The Inspector General of the Department of of Housing and Urban Development issued an audit of FHA’s Loss Mitigation Program (2014-KC-0004).  The Office of the Inspector General (the OIG) did the audit because of its “concern that FHA might have incurred costs while allowing lenders to make large amounts of money by modifying defaulted FHA-insured loans. Our audit objective was to determine the extent to which loans modified under the FHA program generated gains for the lenders.” (1)

The OIG found that

Lenders generated an estimated $428 million in gains from the sale of Government National Mortgage Association securities when modifying defaulted FHA loans in fiscal year 2013. These loan modifications were completed as part of FHA’s loss mitigation program. None of these lender generated gains were used to offset FHA’s insurance fund costs. As a result, FHA missed opportunities to strengthen its insurance fund. (1)

Given that the FHA had to be bailed out for the first time in its 80 year history, the findings of this audit are a bit heartbreaking, at least for a housing finance nerd like me.  $428 million would cover more than a quarter of the amount that Treasury had to advance to the FHA, no small potatoes.

The OIG found that the FHA “may have missed opportunities to strengthen its insurance fund. Lenders could be required to offset gains they obtained from the sale of securities for incentive fees and claims for modified loans that redefault.” (5)

The Auditee Comments and the OIG’s Evaluation of Auditee Comments make it clear that the extent of the gains had by lenders is very contested because the OIG did not “know the costs of the lenders.” (17) This seems like a pretty important missing piece of the story. Nonetheless, I hope that HUD, as the parent of both the FHA and Ginnie Mae, takes questions raised by this audit seriously to ensure that public monies are being put to their best use.