The U.S. Department of Housing and Urban Development’s (HUD), Office of Inspector General reviewed HUD’s Federal Housing Administration (FHA) loss mitigation program.  We initiated this audit due to our concern that FHA might have incurred costs while allowing lenders to make large amounts of money by modifying defaulted FHA-insured loans.  Our audit objective was to determine the extent to which loans modified under the FHA program generated gains for the lenders.

We found that lenders generated an estimated $428 million in gains from the sale of Government National Mortgage Association securities when modifying defaulted FHA loans in fiscal year 2013.  These loan modifications were completed as part of FHA’s loss mitigation program.  None of these lender generated gains were used to offset FHA’s insurance fund costs.  As a result, FHA missed opportunities to strengthen its insurance fund.

We recommend that HUD perform a study of the loan modification program and evaluate whether any changes are needed to strengthen the insurance fund.