We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of safe water requirements for Federal Housing Administration (FHA)-insured loans nationwide.  We conducted the audit based on news reports that identified lead contamination in public water systems across the country and also because of an audit in which we found that HUD did not have adequate controls to ensure that FHA-insured properties located in Flint, MI, had safe water.   Our audit objective was to determine whether HUD provided sufficient guidance and oversight to ensure that properties approved for mortgage insurance had a continuing and sufficient supply of safe and potable water.

HUD did not provide sufficient guidance and oversight to ensure that properties approved for mortgage insurance had a continuing and sufficient supply of safe and potable water.  Of 49 loan files reviewed, from a universe of 1,432 properties connected to a public water supply for which a notice that it had lead contamination was issued to the public, none disclosed the contamination or contained evidence of water testing.  This condition occurred because HUD maintained that its existing policies and guidance sufficiently ensured that FHA-insured properties had a continuing and sufficient supply of safe and potable water.  HUD also lacked controls to determine whether appraisers notified lenders of properties in areas serviced by a public water system with unacceptable levels of contaminants.  As a result, HUD could be endorsing loans for properties with contaminants that affect families’ health.  Further, if property values decrease due to the water quality issues, both HUD and the homeowner face an increased risk of loss. 

We recommend that HUD direct the applicable lenders to provide evidence that the properties for 1,383 FHA-insured loans had a safe and potable water source, or that the appraisers had not notified them of the water quality issue on their appraisals.  If they cannot provide this evidence, direct them to perform water testing and any necessary remediation, or indemnify HUD against future loss.  We also recommend that HUD improve its guidance and implement policies and procedures to ensure compliance, thereby putting at least $238.1 million to better use.