The OIG has determined that the contents of this recommendation would not be appropriate for public disclosure and has therefore limited its distribution to selected officials.

Establish and implement an effective quality control process to prevent or detect model processing errors cited in our report and prevent other similar model processing errors in the future.

Reevaluate FHA’s existing model documentation for single-family, HECM, and multifamily models to determine whether their current state is acceptable, so that it provides the intended users a thorough understanding of how the model works and also allows new users to assume responsibility for the model’s use (operational procedures). Based on this review, FHA should make adjustments as needed to the model documentation. At a minimum, these adjustments should include appropriate actions taken to address model documentation deficiencies cited in our report.

Review FHA’s existing model coding for single-family, HECM, and multifamily models and make necessary changes to make them consistent with industry’s best practices in model coding. At a minimum, FHA should implement actions to address model coding deficiencies cited in our report.

Establish and implement policies and procedures for assessing and monitoring the reliability of the work performed by FHA’s modeling contractors.

Revisit the model’s ability to predict future performance of the single-family portfolio, based on our concerns expressed in this report regarding relationships of certain variables (such as loan-to-value ratio and FICO scores to prepayment) that are not consistent with our expectations. FHA should provide us an analysis to support its position if it believes that a model design change is not warranted.

Correct the impact of all the modeling errors that we identified in this report.

Ensure that the $270.7 million identified as invalid obligations in fiscal year 2017 is deobligated as appropriate.

Develop and implement policies, procedures, and controls to ensure that he obligation is recognized when the loan guarantee commitment or the direct loan obligation is made and the subsidy cost expense is recognized when the loan is endorsed for loan guarantees and when the loan is disbursed for direct loans.

Develop and implement a reconciliation process to ensure that the information in various systems is consistent for all accounting events.

Develop and implement (1) a methodology to estimate accrued liabilities for property contracts to account for expenses that had been incurred by contractors but not billed and (2) a process to ensure that an audit trail exists for identifying accruals in the general ledger.

Develop and implement policies and procedures to ensure that the reasonableness and appropriateness of the quarterly supplemental claims accrual estimation methodology is periodically reviewed.

Develop and implement policies, procedures, and controls to ensure that the reported current-year endorsements in HERMIT and SFHEDW agree with the current-year endorsements in CHUMS.

Strengthen existing internal control to ensure that amounts reported on the financial statements agree with the appropriate supporting documentation.

Restate the fiscal year 2016 financial statement notes to correct the inaccurate loan guarantee amounts reported by FHA.

Develop and implement procedures and controls to ensure that management reviews and approves changes in the reestimate workbook before they are implemented and maintains documentation to support the rationale for making changes in the reestimate workbook.

Correct the presentation error related to the allocation of reestimates in FHA’s fiscal year 2017 financial statements.

Assess whether prior-year financial statements need to be restated to correct the impact of the presentation error in the allocation of reestimates identified in fiscal year 2017.

We recommend that the Southwest Region Director of Multifamily Housing require Villa Main Apartments owner to repay HUD $534,741 for 39 subsidized units with ineligible “ghost” tenants.

We recommend that the Southwest Region Director of Multifamily Housing require Villa Main Apartments owner to provide support that the subsidized 43 units without annual physical inspections, without required EIV reports, or with missing files were eligible or repay HUD $1,095,364 for those subsidies.