We audited the U.S. Department of Housing and Urban Development (HUD), Federal Housing Administration’s (FHA) Home Affordable Modification Program (HAMP) partial claim option because we noted issues in the postclaim review process during a previous partial claim audit.1 Our audit objective was to determine whether HUD had adequate controls over its postclaim reviews and adequate policies in place to ensure that servicers properly understood the FHA-HAMP partial claim option.

HUD did not have an effective postclaim review function and did not have clear program guidance in place for the FHA-HAMP partial claim option. As a result, HUD overpaid at least $177 million in partial claim notes due to servicer miscalculations, which affected at least 21,200 loans. Without additional controls, HUD will continue to overpay approximately $88.5 million per year. In addition, HUD’s policies allowed servicers to determine partial claim amounts in different ways, which resulted in some claims that were higher than necessary. This condition occurred because HUD and its contractor did not produce quality postclaim review reports in a timely manner and HUD lacked attention to detail concerning FHA-HAMP.

We recommend that HUD (1) assign the necessary administrative resources and oversight to reduce potential losses of $88.5 million per year for ineligible FHA-HAMP claim amounts that may go undetected, (2) require servicers to repay HUD $414,673 in ineligible partial claim amounts, (3) require servicers to provide support or repay $94,120 in partial claim amounts, (4) provide training to HUD staff and its contractor on all loss mitigation programs, (5) review a sample of postclaim reviews submitted by the contractor to ensure that the contractor adequately identifies ineligible claims, and (6) update FHA-HAMP policies to ensure that all servicers apply policies consistently.