The U.S. Department of Housing and Urban Development’s (HUD) Office of Inspector General audited HUD’s oversight of the Federal Housing Administration (FHA)-insured home equity conversion mortgages (HECM) program. We initiated the audit as part of the activities in our 2008 annual audit plan. Our audit objective was to determine whether HUD had adequate oversight of the underwriting of HECM loans. This is the second of two audit reports regarding HUD’s oversight of the program.

HUD’s Processing and Underwriting and Quality Assurance Divisions generally performed adequate reviews of loans insured under the program with the exception of four loans reviewed. For the four loans, HUD did not identify errors fully address underwriting deficiencies. Further, HUD did not maintain documentation to fully determine whether the appropriate parties were checked against the General Service Administration’s excluded parties’ list system. General Service Administration’s excluded parties list is a system that identifies those parties excluded from receiving federal contracts, certain subcontracts, and certain types of federal financial and nonfinancial assistance and benefits. As a result, HUD could benefit from improvements to its review processes to increase its assurance that lenders complied with the underwriting requirements for program loans.

We recommend that the Deputy Assistant Secretary for Single Family Housing require the Office of Single Family Housing to require the lender to reduce payments to the borrower or seek reimbursement for case number 431-4214046 for the $11,742 in excess of the borrower’s initial principal limit and provide documentation for case number 105-2935187 with maximum claim amounts totaling $70,000, showing that the borrower’s unacceptable rating has been resolved. If it is determined that the rating has not been resolved, the Office of Single Family Housing should seek indemnification for the life of the loan. The estimated risk to HUD for case number 105-2935187 is $37,294.

We also recommend that the Deputy Assistant Secretary for Single Family Housing require the Office of Single Family Housing to improve its existing procedures and controls for performing postendorsement technical and quality assurance reviews of program loans, to provide reasonable assurance that underwriting deficiencies will be detected, and require the lenders to reimburse the borrowers the $650 in fees charged for case numbers 412-5484306 and 412-5431355 that were deemed not customary and reasonable.