OFFICE OF AUDIT
REGION 4
ATLANTA, GA
U.S. Department of Housing and Urban
Development
Insured Multifamily and Healthcare Programs
Washington, DC
2013-AT-0001 MAY 13, 2013
Issue Date: May 13, 2013
Audit Report Number: 2013-AT-0001
TO: Carol Galante, FHA Commissioner-Assistant Secretary, Office of Housing, H
FROM: Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA
SUBJECT: The Office of Housing Had Not Fully Developed Formal Risk Based Procedures
for Postendorsement Underwriting Reviews of Multifamily and Healthcare Loans
Attached are the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the Office of Housing’s multifamily and
healthcare insured mortgage programs.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
404-331-3369.
Date of Issuance: May 13, 2013
The Office of Housing Had Not Fully Developed
Formal Risk-Based Procedures for
Postendorsement Underwriting Reviews of
Multifamily and Healthcare Loans
Highlights
Audit Report 2013-AT-0001
What We Audited and Why What We Found
We audited certain portions of the U.S. For the audit period ending December 2011, the
Department of Housing and Urban Office of Housing had not fully developed
Development’s (HUD) multifamily formal risk-based procedures and controls for
housing and healthcare insured postendorsement underwriting reviews of insured
mortgage programs as part of our fiscal loans for multifamily and healthcare (Section
year 2012 annual audit plan. The 232) projects. These conditions occurred
objective of the review was to because senior management had not fully
determine the adequacy of the Office of implemented departmental guidance for
Housing’s procedures and controls for management controls. The audit identified the
selecting, conducting, and following up need for improvement in several areas, including
on postendorsement underwriting but not limited to instances in which required
reviews of insured multifamily and postendorsement underwriting reviews were not
healthcare loans and use of the reviews conducted, no postendorsement review
to identify and correct adverse requirements for some project types, and more
underwriting conditions detected by complete procedures for follow-up on review
them. We did not review any other results. The failure to conduct the reviews in all
aspects of their risk-based programs cases where they were required or needed
beyond postendorsement underwriting represented missed opportunities to identify
reviews. adverse underwriting patterns and correct them
in a timely manner in an effort to help reduce
What We Recommend losses to the insurance fund.
We recommend that the Assistant
Secretary for Housing-FHA [Federal
Housing Administration] Commissioner
develop and implement more complete
written procedures and controls for
conducting and following up on
postendorsement underwriting reviews
of HUD’s insured multifamily and
healthcare loans processed by the Office
of Multifamily Housing Programs and
the Office of Healthcare Programs.
TABLE OF CONTENTS
Background and Objective 3
Results of Audit
Finding: The Office of Housing Had Not Fully Developed Formal Risk-Based 5
Controls and Procedures for Postendorsement Underwriting
Reviews of Multifamily and Healthcare Loans
Scope and Methodology 11
Internal Controls 12
Appendix 13
2
BACKGROUND AND OBJECTIVE
Since 1937, the U.S. Department of Housing and Urban Development’s (HUD) Federal
Housing Administration (FHA) multifamily mortgage insurance has been a major source of
financing for affordable housing. Between January 1, 2007, and December 31, 2011, FHA
insured more than $47.4 billion in mortgage loans to facilitate the construction, substantial
rehabilitation, purchase, and refinancing of multifamily housing projects and healthcare
facilities. FHA mortgage insurance protects lenders against financial losses stemming from
defaults. HUD’s Office of Housing is responsible for establishing requirements for the
administration of HUD’s multifamily mortgage insurance program primarily through its
Office of Multifamily Housing Programs and the Office of Healthcare Programs.
Starting in 2009, Housing initiated and later completed major changes to enhance its
underwriting processes for multifamily and healthcare insured loans. The changes included
but were not limited to revisions to its underwriting procedures, implementation of
Multifamily hub and national loan review committees, the establishment of the Office of
Healthcare Programs in April 2009, and the transfer of the Section 232 program from
multifamily to healthcare. The changes were designed and implemented to improve the
quality of underwriting for multifamily and healthcare loans. Specifically
• Multifamily is responsible for the overall management, development, direction, and
administration of HUD’s multifamily housing programs. It provides direction and
oversight for FHA mortgage insurance loan origination using multifamily accelerated
processing (MAP) and traditional application processing (TAP). HUD designed MAP
to establish national standards for approved lenders to follow when preparing, processing,
and submitting loan applications for FHA multifamily mortgage insurance. The MAP
program is intended to provide a consistent, expedited mortgage insurance application
process at each HUD Multifamily hub or program center. The Multifamily Lender
Qualification and Monitoring Division (LQMD) is responsible for monitoring MAP
lenders and providing general oversight of lender performance. Housing had not
established formalized requirements to monitor TAP loans underwritten and approved
by HUD staff.
• Healthcare is responsible for the administration, processing, and approval of loans for
healthcare projects. The office administers FHA’s healthcare programs that provide
mortgage insurance on loans that finance the construction, renovation, acquisition, or
refinancing of healthcare facilities, such as residential care facilities and hospitals.
The office processes Section 232 loans using LEAN 1 processing, developed in 2008
for Section 232 applications. All Section 232 loans are processed and approved by
healthcare’s headquarters office staff.
1
LEAN refers to the procedures implemented by HUD which standardized the process used by lenders to assemble
Section 232 loan application packages and for use by HUD staff to underwrite the applications.
3
The objective of the audit was to review the adequacy of procedures and controls used by the
Office of Housing for selecting, conducting, and following up on postendorsement
underwriting reviews of multifamily and healthcare insured loans and use of the reviews to
identify and correct adverse underwriting conditions detected by them.
4
RESULTS OF AUDIT
Finding: The Office of Housing Had Not Fully Developed Formal Risk-
Based Controls and Procedures for Postendorsement Underwriting
Reviews of Multifamily and Healthcare Loans
The Office of Housing could improve the postendorsement review process by more fully
developing formal risk-based procedures and controls for conducting, following up on, and
assessing the results of postendorsement underwriting reviews of insured loans for multifamily
and healthcare (Section 232) projects and better adherence to procedures that were in place. We
identified the need to develop and formalize more complete written procedures for conducting
(1) postendorsement underwriting reviews by Multifamily, (2) trend assessments by Multifamily,
and (3) postendorsement underwriting reviews and trend assessments by Healthcare. These
conditions occurred because senior management within Housing had not fully implemented
required management controls. The failure to conduct the reviews in all cases where they were
required or needed represented missed opportunities to identify adverse underwriting patterns
and correct them in a timely manner in an effort to help reduce losses to the insurance fund.
More Complete Procedures and
Controls Needed for
Conducting Postendorsement
Underwriting Reviews
Housing had not fully developed formal risk-based monitoring procedures and
controls to ensure that Multifamily and Healthcare conducted and properly
followed up on postendorsement underwriting reviews. HUD Handbook 1840.1,
Departmental Management Control Program, paragraph 1-3(D)(4), provides that
the Assistant Secretary for Housing is responsible for implementing management
control requirements for the Office of Housing. Office of Management and
Budget Circular A-123, Section IV, requires managers to continuously monitor
and assess the effectiveness of management controls for their programs.
Multifamily and Healthcare did not conduct all postendorsement reviews that
were required, did not require reviews for some project types, or did not conduct
the required number of reviews. The additional information obtained from the
reviews could have helped Housing identify inadequate underwriting patterns and
the ability to initiate timely action to correct them. This condition occurred
because senior managers in Housing had not fully established formalized the
required complete risk-based procedures and controls.
5
Better Compliance Needed for
Postendorsement Underwriting
Reviews and Better Procedures
for Trend Assessments by
Multifamily
Housing had not fully established formal adequate risk-based controls and
procedures for postendorsement underwriting reviews of loans processed and
approved by Multifamily using traditional application processing (TAP), and
multifamily application processing (MAP). Handbook 1840.1, Paragraph 7-3,
requires that all monitoring is to be based on the application of risk management
concepts. As a result, Housing did not have readily available trend information
needed from the reviews to assess and correct any adverse underwriting patterns
that the reviews may have identified to help protect the insurance fund from
losses.
Traditional Application Processing - Housing had not fully established formal
risk-based procedures and controls to select, conduct, follow up, and access
postendorsement underwriting reviews of TAP loans that were underwritten and
approved by HUD staff. This condition was significant considering that during
our audit period, January 2007 through December 2011, HUD’s system showed
that Multifamily had 19 early assigned TAP loans, but Multifamily reviewed only
1 2 of the loans in 2010, leaving 18 loans with mortgages totaling more than $140
million that were not reviewed. Multifamily had established requirements to
review all early assigned and a sample of other MAP loans, but it had not
established similar requirements for TAP loans.
Section 1-4 of The Multifamily Lender Qualification and Monitoring Division’s
(LQMD) internal desk guide provides that LQMD may conduct reviews of TAP
loans underwritten by HUD staff. However, this statement was not a requirement
to conduct the reviews. Multifamily officials stated that they did not believe that
it was necessary or a good use of resources to establish procedures to conduct
postendorsement reviews of TAP loans because TAP loans represented only about
2 or 3 percent of their production volume. Multifamily officials further stated that
about a third of the TAP loans identified in HUD’s system were erroneously
coded and should have been recorded as MAP loans. Multifamily officials stated
that this data integrity issue was caused by misclassifications when the staff
entered the information into HUD’s system. As a result of this condition, we
could not readily identify how many TAP loans were in Multifamily’s inventory.
However, as long as TAP loans are a part of Multifamily processing then they are
subject to HUD’s risk-based monitoring requirements.
2
We identified this review, although a Multifamily official stated that Multifamily did not perform postendorsement
underwriting reviews of TAP loans.
6
Multifamily officials stated that although TAP loans were not reviewed by
LQMD, they were included in the pool of pipeline loans (loans still in the
underwriting process) reviewed by the Office of Risk Management. They stated
that Risk Management randomly selected five loans per month for
postcommitment quality control reviews through a memorandum of
understanding with Multifamily, which was executed in February 2012. 3 The
memorandum provided that the reviews were to evaluate the quality of
multifamily underwriting to ensure that underwriters complied with the MAP
guide but the MAP guide is not applicable to TAP loans. In addition, the
memorandum did not specifically provide for the selection and review of TAP
loans.
Multifamily Accelerated Processing - Housing had not fully established formal
risk-based postendorsement underwriting review procedures for Multifamily, and
it needed to improve written procedures and controls to ensure that Multifamily
followed requirements that were in place for conducting postendorsement
underwriting reviews of early assigned MAP loans. Section 4-4 of LQMD’s
internal desk guide requires postendorsement underwriting reviews of all early
assigned loans (assigned within 4 years of endorsement) and selective review of
other MAP loans based on various loan and project characteristics, including but
not limited to mortgage amount, default or election to assign within 4 years of
final endorsement, size of the project, and geographic location. Specifically,
Multifamily had not
• Conducted postendorsement underwriting reviews of all early assigned
MAP loans since 2009. Multifamily conducted reviews of only 12 of the 34
MAP loans that were early assigned during the period covered by the
review, January 1, 2007, through December 31, 2011. This left 22 loans
with mortgages totaling more than $268 million that were not reviewed,
although Multifamily was required to review all early assigned loans
(Section 4-4 of LQMD internal desk guide). The Director of LQMD stated
that no other reviews were conducted in 2010 and 2011 because LQMD was
in the process of reevaluating and revising its monitoring processes and
procedures. The Director stated that in 2012 LQMD had resumed
performing postendorsement underwriting reviews of early assigned loans
as part of its lender reviews and that reviews of several of the other early
assigned loans questioned as not reviewed were underway or would be
scheduled.
• Fully established and implemented formal risk-based procedures for
determining the number of reviews to conduct, selecting risk-based samples,
and following up on MAP loans that were not early assignments. Handbook
1840.1, Paragraph 7-3 requires (a) identification of the monitoring objective
to determine what is to be monitored, (b), timely risk-based monitoring, (c)
selection of programs/program participants for monitoring, and (d)
3
This was after we started our audit.
7
documenting the process and recording the rationale for choosing
participants. Although procedures were lacking, LQMD reviewed 44 loans
that were not early assignments and 1 early assigned TAP loan. We
observed that Housing’s Office of Evaluation produced and distributed
comprehensive and thorough trend reports that could be used to assist in the
risk-based assessments required for selecting loans for postendorsement
review. For instance, the reports showed beneficial information such as
endorsements, claims, defaults, and delinquencies by HUD office and
section of the Housing Act.
• Fully established and implemented timeframes for conducting
postendorsement underwriting reviews of early assigned and other loans.
When we brought this matter to the attention of Multifamily officials, they
revised LQMD’s internal desk guide to specify that all early claim MAP
loans would be reviewed within 1 year of claim, but they did not specify a
timeframe for conducting reviews of loans that were not early claim. The
guide provided only that LQMD would review a sample of other loans to the
extent that it had the capacity to do so with no reference to a timeframe and
the number of loans to be reviewed.
• Fully developed procedures to assess and document trends identified by the
postendorsement underwriting reviews and follow up to address corrective
action when needed. Handbook 1840.1, Paragraph 7-3, requires identifying
whether follow-up corrective actions are necessary. Multifamily officials
acknowledged the lack of written procedures related to these two issues.
They stated that the collection and analysis of LQMD’s underwriting
review results were documented in HUD’s SharePoint and the results were
discussed in the minutes of monthly staff meetings and that they provide
MAP training to address underwriting deficiencies and program violations.
Multifamily officials believed that the assessing and tracking approaches
they had in place were adequate and did not believe that written procedures
were required. We believe that written procedures are needed to ensure that
the data is compiled and assessed in a consistent manner and to help
enhance the results for use by Housing to identify risk areas that should be
considered when establishing monitoring objective as required by Handbook
1840.1, paragraph 7.5D.
For instance, in 2009, LQMD prepared a comprehensive report with
background information on defaults and claims by HUD field offices; lender
default and claim activity; and a summary of risk factors, trends, and
recommended actions associated with its planning, conducting, and
assessment of 23 postendorsement reviews conducted in 2008. The report
was an effective example of the type of periodic assessments of
postendorsement underwriting review results that, as discussed above, is
required to help in establishing risk based monitoring objectives. We
assessed the results of 22 postendorsement reviews and the results
8
confirmed the trends cited in HUD’s assessment. We found no evidence of
a similar assessment since 2009.
No Postendorsement
Underwriting Reviews and
Trend Assessments by
Healthcare
Housing had not fully established formal risk-based postendorsement
underwriting review procedures and controls for Section 232 loans processed and
approved by Healthcare. Handbook 1840.1, Paragraph 7-3, requires that all
monitoring is to be based on the application of risk management concepts. In
addition, neither Housing nor Healthcare had conducted or arranged for others to
conduct postendorsement underwriting reviews of Section 232 loans since
Healthcare received responsibility for the program from Multifamily in March 2009.
The reviews were needed to ensure that lenders and HUD staff complied with FHA
underwriting requirements and help reduce the risk of losses to the insurance funds
due to poor quality underwriting.
The absence of reviews was significant, considering that from January 2010 through
December 2011, Healthcare endorsed more than 730 Section 232 loans with
mortgages that totaled more than $6 billion. 4 Specifically, Housing had not
established and implemented risk-based procedures and controls to be followed
by Healthcare staff to
• Determine the number of postendorsement underwriting reviews to conduct;
• Select risk-based samples of loans for postendorsement review;
• Conduct and document the reviews;
• Follow up and resolve review findings; and
• Assess, develop, and follow up on trends resulting from reviews.
A Healthcare representative stated that Healthcare had not conducted or asked
LQMD to conduct postendorsement underwriting reviews because it did not feel
that the reviews were necessary, considering the extensive underwriting controls
that Healthcare had put in place. This comment was not consistent with
Handbook 1840.1, Paragraph 7-3, which requires (a) identification of the
monitoring objective to determine what is to be monitored, (b), timely risk-based
monitoring, (c) selection of programs/program participants for monitoring, (d)
identification of whether follow-up corrective actions are necessary, and (e)
documenting the process and recording the rationale for choosing participants.
Further, trend data prepared by Housing’s Office of Evaluation showed increasing
delinquencies for Section 232 loans, which highlights the need to consider such
projects for postendorsement underwriting reviews. Specifically, the March 2012
4
We found no evidence that any of the endorsed loans had gone to early assignment.
9
report showed 20 delinquencies and claims in the fourth quarter of 2009 and 36 in
March 2012, representing an 80 percent increase. 5
We do not question Healthcare’s claim of a thorough underwriting process but we
do questions Housing’s under-developed written procedures to subject
Healthcare’s underwriting process to the required risk based monitoring
requirements in Handbook 1840,1, paragraph 7-3.
Conclusion
Housing needs to fully develop formal risk-based procedures and controls for
Multifamily and Healthcare to conduct, follow up on, and assess the results of
postendorsement underwriting reviews. These conditions occurred because senior
management within Housing had not fully developed and implemented required
management controls. The conditions are significant, considering that during the
5-year audit period, Housing endorsed 86 loans with mortgages totaling more than
$1.3 billion that were either delinquent, in default, or assigned. The average
mortgage for a troubled loan amounted to more than $16 million, coupled with a
HUD recovery of only 48 percent of mortgage amounts on note sale loans. 6 Thus,
a single troubled loan had the potential of exposing HUD’s insurance fund to
millions of dollars in losses. This condition underscores the importance of having
fully developed procedures and controls for conducting postendorsement
underwriting reviews. The failure to conduct the reviews in all cases where they
were required or needed represented missed opportunities to identify adverse
underwriting patterns and correct them in a timely manner in an effort to help
reduce losses to the insurance fund.
Recommendations
We recommend that the Assistant Secretary for Housing-Federal Housing
Commissioner
1A. Develop and implement more complete and formalized written procedures
and controls for risk-based postendorsement underwriting, complete with
objectives and procedures for Multifamily and Healthcare for selecting
samples, conducting and documenting reviews, resolving review findings,
assessing the reviews for adverse underwriting trends, and following up on
trends identified by the reviews.
5
We recognize that some of the delinquencies and claims may relate to loans processed and approved by Multifamily before
Healthcare took over the Section 232 program in 2009. However, the monitoring requirements previously cited for Handbook
1840.1 is applicable to Housing without regard to whether the loans were processed and approved by Multifamily or Healthcare.
In this case, Healthcare is now responsible for the monitoring.
6
We obtained the recovery percentage from Housing’s Office of Asset Sales based on multifamily and healthcare loan note sales
from September 2007 to December 2011.
10
SCOPE AND METHODOLOGY
We performed the review from January to October 2012 at HUD headquarters in Washington,
DC, and Office of Inspector General (OIG) offices in Jacksonville, FL, and Atlanta, GA. The
audit survey covered the period January 1, 2007, through December 31, 2011. We adjusted the
period when necessary.
To accomplish our audit objective, we
• Reviewed reports issued by the Government Accountability Office (GAO) from 2002 to
2011 to identify issues and recommendations that were relevant to our survey objectives
and determine whether HUD had initiated appropriate actions to address the concerns
raised by GAO.
• Reviewed recent OIG reports related to our survey objective.
• Interviewed Multifamily and Healthcare headquarters officials and reviewed the policies
and procedures they used to process and underwrite multifamily loans and conduct and
follow up on postendorsement underwriting reviews.
• Reviewed reports issued by the Office of Evaluation on delinquency and claim rate
activity and trends.
• Reviewed HUD’s information system data on insured multifamily and healthcare loans
for patterns and trends such as defaults, delinquencies, assignments, high default and
claim lenders, and high default and claim hubs and field offices. We did not test the
reliability of the system from which the data was obtained because we only used it for
background and informational purposes.
• Selected and reviewed all 22 reports involving defaulted loans from among 57 LQMD
postendorsement review reports issued between 2007 and 2011 for underwriting
deficiency patterns and trends.
We conducted the 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 findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusion based on our audit objective.
11
INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to
• Effectiveness and efficiency of operations,
• Reliability of financial reporting, and
• Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit
objective:
• Compliance with laws and regulations to ensure that the Office of Housing
developed and implemented comprehensive procedures and controls for
postendorsement underwriting reviews of HUD have insured multifamily
and healthcare loans.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their
assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
impairments to effectiveness or efficiency of operations, (2) misstatements in
financial or performance information, or (3) violations of laws and regulations on a
timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:
• The Office of Housing had not fully developed formal comprehensive risk-
based controls and procedures for postendorsement underwriting reviews
of multifamily and healthcare loans (finding 1).
12
APPENDIX
The Assistant Secretary for Housing-Federal Housing Commissioner informed us by email that
she agreed with the draft report as revised to address concerns raised by her and her staff at the
exit conference and that she had no written comments for use to include in the final report.
13
The Office of Housing Had Not Fully Developed Formal Risk Based Procedures for Postendorsement Underwriting Reviews of Multifamily and Healthcare Loans
Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-05-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)