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entitled 'Recovery Act: Tax Debtors Have Received FHA Mortgage 
Insurance and First-Time Homebuyer Credits' which was released on June 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

May 2012: 

Recovery Act: 

Tax Debtors Have Received FHA Mortgage Insurance and First-Time 
Homebuyer Credits: 

GAO-12-592: 

GAO Highlights: 

Highlights of GAO-12-592, a report to congressional requesters. 

Why GAO Did This Study: 

Under a Recovery Act provision that increased mortgage insurance loan 
limits, FHA insured $20 billion in mortgages for 87,000 homeowners. 
The Recovery Act also provided for the awarding of an estimated $12 
billion of FTHBCs to 1.7 million individuals. GAO was asked to 
determine the (1) extent to which tax debtors benefited from the 
Recovery Act’s provisions for increased FHA loan limits and the FTHBC, 
and (2) challenges, if any, FHA faces in preventing ineligible tax 
debtors from receiving mortgage insurance. Using IRS and FHA data, GAO 
identified Recovery Act recipients and compared them to federal tax 
debtors as of June 30, 2010. GAO reviewed relevant policies and 
interviewed agency officials and lenders. GAO also reviewed detailed 
IRS and FHA documents for a nonrepresentative selection of 18 
individuals who received FHA mortgage insurance. These were selected 
based on a combination of factors, such as amount of taxes owed and 
number of delinquent tax periods. Due to data availability and other 
factors, GAO was able to completely evaluate only 8 of 18 individuals 
on their eligibility for FHA mortgage insurance. These cases cannot be 
generalized beyond those presented. 

What GAO Found: 

The Federal Housing Administration (FHA) insured over $1.44 billion in 
mortgages for 6,327 borrowers with $77.6 million in federal tax debt 
who benefited from the 2009 American Recovery and Reinvestment Act. Of 
these borrowers, 3,815 individuals claimed and received $27.4 million 
in Recovery Act First-Time Homebuyer Credits (FTHBC). This analysis 
includes tax debtors who (1) benefited from FHA’s increased loan 
limits, or (2) claimed the FTHBCs and received FHA mortgage insurance 
of any value. Federal policy makes delinquent tax debtors ineligible 
for FHA mortgage insurance unless they repay their debt or are in a 
valid repayment agreement with the Internal Revenue Service (IRS), but 
the FTHBC, like all tax credits, was available to those who qualified, 
regardless of their tax debt. GAO could not determine the proportion 
of borrowers who were ineligible for FHA insurance because GAO could 
not systematically identify which of the 6,327 borrowers were in valid 
repayment agreements using the data GAO received from IRS. However, 
GAO did find that 5 of the 8 borrowers completely evaluated were 
ineligible because they were not in valid repayment agreements at the 
time they obtained FHA mortgage insurance. In addition, GAO found that 
Recovery Act borrowers with unpaid taxes had foreclosure rates two to 
three times greater than borrowers without unpaid taxes, which 
potentially represents an increased risk to FHA. 

Some ineligible tax debtors received FHA mortgage insurance, in part, 
due to shortcomings in the capacity of FHA-required documentation to 
identify tax debts, and shortcomings in other policies that lenders 
may misinterpret. Lenders must perform steps to identify an 
applicant’s federal debt status, but sources commonly used, such as 
the loan application and credit report, do not reliably indicate an 
applicant’s tax debt. Statutory restrictions generally prohibit the 
disclosure of taxpayer information, such as tax debt, without the 
taxpayer’s consent. Lenders are already required to obtain such 
consent through an IRS form they use to validate the income of some 
applicants. This same form could also be used to obtain permission 
from applicants to obtain reliable tax-debt information directly from 
IRS, but doing so is not addressed in FHA policies. Requiring lenders 
to collect more reliable information on tax debts could better prevent 
ineligible tax debtors from obtaining FHA mortgage insurance. Further, 
FHA’s policies requiring lenders to investigate whether tax liens 
indicate unresolved tax debt are unclear and may be misinterpreted. 
The lenders GAO spoke with believed they were in compliance with FHA’s 
policies when they provided FHA-insured loans to applicants with tax 
liens and no repayment agreements, but FHA officials indicated 
otherwise. As a result of these shortcomings, lenders may approve 
federally insured mortgages for ineligible applicants with delinquent 
tax debt in violation of federal policies. 

What GAO Recommends: 

HUD should (1) consult with IRS to require lenders to collect more 
reliable tax debt information from applicants and (2) provide lenders 
with revised policies or guidance, including the consideration of tax 
liens, for approving FHA mortgage insurance. HUD agreed with the 
recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-12-592]. For more 
information, contact Greg Kutz at (202) 512-6722 or kutzg@gao.gov. 

Contents: 

Letter: 

Background: 

FHA Insured over $1.44 Billion in Mortgages for Thousands of Recovery 
Act Beneficiaries with Federal Tax Debt: 

Shortcomings in the Capacity of FHA-Required Documentation to Identify 
Tax Debts and in Certain Policies Allow Tax Debtors to Obtain Mortgage 
Insurance: 

Conclusion: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Excerpts of the Uniform Residential Loan Application: 

Appendix III: Comments from the Federal Housing Administration: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: Tax Debtors who Benefited from the Recovery Act Obtained 
$1.44 Billion in FHA Mortgage Insurance and $27.4 Million in FTHBCs: 

Figure 2: Serious Delinquency and Foreclosure Rates for Borrowers Who 
Received Increased FHA Mortgage Insurance under the Recovery Act with 
Tax Debt Compared to Borrowers without Tax Debt: 

Figure 3: Serious Delinquency and Foreclosure Rates for Borrowers with 
Tax Debt Who Claimed the FTHBC under The Recovery Act Compared to 
Borrowers without Tax Debt: 

Figure 4: Excerpt of IRS Form 4506-T: 

Figure 5: FHA Policy Excerpts on Tax Debt That Some Lenders 
Misinterpret: 

Figure 6: Liabilities Section of the Uniform Residential Loan 
Application: 

Figure 7: Declarations Section of the Uniform Residential Loan 
Application: 

Figure 8: Line on the Uniform Residential Loan Application Showing the 
Consequences of Making a False Statement: 

Abbreviations: 

CAIVRS: Credit Alert Interactive Voice Response System: 

CBO: Congressional Budget Office: 

ESA: Economic Stimulus Act: 

FHA: Federal Housing Administration: 

FTHBC: First-Time Homebuyer Credit: 

HAIA: Homebuyer Assistance and Improvement Act: 

HERA: Housing and Economic Recovery Act: 

HUD: Department of Housing and Urban Development: 

IRS: Internal Revenue Service: 

IVES: Income Verification Express Service: 

LI: Lender Insurance: 

MMIF: Mutual Mortgage Insurance Fund: 

OMB: Office of Management and Budget: 

SFDW: Single Family Data Warehouse: 

SSN: Social Security number: 

TIN: Taxpayer Identification Number: 

TOTAL: Technology Open to Approved Lenders: 

URLA: Uniform Residential Loan Application: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

May 29, 2012: 

Congressional Requesters: 

As of September 30, 2011, individuals, businesses, and other entities 
owed the U.S. government over $350 billion in known unpaid taxes, 
including interest and penalties, according to the Internal Revenue 
Service (IRS).[Footnote 1] Beyond this amount of known tax debt, the 
amount of unknown tax debts is substantial. This is because the 
inventory of tax debts excludes underreported amounts filed by 
taxpayers and taxes owed by taxpayers who do not file tax returns. 
[Footnote 2] Given the many challenges that IRS faces, the enforcement 
of the tax laws continues to be on our list of high-risk areas. 
[Footnote 3] We have previously reported that many individuals with 
tax debt take advantage of government programs, such as federal loan 
insurance, thereby reaping benefits from these programs while failing 
to pay their own taxes.[Footnote 4] 

The American Recovery and Reinvestment Act of 2009 included numerous 
provisions aimed at spurring economic activity and shoring up the 
declining housing market. Under a provision that increased the maximum 
loan limits for mortgage insurance in 2009, the Federal Housing 
Administration (FHA), part of the Department of Housing and Urban 
Development (HUD), insured more than $20 billion in mortgages for 
87,000 borrowers.[Footnote 5] In addition, as of July 3, 2010, over 
1.7 million individuals were awarded over $12 billion in First-Time 
Homebuyer Credits (FTHBC) under the Recovery Act for homes purchased 
in 2009, according to IRS.[Footnote 6],[Footnote 7] In this report, we 
refer to individuals who received either increased limits on their FHA 
mortgage insurance or the FTHBC in 2009 as Recovery Act beneficiaries. 

Federal policy makes delinquent tax debtors ineligible for FHA 
mortgage insurance at the time of application, unless they repaid the 
debt or were in a valid repayment agreement with IRS, while the FTHBC, 
like all tax credits, was available to those who qualified regardless 
of their tax debt. The Recovery Act made no exceptions to these 
federal policies. You asked us to review several issues concerning 
individuals with unpaid federal taxes who benefited from the Recovery 
Act. This is the second in a series of reports that respond to your 
request. In the first report, we identified thousands of Recovery Act 
contract and grant recipients that owed hundreds of millions of 
dollars in federal taxes.[Footnote 8] In this report, we determined 
the (1) extent to which tax debtors benefited from the Recovery Act's 
provisions for increased FHA loan limits and the FTHBC, and (2) 
challenges, if any, FHA faces in preventing ineligible tax debtors 
from receiving mortgage insurance. 

To determine the extent to which Recovery Act beneficiaries with 
unpaid tax debt benefited from the increased loan limits for FHA 
mortgage insurance or were awarded the FTHBC, we obtained and analyzed 
FHA mortgage insurance data as of September 2011, IRS data on FTHBC 
transactions as of July 2010,[Footnote 9] and IRS data on unpaid 
federal tax debts as of June 2010.[Footnote 10] The FHA data allowed 
us to identify all those who received FHA insurance under the Recovery 
Act's increased loan limits. However, limitations in the FTHBC data we 
received from IRS did not allow us to isolate all individuals who 
benefited from the FTHBC under the Recovery Act.[Footnote 11] To 
address this limitation, we used the FHA data to assist us in 
isolating FTHBCs awarded under the Recovery Act. As a result, we were 
unable to analyze any credits for individuals who did not use FHA 
mortgage insurance in the financing of their home, and therefore we 
estimate that our analysis included 43 percent of all FTHBCs awarded 
under the Recovery Act. Our analysis includes two groups: 

1. individuals who received FHA mortgage insurance under the higher 
limits authorized under the Recovery Act, and: 

2. individuals who received the FTHBC under the Recovery Act and 
obtained FHA mortgage insurance of any value. 

We electronically matched IRS tax debt data to these groups using 
Social Security numbers (SSN) as unique identifiers. We included only 
those individuals with tax debts of $100 or more from tax years 2008 
and earlier to eliminate small tax debts and debts that may involve 
matters that are routinely resolved between the taxpayers and IRS, 
with the taxes paid or abated within a short time. We excluded any 
debts that were assessed by IRS after the mortgage insurance was 
received because those debts would not have been included in IRS 
records at the time the mortgage insurance was issued. We determined 
that the data were sufficiently reliable to address the report's 
objectives by performing electronic testing on the data, speaking with 
agency officials, and reconciling data to published figures and source 
documents. 

To determine if FHA mortgage insurance was provided to ineligible 
individuals with unpaid federal tax debt, we identified a 
nonrepresentative selection of 18 individuals from the above analyses, 
who had federal tax debt and benefited from the Recovery Act, for 
detailed reviews. We selected these individuals based on a combination 
of (1) high amounts of unpaid federal taxes, (2) at least three 
delinquent tax periods,[Footnote 12] (3) an insured mortgage of at 
least $200,000, and (4) indications of IRS penalties or home 
foreclosures.[Footnote 13] We requested IRS notes, detailed account 
transcripts, and other records from IRS as well as mortgage files from 
FHA for these 18 individuals. Of these requested cases, FHA provided 
us information that allowed us to fully analyze 8.[Footnote 14], 
[Footnote 15] Although we did not receive complete information 
necessary to fully analyze the remaining cases, we were able to assess 
all 18 for limited purposes (e.g., nonfiling of tax returns). We also 
selected 9 additional cases of FTHBC recipients who received tax 
refunds to determine how they were able to receive federal tax refunds 
while having unpaid federal taxes.[Footnote 16],[Footnote 17] These 
cases were selected to illustrate the sizeable amounts of taxes owed 
by some individuals who benefited from the Recovery Act but cannot be 
generalized beyond the cases presented. 

To understand how private lenders interpret and implement FHA's 
guidelines for preventing individuals with delinquent federal tax debt 
from receiving mortgage insurance, we interviewed FHA officials and 
reviewed relevant federal laws and policies, FHA regulations, policy 
manuals, and other FHA documents related to mortgage insurance. We 
also interviewed officials from three large, private, FHA-approved 
lenders, which together endorsed 15 percent of all FHA mortgages for 
homes purchased in 2009, and reviewed and discussed their policies for 
determining FHA mortgage insurance applicants' tax debt status and 
preventing ineligible tax debtors from obtaining FHA mortgage 
insurance. A more detailed description of the scope and methodology 
can be found in appendix I. 

We conducted this performance audit from April 2011 through May 2012 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
audit findings and conclusions based on our audit objectives. We 
believe that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

The Recovery Act of 2009 was enacted in response to significant 
weakness in the economy to, among other things, help promote economic 
recovery and assist those most affected by the recession.[Footnote 18] 
The Congressional Budget Office (CBO) estimated the Recovery Act's 
cost at $825 billion as of August 2011. The Recovery Act included 
provisions to help stimulate the housing market, including increasing 
loan limits for FHA-insured mortgages in 669 high-cost counties in 
calendar year 2009.[Footnote 19] The provision allowed FHA to insure 
mortgages at a higher amount than would have been authorized without 
the Recovery Act. Under this provision, FHA insured over $20 billion 
in mortgages for 87,000 homeowners who were approved for FHA mortgage 
insurance in 2009. The Recovery Act also adapted and extended the 
FTHBC through November 2009.[Footnote 20] Through July 3, 2010, IRS 
reported that about 1.7 million individuals claimed more than $12 
billion in FTHBCs under the Recovery Act for homes purchased in 2009. 
[Footnote 21] Office of Management and Budget (OMB) Circular A-129 
states that delinquent tax debtors are ineligible for federal loan 
insurance, such as FHA mortgage insurance, unless they repaid the debt 
or were in a valid repayment agreement with IRS, but the FTHBC was 
available to those who qualified regardless of their tax debt. 

FHA Mortgage Insurance: 

FHA's single-family programs insure private lenders against 100 
percent of the value of the loan for foreclosures on mortgages that 
meet FHA criteria, including mortgages for initial home purchases, 
construction rehabilitation, and refinancing. As of September 2011, 
almost 3,700 lenders were approved to participate in these programs. 
[Footnote 22] The insurance covers the principal, interest, and 
associated foreclosure costs, among other things.[Footnote 23] Lenders 
usually require mortgage insurance when a home buyer makes a down 
payment of less than 20 percent of the value of the home. FHA mortgage 
insurance allows a home buyer to make a modest down payment--as low as 
3.5 percent--and obtain a mortgage for the balance of the purchase 
price. As the recent housing and economic recession set in, FHA's 
share of the market for home purchase mortgages grew sharply due to 
the contraction of other mortgage market segments--rising from about 5 
percent in 2006 to nearly 30 percent in 2009.[Footnote 24],[Footnote 
25] FHA insured almost 2 million single-family mortgages valued at 
more than $300 billion in mortgage insurance in 2009.[Footnote 26] FHA 
generally is thought to promote stability in the market by ensuring 
the availability of mortgage credit in areas that may be underserved 
by the private sector or that are experiencing economic downturns. It 
has played a particularly large role among minority, lower-income, and 
first-time home buyers; almost 80 percent of FHA-insured home purchase 
loans in 2010 went to first-time home buyers.[Footnote 27],[Footnote 
28] 

The FHA home mortgage insurance programs are funded by the FHA Mutual 
Mortgage Insurance Fund (MMIF), which is supported by insurance 
premiums charged to borrowers. The MMIF is used to cover claims on 
foreclosed mortgages, among other things. The Omnibus Budget 
Reconciliation Act of 1990 required the Secretary of HUD to take steps 
to ensure that the MMIF attained a capital ratio (i.e., economic value 
divided by the unamortized insurance-in-force) of at least 2 percent 
by November 2000 and maintain a 2 percent ratio at all times 
thereafter.[Footnote 29] The act also required an annual independent 
actuarial review of the economic net worth and soundness of the MMIF. 
The actuarial review estimates the economic value of the MMIF as well 
as the capital ratio to determine whether the MMIF has met the capital 
standards in the act. The capital ratio has dropped sharply in recent 
years due to declines in home prices and increases in seriously 
delinquent loans and foreclosures. The most recent actuarial study 
shows that the capital ratio is currently below the statutorily 
mandated level, at 0.24 percent, representing $2.6 billion in 
estimated capital resources against an active portfolio of $1.08 
trillion.[Footnote 30] The MMIF has historically been sufficient to 
fund the FHA home mortgage insurance programs without additional 
funding from the federal government, but if the reserve were to be 
depleted, FHA would need to draw on permanent and indefinite budget 
authority to cover additional increases in estimated losses. A 
weakening in the performance of FHA-insured loans could increase the 
possibility that FHA will require additional federal funds. Our work 
has previously shown that the increased reliance on FHA mortgage 
insurance highlights the need for FHA to ensure that it has the proper 
controls in place to minimize financial risks to the federal 
government while meeting the housing needs of borrowers.[Footnote 31] 

Lenders are responsible for underwriting the loans to determine an 
applicant's eligibility for FHA mortgage insurance in accordance with 
FHA policies. Underwriting is a risk analysis that uses information 
collected during the loan origination process to decide whether to 
approve a loan for FHA insurance. Lenders employ automated 
underwriting--the process by which lenders enter information on 
potential borrowers into electronic systems that contain an evaluative 
formula, or algorithm, known as a scorecard. The scorecard attempts to 
quickly and objectively measure the borrower's risk of default by 
examining data such as application information and credit score. 
[Footnote 32] Since 2004, FHA has used its own scorecard called 
Technology Open to Approved Lenders (TOTAL). FHA lenders now use TOTAL 
in conjunction with automated underwriting systems to determine the 
likelihood of default. Although TOTAL can assess the credit risk of a 
borrower, it does not reject a loan outright. Rather, TOTAL will 
assign a risk assessment of either "accept" or "refer" for each 
borrower. FHA requires lenders to manually underwrite loans that are 
assessed as "refer" by TOTAL to give a final determination if the loan 
should be accepted or rejected. According to FHA policy, a lender 
remains accountable for compliance with FHA eligibility requirements, 
regardless of the risk assessment provided by TOTAL. 

Virtually all of the lenders that participate in FHA's mortgage 
insurance programs for single-family homes have direct endorsement 
authority. These lenders can underwrite and close mortgage loans 
without FHA's prior review or approval.[Footnote 33] FHA insures 
lenders against nearly all losses resulting from foreclosed loans and 
covers 100 percent of the value of the loan. In general, foreclosure 
may be initiated when three monthly installments are due and unpaid, 
and it must be initiated when six monthly installments are due and 
unpaid, except when prohibited by law.[Footnote 34] To minimize the 
number of FHA loans entering foreclosure, servicers are responsible 
for pursuing various loss mitigation strategies, including suspended 
payments, loan modification, reduced mortgage payments, and sale of 
the property by the borrower. If, despite these loss mitigation 
strategies, the lender forecloses on the loan, the lender can file an 
insurance claim with FHA for the unpaid balance of the loan and other 
costs.[Footnote 35] However, FHA reviews a selection of insured loans, 
including early payment defaults (loans at least 60 days delinquent in 
the first six payments), in part to minimize potential FHA losses and 
ensure the underwriting for these mortgages met FHA guidelines. 
Reviews revealing serious deficiencies may result in FHA requiring the 
lenders to compensate the department for financial losses, known as 
indemnification, which requires the lender to repay FHA for any losses 
that it incurs after a loan has gone into default and the property has 
been sold. 

Congress, through legislation, sets limits on the size of loans that 
may be insured by FHA. These loan limits vary by county and can change 
from year to year. To mitigate the effects from the economic downturn 
and the sharp reduction of mortgage credit availability from private 
sources, Congress increased FHA loan limits. The Economic Stimulus Act 
(ESA) enacted in February 2008 stipulated that FHA loan limits be set 
temporarily at 125 percent of the median house price in each area, 
[Footnote 36] with a maximum loan limit of $729,750 for a one-unit 
home.[Footnote 37] Immediately prior to ESA's enactment, the limits 
had been set at 95 percent of area median house prices.[Footnote 38] 
In July 2008, 5 months after passing ESA, Congress passed the Housing 
and Economic Recovery Act (HERA), which established new statutory 
limits of 115 percent of area median home prices.[Footnote 39], 
[Footnote 40] Then, in February 2009, Congress passed the Recovery 
Act, which stipulated that FHA loan limits for 2009 be set in each 
county at the higher dollar amount when comparing loan limits 
established under 2008 ESA requirements and limits for 2009 under HERA. 

First-Time Homebuyer Credit: 

Congress passed the FTHBC to assist the struggling real estate market 
and encourage individuals to purchase their first home.[Footnote 41] 
The credit was initially enacted by HERA and later revised by the 
Recovery Act. The 2008 HERA FTHBC provided taxpayers a credit of up to 
$7,500 to be paid back over 15 years, essentially serving as an 
interest-free loan. In 2009, the Recovery Act was enacted and 
increased the maximum credit for the 2009 FTHBC to $8,000, with no 
payback required unless the home is sold or ceases to be the 
taxpayer's principal residence within 3 years of the purchase. 
[Footnote 42],[Footnote 43] The credit of up to $8,000 was a 
refundable tax credit paid out to the claimant if there was no tax 
liability or the credit exceeded the amount of any federal tax due. In 
July 2010, the Homebuyer Assistance and Improvement Act (HAIA) of 2010 
extended the date to close on a home purchase to September 30, 2010. 
[Footnote 44] 

Federal Policies on Tax Debtors Receiving Federal Loan Insurance: 

To protect federal government assets and minimize unintended costs to 
the government, OMB Circular A-129 states that individuals with 
delinquent federal debts are ineligible for loan insurance and 
prohibits federal agencies from issuing loans to such applicants; 
however, OMB's policy allows individuals with delinquent federal taxes 
or other federal debt to attain eligibility by repaying their debt in 
full or entering into a valid repayment plan with the agency they owe. 
[Footnote 45] The policy states that agencies should determine if the 
applicant is eligible by including a question on loan applications 
asking applicants if they have such delinquencies. The policy also (1) 
requires agencies and lenders to use credit bureaus as screening 
tools, because tax liens resulting from delinquent tax debt typically 
appear on credit reports, and (2) encourages agencies to use HUD's 
Credit Alert Interactive Voice Response System (CAIVRS), a database of 
delinquent federal debtors. CAIVRS contains delinquent debt 
information for six federal agencies; however, it does not contain any 
tax debts from IRS.[Footnote 46] According to OMB policy, if 
delinquent federal debts are discovered, processing of applications 
must be suspended until the applicant attains eligibility. 

FHA's policies for lenders dictate that an FHA mortgage insurance 
applicant must be rejected if he or she is delinquent on any federal 
debt, including tax debt, or has a lien placed against his or her 
property for a debt owed to the federal government.[Footnote 47] Like 
OMB's policy, FHA policy states that an applicant with federal debt 
may become eligible for mortgage insurance by repaying the debt in 
full or by entering into a valid repayment agreement with the federal 
agency owed, which must be verified in writing. Such repayment plans 
include IRS-accepted installment agreements and offers in 
compromise.[Footnote 48] To identify individuals with tax debt, FHA 
requires mortgage insurance applicants to declare whether they are 
delinquent or in default on any federal debt on their insurance 
application, the Uniform Residential Loan Application (URLA). As 
printed on the application, knowingly making any false statement on 
the URLA is a federal crime punishable by fine or imprisonment. 
[Footnote 49] FHA also requires that lenders review credit reports for 
all applicants to identify tax liens and other potential derogatory 
credit information. 

FHA Insured over $1.44 Billion in Mortgages for Thousands of Recovery 
Act Beneficiaries with Federal Tax Debt: 

In 2009, FHA insured over $1.44 billion in mortgages for 6,327 
borrowers who at the same time had delinquent tax debt and benefited 
from the Recovery Act. According to IRS records, these borrowers had 
an estimated $77.6 million in unpaid federal taxes as of June 30, 
2010. As figure 1 illustrates, our analysis included tax debtors who 
either benefited from FHA's increased loan limits or who claimed the 
FTHBC and received FHA mortgage insurance of any value.[Footnote 50] 
Although federal policies did not prohibit tax debtors from claiming 
the FTHBC, they were ineligible for FHA mortgage insurance unless 
their delinquent federal taxes and other federal debt had been fully 
repaid or otherwise addressed through a repayment agreement. We could 
not determine the proportion of borrowers who were ineligible because 
we could not systematically identify which of the 6,327 borrowers had 
valid repayment agreements at the time of the mortgage approval using 
IRS's data; however, we found that five of our eight selected 
borrowers were not in valid repayment agreements at the time they 
obtained FHA mortgage insurance. In addition, FHA records indicate 
that borrowers with tax debt had serious delinquency (in default for 
90 days or more) and foreclosure rates two to three times greater than 
borrowers without tax debt, which potentially represents an increased 
risk to FHA.[Footnote 51] 

Figure 1: Tax Debtors who Benefited from the Recovery Act Obtained 
$1.44 Billion in FHA Mortgage Insurance and $27.4 Million in FTHBCs: 

[Refer to PDF for image: table] 

Benefit tax debtor received: FHA Mortgage Insurance under the Recovery 
Act
Number of tax debtors: 2,646[A]; 
Amount of known unpaid tax debt: $35.5 million; 
Federal benefits to individuals with known federal tax debt: 
FHA mortgage insurance: $759.3 million; 
FTHBC: N/A. 

Benefit tax debtor received: FTHBCs from the IRS under the Recovery 
Act and FHA Mortgage Insurance; 
Number of tax debtors: 3,815[B]; 
Amount of known unpaid tax debt: $43.5 million; 
Federal benefits to individuals with known federal tax debt: 
FHA mortgage insurance: $717.2 million; 
FTHBC: $27.4 million[C]. 

Benefit tax debtor received: Overlap (Both FTHBC and FHA Mortgage 
Insurance under the Recovery Act); 
Number of tax debtors: (134); 
Amount of known unpaid tax debt: ($1.4 million); 
Federal benefits to individuals with known federal tax debt: 
FHA mortgage insurance: ($36.5 million); 
FTHBC: (N/A). 

Benefit tax debtor received: Total; 
Number of tax debtors: 6,327; 
Amount of known unpaid tax debt: $77.6 million; 
Federal benefits to individuals with known federal tax debt: 
FHA mortgage insurance: $1.44 billion; 
FTHBC: $27.4 million. 

Source: GAO analysis of FHA mortgage data as of September 2011, IRS 
FTHBC data as of July 10, 2010, and IRS known tax debt data as of June 
30, 2010. 

[A] 3.7% of all Recovery Act mortgages. 

[B] 0.5% of all FHA insured mortgages for borrowers who also claimed 
the FTHBC. 

[C] The FTHBC, like all tax credits, was available to those who 
qualified, regardless of their tax debt. 

Note: We cannot determine the proportion of borrowers who were 
ineligible for mortgage insurance because we could not systematically 
identify which of the 6,327 borrowers had valid repayment agreements 
using the data we received from IRS. 

[End of figure] 

FHA Insured $759.3 Million in Mortgages for Tax Debtors Benefiting 
from the Recovery Act's Increased Loan Limits: 

[Side bar: Example 1: Nonfiling of Tax Returns: 
* Unpaid federal taxes: over $200,000; 
* FHA Mortgage: nearly $400,000. 
IRS records indicate that the taxpayer failed to file tax returns for 
at least 5 years. Records also indicate the taxpayer filed frivolous 
tax returns-—a return that lacks any basis in law-—for several tax 
periods. In one of these returns, the taxpayer improperly claimed a 
refund for hundreds of thousands of dollars in the same year the 
taxpayer obtained FHA mortgage insurance. End of side bar] 

In 2009, FHA insured $759.3 million in mortgages for 2,646 individuals 
who owed $35.5 million in unpaid federal taxes as of June 30, 2010, 
under the Recovery Act's provision for increased loan limits.[Footnote 
52] These borrowers and co-borrowers obtained 1,913 insured mortgages 
with a median value of $352,309 and had a median tax debt of $6,290 
per person.[Footnote 53] Their mortgages accounted for 3.7 percent of 
the 52,006 mortgages FHA insured under Recovery Act provisions for 
increased limits in 2009, which in turn represented 2.5 percent of all 
mortgages insured by FHA in 2009. Our analysis likely understates the 
amount of unpaid federal taxes because IRS data do not cover 
individuals who fail to file tax returns or who understate their 
income. Of the 18 selected individuals who benefited from increased 
loan limits for FHA mortgage insurance or received the FTHBC under the 
Recovery Act, we found that 11 had not filed all of their federal tax 
returns. 

Using IRS data, we cannot systematically determine which of these 
individuals was in a valid repayment agreement at the time of the 
mortgage, and therefore cannot determine whether insuring each of 
these 1,913 mortgages was improper, but it is possible that borrowers 
with tax debt represent a greater financial risk to the federal 
government.[Footnote 54] As illustrated in figure 2, serious 
delinquency and foreclosure rates among Recovery Act borrowers with 
unpaid federal taxes were at least twice as high as the rates for 
other borrowers. As of September 2011, 32 percent of the 1,913 
mortgages made to borrowers with tax debt were seriously delinquent on 
their payments, compared with 15.4 percent of other FHA-insured 
mortgages. About 6.3 percent of the mortgages for borrowers with tax 
debt went into foreclosure since the home was purchased in 2009, 
compared with 2.4 percent for others.[Footnote 55],[Footnote 56] The 
homes foreclosed after they were purchased by tax debtors were insured 
for $44.9 million, potentially leaving FHA responsible for paying 
claims for the remaining loan balance and certain interest and 
foreclosure costs. FHA recovers some of these costs when it sells the 
property. 

Figure 2: Serious Delinquency and Foreclosure Rates for Borrowers Who 
Received Increased FHA Mortgage Insurance under the Recovery Act with 
Tax Debt Compared to Borrowers without Tax Debt: 

[Refer to PDF for image: table] 

Borrower: With tax debt; 
Number of mortgages: 1,913[A]; 
Percentage seriously delinquent: 32.0%; 
Percentage foreclosed: 6.3%. 

Borrower: Without tax debt; 
Number of mortgages: 50,093[B]; 
Percentage seriously delinquent: 15.4%; 
Percentage foreclosed: 2.4%. 

Borrower: Total: 
Number of mortgages: 52,006. 

Source: GAO analysis of FHA and IRS data. GAO analysis of FHA mortgage 
data as of September 2011 and IRS known tax debt data as of June 30, 
2010. 

[A] 3.7% of mortgages insured under Recovery Act's increased loan 
limit provisions in 2009 where borrowers had known federal tax debts. 

[B] The remaining 96.3% of FHA insured mortgages under Recovery Act's 
increased loan limit provisions in 2009. 

[End of figure] 

Finally, FHA's increased exposure to risk from insuring tax debtors is 
unlikely to be limited to Recovery Act beneficiaries. Because FHA uses 
identical methods to insure non-Recovery Act mortgages, it is 
reasonable to assume that some portion of FHA borrowers for the 
remaining 97.5 percent of mortgages we did not analyze as part of this 
review are tax debtors. 

$717.2 Million in FHA Mortgage Insurance Was Provided to Tax Debtors 
Who Claimed $27.4 Million in Recovery Act FTHBCs: 

[Side bar: Example 2: Current IRS Compromise Agreement: 
* Unpaid federal taxes: over $100,000; 
* FHA Mortgage: over $300,000; 
* FTHBC amount: $8,000. 
At the time of the mortgage, the taxpayer was in a current compromise 
agreement to pay about 25 percent of the federal tax debt in monthly 
payments over 10 years and was therefore eligible to receive FHA 
mortgage insurance. End of side bar] 

In 2009, $717.2 million in FHA mortgage insurance and $27.4 million in 
Recovery Act FTHBCs were provided to 3,815 individuals who owed an 
estimated $43.5 million in unpaid federal taxes.[Footnote 57] These 
borrowers obtained 3,812 insured mortgages with a median value of 
$167,887 and had a median unpaid tax amount of $5,044 per person. 
[Footnote 58] Their mortgages represented 0.5 percent of the 700,003 
mortgages insured by FHA for borrowers who claimed the FTHBC.[Footnote 
59] As discussed above, we were unable to determine the proportion of 
the mortgage insurance that was provided to borrowers who were, in 
fact, eligible as a result of entering into a valid repayment 
agreement with IRS. We found that three of our eight selected 
borrowers were in valid repayment agreements at the time they obtained 
FHA mortgage insurance. 

As illustrated in figure 3, we found that serious delinquency and 
foreclosure rates for mortgages obtained by FHA borrowers with federal 
tax debts who received the FTHBC were two to three times higher than 
the rates for other borrowers. As of September 2011, 26.9 percent of 
the 3,812 mortgages made to borrowers with unpaid tax debts were 
seriously delinquent on their payments, compared with 11.9 percent of 
borrowers without tax debt who received the FTHBC and FHA mortgage 
insurance. About 4.7 percent of the mortgages of borrowers with tax 
debt were foreclosed, compared with 1.4 percent for other borrowers. 
The 181 foreclosed homes purchased by tax debtors had a total mortgage 
insurance value of $36.5 million, potentially resulting in a loss to 
the MMIF. 

Figure 3: Serious Delinquency and Foreclosure Rates for Borrowers with 
Tax Debt Who Claimed the FTHBC under The Recovery Act Compared to 
Borrowers without Tax Debt: 

[Refer to PDF for image: table] 

Borrower: With tax debt; 
Number of mortgages: 3,812[A]; 
Percentage seriously delinquent: 26.9%; 
Percentage foreclosed: 4.7%. 

Borrower: Without tax debt; 
Number of mortgages: 696,191[B]; 
Percentage seriously delinquent: 11.9%; 
Percentage foreclosed: 1.4%. 

Borrower: Total: 
Number of mortgages: 700,003. 

Source: GAO analysis of FHA and IRS data. GAO analysis of FHA mortgage 
data as of September 2011 and IRS known tax debt data as of June 30, 
2010. 

[A] 0.5% of all mortgages obtained by FHA borrowers with known federal 
tax debts who received the FTHBC under the Recovery Act. 

[B] 99.5% of all mortgages obtained by FHA borrowers without known 
federal tax debts who received the FTHBC under the Recovery Act. 

[End of figure] 

[Side bar: Example 3: Proper Issuance of a Tax Refund: 
* Unpaid federal taxes: over $70,000; 
* FTHBC amount: $8,000; 
* FHA Mortgage: over $150,000; 
The taxpayer had tax debt, obtained an FHA-insured mortgage, and 
claimed the FTHBC. The taxpayer filed for bankruptcy and thereafter 
received a tax refund. (The borrower has since been at least 3 months 
delinquent on mortgage payments.) End of side bar] 

The FTHBC is a refundable credit, meaning taxpayers could receive 
payments in excess of their tax liability. Federal law typically 
requires that any federal tax refund be offset to pay down an unpaid 
taxes.[Footnote 60] Of the 3,815 borrowers we identified with tax 
debt, 233 received a federal tax refund after claiming the FTHBC. We 
selected 9 of these borrowers for a detailed review and found that all 
9 were issued refunds in accordance with federal law. For example, 
three of these cases had filed bankruptcy prior to receiving the 
refund. Federal bankruptcy law prevents IRS from taking collections 
actions, such as offsetting postpetition refunds, against individuals 
undergoing bankruptcy proceedings. [Footnote 61] 

The amounts of unpaid federal taxes, mortgage insurance, and FTHBCs we 
identified are likely understated for the following reasons: 

* Certain individuals did not file tax returns or underreported their 
income, and therefore are not included in our analysis. 

* Data limitations in the FTHBC data prevented us from isolating all 
individuals who benefited from the FTHBC under the Recovery Act. 
[Footnote 62] 

* Any Recovery Act FTHBC recipient whose FTHBC was greater than their 
outstanding tax liability would not be included in our analysis 
because the refundable credit would have offset their outstanding tax 
liability. Federal law generally requires that IRS offset any refund 
against an individual's tax liability.[Footnote 63] 

Shortcomings in the Capacity of FHA-Required Documentation to Identify 
Tax Debts and in Certain Policies Allow Tax Debtors to Obtain Mortgage 
Insurance: 

Some ineligible tax debtors received FHA mortgage insurance, in part, 
due to shortcomings in the capacity of FHA-required documentation to 
identify tax debts and shortcomings in other policies that lenders may 
misinterpret. Lenders are required by FHA policy to perform steps to 
identify an applicant's federal debt status, but the information 
provided by these steps does not reliably indicate an applicant's tax 
debt. Statutory restrictions limit the disclosure of taxpayer 
information without the taxpayer's consent. Lenders are already 
required to obtain such consent through an IRS form they use to 
validate the income of some applicants. This same form could also be 
used to obtain permission from applicants to access reliable tax-debt 
information directly from IRS, but doing so is not addressed in FHA's 
policies. Requiring lenders to collect more reliable information on 
tax debts could better prevent ineligible tax debtors from obtaining 
FHA mortgage insurance. Further, FHA's policies requiring lenders to 
investigate whether tax liens indicate unresolved tax debt are unclear 
and may be misinterpreted. The lenders we spoke with believed they 
were in compliance with FHA policies when they provided FHA-insured 
loans to applicants with tax liens, but FHA officials indicated 
otherwise. As a result of these shortcomings, lenders may approve 
federally insured mortgages for ineligible applicants with delinquent 
tax debt in violation of federal policies. 

Information That FHA Requires Lenders to Collect on Mortgage 
Applicants Does Not Reliably Indicate the Existence of Federal Tax 
Debt: 

[Side bar: Example 4: False Declaration of Unpaid Federal Debt: 
* Unpaid taxes: about $15,000; 
* FHA insurance: over $700,000; 
The ineligible taxpayer did not properly disclose the delinquent 
federal debt on the declaration section of the URLA. The ineligible 
taxpayer subsequently lost the home to foreclosure. End of side bar] 

[Side bar: Example 5: Failure to Disclose Federal Tax Liability: 
* Unpaid taxes: over $10,000; 
* FHA insurance: over $700,000; 
The taxpayer was in a valid repayment agreement with IRS to repay tax 
debts. Because the taxpayer was in a repayment agreement, the taxpayer 
was not required to declare the delinquent federal debt. However, the 
taxpayer did not disclose the liability associated with the repayment 
agreement on the liabilities section of the URLA. Additionally, in the 
same year the taxpayer applied for over $700,000 in FHA mortgage 
insurance, the taxpayer claimed the earned income tax credit, a 
refundable credit for the working poor. The taxpayer later filed 
bankruptcy and the home was foreclosed. End of side bar] 

Consistent with OMB policies, FHA has lender policies intended to 
prevent ineligible tax debtors from obtaining FHA mortgage insurance; 
however, the information the agency requires lenders to collect does 
not reliably indicate the existence of federal tax debt. The three 
sources of information FHA requires lenders to obtain each have 
shortcomings in their capacity to identify borrowers' tax debts: 

* Uniform Residential Loan Application (URLA). The URLA requires that 
applicants declare any federal debt that is delinquent or in default. 
The URLA also requires applicants to disclose any liabilities, 
including tax debt, so a lender can assess the applicant's ability to 
repay the proposed mortgage. While knowingly making false statements 
on an URLA is a federal crime and may deter some from lying about 
their tax debt, much of our work has focused on the inadequacies of 
self-reported information without independent verification.[Footnote 
64] In fact, our comparison of the URLAs in eight mortgage files with 
IRS tax data revealed that five borrowers wrongly declared they were 
not, by FHA's definition, delinquent or in default on federal tax debt 
(e.g., not in a valid IRS repayment agreement).[Footnote 65] In 
addition, six of the borrowers did not properly disclose the tax debts 
on the liabilities section of the URLA. Because of the federal statute 
that prohibits the disclosure of taxpayer information, we are unable 
to refer these cases to FHA for further investigation.[Footnote 66] 
Excerpts of the URLA where applicants are required to disclose any 
debts that may affect their eligibility for FHA mortgage insurance or 
their ability to repay the proposed mortgage are illustrated in 
appendix II. 

* CAIVRS. FHA requires that lenders check all applicants against 
CAIVRS, HUD's database of delinquent federal debtors, to identify 
federal debts. While it contains delinquent debt information from six 
agencies, such as the Department of Education and the Small Business 
Administration, CAIVRS does not contain federal tax information from 
IRS because statutory restrictions generally prohibit IRS from 
disclosing taxpayer information without the taxpayer's consent. Two of 
the three lenders we spoke with mistakenly believed CAIVRS could be 
used to identify federal tax debt. 

* Credit reports. Lenders told us that credit reports, which contain 
public records such as federal tax liens, were a primary method of 
identifying liens to indicate certain tax debts. However, delinquent 
federal taxes do not always appear on credit reports because IRS does 
not file liens on all tax debtors with property. In addition, many FHA 
borrowers are first-time home buyers and may not have real property on 
which IRS can place a lien. IRS records indicated that only two of our 
eight selected borrowers had tax liens filed against them at the time 
they obtained FHA mortgage insurance. 

[Side bar: Example 6: IRS Lien Not Filed: 
* Unpaid taxes: over $250,000; 
* FHA insurance: over $450,000; 
At the time of the taxpayer's application, IRS had no tax liens 
against the taxpayer for tax debts incurred during the early 2000s. In 
addition, at the time of the mortgage application, the taxpayer was 
not paying employment taxes for the taxpayer's business, resulting in 
over $100,000 in trust fund recovery penalties (penalty assessed for 
failure to pay payroll taxes). IRS levied the taxpayer's bank accounts 
and considered seizing the FHA-insured house but determined that there 
was not enough equity in the property. IRS placed a lien on the 
property about 1 year later. End of side bar] 

Lenders using only these FHA-required methods for identifying tax debt 
are missing an opportunity to more accurately determine whether 
applicants are eligible for FHA-insured mortgages, in part, because 
they do not have access to certain information. Access to the federal 
tax information needed to obtain the tax payment status of applicants 
is restricted under section 6103 of the Internal Revenue Code, which 
prohibits disclosure of taxpayer data to lenders in most instances. 
However, lenders may request information on federal tax debts directly 
from IRS if the applicant provides consent. To verify the income of 
self-employed and commission-income applicants, FHA requires that 
lenders obtain an applicant-signed consent form allowing the lender to 
verify the applicant's income directly with IRS. 

The three lenders we spoke with indicated they use IRS form 4506-T 
Request for Transcript of Tax Return to satisfy this requirement. FHA 
could also compel lenders to use this form or otherwise obtain 
borrower consent to identify tax debts.[Footnote 67] Files for four of 
our eight selected borrowers had a copy of the IRS Form 4506-T in 
their FHA mortgage files. The lenders for these borrowers used the 
4506-T only to validate income by requesting federal tax return 
transcripts and did not use the form to request account transcripts 
that would have disclosed tax debt information. None of the eight 
mortgage files contained IRS tax account transcripts. Officials from 
each of the lenders we interviewed said it is their policy to use the 
4506-T only to validate the income of these applicants, as this is the 
requirement under FHA policies. Officials from two of the lenders used 
the form to verify income for all borrowers.[Footnote 68] In contrast, 
officials from the third lender stated that they executed this form 
for a random sample of additional applicants for income verification, 
but noted that doing so for every applicant would be too burdensome. 

As shown in figure 4, checking box 6a on the form allows a lender to 
obtain tax return transcripts for applicants, which do not disclose 
tax debt information. Checking box 6b would allow a lender to request 
and receive account transcripts. Account transcripts contain 
information on the financial status of the account, including 
information on any existing tax debts.[Footnote 69] These transcripts 
would allow a lender to identify federal taxes owed by any applicant, 
including debts not found on credit reports because a federal tax lien 
does not exist. Checking box 6c would allow a lender to obtain both 
tax return transcripts and account transcripts, which the lender could 
use to verify the income of an applicant as well as identify whether 
the applicant has federal tax debt. The lender may request account 
transcripts only for the current year and up to 3 prior years and must 
state the requested years on the form; transcripts beyond this are 
generally unavailable. Despite this limitation, the IRS form 4506-T 
could serve as a method for lenders to identify loan applicants with 
unpaid debt. Without such a method, lenders may approve federally 
insured mortgages for ineligible applicants with delinquent tax debt 
in violation of OMB and FHA policies. 

Figure 4: Excerpt of IRS Form 4506-T: 

[Refer to PDF for image: excerpts from Form 4506-T] 

Checking Box 6a can be used to substantiate an applicant's income, 
which is an FHA requirement: 
6: Transcript requested. Enter the tax form number here (1040, 1065, 
1120, etc.) and check the appropriate box below. Enter only one tax form
number per request.  

a: Return Transcript, which includes most of the line items of a tax 
return as filed with the IRS. A tax return transcript does not reflect 
account after the return is processed. Transcripts are only available 
for the following returns: Form 1040 series, Form 1065, Form 1120, 
Form 1120A, Form 1120H, Form 1120L, and Form 1120S. Return transcripts 
are available for the current year and returns processed during the 
prior 3 processing years. Most requests will be processed within 10 
business days. 

Checking Box 6b can be used to identify existing tax debts, which is 
not an FHA requirement: 

b: Account Transcript, which contains information on the financial 
status of the account, such as payments made on the account, penalty 
made by you or the IRS after the return was filed. Return information 
is limited to items such as tax liability Account transcripts are 
available for most returns. Most requests will be processed within 30 
calendar days. 
  
Checking Box 6c can be used to verify income and identify existing tax 
debts: 

c: Record of Account, which provides the most detailed information as 
it is a combination of the Return Transcript and the Account 
Transcript. Available for current year and 3 prior tax years. Most 
requests will be processed within 30 calendar days. 

Source: GAO analysis of IRS Form 4506-T. 

Note: In practice, records of account and account transcripts are 
processed in the same amount of time as tax return transcripts (i.e., 
10 business days) or within 48 hours through the IRS Income 
Verification Express Service at an expense of $2. 

[End of figure] 

Shortcomings in FHA Policies May Have Led to Ineligible Tax Debtors 
Obtaining Mortgage Insurance: 

All three lenders we spoke with unknowingly violated FHA policies on 
requirements to investigate tax liens. Federal tax liens remain on a 
property until the associated tax debt has been paid in full or 
otherwise satisfied.[Footnote 70] The presence of a lien does not 
prevent an applicant from receiving FHA mortgage insurance because, 
per OMB and FHA policies, applicants are eligible for mortgage 
insurance if they are in a valid repayment agreement. However, 
according to FHA officials, FHA requires lenders to investigate 
whether the tax debt that caused the lien has been resolved or brought 
current under a repayment plan. If it has not, insurance must be 
denied. Lenders understood these policies to have exemptions for some 
applicants. FHA officials told us that endorsing a mortgage without 
determining applicant eligibility by investigating the status of tax 
debts related to federal tax liens for any applicant is improper due 
diligence. 

Specifically, officials from two of the three lenders said they would 
approve FHA insurance for applicants with a federal tax lien on their 
credit report if IRS agreed to subordinate the lien to FHA.[Footnote 
71],[Footnote 72] The lenders believed this was in accordance with FHA 
policy that indicates that tax liens may remain unpaid if the lien 
holder subordinates the lien to FHA. One of the lenders told us that 
this policy could potentially allow ineligible applicants with 
delinquent federal tax debt to obtain FHA mortgage insurance. However, 
FHA officials told us that this policy is only applicable if the 
lender has previously determined the applicant is eligible by 
investigating the lien (i.e., requesting verification from IRS that 
they have repaid their debt or are in a repayment agreement). See 
figure 5 for FHA policy excerpts. 

Figure 5: FHA Policy Excerpts on Tax Debt That Some Lenders 
Misinterpret: 

[Refer to PDF for image: policy excerpts] 

(1) 4155.1 4.A.2.f: Borrower Ineligibility due to Delinquent Federal 
Debts: 
If, after checking public records, credit information or CAIVRS, a 
borrower is found to be presently delinquent on any Federal debt or 
has had a lien (including taxes) placed against his/her property
for a debt owed to the Federal government, he/she is not eligible for 
an FHA mortgage until the delinquent account is brought current, paid, 
or otherwise satisfied, or a satisfactory repayment plan is 
established between the borrower and the Federal agency owed, which is 
verified in writing. Tax liens may remain unpaid provided the lien 
holder subordinates the tax lien to the FHA-insured mortgage.
For more information on tax liens affecting eligibility for federally 
related credit, see HUD 4155.14.A.2.h. 

(2) This policy is only applicable if the lender has previously 
determined the applicant is eligible by investigating the lien, 
according to FHA officials.  

4155.1 4.A.2.h: Tax Liens and Eligibility for Federally Related 
Credit:  
The Internal Revenue Service (IRS) routinely takes a second lien 
position without the need for independent documentation. For this 
reason, eligibility for FHA mortgage insurance is not jeopardized by 
outstanding IRS tax liens remaining on the property, unless the lender 
has information that the IRS has demanded a first-lien position. 
Tax liens may remain unpaid if the lien holder subordinates the tax 
lien to the FHA-insured mortgage. Note: If any regular payments are to 
be made, they must be included in the qualifying ratios.  

Source: GAO analysis of HUD 4155.1, Mortgage Credit Analysis for 
Mortgage Insurance, and interviews with FHA officials. 

[End of figure] 

Officials from the third lender said they would approve any applicant 
rated as "accept" by TOTAL without additional review or manual 
underwriting, even if the applicant's credit report showed a tax lien. 
The officials believed this was consistent with FHA policy because 
TOTAL would not have granted an "accept" unless the application met 
FHA requirements. However, FHA officials told us that while TOTAL 
considers an applicant's credit score in its risk evaluation, it does 
not consider other factors such as tax liens. FHA guidance states that 
the lender remains accountable for compliance with FHA eligibility 
requirements, regardless of the risk assessment provided by TOTAL. 

Due to potential shortcomings in FHA policies, lenders may 
misinterpret them, which could result in lenders approving federally 
insured mortgages for ineligible applicants with delinquent tax debt 
in violation of OMB and FHA policies. Our review was limited to 
mortgages obtained under the Recovery Act provisions; however, these 
policies are the same for all FHA mortgages. Our review included only 
a small percentage of all mortgages insured by FHA in 2009, and it is 
likely that FHA's unclear policies may negatively affect some of the 
other mortgages. 

Conclusion: 

FHA has helped millions of families purchase homes through its single-
family mortgage insurance programs. As more and more Americans turn to 
FHA to finance their homes, it is critical for FHA to ensure that it 
has policies in place to minimize financial risks to the federal 
government while meeting the housing needs of borrowers. Tax debtors 
who were ineligible for FHA mortgage insurance were still able to 
obtain insurance, despite FHA policies intended to prohibit this. Our 
review focused exclusively on individuals who benefited from the 
Recovery Act, which only accounted for a small percentage of FHA 
borrowers in 2009; nevertheless we were able to identify thousands of 
tax debtors who obtained insurance. These debtors became seriously 
delinquent in their payments and lost their homes to foreclosures at a 
higher rate than those without tax debt. 

Current shortcomings we found in the capacity of available information 
sources to identify applicants' tax debts could be addressed by 
improved access to federal tax information. But because FHA's 
underwriting policies apply equally to all mortgage insurance 
applicants, it is likely that loans we did not review also included 
tax debtors. To ensure compliance with the confidentiality 
requirements associated with the disclosure of taxpayer information, 
FHA would need to consult with IRS to take action to identify tax 
debtors who are ineligible for FHA mortgage insurance, as has been 
done to verify the income of certain applicants. This would include 
developing appropriate criteria and safeguards to ensure taxpayer 
privacy and minimize undue approval delays. In addition, strengthening 
FHA policies and their interpretation by lenders can help prevent 
ineligible tax debtors from continuing to receive the benefit of FHA 
insurance. To the extent that borrowers with tax debt represent 
additional risk, FHA could minimize the potential for this risk by 
taking steps to address the issues identified in this report. 

Recommendations for Executive Action: 

The Secretary of HUD should direct the Assistant Secretary for Housing 
(Federal Housing Commissioner) to implement the following two 
recommendations: 

* Consult with IRS to develop written policies requiring lenders to 
collect and evaluate IRS documentation appropriate for identifying 
ineligible applicants with unpaid federal taxes, while fully complying 
with the statutory restriction on disclosure of taxpayer information. 
For example, FHA could require lenders to obtain consent from 
borrowers to allow FHA and its lenders to verify with IRS whether 
recipients of FHA insurance have unpaid federal taxes. 

* Provide FHA lenders with revised policies or additional guidance on 
borrower ineligibility due to delinquent federal debts and tax liens 
to more clearly distinguish requirements for lenders to investigate 
any indication that an applicant has federal tax debt (such as a 
federal tax lien) to provide reasonable assurance that ineligible 
borrowers do not receive FHA mortgage insurance. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to IRS and HUD for review and 
comment. IRS did not have any comments in response to the draft 
report. The Acting Assistant Secretary for Housing (Federal Housing 
Commissioner) provided a written response which is reprinted in 
appendix III. 

In HUD's response, the agency agreed with our recommendations and 
acknowledged that current policies and procedures may fail to identify 
all potential borrowers with delinquent tax debt. To address our 
recommendations, FHA stated that it would contact IRS in an effort to 
establish executable policy that may identify delinquent tax debtors. 
Further, the agency affirmed that it would execute changes to current 
FHA requirements for lenders in order to address the concerns 
discovered through the audit. Included in its written response, HUD 
provided technical comments which were incorporated into this report. 
Specifically, HUD recommended that we change the terminology used to 
characterize federal tax debts. According to HUD, this suggested 
change would provide clarity and avoid the appearance that FHA knew of 
delinquent tax debts. We agreed to make the recommended change. 
However, for certain cases included in our review, evidence indicates 
that FHA-approved lenders were aware of tax debts. 

As agreed with your offices, unless you publicly release its contents 
earlier we plan no further distribution of this report until 30 days 
from its issue date. At that time, we will send copies of this report 
to interested congressional committees, the Secretary of the Treasury, 
the Secretary of Housing and Urban Development, the Commissioner of 
Internal Revenue, the Acting Assistant Secretary for Housing (Federal 
Housing Commissioner), and other interested parties. The report is 
also available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. If you have any questions concerning this report, 
please contact Gregory D. Kutz at (202) 512-6722 or kutzg@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. Major 
contributors to this report are acknowledged in appendix IV. 

Signed by: 

Gregory D. Kutz: 
Director: 
Forensic Audits and Investigative Service: 

List of Congressional Requesters: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Orrin Hatch: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

The Honorable Charles Grassley: 
Ranking Member: 
Committee on the Judiciary: 
United States Senate: 

The Honorable Carl Levin: 
Chairman: 
The Honorable Tom Coburn, M.D. 
Ranking Member: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives were to determine: (1) the extent to which tax debtors 
benefited from the Recovery Act's provisions for increased Federal 
Housing Administration (FHA) loan limits and the First-Time Homebuyer 
Credit (FTHBC); and (2) what challenges, if any, FHA faces in 
preventing ineligible tax debtors from receiving mortgage insurance. 

To determine the extent to which individuals with unpaid tax debt 
benefited from the Recovery Act's provision for increased loan limits 
on FHA mortgage insurance, we obtained and analyzed electronic data 
from FHA's Single Family Data Warehouse (SFDW) as of September 2011. 
[Footnote 73] We also obtained and analyzed tax debt data from the 
Internal Revenue Service (IRS) as of June 30, 2010.[Footnote 74] Using 
the taxpayer identification numbers (TIN) present in these data, we 
electronically matched IRS's tax debt data to the population we 
identified of Recovery Act borrower Social Security numbers (SSN) from 
the SFDW.[Footnote 75] The Recovery Act stipulated that revised FHA 
loan limits for 2009 be set in each county at the higher of the loan 
limits established under the Economic Stimulus Act of 2008 (ESA) or 
those established under the Housing and Economic Recovery Act of 2009 
(HERA). Since loan limits would have reverted to HERA-established 
rates if the Recovery Act had not been promulgated, we considered an 
FHA borrower to be part of our Recovery Act population if he or she 
obtained mortgage insurance in 2009 at a value greater than would have 
been authorized under HERA.[Footnote 76],[Footnote 77] FHA officials 
agreed with this methodology. 

To determine the extent to which individuals with unpaid taxes 
received the FTHBC under the Recovery Act, we obtained and analyzed 
FTHBC transaction data from IRS as of July 10, 2010, and then 
electronically matched IRS's tax debt data to the population of 
individuals who claimed the FTHBC under the Recovery Act.[Footnote 78] 
Since IRS's FTHBC data do not contain home purchase dates, we were 
unable to isolate all individuals who benefited from the FTHBC under 
the Recovery Act. As a result, we used the SFDW to obtain home 
purchase dates to determine which FTHBCs were awarded under the 
Recovery Act. We electronically matched the FTHBC transaction data 
TINs with the SSNs in the SFDW and extracted mortgages with closing 
dates from January 1, 2009, through November 30, 2009, to identify a 
population of Recovery Act FTHBC recipients with FHA mortgage 
insurance. We identified 722,003 FTHBC claims associated with the 
Recovery Act for individuals who financed their home using FHA 
mortgage insurance, and in our prior work we found that there were 
1,669,081 FTHBC claims filed under the Recovery Act.[Footnote 79] 
Therefore, we estimate that our analysis includes approximately 43 
percent of all FTHBCs claimed under the Recovery Act. 

Therefore, our analysis includes two groups: 

1. individuals who received FHA mortgage insurance under the higher 
limits authorized under the Recovery Act, and: 

2. individuals who received the FTHBC under the Recovery Act and 
obtained FHA mortgage insurance of any value. 

Further, to determine the extent to which these Recovery Act FTHBC 
recipients with unpaid tax debt received federal tax refunds in the 
same year they claimed the FTHBC, we obtained and analyzed federal tax 
refund data from IRS from fiscal years 2009 and 2010.[Footnote 80] We 
electronically matched the refund data TINs with the TINs we 
identified to be FHA mortgage insurance borrowers who claimed the 
FTHBC under the Recovery Act while having unpaid federal tax debt. 

To avoid overestimating the amount owed by borrowers who benefited 
from the increased loan limits for FHA mortgage insurance under the 
Recovery Act and FTHBC recipients with unpaid federal tax debts, and 
to capture only significant tax debts, we excluded from our analysis 
tax debts meeting specific criteria to establish a minimum threshold 
in the amount of tax debt to be considered when determining whether a 
tax debt is significant. The criteria we used to exclude tax debts are 
as follows: 

* tax debts IRS classified as compliance assessments or memo accounts 
for financial reporting,[Footnote 81] 

* tax debts from calendar years 2009 and 2010 tax periods,[Footnote 82] 

* tax debts that were assessed by IRS after the mortgage insurance was 
issued, and: 

* tax debts from individuals with total unpaid taxes of less than $100. 

The criteria above were used to exclude tax debts that might be under 
dispute or generally duplicative or invalid, and tax debts that were 
recently incurred. Specifically, compliance assessments or memo 
accounts were excluded because these taxes have neither been agreed to 
by the taxpayers nor affirmed by the court, or these taxes could be 
invalid or duplicative of other taxes already reported. We also 
excluded tax debts from calendar years 2009 and 2010 tax periods to 
eliminate tax debt that may involve matters that are routinely 
resolved between the taxpayers and IRS, with the taxes paid or abated 
within a short time. We excluded any debts that were assessed by IRS 
after the mortgage insurance was received because those debts would 
not have been included in IRS records at the time the mortgage 
insurance was issued. We also excluded tax debts of less than $100 
because we considered them insignificant for the purpose of 
determining the extent of taxes owed by Recovery Act recipients. Using 
these criteria, we identified at least 6,327 Recovery Act recipients 
with federal tax debt. 

To provide examples of Recovery Act recipients who have unpaid federal 
taxes, we selected a non-probability sample of Recovery Act 
beneficiaries for a detailed review. We used the selection criteria 
below to provide examples that illustrate the sizeable amounts of 
taxes owed by some individuals who benefited from the Recovery Act: 

* We selected nine individuals who benefited from increased FHA 
mortgage limits who had (1) large amounts of unpaid federal tax debt 
(at least $100,000), (2) at least three delinquent tax periods, and 
(3) indications of IRS penalties or home foreclosures. 

* We also selected nine individuals who benefited from the FTHBC and 
obtained FHA mortgage insurance of any value who had (1) large amounts 
of unpaid federal tax debt (at least $50,000), (2) at least five 
delinquent tax periods, (3) FHA mortgage insurance of $200,000 or 
more, and (4) indications of IRS penalties or home foreclosures. 
[Footnote 83] 

We requested IRS notes, detailed account transcripts, and other 
records from IRS as well as mortgage files from FHA for these 18 
individuals. Of the 18 total requested cases, FHA provided us 
information that only allowed us to fully analyze 8 of them.[Footnote 
84],[Footnote 85] Although we did not receive complete information 
necessary to fully analyze the remaining cases, we were able to assess 
all 18 for limited purposes (e.g., nonfiling of tax returns). We also 
selected 9 additional cases of FTHBC recipients who received tax 
refunds to determine how they were able to receive federal tax refunds 
while having unpaid federal taxes.[Footnote 86] For these 9, we 
selected individuals who had (1) at least $5,000 in unpaid federal tax 
debt, (2) at least three delinquent tax periods, and (3) a federal tax 
refund value of at least $5,000. All of our cases were selected to 
illustrate the sizeable amounts of taxes owed by some individuals who 
benefited from the Recovery Act. None of our case selections provide 
information that can be generalized beyond the specific cases 
presented. 

To analyze the controls FHA has in place to prevent ineligible 
individuals with unpaid federal tax debt from receiving mortgage 
insurance, we reviewed FHA's lender credit analysis and underwriting 
handbook, mortgagee letters, and reports from GAO and HUD's Office of 
Inspector General.[Footnote 87],[Footnote 88] We also interviewed 
officials from FHA's Office of Single Family Housing and Office of the 
Chief Information Officer. 

To understand how private lenders interpret and implement FHA's 
guidelines for preventing individuals with delinquent federal tax debt 
from receiving mortgage insurance, we interviewed senior-level 
officials from three large FHA-approved lenders. We selected four 
lenders based on the following criteria: (1) we selected the two 
largest lenders in terms of the number of FHA loans approved in 2009, 
and (2) we selected 2 of the top 10 largest FHA lenders that approved 
a comparable number of FHA loans in 2009 but varied in proportion of 
loans awarded to individuals with federal tax debt. However, the 
lender chosen for having a high proportion of loans awarded to 
individuals with federal tax debt declined to speak with GAO 
officials. In total, the three lenders we interviewed endorsed about 
15 percent of all FHA mortgages for homes purchased in 2009. 

Data Reliability Assessment: 

To assess the reliability of record-level IRS unpaid assessments and 
FTHBC data, we relied on the work we performed during our annual audit 
of IRS's financial statements and interviewed knowledgeable IRS 
officials about any data reliability issues.[Footnote 89] We also 
performed electronic testing of required FTHBC elements. While our 
financial statement audits have identified some data reliability 
problems associated with tracing IRS's tax records to source records 
and including errors and delays in recording taxpayer information and 
payments, we determined that the data were sufficiently reliable to 
address this report's objectives. 

To assess the reliability of record-level FHA mortgage insurance data, 
we reviewed documentation from FHA, interviewed FHA officials who 
administer these information systems and officials who routinely use 
these systems for mortgage insurance management, verified selected 
data across multiple sources, and performed electronic testing of 
required elements. We determined that the data were sufficiently 
reliable for our purposes. 

We conducted this performance audit and related investigations from 
April 2011 through May 2012. We performed this performance audit in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
audit findings and conclusions based on our audit objectives. We 
believe that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Excerpts of the Uniform Residential Loan Application: 

Two of the three figures below represent sections of the Uniform 
Residential Loan Application (URLA) where applicant's are required to 
disclose any debts that may affect their eligibility for FHA mortgage 
insurance or their ability to repay the proposed mortgage. The third 
excerpt lists the consequences of making a false statement on the 
URLA. Knowingly making any false statement on the URLA is a federal 
crime punishable by fine or imprisonment.[Footnote 90] 

Figure 6: Liabilities Section of the Uniform Residential Loan 
Application: 

[Refer to PDF for image: Liabilities Section of the Uniform 
Residential Loan Application] 

Liabilities and Pledged Assets. List the creditor's name, address, and 
account number for all outstanding debts, including automobile loans, 
revolving charge accounts, real estate loans, alimony, child support, 
stock pledges, etc. Use continuation sheet, if necessary. Indicate by 
(*) those liabilities, which will be satisfied upon sale of real 
estate owned or upon refinancing of the subject property.   

Liabilities: 

Name and address of Company: 
Acct. no. 
Monthly Payment & Months Left to Pay: 
Unpaid Balance: 

Name and address of Company: 
Acct. no. 
Monthly Payment & Months Left to Pay: 
Unpaid Balance: 

Name and address of Company: 
Acct. no. 
Monthly Payment & Months Left to Pay: 
Unpaid Balance: 

Source: GAO analysis of the Uniform Residential Loan Application. 

[End of figure] 

Figure 7: Declarations Section of the Uniform Residential Loan 
Application: 

[Refer to PDF for image: excerpt] 

f. Are you presently delinquent or in default on any Federal debt or 
any other loan, mortgage, financial obligation, bond, or loan 
guarantee? 

Source: GAO analysis of the Uniform Residential Loan Application. 

[End of figure] 

Figure 8: Line on the Uniform Residential Loan Application Showing the 
Consequences of Making a False Statement: 

[Refer to PDF for image: excerpt] 

I/We fully understand that it is a Federal crime punishable by fine or 
imprisonment, or both, to knowingly make any false statements 
concerning any of the above facts as applicable under the provisions 
of Title 18, United States Code, Section 1001, et seq. 

Borrower's Signature: 
Date: 

Co-Borrower's Signature: 
Date: 

Source: GAO analysis of the Uniform Residential Loan Application. 

[End of figure] 

[End of section] 

Appendix III: Comments from the Federal Housing Administration: 

U.S. Department of Housing and Urban Development: 
Assistant Secretary for Housing--Federal Housing Commissioner: 
WASHINGTON, DC 20410-8000: 

May 8, 2012: 

Mr. Matthew F. Valenta: 
Assistant Director: 
Forensic Audits and Investigative Service: 
United States Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548:
 
Dear Mr. Valenta:  

The Department of Housing and Urban Development (HUD) appreciates the 
opportunity to respond to the Government Accountability Office (GAO) 
draft report, Tax Debtors Have Received FHA Mortgage Insurance and 
First-Time Homebuyer Credits (GAO-l2-592). In the report, GAO 
recommends that HUD should 1) consult with IRS to require lenders to 
collect more reliable tax debt information from applicants, and 2) 
provide lenders with revised policies or guidance, including the 
consideration of tax liens, for approving FHA mortgage insurance.  

In general, the Department agrees that current policies and procedures 
may fail to identify all potential borrowers with delinquent tax debt. 
As indicated in the draft report, FHA has policies in place intended 
to prohibit the insurance of loans to borrowers with delinquent tax 
debt in accordance with the Applicant Screening requirements for 
Delinquency on Federal Debt in OMB circular A-129. However, due to the 
strict confidentiality associated with the disclosure of Lax 
information, the discovery of delinquent tax debt is limited under 
current policy but FHA would benefit from better access to information 
regarding tax debts of applicants for FHA-insured mortgages. These 
limitations may lead to the issuance of FHA insured loans for 
borrowers whose delinquent tax debt is Unknown to FHA and the lender. 
To clarify this, the Department recommends that you change the terms 
"known unpaid taxes (debts)" and "known federal tax debt" to 
"delinquent federal tax debt" throughout the report. This change in 
terminology will provide clarity and consistency, and will avoid the 
appearance that FHA rather than the IRS knew of such delinquent debt.  

FHA has stated policy regarding the ineligibility of borrowers with 
tax liens, unless involved in a repayment plan, in its Handbook 
4155.1, Mortgage Credit Analysis for Mortgage Insurance on One-to Four-
Unit Mortgage Loans. However, the approval of loans that are 
ineligible for FHA insurance may occur if relevant sections of the 
handbook are not read in their entirety. Therefore, FHA will seek to 
provide further clarification regarding the current eligibility 
requirements for borrowers with federal tax liens. 

HUD appreciates the GAO's work through this audit to identify the 
limitations on FHA's existing guidance. FHA will contact the IRS in an 
effort to establish executable policy that may identify delinquent tax 
debtors. FHA will also execute changes to our current requirements for 
lenders in order to address the concerns discovered through the 
audit.   

If you have any questions about this response, please contact Kevin 
Stevens at (1202) 402-4317.  

Sincerely, 

Signed by: 

Carol J. Galante: 
Acting Assistant Secretary for Housing--Federal Housing Commissioner: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Gregory D. Kutz, (202) 512-6722 or kutzg@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Matthew Valenta, Assistant 
Director; Emily C.B. Wold, Analyst-in-Charge; Jamie L. Berryhill; Jeff 
McDermott; Maria McMullen; Wayne Turowski; Susan B. Wallace; and 
Timothy Walker made significant contributions to this report. 

[End of section] 

Footnotes: 

[1] This figure includes (1) taxes receivable of $147 billion, (2) 
compliance assessments--amounts that have not been agreed to by either 
the taxpayer or a court--of $103 billion, and (3) write-offs of $106 
billion. 

[2] In addition to known unpaid taxes, the net tax gap, estimated to 
be about $385 billion for tax year 2006 (the most recent estimate 
made), represents the net amount of noncompliance with the tax laws 
(after enforcement and late payments). According to IRS, 
underreporting of tax liability accounts for 84 percent of the gross 
gap, and nonfiling and underpayment of taxes comprised the rest of the 
gross tax gap. Tax gap estimates do not include all areas of the 
economy, such as illegal activity. 

[3] GAO, 2011 High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February 
2011). 

[4] GAO, Debt Collection: Barring Delinquent Taxpayers From Receiving 
Federal Contracts and Loan Assistance, [hyperlink, 
http://www.gao.gov/products/GAO/T-GGD/AIMD-00-167] (Washington D.C.: 
May 9, 2000); and Management Report: Improvements Are Needed to 
Enhance the Internal Revenue Service's Internal Controls and Operating 
Effectiveness, [hyperlink, http://www.gao.gov/products/GAO-11-494R] 
(Washington, D.C.: June 21, 2011). 

[5] We refer to individuals who received FHA mortgage insurance as 
borrowers. 

[6] The Recovery Act FTHBC only covered home purchases from January 1 
through November 30, 2009. 

[7] GAO, Tax Administration: Usage and Selected Analyses of the First-
Time Homebuyer Credit, [hyperlink, 
http://www.gao.gov/products/GAO-10-1025R] (Washington, D.C.: Sept. 2, 
2010). 

[8] GAO, Recovery Act: Thousands of Recovery Act Contract and Grant 
Recipients Owe Hundreds of Millions in Federal Taxes, [hyperlink, 
http://www.gao.gov/products/GAO-11-485] (Washington, D.C.: Apr. 28, 
2011). 

[9] The FTHBC under the Recovery Act had to be claimed on either a 
2008 or 2009 tax return. Because returns for the 2009 tax year were 
due by April 15, 2010, all claims filed on time without an extension 
would be accounted for in the July 2010 data. 

[10] For this analysis we used known federal tax debts. Under federal 
accounting standards, unpaid tax assessments require agreement from 
either the taxpayer or the court to be considered federal taxes 
receivable. Compliance assessments and memo accounts are not 
considered federal taxes receivable because they are not agreed to by 
taxpayers or the courts. 

[11] IRS's FTHBC data do not contain home purchase dates, which were 
needed to associate the credit with its enacting legislation. The 
Recovery Act applied to only 1 of the 3 years for which the FTHBC was 
available. To obtain the needed dates, we used the Social Security 
number from the IRS FTHBC data as a unique identifier, and we 
electronically matched them to Social Security numbers found in the 
FHA data, which contained home purchase dates. Using this method, we 
estimate that our analysis included 43 percent of all FTHBCs awarded 
under the Recovery Act because we were unable to analyze any credits 
for individuals who did not use FHA mortgage insurance in the 
financing of their home. Such individuals may have financed their home 
purchases through conventional loans or other government loan 
programs, such as those available through the Department of Veterans 
Affairs. 

[12] The length of a delinquent tax period is dependent on the type of 
tax owed. For instance, income taxes are assessed annually; payroll 
taxes are assessed quarterly. 

[13] The value of mortgage insurance was not a criterion in selecting 
cases for borrowers who obtained FHA mortgage insurance under the 
Recovery Act because all of these mortgages resulted from increased 
FHA loan limits in high-cost areas. For each of the two groups 
included in our analysis, we selected two cases with IRS civil 
penalties for noncompliance and two cases in which the home had been 
foreclosed. 

[14] To mask the identities of the tax debtors included in our case 
studies, we requested additional files from FHA that were not tax 
debtors. 

[15] FHA and IRS provided us some information on an additional three 
cases; however, we found that two of these cases did not have 
outstanding debt at the time they obtained FHA mortgage insurance, 
because they were either deemed an innocent spouse (granted relief 
from a joint tax liability) or had satisfied the repayment portion on 
an offer in compromise (an agreement to settle the debt for less than 
the amount owed).The third case's debt had been removed from IRS 
because it was beyond the 10-year statutory collection period at the 
time we received the IRS records, therefore we did not include them in 
our analysis. We did not receive FHA mortgage files from FHA for the 
remaining seven case because the lenders for these files had either 
gone out of business or were not otherwise required to provide the 
mortgage file, according to FHA officials. 

[16] We did not request FHA mortgage files for these nine cases. 

[17] Federal law typically requires that any federal tax refund be 
offset to pay down an individual's unpaid taxes. 

[18] Pub. L. No. 111-5 (Feb. 17, 2009). 

[19] Section 1202 of Pub. L. No. 111-5. 

[20] The FTHBC was originally enacted by the Housing and Economic 
Recovery Act of 2008 (HERA) as an interest free loan of up to $7,500 
and was to expire on July 1, 2009. Pub. L. No. 110-289, § 3011 (July 
30, 2008). The Recovery Act modified and extended the FTHBC by 
increasing the maximum refundable credit to $8,000 for homes purchases 
from January 1, 2009, through November 30, 2009, with no payback 
required unless the home ceases to be the taxpayer's principal 
residence within 3 years of the purchase. Pub. L. No. 111-5, § 1006 
(Feb. 17, 2009). 

[21] Homes purchased in 2009 would have been claimed on tax returns 
filed in 2009 or 2010. 

[22] Prior to January 1, 2011, about 13,000 lending institutions were 
approved to participate in FHA's single-family mortgage insurance 
programs. At that time, FHA stopped allowing loan correspondents to 
participate in FHA programs. Loan correspondents were lenders that 
originated FHA-insured loans--meaning that they could accept mortgage 
applications, obtain employment verifications and credit histories on 
applicants, order appraisals, and perform other tasks that precede the 
loan underwriting process--but did not have direct endorsement 
authority. 

[23] 24 C.F.R. § 203.402. 

[24] In fiscal year 2011, FHA's share of the market for home purchases 
was about 24 percent. 

[25] GAO, Mortgage Financing: Opportunities to Enhance Management and 
Oversight of FHA's Financial Condition, [hyperlink, 
http://www.gao.gov/products/GAO-10-827R] (Washington D.C.: Sept. 14, 
2010). 

[26] FHA, Annual Management Report Fiscal Year 2009 (Washington D.C.: 
2009). 

[27] HUD generally defines a first-time homebuyer as an individual who 
has had no ownership in a principal residence during the 3-year period 
ending on the date of purchase of the property. 

[28] See [hyperlink, http://www.gao.gov/products/GAO-10-827R]. 

[29] 12 U.S.C. § 1711. 

[30] HUD, Annual Report to Congress, Fiscal Year 2011 Financial 
Status, FHA Mutual Mortgage Insurance Fund (Nov. 15, 2011), p. 33, 
[hyperlink, 
http://portal.hud.gov/hudportal/documents/huddoc?id=FHAMMIFundAnnRptFY20
11.pdf]. 

[31] GAO, Federal Housing Administration: Improvements Needed in Risk 
Assessment and Human Capital Management, [hyperlink, 
http://www.gao.gov/products/GAO-12-15] (Washington, D.C.: Nov. 7, 
2011). 

[32] Credit scores assign a numeric value generally ranging from 300-
850 to a borrower's credit history, with higher values signifying 
better credit. Per FHA policy, applicants with credit scores below 500 
are not qualified for FHA mortgage insurance. 

[33] According to FHA officials, direct endorsement lenders who 
participate in FHA's lender insurance (LI) program can underwrite, 
close, and insure loans while those lenders without LI can underwrite 
and close loans, but FHA is still responsible for insuring the loans. 

[34] 24 C.F.R. § 203.606. State law may prohibit the start of 
foreclosure proceedings within the time frame specified by HUD. Also, 
military service of the borrower may delay foreclosure proceedings (24 
C.F.R. § 203.346). 

[35] 24 C.F.R. § 203.401. 

[36] Pub. L. No. 110-185, § 202 (Feb. 13, 2008). 

[37] Loan limits for one-through four-unit homes under ESA were 
$729,750, $934,200, $1,129,250, and $1,403,400, respectively. 

[38] In 2007, the loan limits were 95 percent of the local median home 
price, with a maximum loan limit of $362,790 for one-unit homes. 
Limits for one-through four-unit homes were $362,790, $464,449, 
$561,441, and $697,696, respectively. 

[39] Pub. L. No. 110-289, § 2111 (July 30, 2008). Loan limits for one-
through four-unit homes under HERA were $625,500, $800,775, $967,950, 
and $1,202,925, respectively. 

[40] Although loan limits under HERA were to be effective in 2009, 
they were not fully implemented due to a series of temporary measures 
passed by Congress, including the Recovery Act, to ensure the higher 
limits were allowed to continue. 

[41] Under 26 U.S.C. § 36, a first-time home buyer has not had an 
ownership interest in any principal residence during the 3-year period 
prior to the date of the purchase of the home eligible for the credit. 
No credit is allowed for property (1) located outside the United 
States, (2) inherited, (3) purchased from a close relative, or (4) 
purchased by a nonresident alien. 

[42] The 2008 FTHBC applies to purchases made from April 9, 2008, 
through December 31, 2008. The 2008 FTHBC was amended by the 2009 
credit, and applies to purchases made from January 1, 2009, through 
November 30, 2009. 

[43] The recapture provision is limited to the amount of gain on the 
sale, meaning a taxpayer could sell within 3 years and still not be 
required to make any repayments if the house was not sold for a gain. 
26 U.S.C. § 36(f)(3). 

[44] Pub. L. No. 111-198 (July 2, 2010). The FTHBC has now expired. 

[45] OMB Circular A-129, Policies for Federal Credit Programs and Non-
Tax Receivables, Appendix A § III (A)(1)(b). 

[46] The six agencies that submit delinquent debt information to 
CAIVRS are: (1) Department of Agriculture, (2) Department of 
Education, (3) Department of Justice, (4) Department of Housing and 
Urban Development, (5) Department of Veterans Affairs, and (6) Small 
Business Administration. 

[47] HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage 
Insurance (March 2011). 

[48] An offer in compromise is an agreement between a tax debtor and 
IRS that resolves the tax debtor's tax debt by accepting less than 
full payment. 

[49] 18 U.S.C. § 1001. 

[50] Limitations with the FTHBC data we obtained from IRS required 
that we analyze FTHBCs for home buyers who also obtained FHA mortgage 
insurance--or approximately 43 percent of all Recovery Act FTHBCs. 
Therefore, we were unable to identify FTHBCs for those who purchased 
their homes using cash, conventional mortgages, or other means. See 
appendix I for additional details on this limitation. 

[51] A mortgage is considered delinquent any time a payment is due and 
not paid. Once the borrower is 30 days late in making a payment, FHA 
considers the mortgage to be in default. Once the mortgage has been in 
default for 90 days or more it is considered to be seriously 
delinquent. 

[52] Our analysis of Recovery Act mortgage insurance borrowers with 
tax debt as of June 30, 2010, excluded (1) tax debts that have not 
been agreed to by the tax debtor or affirmed by the court (i.e., tax 
debts that IRS classified as compliance assessments or memo accounts 
for financial reporting), (2) tax debts from calendar year 2009 and 
2010 tax periods, (3) tax debts that were assessed by IRS after the 
mortgage insurance was issued, and (4) tax debts of less than $100. 
Additionally, there is generally a 10-year statutory collection period 
beyond which IRS is prohibited from attempting to collect tax debt. 26 
U.S.C. § 6502. Tax debts that are beyond this statutory period are not 
included in our analysis. 

[53] FHA-insured mortgages may have one borrower and up to four 
coborrowers. We included the borrower and first co-borrower in our 
analysis. We found instances in which the borrower and co-borrower 
both had federal tax debt, thus, the number of borrowers is greater 
than the number of mortgages. For the purposes of this report, we 
refer to both borrowers and coborrowers as borrowers. 

[54] We are unable to systematically determine which individuals were 
in repayment agreements at the time of the mortgage due to timing 
differences in the data we used. The IRS data on unpaid federal tax 
debts are as of June 2010, while each of the borrowers included in our 
analysis received mortgage insurance in 2009. Therefore, we are unable 
to systematically determine whether each borrower was in a valid 
repayment agreement on the day the borrower received mortgage 
insurance. 

[55] In general, foreclosure may be initiated when three monthly 
installments are due and unpaid and must be initiated when six monthly 
installments are due and unpaid, except when prohibited by law. 

[56] We could not assess the likelihood of serious delinquency and 
foreclosure based on other characteristics that may be associated with 
these events (e.g., credit score of the borrower, loan-to-value ratio 
of the mortgage, etc.) and therefore are not suggesting that tax debt 
is the only or strongest factor associated with serious delinquency or 
foreclosure. 

[57] Our analysis of Recovery Act mortgage insurance borrowers with 
tax debt as of June 30, 2010, excluded (1) tax debts that have not 
been agreed to by the tax debtor or affirmed by the court, i.e., tax 
debts that IRS classified as compliance assessments or memo accounts 
for financial reporting; (2) tax debts from calendar years 2009 and 
2010 tax periods; (3) tax debts that were assessed by IRS after the 
mortgage insurance was issued; and (4) tax debts of less than $100. 
Additionally, there is generally a 10-year statutory collection period 
beyond which IRS is prohibited from attempting to collect tax debt.26 
U.S.C. § 6502. Tax debts that are beyond this statutory period are not 
included in our analysis. 

[58] We found instances in which the borrower and co-borrower both had 
federal tax debt and claimed the FTHBC, thus, the number of borrowers 
is greater than the number of mortgages. 

[59] Any Recovery Act FTHBC recipient whose credit value was greater 
than their outstanding tax liability would not be included in our IRS 
June 30, 2010, file because the refundable credit would have 
eliminated their outstanding tax liability. 

[60] 26 U.S.C. § 6402(d). 

[61] 11 U.S.C. § 362(b)(26). 

[62] We were only able to identify and analyze about 43 percent of all 
Recovery Act FTHBCs. Additional details on scope limitations related 
to the FTHBC can be found in appendix I. 

[63] 26 U.S.C. § 6402(d). 

[64] GAO, Service-Disabled Veteran-Owned Small Business Program: 
Governmentwide Fraud Prevention Control Weaknesses Leave Program 
Vulnerable to Fraud and Abuse, but VA Has Made Progress in Improving 
Its Verification Process. [hyperlink, 
http://www.gao.gov/products/GAO-12-443T] (Washington, D.C.: Feb. 7, 
2012), and Energy Star Program: Covert Testing Shows the Energy Star 
Program Certification Process Is Vulnerable to Fraud and Abuse. 
[hyperlink, http://www.gao.gov/products/GAO-10-470] (Washington, D.C.: 
Mar. 5, 2010). 

[65] We requested IRS notes, detailed account transcripts, and other 
records from IRS as well as mortgage files from FHA for 18 
individuals. Of these requested cases, FHA provided us information 
that only allowed us to fully analyze 8 of them. For additional 
details on our selection methodology, see appendix I. 

[66] 26 U.S.C. § 6103. 

[67] FHA policy allows lenders to use IRS form 4506 Request for Copy 
of Tax Return, IRS form 4506-T Request for Transcript of Tax Return, 
or any other document that is appropriate for obtaining tax returns 
from IRS. Any of these options could be used to obtain the financial 
status of an applicant's account, so long as it includes the same 
information and provides for the taxpayer's signature and date of 
signature. 

[68] IRS form 4506-T is not used to verify income when the applicant 
is applying for a streamline refinance (a refinance of an existing FHA 
mortgage that requires limited documentation). 

[69] IRS returns the information requested on IRS form 4506-T within 
10 business days at no expense to the requester, or within 48 hours 
through the IRS Income Verification Express Service (IVES) at an 
expense of $2.00, according to IRS officials. 

[70] During prior audits of IRS's financial statement, we found that 
IRS did not always release the applicable federal tax lien within 30 
days after a tax liability is satisfied, either through payment or 
abatement, as required by the Internal Revenue Code. See GAO, 
Financial Audit: IRS's Fiscal Years 2011 and 2010 Financial 
Statements, [hyperlink, http://www.gao.gov/products/GAO-12-165] 
(Washington, D.C.: Nov. 10, 2011). 

[71] Lien subordination is when IRS allows a later lien to take 
precedence over the federal tax lien. 

[72] One of the lenders said they would approve FHA insurance in this 
manner as long as TOTAL rated the applicant as "accept." This lender 
subsequently told us that applicants with federal tax liens are 
ineligible for FHA mortgage insurance unless they have repaid their 
tax debt or entered into a valid repayment agreement with IRS; 
however, this lender's written policies show that reviewing credit 
reports for tax liens is not required for applicants for whom Total 
rates as "accept." 

[73] FHA's SFDW is an information system used to obtain case-level 
information covering all the processes in the mortgage insurance 
lifecycle. The SFDW contains Social Security numbers for the primary 
borrower and up to four coborrowers. For the purposes of this audit, 
we have limited our scope to the primary borrower and first co-
borrower, if applicable. 

[74] The FTHBC under the Recovery Act had to be claimed on either a 
2008 or 2009 tax return. Because returns for the 2009 tax year were 
due by April 15, 2010, all claims filed on time, without an extension, 
would be accounted for in the July 2010 data. 

[75] A TIN is a unique nine-digit identifier assigned to each business 
and individual that files a tax return. For most individuals, the 
Social Security number is the TIN. For businesses, the employer 
identification number assigned by IRS serves as the TIN. 

[76] Loan limits set forth under HERA were to be in place in 2009, but 
they were not fully implemented until October 2011 due to a series of 
temporary measures, including the Recovery Act, to ensure that higher 
limits were allowed to continue. 

[77] The Recovery Act applied for borrowers with credit approval 
dates--the underwriters' approval date of the loan--in calendar year 
2009. 

[78] The FTHBC was available under the Recovery Act for homes 
purchased from January 1, 2009, through November 30, 2009. 

[79] GAO, Tax Administration: Usage and Selected Analyses of the First-
Time Homebuyer Credit, [hyperlink, 
http://www.gao.gov/products/GAO-10-1025R] (Washington, D.C.: Sept. 2, 
2010). 

[80] We removed refunds that occurred after June 30, 2010, because our 
unpaid tax data from IRS were as of this date. This was necessary 
because we would not have been able to identify whether an individual 
had paid off their federal tax debt if they had done so after June 30, 
2010. 

[81] Under federal accounting standards, unpaid assessments require 
taxpayer or court agreement to be considered federal taxes 
receivables. Compliance assessments and memo accounts are not 
considered federal taxes receivable because they are not agreed to by 
taxpayers or the courts. 

[82] The length of a delinquent tax period is dependent on the type of 
tax owed. For instance, income taxes are assessed on an annual basis; 
payroll taxes are assessed on a quarterly basis. 

[83] The value of mortgage insurance was not a criterion in selecting 
cases for borrowers who obtained FHA mortgage insurance under the 
Recovery Act because all of these mortgages were as a result of 
increased FHA loan limits in high-cost areas. For each of the two 
groups included in our analysis, we selected two cases with IRS civil 
penalties for noncompliance and two cases in which the home had been 
foreclosed. 

[84] To mask the identities of the tax debtors included in our case 
studies, we requested additional files from FHA that were not tax 
debtors. 

[85] FHA and IRS provided us some information on an additional three 
cases; however, we found that two of these cases did not have 
outstanding debt at the time they obtained FHA mortgage insurance, 
because they were either deemed an innocent spouse (granted relief 
from a joint tax liability) or had satisfied the repayment portion on 
an offer in compromise (an agreement to settle the debt for less than 
the amount owed).The third case's debt had been removed from IRS 
because it was beyond the 10-year statutory collection period at the 
time we received the IRS records, therefore we did not include them in 
our analysis. We did not receive FHA mortgage files from FHA for the 
remaining seven cases because the lenders for these files had either 
gone out of business or were not otherwise required to provide the 
mortgage file, according to FHA officials. 

[86] We did not request FHA mortgage files for these nine cases. 

[87] HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage 
Insurance (March 2011). 

[88] Mortgagee letters are written instructions that FHA periodically 
issues to all of its approved lenders (mortgagees). 

[89] GAO, Financial Audit: IRS's Fiscal Years 2010 and 2009 Financial 
Statements, [hyperlink, http://www.gao.gov/products/GAO-11-142] 
(Washington, D.C.: Nov. 10, 2010). 

[90] 18 U.S.C. § 1001. 

[End of section] 

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