oversight

Recovery Act: Tax Debtors Have Received FHA Mortgage Insurance and First-Time Homebuyer Credits

Published by the Government Accountability Office on 2012-05-29.

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

             United States Government Accountability Office

GAO          Report to Congressional Requesters




May 2012
             RECOVERY ACT

             Tax Debtors Have
             Received FHA
             Mortgage Insurance
             and First-Time
             Homebuyer Credits




GAO-12-592
                                            May 2012


                                            RECOVERY ACT
                                            Tax Debtors Have Received FHA Mortgage Insurance
                                            and First-Time Homebuyer Credits
Highlights of GAO-12-592, a report to
congressional requesters




                                            What GAO Found
Why GAO Did This Study
                                            The Federal Housing Administration (FHA) insured over $1.44 billion in
Under a Recovery Act provision that
                                            mortgages for 6,327 borrowers with $77.6 million in federal tax debt who
increased mortgage insurance loan
limits, FHA insured $20 billion in          benefited from the 2009 American Recovery and Reinvestment Act. Of these
mortgages for 87,000 homeowners.            borrowers, 3,815 individuals claimed and received $27.4 million in Recovery Act
The Recovery Act also provided for the      First-Time Homebuyer Credits (FTHBC). This analysis includes tax debtors who
awarding of an estimated $12 billion of     (1) benefited from FHA’s increased loan limits, or (2) claimed the FTHBCs and
FTHBCs to 1.7 million individuals.          received FHA mortgage insurance of any value. Federal policy makes delinquent
GAO was asked to determine the (1)          tax debtors ineligible for FHA mortgage insurance unless they repay their debt or
extent to which tax debtors benefited       are in a valid repayment agreement with the Internal Revenue Service (IRS), but
from the Recovery Act’s provisions for      the FTHBC, like all tax credits, was available to those who qualified, regardless
increased FHA loan limits and the           of their tax debt. GAO could not determine the proportion of borrowers who were
FTHBC, and (2) challenges, if any,          ineligible for FHA insurance because GAO could not systematically identify which
FHA faces in preventing ineligible tax      of the 6,327 borrowers were in valid repayment agreements using the data GAO
debtors from receiving mortgage             received from IRS. However, GAO did find that 5 of the 8 borrowers completely
insurance. Using IRS and FHA data,          evaluated were ineligible because they were not in valid repayment agreements
GAO identified Recovery Act recipients      at the time they obtained FHA mortgage insurance. In addition, GAO found that
and compared them to federal tax            Recovery Act borrowers with unpaid taxes had foreclosure rates two to three
debtors as of June 30, 2010. GAO            times greater than borrowers without unpaid taxes, which potentially represents
reviewed relevant policies and
                                            an increased risk to FHA.
interviewed agency officials and
lenders. GAO also reviewed detailed
IRS and FHA documents for a
nonrepresentative selection of 18           Some ineligible tax debtors received FHA mortgage insurance, in part, due to
individuals who received FHA                shortcomings in the capacity of FHA-required documentation to identify tax
mortgage insurance. These were              debts, and shortcomings in other policies that lenders may misinterpret. Lenders
selected based on a combination of          must perform steps to identify an applicant’s federal debt status, but sources
factors, such as amount of taxes owed       commonly used, such as the loan application and credit report, do not reliably
and number of delinquent tax periods.       indicate an applicant’s tax debt. Statutory restrictions generally prohibit the
Due to data availability and other          disclosure of taxpayer information, such as tax debt, without the taxpayer’s
factors, GAO was able to completely         consent. Lenders are already required to obtain such consent through an IRS
evaluate only 8 of 18 individuals on        form they use to validate the income of some applicants. This same form could
their eligibility for FHA mortgage          also be used to obtain permission from applicants to obtain reliable tax-debt
insurance. These cases cannot be            information directly from IRS, but doing so is not addressed in FHA policies.
generalized beyond those presented.         Requiring lenders to collect more reliable information on tax debts could better
What GAO Recommends                         prevent ineligible tax debtors from obtaining FHA mortgage insurance. Further,
                                            FHA’s policies requiring lenders to investigate whether tax liens indicate
HUD should (1) consult with IRS to          unresolved tax debt are unclear and may be misinterpreted. The lenders GAO
require lenders to collect more reliable    spoke with believed they were in compliance with FHA’s policies when they
tax debt information from applicants        provided FHA-insured loans to applicants with tax liens and no repayment
and (2) provide lenders with revised        agreements, but FHA officials indicated otherwise. As a result of these
policies or guidance, including the         shortcomings, lenders may approve federally insured mortgages for ineligible
consideration of tax liens, for approving   applicants with delinquent tax debt in violation of federal policies.
FHA mortgage insurance. HUD
agreed with the recommendations.



View GAO-12-592. For more information,
contact Greg Kutz at (202) 512-6722 or
kutzg@gao.gov.

                                                                                    United States Government Accountability Office
Contents


Letter                                                                                  1
               Background                                                               5
               FHA Insured over $1.44 Billion in Mortgages for Thousands of
                 Recovery Act Beneficiaries with Federal Tax Debt                     12
               Shortcomings in the Capacity of FHA-Required Documentation to
                 Identify Tax Debts and in Certain Policies Allow Tax Debtors to
                 Obtain Mortgage Insurance                                            19
               Conclusion                                                             26
               Recommendations for Executive Action                                   27
               Agency Comments and Our Evaluation                                     27

Appendix I     Objectives, Scope, and Methodology                                      30



Appendix II    Excerpts of the Uniform Residential Loan Application                    36



Appendix III   Comments from the Federal Housing Administration                        39



Appendix IV    GAO Contact and Staff Acknowledgments                                   41



Figures
               Figure 1: Tax Debtors who Benefitted from the Recovery Act
                        Obtained $1.44 Billion in FHA Mortgage Insurance and
                        $27.4 Million in FTHBCs                                       14
               Figure 2: Serious Delinquency and Foreclosure Rates for
                        Borrowers Who Received Increased FHA Mortgage
                        Insurance under the Recovery Act with Tax Debt
                        Compared to Borrowers without Tax Debt                        16
               Figure 3: Serious Delinquency and Foreclosure Rates for
                        Borrowers with Tax Debt Who Claimed the FTHBC under
                        The Recovery Act Compared to Borrowers without Tax
                        Debt                                                          18
               Figure 4: Excerpt of IRS Form 4506-T                                   23
               Figure 5: FHA Policy Excerpts on Tax Debt That Some Lenders
                        Misinterpret                                                  25



               Page i                                              GAO-12-592 Recovery Act
Figure 6: Liabilities Section of the Uniform Residential Loan
         Application                                                                      36
Figure 7: Declarations Section of the Uniform Residential Loan
         Application                                                                      37
Figure 8: Line on the Uniform Residential Loan Application
         Showing the Consequences of Making a False Statement                             38




Abbreviations

CAIVRS            Credit Alert Interactive Voice Response System
CBO               Congressional Budget Office
ESA               Economic Stimulus Act
FHA               Federal Housing Administration
FTHBC             First-Time Homebuyer Credit
HAIA              Homebuyer Assistance and Improvement Act
HERA              Housing and Economic Recovery Act
HUD               Department of Housing and Urban Development
IRS               Internal Revenue Service
IVES              Income Verification Express Service
LI                Lender Insurance
MMIF              Mutual Mortgage Insurance Fund
OMB               Office of Management and Budget
SFDW              Single Family Data Warehouse
SSN               Social Security number
TIN               Taxpayer Identification Number
TOTAL             Technology Open to Approved Lenders
URLA              Uniform Residential Loan Application




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Page ii                                                          GAO-12-592 Recovery Act
United States Government Accountability Office
Washington, DC 20548




                                   May 29, 2012

                                   Congressional Requesters

                                   As of September 30, 2011, individuals, businesses, and other entities
                                   owed the U.S. government over $350 billion in known unpaid taxes,
                                   including interest and penalties, according to the Internal Revenue
                                   Service (IRS). 1 Beyond this amount of known tax debt, the amount of
                                   unknown tax debts is substantial. This is because the inventory of tax
                                   debts excludes underreported amounts filed by taxpayers and taxes owed
                                   by taxpayers who do not file tax returns. 2 Given the many challenges that
                                   IRS faces, the enforcement of the tax laws continues to be on our list of
                                   high-risk areas. 3 We have previously reported that many individuals with
                                   tax debt take advantage of government programs, such as federal loan
                                   insurance, thereby reaping benefits from these programs while failing to
                                   pay their own taxes. 4

                                   The American Recovery and Reinvestment Act of 2009 included
                                   numerous provisions aimed at spurring economic activity and shoring up
                                   the declining housing market. Under a provision that increased the
                                   maximum loan limits for mortgage insurance in 2009, the Federal
                                   Housing Administration (FHA), part of the Department of Housing and
                                   Urban Development (HUD), insured more than $20 billion in mortgages



                                   1
                                    This figure includes (1) taxes receivable of $147 billion, (2) compliance assessments—
                                   amounts that have not been agreed to by either the taxpayer or a court—of $103 billion,
                                   and (3) write-offs of $106 billion.
                                   2
                                    In addition to known unpaid taxes, the net tax gap, estimated to be about $385 billion for
                                   tax year 2006 (the most recent estimate made), represents the net amount of
                                   noncompliance with the tax laws (after enforcement and late payments). According to IRS,
                                   underreporting of tax liability accounts for 84 percent of the gross gap, and nonfiling and
                                   underpayment of taxes comprised the rest of the gross tax gap. Tax gap estimates do not
                                   include all areas of the economy, such as illegal activity.
                                   3
                                    GAO, 2011 High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February
                                   2011).
                                   4
                                    GAO, Debt Collection: Barring Delinquent Taxpayers From Receiving Federal Contracts
                                   and Loan Assistance, GAO/T-GGD/AIMD-00-167 (Washington D.C.: May 9, 2000); and
                                   Management Report: Improvements Are Needed to Enhance the Internal Revenue
                                   Service’s Internal Controls and Operating Effectiveness, GAO-11-494R (Washington,
                                   D.C.: June 21, 2011).




                                   Page 1                                                           GAO-12-592 Recovery Act
for 87,000 borrowers. 5 In addition, as of July 3, 2010, over 1.7 million
individuals were awarded over $12 billion in First-Time Homebuyer
Credits (FTHBC) under the Recovery Act for homes purchased in 2009,
according to IRS. 6, 7 In this report, we refer to individuals who received
either increased limits on their FHA mortgage insurance or the FTHBC in
2009 as Recovery Act beneficiaries.

Federal policy makes delinquent tax debtors ineligible for FHA mortgage
insurance at the time of application, unless they repaid the debt or were in
a valid repayment agreement with IRS, while the FTHBC, like all tax
credits, was available to those who qualified regardless of their tax debt.
The Recovery Act made no exceptions to these federal policies. You
asked us to review several issues concerning individuals with unpaid
federal taxes who benefited from the Recovery Act. This is the second in
a series of reports that respond to your request. In the first report, we
identified thousands of Recovery Act contract and grant recipients that
owed hundreds of millions of dollars in federal taxes. 8 In this report, we
determined the (1) extent to which tax debtors benefited from the
Recovery Act’s provisions for increased FHA loan limits and the FTHBC,
and (2) challenges, if any, FHA faces in preventing ineligible tax debtors
from receiving mortgage insurance.

To determine the extent to which Recovery Act beneficiaries with unpaid
tax debt benefitted from the increased loan limits for FHA mortgage
insurance or were awarded the FTHBC, we obtained and analyzed FHA
mortgage insurance data as of September 2011, IRS data on FTHBC
transactions as of July 2010, 9 and IRS data on unpaid federal tax debts




5
We refer to individuals who received FHA mortgage insurance as borrowers.
6
 The Recovery Act FTHBC only covered home purchases from January 1 through
November 30, 2009.
7
 GAO, Tax Administration: Usage and Selected Analyses of the First-Time Homebuyer
Credit, GAO-10-1025R (Washington, D.C.: Sept. 2, 2010).
8
 GAO, Recovery Act: Thousands of Recovery Act Contract and Grant Recipients Owe
Hundreds of Millions in Federal Taxes, GAO-11-485 (Washington, D.C.: Apr. 28, 2011).
9
 The FTHBC under the Recovery Act had to be claimed on either a 2008 or 2009 tax
return. Because returns for the 2009 tax year were due by April 15, 2010, all claims filed
on time without an extension would be accounted for in the July 2010 data.




Page 2                                                            GAO-12-592 Recovery Act
as of June 2010. 10 The FHA data allowed us to identify all those who
received FHA insurance under the Recovery Act’s increased loan limits.
However, limitations in the FTHBC data we received from IRS did not
allow us to isolate all individuals who benefited from the FTHBC under the
Recovery Act. 11 To address this limitation, we used the FHA data to assist
us in isolating FTHBCs awarded under the Recovery Act. As a result, we
were unable to analyze any credits for individuals who did not use FHA
mortgage insurance in the financing of their home, and therefore we
estimate that our analysis included 43 percent of all FTHBCs awarded
under the Recovery Act. Our analysis includes two groups:

1. individuals who received FHA mortgage insurance under the higher
   limits authorized under the Recovery Act, and
2. individuals who received the FTHBC under the Recovery Act and
   obtained FHA mortgage insurance of any value.

We electronically matched IRS tax debt data to these groups using Social
Security numbers (SSN) as unique identifiers. We included only those
individuals with tax debts of $100 or more from tax years 2008 and earlier
to eliminate small tax debts and debts that may involve matters that are
routinely resolved between the taxpayers and IRS, with the taxes paid or
abated within a short time. We excluded any debts that were assessed by
IRS after the mortgage insurance was received because those debts
would not have been included in IRS records at the time the mortgage
insurance was issued. We determined that the data were sufficiently
reliable to address the report’s objectives by performing electronic testing



10
  For this analysis we used known federal tax debts. Under federal accounting standards,
unpaid tax assessments require agreement from either the taxpayer or the court to be
considered federal taxes receivable. Compliance assessments and memo accounts are
not considered federal taxes receivable because they are not agreed to by taxpayers or
the courts.
11
  IRS’s FTHBC data do not contain home purchase dates, which were needed to
associate the credit with its enacting legislation. The Recovery Act applied to only 1 of the
3 years for which the FTHBC was available. To obtain the needed dates, we used the
Social Security number from the IRS FTHBC data as a unique identifier, and we
electronically matched them to Social Security numbers found in the FHA data, which
contained home purchase dates. Using this method, we estimate that our analysis
included 43 percent of all FTHBCs awarded under the Recovery Act because we were
unable to analyze any credits for individuals who did not use FHA mortgage insurance in
the financing of their home. Such individuals may have financed their home purchases
through conventional loans or other government loan programs, such as those available
through the Department of Veterans Affairs.




Page 3                                                             GAO-12-592 Recovery Act
on the data, speaking with agency officials, and reconciling data to
published figures and source documents.

To determine if FHA mortgage insurance was provided to ineligible
individuals with unpaid federal tax debt, we identified a nonrepresentative
selection of 18 individuals from the above analyses, who had federal tax
debt and benefitted from the Recovery Act, for detailed reviews. We
selected these individuals based on a combination of (1) high amounts of
unpaid federal taxes, (2) at least three delinquent tax periods, 12 (3) an
insured mortgage of at least $200,000, and (4) indications of IRS
penalties or home foreclosures.13 We requested IRS notes, detailed
account transcripts, and other records from IRS as well as mortgage files
from FHA for these 18 individuals. Of these requested cases, FHA
provided us information that allowed us to fully analyze 8.14,15 Although
we did not receive complete information necessary to fully analyze the
remaining cases, we were able to assess all 18 for limited purposes (e.g.,
nonfiling of tax returns). We also selected 9 additional cases of FTHBC
recipients who received tax refunds to determine how they were able to
receive federal tax refunds while having unpaid federal taxes. 16, 17 These


12
  The length of a delinquent tax period is dependent on the type of tax owed. For
instance, income taxes are assessed annually; payroll taxes are assessed quarterly.
13
  The value of mortgage insurance was not a criterion in selecting cases for borrowers
who obtained FHA mortgage insurance under the Recovery Act because all of these
mortgages resulted from increased FHA loan limits in high-cost areas. For each of the two
groups included in our analysis, we selected two cases with IRS civil penalties for
noncompliance and two cases in which the home had been foreclosed.
14
  To mask the identities of the tax debtors included in our case studies, we requested
additional files from FHA that were not tax debtors.
15
  FHA and IRS provided us some information on an additional three cases; however, we
found that two of these cases did not have outstanding debt at the time they obtained FHA
mortgage insurance, because they were either deemed an innocent spouse (granted relief
from a joint tax liability) or had satisfied the repayment portion on an offer in compromise
(an agreement to settle the debt for less than the amount owed).The third case’s debt had
been removed from IRS because it was beyond the 10-year statutory collection period at
the time we received the IRS records, therefore we did not include them in our analysis.
We did not receive FHA mortgage files from FHA for the remaining seven case because
the lenders for these files had either gone out of business or were not otherwise required
to provide the mortgage file, according to FHA officials.
16
 We did not request FHA mortgage files for these nine cases.
17
  Federal law typically requires that any federal tax refund be offset to pay down an
individual’s unpaid taxes.




Page 4                                                            GAO-12-592 Recovery Act
             cases were selected to illustrate the sizeable amounts of taxes owed by
             some individuals who benefitted from the Recovery Act but cannot be
             generalized beyond the cases presented.

             To understand how private lenders interpret and implement FHA’s
             guidelines for preventing individuals with delinquent federal tax debt from
             receiving mortgage insurance, we interviewed FHA officials and reviewed
             relevant federal laws and policies, FHA regulations, policy manuals, and
             other FHA documents related to mortgage insurance. We also
             interviewed officials from three large, private, FHA-approved lenders,
             which together endorsed 15 percent of all FHA mortgages for homes
             purchased in 2009, and reviewed and discussed their policies for
             determining FHA mortgage insurance applicants’ tax debt status and
             preventing ineligible tax debtors from obtaining FHA mortgage insurance.
             A more detailed description of the scope and methodology can be found
             in appendix I.

             We conducted this performance audit from April 2011 through May 2012
             in accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             audit findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives.

             The Recovery Act of 2009 was enacted in response to significant
Background   weakness in the economy to, among other things, help promote economic
             recovery and assist those most affected by the recession. 18 The
             Congressional Budget Office (CBO) estimated the Recovery Act’s cost at
             $825 billion as of August 2011. The Recovery Act included provisions to
             help stimulate the housing market, including increasing loan limits for
             FHA-insured mortgages in 669 high-cost counties in calendar year
             2009. 19 The provision allowed FHA to insure mortgages at a higher
             amount than would have been authorized without the Recovery Act.
             Under this provision, FHA insured over $20 billion in mortgages for
             87,000 homeowners who were approved for FHA mortgage insurance in
             2009. The Recovery Act also adapted and extended the FTHBC through


             18
              Pub. L. No. 111-5 (Feb. 17, 2009).
             19
              Section 1202 of Pub. L. No. 111-5.




             Page 5                                                GAO-12-592 Recovery Act
                         November 2009. 20 Through July 3, 2010, IRS reported that about 1.7
                         million individuals claimed more than $12 billion in FTHBCs under the
                         Recovery Act for homes purchased in 2009. 21 Office of Management and
                         Budget (OMB) Circular A-129 states that delinquent tax debtors are
                         ineligible for federal loan insurance, such as FHA mortgage insurance,
                         unless they repaid the debt or were in a valid repayment agreement with
                         IRS, but the FTHBC was available to those who qualified regardless of
                         their tax debt.


FHA Mortgage Insurance   FHA’s single-family programs insure private lenders against 100 percent
                         of the value of the loan for foreclosures on mortgages that meet FHA
                         criteria, including mortgages for initial home purchases, construction
                         rehabilitation, and refinancing. As of September 2011, almost 3,700
                         lenders were approved to participate in these programs. 22 The insurance
                         covers the principal, interest, and associated foreclosure costs, among
                         other things. 23 Lenders usually require mortgage insurance when a home
                         buyer makes a down payment of less than 20 percent of the value of the
                         home. FHA mortgage insurance allows a home buyer to make a modest
                         down payment—as low as 3.5 percent—and obtain a mortgage for the
                         balance of the purchase price. As the recent housing and economic
                         recession set in, FHA’s share of the market for home purchase
                         mortgages grew sharply due to the contraction of other mortgage market
                         segments—rising from about 5 percent in 2006 to nearly 30 percent in


                         20
                           The FTHBC was originally enacted by the Housing and Economic Recovery Act of 2008
                         (HERA) as an interest free loan of up to $7,500 and was to expire on July 1, 2009. Pub. L.
                         No. 110-289, § 3011 (July 30, 2008). The Recovery Act modified and extended the
                         FTHBC by increasing the maximum refundable credit to $8,000 for homes purchases from
                         January 1, 2009, through November 30, 2009, with no payback required unless the home
                         ceases to be the taxpayer’s principal residence within 3 years of the purchase. Pub. L. No.
                         111-5, § 1006 (Feb. 17, 2009).
                         21
                           Homes purchased in 2009 would have been claimed on tax returns filed in 2009 or
                         2010.
                         22
                           Prior to January 1, 2011, about 13,000 lending institutions were approved to participate
                         in FHA’s single-family mortgage insurance programs. At that time, FHA stopped allowing
                         loan correspondents to participate in FHA programs. Loan correspondents were lenders
                         that originated FHA-insured loans—meaning that they could accept mortgage
                         applications, obtain employment verifications and credit histories on applicants, order
                         appraisals, and perform other tasks that precede the loan underwriting process—but did
                         not have direct endorsement authority.
                         23
                          24 C.F.R. § 203.402.




                         Page 6                                                           GAO-12-592 Recovery Act
2009. 24, 25 FHA insured almost 2 million single-family mortgages valued at
more than $300 billion in mortgage insurance in 2009. 26 FHA generally is
thought to promote stability in the market by ensuring the availability of
mortgage credit in areas that may be underserved by the private sector or
that are experiencing economic downturns. It has played a particularly
large role among minority, lower-income, and first-time home buyers;
almost 80 percent of FHA-insured home purchase loans in 2010 went to
first-time home buyers. 27, 28

The FHA home mortgage insurance programs are funded by the FHA
Mutual Mortgage Insurance Fund (MMIF), which is supported by
insurance premiums charged to borrowers. The MMIF is used to cover
claims on foreclosed mortgages, among other things. The Omnibus
Budget Reconciliation Act of 1990 required the Secretary of HUD to take
steps to ensure that the MMIF attained a capital ratio (i.e., economic
value divided by the unamortized insurance-in-force) of at least 2 percent
by November 2000 and maintain a 2 percent ratio at all times thereafter. 29
The act also required an annual independent actuarial review of the
economic net worth and soundness of the MMIF. The actuarial review
estimates the economic value of the MMIF as well as the capital ratio to
determine whether the MMIF has met the capital standards in the act.
The capital ratio has dropped sharply in recent years due to declines in
home prices and increases in seriously delinquent loans and
foreclosures. The most recent actuarial study shows that the capital ratio
is currently below the statutorily mandated level, at 0.24 percent,
representing $2.6 billion in estimated capital resources against an active




24
  In fiscal year 2011, FHA’s share of the market for home purchases was about 24
percent.
25
 GAO, Mortgage Financing: Opportunities to Enhance Management and Oversight of
FHA’s Financial Condition, GAO-10-827R (Washington D.C.: Sept. 14, 2010).
26
 FHA, Annual Management Report Fiscal Year 2009 (Washington D.C.: 2009).
27
  HUD generally defines a first-time homebuyer as an individual who has had no
ownership in a principal residence during the 3-year period ending on the date of
purchase of the property.
28
 See GAO-10-827R.
29
 12 U.S.C. § 1711.




Page 7                                                           GAO-12-592 Recovery Act
portfolio of $1.08 trillion. 30 The MMIF has historically been sufficient to
fund the FHA home mortgage insurance programs without additional
funding from the federal government, but if the reserve were to be
depleted, FHA would need to draw on permanent and indefinite budget
authority to cover additional increases in estimated losses. A weakening
in the performance of FHA-insured loans could increase the possibility
that FHA will require additional federal funds. Our work has previously
shown that the increased reliance on FHA mortgage insurance highlights
the need for FHA to ensure that it has the proper controls in place to
minimize financial risks to the federal government while meeting the
housing needs of borrowers. 31

Lenders are responsible for underwriting the loans to determine an
applicant’s eligibility for FHA mortgage insurance in accordance with FHA
policies. Underwriting is a risk analysis that uses information collected
during the loan origination process to decide whether to approve a loan
for FHA insurance. Lenders employ automated underwriting— the
process by which lenders enter information on potential borrowers into
electronic systems that contain an evaluative formula, or algorithm,
known as a scorecard. The scorecard attempts to quickly and objectively
measure the borrower’s risk of default by examining data such as
application information and credit score. 32 Since 2004, FHA has used its
own scorecard called Technology Open to Approved Lenders (TOTAL).
FHA lenders now use TOTAL in conjunction with automated underwriting
systems to determine the likelihood of default. Although TOTAL can
assess the credit risk of a borrower, it does not reject a loan outright.
Rather, TOTAL will assign a risk assessment of either “accept” or “refer”
for each borrower. FHA requires lenders to manually underwrite loans
that are assessed as “refer” by TOTAL to give a final determination if the
loan should be accepted or rejected. According to FHA policy, a lender




30
  HUD, Annual Report to Congress, Fiscal Year 2011 Financial Status, FHA Mutual
Mortgage Insurance Fund (Nov. 15, 2011), p. 33,
http://portal.hud.gov/hudportal/documents/huddoc?id=FHAMMIFundAnnRptFY2011.pdf.
31
  GAO, Federal Housing Administration: Improvements Needed in Risk Assessment and
Human Capital Management, GAO-12-15 (Washington, D.C.: Nov. 7, 2011).
32
  Credit scores assign a numeric value generally ranging from 300-850 to a borrower’s
credit history, with higher values signifying better credit. Per FHA policy, applicants with
credit scores below 500 are not qualified for FHA mortgage insurance.




Page 8                                                              GAO-12-592 Recovery Act
remains accountable for compliance with FHA eligibility requirements,
regardless of the risk assessment provided by TOTAL.

Virtually all of the lenders that participate in FHA’s mortgage insurance
programs for single-family homes have direct endorsement authority.
These lenders can underwrite and close mortgage loans without FHA’s
prior review or approval. 33 FHA insures lenders against nearly all losses
resulting from foreclosed loans and covers 100 percent of the value of the
loan. In general, foreclosure may be initiated when three monthly
installments are due and unpaid, and it must be initiated when six monthly
installments are due and unpaid, except when prohibited by law. 34 To
minimize the number of FHA loans entering foreclosure, servicers are
responsible for pursuing various loss mitigation strategies, including
suspended payments, loan modification, reduced mortgage payments,
and sale of the property by the borrower. If, despite these loss mitigation
strategies, the lender forecloses on the loan, the lender can file an
insurance claim with FHA for the unpaid balance of the loan and other
costs. 35 However, FHA reviews a selection of insured loans, including
early payment defaults (loans at least 60 days delinquent in the first six
payments), in part to minimize potential FHA losses and ensure the
underwriting for these mortgages met FHA guidelines. Reviews revealing
serious deficiencies may result in FHA requiring the lenders to
compensate the department for financial losses, known as
indemnification, which requires the lender to repay FHA for any losses
that it incurs after a loan has gone into default and the property has been
sold.

Congress, through legislation, sets limits on the size of loans that may be
insured by FHA. These loan limits vary by county and can change from
year to year. To mitigate the effects from the economic downturn and the
sharp reduction of mortgage credit availability from private sources,



33
  According to FHA officials, direct endorsement lenders who participate in FHA’s lender
insurance (LI) program can underwrite, close, and insure loans while those lenders
without LI can underwrite and close loans, but FHA is still responsible for insuring the
loans.
34
  24 C.F.R. § 203.606. State law may prohibit the start of foreclosure proceedings within
the time frame specified by HUD. Also, military service of the borrower may delay
foreclosure proceedings (24 C.F.R. § 203.346).
35
     24 C.F.R. § 203.401.




Page 9                                                           GAO-12-592 Recovery Act
                       Congress increased FHA loan limits. The Economic Stimulus Act (ESA)
                       enacted in February 2008 stipulated that FHA loan limits be set
                       temporarily at 125 percent of the median house price in each area, 36 with
                       a maximum loan limit of $729,750 for a one-unit home. 37 Immediately
                       prior to ESA’s enactment, the limits had been set at 95 percent of area
                       median house prices. 38 In July 2008, 5 months after passing ESA,
                       Congress passed the Housing and Economic Recovery Act (HERA),
                       which established new statutory limits of 115 percent of area median
                       home prices. 39, 40 Then, in February 2009, Congress passed the Recovery
                       Act, which stipulated that FHA loan limits for 2009 be set in each county
                       at the higher dollar amount when comparing loan limits established under
                       2008 ESA requirements and limits for 2009 under HERA.

First-Time Homebuyer   Congress passed the FTHBC to assist the struggling real estate market
Credit                 and encourage individuals to purchase their first home. 41 The credit was
                       initially enacted by HERA and later revised by the Recovery Act. The
                       2008 HERA FTHBC provided taxpayers a credit of up to $7,500 to be
                       paid back over 15 years, essentially serving as an interest-free loan. In
                       2009, the Recovery Act was enacted and increased the maximum credit
                       for the 2009 FTHBC to $8,000, with no payback required unless the home
                       is sold or ceases to be the taxpayer’s principal residence within 3 years of




                       36
                            Pub. L. No. 110-185, § 202 (Feb. 13, 2008).
                       37
                        Loan limits for one- through four-unit homes under ESA were $729,750, $934,200,
                       $1,129,250, and $1,403,400, respectively.
                       38
                         In 2007, the loan limits were 95 percent of the local median home price, with a maximum
                       loan limit of $362,790 for one-unit homes. Limits for one- through four-unit homes were
                       $362,790, $464,449, $561,441, and $697,696, respectively.
                       39
                        Pub. L. No. 110-289, § 2111 (July 30, 2008). Loan limits for one- through four-unit
                       homes under HERA were $625,500, $800,775, $967,950, and $1,202,925, respectively.
                       40
                         Although loan limits under HERA were to be effective in 2009, they were not fully
                       implemented due to a series of temporary measures passed by Congress, including the
                       Recovery Act, to ensure the higher limits were allowed to continue.
                       41
                         Under 26 U.S.C. § 36, a first-time home buyer has not had an ownership interest in any
                       principal residence during the 3-year period prior to the date of the purchase of the home
                       eligible for the credit. No credit is allowed for property (1) located outside the United
                       States, (2) inherited, (3) purchased from a close relative, or (4) purchased by a
                       nonresident alien.




                       Page 10                                                          GAO-12-592 Recovery Act
                            the purchase. 42, 43 The credit of up to $8,000 was a refundable tax credit
                            paid out to the claimant if there was no tax liability or the credit exceeded
                            the amount of any federal tax due. In July 2010, the Homebuyer
                            Assistance and Improvement Act (HAIA) of 2010 extended the date to
                            close on a home purchase to September 30, 2010. 44


Federal Policies on Tax     To protect federal government assets and minimize unintended costs to
Debtors Receiving Federal   the government, OMB Circular A-129 states that individuals with
Loan Insurance              delinquent federal debts are ineligible for loan insurance and prohibits
                            federal agencies from issuing loans to such applicants; however, OMB’s
                            policy allows individuals with delinquent federal taxes or other federal
                            debt to attain eligibility by repaying their debt in full or entering into a valid
                            repayment plan with the agency they owe. 45 The policy states that
                            agencies should determine if the applicant is eligible by including a
                            question on loan applications asking applicants if they have such
                            delinquencies. The policy also (1) requires agencies and lenders to use
                            credit bureaus as screening tools, because tax liens resulting from
                            delinquent tax debt typically appear on credit reports, and (2) encourages
                            agencies to use HUD’s Credit Alert Interactive Voice Response System
                            (CAIVRS), a database of delinquent federal debtors. CAIVRS contains
                            delinquent debt information for six federal agencies; however, it does not
                            contain any tax debts from IRS. 46 According to OMB policy, if delinquent
                            federal debts are discovered, processing of applications must be
                            suspended until the applicant attains eligibility.




                            42
                              The 2008 FTHBC applies to purchases made from April 9, 2008, through December 31,
                            2008. The 2008 FTHBC was amended by the 2009 credit, and applies to purchases made
                            from January 1, 2009, through November 30, 2009.
                            43
                              The recapture provision is limited to the amount of gain on the sale, meaning a taxpayer
                            could sell within 3 years and still not be required to make any repayments if the house was
                            not sold for a gain. 26 U.S.C. § 36(f)(3).
                            44
                             Pub. L. No. 111-198 (July 2, 2010). The FTHBC has now expired.
                            45
                             OMB Circular A-129, Policies for Federal Credit Programs and Non-Tax Receivables,
                            Appendix A § III (A)(1)(b).
                            46
                              The six agencies that submit delinquent debt information to CAIVRS are: (1) Department
                            of Agriculture, (2) Department of Education, (3) Department of Justice, (4) Department of
                            Housing and Urban Development, (5) Department of Veterans Affairs, and (6) Small
                            Business Administration.




                            Page 11                                                          GAO-12-592 Recovery Act
                     FHA’s policies for lenders dictate that an FHA mortgage insurance
                     applicant must be rejected if he or she is delinquent on any federal debt,
                     including tax debt, or has a lien placed against his or her property for a
                     debt owed to the federal government. 47 Like OMB’s policy, FHA policy
                     states that an applicant with federal debt may become eligible for
                     mortgage insurance by repaying the debt in full or by entering into a valid
                     repayment agreement with the federal agency owed, which must be
                     verified in writing. Such repayment plans include IRS-accepted
                     installment agreements and offers in compromise. 48 To identify individuals
                     with tax debt, FHA requires mortgage insurance applicants to declare
                     whether they are delinquent or in default on any federal debt on their
                     insurance application, the Uniform Residential Loan Application (URLA).
                     As printed on the application, knowingly making any false statement on
                     the URLA is a federal crime punishable by fine or imprisonment. 49 FHA
                     also requires that lenders review credit reports for all applicants to identify
                     tax liens and other potential derogatory credit information.


                     In 2009, FHA insured over $1.44 billion in mortgages for 6,327 borrowers
FHA Insured over     who at the same time had delinquent tax debt and benefited from the
$1.44 Billion in     Recovery Act. According to IRS records, these borrowers had an
                     estimated $77.6 million in unpaid federal taxes as of June 30, 2010. As
Mortgages for        figure 1 illustrates, our analysis included tax debtors who either benefited
Thousands of         from FHA’s increased loan limits or who claimed the FTHBC and received
                     FHA mortgage insurance of any value. 50 Although federal policies did not
Recovery Act         prohibit tax debtors from claiming the FTHBC, they were ineligible for
Beneficiaries with   FHA mortgage insurance unless their delinquent federal taxes and other
Federal Tax Debt     federal debt had been fully repaid or otherwise addressed through a
                     repayment agreement. We could not determine the proportion of



                     47
                       HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance (March
                     2011).
                     48
                       An offer in compromise is an agreement between a tax debtor and IRS that resolves the
                     tax debtor’s tax debt by accepting less than full payment.
                     49
                      18 U.S.C. § 1001.
                     50
                       Limitations with the FTHBC data we obtained from IRS required that we analyze
                     FTHBCs for home buyers who also obtained FHA mortgage insurance—or approximately
                     43 percent of all Recovery Act FTHBCs. Therefore, we were unable to identify FTHBCs
                     for those who purchased their homes using cash, conventional mortgages, or other
                     means. See appendix I for additional details on this limitation.




                     Page 12                                                       GAO-12-592 Recovery Act
borrowers who were ineligible because we could not systematically
identify which of the 6,327 borrowers had valid repayment agreements at
the time of the mortgage approval using IRS’s data; however, we found
that five of our eight selected borrowers were not in valid repayment
agreements at the time they obtained FHA mortgage insurance. In
addition, FHA records indicate that borrowers with tax debt had serious
delinquency (in default for 90 days or more) and foreclosure rates two to
three times greater than borrowers without tax debt, which potentially
represents an increased risk to FHA. 51




51
  A mortgage is considered delinquent any time a payment is due and not paid. Once the
borrower is 30 days late in making a payment, FHA considers the mortgage to be in
default. Once the mortgage has been in default for 90 days or more it is considered to be
seriously delinquent.




Page 13                                                         GAO-12-592 Recovery Act
Figure 1: Tax Debtors who Benefitted from the Recovery Act Obtained $1.44 Billion in FHA Mortgage Insurance and $27.4
Million in FTHBCs




                                        Note: We cannot determine the proportion of borrowers who were ineligible for mortgage insurance
                                        because we could not systematically identify which of the 6,327 borrowers had valid repayment
                                        agreements using the data we received from IRS.




                                        Page 14                                                               GAO-12-592 Recovery Act
FHA Insured $759.3 Million   In 2009, FHA insured $759.3 million in mortgages for 2,646 individuals
in Mortgages for Tax         who owed $35.5 million in unpaid federal taxes as of June 30, 2010,
Debtors Benefitting from     under the Recovery Act’s provision for increased loan limits. 52 These
                             borrowers and coborrowers obtained 1,913 insured mortgages with a
the Recovery Act’s
                             median value of $352,309 and had a median tax debt of $6,290 per
Increased Loan Limits        person. 53 Their mortgages accounted for 3.7 percent of the 52,006
                             mortgages FHA insured under Recovery Act provisions for increased
                             limits in 2009, which in turn represented 2.5 percent of all mortgages
                             insured by FHA in 2009. Our analysis likely understates the amount of
                             unpaid federal taxes because IRS data do not cover individuals who fail
                             to file tax returns or who understate their income. Of the 18 selected
                             individuals who benefitted from increased loan limits for FHA mortgage
                             insurance or received the FTHBC under the Recovery Act, we found that
                             11 had not filed all of their federal tax returns.

                             Using IRS data, we cannot systematically determine which of these
                             individuals was in a valid repayment agreement at the time of the
                             mortgage, and therefore cannot determine whether insuring each of these
                             1,913 mortgages was improper, but it is possible that borrowers with tax
                             debt represent a greater financial risk to the federal government. 54 As
                             illustrated in figure 2, serious delinquency and foreclosure rates among
                             Recovery Act borrowers with unpaid federal taxes were at least twice as



                             52
                               Our analysis of Recovery Act mortgage insurance borrowers with tax debt as of June
                             30, 2010, excluded (1) tax debts that have not been agreed to by the tax debtor or
                             affirmed by the court (i.e., tax debts that IRS classified as compliance assessments or
                             memo accounts for financial reporting), (2) tax debts from calendar year 2009 and 2010
                             tax periods, (3) tax debts that were assessed by IRS after the mortgage insurance was
                             issued, and (4) tax debts of less than $100. Additionally, there is generally a 10-year
                             statutory collection period beyond which IRS is prohibited from attempting to collect tax
                             debt. 26 U.S.C. § 6502. Tax debts that are beyond this statutory period are not included in
                             our analysis.
                             53
                               FHA-insured mortgages may have one borrower and up to four coborrowers. We
                             included the borrower and first coborrower in our analysis. We found instances in which
                             the borrower and coborrower both had federal tax debt, thus, the number of borrowers is
                             greater than the number of mortgages. For the purposes of this report, we refer to both
                             borrowers and coborrowers as borrowers.
                             54
                               We are unable to systematically determine which individuals were in repayment
                             agreements at the time of the mortgage due to timing differences in the data we used. The
                             IRS data on unpaid federal tax debts are as of June 2010, while each of the borrowers
                             included in our analysis received mortgage insurance in 2009. Therefore, we are unable to
                             systematically determine whether each borrower was in a valid repayment agreement on
                             the day the borrower received mortgage insurance.




                             Page 15                                                          GAO-12-592 Recovery Act
                                       high as the rates for other borrowers. As of September 2011, 32 percent
                                       of the 1,913 mortgages made to borrowers with tax debt were seriously
                                       delinquent on their payments, compared with 15.4 percent of other FHA-
                                       insured mortgages. About 6.3 percent of the mortgages for borrowers
                                       with tax debt went into foreclosure since the home was purchased in
                                       2009, compared with 2.4 percent for others. 55, 56 The homes foreclosed
                                       after they were purchased by tax debtors were insured for $44.9 million,
                                       potentially leaving FHA responsible for paying claims for the remaining
                                       loan balance and certain interest and foreclosure costs. FHA recovers
                                       some of these costs when it sells the property.

Figure 2: Serious Delinquency and Foreclosure Rates for Borrowers Who Received Increased FHA Mortgage Insurance under
the Recovery Act with Tax Debt Compared to Borrowers without Tax Debt




                                       Finally, FHA’s increased exposure to risk from insuring tax debtors is
                                       unlikely to be limited to Recovery Act beneficiaries. Because FHA uses
                                       identical methods to insure non-Recovery Act mortgages, it is reasonable
                                       to assume that some portion of FHA borrowers for the remaining 97.5



                                       55
                                         In general, foreclosure may be initiated when three monthly installments are due and
                                       unpaid and must be initiated when six monthly installments are due and unpaid, except
                                       when prohibited by law.
                                       56
                                         We could not assess the likelihood of serious delinquency and foreclosure based on
                                       other characteristics that may be associated with these events (e.g., credit score of the
                                       borrower, loan-to-value ratio of the mortgage, etc.) and therefore are not suggesting that
                                       tax debt is the only or strongest factor associated with serious delinquency or foreclosure.




                                       Page 16                                                           GAO-12-592 Recovery Act
                            percent of mortgages we did not analyze as part of this review are tax
                            debtors.


$717.2 Million in FHA       In 2009, $717.2 million in FHA mortgage insurance and $27.4 million in
Mortgage Insurance Was      Recovery Act FTHBCs were provided to 3,815 individuals who owed an
Provided to Tax Debtors     estimated $43.5 million in unpaid federal taxes. 57 These borrowers
                            obtained 3,812 insured mortgages with a median value of $167,887 and
Who Claimed $27.4 Million   had a median unpaid tax amount of $5,044 per person. 58 Their mortgages
in Recovery Act FTHBCs      represented 0.5 percent of the 700,003 mortgages insured by FHA for
                            borrowers who claimed the FTHBC. 59 As discussed above, we were
                            unable to determine the proportion of the mortgage insurance that was
                            provided to borrowers who were, in fact, eligible as a result of entering
                            into a valid repayment agreement with IRS. We found that three of our
                            eight selected borrowers were in valid repayment agreements at the time
                            they obtained FHA mortgage insurance.

                            As illustrated in figure 3, we found that serious delinquency and
                            foreclosure rates for mortgages obtained by FHA borrowers with federal
                            tax debts who received the FTHBC were two to three times higher than
                            the rates for other borrowers. As of September 2011, 26.9 percent of the
                            3,812 mortgages made to borrowers with unpaid tax debts were seriously
                            delinquent on their payments, compared with 11.9 percent of borrowers
                            without tax debt who received the FTHBC and FHA mortgage insurance.
                            About 4.7 percent of the mortgages of borrowers with tax debt were
                            foreclosed, compared with 1.4 percent for other borrowers. The 181



                            57
                              Our analysis of Recovery Act mortgage insurance borrowers with tax debt as of June
                            30, 2010, excluded (1) tax debts that have not been agreed to by the tax debtor or
                            affirmed by the court, i.e., tax debts that IRS classified as compliance assessments or
                            memo accounts for financial reporting; (2) tax debts from calendar years 2009 and 2010
                            tax periods; (3) tax debts that were assessed by IRS after the mortgage insurance was
                            issued; and (4) tax debts of less than $100. Additionally, there is generally a 10-year
                            statutory collection period beyond which IRS is prohibited from attempting to collect tax
                            debt.26 U.S.C. § 6502. Tax debts that are beyond this statutory period are not included in
                            our analysis.
                            58
                              We found instances in which the borrower and coborrower both had federal tax debt and
                            claimed the FTHBC, thus, the number of borrowers is greater than the number of
                            mortgages.
                            59
                              Any Recovery Act FTHBC recipient whose credit value was greater than their
                            outstanding tax liability would not be included in our IRS June 30, 2010, file because the
                            refundable credit would have eliminated their outstanding tax liability.




                            Page 17                                                           GAO-12-592 Recovery Act
                                       foreclosed homes purchased by tax debtors had a total mortgage
                                       insurance value of $36.5 million, potentially resulting in a loss to the
                                       MMIF.

Figure 3: Serious Delinquency and Foreclosure Rates for Borrowers with Tax Debt Who Claimed the FTHBC under The
Recovery Act Compared to Borrowers without Tax Debt




                                       The FTHBC is a refundable credit, meaning taxpayers could receive
                                       payments in excess of their tax liability. Federal law typically requires that
                                       any federal tax refund be offset to pay down an individual’s unpaid
                                       taxes. 60 Of the 3,815 borrowers we identified with tax debt, 233 received
                                       a federal tax refund after claiming the FTHBC. We selected 9 of these
                                       borrowers for a detailed review and found that all 9 were issued refunds
                                       in accordance with federal law. For example, three of these cases had
                                       filed bankruptcy prior to receiving the refund. Federal bankruptcy law
                                       prevents IRS from taking collections actions, such as offsetting
                                       postpetition refunds, against individuals undergoing bankruptcy
                                       proceedings. 61




                                       60
                                        26 U.S.C. § 6402(d).
                                       61
                                        11 U.S.C. § 362(b)(26).




                                       Page 18                                                 GAO-12-592 Recovery Act
                      The amounts of unpaid federal taxes, mortgage insurance, and FTHBCs
                      we identified are likely understated for the following reasons:

                      •     Certain individuals did not file tax returns or underreported their
                            income, and therefore are not included in our analysis.
                      •     Data limitations in the FTHBC data prevented us from isolating all
                            individuals who benefitted from the FTHBC under the Recovery Act. 62
                      •     Any Recovery Act FTHBC recipient whose FTHBC was greater than
                            their outstanding tax liability would not be included in our analysis
                            because the refundable credit would have offset their outstanding tax
                            liability. Federal law generally requires that IRS offset any refund
                            against an individual’s tax liability. 63


                      Some ineligible tax debtors received FHA mortgage insurance, in part,
Shortcomings in the   due to shortcomings in the capacity of FHA-required documentation to
Capacity of FHA-      identify tax debts and shortcomings in other policies that lenders may
                      misinterpret. Lenders are required by FHA policy to perform steps to
Required              identify an applicant’s federal debt status, but the information provided by
Documentation to      these steps does not reliably indicate an applicant’s tax debt. Statutory
Identify Tax Debts    restrictions limit the disclosure of taxpayer information without the
                      taxpayer’s consent. Lenders are already required to obtain such consent
and in Certain        through an IRS form they use to validate the income of some applicants.
Policies Allow Tax    This same form could also be used to obtain permission from applicants
                      to access reliable tax-debt information directly from IRS, but doing so is
Debtors to Obtain     not addressed in FHA’s policies. Requiring lenders to collect more reliable
Mortgage Insurance    information on tax debts could better prevent ineligible tax debtors from
                      obtaining FHA mortgage insurance. Further, FHA’s policies requiring
                      lenders to investigate whether tax liens indicate unresolved tax debt are
                      unclear and may be misinterpreted. The lenders we spoke with believed
                      they were in compliance with FHA policies when they provided FHA-
                      insured loans to applicants with tax liens, but FHA officials indicated
                      otherwise. As a result of these shortcomings, lenders may approve
                      federally insured mortgages for ineligible applicants with delinquent tax
                      debt in violation of federal policies.




                      62
                        We were only able to identify and analyze about 43 percent of all Recovery Act
                      FTHBCs. Additional details on scope limitations related to the FTHBC can be found in
                      appendix I.
                      63
                          26 U.S.C. § 6402(d).




                      Page 19                                                        GAO-12-592 Recovery Act
Information That FHA       Consistent with OMB policies, FHA has lender policies intended to
Requires Lenders to        prevent ineligible tax debtors from obtaining FHA mortgage insurance;
Collect on Mortgage        however, the information the agency requires lenders to collect does not
                           reliably indicate the existence of federal tax debt. The three sources of
Applicants Does Not        information FHA requires lenders to obtain each have shortcomings in
Reliably Indicate the      their capacity to identify borrowers’ tax debts:
Existence of Federal Tax
Debt                       •     Uniform Residential Loan Application (URLA). The URLA requires that
                                 applicants declare any federal debt that is delinquent or in default.
                                 The URLA also requires applicants to disclose any liabilities, including
                                 tax debt, so a lender can assess the applicant’s ability to repay the
                                 proposed mortgage. While knowingly making false statements on an
                                 URLA is a federal crime and may deter some from lying about their
                                 tax debt, much of our work has focused on the inadequacies of self-
                                 reported information without independent verification. 64 In fact, our
                                 comparison of the URLAs in eight mortgage files with IRS tax data
                                 revealed that five borrowers wrongly declared they were not, by FHA’s
                                 definition, delinquent or in default on federal tax debt (e.g., not in a
                                 valid IRS repayment agreement). 65 In addition, six of the borrowers
                                 did not properly disclose the tax debts on the liabilities section of the
                                 URLA. Because of the federal statute that prohibits the disclosure of
                                 taxpayer information, we are unable to refer these cases to FHA for
                                 further investigation. 66 Excerpts of the URLA where applicants are
                                 required to disclose any debts that may affect their eligibility for FHA
                                 mortgage insurance or their ability to repay the proposed mortgage
                                 are illustrated in appendix II.

                           •     CAIVRS. FHA requires that lenders check all applicants against
                                 CAIVRS, HUD’s database of delinquent federal debtors, to identify
                                 federal debts. While it contains delinquent debt information from six


                           64
                             GAO, Service-Disabled Veteran-Owned Small Business Program: Governmentwide
                           Fraud Prevention Control Weaknesses Leave Program Vulnerable to Fraud and Abuse,
                           but VA Has Made Progress in Improving Its Verification Process. GAO-12-443T
                           (Washington, D.C.: Feb. 7, 2012), and Energy Star Program: Covert Testing Shows the
                           Energy Star Program Certification Process Is Vulnerable to Fraud and Abuse.
                           GAO-10-470 (Washington, D.C.: Mar. 5, 2010).
                           65
                             We requested IRS notes, detailed account transcripts, and other records from IRS as
                           well as mortgage files from FHA for 18 individuals. Of these requested cases, FHA
                           provided us information that only allowed us to fully analyze 8 of them. For additional
                           details on our selection methodology, see appendix I.
                           66
                               26 U.S.C. § 6103.




                           Page 20                                                          GAO-12-592 Recovery Act
     agencies, such as the Department of Education and the Small
     Business Administration, CAIVRS does not contain federal tax
     information from IRS because statutory restrictions generally prohibit
     IRS from disclosing taxpayer information without the taxpayer’s
     consent. Two of the three lenders we spoke with mistakenly believed
     CAIVRS could be used to identify federal tax debt.

•    Credit reports. Lenders told us that credit reports, which contain public
     records such as federal tax liens, were a primary method of identifying
     liens to indicate certain tax debts. However, delinquent federal taxes
     do not always appear on credit reports because IRS does not file liens
     on all tax debtors with property. In addition, many FHA borrowers are
     first-time home buyers and may not have real property on which IRS
     can place a lien. IRS records indicated that only two of our eight
     selected borrowers had tax liens filed against them at the time they
     obtained FHA mortgage insurance.
Lenders using only these FHA-required methods for identifying tax debt
are missing an opportunity to more accurately determine whether
applicants are eligible for FHA-insured mortgages, in part, because they
do not have access to certain information. Access to the federal tax
information needed to obtain the tax payment status of applicants is
restricted under section 6103 of the Internal Revenue Code, which
prohibits disclosure of taxpayer data to lenders in most instances.
However, lenders may request information on federal tax debts directly
from IRS if the applicant provides consent. To verify the income of self-
employed and commission-income applicants, FHA requires that lenders
obtain an applicant-signed consent form allowing the lender to verify the
applicant’s income directly with IRS.

The three lenders we spoke with indicated they use IRS form 4506-T
Request for Transcript of Tax Return to satisfy this requirement. FHA
could also compel lenders to use this form or otherwise obtain borrower
consent to identify tax debts. 67 Files for four of our eight selected
borrowers had a copy of the IRS Form 4506-T in their FHA mortgage
files. The lenders for these borrowers used the 4506-T only to validate


67
  FHA policy allows lenders to use IRS form 4506 Request for Copy of Tax Return, IRS
form 4506-T Request for Transcript of Tax Return, or any other document that is
appropriate for obtaining tax returns from IRS. Any of these options could be used to
obtain the financial status of an applicant’s account, so long as it includes the same
information and provides for the taxpayer's signature and date of signature.




Page 21                                                        GAO-12-592 Recovery Act
income by requesting federal tax return transcripts and did not use the
form to request account transcripts that would have disclosed tax debt
information. None of the eight mortgage files contained IRS tax account
transcripts. Officials from each of the lenders we interviewed said it is
their policy to use the 4506-T only to validate the income of these
applicants, as this is the requirement under FHA policies. Officials from
two of the lenders used the form to verify income for all borrowers. 68 In
contrast, officials from the third lender stated that they executed this form
for a random sample of additional applicants for income verification, but
noted that doing so for every applicant would be too burdensome.

As shown in figure 4, checking box 6a on the form allows a lender to
obtain tax return transcripts for applicants, which do not disclose tax debt
information. Checking box 6b would allow a lender to request and receive
account transcripts. Account transcripts contain information on the
financial status of the account, including information on any existing tax
debts. 69 These transcripts would allow a lender to identify federal taxes
owed by any applicant, including debts not found on credit reports
because a federal tax lien does not exist. Checking box 6c would allow a
lender to obtain both tax return transcripts and account transcripts, which
the lender could use to verify the income of an applicant as well as
identify whether the applicant has federal tax debt. The lender may
request account transcripts only for the current year and up to 3 prior
years and must state the requested years on the form; transcripts beyond
this are generally unavailable. Despite this limitation, the IRS form 4506-T
could serve as a method for lenders to identify loan applicants with
unpaid debt. Without such a method, lenders may approve federally
insured mortgages for ineligible applicants with delinquent tax debt in
violation of OMB and FHA policies.




68
  IRS form 4506-T is not used to verify income when the applicant is applying for a
streamline refinance (a refinance of an existing FHA mortgage that requires limited
documentation).
69
  IRS returns the information requested on IRS form 4506-T within 10 business days at no
expense to the requester, or within 48 hours through the IRS Income Verification Express
Service (IVES) at an expense of $2.00, according to IRS officials.




Page 22                                                          GAO-12-592 Recovery Act
Figure 4: Excerpt of IRS Form 4506-T




                                       Note: In practice, records of account and account transcripts are processed in the same amount of
                                       time as tax return transcripts (i.e., 10 business days) or within 48 hours through the IRS Income
                                       Verification Express Service at an expense of $2.


Shortcomings in FHA                    All three lenders we spoke with unknowingly violated FHA policies on
Policies May Have Led to               requirements to investigate tax liens. Federal tax liens remain on a
Ineligible Tax Debtors                 property until the associated tax debt has been paid in full or otherwise
                                       satisfied. 70 The presence of a lien does not prevent an applicant from
Obtaining Mortgage
                                       receiving FHA mortgage insurance because, per OMB and FHA policies,
Insurance                              applicants are eligible for mortgage insurance if they are in a valid
                                       repayment agreement. However, according to FHA officials, FHA requires
                                       lenders to investigate whether the tax debt that caused the lien has been


                                       70
                                         During prior audits of IRS's financial statement, we found that IRS did not always
                                       release the applicable federal tax lien within 30 days after a tax liability is satisfied, either
                                       through payment or abatement, as required by the Internal Revenue Code. See GAO,
                                       Financial Audit: IRS’s Fiscal Years 2011 and 2010 Financial Statements, GAO-12-165
                                       (Washington, D.C.: Nov. 10, 2011).




                                       Page 23                                                                 GAO-12-592 Recovery Act
resolved or brought current under a repayment plan. If it has not,
insurance must be denied. Lenders understood these policies to have
exemptions for some applicants. FHA officials told us that endorsing a
mortgage without determining applicant eligibility by investigating the
status of tax debts related to federal tax liens for any applicant is improper
due diligence.

Specifically, officials from two of the three lenders said they would
approve FHA insurance for applicants with a federal tax lien on their
credit report if IRS agreed to subordinate the lien to FHA. 71, 72 The lenders
believed this was in accordance with FHA policy that indicates that tax
liens may remain unpaid if the lien holder subordinates the lien to FHA.
One of the lenders told us that this policy could potentially allow ineligible
applicants with delinquent federal tax debt to obtain FHA mortgage
insurance. However, FHA officials told us that this policy is only
applicable if the lender has previously determined the applicant is eligible
by investigating the lien (i.e., requesting verification from IRS that they
have repaid their debt or are in a repayment agreement). See figure 5 for
FHA policy excerpts.




71
  Lien subordination is when IRS allows a later lien to take precedence over the federal
tax lien.
72
  One of the lenders said they would approve FHA insurance in this manner as long as
TOTAL rated the applicant as “accept.” This lender subsequently told us that applicants
with federal tax liens are ineligible for FHA mortgage insurance unless they have repaid
their tax debt or entered into a valid repayment agreement with IRS; however, this lender’s
written policies show that reviewing credit reports for tax liens is not required for applicants
for whom TOTAL rates as “accept.”




Page 24                                                             GAO-12-592 Recovery Act
Figure 5: FHA Policy Excerpts on Tax Debt That Some Lenders Misinterpret




                                       Officials from the third lender said they would approve any applicant rated
                                       as “accept” by TOTAL without additional review or manual underwriting,
                                       even if the applicant’s credit report showed a tax lien. The officials
                                       believed this was consistent with FHA policy because TOTAL would not
                                       have granted an “accept” unless the application met FHA requirements.
                                       However, FHA officials told us that while TOTAL considers an applicant’s
                                       credit score in its risk evaluation, it does not consider other factors such
                                       as tax liens. FHA guidance states that the lender remains accountable for


                                       Page 25                                               GAO-12-592 Recovery Act
             compliance with FHA eligibility requirements, regardless of the risk
             assessment provided by TOTAL.

             Due to potential shortcomings in FHA policies, lenders may misinterpret
             them, which could result in lenders approving federally insured mortgages
             for ineligible applicants with delinquent tax debt in violation of OMB and
             FHA policies. Our review was limited to mortgages obtained under the
             Recovery Act provisions; however, these policies are the same for all
             FHA mortgages. Our review included only a small percentage of all
             mortgages insured by FHA in 2009, and it is likely that FHA’s unclear
             policies may negatively affect some of the other mortgages.


             FHA has helped millions of families purchase homes through its single-
Conclusion   family mortgage insurance programs. As more and more Americans turn
             to FHA to finance their homes, it is critical for FHA to ensure that it has
             policies in place to minimize financial risks to the federal government
             while meeting the housing needs of borrowers. Tax debtors who were
             ineligible for FHA mortgage insurance were still able to obtain insurance,
             despite FHA policies intended to prohibit this. Our review focused
             exclusively on individuals who benefitted from the Recovery Act, which
             only accounted for a small percentage of FHA borrowers in 2009;
             nevertheless we were able to identify thousands of tax debtors who
             obtained insurance. These debtors became seriously delinquent in their
             payments and lost their homes to foreclosures at a higher rate than those
             without tax debt.

             Current shortcomings we found in the capacity of available information
             sources to identify applicants’ tax debts could be addressed by improved
             access to federal tax information. But because FHA’s underwriting
             policies apply equally to all mortgage insurance applicants, it is likely that
             loans we did not review also included tax debtors. To ensure compliance
             with the confidentiality requirements associated with the disclosure of
             taxpayer information, FHA would need to consult with IRS to take action
             to identify tax debtors who are ineligible for FHA mortgage insurance, as
             has been done to verify the income of certain applicants. This would
             include developing appropriate criteria and safeguards to ensure taxpayer
             privacy and minimize undue approval delays. In addition, strengthening
             FHA policies and their interpretation by lenders can help prevent ineligible
             tax debtors from continuing to receive the benefit of FHA insurance. To
             the extent that borrowers with tax debt represent additional risk, FHA
             could minimize the potential for this risk by taking steps to address the
             issues identified in this report.


             Page 26                                                 GAO-12-592 Recovery Act
                      The Secretary of HUD should direct the Assistant Secretary for Housing
Recommendations for   (Federal Housing Commissioner) to implement the following two
Executive Action      recommendations:

                      •   Consult with IRS to develop written policies requiring lenders to collect
                          and evaluate IRS documentation appropriate for identifying ineligible
                          applicants with unpaid federal taxes, while fully complying with the
                          statutory restriction on disclosure of taxpayer information. For
                          example, FHA could require lenders to obtain consent from borrowers
                          to allow FHA and its lenders to verify with IRS whether recipients of
                          FHA insurance have unpaid federal taxes.

                      •   Provide FHA lenders with revised policies or additional guidance on
                          borrower ineligibility due to delinquent federal debts and tax liens to
                          more clearly distinguish requirements for lenders to investigate any
                          indication that an applicant has federal tax debt (such as a federal tax
                          lien) to provide reasonable assurance that ineligible borrowers do not
                          receive FHA mortgage insurance.

                      We provided a draft of this report to IRS and HUD for review and
Agency Comments       comment. IRS did not have any comments in response to the draft report.
and Our Evaluation    The Acting Assistant Secretary for Housing (Federal Housing
                      Commissioner) provided a written response which is reprinted in
                      appendix III.

                      In HUD’s response, the agency agreed with our recommendations and
                      acknowledged that current policies and procedures may fail to identify all
                      potential borrowers with delinquent tax debt. To address our
                      recommendations, FHA stated that it would contact IRS in an effort to
                      establish executable policy that may identify delinquent tax debtors.
                      Further, the agency affirmed that it would execute changes to current
                      FHA requirements for lenders in order to address the concerns
                      discovered through the audit. Included in its written response, HUD
                      provided technical comments which were incorporated into this report.
                      Specifically, HUD recommended that we change the terminology used to
                      characterize federal tax debts. According to HUD, this suggested change
                      would provide clarity and avoid the appearance that FHA knew of
                      delinquent tax debts. We agreed to make the recommended change.
                      However, for certain cases included in our review, evidence indicates that
                      FHA-approved lenders were aware of tax debts.

                      As agreed with your offices, unless you publicly release its contents
                      earlier we plan no further distribution of this report until 30 days from its


                      Page 27                                                  GAO-12-592 Recovery Act
issue date. At that time, we will send copies of this report to interested
congressional committees, the Secretary of the Treasury, the Secretary of
Housing and Urban Development, the Commissioner of Internal Revenue,
the Acting Assistant Secretary for Housing (Federal Housing
Commissioner), and other interested parties. The report is also available
at no charge on the GAO Web site at http://www.gao.gov. If you have any
questions concerning this report, please contact Gregory D. Kutz at (202)
512-6722 or kutzg@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Major contributors to this report are acknowledged in
appendix IV.




Gregory D. Kutz
Director
Forensic Audits and Investigative Service




Page 28                                              GAO-12-592 Recovery Act
List of Congressional Requesters

The Honorable Max Baucus
Chairman
The Honorable Orrin Hatch
Ranking Member
Committee on Finance
United States Senate

The Honorable Charles Grassley
Ranking Member
Committee on the Judiciary
United States Senate

The Honorable Carl Levin
Chairman
The Honorable Tom Coburn, M.D.
Ranking Member
Permanent Subcommittee on Investigations
Committee on Homeland Security and Governmental Affairs
United States Senate




Page 29                                         GAO-12-592 Recovery Act
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              Our objectives were to determine: (1) the extent to which tax debtors
              benefited from the Recovery Act’s provisions for increased Federal
              Housing Administration (FHA) loan limits and the First-Time Homebuyer
              Credit (FTHBC); and (2) what challenges, if any, FHA faces in preventing
              ineligible tax debtors from receiving mortgage insurance.

              To determine the extent to which individuals with unpaid tax debt
              benefited from the Recovery Act’s provision for increased loan limits on
              FHA mortgage insurance, we obtained and analyzed electronic data from
              FHA’s Single Family Data Warehouse (SFDW) as of September 2011. 1
              We also obtained and analyzed tax debt data from the Internal Revenue
              Service (IRS) as of June 30, 2010. 2 Using the taxpayer identification
              numbers (TIN) present in these data, we electronically matched IRS’s tax
              debt data to the population we identified of Recovery Act borrower Social
              Security numbers (SSN) from the SFDW.3 The Recovery Act stipulated
              that revised FHA loan limits for 2009 be set in each county at the higher
              of the loan limits established under the Economic Stimulus Act of 2008
              (ESA) or those established under the Housing and Economic Recovery
              Act of 2009 (HERA). Since loan limits would have reverted to HERA-
              established rates if the Recovery Act had not been promulgated, we
              considered an FHA borrower to be part of our Recovery Act population if
              he or she obtained mortgage insurance in 2009 at a value greater than
              would have been authorized under HERA. 4, 5 FHA officials agreed with
              this methodology.



              1
               FHA’s SFDW is an information system used to obtain case-level information covering all
              the processes in the mortgage insurance lifecycle. The SFDW contains Social Security
              numbers for the primary borrower and up to four coborrowers. For the purposes of this
              audit, we have limited our scope to the primary borrower and first coborrower, if
              applicable.
              2
               The FTHBC under the Recovery Act had to be claimed on either a 2008 or 2009 tax
              return. Because returns for the 2009 tax year were due by April 15, 2010, all claims filed
              on time, without an extension, would be accounted for in the July 2010 data.
              3
               A TIN is a unique nine-digit identifier assigned to each business and individual that files a
              tax return. For most individuals, the Social Security number is the TIN. For businesses,
              the employer identification number assigned by IRS serves as the TIN.
              4
               Loan limits set forth under HERA were to be in place in 2009, but they were not fully
              implemented until October 2011 due to a series of temporary measures, including the
              Recovery Act, to ensure that higher limits were allowed to continue.
              5
               The Recovery Act applied for borrowers with credit approval dates—the underwriters’
              approval date of the loan—in calendar year 2009.




              Page 30                                                            GAO-12-592 Recovery Act
Appendix I: Objectives, Scope, and
Methodology




To determine the extent to which individuals with unpaid taxes received
the FTHBC under the Recovery Act, we obtained and analyzed FTHBC
transaction data from IRS as of July 10, 2010, and then electronically
matched IRS’s tax debt data to the population of individuals who claimed
the FTHBC under the Recovery Act. 6 Since IRS’s FTHBC data do not
contain home purchase dates, we were unable to isolate all individuals
who benefitted from the FTHBC under the Recovery Act. As a result, we
used the SFDW to obtain home purchase dates to determine which
FTHBCs were awarded under the Recovery Act. We electronically
matched the FTHBC transaction data TINs with the SSNs in the SFDW
and extracted mortgages with closing dates from January 1, 2009,
through November 30, 2009, to identify a population of Recovery Act
FTHBC recipients with FHA mortgage insurance. We identified 722,003
FTHBC claims associated with the Recovery Act for individuals who
financed their home using FHA mortgage insurance, and in our prior work
we found that there were 1,669,081 FTHBC claims filed under the
Recovery Act. 7 Therefore, we estimate that our analysis includes
approximately 43 percent of all FTHBCs claimed under the Recovery Act.

Therefore, our analysis includes two groups:

1. individuals who received FHA mortgage insurance under the higher
   limits authorized under the Recovery Act, and
2. individuals who received the FTHBC under the Recovery Act and
   obtained FHA mortgage insurance of any value.

Further, to determine the extent to which these Recovery Act FTHBC
recipients with unpaid tax debt received federal tax refunds in the same
year they claimed the FTHBC, we obtained and analyzed federal tax
refund data from IRS from fiscal years 2009 and 2010. 8 We electronically
matched the refund data TINs with the TINs we identified to be FHA



6
 The FTHBC was available under the Recovery Act for homes purchased from January 1,
2009, through November 30, 2009.
7
 GAO, Tax Administration: Usage and Selected Analyses of the First-Time Homebuyer
Credit, GAO-10-1025R (Washington, D.C.: Sept. 2, 2010).
8
 We removed refunds that occurred after June 30, 2010, because our unpaid tax data
from IRS were as of this date. This was necessary because we would not have been able
to identify whether an individual had paid off their federal tax debt if they had done so after
June 30, 2010.




Page 31                                                             GAO-12-592 Recovery Act
Appendix I: Objectives, Scope, and
Methodology




mortgage insurance borrowers who claimed the FTHBC under the
Recovery Act while having unpaid federal tax debt.

To avoid overestimating the amount owed by borrowers who benefitted
from the increased loan limits for FHA mortgage insurance under the
Recovery Act and FTHBC recipients with unpaid federal tax debts, and to
capture only significant tax debts, we excluded from our analysis tax
debts meeting specific criteria to establish a minimum threshold in the
amount of tax debt to be considered when determining whether a tax debt
is significant. The criteria we used to exclude tax debts are as follows:

•    tax debts IRS classified as compliance assessments or memo
     accounts for financial reporting, 9
•    tax debts from calendar years 2009 and 2010 tax periods, 10
•    tax debts that were assessed by IRS after the mortgage insurance
     was issued, and
•    tax debts from individuals with total unpaid taxes of less than $100.
The criteria above were used to exclude tax debts that might be under
dispute or generally duplicative or invalid, and tax debts that were
recently incurred. Specifically, compliance assessments or memo
accounts were excluded because these taxes have neither been agreed
to by the taxpayers nor affirmed by the court, or these taxes could be
invalid or duplicative of other taxes already reported. We also excluded
tax debts from calendar years 2009 and 2010 tax periods to eliminate tax
debt that may involve matters that are routinely resolved between the
taxpayers and IRS, with the taxes paid or abated within a short time. We
excluded any debts that were assessed by IRS after the mortgage
insurance was received because those debts would not have been
included in IRS records at the time the mortgage insurance was issued.
We also excluded tax debts of less than $100 because we considered
them insignificant for the purpose of determining the extent of taxes owed
by Recovery Act recipients. Using these criteria, we identified at least
6,327 Recovery Act recipients with federal tax debt.


9
 Under federal accounting standards, unpaid assessments require taxpayer or court
agreement to be considered federal taxes receivables. Compliance assessments and
memo accounts are not considered federal taxes receivable because they are not agreed
to by taxpayers or the courts.
10
  The length of a delinquent tax period is dependent on the type of tax owed. For
instance, income taxes are assessed on an annual basis; payroll taxes are assessed on a
quarterly basis.




Page 32                                                       GAO-12-592 Recovery Act
Appendix I: Objectives, Scope, and
Methodology




To provide examples of Recovery Act recipients who have unpaid federal
taxes, we selected a non-probability sample of Recovery Act beneficiaries
for a detailed review. We used the selection criteria below to provide
examples that illustrate the sizeable amounts of taxes owed by some
individuals who benefitted from the Recovery Act:

•     We selected nine individuals who benefitted from increased FHA
      mortgage limits who had (1) large amounts of unpaid federal tax debt
      (at least $100,000), (2) at least three delinquent tax periods, and (3)
      indications of IRS penalties or home foreclosures.
•     We also selected nine individuals who benefitted from the FTHBC and
      obtained FHA mortgage insurance of any value who had (1) large
      amounts of unpaid federal tax debt (at least $50,000), (2) at least five
      delinquent tax periods, (3) FHA mortgage insurance of $200,000 or
      more, and (4) indications of IRS penalties or home foreclosures. 11
We requested IRS notes, detailed account transcripts, and other records
from IRS as well as mortgage files from FHA for these 18 individuals. Of
the 18 total requested cases, FHA provided us information that only
allowed us to fully analyze 8 of them. 12, 13 Although we did not receive
complete information necessary to fully analyze the remaining cases, we
were able to assess all 18 for limited purposes (e.g., nonfiling of tax
returns). We also selected 9 additional cases of FTHBC recipients who
received tax refunds to determine how they were able to receive federal
tax refunds while having unpaid federal taxes. 14 For these 9, we selected


11
  The value of mortgage insurance was not a criterion in selecting cases for borrowers
who obtained FHA mortgage insurance under the Recovery Act because all of these
mortgages were as a result of increased FHA loan limits in high-cost areas. For each of
the two groups included in our analysis, we selected two cases with IRS civil penalties for
noncompliance and two cases in which the home had been foreclosed.
12
  To mask the identities of the tax debtors included in our case studies, we requested
additional files from FHA that were not tax debtors.
13
  FHA and IRS provided us some information on an additional three cases; however, we
found that two of these cases did not have outstanding debt at the time they obtained FHA
mortgage insurance, because they were either deemed an innocent spouse (granted relief
from a joint tax liability) or had satisfied the repayment portion on an offer in compromise
(an agreement to settle the debt for less than the amount owed).The third case’s debt had
been removed from IRS because it was beyond the 10-year statutory collection period at
the time we received the IRS records, therefore we did not include them in our analysis.
We did not receive FHA mortgage files from FHA for the remaining seven cases because
the lenders for these files had either gone out of business or were not otherwise required
to provide the mortgage file, according to FHA officials.
14
     We did not request FHA mortgage files for these nine cases.




Page 33                                                            GAO-12-592 Recovery Act
                   Appendix I: Objectives, Scope, and
                   Methodology




                   individuals who had (1) at least $5,000 in unpaid federal tax debt, (2) at
                   least three delinquent tax periods, and (3) a federal tax refund value of at
                   least $5,000. All of our cases were selected to illustrate the sizeable
                   amounts of taxes owed by some individuals who benefitted from the
                   Recovery Act. None of our case selections provide information that can
                   be generalized beyond the specific cases presented.

                   To analyze the controls FHA has in place to prevent ineligible individuals
                   with unpaid federal tax debt from receiving mortgage insurance, we
                   reviewed FHA’s lender credit analysis and underwriting handbook,
                   mortgagee letters, and reports from GAO and HUD’s Office of Inspector
                   General. 15, 16 We also interviewed officials from FHA’s Office of Single
                   Family Housing and Office of the Chief Information Officer.

                   To understand how private lenders interpret and implement FHA’s
                   guidelines for preventing individuals with delinquent federal tax debt from
                   receiving mortgage insurance, we interviewed senior-level officials from
                   three large FHA-approved lenders. We selected four lenders based on
                   the following criteria: (1) we selected the two largest lenders in terms of
                   the number of FHA loans approved in 2009, and (2) we selected 2 of the
                   top 10 largest FHA lenders that approved a comparable number of FHA
                   loans in 2009 but varied in proportion of loans awarded to individuals with
                   federal tax debt. However, the lender chosen for having a high proportion
                   of loans awarded to individuals with federal tax debt declined to speak
                   with GAO officials. In total, the three lenders we interviewed endorsed
                   about 15 percent of all FHA mortgages for homes purchased in 2009.


Data Reliability   To assess the reliability of record-level IRS unpaid assessments and
Assessment         FTHBC data, we relied on the work we performed during our annual audit
                   of IRS’s financial statements and interviewed knowledgeable IRS officials
                   about any data reliability issues. 17 We also performed electronic testing of
                   required FTHBC elements. While our financial statement audits have


                   15
                     HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance (March
                   2011).
                   16
                     Mortgagee letters are written instructions that FHA periodically issues to all of its
                   approved lenders (mortgagees).
                   17
                    GAO, Financial Audit: IRS’s Fiscal Years 2010 and 2009 Financial Statements,
                   GAO-11-142 (Washington, D.C.: Nov. 10, 2010).




                   Page 34                                                             GAO-12-592 Recovery Act
Appendix I: Objectives, Scope, and
Methodology




identified some data reliability problems associated with tracing IRS’s tax
records to source records and including errors and delays in recording
taxpayer information and payments, we determined that the data were
sufficiently reliable to address this report’s objectives.

To assess the reliability of record-level FHA mortgage insurance data, we
reviewed documentation from FHA, interviewed FHA officials who
administer these information systems and officials who routinely use
these systems for mortgage insurance management, verified selected
data across multiple sources, and performed electronic testing of required
elements. We determined that the data were sufficiently reliable for our
purposes.

We conducted this performance audit and related investigations from
April 2011 through May 2012. We performed this performance audit in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
audit findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




Page 35                                               GAO-12-592 Recovery Act
Appendix II: Excerpts of the Uniform
                                          Appendix II: Excerpts of the Uniform
                                          Residential Loan Application



Residential Loan Application

                                          Two of the three figures below represent sections of the Uniform
                                          Residential Loan Application (URLA) where applicant’s are required to
                                          disclose any debts that may affect their eligibility for FHA mortgage
                                          insurance or their ability to repay the proposed mortgage. The third
                                          excerpt lists the consequences of making a false statement on the URLA.
                                          Knowingly making any false statement on the URLA is a federal crime
                                          punishable by fine or imprisonment. 1

Figure 6: Liabilities Section of the Uniform Residential Loan Application




                                          1
                                           18 U.S.C. § 1001.




                                          Page 36                                            GAO-12-592 Recovery Act
                                         Appendix II: Excerpts of the Uniform
                                         Residential Loan Application




Figure 7: Declarations Section of the Uniform Residential Loan Application




                                         Page 37                                GAO-12-592 Recovery Act
                                        Appendix II: Excerpts of the Uniform
                                        Residential Loan Application




Figure 8: Line on the Uniform Residential Loan Application Showing the Consequences of Making a False Statement




                                        Page 38                                                  GAO-12-592 Recovery Act
Appendix III: Comments from the Federal
              Appendix III: Comments from the Federal
              Housing Administration



Housing Administration




              Page 39                                   GAO-12-592 Recovery Act
Appendix III: Comments from the Federal
Housing Administration




Page 40                                   GAO-12-592 Recovery Act
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Gregory D. Kutz, (202) 512-6722 or kutzg@gao.gov
GAO Contact
                  In addition to the contact named above, Matthew Valenta, Assistant
Staff             Director; Emily C.B. Wold, Analyst-in-Charge; Jamie L. Berryhill; Jeff
Acknowledgments   McDermott; Maria McMullen; Wayne Turowski; Susan B. Wallace; and
                  Timothy Walker made significant contributions to this report.




(192379)
                  Page 41                                             GAO-12-592 Recovery Act
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