oversight

HUD Did Not Always Identify and Collect Partial Claims Out of Surplus Proceeds From Nonconveyance Foreclosures

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-09-20.

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

     U.S. Department of Housing and
   Urban Development, Office of Single
            Family Housing
    Surplus Proceeds From Nonconveyance Foreclosures




Office of Audit, Region 7     Audit Report Number: 2018-KC-0004
Kansas City, KS                               September 20, 2018
To:            Gisele Roget, Deputy Assistant Secretary for Single Family Housing, HU

               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
Subject:       HUD Did Not Always Identify and Collect Partial Claims Out of Surplus
               Foreclosure Proceeds




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of HUD’s identification and collection of surplus
foreclosure proceeds to offset outstanding partial claims.
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 8M, requires that OIG post its
publicly available reports on the OIG website. 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
913-551-5870.
                    Audit Report Number: 2018-KC-0004
                    Date: September 20, 2018

                    HUD Did Not Always Identify and Collect Partial Claims Out of Surplus
                    Foreclosure Proceeds



Highlights

What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD) efforts in
recovering partial claims from surplus foreclosure proceeds. We initiated this audit because we
learned while doing unrelated audit work that a trustee attorney held surplus proceeds from two
nonconveyance foreclosures and HUD had not claimed these funds to offset earlier partial claims
it had paid for the properties. Our audit objective was determine whether HUD identified and
collected outstanding partial claims out of surplus proceeds from nonconveyance foreclosures.

What We Found
HUD did not always identify and collect partial claims out of surplus proceeds from
nonconveyance foreclosures. Of the 81 foreclosures reviewed, 32 had nearly $768,000 in
surplus proceeds that HUD did not recover. As a result, HUD’s insurance fund did not receive
the benefit of nearly $6.8 million, various third parties benefited at HUD’s expense, and the
unclaimed funds sat dormant with the custodians.

What We Recommend
We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing (1) pursue
the collection of $5.7 million in surplus proceeds that HUD is entitled to reclaim from 2017 loan
terminations, (2) implement a policy to require servicers to send surplus proceeds notifications to
HUD’s national loan-servicing contractor and establish procedures to improve HUD’s surplus
proceeds collection efforts, and (3) redesign the partial claim program to eliminate its
weaknesses to put $6.8 million to better use.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: HUD Did Not Always Identify and Collect Partial Claims Out of Surplus
         Foreclosure Proceeds ........................................................................................................ 4

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................10
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 10

         B. Auditee Comments ................................................................................................... 11

         C. Unrecovered Surplus Proceeds ................................................................................ 12

         D. Sampling and Projections......................................................................................... 13




                                                                  2
Background and Objective
The Federal Housing Administration (FHA) provides mortgage insurance for loans made by
FHA-approved lenders throughout the United States and its territories. FHA mortgage insurance
protects lenders against losses from homeowners defaulting on their mortgage loans. If a
property is foreclosed upon and the lender is the winning bidder at the foreclosure sale, the
lender will generally convey the property to FHA, which pays a claim to make the lender whole.
A claim without conveyance of title is a procedure under which the lender attempts to secure a
third-party purchaser for the mortgaged property so that conveyance to HUD is not required in
exchange for mortgage insurance benefits. However, if a third party is the winning bidder and
the lender has been made whole by the sales proceeds, there is no need for FHA to pay a claim.
Loss mitigation is critical to FHA because it helps borrowers in default keep their homes while
reducing the economic impact on the insurance fund. The FHA partial claim is a loss mitigation
tool that helps borrowers keep their homes by advancing funds on behalf of the borrowers to
reinstate delinquent FHA-insured mortgages. The borrowers execute promissory notes and
mortgages payable to the U.S. Department of Housing and Urban Development (HUD) when
they accept the advances. A partial claim note does not accrue interest and is not due and
payable until the related first mortgage has been paid off, has matured, or has been refinanced
with a non-FHA-insured mortgage or the borrower sells the property. It is used to write down
the mortgage balance and is recorded as a junior lien against the property in favor of HUD.
HUD has paid more than 640,000 partial claims since the program began in 1997.
HUD’s National Servicing Center helps FHA homeowners by working with lenders to
administer the Loss Mitigation program. The National Servicing Center contracts the servicing,
collecting, and managing of partial claims to its national loan-servicing contractor. Partial claim
notes become due and payable when their related FHA-insured mortgages are terminated.
FHA mortgages are sometimes terminated in foreclosure. Surplus proceeds may exist when a
foreclosed-on property is sold to a third party for more than the outstanding balance of the
mortgage. Rising real estate values create an environment in which lenders can foreclose on
properties and sell them above the mortgage balance, which is more likely when a mortgage has
been previously reduced by a partial claim. Surplus proceeds remaining after the first mortgage
is satisfied are generally held by the foreclosure trustee or local clerk of the court and disbursed
to satisfy junior lien holders. In the case of an FHA partial claim, HUD is a junior lien holder
entitled to those surplus funds. The claim and disbursement processes are governed by State law
and, therefore, vary by jurisdiction. In all cases, lien holders have to file a claim with the
appropriate entity to receive their portion of the surplus as these funds are not automatically
disbursed. The funds are then disbursed based on lien priority. If no lien holder claims are
submitted, the funds may be deposited with the State unclaimed funds office after a certain
period or claimed by the foreclosed-on homeowners.
Our audit objective was determine whether HUD identified and collected outstanding partial
claims out of surplus proceeds from nonconveyance foreclosures.


                                                  3
Results of Audit

Finding: HUD Did Not Always Identify and Collect Partial Claims
Out of Surplus Foreclosure Proceeds
HUD did not always identify and collect partial claims out of surplus proceeds from
nonconveyance foreclosures. This condition occurred because HUD lacked a policy enabling it
to identify surplus funds, HUD had inadequate procedures to claim surplus funds, and the partial
claim program as designed did not always adequately protect HUD’s interests. As a result,
HUD’s insurance fund did not receive the benefit of nearly $6.8 million, various third parties
benefited at HUD’s expense, and the unclaimed funds sat dormant with the custodians.
HUD Did Not Identify and Collect Surplus Proceeds
HUD did not always identify and collect partial claims out of surplus proceeds from
nonconveyance foreclosures. Of the 81 foreclosures reviewed, 32 had nearly $768,000 in
surplus proceeds that HUD did not recover (appendix C). We project that HUD failed to recover
surplus proceeds from 353 properties with insurance that terminated in 2017 (appendix D).
HUD did not always identify surplus proceeds from the sale of foreclosed-on properties. While
HUD received foreclosure notifications, it had no way of identifying which foreclosures would
generate surplus proceeds as only a small portion of the foreclosures did so. After the
foreclosures, the trustees or courts in jurisdictions across the country did not always send
notifications of surplus proceeds to HUD, and when they did, notifications varied regarding
where they were sent and what information they contained. When HUD did not receive
notification, it was not aware of the existence of surplus proceeds that it could claim to offset
outstanding partial claims.
HUD did not always collect surplus proceeds from the relevant courts or trustees. In some
instances, HUD was aware of the existence of surplus proceeds but failed to collect the funds. In
one case, an attorney filed for and received surplus proceeds on behalf of HUD, but HUD did not
obtain the funds. HUD was not aware that the attorney had received the funds on its behalf. In
another case, a company offered to claim surplus proceeds on HUD’s behalf for a fee. HUD
declined to engage the company and did not attempt to collect the funds itself.
HUD Had Inadequate Controls To Protect Its Interests
HUD lacked a policy enabling it to identify surplus funds, it had inadequate procedures to claim
surplus funds, and the partial claim program as designed did not always adequately protect its
interests.
HUD lacked a policy enabling it to identify surplus proceeds from foreclosure sales. It did not
require mortgage servicers to notify it of surplus proceeds when insured properties underwent
nonconveyance foreclosures and the associated properties were sold for more than the mortgage
balances. HUD could have identified surplus proceeds to be claimed if it had required servicers
to submit specific information about surplus proceeds to a specified address. Such a policy could


                                                 4
have required submission of information needed by HUD to claim the surplus proceeds and
prescribed penalties for noncompliance. Without such a requirement, HUD had to rely on
various third parties for surplus proceeds notifications, which varied based on State laws and
trustee practices. Courts and trustees sent notification letters to various addresses, including the
local United States Attorney’s offices or HUD headquarters. HUD’s national loan-servicing
contractor did not always receive these notifications of surplus proceeds.
HUD had inadequate procedures to ensure that it pursued collection of surplus proceeds. The
national loan-servicing contractor’s loan-servicing guide required it to diligently pursue the
collection of all surplus funds to augment any losses that typically occurred from the foreclosure
of the first lien by completing all documentation required to obtain those funds in a timely
manner. However, in cases in which surplus proceeds were deposited with court systems,
HUD’s contractor was unable to file for the surplus proceeds directly and had to rely on HUD’s
Office of General Counsel or a finder firm. HUD did not have a procedure to ensure that it
referred surplus proceeds cases, received from finder firms that it declined to hire, to the Office
of General Counsel for processing. HUD also lacked a procedure for following up on finder
firms that it hired to ensure that they remitted the required surplus proceeds amount.
HUD’s collection efforts were hampered by the design of the partial claim program. When a
borrower received a partial claim to pay down the principal mortgage amount, the amount of the
partial claim became a junior lien without priority over any other liens that existed when the
partial claim was recorded. In essence, the partial claim amount was moved from first priority in
the mortgage to an inferior lien position. The partial claims were not serviced by the FHA loan
servicer, so the FHA loan servicer did not make a claim on HUD’s behalf when the associated
property was sold in a foreclosure sale. However, the FHA loan servicer had the information
needed to make the claim for the partial claim and remit the funds to HUD. Junior liens were not
included in the loan payoff of the first mortgage or foreclosure judgments and required a separate
claim process from the first mortgage, which hindered collection efforts.
HUD Did Not Receive $6.8 Million in Surplus Proceeds
HUD’s insurance fund did not receive the benefit of nearly $6.8 million, various third parties
benefited at HUD’s expense, and the unclaimed funds sat dormant with the custodians.
As the partial claim program is currently structured, HUD could have claimed only $5.7 million
of the $6.8 million. HUD’s insurance fund did not receive the benefit of $5.7 million that it
could have collected under the current structure of the partial claim program. For the sample
loans, HUD could have collected more than $643,000 if it had immediately claimed the surplus
foreclosure proceeds. This figure was calculated after deducting amounts due to higher priority
lien holders. For all loans terminated in 2017, we estimated that HUD could have collected
nearly $5.7 million in surplus proceeds if it had claimed the funds (appendix D).
Junior lien holders with higher priority benefited at HUD’s expense as their claims were paid
before HUD’s, exhausting the surplus proceeds. We identified seven sample items for which
HUD received or might receive less of the surplus proceeds due to other lien holders’ claims on
the funds. In one case, there was a surplus of $101,225, but HUD received only $57,695 to
satisfy $129,535 in outstanding partial claims. In another case, a superior lien holder received all
of the $15,578 in surplus proceeds. If HUD had been able to receive the full amount of the


                                                  5
surplus it was entitled to reclaim for our sample, it would have received an additional $125,000.
For all loans terminated in 2017, we estimated that HUD could have collected nearly $6.8
million if the partial claim had not lost lien priority to a previously recorded lien.
Some foreclosed-on homeowners received the surplus funds at HUD’s expense. For nine
sampled items, the foreclosed-on homeowners received a total of nearly $200,000 in surplus
proceeds that HUD failed to claim. In one case in the State of Utah, the notification of surplus
funds was sent to HUD at 451 7th Street SW, Washington, DC 20410, but the contractor did not
receive it, and the borrower claimed the $31,649 surplus.
Finally, trustees, court systems and States held onto the surplus proceeds until they were
claimed. These entities held onto the funds, which HUD might never claim. In one of these
cases, the funds were deposited with the State of Virginia’s Unclaimed Property office in the
name of a trustee listed on the recorded partial claim mortgage. No other information, such as an
FHA case number, was listed to indicate that the funds were surplus proceeds from a foreclosure
sale that HUD was entitled to receive.
Conclusion
HUD did not always identify and collect partial claims out of surplus proceeds because it had
inadequate policies and procedures and the partial claim program as designed did not always
adequately protect its interests. As a result, HUD did not collect an estimated $5.7 million in
surplus proceeds from 2017 loan terminations and might not collect an additional $6.8 million
over the next year.
Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing

       1A.     Pursue the collection of the $5,690,000 in surplus proceeds that HUD was entitled
               to receive from 2017 loan terminations.
       1B.     Implement a policy to require servicers to send surplus proceeds notifications to
               the HUD Secretary-held assets servicing contractor and establish procedures to
               improve HUD’s surplus proceeds collection efforts.
       1C.     Redesign the partial claim program to eliminate its weaknesses and ensure that
               partial claims benefit from a stronger lien position to put $6,770,000 to better use.




                                                 6
Scope and Methodology
To accomplish our objective, we

   interviewed HUD and loan-servicing contractor personnel;
   reviewed Federal regulations, HUD handbooks, and mortgagee letters;
   selected and reviewed a sample of loans for which insurance coverage was terminated in
    HUD’s Single Family Data Warehouse without an insurance claim being paid; and
   reviewed sample documentation from lenders, trustees, and court systems.

We performed our audit between January and July 2018. Our audit generally covered January 1
through December 31, 2017. We conducted onsite work at HUD headquarters at 451 7th Street
SW, Washington, DC; HUD’s National Servicing Center at 301 Northwest 6th Street, Suite 200,
Oklahoma City, OK; and HUD’s national loan-servicing contractor’s office at 2401 Northwest
23rd Street, Suite 1A1, Oklahoma City, OK.
The Single Family Data Warehouse is a large and extensive collection of database tables,
organized and dedicated to support the analysis, verification, and publication of single-family
housing data. Using this system, we identified 1,184 loans with 1,267 partial claims that totaled
more than $35.8 million. These loans were terminated during calendar year 2017 without
insurance claims and were coded as third-party sales or nonconveyance foreclosures. We
reviewed a sample of 81 of those loans with more than $3.1 million in partial claims. This
sample included 75 statistically selected loans plus 6 loans that were excluded from the statistical
universe as outliers. See appendix D for a detailed explanation of our sample selection and
results projection. 
For each loan in our sample, we requested from the lenders documentation of evidence of the
amount paid by the third-party purchaser, the total loan payoff amount, evidence showing payoff
of partial claims, evidence of the existence of surplus proceeds, evidence of the disposition of
surplus proceeds, title search documents, contact information for the attorney or trustee firm that
handled the foreclosure sale, the court jurisdiction that handled the foreclosure sale, and any
communications with HUD related to this loan. When the lenders provided insufficient
information, we contacted various court systems and trustee attorneys for additional information.
We reviewed this information to determine whether there were surplus proceeds generated from
the foreclosure sale that HUD did not claim.
We also obtained the current status of the partial claims in our audit universe from HUD’s
Single-Family Mortgage Asset Recovery Technology System. This is HUD’s comprehensive
loan-servicing system used for analyzing, processing, and tracking FHA-insured mortgage loan-
servicing functions. We used this information to determine the stage in the collection process for
each partial claim in our sample.
We relied in part on data maintained by HUD in its Single Family Data Warehouse database.
Specifically, we relied on the data to identify loans with insurance coverage terminated during
our audit period. Although we did not perform a detailed assessment of the reliability of the


                                                 7
data, we verified the fields used to determine our sample universe against documentary evidence
supplied by the lenders for our 81 sampled loans. Based on the work performed, we determined
that the computer-processed data were sufficiently reliable for the purposes of this report.
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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                8
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:

   Controls to ensure that HUD identifies and collects outstanding partial claims out of surplus
    proceeds from nonconveyance foreclosures.
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:

    HUD did not have policies and procedures in effect to identify and collect surplus
    foreclosure proceeds to offset partial claims.




                                                  9
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use
                Recommendation                     Funds to be put
                                    Ineligible 1/  to better use 2/
                     number
                         1A             $5,690,000
                         1C                                $6,770,000

                        Totals            5,690,000          6,770,000



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations. In this instance, HUD is entitled to the surplus proceeds from
     loans terminated in 2017 and needs to collect them. We have categorized them as
     ineligible costs because it is money due to HUD and not eligible to be retained by others.
2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this case, if HUD implements our recommendations, it
     will ensure that it receives its portion of available surplus proceeds.




                                              10
Appendix B
                                    Auditee Comments


The Office of Single Family Housing informed us that HUD did not wish to provide written
comments to include in the final report.




                                              11
  Appendix C
                                       Unrecovered Surplus Proceeds
Count Case #             Partial        Unrecovered         Unrecovered               State     Holder at time of
                         claim          surplus             surplus proceeds                    sample selection
                         amount         proceeds            adjusted for liens*
  1      023-4086549        28,432            27,402                 27,402             AZ            Finder firm
  2      023-5339837        51,087            51,087                51,087              AZ           Court system
  3      052-1406691        31,811            31,811                31,811              CO             Borrower
  4      052-5576508        53,357            47,385                50,493              CO       Borrower-lien holder
  5      091-3786904        23,505              53                     53               FL           Court system
  6      093-7724075        30,038            30,038                30,038              FL             Borrower
  7      095-1431593        26,000            3,563                  3,563              FL            Lien holder
  8      105-1563057        27,486            4,139                  24,395             GA              Trustee
  9      105-5361020        26,878            26,878                 26,878             GA              Trustee
 10      105-7104047        90,546            27,130                 27,130             GA             Servicer
11**     197-3738981        123,906           11,040                 21,015             CA       Borrowers-lien holder
12**     197-4158964        129,535           57,695                101,225             CA              Trustee
 13      264-0368086        49,561            25,000                25,000              MI       Sheriff’s department
 14      321-1863383        13,564             101                    101               NE             Borrower
 15      332-4882614        22,500            22,500                22,500              NV             Borrower
 16      341-1000319        79,436            21,688                 21,688             NH              Trustee
 17      387-0451596        21,655            21,655                 21,655             NC           Court system
 18      387-0665726        15,767            7,468                  7,468              NC           Court system
 19      492-4847316        12,540            12,540                 12,540             TX              Trustee
 20      492-8362967        40,897            24,342                 24,342             TX              Trustee
 21      492-9114500         6,105            6,105                  6,105              TX             Borrower
 22      493-6948677        24,430            24,430                 24,430             TX            Borrowers
 23      493-8204173        38,221             148                    148               TX            Lien holder
 24      493-8409709         4,959            4,959                  4,959              TX              Trustee
 25      521-8001584        24,985            24,985                24,985              UT             Borrower
 26      541-5966228        34,314            5,799                  34,082             VA              Trustee
 27      544-0242937        39,987            2,305                  2,305              VA        Unclaimed Property
 28      544-0871741        37,575              0                    4,042              VA            Lien holder
29**     561-9675049        164,399           44,736                 44,736             WA           Court system
 30      562-1963897        35,378              0                    15,578             WA            Lien holder
 31      566-1033095        105,040           48,633                 48,633             WA           Court system
 32      591-1051546        46,235            27,601                 27,601             WY              Trustee
Total                     1,460,129          643,216                767,988
  *This column shows the amount adjusted upward to what HUD could have claimed absent pre-existing liens.
  **Selected as part of the 100 percent sample of six outliers. The other items were statistically selected.



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Appendix D
                                           Sampling and Projections


Our sampling objective was to determine whether there were surplus proceeds from
nonconveyance foreclosures that HUD failed to claim to offset its balance of partial claims
secondary loans. Our sampling universe consisted of 1,178 mortgages, which had been restored
at least once by secondary loans known as “partial claims” but were later reported as ending in
third-party sales or nonconveyance foreclosures and terminated in HUD’s insurance system in
calendar year 2017. The total amount of partial claims on these loans was more than $35
million. Six mortgages from 2017, which had partial claim amounts in excess of $112,000, were
omitted as outliers and were not
included in the counts above.                                Sample design
To control for variance, we stratified                     Strata            Universe      Samples        Wts.
on the amount of the partial claim.
Loans were sorted and ranked by dollar             0-10pct                       118           7          16.857
value and then stratified in eight                 10-20pct                      117           7          16.714
groups according to percentile points              20-30pct                      118           8          14.750
along this continuum.                              30-50pct                      236           15         15.733
                                                   50-70pct                      235           15         15.667
We validated the sample design using
                                                   70-90pct                      236           15         15.733
replicated sampling (computer
                                                   90-95pct                       59           4          14.750
simulations) across several audit
                                                   95-100pct                     59            4          14.750
scenarios. A sample size of 75 was
found to be sufficient.1                                   Totals               1,178          75

Based on the design, we selected a statistical sample using the surveyselect procedure in SAS®,
a widely used statistical software package. Using the selected sample, the audit team acquired
records from the relevant loan servicers, as well as court systems and attorneys as needed in
certain cases. The audit team examined records to determine whether there were surplus
proceeds, which HUD could have recovered to repay its outstanding partial claims loans.
The team determined whether HUD failed to recover the available surplus proceeds, the current
status of the surplus proceeds, and how much HUD could have expected to receive. The team
determined two amounts for each failure: (1) the amount HUD could have expected to receive if
it had filed for the surplus and (2) the amount HUD could have expected to receive if the partial
claim had not lost lien priority to a previously recorded lien.
Percentages, counts, and average dollar amounts were estimated and projected to the universe as
a whole. Because all randomly selected samples are subject to “the luck of the draw,” we

1
    During execution of the audit, one of the 75 was untraceable with respect to the dispensation of foreclosure
     proceeds due to rare circumstances. This sample item (case number 221-1756769) was replaced with a spare,
     which had been selected for that possibility along with the original sample.




                                                          13
calculated a margin of error for each type of measure and made a final projection on that basis.
This was done by computing the mean and standard error of the percentages and dollar amounts
using the means estimating procedure (surveymeans) and counts estimating procedures
(surveyfreq) in SAS®. Variances were calculated using a Taylor series. We used the traditional
formulas for estimating the lower bounds (LCL) of counts and dollar amounts as noted below:

                     = N (pct -     /      %)     

                        = N(µ -     /      $)   + individual outlier cases

In auditing the 75 mortgage terminations, we found leftover partial claims funds, which HUD
was entitled to reclaim, in 27 of the 75 loans in our sample. We also found cases in which HUD
was not protected as a first-priority lien holder, and if the program had been designed to ensure
that HUD remained a first-position debtor, HUD could have collected funds on 29 of the 75
loans in the sample. Applied to the 1,178 loans in our universe, which had partial claims, we can
say the following things2with a one-sided confidence interval of 95 percent:
HUD Missed the Opportunity To Recover Significant Funds, Which Could Have Been
Used To Pay Off Outstanding Debts From Unpaid Partial Claims Loans
Even after deducting a margin of error, we can say that HUD failed to recover at least $5.69
million in unrecovered surplus proceeds, which were owed on partial claims secondary loans.
These problems affected at least 321 loans.
Our calculations are shown below:
(35.87% - 1.668 X 5.15%) x N = 27.3% x N ≈ 321 loans with unrecovered surplus

(6986.1 - 1.668 X 1345.9) x N = 4741.29 x N + $113,472 ii = $5,690,000 unrecovered surplus proceeds

If the program had been adequately designed to protect HUD as the first-priority lien holder, we
could say that HUD had failed to recover at least $6.77 million in unrecovered surplus proceeds,
which were owed on partial claims’ secondary loans. These problems affected at least 353 loans.
Our calculations are shown below:
(38.53% - 1.668 X 5.12%) x N = 30% x N ≈ 353 loans with unrecovered surplus

(7934.1 - 1.668 X 1393.8) x N = 5609.31 x N + $166,977 = 6,770,000 unrecovered surplus proceeds




ii
     Six loans were removed from the statistically projectable universe as individual outlier cases due to their large size.
       These loans were audited separately from the audit sample. While these loans did not add significant amounts to
       the projected totals, they did add some, and the total unrecovered funds from these six loans were added to the
       statistically projected totals. These loans added $113,472 to the statistical projection in one case and $166,977 in
       the other. We did not add the results from these six loans to the projected counts because their impact on the
       percentages would be minimal and the additional effect was overpowered by other sources of uncertainty, such
       as how well the Gaussian treatment of percentages mimics a hypergeometric calculation of the true percentages.



                                                               14
Because our sample period covered an entire year, we can say that these findings represent $5.69
million per year that HUD loaned under the partial claims program, which could have been
recovered and put to better use. Accounting for the failure to protect first-priority status as a lien
holder, this number becomes $6.77 million per year.




                                                   15