We audited the Virginia Housing Development Authority’s implementation of the U.S. Department of Housing and Urban Development’s (HUD) Loss Mitigation program for loans insured by the Federal Housing Administration (FHA).  We conducted the audit because the Authority had the largest active portfolio and the largest number of delinquent loans for servicers located in Virginia as of October 31, 2014.  Our objectives were to determine whether the Authority (1) properly implemented HUD’s Loss Mitigation program, (2) properly initiated foreclosures without using loss mitigation, (3) complied with HUD reporting requirements, and (4) developed and implemented its quality control program in accordance with HUD requirements.

The Authority did not always accurately report its servicing actions in HUD’s Single Family Default Monitoring system.  Of the 26 loans reviewed, 10 contained an improper status code.  This condition occurred because the Authority’s automated system was incorrectly programed, which triggered the inaccurate status code.  The Authority also lacked a control to ensure that accurate status codes were reported in HUD’s system.  As a result, HUD was unable to assess the effectiveness of the Authority’s servicing activities and the potential risk to the FHA insurance fund.  The Authority initiated corrective action during the audit to address this problem.  It replaced its automated system and implemented an additional control.  Additionally, the Authority properly implemented HUD’s Loss Mitigation program and properly initiated foreclosures without using loss mitigation for the 26 loans reviewed, and it generally developed and implemented a quality control program in accordance with HUD requirements.

We recommend that HUD require the Authority to provide verification that it has taken appropriate action to correct its erroneous reporting of the “loss mitigation option failure” status code in HUD’s Single Family Default Monitoring system.