oversight

Major Management Challenges and Program Risks: Department of Housing and Urban Development

Published by the Government Accountability Office on 2003-01-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Performance and Accountability Series




January 2003
               Major Management
               Challenges and
               Program Risks
               Department of
               Housing and Urban
               Development




GAO-03-103
               a
A Glance at the Agency Covered in This Report
The Department of Housing and Urban Development’s complex and diverse
mission is to promote
●    adequate and affordable housing by making homeownership more accessible
     and less expensive;
●    the development of affordable and decent rental housing for low-income
     families;
●    economic opportunity by supporting community and economic development
     efforts, including strengthening and expanding community partnerships,
     providing capital to create and retain jobs, and improving economic conditions
     in distressed communities; and
●    a suitable living environment, free from discrimination, by enforcing fair housing
     laws and educating lenders, landlords, and tenants in complying with the laws.


The Department of Housing and Urban Development’s Budgetary and Staff Resources


Budgetary Resources a, b                                               Staff Resources b
Dollars in billions                                                    FTEs in thousands

 80                                                                    12
                                                                              10       10        10        10         10
                                        60        60
 60                 58                                                  9
          53                  50

 40                                                                     6



 20                                                                     3


    0                                                                   0
        1998      1999      2000      2001        2002                       1998     1999      2000      2001        2002
         Fiscal year                                                         Fiscal year
Source: Budget of the United States Government.

a Budgetary resources include new budget authority (BA) and unobligated balances of previous BA. Budgetary
    resources exclude unobligated balances from the FHA-Mutual Mortgage and Cooperative Housing Insurance
    Funds, FHA-General and Special Risk Insurance Funds, and Guarantees of Mortgage-Backed Securities
    Liquidating Accounts.
b Budget and staff resources are actuals for FY 1998-2001. FY 2002 are estimates from the FY 2003 budget, which
    are the latest publicly available figures on a consistent basis as of January 2003. Actuals for FY 2002 will be
    contained in the President’s FY 2004 budget to be released in February 2003.




This Series
This report is part of a special GAO series, first issued in 1999 and updated in
2001, entitled the Performance and Accountability Series: Major Management
Challenges and Program Risks. The 2003 Performance and Accountability Series
contains separate reports covering each cabinet department, most major
independent agencies, and the U.S. Postal Service. The series also includes a
governmentwide perspective on transforming the way the government does
business in order to meet 21st century challenges and address long-term fiscal
needs. The companion 2003 High-Risk Series: An Update identifies areas at high risk
due to either their greater vulnerabilities to waste, fraud, abuse, and
mismanagement or major challenges associated with their economy, efficiency, or
effectiveness. A list of all of the reports in this series is included at the end of
this report.
                                                    January 2003


                                                    PERFORMANCE AND ACCOUNTABILITY SERIES

                                                    Department of Housing and Urban
Highlights of GAO-03-103, a report to               Development
Congress included as part of GAO’s
Performance and Accountability Series




In its 2001 performance and                         HUD has made progress since January 2001 in addressing identified
accountability report on the U.S.                   weaknesses in its high-risk program areas and management challenges but
Department of Housing and Urban                     significant challenges remain. GAO is maintaining the department’s single-
Development (HUD), GAO                              family mortgage insurance and rental housing assistance program areas as
identified two of HUD’s major                       high risk at this time. In the single-family mortgage insurance program, HUD
program areas—single-family
mortgage insurance and rental
                                                    has, among other things, developed new processes to review lenders and
housing assistance—as high risk.                    appraisers and implemented new incentives to improve the performance of its
GAO also reported that HUD faced                    property disposition contractors. However, many of HUD’s strategies for
major management challenges                         resolving problems in its high-risk program areas represent new initiatives in
concerning its human capital and                    early stages of implementation, and evidence shows that significant problems
programmatic and financial                          remain. In its rental housing assistance programs, HUD estimates that rental
management information systems.                     subsidy overpayments—some $2 billion out of $19 billion in assistance in fiscal
The information GAO presents in                     year 2000—are greater than previously estimated; implementation of a new
this report is intended to help to                  assessment system for public housing agencies has been delayed; and
sustain congressional attention and                 correcting housing quality violations remains problematic. HUD is in the early
a departmental focus on continuing                  stages of developing a strategic human capital planning approach and has not
to make progress in addressing
these challenges and ultimately
                                                    yet developed a comprehensive plan to resolve serious, long-standing
overcoming them.                                    programmatic and financial management information system deficiencies.
                                                    GAO is retaining human capital and programmatic and financial management
                                                    information systems as major management challenges. In addition, GAO is
                                                    designating acquisitions management as a new major management challenge
HUD needs to                                        because of HUD’s extensive and growing reliance on contractors, as well as
•  improve management and                           identified weaknesses in monitoring and oversight of these contractors,
   oversight of its single-family                   managing and training its acquisitions workforce, and developing information
   mortgage insurance programs,                     systems that support contracting. These management challenges cut across
   to reduce risk of losses from                    HUD’s program areas and contribute to GAO’s high-risk designations.
   loan defaults or fraud;
•  ensure that its rental housing
   assistance programs operate                      HUD’s High-Risk Program Areas and Management Challenges
   effectively and efficiently,
   specifically ensuring that
   subsidy payments are
   accurate, subsidy recipients
   are eligible, assisted housing
   meets quality standards, and
   contractors perform as
   expected; and
•  resolve issues concerning its
   programmatic and financial
   management information
   systems, human capital, and
   acquisitions management.

www.gao.gov/cgi-bin/getrpt?GAO-03-103.

To view the full report, click on the link above.
For more information, contact Thomas J.
McCool at (202) 512-8678 or
mccoolt@gao.gov.
Contents



Transmittal Letter                                                                                                1


Major Performance                                                                                                  2

and Accountability
Challenges

GAO Contacts                                                                                                      45


Related GAO Products                                                                                              46


Performance and                                                                                                   49

Accountability and
High-Risk Series




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                       Page i                                                        GAO-03-103 HUD Challenges
A
United States General Accounting Office
Washington, D.C. 20548
                                                                                         Comptroller General
                                                                                         of the United States




           January 2003                                                                                          T
                                                                                                                 ransmL
                                                                                                                      ta
                                                                                                                       ileter




           The President of the Senate
           The Speaker of the House of Representatives

           This report addresses the major management challenges and program risks facing the U.S.
           Department of Housing and Urban Development (HUD) as it works to carry out its multiple and
           highly diverse missions. The report discusses the actions that HUD has taken and that are under way
           to address the challenges GAO identified in its Performance and Accountability Series 2 years ago.
           Also, GAO summarizes the challenges that remain, new ones that have emerged, and further actions
           that GAO believes are needed.

           This analysis should help the new Congress and the administration carry out their oversight
           responsibilities for HUD, helping to improve government for the benefit of the American people. For
           additional information about this report, please contact Thomas J. McCool, Managing Director,
           Financial Markets and Community Investment, at (202) 512-8678 or at mccoolt@gao.gov.




           David M. Walker
           Comptroller General
           of the United States




                                    Page 1                                              GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges

              The Congress has long been concerned with management problems at
              HUD. Over time, these have included an inefficient organizational
              structure, inadequate human capital planning, and outdated and inefficient
              information technology, as well as overlapping, complicated, and poorly
              designed programs. At one time, the Congress was considering dismantling
              HUD and transferring its programs to other agencies.1 In recent years,
              HUD has undertaken various management reform initiatives to address
              these deficiencies, a task made difficult by the fact that the agency has a
              complex and diverse mission and must work through thousands of
              intermediaries to deliver its programs. As we have reported in recent years,
              HUD has made progress toward overhauling its operations. The current
              leadership faces the challenge of sustaining this progress in order to
              achieve the department’s goal of becoming a high-performing agency. As
              part of efforts to address management challenges across the government,
              the Office of Management and Budget presented the President’s
              Management Agenda for fiscal year 2002. In addition to the
              governmentwide initiatives, the agenda includes agency-specific initiatives
              to address the most significant management challenges. For HUD, the
              agenda includes initiatives related in part to the department’s high-risk
              areas and management challenges identified by GAO: improving the
              performance of housing intermediaries, reducing overpaid rent subsidies,
              improving risk management at the Federal Housing Administration (FHA),
              and strengthening program controls.2

              In our January 2001 report on HUD’s management challenges and program
              risks,3 we reported that HUD had made credible progress in addressing
              some of its long-standing management deficiencies. For example, HUD had
              completed its first physical inspections and financial assessments of the
              inventory of assisted and insured multifamily housing properties to assess
              the condition of these properties; taken steps to develop an information


              1
               U.S. General Accounting Office, Housing and Urban Development: Potential
              Implications of Legislation Proposing to Dismantle HUD, GAO/RCED-97-36 (Washington,
              D.C.: Feb. 21, 1997).
              2
               The last initiative, reducing meaningless compliance burdens, concerns the consolidated
              plan process in HUD’s Office of Community Planning and Development. This report does
              not discuss this initiative because it does not relate to HUD’s program areas that we
              consider at high risk or to management challenges we have identified.
              3
               U.S. General Accounting Office, Major Management Challenges and Program Risks:
              Department of Housing and Urban Development, GAO-01-248 (Washington, D.C.: January
              2001).




              Page 2                                                        GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




technology (IT) investment management process to improve and
strengthen the selection, control, and evaluation of IT projects; and piloted
a new resource estimation and allocation process to determine appropriate
staffing levels. Recognizing the progress HUD had made, and consistent
with our criteria for determining high risk, we redefined and reduced the
number of HUD programs deemed to be high risk. Specifically, because of
the actions HUD took to improve management controls, we concluded that
community planning and development programs were no longer at high
risk. However, because significant weaknesses persisted in two major
program areas—single-family mortgage insurance programs and rental
housing assistance programs—we retained their high-risk designations.
Additionally, we identified as major management challenges HUD’s (1)
programmatic and financial management information systems and (2)
human capital management.

Since January 2001, HUD has made efforts to address weaknesses in its
high-risk and management challenge areas. In the single-family mortgage
insurance programs, HUD has developed new processes to review lenders
and appraisers and has implemented new incentives to improve the
performance of its single-family property disposition contractors. HUD has
also initiated a new effort to reduce rental housing assistance
overpayments. To improve its programmatic and financial management
information systems, HUD has deployed a new general ledger, improved
interfaces with legacy systems, and developed an IT investment
management program and a project management training program.4 To
help address its human capital weaknesses, HUD has completed its
resource estimation and allocation process for determining appropriate
staffing levels and has begun a work measurement process to further refine
its resource allocation.

While we recognize HUD’s progress, serious weaknesses remain in HUD’s
high-risk programs, and some of its strategies for addressing these
problems are new initiatives that are in the early stages of implementation.
Consequently, we are maintaining the department’s single-family mortgage
insurance and rental housing assistance program areas as high risk at this
time. For example, the single-family mortgage insurance programs remain
a high-risk area because of continued weaknesses in the mortgage
insurance process, evidence of fraud, and the variety of management


4
 A legacy system generally refers to an old or outdated computer system that remains in use
even after more modern technology has been installed.




Page 3                                                         GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




challenges HUD faces in implementing corrective actions. Rental housing
assistance also remains a high-risk area because of evidence that
overpayments due to errors in determining rental assistance amounts are
greater than previously estimated, challenges in ensuring compliance with
housing quality standards, and delays in implementing a new assessment
system for public housing authorities. Programmatic and financial
management information systems and human capital are still major
management challenges. In addition, we are designating acquisitions
management as a new management challenge because of the agency’s
extensive and growing reliance on contractors and third parties and
deficiencies in HUD’s contractor monitoring and oversight, management of
the acquisitions workforce, and information systems that support
acquisitions.




Page 4                                            GAO-03-103 HUD Challenges
                          Major Performance and Accountability
                          Challenges




Reduce the Risk of        HUD’s FHA administers programs aimed at making mortgage financing
                          more accessible to homebuyers, particularly low-income and first-time
Losses in HUD’s Single-   homebuyers. To expand homeownership, FHA insures private lenders
Family Mortgage           against nearly all losses on mortgages that finance single-family homes,
                          managing about $500 billion in insured single-family mortgages.5 FHA’s
Insurance Programs        insurance programs are dependent on the actions of third parties—private
                          lenders who make the loans, appraisers contracted by those lenders, and
                          contractors who manage the property that FHA acquires when the
                          borrower defaults on the mortgage (fig. 1). While FHA insures lenders
                          against nearly all losses resulting from foreclosed loans, it relies on the
                          lenders to underwrite the loans and determine borrowers’ eligibility for
                          FHA mortgage insurance. The loan amount that FHA can insure is based, in
                          part, on the appraised value of the home. The appraisal (1) determines the
                          property’s eligibility for mortgage insurance on the basis of its condition
                          and location and (2) estimates the value of the property for mortgage
                          insurance purposes. The appraiser is required to identify any visible
                          deficiencies impairing the safety, sanitation, structural soundness, and
                          continued marketability of the property and to assess the property’s
                          compliance with FHA’s other minimum property standards. Lenders
                          making FHA-insured loans are required to select appraisers from FHA’s
                          roster of state-licensed or -certified appraisers.




                          5
                           This is the value of single-family insurance-in-force as of September 30, 2001. FHA
                          endorsed 1,067,000 single-family mortgage loans through about 7,500 approved lenders in
                          fiscal year 2001, including loans for refinancing.




                          Page 5                                                       GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




Figure 1: HUD and Third-Party Roles in FHA’s Single-Family Mortgage Insurance
Process




Page 6                                                 GAO-03-103 HUD Challenges
                           Major Performance and Accountability
                           Challenges




                           Because of weaknesses in FHA’s processes and oversight, ineligible buyers
                           sometimes fraudulently obtain loans or foreclosed properties, or loans are
                           made on properties actually worth less than the loan amount, increasing
                           the risk of default and losses. Every year, thousands of borrowers default
                           on their FHA insured single-family mortgage loans. When borrowers
                           default, lenders may foreclose on the properties for which the loans were
                           secured, file claims against the FHA insurance program, and convey the
                           properties to HUD. HUD contracts with management and marketing
                           contractors to secure, maintain, and sell the foreclosed properties. Further,
                           if the properties are not properly secured and maintained in a timely
                           fashion, their condition can deteriorate, resulting in lower sales prices and
                           limiting FHA’s ability to recover its costs.

                           In January 2001 we reported that HUD and FHA had made considerable
                           progress in streamlining operations and making FHA’s single-family
                           mortgage insurance programs more efficient.6 However, we also reported
                           that significant deficiencies remained and that because of the value of the
                           insurance programs, the variety of management challenges FHA faces, and
                           FHA’s potential liability under these programs, FHA’s single-family
                           mortgage insurance programs maintained their high-risk designation. On
                           the basis of our work and that of others, we said that HUD needed to

                           • further improve the management and monitoring of lenders, appraisers,
                             and property disposition contractors,

                           • ensure that sufficient staff are available and have the skills needed to
                             carry out FHA’s mission, and

                           • improve programmatic and financial management information systems.



Need to Improve the        Since 2001, HUD has taken steps to improve its single-family mortgage
Management and             insurance operations, including overseeing lenders and appraisers. As part
                           of the President’s Management Agenda, HUD is working to reduce the risk
Monitoring of Lenders,
                           of loss to FHA’s insurance fund by holding lenders accountable for the
Appraisers, and Property   performance of brokers and appraisers and is including plans to eliminate
Disposition Contractors    most, if not all, falsely inflated appraisals by 2004, taking strong action




                           6
                           GAO-01-248.




                           Page 7                                               GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




when fraud is found in the program. More specifically, the following steps
have been taken:

• HUD has developed the Lender Assessment Subsystem (LASS), a Web-
  based system that receives; collects; assesses; and scores financial,
  compliance, and performance-related information from 7,500 FHA-
  approved lenders to help HUD identify and measure the risk posed by
  lenders to the insured portfolio. LASS replaces a manual process and
  allows lenders to electronically submit annual audited financial
  statements and program compliance information. HUD issued
  regulations on August 15, 2002, which according to the department,
  requires that lenders use LASS to submit their annual financial and
  compliance data, beginning with those lenders having a September 2002
  fiscal year end. These first submissions were due to HUD December 31,
  2002.

• In response to our recommendations,7 HUD is revising the Credit Watch
  Program's regulations to cover lenders that underwrite FHA-insured
  loans and have excessive default and claim rates, as well as lenders that
  originate such loans.8 In addition, the department is developing
  procedures and enhancing FHA's management information systems to
  identify and select for technical reviews loans and lenders that pose a
  high risk of financial loss to FHA.

• HUD has initiated the Single Family Appraiser Subsystem (SASS) to
  review the quality of real estate appraisals. Among other things, HUD
  has assigned approved appraisers to perform independent reviews of
  FHA appraisals, and has had its Real Estate Assessment Center (REAC)
  administer FHA appraiser testing. However, according to HUD, the
  process as originally designed proved to be an inefficient means for
  identifying poorly performing appraisers. The process resulted in a high
  volume of automated reviews that identified only minor problems and
  did not identify patterns of problems with appraisers. In fiscal year 2001,
  SASS cost HUD about $20 million and resulted in the removal of 23


7
 U.S. General Accounting Office, Single-Family Housing: Stronger Oversight of FHA
Lenders Could Reduce HUD’s Insurance Risk, GAO/RCED-00-112 (Washington, D.C.:
Apr. 28, 2000).
8
 Credit Watch is a program that enables FHA to analyze trends in claim and default data by
lender and impose sanctions on problem lenders, including terminating their loan
origination authority.




Page 8                                                        GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




     appraisers. To address these concerns, HUD revised the process to
     include focusing on appraisers rather than appraisals and moving the
     function from REAC to the Office of Single Family Housing where staff
     would have the expertise to review appraiser performance. Appraiser
     reviews are based on known risk factors, such as an appraiser’s
     association with mortgages with high default and claim rates,
     rehabilitation loans, and foreclosed properties. According to HUD, the
     new targeted system resulted in the removal of 97 appraisers in fiscal
     year 2002 at a cost of about $300,000.

• Based on our recommendation,9 HUD developed incentives and
  penalties to encourage the management and marketing contractors to
  reduce the number of properties that are in the inventory longer than 6
  months. For example, the department now includes the selling of aged
  properties in its performance evaluation of contractors. Generally, the
  less time a property is in HUD’s inventory, the less cost HUD bears. HUD
  told us that the percentage of aged inventory decreased from 8.4 percent
  to 6 percent between fiscal year 2001 and fiscal year 2002.

• As part of the President’s Management Agenda, HUD is working to
  improve FHA’s risk management and to increase amounts FHA recovers
  from defaulted loans and foreclosed properties. Specifically, in fiscal
  year 2002 HUD initiated a demonstration program using mortgage loan
  purchase and sale authority granted under the National Housing Act, as
  amended,10 known as the 601 Accelerated Claim Disposition Program.
  The intent of the demonstration project is to reduce foreclosure claim
  losses by paying claims on loans considered most at risk of foreclosure
  early in the default cycle and selling them to private sector joint venture
  partners. On October 31, 2002, HUD awarded Salomon Brothers Realty
  Corporation a 70 percent equity interest in a joint venture to acquire,
  service, and dispose of 5,100 nonperforming loans. According to HUD,
  these partnerships will help to restructure mortgage notes to improve
  performance, accelerate the claims process, and increase recoveries to
  the FHA fund and the department will evaluate this demonstration



9
 U.S. General Accounting Office, Single-Family Housing: Stronger Measures Needed to
Encourage Better Performance by Management and Marketing Contractors, GAO/RCED-
00-117 (Washington, D.C.: May 12, 2000).
10
 Section 204 of the National Housing Act, as amended by section 601 of the HUD
Appropriations Act of Fiscal Year 1999.




Page 9                                                      GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




     project as it develops plans for subsequent asset disposition
     demonstrations and permanent program implementation.

• In response to recommendations we made in June 1999 concerning
  problems with the 203(k) Home Rehabilitation Loan Program, since
  January 2001 HUD has taken actions to address weaknesses in insuring
  home renovation loans.11 HUD developed specific procedures for
  identifying high-risk 203(k) lenders and targeting them for annual
  monitoring, issued guidance that set new standards and procedures for
  consultants’ participation in the 203(k) program, and issued guidance
  that set uniform standards for nonprofit agency participation and re-
  certification in all FHA activities. HUD issued regulations during 2002 to
  remove nonperforming 203(k) consultants and nonperforming nonprofit
  organizations from the list of approved participants.

Although these improvements are under way, GAO and HUD’s Inspector
General have continued to identify problem areas that increase FHA’s risk
in its single-family mortgage insurance programs. More specifically, the
problem areas are as follows:

• In its latest semiannual report, HUD’s Inspector General stated that
  fraud in the origination of mortgages for single-family properties
  continued to be the most pervasive problem uncovered by its
  investigations.12 The Inspector General noted that a joint investigation
  with the Federal Bureau of Investigation uncovered a 20-person
  property-flipping scheme in Chicago, Illinois, that resulted in 21
  indictments and convictions and 12 jail sentences. The report added that
  the use of fraudulent documentation to qualify borrowers for FHA-
  insured mortgages had led to criminal indictments and convictions in
  several other communities.

• LASS is not yet calculating key financial indicators to determine lenders’
  soundness and risk exposure as planned. Implementation of the system
  has been delayed because the Office of Single Family Housing does not
  yet have the technical capacity to support the function. HUD is working


11
 U.S. General Accounting Office, Homeownership: Problems Persist with HUD’s 203(k)
Home Rehabilitation Loan Program, GAO/RCED-99-124 (Washington, D.C.: June 14, 1999).
12
 U.S. Department of Housing and Urban Development, Office of Inspector General, Semi-
annual Report to the Congress for the period ending September 30, 2002 (Washington,
D.C.).




Page 10                                                    GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




     to develop the electronic environment within the Office of Single Family
     Housing to support the LASS function. HUD reports that the LASS will
     be modified during fiscal year 2003.

• In June 2001, the Inspector General reported that HUD’s Philadelphia
  Homeownership Center needed to strengthen its monitoring of
  management and marketing contractors and its existing follow-up
  procedures to ensure that significant and recurring performance
  deficiencies were reported and more closely monitored and tracked.13
  As a result of these deficiencies, contractor performance problems were
  not corrected and subjected HUD to the higher risks associated with
  poor property conditions. According to HUD, it is taking corrective
  actions to address the Inspector General’s concerns, including using a
  new performance evaluation tool and taking action against one
  contractor. HUD’s reviews have indicated the need to better incorporate
  the results of property inspections in assessments of contractor
  performance, and the department is exploring options to use this
  information more effectively.

• In September 2001, we testified that the 203(k) program requires
  continued management attention and further improvements in
  oversight.14 We had recommended that HUD improve its process for
  identifying underwriting violations, notifying lenders of violations, and
  imposing penalties. HUD agreed that lenders with poor underwriting
  practices should be targeted for enforcement actions and is in the
  process of hiring a contractor to assess the results of its desk reviews of
  203(k) lenders and develop criteria for evaluating the risks associated
  with these lenders.




13
  U.S. Department of Housing and Urban Development, Office of Inspector General, Audit
Memorandum: Philadelphia Homeownership Center Single-Family Disposition
Activities, 2001-PH-0803 (Washington, D.C.: June 2001). Responsibility for FHA’s single-
family insurance loan processing and property management is assigned to four
homeownership centers located in Atlanta, Denver, Philadelphia, and Santa Ana
(California).
14
 U.S. General Accounting Office, Homeownership: Problems Persist with HUD’s 203(k)
Home Rehabilitation Loan Program, GAO-01-1124T (Washington, D.C.: Sept. 10, 2001).




Page 11                                                      GAO-03-103 HUD Challenges
                               Major Performance and Accountability
                               Challenges




                               • In April 2002,15 we reported that FHA’s foreclosure process could be
                                 improved if FHA adopted a process more like that used by other entities
                                 to reduce the time properties were not actively managed. With a revised
                                 process, FHA could better ensure that properties did not deteriorate and
                                 could recoup more of its losses when the house was sold. We reported
                                 that FHA’s foreclosure procedures (1) prevented the timely initiation of
                                 critical property maintenance and marketing of the kind practiced by
                                 the other organizations, (2) could delay conveyance to FHA’s
                                 management and marketing contractors because of the time-consuming
                                 procedures necessary to perform maintenance that exceeded
                                 established cost ceilings, and (3) resulted in disputes between FHA
                                 servicers and management and marketing contractors after the property
                                 was conveyed. We recommended that HUD establish unified property
                                 custody—a method in which a single entity is responsible for custody of
                                 a property after foreclosure through the sale to a new homeowner—as a
                                 priority for FHA and that HUD determine the method for unified
                                 custody that best ensures FHA borrowers continuing benefits from loss
                                 mitigation and homeowner protections under state and federal laws,
                                 provides appropriate incentives for limiting the time and expense of
                                 acquiring and selling properties, and ensures that properties are
                                 maintained to the benefit of the FHA insurance fund and communities.
                                 HUD agreed with these recommendations and has considered proposals
                                 to streamline FHA’s foreclosure procedures, including issuing updated
                                 guidance and policy to address the title approval process. However,
                                 HUD has not revised its approach for accepting properties after
                                 foreclosure as recommended due to concerns about the potential
                                 negative impact on former homeowners and tenants and because
                                 statutory authority would have to be amended, according to HUD. We
                                 continue to believe that unified property custody would provide the
                                 most effective means for acquiring and selling FHA foreclosed
                                 properties and, as we stated in our April report, if this requires
                                 additional statutory authority, the HUD Secretary should seek it.



Ensure Sufficient Staff with   HUD has substantially reorganized its single-family function in recent
Needed Skills                  years, reducing the program’s staffing levels and significantly changing the
                               nature of the jobs performed by HUD’s single-family staff. This situation


                               15
                                U.S. General Accounting Office, Single-Family Housing: Opportunities to Improve
                               Federal Foreclosure and Property Sale Processes, GAO-02-305 (Washington, D.C.: Apr. 17,
                               2002).




                               Page 12                                                     GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




has presented HUD with a continuing challenge to ensure that it has
adequate staff with the right skills to perform their jobs effectively. We have
found that staffing problems and skill imbalances have contributed to
weaknesses in the single-family mortgage insurance programs.

For example, we reported in July 2001 that while HUD’s four
homeownership centers had improved their services, staffing imbalances
had hampered the centers’ operations.16 While HUD envisioned leaving
about a third of the centers’ staff in field offices, nearly half remained in 71
field offices across the country. In addition, the deployment of staff across
the centers was not consistent with their workload. As a result, all four
centers were having difficulty supervising and making effective use of the
staff in field offices, and the Philadelphia center, which had the largest
workload, had fewer staff than two of the other centers. These imbalances
existed because HUD had assigned staff to the centers without performing
a systematic workload analysis and did not require staff to relocate from
the field to the centers as workloads shifted. Furthermore, as the centers
struggled to use their staff effectively, new initiatives, such as fraud
prevention efforts, have increased the centers’ workload. To make more
effective use of their staff, the centers would like to eventually move many
field office positions to the centers as existing field staff members leave or
retire. According to HUD, the homeownership centers are using the
department’s recently completed resource studies and other workload
information to adjust staffing plans at the centers.




16
 U.S. General Accounting Office, Single-Family Housing: Better Strategic Human
Capital Management Needed at HUD’s Homeownership Centers, GAO-01-590 (Washington,
D.C.: July 26, 2001).




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Improve Programmatic and   As we reported in October 2001, FHA’s single-family information systems
Financial Management       do not adequately support the centers’ efforts to oversee lenders and
                           contractors.17 Given the multibillion-dollar insurance risk that FHA
Information Systems        assumes annually, it is critical that the information systems help the agency
                           carry out its responsibilities efficiently and effectively. FHA’s
                           homeownership centers use more than 20 different information systems to
                           oversee the work of lenders and contractors, and homeownership center
                           staff have developed specialized databases to improve their ability to meet
                           their responsibilities. As a result, center staff must collect information from
                           many different sources to identify high-risk lenders for review and to
                           identify and investigate potential fraud cases. This situation creates a
                           greater risk of error and increases the likelihood that these problems will
                           go unnoticed. In addition, FHA’s single-family information systems do not
                           readily provide information that the centers need to monitor the
                           performance of management and marketing contractors. For example, the
                           homeownership centers’ systems do not generate the reports needed to
                           monitor these contractors’ sale of properties under special programs that
                           allow police officers and teachers to purchase HUD-owned homes in
                           certain neighborhoods at a discount. HUD’s Inspector General identified
                           evidence of potential fraud in these programs, causing HUD to suspend the
                           programs for 120 days.18 According to HUD, FHA will undertake a new
                           single-family integration project in 2003 to re-engineer and integrate
                           systems to address data needs of staff and modernize its technical
                           environment. The project will take several years to complete.




                           17
                            U.S. General Accounting Office, Single-Family Housing: Current Information Systems
                           Do Not Support the Business Processes at HUD’s Homeownership Centers, GAO-02-44
                           (Washington, D.C.: Oct. 24, 2001).
                           18
                              U.S. Department of Housing and Urban Development, Office of Inspector General, Review
                           of Officer/Teacher Next Door Program, 2002-DE-0802 (Denver, CO: Mar. 12, 2002).




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                          In the audit of FHA’s fiscal year 2001 financial statements,19 the
                          independent auditors reported a material weakness related to the financial
                          management systems20—that FHA’s information systems need to more
                          effectively support its business processes. According to the audit report,
                          FHA is still conducting its day-to-day business with legacy systems, which
                          results in staff manually processing and analyzing some financial
                          transactions. The report specifically noted that key systems, including the
                          Single Family Acquired Asset Management System and the Single Family
                          Mortgage Notes System, are maintained in local databases that are not
                          integrated with FHA financial management processes. This lack of
                          integration increases the level of manual processing needed and reduces
                          both the overall reliability of data and the efficiency of FHA personnel.
                          Because of this lack of integration, FHA is unable to manage financial
                          transactions in accordance with the Federal Financial Management
                          Improvement Act (FFMIA). FHA has taken steps to begin addressing these
                          problems, but the solutions are long term. For example, FHA implemented
                          a new general ledger on October 1, 2002, and plans to develop an integrated
                          financial management system over a 5-year period.



Increase Efficiency and   HUD encourages the development of affordable rental housing through a
                          wide range of incentives and assistance. Specifically, it provides (1)
Effectiveness of Rental   mortgage insurance through FHA for the construction and rehabilitation of
Housing Assistance        multifamily developments; (2) grants for the development of housing for
                          the elderly, persons with disabilities, and public housing; (3) project-based
Programs                  rental assistance to owners of insured and uninsured multifamily projects;
                          (4) operating subsidies to public housing authorities to help finance the
                          operations and maintenance costs of housing projects; and (5) tenant-
                          based vouchers for eligible households to use in securing privately-owned
                          housing. HUD is responsible for ensuring that the insured and assisted
                          properties remain in good physical and financial condition, and that



                          19
                           To complete the FHA audit, HUD’s Inspector General contracted with the independent
                          certified public accounting firm of KPMG. Department of Housing and Urban Development,
                          Office of Inspector General, Federal Housing Administration Audit of Financial
                          Statements Fiscal Years 2001 and 2000, 2002-FO-0002 (Washington, D.C.: Feb. 22, 2002).
                          20
                            A material weakness is a condition in which the design of one or more of the internal
                          control components does not reduce, to a relatively low level, the risk that errors or
                          irregularities, in amounts that would be material to the financial statements, may occur and
                          not be detected promptly by employees in the normal course of performing their duties.




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                                                households receiving rental assistance meet eligibility requirements and
                                                receive the proper amount of assistance.

                                                As it does in its single-family programs, HUD relies extensively on third
                                                parties to carry out the rental housing assistance programs, including
                                                public housing authorities, state housing finance agencies, lenders,
                                                appraisers, landlords and property management contractors (see table 1).
                                                HUD, through FHA, has about $55 billion in insured multifamily mortgages-
                                                in-force and manages about $7 billion in capital grants for housing for the
                                                elderly and persons with disabilities. HUD’s rental housing assistance
                                                programs are administered by about 4,500 housing agencies21 as well as
                                                under contracts covering about 22,000 privately owned properties.22 In
                                                fiscal year 2001, HUD provided about $19 billion in rental subsidies to make
                                                housing affordable for an estimated 5 million households. Despite the
                                                magnitude of the assistance it provides, HUD is able to serve fewer than
                                                half of those who are eligible for assisted housing. Ensuring that proper
                                                subsidies are paid is necessary to maximize the number of families that can
                                                be served.



Table 1: HUD Programs That Support Affordable Rental Housing

Program                              What third party participants do                      What HUD does
Multifamily Mortgage Insurance:      • Lender loans money to developer.                    • Insures lenders against risk of developer
about $55 billion for about 14,700   • Developer constructs, purchases, or rehabilitates     defaulting on loan.
mortgages;a foreclosed property        affordable multifamily housing.                     • Inspects construction.
inventory of about $750 million,     • If borrower defaults on loan,
with estimated annual                                                                      • Pays claim to lender.
expenditures to manage and           • lender forecloses on property or conveys note to
maintain of about $214 million in      HUD, and                                            • Services the note to restore to financial
FY 2001; about $2.2 billion in       • lender conveys property to HUD for disposition.       soundness or forecloses.
mortgage notes being serviced.                                                             • Assigns property to property management
                                                                                             contractor to maintain until sold.




                                                21
                                                 Housing agencies may administer public housing or Section 8 tenant-based assistance
                                                (housing vouchers) or both.
                                                22
                                                   The assistance provided under these contracts is called Section 8 project-based
                                                assistance.




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(Continued From Previous Page)
Program                              What third party participants do                            What HUD does
Housing for the Elderly/Disabled     • Sponsor applies for grant for construction or  • Reviews and approves grant.
(Section 202/811): funding             rehabilitation.
commitments of about $800            • Owner constructs project.                      • Inspects throughout construction and
million per year as of the end of    • Inspectors monitor progress of construction.     contracts with inspectors for assistance.
fiscal year 2001, with about $4      • Sponsor/owner must comply with use agreements. • Monitors throughout term of use agreement.
billion in unexpended obligated
funds, about $2.8 billion in
unobligated, unexpended
balances; about $7.8 billion in
remaining balances from direct
loans under the pre-1992
program.
Section 8 Project-based Rental      • Landlord/property manager determines eligibility of • Pays landlord the difference between the fair
Assistance (administered by           applicants to reside in assisted units.               market rent and the tenant’s portion of the
HUD staff and Section 8 contract • Landlord/property manager rents units to eligible        rent.
administrators): work directly with   low-income tenants (including elderly or            • Inspects properties to ensure they meet
about 22,000 property owners          handicapped tenants) who pay rent equal to 30         HUD’s housing quality standards.
and agents; about $7 billion spent    percent of their income or a minimum flat rent of
on 1.3 million units in fiscal year   $25.
2001.                               • Landlord/property manager verifies tenant income • Contracts with contract administrators to
                                      and submits request for payments to HUD or            manage the Section 8 project-based program
                                      contract administrators.                              in some areas.
                                    • Contract administrator manages Section 8
                                      contracts, submits bills to HUD, and inspects
                                      properties.
Section 8 Housing Choice             • Public housing agencies allot vouchers to eligible        • Allots vouchers to local public housing
Voucher (administered by public        households.                                                 agencies.
housing agencies): about $9.5        • Eligible households find privately owned housing          • Pays public housing agencies the difference
billion obligated in subsidies for     willing to accept vouchers.b                                between the fair market rent and the tenant’s
about 1.97 million units in fiscal                                                                 portion of the rent.
year 2001.                                                                                       • Regulates and monitors PHA performance.
Public Housing (administered by • Public housing agencies rent housing units they                • Pays public housing agencies to develop,
public housing agencies): in fiscal own to eligible low-income tenants (including                  maintain, and rehabilitate units.
year 2001, about $3.2 billion       elderly and handicapped) for rent equal to 30                • Provides public housing agencies with funds
spent in operating subsidies and    percent of their income (or a minimum rent up to               to cover the difference between operating
$3 billion spent in modernization   $50) or a flat rent.                                           costs and the tenants’ rent.
to support about 3,200 public                                                                    • Inspects properties to ensure they meet
housing agencies that manage                                                                       uniform physical condition standards.
about 1.2 million public housing
units.
                                                 Source: GAO and HUD.
                                                 Note: GAO presentation of HUD programs.
                                                 a
                                                 Some of these loans are for health care facilities.
                                                 b
                                                  In some markets, households with vouchers are unable to find eligible units at rates they can afford
                                                 and are unable to use the vouchers.


                                                 In January 2001, we reported that HUD faced considerable management
                                                 challenges in closing the gap between the number of households needing



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                          assistance and those that receive it, as well as in ensuring that assisted
                          housing complies with HUD standards. We noted that HUD’s rental housing
                          programs were still high risk because of their size and complexity and
                          because improving the management of these programs would allow HUD
                          to provide assisted housing to more low-income households. More
                          specifically, we said that HUD had not yet ensured that

                          • existing housing subsidies are received only by eligible households, and
                            households receive no more than the amounts to which they are
                            entitled;

                          • housing providers receiving assistance from HUD comply with HUD’s
                            quality standards for housing that is decent, safe, sanitary, and in good
                            repair; and

                          • its human capital management supported efforts to correct program
                            weaknesses.



Reduce Overpayments and   Errors in determining rental assistance amounts can increase the
Errors in Determining     government’s assistance payments, reduce the number of families who may
                          be assisted, and result in ineligible families retaining subsidized units. In
Rental Assistance
                          HUD’s consolidated financial statement audit reports since fiscal year 1995,
                          HUD’s Inspector General has reported as a material internal control
                          weakness that HUD needs to improve its efforts to ensure it is paying
                          correct rental assistance. Table 2 presents the rental program expenditures
                          and excess rental assistance HUD estimates it paid for fiscal years 1996
                          through 2001.



                          Table 2: Estimated Excess Rental Assistance, Fiscal Years 1996–2001

                          Dollars in millions
                          Fiscal year           Estimated excess            Program          Percentage of
                          reporteda              rental paymentsb       expenditures     excess assistance
                          1996                              $538c            $19,257                 2.8%
                          1997                               $804            $18,069                 4.4%
                          1998                               $857            $18,600                 4.6%
                          1999                               $935            $18,606                 5.0%
                                                                 d
                          2000                              $617             $18,883                 3.3%
                          2001                            $2,013e            $18.883f               10.7%




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Source: HUD.
Note: HUD data reported in annual audited financial statements.
a
 The estimated excess rental assistance is reported in footnotes to HUD’s annual consolidated
financial statements for fiscal years ending September 30 of each year; however, the estimates are
computed from data for the preceding calendar year.
b
    These estimates result from unreported tenant income, unless otherwise noted.
c
 In the audit of HUD’s fiscal year 1996 consolidated financial statements, HUD’s Inspector General
concluded that the $538 million estimate of excess rental assistance was understated because HUD
did not include Supplemental Security Income (SSI) in the computer matching. In addition, the
Inspector General expressed concern about the completeness of HUD’s tenant databases. HUD
reported to us that subsequent analysis shows that underreported SSI income had a nominal effect on
the estimate of excess rental assistance.
d
 In the fiscal year 2000 financial statement audit, the Inspector General also reported that HUD
completed a separate quality control review of rent determination errors made by public housing
agencies, owners, and agents responsible for program administration. This study estimated about $1.3
billion in overpayment errors or about 6.6 percent of total rental assistance. This methodology was
incorporated in the analysis done for the fiscal year 2001 financial statement audit report that resulted
in the higher error estimate. The $617 million relates to unreported tenant income.
e
 The fiscal year 2001 estimated error increased because of a change in HUD’s methodology for
calculating rental assistance errors to more accurately capture the full extent of such errors. The new
methodology includes an estimate of the amount of errors in rent determinations made by project
owners/agents, as discussed below, which was not included in previous years’ estimates.
f
HUD reported results using fiscal year 2000 program expenditures.


To capture the full extent of errors made in rental assistance
determinations, HUD has expanded the scope of its error measurement
methodology since January 2001. The expanded methodology covers the
three primary types of rental assistance program errors—(1) incorrect
reporting of income by tenants;23 (2) mistakes by public housing agencies,
owners, and renting agents in calculating income and rent amounts; and (3)
mistakes made by public housing agencies, owners, and renting agents in
completing appropriate paperwork and billing HUD for rental assistance.
The error measurement methodology used for fiscal year 2000 included the
first two of the three primary types of rental assistance errors, and starting
in 2003 HUD intends to measure and report on all three types of primary
errors annually. As table 2 shows, HUD’s latest estimate is that it paid a
total of about $2.013 billion in excess assistance as a result of tenants
underreporting or failing to report their income and because of errors made
by program administrators in calculating rent subsidies.

In 2001, HUD initiated the Rental Housing Integrity Improvement Project,
which is designed to address the causes of the errors and improper

23
 Until 2000, HUD’s methodology focused on incorrect reporting of income by tenants by
matching the income amount tenants reported to HUD with data obtained from the Internal
Revenue Service and the Social Security Administration.




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payments and ensure that only eligible people receive subsidies and that
the subsidies are properly calculated. This initiative is also one of HUD’s
President’s Management Agenda items. HUD’s goal is to reduce the error
rate by 50 percent by the end of 2005 by improving the way incomes are
verified and reducing errors in calculating subsidies. Both the Office of
Housing and the Office of Public and Indian Housing have designed
program fact sheets for use by tenants, public housing agencies, owners,
landlords/renting agents, and HUD staff that explain HUD’s requirements
for reporting income and determining subsidies. HUD is testing a process
for automating the rent calculations, which will help to ensure that no
program requirements are overlooked, and is also considering options to
simplify the program rules. Finally, the Office of Housing and the Office of
Public and Indian Housing have developed quality control programs and
redeployed and trained staff to focus on reducing errors.

HUD’s efforts to reduce rental assistance overpayments face significant
challenges and the results may not be known for several years. For
example, in order to identify unreported income before rental subsidies are
provided, HUD is trying to gain access to the National Directory of New
Hires,24 maintained by the Department of Health and Human Services.
However, because accessing this data will require legislation, HUD
estimates that it may take two years or more to gain access to this
database. In the interim, the Office of Public and Indian Housing is
pursuing an initiative to use state wage data to verify income. According to
HUD, one agreement was signed with the state of Texas in October 2002
and cooperative agreements are being discussed with five other states.
Even with access to the National Directory of New Hires and sharing
agreements with states, privacy concerns may limit the use of such data,
particularly by private owners and lenders who calculate the rental
assistance amounts.




24
 The directory includes centralized sources of state wage, unemployment insurance, and
new hires data for all 50 states.




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                         HUD’s Inspector General has reported that some of the information
                         systems containing tenant data that is necessary to calculate rents and
                         analyze rental assistance payments contain inaccurate or incomplete data
                         that may affect the department’s ability to reduce overpayments. The
                         current income verification process uses two HUD data sources for tenant
                         information—the Tenant Rental Assistance Certification System (TRACS)
                         for Section 8 project-based renters and the Multifamily Tenant
                         Characteristics System (MTCS) for public housing renters.25 In a September
                         2000 report, HUD’s Inspector General stated that TRACS contained
                         inaccurate data that decreased the effectiveness of HUD’s error calculation
                         efforts.26 In HUD’s fiscal year 2001 consolidated financial statements audit
                         report, the Inspector General stated that about 50 percent of the Section 8
                         contracts in TRACS contained inaccurate rent rates and that HUD lacked
                         written procedures that specified when or by whom TRACS should be
                         updated after a rent rate change.27 The Inspector General recommended
                         that HUD ensure that planned actions to upgrade TRACS are completed
                         and that TRACS data are useful and cost-efficient. Otherwise, the
                         department should discard TRACS and investigate alternative systems.
                         According to HUD, it has developed a rent module in the Real Estate
                         Management System, which tracks information on HUD’s multifamily
                         portfolio, to maintain rent data for the multifamily housing portfolio
                         effective January 2003. The Inspector General also reported that, as of
                         December 2001, approximately half of the housing authorities had not
                         reported household data to MTCS. As of December 2002, 94 percent of
                         public housing agencies are accessing MTCS, according to HUD.



Assure Housing Quality   Since January 2001, HUD has continued to respond to our
Standards                recommendations on its efforts to manage the quality of assisted and
                         insured rental housing. HUD has undertaken initiatives to improve its
                         oversight and ensure that housing providers receiving assistance comply



                         25
                              HUD reports that MTCS is now known as PIC-50058.
                         26
                          U.S. Department of Housing and Urban Development, Office of Inspector General,
                         Housing Subsidy Payments: Office of Housing, 00-KC-103-0002 (Kansas City, MO: Sept. 29,
                         2000).
                         27
                          U.S. Department of Housing and Urban Development, Office of Inspector General, Audit
                         of U.S. Department of Housing and Urban Development Financial Statements for Fiscal
                         Years 2001 and 2000, 2002-FO-0003 (Washington, D.C.: Feb. 27, 2002).




                         Page 21                                                     GAO-03-103 HUD Challenges
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with HUD’s quality standards for housing that is decent, safe, sanitary, and
in good repair. Specifically:

• Since January 2001, HUD has taken a number of steps to respond to
  recommendations we made in July 2000 concerning the reliability of
  inspection scores.28 Since these actions were implemented, the
  percentage of inspections that failed to meet REAC’s standards has
  continued to decrease,29 demonstrating REAC’s progress in ensuring the
  accuracy and reliability of its physical inspection scores. For example,
  according to data provided by HUD for fiscal year 2001, REAC staff
  accompanied contract inspectors on 1,616 inspections and found that
  less than 8.3 percent of the inspections did not meet REAC’s standards,
  compared with 12 percent when we reported the problem in July 2000.

• In our June 2001 report on HUD’s efforts to address physical problems
  at multifamily properties in substandard condition, we noted that HUD
  could not verify that repairs at substandard properties had been made.30
  In response to our recommendations, HUD has taken steps to ensure
  that owners of properties in substandard condition correct all physical
  deficiencies at their properties. For example, HUD hired a contractor to
  verify that repairs had been made at properties where the owners had
  certified that repairs were completed. HUD officials also noted that
  effective November 1, 2002, the Departmental Enforcement Center is
  required to meet directly with the owners of properties that receive low
  inspection scores and pursue specific steps to ensure the owner
  improves property conditions. If the owner does not make the necessary
  improvements, the center will take immediate enforcement action,
  which could include taking control of the property.




28
 U.S. General Accounting Office, HUD Housing Portfolios: HUD has Strengthened
Physical Inspections but Needs to Resolve Concerns About their Reliability, GAO/RCED-
00-168 (Washington, D.C.: July 25, 2000).
29
 HUD’s REAC is responsible for assessing whether properties in the agency’s public and
assisted multifamily housing programs comply with standards for safety, cleanliness, and
good repair. Contractors certified by REAC inspect projects for compliance with HUD
standards.
30
  U.S. General Accounting Office, HUD Multifamily Housing: Improved Followup Needed
to Ensure that Physical Problems are Corrected, GAO-01-668 (Washington, D.C.: June 21,
2001).




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• In our March 2002 report, we found that HUD was still testing and
  revising its new Public Housing Assessment System (PHAS), but had
  begun to use the results to designate certain housing agencies as
  “troubled” and to assign them to recovery centers to receive technical
  and other assistance to correct their problems.31 Poor-quality units are
  one such problem. We reported that, as of December 2001, HUD had
  designated as troubled 21 of about 3,200 agencies that manage public
  housing units. Since that time, HUD has designated a total of 84 public
  housing agencies as troubled through September 2002.

• In December 1999, HUD implemented a new system assigning risk levels
  to public housing agencies. One component is an assessment of housing
  quality. HUD field offices use these risk assessments to plan their
  monitoring strategies and target their monitoring resources. In March
  2002, we recommended that HUD revise its risk assessment system to
  automatically classify all troubled housing agencies as high risk, which
  was not previously being done. According to HUD, the system has been
  modified to make this classification, and the department held training
  sessions in June 2002 for field office staff on the modifications.

• HUD also relies on its Section 8 Management Assessment Program
  (SEMAP) to evaluate the performance of public housing agencies that
  administer Section 8 tenant-based rental assistance—including an
  evaluation of housing quality. Under the President’s Management
  Agenda, one of HUD’s goals is to use the program to continue improving
  its oversight capability and the performance of housing agencies that
  administer tenant-based Section 8 programs. According to HUD, SEMAP
  was revised in November 2001 to provide field offices with better
  assistance in implementing the program.

Although these are positive steps, some have not yet been finalized, and the
impact of recent organizational realignments on HUD’s progress in
monitoring and ensuring the quality of assisted and insured housing
remains unclear. Further, our work and that of the HUD Inspector General
indicates that ensuring compliance with housing quality standards remains
a serious challenge. Following are examples of housing quality standards
compliance challenges:



31
 U.S. General Accounting Office, Public Housing: New Assessment System Holds
Potential for Evaluating Performance, GAO-02-282 (Washington, D.C.: Mar. 15, 2002).




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• In January 2001 we reported that despite the preponderance of
  satisfactory physical inspection scores for multifamily and public
  housing properties, inspectors cited a substantial number of properties
  for life threatening health and safety problems. Our analysis of HUD
  property data indicates that this situation has not significantly changed
  in the last 2 years. For fiscal year 2002, about 91 percent of multifamily
  and public housing properties received satisfactory inspection scores,
  but about half of these properties also had life threatening health and
  safety problems at the time of their inspection.32 According to HUD’s
  analysis of the data by unit level, about 24 percent of multifamily units
  and 20 percent of public housing units had life threatening health and
  safety problems.

• In May 2002, HUD’s Inspector General reported that public housing
  authorities were either not correcting, or not correcting in a timely
  manner, life threatening health and safety violations identified during
  REAC’s physical inspections.33 Specifically, only 16 percent of the
  deficiencies the Inspector General selected for review had been
  corrected within the required time frame. The Inspector General also
  noted that the monitoring methods local HUD offices used to ensure
  that authorities corrected identified deficiencies were inconsistent and
  ineffective. Because the deficiencies were not being corrected, many
  public housing residents were forced to live in unsafe or unsanitary
  conditions—or both—for extended periods of time. According to HUD,
  the Office of Public and Indian Housing has issued guidance for fiscal
  year 2003 that requires field staff to conduct spot check reviews of
  repairs when they make site visits to public housing agencies.

• In our March 2002 report,34 we found that HUD had designated 21 of
  about 3,200 public housing agencies as troubled as of December 2001.
  However, our analysis showed that other public housing agencies could
  have received the same designation if PHAS, which is HUD’s new system
  for assessing and managing the performance of housing agencies, had


32
 Inspection data for fiscal year 2002 is for the period through September 2002 for public
housing and through June 2002 for multifamily housing.
33
  U.S. Department of Housing and Urban Development, Office of Inspector General, Multi-
location Review of HUD’s Utilization of the Public Housing Assessment System, 2002-PH-
0001 (Washington, D.C.: May 2002).
34
     GAO-02-282.




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                                 been fully implemented in fiscal year 2001. As many as 90 agencies could
                                 have been designated as troubled overall, and another 442 designated as
                                 troubled in at least one area, in part because of the poor quality of their
                                 housing units. As of September 2002, although HUD finalized the
                                 system, HUD had still not fully implemented PHAS to use the results in
                                 designating housing agencies as troubled. Until the system is fully
                                 implemented, we cannot assess how effective PHAS will be in
                                 identifying and providing for the correction of long-standing problems at
                                 public housing agencies.

                            As part of a series of organizational realignments, HUD revised REAC’s
                            responsibilities to shift some programs to the Office of Housing and change
                            the organizational structure so that REAC reports through the Office of
                            Public and Indian Housing. According to HUD officials, this realignment
                            and reorganization was completed in October 2002, with some
                            administrative decisions concerning the personnel actions needed to effect
                            the realignments yet to be made. As we stated in July 2002, the creation of
                            REAC was a positive development that yielded real results; while the
                            Secretary has the prerogative to align the organization as he sees fit,
                            consistent with his vision and management style, it is important that
                            progress made to date in improving the condition and oversight of HUD’s
                            inventory not be jeopardized.35 Regardless of how REAC is aligned, HUD
                            must continue to make progress improving the physical condition of public
                            and assisted multifamily housing properties. While it is too soon to evaluate
                            the effect of the organizational changes, ultimately the success or failure
                            will be viewed in that light.



Effectively Address Human   Our work, and that of HUD’s Inspector General, has highlighted the
Capital Issues              importance of human capital management in correcting weaknesses in
                            rental assistance programs. Examples of human capital issues are as
                            follows:




                            35
                             U.S. General Accounting Office, HUD Management: HUD’s High-Risk Program Areas
                            and Management Challenges, GAO-02-869T (Washington D.C.: July 24, 2002).




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• Our work and that of the HUD Inspector General identified mismatches
  between workload and staffing in HUD’s public housing program. We
  reported in July 2002 that HUD’s public housing directors believed they
  did not have adequate field office staff to provide effective assistance to
  the public housing agencies for which they were responsible.36 At the
  same time, HUD’s Inspector General found that staff at HUD’s
  specialized centers, established to deal with troubled public housing
  agencies, were often underemployed. Specifically, the two Troubled
  Agency Recovery Centers (TARC) had expected to assist some 575
  troubled agencies but because PHAS implementation was delayed, the
  expected workload had not materialized. Meanwhile, HUD’s field offices
  were using their limited resources to assist the agencies that might have
  been designated as troubled if PHAS were implemented. According to
  HUD, it now assigns staff from the TARCs as needed to the field offices
  to help with the workload. HUD told us it was considering making the
  field offices formally responsible for troubled agencies and permanently
  moving all TARC staff to the field offices, essentially disbanding the
  recovery centers. To address this issue, in December 2002, HUD officials
  stated that a restructuring plan has been developed to consolidate the
  Office of Troubled Agency Recovery into the Field Operations to create
  a new Office of Field Operations to improve coordination with field
  offices and oversight of public housing agencies.

• In our July 2002 report we noted that because of their heavy workloads,
  the staff of some field offices could not implement processes and
  procedures for reviewing and monitoring underwriting of insured
  multifamily loans. We found that workloads in some offices often
  exceeded HUD’s standard. To address this issue, HUD told us the
  department would shift the workload among field offices as needed.




36
 U.S. General Accounting Office, HUD Human Capital Management: Comprehensive
Strategic Workforce Planning Needed, GAO-02-839 (Washington D.C.: July 24, 2002).




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                           • Our reviews of contracts in HUD’s Office of Multifamily Housing and of
                             improper payments associated with some of those contracts indicates
                             that weaknesses exist in both monitoring and management of contracts,
                             partly because of staffing issues.37 As discussed in more detail under the
                             acquisitions management challenge section, we found that HUD’s
                             monitoring of its multifamily contractors was not systematic and was
                             generally remote. Staff reported to us that the workload and wide
                             dispersion of properties makes it difficult to conduct site visits as often
                             as is required or as often as staff believe is necessary. Monitoring is
                             generally conducted based on where staff are located or after a
                             significant contractor performance problem has been identified. To help
                             compensate for its inability to do more on-site monitoring, HUD
                             contracted with a firm to conduct on-site inspections of multifamily
                             properties it is responsible for managing. However, staff report they are
                             unable to routinely follow up on identified deficiencies for the same
                             reasons.



Address Department’s       Three crosscutting management challenges affect HUD’s operations and
                           contribute to placing the single-family mortgage insurance and rental
Crosscutting               housing assistance program areas at high risk. Two of these challenges—
Management                 improving programmatic and financial management information systems
                           and human capital management—are long-standing issues that both we and
Challenges                 HUD’s Inspector General have reported for several years. Because of
                           HUD’s heavy and ever-increasing reliance on third parties operating under
                           contractual arrangements and weaknesses in HUD’s acquisitions
                           management, we believe acquisitions management is also a management
                           challenge that the department needs to address.



Improve Programmatic and   Both we and HUD’s Inspector General have reported on weaknesses
Financial Management       related to HUD’s programmatic and financial management information
                           systems for many years. For example, in audits of HUD’s consolidated
Information Systems        financial statements, the Inspector General has identified numerous
                           material internal control weaknesses. Most of these weaknesses are long-


                           37
                            U.S. General Accounting Office, HUD Management: Actions Needed to Improve
                           Acquisition Management, GAO-03-157 (Washington, D.C.: Nov. 15, 2002); and U.S. General
                           Accounting Office, Financial Management: Strategies to Address Improper Payments at
                           HUD, Education, and Other Federal Agencies, GAO-03-167T (Washington, D.C.: Oct. 3,
                           2002).




                           Page 27                                                    GAO-03-103 HUD Challenges
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standing and are the result of inadequate financial systems that do not meet
the department’s needs. In these audits for the past several years, HUD’s
Inspector General has stated that the most critical need faced by HUD in
improving its financial management control environment is to complete the
development of adequate systems. The weaknesses in HUD’s systems
impede its financial management, program effectiveness, and oversight
functions. Accordingly, developing a plan to substantially improve
programmatic and financial management information systems to meet the
department’s needs and comply with federal financial system requirements
is crucial to HUD’s effort to successfully address its high-risk program
areas.

Since January 2001, HUD has continued its efforts to improve its
programmatic and financial management systems and management of its
IT. According to HUD, its focus has been on stabilizing and enhancing its
existing financial management systems structure, and the department has
deferred action on planning the next generation of core financial
management systems. HUD is planning to complete a feasibility study to
determine the most cost-effective solution to address its long-standing
financial management systems issues, although no date has yet been set for
completion of the study. Specific improvements to HUD’s financial and
programmatic information systems include the following:

• As of October 2002, FHA deployed a new general ledger module and
  improved interfaces with its legacy systems. This deployment makes
  progress toward responding to one of FHA’s material internal control
  weaknesses. These improvements are expected to eliminate much of the
  manual processing of transactions previously required to generate
  consolidated financial statement data for HUD. The new module is
  consistent with federal government accounting principles and provides
  for automated monthly interfaces with HUD’s current general ledger.

• FHA is also taking steps to improve funds control, which the Inspector
  General also reported as a material weakness, by providing managers
  with additional training, updating outdated funds control policies, and
  enhancing existing funds control systems. FHA intends to implement a
  new subsidiary ledger system that, among other things, is intended to
  redesign the funds control process. The first phase of implementation
  occurred in October 2002, with full implementation targeted for fiscal
  year 2006. The new process is intended to improve FHA’s monitoring
  and control of budgetary resources and reduce manual analyses and
  reconciliations.



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• HUD established an investment management program to select, control,
  and evaluate IT investments. Since fiscal year 2000, HUD has routinely
  assessed and scored proposed projects against departmentwide project
  selection criteria and used the process to select IT projects. Also, HUD
  has been conducting quarterly in-process reviews of all IT projects to
  determine whether the projects are achieving the approved objectives,
  milestones, and budget targets. HUD has ordered corrections to projects
  that fall short of the targets, reallocated project funding, and stopped
  projects that were not making sufficient progress or were not being
  properly managed based on risk. In January 2002, HUD completed a
  pilot postimplementation review of a project and has scheduled reviews
  for projects starting in October 2002. According to the Director of IT
  Investment Management, HUD intends to accelerate the number of
  postimplementation reviews until they are conducted routinely on all
  implemented projects.

In addition, HUD has undertaken several efforts—some still ongoing—to
address governmentwide initiatives under the President’s Management
Agenda to (1) improve financial performance, (2) expand electronic
government (e-government), and (3) improve budget and performance
integration. For example, to improve financial management, the
department is seeking to further reduce the number of noncompliant
systems from 17 to 14 in fiscal year 2003, with full compliance with federal
financial standards by 2006, and is developing a blueprint to reduce
overpayments of rent subsidies. To help further the e-government initiative,
HUD has, among other things, conducted an e-government assessment to
identify current, short-term, and long-term e-government opportunities.
Finally, to address the budget and performance integration initiative, the
department has developed a plan to integrate budgeting, planning, and
evaluation, and is working to further integrate performance and budget
information in the fiscal year 2004 budget. HUD also developed an IT
investment management program and a project management training
program that has trained 150 IT project managers and had planned to make
the training program Web-based by September 2002.

While the continuing efforts are encouraging, we remain concerned that
HUD’s programmatic and financial management information systems do
not today fully support its programs—including its single-family mortgage
insurance and rental housing assistance programs—and do not ensure
effective financial management of those programs. The following are
examples of these programmatic and financial management concerns:




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• As discussed in more detail earlier, to oversee lenders, including
  identifying high-risk lenders, and investigate potential fraud cases in
  HUD’s single-family mortgage insurance programs, staff at the
  department’s homeownership centers must collect and manually
  compile information from multiple systems and sources. Working
  manually creates a greater risk of error and increases the likelihood that
  problems will go unnoticed.

• As we reported in July 2002,38 HUD’s system for tracking the status of
  multifamily loan applications does not reliably record and track several
  key steps in the accelerated approval process. As a consequence, HUD
  field staff must develop and maintain spreadsheets and other informal
  systems to monitor the status of HUD’s actions.

• As we reported in November 2002,39 HUD’s contracting information
  systems do not effectively support acquisitions management. The
  department’s centralized contracting management information system
  does not contain reliable data and its financial management information
  systems do not readily provide complete and consistent obligation and
  expenditure information on contracting activities. To address this issue,
  HUD plans to implement data verification procedures and provide data
  quality training to staff during fiscal year 2003.

• Finally, in September 2001, we reported that HUD’s processes for
  acquiring software were immature and could be characterized as ad hoc,
  sometimes chaotic, and not repeatable across projects.40 These
  weaknesses can lead to systems that do not meet the information needs
  of management and staff, do not provide support for needed programs
  and operations, and cost more and take longer than expected to
  complete. HUD agreed to strengthen its software acquisitions process
  and, according to the Deputy Secretary, the department has prepared a
  strategy and plan to improve its acquisitions of software projects.



38
 U.S. General Accounting Office, Multifamily Housing: Improvements Needed in HUD's
Oversight of Lenders That Underwrite FHA-Insured Loans, GAO-02-680 (Washington,
D.C.: July 19, 2002).
39
     GAO-03-157.

 U.S. General Accounting Office, HUD Information Systems: Immature Software
40

Acquisition Capability Increases Project Risk, GAO-01-962 (Washington, D.C.: Sept. 14,
2001).




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Financial Management   HUD and FHA financial management information systems remain major
Deficiencies Remain    concerns. In February 2002, for the eleventh year in a row, HUD’s Inspector
                       General cited the lack of an integrated financial management system in
                       compliance with federal financial system requirements as a material
                       weakness in its audit of the department’s financial statements. Although
                       HUD obtained an unqualified opinion for its fiscal year 2000 consolidated
                       financial statements, after the Inspector General issued a disclaimer on
                       HUD’s fiscal year 1999 financial statements, the department relied on
                       extensive ad hoc analyses and manual reconciliations to develop account
                       balances and the necessary disclosures.41 HUD also received an unqualified
                       audit opinion for fiscal year 2001, but the department again relied on
                       extraordinary manual efforts to prepare its financial statements. This
                       manual work was necessary because HUD’s and FHA’s financial
                       management systems cannot perform these functions. While an unqualified
                       opinion is an important milestone in financial management, the ultimate
                       objective is to have information systems and controls in place to provide
                       accurate, timely, and useful information to manage agencies on a day-to-
                       day basis. HUD does not yet have systems that meet these financial
                       management goals.




                       41
                        Due to problems experienced in converting to a new system, the Inspector General was
                       unable to issue an opinion on HUD’s fiscal year 1999 consolidated financial statements.
                       HUD could not prepare auditable financial statements and related disclosures in time to
                       allow the Inspector General to complete the audit within statutory time frames.




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The audit report on HUD’s fiscal year 2001 consolidated financial
statements identified a total of five material internal control weaknesses.
Three weaknesses, most of which are long-standing issues, related to HUD
and two related specifically to FHA.42 The Inspector General found that
HUD needed to (1) complete improvements to its financial systems, (2)
improve its oversight and monitoring of housing assistance determinations,
and (3) ensure that rental assistance is based on correct tenant income.
The audit report also identified nine additional reportable conditions,43
including computer security issues.

In the audit report on HUD’s consolidated financial statements, the
Inspector General also reported that HUD did not substantially comply
with FFMIA for fiscal year 2001. FFMIA requires agencies to put in place
financial management systems that substantially comply with federal
financial management systems’ requirements and with applicable
accounting standards and that allow transactions to be processed in
accordance with the United States Standard General Ledger. The Inspector
General reported noncompliance in all three areas.




42
 The two FHA material weaknesses, which have contributed to our high-risk designation
for HUD’s single-family mortgage insurance programs, are discussed in the single-family
mortgage insurance section of this report. Two of HUD’s material weaknesses specifically
relate to rental assistance determination and payment processes, which have contributed to
our high-risk designation for HUD’s rental housing assistance programs, as discussed in the
rental housing assistance section of this report.
43
  Reportable conditions are matters coming to the attention of the auditors that, in their
judgment, should be communicated to management because they represent significant
deficiencies in the design or operation of internal control that could adversely affect the
organization’s ability to meet the objectives of reliable financial reporting and compliance
with applicable laws and regulations.




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In its fiscal year 2001 Accountability Report, HUD specifically reported that
17 of its 57 financial management systems did not materially conform to
federal requirements, an increase from the 11 reported in the fiscal year
2000 Accountability Report.44 HUD noted several financial management
system deficiencies, including several system interfaces that were not
automated and that, therefore, required staff to do manual analyses and
reprocessing and make additional entries to compile complete agencywide
financial results. Further, HUD reported that its systems did not provide
adequate funds control, limited the department’s ability to ensure the
propriety of Section 8 rental assistance payments, and did not fully support
efforts to identify quickly any funds remaining on expired Section 8
contracts. Additionally, weaknesses in controls over HUD’s financial
management systems—both generally and for specific applications—
increased the risk of unauthorized access and manipulation of applications
and data on these systems.

In a separate report, HUD’s Inspector General reported on deficiencies in
HUD’s information security. The Inspector General reported that while
HUD has improved some aspects of its Information Systems Security
program, significant weaknesses persist.45 Specifically, delays in the
implementation of corrective actions and tasks designed to strengthen the
program continue to put critical data and resources at risk. As a result,
progress toward strengthening the program has been hampered and the
program remains immature and not fully effective in ensuring the integrity,
confidentiality, and authenticity of information and information systems
supporting departmental operations and assets. In response to this report,
the Deputy Secretary said HUD currently has four contract initiatives under
way that will have a direct bearing on the Inspector General’s audit
findings. These contract initiatives cover incident response service; policy
development; training for all HUD staff and collocated contractor staff; and
security plans, reviews and threat assessments for 17 mission critical
systems.




44
 HUD stated that the number of noncompliant FHA systems increased largely as a result of
applying revised criteria from the Office of Management and Budget.
45
   Office of Inspector General, Department of Housing and Urban Development, Annual
Evaluation of HUD’s Information Security Program, 2003-DP-0801 (Washington, D.C.: Oct.
30, 2002).




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In the audit report on FHA’s fiscal year 2001 financial statements, the
independent auditors reported two material weaknesses that specifically
affect FHA’s financial management. The auditors concluded that FHA
needs to (1) enhance its information technology systems to more
effectively support FHA’s business processes and (2) improve its controls
over budget execution and funds control. The independent auditors
reported that FHA’s inability to significantly update its system environment
adversely affects internal controls related to accounting and reporting
financial activities. The auditors also said that FHA does not have financial
systems that are capable of fully monitoring and controlling budgetary
resources. FHA reported that weaknesses in its budget execution and
funds control areas contributed to an Anti-Deficiency Act violation in fiscal
year 2000 in the amount of $7.3 million, which required a supplemental
appropriation from Congress.46 The weaknesses in its financial
management systems also increased the risk of noncompliance with
applicable federal accounting standards.47 According to HUD, the
implementation of the new FHA General Ledger in October 2002 put in
place the core system for beginning to address funds control issues. In
addition, as part of a departmentwide effort, FHA is in the process of
updating its funds control plans.




46
 The Antideficiency Act (31 U.S.C. 1341) provides that unless otherwise authorized by law,
no officer or employee of the United States may obligate or expend funds in excess of
amounts appropriated by law or before such funds are appropriated.
47
 Statement of Federal Financial Accounting Standards Number 7, “Accounting for Revenue
and Other Financing Sources and Concepts for Reconciling Budgetary and Financial
Accounting.”




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Address Critical Human   Like other federal agencies, HUD has historically not strategically managed
Capital Issues           its human capital. In our January 2001 report, we noted that the
                         reorganizations that took place as part of HUD’s 2020 Management Reform
                         Plan had resulted in imbalances in workload at several specialty centers
                         and in some of the field offices. Managers we surveyed reported that
                         training and staff skills had generally improved, but also thought that
                         training should be increased. HUD’s human capital challenges can be seen
                         as part of a broader pattern of human capital shortcomings that have
                         eroded mission capabilities across the federal government. (See our high-
                         risk series update for a discussion of human capital as a governmentwide
                         high-risk area.48)

                         HUD’s most significant workforce planning to date has been its Resource
                         Estimation and Allocation Process (REAP) study, which was completed in
                         December 2001. On an office-by-office basis, the REAP study looked at the
                         number of staff on board and assigned a staff ceiling—the number of staff
                         needed for that office based on the work the office was currently
                         performing—and calculated the resources required to do that work. In
                         support and validation of REAP, HUD has implemented a workload
                         measurement system that captures the type of work HUD employees and
                         contractors perform and the time required to do it. While the results of the
                         REAP study suggested an increase in the number of full-time equivalent
                         positions—from 9,531 to 10,600—HUD did not request the higher number
                         of staff in its fiscal year 2003 budget submission. According to a HUD
                         official, the workload measurement system was not fully implemented
                         when the budget went to the Congress and HUD was still redeploying
                         existing staff. However, HUD told us that the redeployment has been
                         completed and that the Assistant Secretary for Administration and Director
                         of Personnel are now focused on hiring and orientation strategies to
                         support an increase in staffing levels.

                         HUD has also analyzed data on staff retirement eligibility by office,
                         position, and grade level. Among its findings is that, by August 2003, half of
                         its workforce in General Schedule Grades 9-15 will be eligible to retire.
                         According to HUD officials, in light of the pending retirements and because
                         the department has done little outside hiring in more than 10 years, HUD
                         needs to undertake a large-scale recruiting and hiring effort. HUD is


                         48
                            U.S. General Accounting Office, High Risk Series: An Update, GAO-03-119 (Washington,
                         D.C.: January 2003).




                         Page 35                                                     GAO-03-103 HUD Challenges
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considering the potential retirements in its hiring strategies by including an
emphasis on recruiting midcareer employees. HUD expects to complete a
5-year strategic plan in early 2003.

Since 2001, HUD has realigned some of its organizational activities and
centers, reassigning staff to address staffing needs in program areas. For
example, the community builder position, which was created to help local
communities more effectively access HUD programs, was abolished and
these individuals were transferred to other positions in program offices
where HUD identified a more critical need. Of the approximately 300
positions redeployed, HUD reports that the staff were reassigned from the
Office of Field Policy Management to other programs in field offices as
shown in Table 3.



Table 3: HUD Staff Redeployed from Field Policy Management to Program Offices

Number of
staff          Program office
97             Office of Housing (74 to multifamily, 23 to single family)
92             Office of Public and Indian Housing
73             Office of Community Planning and Development
34             Office of Fair Housing and Equal Opportunity
Source: HUD.


HUD has also undertaken additional human capital planning activities to
respond to the President’s Management Agenda. In addition to redeploying
staff to mission-critical positions, HUD has taken steps to

• reduce management layers and the ratio of supervisors to staff,

• develop an intern program (The department told us it met the goal of
  hiring and training at least 200 interns in the summer of 2002.),

• identify core competencies for major offices, and

• develop training opportunities and career paths to support staff
  development.

HUD has also convened a Human Capital Steering Committee to organize
these initiatives.



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While these efforts are important first steps toward strategic human capital
management, additional workforce planning steps are necessary. Missing
from HUD’s workforce planning are elements that we believe are essential,
including analyses of what the work staff should be doing now and in the
future and the knowledge, skills, and abilities needed to do this work; the
appropriate staff deployment across the organization; and strategies for
identifying and filling workforce gaps. A comprehensive workforce plan
would allow HUD to better manage its current staff and plan for the
department’s future needs. In July 2002, we recommended that HUD
develop a comprehensive strategic workforce plan that is aligned with the
department’s strategic plan and contains the elements outlined above.
Lacking these elements, HUD is not as prepared as it could be to address its
human capital challenges and to recruit and hire the staff needed to pursue
its mission. HUD officials report that they are in the process of developing
a statement of work to hire a contractor to complete a comprehensive
workforce planning study.




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In December 2002,49 HUD’s Inspector General also reported that although
the department had made significant progress in implementing its resource
estimation process, it lacked a comprehensive strategic plan that defines
how the data from the studies will be used to justify and allocate its human
capital resources among its operating components. The Inspector General
observed that this may limit HUD’s effectiveness in helping manage its
human capital resources.

HUD’s lack of a comprehensive workforce plan has affected the agency’s
performance in several program areas, including the following:

• In the single-family homeownership centers, staffing imbalances have
  hampered center operations, and deployment of staff is not consistent
  with the centers’ workload. As a result, all four centers have had
  difficulty supervising and making effective use of the staff in field
  offices. Further, HUD has transferred two key functions—overseeing
  appraisers and assessing lenders—from the REAC to the Office of Single
  Family Housing. While the Office of Single Family Housing has received
  authorization for the positions it needs to carry out these functions, it
  has not filled all of the positions. According to officials from the office,
  the shortages have increased the existing staff’s workloads.

• We also reported that training at the homeownership centers was
  inadequate, as HUD had not developed a standard training curriculum
  for center staff. We recommended that HUD assess the centers’
  workforce, develop a plan for locating center staff where they are
  needed, and deploy the staff effectively; develop a training curriculum
  for center staff; and develop a strategic human capital management plan
  for the homeownership centers that considers all areas of human capital
  management. HUD has made some progress in these areas, but the
  recommendations remain open.

• In July 2002,50 we reported that some managers and staff in the Office of
  Public and Indian Housing found that the lack of workforce planning
  made it difficult to accomplish several mission-related activities and


49
  U.S. Department of Housing and Urban Development, Office of Inspector General,
Assessment of HUD’s Progress in Implementing the Resource Estimation and Allocation
Process (REAP) and Total Estimation and Allocation Mechanism(TEAM) Components of
its Human Resource Management System, 2003-PH-0801 (Philadelphia, PA: Dec. 3, 2002)
50
     GAO-02-839.




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     provide service to customers. The workforce planning issue of greatest
     concern to office managers and staff was insufficient staff. Directors of
     several public housing and Native American program field offices—
     which were staffed at less than 90 percent of the recommended staffing
     level at the time—said that they lacked the staff to provide the level of
     oversight and technical assistance that the housing agencies need.
     Although the field office directors we interviewed said that they were
     meeting the goal of using risk assessment techniques to focus oversight
     efforts, they lacked a standard method of assigning levels of oversight
     based on risk. According to field office directors, the staffing shortages
     were exacerbated by skills gaps and uncertainties about what work
     should be done and the best mix of staff knowledge, skills, and abilities
     to do it. According to HUD, the Office of Public and Indian Housing will
     continue to review workload and consult field staff on ways to improve
     program implementation and monitoring efforts. Additionally, HUD
     officials told us they are developing training to address a perceived
     skills gap, but noted that financial support for travel funds and supplies
     is necessary to fully implement the training program.

• HUD’s Inspector General also found that some areas were plagued by
  human capital difficulties. An August 2001 review of HUD’s Troubled
  Agency Recovery Center in Memphis revealed that the center was
  unable to fully and effectively utilize its staff.51 In addition, in April 2002,
  the Inspector General reported that staff resources at HUD’s Seattle
  Technical Assessment Center were underutilized, that opportunities for
  employee misconduct existed, and similar problems could exist at the
  Chicago Center.52 HUD agreed with these findings and has taken steps to
  address the Inspector General’s recommendations, including increasing
  the number of housing agencies assigned to the Memphis Center and
  planning to reassign much of the Seattle and Chicago staff to other
  positions in the Office of Public and Indian Housing or in REAC where
  they will be more effectively utilized.



51
 U.S. Department of Housing and Urban Development, Office of Inspector General,
Troubled Agency Recovery Center, Memphis, Tennessee, 2001-AT-0002 (Atlanta, GA: Aug.
17, 2001).
52
 U.S. Department of Housing and Urban Development, Office of Inspector General, Audit
Memorandum on the Staffing Resources of the Real Estate Assessment Center’s Tenant
Assessment Subsystem, Seattle Technical Assistance Center, 2002-SE-0801 (Seattle, WA:
Apr. 23, 2002).




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                            In November 2002,53 we reported that HUD does not strategically manage
                            its acquisitions workforce to ensure that staff responsible for managing and
                            oversight of its contracts have the appropriate workload, skills, and
                            training that would enable them to effectively perform their jobs, as
                            discussed in more detail in the following section.



Actions Needed to Improve   As HUD downsized its staff in the 1990s—from about 13,500 people to
Acquisitions Management     around 9,000 today—the scope of its mission and the needs of the people it
                            serves did not decrease.54 As a result, HUD came to rely more and more on
                            private contractors to help carry out its mission. HUD’s contracting
                            commitments between fiscal years 1997 and 2000 increased by about 62
                            percent—from about $786 million to almost $1.3 billion (in 2001 constant
                            dollars)—and HUD expects this trend to continue. HUD’s contractors are
                            an integral part of program delivery and other vital functions, and HUD has
                            estimated that the size of its contractor workforce may nearly equal its
                            own. Contractors are responsible for key portions of HUD’s single-family
                            insurance program and its rental housing assistance programs—areas that
                            we consider high risk. For example, contractors are responsible for
                            managing and disposing of HUD’s inventory of single-family and
                            multifamily properties—properties that have a combined value of about $3
                            billion (as of September 30, 2001).

                            In October 2001,55 we concluded that acquisitions management was one of
                            the significant challenges facing HUD in its attempts to sustain the progress
                            of its management reform and move toward its goal of becoming a high-
                            performing organization. Most recently, in November of 2002, we
                            concluded that weaknesses in acquisitions management limited HUD’s
                            ability to prevent, identify, and hold its contractors accountable.56




                            53
                                 GAO-03-157.
                            54
                             These staff levels include only staff assigned to HUD’s program offices and do not include
                            full-time equivalents assigned to HUD’s Office of Inspector General, working capital fund,
                            and the Office of Federal Housing Enterprise Oversight.
                            55
                             U.S. General Accounting Office, HUD Management: Progress Made on Management
                            Reforms, but Challenges Remain. GAO-02-45 (Washington, D.C.: Oct. 31, 2001).
                            56
                                 GAO-03-157.




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Major Performance and Accountability
Challenges




In response to criticisms and as part of its recent management reform
initiatives, HUD has taken actions to improve its acquisitions management.
These actions include the following:

• hiring a Chief Procurement Officer,

• creating full-time technical positions at the program level with
  responsibility for monitoring contractors’ performance,

• instituting a certification training program and supplementary on-line
  training on the federal contracting process as implemented at HUD,

• establishing and upgrading an agencywide contracting management
  information system to help consolidate contracting data and integrate it
  with HUD’s financial systems, and

• creating a Contract Management Review Board to improve procurement
  planning and contract administration.

While HUD has initiated these actions, our work shows that the agency still
faces significant challenges in acquisitions management. Taken together,
these weaknesses limit HUD’s ability to readily prevent, identify, and
address contractor performance problems. As a result, HUD cannot yet
ensure that it fulfills its mission and maintains the financial integrity of its
programs.




Page 41                                                GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




The department and, in particular, its multifamily housing program, does
not employ certain processes and practices that could facilitate effective
monitoring and ensure contractors are held accountable.57 HUD’s
monitoring of its contractors is not systematic and is largely remote.
Specifically, HUD’s monitoring does not consistently include the use of
contract monitoring plans, risk-based strategies, or the tracking of
contractor performance—which would be helpful in the administration of
such plans and strategies.58 According to a GAO survey, only 23 percent of
HUD’s government technical representatives who are responsible for
contract oversight use a contract administration plan, which the Office of
Federal Procurement Policy describes as essential to good contract
administration. Instead, HUD’s monitoring techniques consist mainly of
reviews of progress reports and invoices, phone calls, and E-mails. When
on-site visits are conducted, they do not occur as often as HUD guidance
specifies, and HUD staff reported their workload and scarce travel
resources limit their ability to follow up on identified problems.59 Without a
systematic approach to oversight and adequate on-site monitoring, the
department’s ability to identify and correct contractor performance
problems and hold contractors accountable is reduced. The resulting
vulnerability limits HUD’s ability to assure that it is receiving the services
for which it pays.




57
 We have defined monitoring as an internal control function that is performed continually
and is ingrained in the agency’s operations. It includes regular management and supervisory
activities, comparisons, reconciliations, and other actions people take in performing their
duties. U.S. General Accounting Office, Standards for Internal Control in the Federal
Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
58
  For example, the Office of Federal Procurement Policy’s Guide to Best Practices for Contract
Administration recommends the use of a contract administration plan for good contract
administration. According to the Guide, this plan should specify the performance outputs and
describe the methodology used to conduct inspections of those outputs. Further, HUD’s Acquisition
Regulation and Procurement Policies and Procedures Handbook specify various monitoring tools
that HUD staff may use to monitor contractor performance, such as a quality assurance plan, a
contractor’s work plan and schedule of performance, or progress reports.
59
 A HUD handbook indicates that quarterly inspections are to occur, but the specific
sections in the handbook that are to discuss those inspections have not yet been developed.




Page 42                                                            GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




Our review of HUD’s files and disbursements indicates that its oversight
processes have not identified instances in which contractors were not
performing as expected. For example, HUD’s files indicated that problems
often surfaced either incidentally or were discovered by people outside
HUD. Problems are not identified through routine monitoring performed by
the program staff responsible for a particular function. For example, a
contracting officer identified situations where a contractor was purchasing
items for properties after HUD had already sold them. Also, our review of
disbursements by one of HUD’s property disposition contractors identified
cases in which the contractor bypassed HUD controls by (1) alleging that
construction renovations were emergencies, thus not requiring multiple
bids, and (2) splitting renovations into multiple projects to stay below the
$50,000 threshold that requires HUD approval.60 In one of the cases, HUD
paid $227,500 to have 15,000 square feet of concrete replaced; however, we
determined that only about one-third of the work HUD paid for was
actually performed.61 HUD’s Inspector General and GAO’s Office of Special
Investigations are investigating these cases.

In addition, HUD has not taken steps to ensure that individuals responsible
for managing and monitoring contracts are given appropriate workloads or
that staff have acquired the skills and training needed to effectively
perform their jobs. While a recent resource allocation study characterized
HUD’s Office of Chief Procurement Officer as an organization “in crisis,”
HUD has not yet addressed the workload disparities raised in that study.
Further, while HUD has undertaken a workforce planning effort for the
entire department, HUD has not assessed the skills and capabilities of its
acquisitions workforce.62 In addition, according to HUD’s records, over half
of the staff that is directly responsible for monitoring contractor
performance has not received the required training. Managers in HUD’s
procurement office were not aware that staff were serving in that capacity
without the required training.



60
 U.S. General Accounting Office, Financial Management: Strategies to Address Improper
Payments at HUD, Education and Other Federal Agencies, GAO-03-167T (Washington,
D.C.: Oct. 3, 2002).
61
     GAO-03-157.
62
 In July 2002,we reported that HUD has undertaken some workforce planning and has
determined how many staff it needs to meet its current workload, but it does not have a
comprehensive strategic workforce plan to guide its recruiting, hiring, and other key human
capital efforts. GAO-02-839.




Page 43                                                        GAO-03-103 HUD Challenges
Major Performance and Accountability
Challenges




Finally, HUD’s programmatic and financial management information
systems do not readily provide accurate and consistent data to support its
acquisitions workforce in their efforts to manage and monitor contracts.
For example, the department’s centralized contracting management
information system does not contain reliable data on the number of active
contracts, the expected cost of the contracts, or the types of goods and
services acquired. In addition, HUD’s financial management information
systems do not readily provide complete and consistent obligation and
expenditure information for HUD’s overall contracting activities or for
individual contracts. To compensate for a lack of information, HUD staff
overseeing contracts have developed informal or “cuff” systems—personal
spreadsheets to fulfill their job responsibilities. However, these informal
systems are not subject to HUD’s policies, procedures, or internal controls
to ensure that the information maintained in them—and used by HUD’s
acquisitions workforce—is accurate. In addition, the programmatic and
financial management information systems do not provide HUD managers
with accurate and timely information needed to oversee the department’s
contracting activities, make informed decisions about the use of HUD’s
resources, and ensure accountability in the department’s programs.

While some of these deficiencies are long-standing and will likely require
years to resolve, HUD can take immediate steps to address certain
acquisitions management deficiencies. For example, in our November 2002
report on HUD’s acquisitions management, we recommended that HUD
implement a systematic approach to monitoring contracts, address
planning and training requirements for its acquisitions workforce, and take
steps to improve the accuracy and usefulness of its centralized contracting
information system. HUD generally agreed with these recommendations
and has initiated steps to address these concerns including emphasizing the
importance of monitoring plans in training, increasing oversight of
procurements done by multifamily property management contractors, and
increasing the staff resources devoted to contract award and
administration.




Page 44                                             GAO-03-103 HUD Challenges
GAO Contacts




               Subject(s) covered in this report              Contact person
               Reduce risk of losses in HUD’s single-family    David G. Wood, Director
               mortgage insurance program                      Financial Markets and Community
                                                               Investment
               Increase efficiency and effectiveness of rental (202) 512-8678
               housing assistance programs                     wooddg@gao.gov

               Address critical human capital issues

               Actions needed to improve acquisition
               management
               Improve programmatic and financial             Joel C. Willemssen, Managing Director
               management information systems                 Information Technology
                                                              (202) 512-6408
                                                              willemssenj@gao.gov

                                                              Linda M. Calbom, Director
                                                              Financial Management and Assurance
                                                              (202) 512-9508
                                                              calboml@gao.gov




               Page 45                                                      GAO-03-103 HUD Challenges
Related GAO Products


                           HUD Management: HUD’s High-Risk Program Areas and Management
                           Challenges. GAO-02-869T. Washington, D.C.: July 24, 2002.

                           Federal Housing Assistance: Comparing the Characteristics and Costs of
                           Housing Programs. GAO-02-76. Washington, D.C.: January 31, 2002.

                           HUD Management: Progress Made on Management Reforms, but
                           Challenges Remain. GAO-02-45. Washington, D.C.: October 31, 2001.

                           Federal Housing Programs: What They Cost and What They
                           Provide. GAO-01-901R. Washington, D.C.: July 18, 2001.

                           Department of Housing and Urban Development: Status of Achieving
                           Key Outcomes and Addressing Major Management Challenges. GAO-01-
                           833. Washington, D.C.: July 6, 2001.

                           High-Risk Series: An Update. GAO-01-263. Washington D.C.: January 2001.

                           Major Management Challenges and Program Risks: Department of
                           Housing and Urban Development. GAO-01-248. Washington, D.C.: January
                           2001.



Reduce Risk of Losses in   Mortgage Financing: Actuarial Soundness of the Federal Housing
HUD’s Single-Family        Administration's Mutual Mortgage Insurance Fund. GAO-02-671T.
                           Washington, D.C.: April 24, 2002.
Mortgage Insurance
Program                    Single-Family Housing: Opportunities to Improve Federal Foreclosure
                           and Property Sale Processes. GAO-02-305. Washington, D.C.: April 17, 2002.

                           Single-Family Housing: Current Information Systems Do Not Fully
                           Support the Business Processes at HUD's Homeownership Centers. GAO-
                           02-44. Washington, D.C.: October 24, 2001.

                           Homeownership: Problems Persist With HUD's 203(k) Home
                           Rehabilitation Mortgage Insurance Program. GAO-01-1124T. Washington,
                           D.C.: September 10, 2001.

                           Single-Family Housing: Better Strategic Human Capital Management
                           Needed at HUD's Homeownership Centers. GAO-01-590. Washington,
                           D.C.: July 26, 2001.




                           Page 46                                            GAO-03-103 HUD Challenges
                          Related GAO Products




                          Mortgage Financing: Actuarial Soundness of the Federal Housing
                          Administration's Mutual Mortgage Insurance Fund. GAO-01-527T.
                          Washington, D.C.: March 20, 2001.

                          Mortgage Financing: FHA's Fund Has Grown, but Options for Drawing
                          on the Fund Have Uncertain Outcomes. GAO-01-460. Washington,
                          D.C.: February 28, 2001.



Increase Efficiency and   Multifamily Housing: Improvements Needed in HUD's Oversight of
Effectiveness of Rental   Lenders That Underwrite FHA-Insured Loans. GAO-02-680. Washington,
                          D.C.: July 19, 2002.
Housing Assistance
Programs                  Public Housing: HUD and Public Housing Agencies' Experiences with
                          Fiscal Year 2000 Plan Requirements. GAO-02-572. Washington, D.C.: May
                          31, 2002.

                          Public Housing: New Assessment System Holds Potential for Evaluating
                          Performance. GAO-02-282. Washington, D.C.: March 15, 2002.

                          Homelessness: Improving Program Coordination and Client Access to
                          Programs. GAO-02-485T. Washington, D.C.: March 6, 2002.

                          Multifamily Housing Finance: Funding FHA's Subsidized Credit
                          Programs. GAO-02-323R. Washington, D.C.: February 1, 2002.

                          Multifamily Housing: Issues Related to Mark-to-Market Program
                          Reauthorization. GAO-01-800. Washington, D.C.: July 11, 2001.

                          HUD Multifamily Housing: Improved Follow-up Needed to Ensure That
                          Physical Problems Are Corrected. GAO-01-668. Washington, D.C.: June 21,
                          2001.

                          Multifamily Housing: Issues Related to Mark-to-Market Program
                          Reauthorization. GAO-01-871T. Washington, D.C.: June 19, 2001.




                          Page 47                                          GAO-03-103 HUD Challenges
                           Related GAO Products




Improve Programmatic and   HUD Management: Actions Needed to Improve Acquisition Management.
Financial Management       GAO-03-157. Washington, D.C.: November 15, 2002.
Information Systems,       Financial Management: Strategies to Address Improper Payments at
Human Capital, and         HUD, Education, and Other Federal Agencies. GAO-03-167T. Washington,
Acquisition Management     D.C.: October 3, 2002.

                           HUD Human Capital Management: Comprehensive Strategic Workforce
                           Planning Needed. GAO-02-839. Washington, D.C.: July 24, 2002.

                           HUD Information Systems: Immature Software Acquisition Capability
                           Increases Project Risks. GAO-01-962. Washington, D.C.: September 14,
                           2001.




                           Page 48                                        GAO-03-103 HUD Challenges
Performance and Accountability and High-
Risk Series

              Major Management Challenges and Program Risks: A Governmentwide
              Perspective. GAO-03-95.

              Major Management Challenges and Program Risks: Department of
              Agriculture. GAO-03-96.

              Major Management Challenges and Program Risks: Department of
              Commerce. GAO-03-97.

              Major Management Challenges and Program Risks: Department of
              Defense. GAO-03-98.

              Major Management Challenges and Program Risks: Department of
              Education. GAO-03-99.

              Major Management Challenges and Program Risks: Department of
              Energy. GAO-03-100.

              Major Management Challenges and Program Risks: Department of
              Health and Human Services. GAO-03-101.

              Major Management Challenges and Program Risks: Department of
              Homeland Security. GAO-03-102.

              Major Management Challenges and Program Risks: Department of
              Housing and Urban Development. GAO-03-103.

              Major Management Challenges and Program Risks: Department of the
              Interior. GAO-03-104.

              Major Management Challenges and Program Risks: Department of
              Justice. GAO-03-105.

              Major Management Challenges and Program Risks: Department of
              Labor. GAO-03-106.

              Major Management Challenges and Program Risks: Department of State.
              GAO-03-107.

              Major Management Challenges and Program Risks: Department of
              Transportation. GAO-03-108.




              Page 49                                       GAO-03-103 HUD Challenges
Performance and Accountability and High-
Risk Series




Major Management Challenges and Program Risks: Department of the
Treasury. GAO-03-109.

Major Management Challenges and Program Risks: Department of
Veterans Affairs. GAO-03-110.

Major Management Challenges and Program Risks: U.S. Agency for
International Development. GAO-03-111.

Major Management Challenges and Program Risks: Environmental
Protection Agency. GAO-03-112.

Major Management Challenges and Program Risks: Federal Emergency
Management Agency. GAO-03-113.

Major Management Challenges and Program Risks: National
Aeronautics and Space Administration. GAO-03-114.

Major Management Challenges and Program Risks: Office of Personnel
Management. GAO-03-115.

Major Management Challenges and Program Risks: Small Business
Administration. GAO-03-116.

Major Management Challenges and Program Risks: Social Security
Administration. GAO-03-117.

Major Management Challenges and Program Risks: U.S. Postal Service.
GAO-03-118.

High-Risk Series: An Update. GAO-03-119.

High-Risk Series: Strategic Human Capital Management. GAO-03-120.

High-Risk Series: Protecting Information Systems Supporting the
Federal Government and the Nation’s Critical Infrastructures. GAO-03-
121.

High-Risk Series: Federal Real Property. GAO-03-122.




Page 50                                         GAO-03-103 HUD Challenges
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