We audited the risk to the U.S. Department of Housing and Urban Development’s (HUD) General Insurance-Special Risk Insurance (GI-SRI) Fund based on our ongoing effort regarding HUD-insured Section 232 mortgages.  Our objective was to determine whether HUD used financial and credit history variables for its cash flow model used to estimate and reestimate the credit subsidy for the cohorts of mortgages within the Section 232 program.

HUD did not use financial and credit history variables for its cash flow model used to estimate and reestimate the credit subsidy for the cohorts of mortgages within the Section 232 program because of a lack of reliable and sufficient financial data in HUD’s systems.  However, financial data was available from the U.S. Department of Health and Human Services that HUD could have possibly used to develop financial and credit history variables for its cash flow model.  Federal requirements state that agencies must accumulate sufficient relevant and reliable data on which to base cash flow projections and should prepare all estimates and reestimates based on the best available data.  As a result, HUD may not have complied with Federal requirements in estimating and reestimating the credit subsidy.  Further, we were not able to determine the impact of HUD not using financial and credit history variables for the cash flow model.  By using financial and credit history data, HUD could potentially improve its cash flow model to obtain more accurate initial estimates and reestimates of the credit subsidy.

We recommend that HUD continue testing the financial and credit history variables, including default data, and include the appropriate variables for the cash flow model used to estimate and reestimate the credit subsidy for the cohorts of mortgages within the Section 232 program.