Skip to main content

Homeownership: Problems Persist With HUD's 203(k) Home Rehabilitation Loan Program

RCED-99-124 Published: Jun 14, 1999. Publicly Released: Jul 01, 1999.
Jump To:
Skip to Highlights

Highlights

Pursuant to a congressional request, GAO reviewed the Department of Housing and Urban Development's (HUD) management of its 203(k) Home Rehabilitation Mortgage Insurance program, focusing on: (1) the risk the 203(k) program poses to the Federal Housing Administration's (FHA) insurance fund relative to the 203(b) program; (2) HUD's efforts to correct program deficiencies identified by HUD's Inspector General and others; and (3) weaknesses, if any, in HUD's oversight of the 203(k) program and the extent to which lenders are complying with HUD's underwriting guidelines for making program loans.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Housing and Urban Development In order to provide the necessary management and oversight of the 203(k) program, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing--Federal Housing Commissioner to improve the post-endorsement technical review to identify lenders' underwriting violations before the program incurs losses as a result of poor underwriting. Lenders should also be notified immediately of underwriting violations and be required to rectify the violation or risk losing HUD's insurance on the loan.
Closed – Implemented
According to HUD's Deputy Director of Single Family Housing, HUD has implemented procedures to improve its oversight of 203(K) lenders, including (1) reviewing all loans originated by non-profit groups, (2) a minimum of 10 percent of all 203(K) loans are targeted for technical reviews, (3) loan underwriting ratings are now sent to lending institutions on a quarterly basis rather than semiannually, and (4) the Office of Single Family awarded a contract in September 2001 to develop a model that will help identify high-risk loan originations and target technical reviews of these riskier loans. This model will be complete in July 2002.
Department of Housing and Urban Development In order to provide the necessary management and oversight of the 203(k) program, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing--Federal Housing Commissioner to target high-risk 203(k) lenders for routine Quality Assurance Reviews to minimize the risks that these lenders pose to the General Insurance Fund.
Closed – Implemented
On May 30, 2000, the Director of HUD's Office of Lender Activities and Program Compliance issued new procedures to all of its Homeownership Centers for targeting high-risk lenders for HUD monitoring. Specifically, the memorandum provides specific procedures for identifying high-risk 203(k) lenders and instructs the Homeownership Centers to target these lenders for annual monitoring by HUD's Quality Assurance Division. The Centers have been instructed to select high-risk 203(k) lenders in September 2000 for reviews to be conducted throughout fiscal year 2001.
Department of Housing and Urban Development In order to provide the necessary management and oversight of the 203(k) program, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing--Federal Housing Commissioner to establish strict criteria to ensure that consultants/inspectors are well versed in residential construction/rehabilitation and cost estimating to protect the interests of the borrower.
Closed – Implemented
On July 26, 2000, HUD issued Mortgagee Letter 00-25 that sets new standards and procedures for 203(k) consultants' participation in the 203(k) program. Specifically, it requires that all consultants wishing to participate in the 203(k) program must re-apply for placement on the 203(k) Consultant Roster. It also requires the prospective consultants to meet minimum criteria and to provide various forms of evidence to support their ability to function as a 203(k) consultant, as well as requiring all prospective consultants to pass a formal examination to demonstrate their level of knowledge.
Department of Housing and Urban Development In order to provide the necessary management and oversight of the 203(k) program, the Secretary of Housing and Urban Development should direct the Assistant Secretary for Housing--Federal Housing Commissioner to establish strict criteria for qualifying and recertifying nonprofit organizations for their continued participation in the program to ensure they have the resources and the expertise to rehabilitate properties.
Closed – Implemented
On March 3, 2000, HUD issued Mortgagee Letter 00-8 which sets uniform standards for non-profit agencies participation and recertification in all FHA activities. Specifically, the letter requires non-profit agencies to complete a formal application process and to be recertified every 2 years. The letter also makes provisions for periodic reviews of the non-profit agencies by HUD to ensure their compliance with FHA activities.

Full Report

Office of Public Affairs

Topics

Comparative analysisGovernment guaranteed loansInsurance claimsInternal controlsMortgage loansMortgage protection insuranceProgram abusesProperty improvement loansRisk managementMortgage programs