We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of property flipping as part of the activities in our fiscal year 2013 annual audit plan, which includes contributing to the protection of the integrity of housing insurance and guarantee programs.  Our audit objective was to determine whether HUD had adequate oversight of its property-flipping waiver.

HUD did not always (1) ensure that lenders complied with the additional underwriting conditions to be eligible for a waiver from its 90-day property-flipping regulation and (2) properly identify or track loans for 90-day property flips.  As a result of these deficiencies, the risk to FHA’s Mutual Mortgage Insurance Fund increased by more than $2.5 million.  Further, HUD lacked assurance of the accuracy of the property-flipping data, which provided the basis for its decision to extend the waiver through 2014.  We estimate that over the next year, if HUD does not implement our recommendations, the potential risk to the FHA Mutual Mortgage Insurance Fund will be nearly $274 million for properties not meeting eligibility requirements for a waiver of HUD’s property-flipping regulation.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require lenders to (1) support or indemnify HUD for any future losses on 12 loans with an estimated loss of $1 million (2) indemnify HUD for any future losses on 16 loans with an estimated loss of $1.5 million.  We also recommend that HUD (1) discontinue the waiver or strengthen its controls over its property-flipping waiver requirements and (2) issue clarification on the criteria for determining a loan’s sales contract date and a property’s resale date to ensure consistent and accurate application by lenders.