to do so. Other agencies, most notably the Department of Veterans Affairs, have done so and have collected some portion of the claim, however small the amount. By not fully documenting the debts owed to it and the reasons for taking or not taking collection actions, and by not establishing receivables when deficiency judgments are obtained, FHA may be missing opportunities to take more effective collection action. Therefore, we suggest that FHA develop a systemic means of documenting when collection actions are not being taken, of recording deficiency judgments as receivables, and of applying the collection provisions of the Act to such receivables. * l l l * The results of our tests indicate that, with respect to the items tested, FHA complied, in all material respects, with the provisions referred to in the second paragraph of this report. With respect to the items not tested, except as described below, nothing came to our attention that caused us to believe that FHA had not complied, in all material respects, with those provisions. Page 27 GAO/AFMD90-36 Federal Housing Administration Auditors’ Report on Compliance With Laws and Regulations Report on Compliance with Laws and Regulations Page 3 There are a number of investigations currently being conducted about alleged improprieties involving HUD’s administration of FHA. These investigations could reveal other violations of laws and regulations, but to date, a final determination about such violations has not yet been made. The outcome of these investigations could have a material effect on FHA’s financial statements, however HUD is not yet able to determine what the effect might be. Nor were we able to satisfy ourselves about the effect of the outcome of these investigations. September 15, 1989 Page 28 GAO/AFMB9M6 Federal Housing Administration l?inmcid Statements Consolidated Statement of Financial Position SEPTEMBER 30, 1988 AND 1987 (Dollars in Thousands) September30, 1988 1987 ASSETS: Fund Balance with the U.S. Treasury % 113.108 $ 175,331 Investments in U.S. Government Securities Principally Non-marketable (Note 3) 6208,004 6,651,427 Foreclosed Property Held for Sale, Net (Note 4) 1,696,364 1,432,116 Mortgage Notes Receivable, Net (Note 6) 2,913,127 2,808,597 Appropriations Receivable (Note 7) 587,813 400,586 Other Assets and Receivables 268,339 437,629 Total Assets $ 11,786,755 $ 11.905.686 LIABILITIES AND GOVERNMENT EQUITY: Claims Payable 628,692 525,759 Loss Reserves (Note 8) 5,411,ooo 2.047.392 Unearned Premiums (Note 9) 3,994,668 3.983.749 Debentures Issued to Claimants (Note i0) 119,545 175,743 Accounts Payable, Accrued Expenses and Other Liabilities 35 1,472 302.775 Distributive Sharesand Premium Refunds Payable 142,133 150,158 Borrowings from the U.S. Treasury (Note 11) 3,993,268 3,531.434 Total Liabilities 14,640,778 10,717,010 Government Equity (Deficiency) (Note 13): Mutual Funds Equity 1.806.811 3,375,571 Subsidized Funds Cumulative Losses (9.941.681) (7,117.649) Appropriated Capital 5,280,847 4,930,754 Total Government Equity (Deficiency) (2.854.023) 1.188.676 Commitments and Contingencies (Note 12) Total Liabilities and Government Equity $ 11,786,755 $ 11,905,686 The notes to the financial statementsare an integral part of this statement. 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Financial Audit: Federal Housing Administration Fund's 1988 Financial Statements
Published by the Government Accountability Office on 1990-02-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)