FHA Insured $940 Million in Loans for Properties in Flood Zones Without the Required Flood Insurance

The U.S. Department of Housing and Urban Development, Office of Inspector General, has completed its audit of Federal Housing Administration (FHA)-insured loans originated in calendar year 2019.  Our audit objective was to determine whether FHA insured loans that were not eligible for insurance because they did not have the required flood insurance coverage. We found FHA insured at least 3,870 loans that closed in 2019, totaling $940 million, which were not eligible for insurance because they were made for properties in flood zones without the required flood insurance coverage.  We found loans that had private flood insurance instead of the required national flood insurance program coverage, coverage that did not meet the minimum required amount, or no coverage at the time the loan was closed and endorsed.  We recommend that FHA require lenders to provide evidence of sufficient flood insurance or execute indemnification agreements for the 43 loans in our statistical sample that did not have sufficient flood insurance at the time of our audit.  We also recommend that FHA add to HUD databases the information necessary to ensure that the required flood insurance is in place at loan origination, including flood zone, flood insurance type, flood insurance amount, and site value of the property, and include system checks that prevent endorsement of loans without the required flood insurance.