The U.S. Department of Housing and Urban Development, Office of Inspector General audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of Federal Housing Administration (FHA)-insured loans. We initiated the audit as part of the activities in our 2011 annual audit plan and strategic plan. Our audit objective was to determine whether HUD had adequate oversight of lenders’ compliance with FHA’s underwriting requirements.

HUD generally had adequate oversight of lenders’ compliance in underwriting FHA-insured loans. Its Processing and Underwriting and Quality Assurance Divisions appropriately identified lenders’ underwriting deficiencies and initiated appropriate corrective actions, with the exception of two out of the 18 loans reviewed by its Quality Assurance Division. For these loans, HUD’s Quality Assurance Division did not (1) require the lender to correct an error that it identified during a review for one loan or (2) identify a material underwriting deficiency for the other. The weaknesses occurred because HUD did not adequately oversee the quality assurance loan file review process. As a result, HUD incurred losses totaling $280,107 on the disposal of the associated properties.

We recommend that the Deputy Assistant Secretary for Single Family Housing require the Office of Single Family Housing to (1) determine whether FHA loan number 095-1259735 was covered under the settlement with Flagstar Bank FSB, (2) ask the lender to provide adequate supporting documentation for FHA case number 541-8917153 to show that the two remaining borrowers were eligible, using credit-qualifying streamline refinancing, or reimburse HUD for $89,052 for the actual loss incurred on the disposal of the associated property; and (3) improve its existing policies and procedures to address the issues identified in this report.