The Federal Housing Administration insured too many mortgages in 2016, potentially costing taxpayers about $41 million, according to a new research report authored by Karan Kaul and Edward Golding for the Urban Institute.
The Office of the Inspector General at the U.S. Department of Housing and Urban Development released a report showing 9,507 mortgages, or $1.9 billion in mortgage volume, it should not have insured in 2016. This means taxpayers could pay about $41 million in losses.
As it turns out, there were two types of ineligible borrowers among these 9,507 loans:
Borrowers with delinquent federal debt: By law, the FHA can’t insure loans to borrowers with delinquent outstanding federal debt. However, the system the FHA uses to combat the risk is the Credit Alert Interactive Voice Response system, a database of ineligible borrowers developed in 1987.
Borrowers with delinquent child support payments: Federal regulation prevents the FHA from insuring borrowers with certain delinquent child support.
In order to find the 9,507 mortgages that were ineligible to be insured, the OIG cross-checked 1.8 million FHA borrowers with the Do Not Pay system, a collection of databases within the U.S. Department of the Treasury’s Bureau of Fiscal Service that contains information on federal debt and child support delinquencies.
The OIG estimates the ineligible loans had 90-day delinquency rates at twice the average for all FHA loans insured in 2016, and claim rates at three times the average.
But this didn’t have to happen. If HUD had been granted to funding it needed to upgrade its 30-year-old IT database, things would have turned out much differently. The FHA might have avoided insuring these ineligible loans.
The cost to upgrade the system? $30 million.
That’s how much HUD requested for fiscal year 2018 for the purpose of updating its IT systems. Even if HUD’s investment just fixed this one issue, it would more than pay for itself in the first year alone.
Back in March, HUD’s newly appointed Chief Financial Officer Irving Dennis announced that the agency is seriously lacking in three key areas which he uses to evaluate a company: people, process and technology.
He explained the bureau is in dire need of an update, and has plans to update its systems but will need additional funding from Congress.
And this isn’t the first time HUD has requested funding to update its systems. In fact, the Urban Institute report explained HUD has requested additional funding for many years to ensure the FHA has the resources it needs to carry out its mission.
The OIG suggested that the FHA rely on the Do Not Pay system to identify delinquent borrowers, which the FHA agreed to look at, after it secures funding to make updates and replace HUD’s CAIVRS system.