The U.S. Department of Housing and Urban Development’s (HUD), Office of Inspector General reviewed the Federal Housing Administration (FHA) Preforeclosure Sale Program. Our objective was to determine whether FHA paid claims for only preforeclosure sales that met the criteria for participation in the program.

We found that 61 of 80 statistically selected claims from September 1, 2010, through August 31, 2011 did not meet the criteria for participation in the Preforeclosure Sale Program. Of these ineligible claims, 55 were submitted by the five lenders involved in the national mortgage settlement. In exchange for roughly $25 billion, the settlement pardoned these lenders’ misconduct in loan servicing, including their processing of preforeclosure sale claims. The remaining six improper claims totaling $360,760 were submitted by lenders that were not involved in the national mortgage settlement.

By projecting our sample results, we estimate that HUD paid $1.06 billion in claims for 11,693 preforeclosure sales during our audit period that did not meet the criteria for participation in the program. While this amount of claims did not comply with HUD requirements, it does not represent a direct loss amount to the FHA insurance fund. The ultimate final cost to the FHA insurance fund would likely be less than this amount because it is reasonable to assume that at least some of these loans could have been processed differently and would have instead gone to foreclosure and become conveyance claims. However, it is also reasonable to assume that at least some of these loans would have resulted in no claim or reduced claims due to alternative loss mitigation procedures.

We recommend that HUD strengthen controls over the Preforeclosure Sale Program. We also recommend that HUD require lenders to reimburse the FHA insurance fund for improper claims.