U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
OFFICE OF INSPECTOR GENERAL
March 17, 2016
MEMORANDUM NO:
2016-KC-0801
Memorandum
TO: Kathleen Zadareky
Deputy Assistant Secretary, Single Family Housing, HU
//signed//
FROM: Ronald J. Hosking
Regional Inspector General for Audit, Denver Region, 8AGA
SUBJECT: FHA Approved Nonprofits Purchasing Real Estate-Owned Homes
INTRODUCTION
We audited the U.S. Department of Housing and Urban Development’s (HUD) rules and
requirements pertaining to nonprofits purchasing real estate-owned (REO) homes during the
exclusive listing period. Our objective was to determine whether HUD had adequate
requirements to prevent nonprofits from acting as investors while purchasing REO homes during
the exclusive listing period. We concluded that HUD did not have adequate requirements in
place to prevent nonprofits from acting as investors while purchasing REO homes during the
exclusive listing period. This deficiency gave nonprofit investors an unfair advantage over
legitimate investors by giving them the first opportunity to purchase REO properties.
We conducted this audit based on information found during an audit of a nonprofit that
purchased homes during the exclusive listing period (2015-DE-1801). In that audit, we reported
that the nonprofit purchased REO homes during the exclusive listing period and then sold those
homes to other than low-income buyers. We concluded that the nonprofit acted as an investor
when it purchased the properties, giving it an unfair advantage over other investors. However,
we also concluded that it did not violate HUD requirements because the requirements did not
explicitly prohibit nonprofits from acting as investors during the exclusive listing period.
METHODOLOGY AND SCOPE
For the purpose of this audit, we relied on testing from our audit of the nonprofit and did not
conduct additional testing. We based our conclusions on that testing and additional interviews
and discussions. During this audit, we met with various HUD program officials to discuss the
findings from the nonprofit audit and options for correcting the issue. We held additional
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meetings over the course of the audit with HUD and HUD Office of Inspector General officials
to clarify HUD’s policy on nonprofits purchasing properties during the exclusive listing period.
BACKGROUND
The HUD Single Family Property Disposition Program is designed to dispose of REO properties
in a manner that expands home-ownership opportunities, strengthens neighborhoods and
communities, and ensures a maximum return to mortgage insurance funds. Under this program,
nonprofit organizations are eligible to purchase REO properties. The following generally
explains how different types of buyers may participate during the four listing periods of the
program. The listing periods are shown in the chronological order by which HUD allows various
buyers to participate in purchasing REO properties:
1. Lottery period: Any qualified potential owner-occupant may purchase insurable
properties;
2. Exclusive period: Through the direct sales program, approved nonprofits may
purchase properties at a discount of up to 30 percent for the purpose of reselling
the property to low-income buyers. Nonprofits may purchase properties without a
discount, but in that case, HUD regulations do not clearly restrict the resale to
low-income buyers. Investors are otherwise not able to purchase properties
during this period;
3. Extended period: Any potential buyer, including investors, may purchase
properties;
4. Dollar period: When properties do not sell during the previous periods, they may
be sold to government agencies for $1.
Regulations at 24 CFR (Code of Federal Regulations) Part 291 contain a definition of “private
nonprofit organizations,” which includes specific eligibility requirements (24 CFR 291.5(b)), and
includes nonprofit organizations in the definition of owner-occupants (24 CFR 291.202 (a)(2)),
Part 291 also provides various processes for purchase. One process is the direct sales program
(24 CFR 291.210), in which preapproved government agencies and nonprofit organizations may
directly acquire REO properties at a discount. The regulations note that HUD may limit the
number of direct sales to a given purchaser and there may be restrictions on resale to ensure
expanded affordable housing opportunities. Part 291 also contains a separate competitive sales
process (24 CFR 291.205), which does not provide a discount or reference postsale restrictions.
The competitive process provides that priority will be given to government entities and nonprofit
organizations over other owner-occupants. This process is also referred to as the exclusive
listing period.
Regulations at 24 CFR 200.194 state that HUD maintains a roster of nonprofit organizations
eligible to participate in certain Federal Housing Administration (FHA) activities. According to
24 CFR Chapter II, HUD recognizes a nonprofit as one that is on the approved roster and
complies with any requirements stated in a specific applicable provision of the single-family
regulations. Additionally, section 200.194 states that a nonprofit organization must submit an
application that specifies the FHA activities it proposes to carry out.
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HUD established guidelines for removal of a nonprofit organization from its approved FHA
roster. According to HUD regulations at 24 CFR 200.195, HUD may remove an organization
from the approved roster for failure to comply with applicable single-family regulations in
Chapter II, mortgagee letters, or other written instructions or standards issued by HUD; failure to
further all objectives described in the affordable housing program narrative; or misrepresentation
or fraudulent statements.
RESULTS OF REVIEW
Federal regulations do not contain adequate clarification to prevent nonprofits from having an
unfair advantage by acting as investors while purchasing REO homes without a discount during
the exclusive listing period. Single Family Property Disposition Program regulations designate
nonprofit agencies as owner-occupants, and the regulations do not specifically prohibit
nonprofits from acting as investors. As a result, nonprofits may potentially benefit from their
status and purchase homes during the exclusive listing period ahead of eligible investors.
Federal Regulations Do Not Contain Adequate Clarification
Nonprofits are required to resell properties to low-income buyers when they purchase those
properties at a discount during the exclusive listing period. However, HUD does not have
adequate clarification in 24 CFR 291.210 and 24 CFR 200.194 to prevent nonprofits from acting
as investors while purchasing REO homes without a discount during the exclusive listing period
and potentially selling to other than low-income buyers.
Nonprofit Agencies Are Designated as Owner-Occupants
HUD’s Single Family Property Disposition Program labels nonprofit agencies as owner-
occupants and has regulations stating what may be done with a home purchased with a discount.
Specifically, the lack of clarification has made it possible for nonprofit agencies to take
advantage of their owner-occupant designation and act as investors when purchasing a home
without a discount. We met with HUD officials during this audit. They stated that this issue
needed resolution and it concerned them that these actions affected the discount sales program.
Nonprofits Should Not Act as Investors During the Exclusive Listing Period
It was not HUD’s intent for nonprofits to act as investors during the exclusive listing period,
regardless of whether the nonprofit purchased the property with or without a discount. This
practice gave nonprofit investors an unfair advantage over legitimate investors for the first
opportunity to purchase REO properties. Program officials agreed during our audit that changes
were needed to ensure that nonprofit agencies participating in its program would not be allowed
to act as investors when purchasing homes during the exclusive listing period.
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RECOMMENDATION
We recommend that the Deputy Assistant Secretary for Single Family Housing
1A. Develop and implement a policy or rule change that prevents nonprofit agencies from
acting as investors for homes purchased during the exclusive listing period, regardless of
whether the nonprofit purchased those homes at a discount.
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Appendix A
Auditee Comments
The HUD Office of Single Family Housing chose not to provide comments to the report.
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FHA Approved Nonprofits Purchasing Real Estate-Owned Homes
Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-03-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)