This is the accessible text file for GAO report number GAO-12-15 
entitled 'Federal Housing Administration: Improvements Needed in Risk 
Assessment and Human Capital Management' which was released on 
November 7, 2011. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 
GAO: 

Report to the Committee on Banking, Housing, and Urban Affairs, U.S. 
Senate: 

November 2011: 

Federal Housing Administration: 

Improvements Needed in Risk Assessment and Human Capital Management: 

GAO-12-15: 

GAO Highlights: 

Highlights of GAO-12-15, a report to the Committee on Banking, 
Housing, and Urban Affairs, U.S. Senate. 

Why GAO Did This Study: 

The Department of Housing and Urban Development’s (HUD) Federal 
Housing Administration (FHA) has helped millions purchase homes by 
insuring private lenders against losses from defaults on FHA-insured 
single-family mortgages. In recent years, FHA has experienced a 
dramatic increase in its market role due, in part, to the contraction 
of other mortgage market segments. 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 while meeting 
the housing needs of borrowers. In addition to providing data on FHA’s 
single-family workload, GAO was asked to evaluate (1) FHA’s risk 
assessment strategy, including the extent to which it is consistent 
with HUD and GAO internal control standards, and (2) steps FHA has 
taken to manage the risks in its single-family programs. To address 
these objectives, GAO analyzed data from fiscal years 2006–2010 on 
single-family business volume and workload, reviewed FHA documents on 
risk assessment and changes made to manage risks (such as those to 
human capital), and interviewed FHA officials. 

What GAO Found: 

While FHA has taken steps to identify risks in its single-family 
programs, it has not combined these risk assessment efforts and lacks 
annual assessments and tools to anticipate risks from changing 
conditions. To improve its risk assessment strategy, FHA created a 
risk office in 2010 and hired a consultant to recommend best practices 
for its operation. It also began a quality control initiative in the 
Office of Single Family Housing (SFH), in which program and field 
offices assess risks and report on efforts to mitigate them. Internal 
control standards require agencies to have an integrated risk 
assessment plan. While FHA’s consultant recommended integrating risk 
assessment, SFH’s quality control initiative and the risk office’s 
activities remain separate efforts. Although HUD’s guidance requires 
annual risk assessments, SFH has not updated its assessments since 
2009. Finally, FHA has not yet acted on the consultant’s 
recommendation to report on emerging risks. Delays in defining the 
risk office’s authority, staff shortages, and changes in FHA 
leadership have slowed implementation of the new approach. Without 
integrated and updated risk assessments that identify emerging risks, 
FHA lacks assurance that it has identified all its risks. 

FHA has enhanced efforts to manage risks in its single-family 
programs, but human capital still presents challenges. To address risk 
associated with lenders and appraisers, FHA reduced the number of 
lenders directly participating in the program and revised its 
oversight. FHA addressed some risks related to staffing but lacks 
strategic workforce and succession plans. HUD and GAO standards 
require workforce planning that identifies critical skills needed to 
meet future needs, defines skill gaps, and considers succession 
planning. Although it has determined that SFH needs more staff, FHA 
has not created a workforce plan that systematically identifies 
critical skills and gaps in skills. Also, 63 percent of homeownership 
center staff (who conduct most day-to-day functions) are eligible to 
retire in the next 3 years, but FHA has not developed a plan to manage 
retirements or hire staff with needed skills. Without a workforce 
planning process that includes succession planning, FHA’s ability to 
systematically identify workforce needs is limited. 

Figure: Number of FHA Loans and Single-Family Staff, 2006–2010: 

[Refer to PDF for image: 2 line graphs] 

Loans: 

Fiscal year: 2006; 
Number of loans: 476,183. 

Fiscal year: 2007; 
Number of loans: 509,711. 

Fiscal year: 2008; 
Number of loans: 1,143,590. 

Fiscal year: 2009; 
Number of loans: 1,945,940. 

Fiscal year: 2010; 
Number of loans: 1,745,610. 

Office of Single Family Housing staff: 

Fiscal year: 2006; 
Number of staff: 932. 

Fiscal year: 2007; 
Number of staff: 896. 

Fiscal year: 2008; 
Number of staff: 942. 

Fiscal year: 2009; 
Number of staff: 937. 

Fiscal year: 2010; 
Number of staff: 1,011. 

Source: GAO analysis of FHA data. 

[End of figure] 

What GAO Recommends: 

FHA should develop an integrated risk assessment strategy, conduct 
annual risk assessments, establish ongoing mechanisms to anticipate 
emerging risks, and develop workforce and succession plans. HUD agreed 
with the recommendations, stating that it was either currently working 
toward achieving the recommendations or had plans to do so in the very 
near future. 

View [hyperlink, http://www.gao.gov/products/GAO-12-15]. For more 
information, contact Mathew J. Scirè at (202) 512-8678 or 
sciremj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

FHA Business Volume and Workload Increased at a Greater Rate than 
Staffing Levels: 

FHA Has Yet to Implement a Comprehensive Risk Assessment Strategy: 

Although FHA Has Enhanced Risk Management and Plans to Modernize 
Information Technology, Human Capital Challenges Remain: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Department of Housing and Urban 
Development: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Homeownership Center Divisions and Responsibilities: 

Table 2: Single Family Housing Staff Levels, 2006-2010: 

Table 3: Loss Mitigation Actions, 2006-2010: 

Table 4: Credit and Operational Risks That FHA Identified in Its 
Single-Family Insurance Programs: 

Table 5: Status of Key Leadership Positions Involved in Implementing 
FHA's New Risk Assessment Strategy, as of September 2011: 

Table 6: Five Most Critical Information Technology Initiatives for 
FHA's Single-Family Insurance Programs: 

Table 7: Percentage of FHA Staff Eligible to Retire within the Next 1, 
2, and 3 Years, as of July 2011: 

Figures: 

Figure 1: Office of Single Family Housing Organizational Chart: 

Figure 2: FHA Loan Volume and Market Share, 2006-2010: 

Figure 3: Number and Results of Post-endorsement Technical Reviews, 
2006-2010: 

Figure 4: Number and Results of Appraisal and Appraiser Reviews, 2006- 
2010: 

Figure 5: Active Real Estate-Owned Property Inventory and REO Staff, 
2006-2010: 

Figure 6: Number and Results of Lender and Loan Reviews, 2006-2010: 

Figure 7: Organizational Chart for FHA's Office of Risk Management and 
Regulatory Affairs, as of August 2011: 

Figure 8: Average Number of Appraisals Reviewed per Appraiser and 
Percentage of Appraisers Reviewed, 2006-2010: 

Figure 9: Selected FHA Single-Family Contractors, 2006-2010: 

Figure 10: FHA Single-Family Overtime Expenditures, 2006-2010: 

Abbreviations: 

CHUMS: Computerized Home Underwriting Management System: 

FHA: Federal Housing Administration: 

FTE: full-time equivalent: 

HUD: Department of Housing and Urban Development: 

IG: Inspector General: 

IT: information technology: 

LTV: loan-to-value: 

PSD: Program Support Division: 

OCSD: Operations and Customer Service Division: 

ORM: Office of Risk Management: 

PETR: post-endorsement technical review: 

PUD: Processing and Underwriting Division: 

QAD: Quality Assurance Division: 

REAP: Resource Estimation and Allocation Process: 

REO: Real Estate Owned Division: 

SFH: Office of Single Family Housing: 

TOTAL: Technology Open to Approved Lenders: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

November 7, 2011: 

The Honorable Tim Johnson:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Department of Housing and Urban Development's (HUD) Federal 
Housing Administration (FHA) has helped millions of families purchase 
homes through its single-family mortgage insurance programs. In recent 
years, FHA has experienced a dramatic increase in its market role due, 
in part, to the contraction of other mortgage market segments. At the 
same time, it has faced fiscal challenges. As we reported in September 
2010, FHA is not meeting statutory capital reserve requirements. 
[Footnote 1] Additionally, although FHA's single-family insurance 
programs historically have produced budgetary receipts for the federal 
government, a weakening in the performance of FHA-insured loans could 
increase the possibility that FHA will require additional funds to 
help cover its costs on insurance issued to date.[Footnote 2] 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 while meeting the housing needs of borrowers. 

Your committee asked us to examine FHA's oversight capacity in light 
of the recent expansion in single-family mortgage insurance programs. 
Specifically, this report discusses (1) recent changes in FHA's 
volume, workload, and resources; (2) FHA's risk assessment strategy, 
including the extent to which it is consistent with HUD and GAO 
internal control standards; and (3) steps FHA has taken to manage the 
risks in its single-family mortgage insurance programs. 

To determine changes in FHA's single-family business volume, we 
analyzed data on business volume and market share from FHA's quarterly 
reports to Congress and quarterly reports on U.S. housing market 
conditions. To determine how FHA's workload has changed, we analyzed 
data for 2006-2010 from various HUD information systems.[Footnote 3] 
We also analyzed data on staff assigned to the Office of Single Family 
Housing in 2006-2010 and contractor staff hired to perform selected 
functions. To assess the reliability of these data, we reviewed 
documentation from FHA, interviewed FHA officials who administer these 
information systems and officials who routinely use these systems for 
workload management, and verified selected data across multiple 
sources. We determined that the data were sufficiently reliable for 
our purposes. To determine the extent to which FHA's risk assessment 
strategy is consistent with GAO's and HUD's risk assessment 
requirements and guidelines, we reviewed Federal Managers' Financial 
Integrity Act requirements, our internal control standards and 
evaluation tool, HUD's management control handbook, and Office of 
Management and Budget Circular No. A-123 requirements regarding an 
internal control structure for risk assessment. To identify FHA's risk 
assessment strategy, we reviewed (1) quality management plans and 
examples of risk assessment worksheets, quarterly statements, and 
other documentation for the Office of Single Family Housing's internal 
quality control initiative and (2) a report on the proposed structure 
and functions of the Office of Risk Management and Regulatory Affairs. 
We also interviewed Office of Single Family Housing and Office of Risk 
Management and Regulatory Affairs staff. We then compared FHA's risk 
assessment strategy with our internal control standards and HUD's 
guidance. To describe the steps FHA has taken to manage the risks it 
has identified, we reviewed changes to regulations and FHA guidance 
that address credit risk and risks associated with lenders and 
appraisers. To determine the advantages and disadvantages of changes 
FHA has made to its oversight of lenders and appraisers, we reviewed 
relevant documents and interviewed FHA officials and officials at 
trade organizations representing large and small lenders. To determine 
the steps FHA has taken to manage the risks associated with its 
information systems, we reviewed documents related to FHA's efforts to 
transform its information systems and interviewed the FHA 
Transformation Initiative program manager. To assess the steps FHA has 
taken to address its staffing needs, we reviewed the 2009 Resource 
Estimation and Allocation Process study for Single Family Housing 
field staff and HUD's Strategic Human Capital Plan. We also 
interviewed FHA officials about their workforce and succession 
planning and obtained any related documents. We compared this 
information with our internal control standards and HUD's human 
capital guidance. 

We conducted this performance audit from October 2010 to November 2011 
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 
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. Appendix I 
contains additional information on our scope and methodology. 

Background: 

FHA's single-family programs insure private lenders against losses 
from borrower defaults on mortgages that meet FHA criteria for 
properties with one to four housing units.[Footnote 4] FHA insures a 
variety of mortgages for initial home purchases, construction and 
rehabilitation, and refinancing. It also insures reverse mortgages, a 
type of loan against the borrower's home that is available to persons 
62 years or older and allows them to convert home equity into flexible 
cash advances while living in their homes. In 2010, FHA insured over 
1.7 million single-family mortgages representing about $319 billion in 
mortgage insurance. The agency has played a particularly large role 
among minority, lower-income, and first-time homebuyers. In 2010, 
almost 80 percent of FHA-insured home purchase loans went to first-
time homebuyers, 30 percent of whom were minorities. FHA generally is 
thought to promote stability in the market by helping to ensure the 
availability of mortgage credit in areas that may be underserved by 
the private sector or that are experiencing economic downturns. 

Legislation sets certain standards for FHA-insured loans. FHA 
borrowers who are purchasing a home are required to make a cash 
investment of at least 3.5 percent of the current purchase price. This 
investment may come from the borrowers' own funds or from certain 
third-party sources. However, borrowers are permitted to finance their 
mortgage insurance premiums and some closing costs, which can create 
an effective loan-to-value (LTV) ratio--that is, the ratio of the 
amount of the mortgage loan to the value of the home--of close to 100 
percent for some FHA-insured loans. Congress also has set limits on 
the size of the loans FHA may insure, which can vary by county. For 
the period from January 1, 2011, through September 30, 2011, the 
limits ranged from $271,050 to $729,750 for one-unit properties in the 
continental United States. Starting October 1, 2011, the limits ranged 
from $271,050 to $625,500 for these properties. 

FHA insures almost all of its single-family mortgages under its Mutual 
Mortgage Insurance Fund (the Fund). The Fund is supported by 
borrowers' insurance premiums. FHA has the authority to establish and 
collect a single up-front premium (in an amount not to exceed 3.0 
percent of the amount of the original insured principal obligation of 
the mortgage) and annual premiums of up to 1.5 percent of the 
remaining insured principal balance, or 1.55 percent for borrowers 
with down payments of less than 5.0 percent. Since April 18, 2011, FHA 
has charged a 1.00 percent up-front premium and a 1.10 or 1.15 percent 
annual insurance premium, depending on the LTV ratio. 

As of September 2011, almost 3,700 lending institutions were approved 
to participate in FHA's mortgage insurance programs for single-family 
homes. Virtually all of these lending institutions have direct 
endorsement authority, meaning that they can underwrite loans and 
determine their eligibility for FHA mortgage insurance without HUD's 
prior review.[Footnote 5] Although they can make underwriting 
decisions without HUD's prior review, direct endorsement lenders are 
still subject to a HUD review of loan paperwork prior to endorsement 
as well as a post-endorsement review of the loan. They can apply to 
participate in the Lender Insurance program, which enables high-
performing lenders to approve mortgages for FHA insurance without a 
pre-endorsement review by HUD. As of September 2011, about 20 percent 
of direct endorsement lenders participated in the Lender Insurance 
program. In 2010, these lenders accounted for about 73 percent of 
FHA's single-family loans. 

FHA's single-family insurance programs are administered by the Deputy 
Assistant Secretary for Single Family Housing (see figure 1), who 
reports to the Assistant Secretary for Housing-Federal Housing 
Commissioner. Within the Office of Single Family Housing, three 
offices develop policy and manage oversight functions: Program 
Development, Asset Management, and Lender Activities and Program 
Compliance. Program Development is responsible for developing 
policies, procedures, and guidance for lenders that originate and 
underwrite FHA insured single-family mortgages; administering FHA's 
housing counseling program; and establishing protocols for property 
appraisals. Asset Management is responsible for policies and 
procedures relating to servicing of FHA-insured mortgages from the 
point of loan insurance until loan payoff or disposition, helping 
homeowners overcome financial difficulties that lead to mortgage 
delinquency (loss mitigation), and managing and selling real estate-
owned properties (that is, acquired by FHA through the foreclosure 
process). It includes the National Servicing Center, which implements 
many of these policies and procedures. Lender Activities and Program 
Compliance's three divisions oversee lenders and carry out enforcement 
activities. Specifically, the Lender Approval and Recertification 
Division approves and recertifies qualified lenders to originate, 
purchase, or service FHA-insured mortgages. The Quality Assurance 
Division assesses lender performance, internal controls, and 
compliance with FHA origination and servicing requirements through on- 
site reviews, off-site evaluations, and electronic monitoring tools. 
Finally, the Mortgagee Review Board Division--which serves as staff 
for the Mortgagee Review Board--pursues administrative actions and 
sanctions against lenders and related parties that violate FHA 
requirements. The Mortgagee Review Board takes administrative action 
against FHA-approved lenders that are not in compliance with FHA 
lending requirements. 

Figure 1: Office of Single Family Housing Organizational Chart: 

[Refer to PDF for image: organizational chart] 

Top level: 
Deputy Assistant Secretary for Single Family Housing. 

Second level, reporting to Deputy Assistant Secretary for Single 
Family Housing: 
* Office of Single Family Program Development; 
* Office of Single Family Asset Management; 
* Office of Lender Activities and Program Compliance; 
* Homeownership Centers (Atlanta, Denver, Philadelphia, Santa Ana). 

Third level, reporting to Homeownership Centers: 
* Director's Office: 
- Program Support Division; 
- Processing and Underwriting Division; 
- Real Estate Owned Division; 
- Operations and Customer Service Division; 
- Quality Assurance Division. 

Source: FHA. 

[End of figure] 

FHA's four homeownership centers, in Atlanta, Georgia; Denver, 
Colorado; Philadelphia, Pennsylvania; and Santa Ana, California, 
undertake many of the day-to-day functions associated with loan 
endorsement, processing, and lender oversight. For example, the 
homeownership centers endorse loans for FHA insurance and oversee 
lenders and appraisers. As shown in table 1, each homeownership center 
is divided into five divisions. 

Table 1: Homeownership Center Divisions and Responsibilities: 

Division: Processing and Underwriting (PUD); 
Responsibilities: Processes requests for FHA mortgage insurance and 
oversees lenders and appraisers. 

Division: Real Estate Owned (REO); 
Responsibilities: Oversees the management and marketing of homes 
acquired through foreclosure. 

Division: Quality Assurance (QAD); 
Responsibilities: Monitors mortgage lenders. 

Division: Program Support (PSD); 
Responsibilities: Performs an array of technical services, including 
(1) approving and monitoring housing counseling agencies and nonprofit 
organizations and (2) providing training. 

Division: Operations and Customer Service (OCSD); 
Responsibilities: Provides internal operational support for the other 
divisions and customer service to lenders and the public. 

Source: FHA documents. 

[End of table] 

FHA Business Volume and Workload Increased at a Greater Rate than 
Staffing Levels: 

FHA's loan volume and the number of lenders and appraisers 
participating in its programs grew significantly from 2006 to 2010. 
During the same time period, Single Family Housing field staffing 
levels remained relatively constant, while key workload items such as 
volume-driven loan reviews and the management of foreclosed homes grew 
considerably. Although FHA has taken a number of steps to address its 
increased workload, it is too soon to determine the effectiveness of 
these process changes. 

FHA's Business Volume, Market Share, and Program Participants 
Increased Dramatically in Recent Years: 

FHA's loan volume and market share grew considerably from 2006 to 
2010, as did the number of lenders and appraisers participating in its 
programs. FHA insured almost half a million loans, totaling $70 
billion in mortgage insurance, in 2006. For 2009, the agency insured 
about 1.9 million loans, totaling more than $350 billion in mortgage 
insurance. The number of loans dropped slightly in 2010 to over 1.7 
million, or about $319 billion in mortgage insurance. The drop in 
overall volume in 2010 largely reflected a decrease in the number of 
refinance and reverse mortgages FHA insured. However, the number of 
home purchase mortgages that FHA insured continued to grow, as shown 
in figure 2. The growth in loan volume in this period resulted from 
the sharp contraction of other segments of the mortgage market and 
increases in the loan amounts eligible for FHA insurance.[Footnote 6] 
FHA's business volume continued to be high in 2011. As of August 31, 
2011, it had insured about 1.2 million loans. 

Figure 2: FHA Loan Volume and Market Share, 2006-2010: 

[Refer to PDF for image: vertical bar graph and line graph] 

Loan Volume: 

Fiscal year: 2006; 
Reverse mortgages: 76,280; 
Refinance mortgages: 106,646; 
Purchase mortgages: 293,257. 

Fiscal year: 2007; 
Reverse mortgages: 107,368; 
Refinance mortgages: 141,178; 
Purchase mortgages: 261,165. 

Fiscal year: 2008; 
Reverse mortgages: 112,015; 
Refinance mortgages: 440,257; 
Purchase mortgages: 591,322. 

Fiscal year: 2009; 
Reverse mortgages: 114,641; 
Refinance mortgages: 836,196; 
Purchase mortgages: 995,103. 

Fiscal year: 2010; 
Reverse mortgages: 78,757; 
Refinance mortgages: 557,696; 
Purchase mortgages: 1,109,16. 

Market share: 

Fiscal year: 2006; 
Overall market share: 3%; 
Purchase mortgage market share: 5%. 

Fiscal year: 2007; 
Overall market share: 5%; 
Purchase mortgage market share: 6%. 

Fiscal year: 2008; 
Overall market share: 20%; 
Purchase mortgage market share: 24%. 

Fiscal year: 2009; 
Overall market share: 21%; 
Purchase mortgage market share: 33%. 

Fiscal year: 2010; 
Overall market share: 20%; 
Purchase mortgage market share: 40%. 

Source: GAO analysis of FHA data. 

[End of figure] 

FHA's overall market share followed a similar trend as loan volume, 
increasing from 3.3 percent in 2006 to 19.9 percent in 2010, as the 
private mortgage market contracted.[Footnote 7] Additionally, FHA's 
market share of purchase mortgages increased from 4.5 percent in 2006 
to 40.2 percent in 2010. 

Lender and, particularly, appraiser numbers also jumped during the 
same period. The total number of FHA-approved lenders increased 24 
percent, from 10,370 in 2006 to 12,844 in 2010. The number of FHA-
approved appraisers increased approximately 67 percent from 33,553 in 
2006 to 56,192 in 2010. FHA attributes these increases to the growth 
in its share of the mortgage market. 

FHA's Field Staffing Levels Remained Relatively Constant, while Key 
Workload Items Increased Significantly: 

Overall, FHA's single-family staff increased 8 percent, from 932 
employees in 2006 to 1,011 employees in 2010, while increases in key 
workload areas often surpassed 100 percent over that period. 
Homeownership center staff in the field--which account for almost 80 
percent of the single-family workforce and conduct most of the day-to- 
day functions for the Office of Single Family Housing--increased about 
4 percent, from 769 employees in 2006 to 799 employees in 2010. At the 
four homeownership centers, the divisions responsible for key 
functions include PUD (loan and appraisal reviews), REO (management 
and marketing of foreclosed properties), and QAD (annual lender 
reviews). Single-family headquarters staff--who are responsible for 
policy development and oversight--increased 30 percent, from 163 in 
2006 to 212 in 2010. Much of the staffing growth in headquarters 
derived from enlarging the Deputy Assistant Secretary's office from 12 
employees in 2009 to 31 employees in 2010.[Footnote 8] See table 2 for 
more information. 

Table 2: Single Family Housing Staff Levels, 2006-2010: 

Single Family Housing total; 
2006: 932; 
2007: 896; 
2008: 942; 
2009: 937; 
2010: 1,011; 
Percentage change from 2006 to 2010: 8%. 

Headquarters total (including the National Servicing Center); 
2006: 163; 
2007: 162; 
2008: 145; 
2009: 157; 
2010: 212; 
Percentage change from 2006 to 2010: 30%. 

Homeownership center total; 
2006: 769; 
2007: 734; 
2008: 797; 
2009: 780; 
2010: 799; 
Percentage change from 2006 to 2010: 4%. 

Homeownership center divisions: 

PUD; 
2006: 217; 
2007: 203; 
2008: 250; 
2009: 270; 
2010: 265; 
Percentage change from 2006 to 2010: 22%. 

REO; 
2006: 143; 
2007: 144; 
2008: 165; 
2009: 158; 
2010: 162; 
Percentage change from 2006 to 2010: 13%. 

QAD; 
2006: 133; 
2007: 125; 
2008: 113; 
2009: 111; 
2010: 135; 
Percentage change from 2006 to 2010: 2%. 

PSD; 
2006: 200; 
2007: 202; 
2008: 204; 
2009: 182; 
2010: 175; 
Percentage change from 2006 to 2010: -13%. 

OCSD; 
2006: 48; 
2007: 39; 
2008: 43; 
2009: 41; 
2010: 41; 
Percentage change from 2006 to 2010: -15%. 

Director's Office; 
2006: 28; 
2007: 21; 
2008: 22; 
2009: 18; 
2010: 21; 
Percentage change from 2006 to 2010: -25%. 

Source: FHA. 

[End of table] 

Loan and Appraisal Reviews: 

PUD staff levels grew at a slower rate (22 percent) than key workload 
items, particularly volume-driven loan reviews (which increased by 
more than 100 percent). PUD staff conduct a variety of oversight 
functions that include technical reviews of loan underwriting quality, 
evaluation of loans from lenders seeking direct endorsement authority, 
and reviews of appraisers. PUD staff levels increased 22 percent, from 
217 in 2006 to 265 in 2010. In addition to relying on these staff, PUD 
relied on contractors to assist with loan and appraiser reviews. FHA 
estimates that contractor full-time equivalents (FTE) devoted to PUD 
activities increased 66 percent, from 89 FTEs in 2006 to 148 FTEs in 
2010.[Footnote 9] The contract for loan reviews was not renewed in 
2011, reducing the number of contractor staff available to assist with 
these reviews. 

The number of post-endorsement technical reviews (PETR) that PUD 
conducted more than doubled, from 40,373 in 2006 to a peak of 102,000 
in 2009 before falling to 85,669 in 2010. These desk audits constitute 
a primary lender oversight function by evaluating the underwriting 
quality of a selection of individual loans already insured by 
FHA.[Footnote 10] Reviews revealing serious deficiencies may result in 
HUD requiring the lenders to compensate the department for financial 
losses, known as indemnification.[Footnote 11] FHA met its goal of 
conducting PETRs on at least 5 percent of insured loans each year from 
2006 to 2010 (see figure 3), although the percentage of loans reviewed 
declined over time. Indemnification agreements as a result of PETRs 
decreased from 293 in 2006 to 66 in 2008 before increasing to 645 in 
2010. Less than 1 percent of PETRs conducted each year resulted in an 
indemnification agreement. 

Figure 3: Number and Results of Post-endorsement Technical Reviews, 
2006-2010: 

[Refer to PDF for image: illustrated table] 

Fiscal year: 2006; 
PETRs conducted: 40,373; 
Percentage of endorsements reviewed through PETR (annual goal: 5%): 9%; 
Indemnification agreements: 293. 

Fiscal year: 2007; 
PETRs conducted: 36,218; 
Percentage of endorsements reviewed through PETR (annual goal: 5%): 7%; 
Indemnification agreements: 112. 

Fiscal year: 2008; 
PETRs conducted: 66,531; 
Percentage of endorsements reviewed through PETR (annual goal: 5%): 6%; 
Indemnification agreements: 66. 

Fiscal year: 2009; 
PETRs conducted: 102,000; 
Percentage of endorsements reviewed through PETR (annual goal: 5%): 5%; 
Indemnification agreements: 283. 

Fiscal year: 2010; 
PETRs conducted: 85,669; 
Percentage of endorsements reviewed through PETR (annual goal: 5%): 5%; 
Indemnification agreements: 645. 

Source: GAO analysis of FHA data. 

[End of figure] 

In 2010, PUD performed significantly more evaluations of individual 
loans from lenders seeking direct endorsement authority than it 
performed in 2006. Lenders seeking such authority must submit 15 
acceptable test cases in a 12-month period. Lenders may submit up to 
30 loans while seeking to meet the threshold of 15 acceptable test 
cases. The number of loans reviewed through this approval process 
increased almost 500 percent, from 1,472 in 2006 to 8,736 in 2009, 
before dropping to 6,381 in 2010. The number of approved direct 
endorsement lenders grew by about 500, from 3,095 in 2006 to 3,598 in 
2010. 

In contrast, PUD workload for appraisal reviews varied little, even 
though the number of FHA-approved appraisers increased by nearly 70 
percent. The appraiser reviews consist of desk reviews (analyses of 
appraisal reports for completeness, compliance, and reasonable and 
logical conclusions of property value) and additional field reviews 
(comprehensive inspections of appraised properties intended to assess 
the quality of appraisal reports). From 2006 to 2010, staff conducted 
between 8,900 and 11,000 desk reviews, meeting their goal of reviewing 
at least 7,200 appraisals annually.[Footnote 12] Additionally, PUD 
conducted between 1,700 and 2,400 field reviews each year. PUD 
addressed the increase in appraiser participation by reducing the 
number of appraisals reviewed per appraiser. This allowed FHA to 
review a greater number of appraisers, while the number of appraisal 
reviews completed remained fairly stable from 2006 to 2010. For 
example, the number of appraisers reviewed each year increased from 
1,285 in 2006 to 3,458 in 2010. Appraiser reviews may result in a 
variety of actions, ranging from removal from FHA programs to required 
education to notices of deficiency for minor processing errors (see 
figure 4). 

Figure 4: Number and Results of Appraisal and Appraiser Reviews, 2006- 
2010: 

[Refer to PDF for image: illustrated table] 

Fiscal year: 2006; 
Appraisal reviews completed (annual goal = 7,200): 11,331; 
Desk reviews: 8,943; 
Field reviews: 2,388; 
Appraisers reviewed: 1,285; 
Notice of deficiency: 174; 
Education: 151; 
Removal: 61. 

Fiscal year: 2007; 
Appraisal reviews completed (annual goal = 7,200): 12,383; 
Desk reviews: 10,292; 
Field reviews: 2,091; 
Appraisers reviewed: 1,685; 
Notice of deficiency: 254; 
Education: 109; 
Removal: 58. 

Fiscal year: 2008; 
Appraisal reviews completed (annual goal = 7,200): 11,268; 
Desk reviews: 9,036; 
Field reviews: 2,232; 
Appraisers reviewed: 1,665; 
Notice of deficiency: 232; 
Education: 142; 
Removal: 42. 

Fiscal year: 2009; 
Appraisal reviews completed (annual goal = 7,200): 12,895; 
Desk reviews: 10,748; 
Field reviews: 2,147; 
Appraisers reviewed: 2,784; 
Notice of deficiency: 1,820; 
Education: 289; 
Removal: 74. 

Fiscal year: 2010; 
Appraisal reviews completed (annual goal = 7,200): 10,779; 
Desk reviews: 9,017; 
Field reviews: 1,762; 
Appraisers reviewed: 3,458; 
Notice of deficiency: 1,044; 
Education: 477; 
Removal: 89. 

Source: GAO analysis of FHA data. 

[End of figure] 

PUD staff undertook 5,016 actions against appraisers from 2006 to 
2010. Annual appraiser actions increased from 386 in 2006 to 1,610 in 
2010. The majority, 70 percent, were notices of deficiency, which have 
little potential to affect value estimates. Another 23 percent of 
actions required FHA-approved appraisers to complete education before 
conducting additional FHA appraisals. The remaining 6 percent of 
actions resulted in removal of 324 appraisers from participation in 
FHA programs.[Footnote 13] 

Foreclosed Property Management: 

Increases in contractor staff and workload related to management of 
foreclosed or real estate-owned properties were substantial, but 
noncontractor staff levels increased at more modest levels. FHA uses 
contractors to dispose of foreclosed properties through its management 
and marketing program.[Footnote 14] Management and marketing contract 
functions include conducting property inspections, performing cosmetic 
enhancements and other ongoing maintenance, and marketing properties. 
FHA's inventory of properties increased 85 percent, from 27,747 active 
properties at the end of 2006 to 51,292 properties at the end of 2010 
(see figure 5). To manage the additional properties, contractor FTEs 
nearly tripled from 360 in 2006 to 980 in 2010. FHA also increased the 
total number of management and marketing contracts from 24 to 55 in 
2010, as a result of a significant change in the structure of these 
contracts. Before 2010, the program operated through 24 geographic 
areas, with one contractor responsible for all management and 
marketing functions in an area. In 2010, FHA consolidated the 24 areas 
into 10 and assigned multiple contractors to an area, with each 
responsible for a particular function.[Footnote 15] This resulted in 
55 management and marketing contracts. If a contractor does not 
perform to expectation, other contractors are available to take over 
the work. 

Figure 5: Active Real Estate-Owned Property Inventory and REO Staff, 
2006-2010: 

[Refer to PDF for image: combination vertical bar and line graph] 

Fiscal year: 2006; 
Properties: 27,747; 
Contractor FTEs: 360; 
Homeownership center REO staff: 143. 

Fiscal year: 2007; 
Properties: 27,707; 
Contractor FTEs: 453; 
Homeownership center REO staff: 144. 

Fiscal year: 2008; 
Properties: 37,702; 
Contractor FTEs: 555; 
Homeownership center REO staff: 165. 

Fiscal year: 2009; 
Properties: 39,404; 
Contractor FTEs: 660; 
Homeownership center REO staff: 158. 

Fiscal year: 2010; 
Properties: 51,292; 
Contractor FTEs: 980; 
Homeownership center REO staff: 162. 

Source: GAO analysis of FHA data. 

Note: The contractor FTE data provided by FHA were a head count of 
contractor employees for 2010 and estimates for 2006-2009 (based on 
the 2010 data). 

[End of figure] 

In contrast, noncontractor REO staff at the homeownership centers 
increased 13 percent, from 143 employees in 2006 to 162 in 2010. These 
employees oversee the management and marketing contracts. A 2009 
Resource Estimation and Allocation Process (REAP) study stated that 
REO workload would increase because the staff would have to monitor 
more contracts than the previous 24 and the division would require 
additional staff to manage the workload.[Footnote 16] As a result, it 
recommended 177 FTEs for REO. As of May 2011, REO had 158 FTEs. 

Loss Mitigation Actions: 

Loss mitigation actions more than doubled from 2006 to 2010, while 
loss mitigation staff levels have remained relatively constant. At 
FHA's National Servicing Center, which is responsible for overseeing 
lenders' servicing of FHA mortgages and loss prevention, staff levels 
dropped from 46 in 2006 to 37 in 2008 before rising to 44 in 2010. As 
shown in table 3, loss mitigation actions more than doubled, from 
80,772 in 2006 to 199,223 in 2010.[Footnote 17] The vast majority of 
these actions, 94 percent, were focused on home retention, which 
includes special forbearances, partial claims, and loan modifications. 
Special forbearance is a payment plan that allows the lender to accept 
less than the total delinquency due. Through partial claims, FHA 
advances funds to the lender on behalf of the borrower to cure a 
default, and the amount of the partial claim is due when the borrower 
sells the property or the mortgage is paid in full. Loan 
modifications, FHA's most utilized loss mitigation tool, are permanent 
changes to one or more terms of the loan that result in a payment that 
the borrower can afford. 

Table 3: Loss Mitigation Actions, 2006-2010: 

Action: Special forbearance; 
2006: 20,666; 
2007: 23,912; 
2008: 22,144; 
2009: 20,713; 
2010: 16,602. 

Action: Partial claim; 
2006: 16,354; 
2007: 15,711; 
2008: 16,416; 
2009: 22,812; 
2010: 15,754. 

Action: Loan modification; 
2006: 38,508; 
2007: 46,904; 
2008: 57,922; 
2009: 83,609; 
2010: 150,612. 

Total home retention: 
2006: 75,528; 
2007: 86,527; 
2008: 96,482; 
2009: 127,134; 
2010: 182,968. 

Action: Preforeclosure sale; 
2006: 4,909; 
2007: 4,026; 
2008: 4,071; 
2009: 6,474; 
2010: 15,291. 

Action: Deed-in-lieu of foreclosure; 
2006: 335; 
2007: 454; 
2008: 614; 
2009: 936; 
2010: 964. 

Total nonretention: 
2006: 5,244; 
2007: 4,480; 
2008: 4,685; 
2009: 7,410; 
2010: 16,255. 

Total actions: 
2006: 80,772; 
2007: 91,007; 
2008: 101,167; 
2009: 134,544; 
2010: 199,223. 

Source: FHA. 

[End of table] 

If a borrower does not qualify for home retention, FHA also uses 
nonretention actions, which consist of preforeclosure sales, or short 
sales, and a deed-in-lieu of foreclosure. A short sale allows 
borrowers to sell their houses for less than the outstanding debt. 
Through a deed-in-lieu of foreclosure, borrowers voluntarily transfer 
a property to the mortgagee. 

Annual Lender Reviews: 

Staffing levels for monitoring approved lenders remained relatively 
constant in 2006-2010, as did the number of loans reviewed. Lender 
reviews typically involve an in-depth analysis of a sample of loans 
and on-site visits to assess lenders' internal control processes for 
making loans. These reviews are meant to help ensure compliance with 
FHA standards and provide feedback to lenders to improve their 
performance. QAD staff at each homeownership center schedule and 
perform these reviews. QAD staff levels fell from 133 in 2006 to 111 
in 2009, before increasing to 135 in 2010. 

Although the number of lenders grew, FHA's review of individual loans 
as part of its annual reviews of lenders' operations remained somewhat 
constant from 2006 to 2010.[Footnote 18] The number of loans reviewed 
(the most direct metric of lender review workload) fluctuated between 
13,500 and 16,600 annually. FHA sets an annual goal for lender reviews 
of 10 percent of active lenders; therefore, the number of lender 
reviews conducted each year varies.[Footnote 19] As shown in figure 6, 
FHA exceeded its goal for lender reviews each year from 2006 to 2010. 
For example, in 2010 FHA exceed its goal of 300 reviews by completing 
327 reviews. 

Figure 6: Number and Results of Lender and Loan Reviews, 2006-2010: 

[Refer to PDF for image: illustrated table] 

Fiscal year: 2006; 
Lender reviews: 
Annual goal: 500; 
Completed[A]: 561; 
Loans reviewed: 16,131; 
Indemnifications: 858; 
Limited denial of participation: 4; 
Referrals[B]: 523. 

Fiscal year: 2007; 
Lender reviews: 
Annual goal: 360; 
Completed[A]: 368; 
Loans reviewed: 13,524; 
Indemnifications: 407; 
Limited denial of participation: 3; 
Referrals[B]: 602. 

Fiscal year: 2008; 
Lender reviews: 
Annual goal: 300; 
Completed[A]: 313; 
Loans reviewed: 16,567; 
Indemnifications: 232; 
Limited denial of participation: 8; 
Referrals[B]: 1,032. 

Fiscal year: 2009; 
Lender reviews: 
Annual goal: 300; 
Completed[A]: 302; 
Loans reviewed: 15,645; 
Indemnifications: 397; 
Limited denial of participation: 4; 
Referrals[B]: 1,585. 

Fiscal year: 2010; 
Lender reviews: 
Annual goal: 300; 
Completed[A]: 327; 
Loans reviewed: 13,709; 
Indemnifications: 702; 
Limited denial of participation: 19; 
Referrals[B]: 1,637. 

Source: GAO analysis of FHA data. 

[A] In 2006, FHA counted lender reviews at subsidiary branches of 
larger institutions as additional reviews. Starting in 2007, lender 
reviews conducted at subsidiary branches of a larger lending 
institution were not counted as separate lender reviews. 

[B] Referrals include cases that are referred to the Mortgagee Review 
Board, the HUD Inspector General, or other entities such as state 
regulatory agencies. 

[End of figure] 

FHA can take a variety of administrative actions as a result of lender 
reviews, such as denying participation in FHA programs or referring 
cases containing material violations to the Mortgagee Review Board, 
cases of fraud to the HUD Inspector General (IG), or cases to other 
entities such as state regulatory agencies. If a lender review found 
serious deficiencies with specific loans or the lender's internal 
controls, FHA could require indemnification agreements of lenders. The 
number of indemnification agreements FHA reached annually as a result 
of lender reviews dropped from 858 in 2006 to 232 in 2008 before 
increasing to 702 in 2010. The number of lenders denied participation 
in FHA programs, or given a limited denial of participation, increased 
from 4 lenders in 2006 to 19 lenders in 2010. Additionally, FHA 
referrals to the Mortgagee Review Board, the HUD Inspector General, or 
other entities as a result of lender reviews increased from 523 in 
2006 to 1,637 in 2010. According to FHA officials, the number of 
referrals increased because, among other things, guidance changes 
emphasized HUD's requirement that lenders report findings of fraud or 
other serious violations to FHA and there has been continued emphasis 
on lender reporting requirements during QAD reviews of lenders. 

Data on how FHA's workload and staffing have affected its capacity are 
limited. In 2008, FHA hired consultants to, among other things, 
examine process constraints related to Single Family Housing's 
capacity to process increasing workloads.[Footnote 20] The study 
indicated that processes supported by the homeownership centers from 
June 1, 2008, through December 6, 2008, exceeded capacity because of a 
lack of staff. For example, the time to process applications increased 
during this period, as did the backlog of PETRs. The study noted that 
historical data needed to conduct additional analyses were not 
available. Although its loan volume has declined somewhat from its 
peak in 2009, FHA has made changes to its work processes to 
accommodate its increased workload. We discuss these changes, their 
potential advantages and disadvantages, and additional human capital 
challenges later in this report. However, it is too soon to determine 
how effective process changes will be in managing FHA's increased 
workload. 

FHA Has Yet to Implement a Comprehensive Risk Assessment Strategy: 

Although FHA has taken steps to assess credit and operational risks 
facing its single-family insurance programs, its current risk 
assessment strategy is not comprehensive because it is not integrated 
across the agency and lacks annual assessments and mechanisms to 
anticipate changing conditions. FHA established a risk office and 
hired a consultant to help the office develop a strategy for 
identifying and addressing risks. However, implementation of the 
consultant's recommendations has been slow because of delays in 
defining the new office's authority, difficulty filling new staff 
positions, and changes in FHA leadership. 

FHA Established a Risk Office, Added Management Controls, and 
Undertook Other Efforts to Assess Risks: 

To improve its risk assessment strategy, FHA established a risk 
office, implemented a new system of management control in the Office 
of Single Family Housing, and undertook studies to identify and 
address risks related to the rapid increase in single-family business 
volume.[Footnote 21] In 2010, FHA received congressional approval to 
establish the Office of Risk Management and Regulatory Affairs and 
create the position of Deputy Assistant Secretary for Risk Management 
and Regulatory Affairs (see figure 7), which reports directly to the 
Assistant Secretary for Housing-FHA Commissioner. The new office 
functions within the Office of Housing to assess and manage risks in 
three program areas: single-family housing, multifamily housing, and 
health care. Within the Office of Risk Management and Regulatory 
Affairs, risk assessment and management functions reside in two 
offices: the already existing Office of Evaluation (with approximately 
25-30 staff) and the newly established Office of Risk Management 
(ORM). When FHA reorganized in 2010, it moved the Office of Evaluation 
into the Office of Risk Management and Regulatory Affairs. Among other 
functions, the Office of Evaluation oversees the annual independent 
actuarial studies that determine the net worth of the insurance fund 
and conducts ongoing portfolio analyses designed to assess risks to 
the insurance fund. The actuarial studies forecast the effect that 
various economic risks will have on the fund, including alternative 
scenarios for volatile interest rates and recoveries and recessions of 
various degrees. The Office of Evaluation also performs ongoing and in-
depth analyses to determine the effects various risk factors, 
including those identified by the annual actuarial review, have had 
and likely would continue to have on the portfolio.[Footnote 22] 

Figure 7: Organizational Chart for FHA's Office of Risk Management and 
Regulatory Affairs, as of August 2011: 

[Refer to PDF for image: organizational chart] 

Top level: 
Deputy Assistant Secretary for Risk Management and Regulatory Affairs. 

Second level, reporting to Deputy Assistant Secretary for Risk 
Management and Regulatory Affairs: 
* Office of Manufactured Housing Programs; 
* Associate Deputy Assistant Secretary for Risk Management and 
Assessment. 

Third level, reporting to Associate Deputy Assistant Secretary for 
Risk Management and Assessment: 
* Office of Risk Management; 
* Office of Evaluation: 
- Portfolio Analysis Division; 
- Market Analysis Division; 
- Reporting and Analysis. 

Source: FHA. 

[End of figure] 

To provide assistance to ORM in developing a risk management strategy 
and organizational structure and establishing risk management policies 
and processes, FHA hired a consultant to produce a comprehensive 
report and recommend best practices for its operation. The 
consultant's December 2010 report outlined a consolidated framework 
for the risk assessment activities carried out in different parts of 
the organization.[Footnote 23] The study also provided a strategy for 
classifying, assessing, and mitigating risk; options for 
organizational design and governance; options and recommendations for 
improvements to key risk processes and reporting; and a timeline for 
implementing changes. Regarding the options for organizational design, 
the study recommended a risk officer for each of the three program 
areas (single-family housing, multifamily housing, and health care) 
and for operations. Regarding the options for governance, the 
consultants recommended that FHA establish charters for the following 
committees: Enterprise (or overall) Risk Management Committee, Single 
Family Credit Risk Committee, Multifamily Credit Risk Committee, 
Health Care Risk Committee, and Operational Risk Committee. The 
charters would identify the issues each committee would address, how 
(such as by majority vote) and to which manager it would make its 
recommendations, the composition of committee members, and the 
frequency of meetings. For example, the Enterprise Risk Management 
Committee would meet quarterly to address, among other things, 
agencywide risk issues, such as those related to its mission and the 
balancing of risks. The FHA Commissioner or the Deputy Assistant 
Secretary for Risk Management and Regulatory Affairs would make 
decisions related to these issues, the Deputy Assistant Secretary for 
Risk Management and Regulatory Affairs would be the committee chair, 
and the FHA Commissioner and all deputy assistant secretaries would be 
standing committee members. According to FHA officials, FHA plans to 
adopt the consultant's recommendation to establish a two-tiered 
structure, with an enterprise risk committee to address overall risk 
to the organization and a second tier of committees to address program 
and operational risks. As discussed later in this report, the risk 
committees and ORM's operational procedures remain under development. 

In addition to commissioning the recent study, FHA had undertaken 
other efforts to assess risks in its single-family programs. For 
instance, in 2009 Single Family Housing implemented a new system of 
management control for risk assessment, the internal quality control 
initiative, at headquarters and the four homeownership centers. 
Although the implementation was the result of an ongoing improvement 
effort, it was also intended to address a 2008 HUD IG audit report 
finding that Single Family Housing had not complied with our internal 
control standards and HUD Handbook 1840.1 requirements.[Footnote 24] 
Among other requirements, our internal control standards state that 
management must comprehensively identify risks, analyze them for 
possible effects, and determine what actions should be taken to manage 
risks. The HUD handbook specifies that HUD managers should assign 
individual programs and administrative functions an annual risk rating 
of low, medium, or high, using a HUD risk assessment worksheet. To 
comply with the handbook requirements as the IG had recommended, 
Single Family Housing completed its initial assessment of risks by 
April 2009. On the basis of this analysis, most of the functional 
areas in headquarters and the homeownership divisions were scored as 
high-risk. For example, PUD, PSD, and REO at the homeownership centers 
were considered high-risk. For the areas identified, headquarters and 
the homeownership center divisions developed internal quality control 
plans to document control objectives and established a monitoring 
strategy that requires each homeownership center to submit quarterly 
reports to the Deputy Assistant Secretary's office at headquarters on 
the effectiveness of these controls, including the status of any 
mitigation efforts. Quarterly, the homeownership centers review 
multiple control processes in each of their divisions. For example, in 
2010 one homeownership center reviewed a total of 26 processes in five 
divisions, including PUD processes for evaluations of loans from 
lenders seeking direct endorsement authority, PETRs, loan 
endorsements, appraiser reviews, and contract/contractor monitoring. 

Other efforts in 2008 and 2009 helped identify and address risks 
related to the rapid increase in single-family business volume: 

* As noted previously, in 2008 FHA hired a consultant to examine 
technology and process constraints and identify the risks related to 
Single Family Housing's capacity to process increasing workloads (that 
is, the increased number of insurance endorsements and lenders 
applying to participate in the program) as the program grew 
dramatically.[Footnote 25] 

* Single Family Housing requested that HUD conduct a REAP study, which 
was completed in 2009, because of unprecedented increases in workload 
and the need to assess the resources needed to address the sharp 
increase in business volume.[Footnote 26] The purpose of HUD's REAP 
studies is to help determine proper staffing levels within each HUD 
program office. 

* Also in 2009, FHA conducted an internal study that assessed its 
information technology weaknesses and proposed an approach to address 
its information system constraints.[Footnote 27] 

(We discuss the results of these reports in more detail later in this 
report.) These reports, along with the consultant's 2010 report on 
ORM, identified specific credit and operational risks for the single-
family insurance programs (see table 4). 

Table 4: Credit and Operational Risks That FHA Identified in Its 
Single-Family Insurance Programs: 

Credit risk: 

Subcategory: Borrower default risk; 
Description: Risks related to rising delinquencies and defaults and 
the need to respond with aggressive loss mitigation interventions. 

Subcategory: Counterparty risk; 
Description: Risks associated with lenders and appraisers related to 
deficient lender practices and the quality and uncertainty of 
appraisals. 

Operational risk: 

Subcategory: Human capital risk; 
Description: Risks related to staffing and contractor capacity to 
process increasing workloads. 

Subcategory: Information technology risk; 
Description: Risks related to FHA's aging and outdated information 
technology. 

Source: GAO analysis of the ORM consultant's report, 2009 risk 
capacity study, 2009 REAP study, and 2009 information technology 
improvement plan. 

[End of table] 

FHA's Current Strategy Is Not Integrated across the Agency and Lacks 
Annual Assessments and Mechanisms to Anticipate Changing Conditions: 

FHA's current risk assessment strategy is not comprehensive because it 
is not integrated throughout the organization, certain aspects are not 
updated annually as required, and it lacks specific mechanisms--such 
as a reporting process for identifying emerging risks--to anticipate 
risk presented by changing conditions. According to our internal 
control guidance, an agency should have an integrated management 
strategy and risk assessment plan that considers the entitywide 
objectives and relevant sources of risk from internal management 
factors and external sources, and establishes a control structure to 
address those risks.[Footnote 28] However, while the ORM consultant 
has recommended that FHA integrate risk assessment and reporting 
throughout the organization, currently Single Family Housing's quality 
control activities and ORM's activities remain two separate efforts. 
For instance, the results of the quarterly quality control activities 
are not shared outside the Office of Single Family Housing. Although 
homeownership center officials may have raised some of the issues from 
the quarterly reports in their regular conferences with the single- 
family program offices in headquarters, the quarterly reports are not 
sent to any office outside of Single Family Housing, such as ORM. 
Further, what actions headquarters has taken based on the risk 
assessments is not clear. Officials at all four homeownership centers 
told us that they had not received any feedback from headquarters 
about their quarterly reports. According to ORM officials, FHA intends 
to integrate the internal quality control initiative implemented by 
Single Family Housing into ORM's new strategy. The ORM consultant's 
report recommended ORM involvement in the monitoring and improvement 
of internal quality efforts by reviewing and making recommendations 
related to policy development and the selection of corrective actions. 
It also recommended that ORM conduct reviews of the program offices' 
internal quality control efforts. ORM officials told us that the 
recently hired operational risk officer would review how the quality 
control initiative should be integrated into ORM's management of 
operational risk and make recommendations to ORM management. However, 
FHA officials noted that until ORM set up a governance process, the 
integration suggested by the consultant would not be possible. In the 
meantime, they stated that every effort was being made to ensure that 
ORM's activities were complementary to those of the program offices, 
including Single Family Housing. 

In addition, contrary to HUD guidance, Single Family Housing has not 
conducted an annual, systematic review of risks to its program and 
administrative functions. HUD Handbook 1840.1 requires that agencies 
perform an annual risk assessment of their programs or administrative 
functions using the HUD risk assessment worksheet. The internal 
quality control initiative coordinator in the Office of Single Family 
Housing told us that while headquarters and the field have continued 
to perform quarterly reviews of their programs to identify and 
mitigate risks, they had not conducted an annual risk assessment using 
the HUD worksheet since the initiative was first implemented in 2009. 
However, the coordinator noted that they were currently in the process 
of reassessing risks using this worksheet. The coordinator also told 
us that although management intended to conduct an annual assessment, 
the dates had slipped because of changes in senior leadership within 
Single Family Housing, loss of staff who previously performed the 
assessments, and additional demands on staff--who would otherwise 
conduct the assessment--from the increased business volume. 

Finally, Single Family Housing's current risk assessment efforts do 
not include procedures for anticipating potential risks presented by 
changing conditions. Our internal control standards and HUD Handbook 
1840.1 require agencies to have mechanisms to identify and address any 
special risks prompted by changing conditions, such as those presented 
by rapid growth or downsizing. The internal quality control initiative 
coordinator told us that the initiative was not designed to include 
such mechanisms, although the program offices may discuss emerging 
risks during management meetings and periodic meetings with field 
staff. The official also stated that the HUD handbook does not provide 
detailed instructions on what mechanisms should be used. Further, 
while the consultant's report recommends that ORM conduct analyses 
related to "enterprise-level risk identification and monitoring," it 
does not explicitly identify the mechanisms to be used to identify 
special risks, such as those that might be caused by changing 
conditions.[Footnote 29] However, the report proposes a reporting 
process and formats for identifying emerging risks. It provides 
specific examples of monthly reports that include a template for 
reporting on the severity and likelihood of risks and on plans and 
actions to address major emerging risks. ORM officials told us that 
the exact design and content of the report formats and templates 
eventually would be determined by the risk committees, once they have 
been established and are operational. 

Moreover, implementation and integration of the new risk assessment 
strategy and planned tools has been slow because of delays in defining 
ORM's authority, difficulty filling new staff positions in ORM, and 
changes in FHA leadership. 

* According to an ORM official, delegations of authority from other 
offices within FHA are needed before ORM can become fully operational. 
After the consultant made its recommendations, ORM drafted and revised 
the delegations. As of the end of September 2011, the delegation 
proposal was still under review. Until the various program offices 
within the Office of Housing have delegated the necessary authority to 
ORM, it cannot establish its operational procedures or form the risk 
committees to formally carry out its risk management function. In the 
interim, ORM officials stated they have been meeting informally with 
program staff to discuss risks. 

* According to FHA officials, implementation of ORM strategies has 
been constrained largely as a result of difficulties in hiring 
qualified staff and matching industry salaries. 

* Finally, the recent departures of FHA's top leadership have made 
obtaining management "buy-in" to establish operational authorities and 
procedures difficult for ORM, which has delayed implementation of the 
new risk assessment strategy. In 2011, both the Assistant Secretary 
for Housing-Federal Housing Commissioner and the Deputy Assistant 
Secretary for Single Family Housing left FHA, and the Deputy Assistant 
Secretary for Risk Management and Regulatory Affairs became the acting 
FHA Commissioner (see table 5). More recently, the acting FHA 
Commissioner left FHA to become an adviser to the Secretary of HUD, 
and the former Deputy Assistant Secretary for Multifamily Housing 
became the acting FHA Commissioner. Also, the Office of Single Family 
Housing is headed by an Acting Deputy Assistant Secretary. According 
to ORM officials, management decisions are required to implement many 
of the key changes, and having frequent changes and temporary 
incumbents in leadership positions hampers FHA's progress. 

Table 5: Status of Key Leadership Positions Involved in Implementing 
FHA's New Risk Assessment Strategy, as of September 2011: 

Position: Assistant Secretary for Housing-Federal Housing Commissioner; 
Status: Acting. 

Position: Deputy Assistant Secretary for Risk Management and 
Regulatory Affairs; 
Status: Acting. 

Position: Deputy Assistant Secretary for Single Family Housing; 
Status: Acting. 

Position: Deputy Assistant Secretary for Multifamily Housing; 
Status: Acting. 

Position: Deputy Assistant Secretary for Healthcare Programs; 
Status: Permanent. 

Source: FHA organizational chart and officials. 

[End of table] 

All of these factors limit FHA's effectiveness in identifying, 
planning for, and addressing risk. More specifically, 

* without an integrated risk assessment strategy, certain risks may 
not be fully addressed at the operational level in a way that 
minimizes risk to the insurance programs; 

* without annual reassessments of its risks, Single Family Housing 
lacks assurance that its quality control efforts are addressing all of 
its risks; and: 

* without ongoing mechanisms in place to anticipate and address new or 
emerging risks, FHA lacks a systematic approach to help the agency 
identify, analyze, and formulate timely plans to respond most 
effectively to changed conditions and risks. 

Although FHA Has Enhanced Risk Management and Plans to Modernize 
Information Technology, Human Capital Challenges Remain: 

FHA has taken steps to address risks to its single-family programs, 
such as credit risk and risks associated with lenders and appraisers. 
It also has made plans to address risks related to its information 
technology. However, it does not have a strategic process for 
determining its future workforce needs, including succession planning. 

FHA Has Made or Proposed Enhancements to Address Credit and 
Counterparty Risk: 

As we previously reported, to help improve the financial condition of 
the Fund (which is supported by borrower premiums), FHA raised 
premiums and made or proposed policy or underwriting changes to 
address credit risk.[Footnote 30] For example, in April 2011 FHA 
increased its annual insurance premiums from 0.85 percent to 1.10 
percent for borrowers with 30-year loans with initial LTV ratios of 95 
percent or less and from 0.90 percent to 1.15 percent for borrowers 
with 30-year loans with initial LTV ratios greater than 95 percent. 
Additionally, FHA increased down payment requirements for borrowers 
with lower credit scores. More specifically, the agency required a 
down payment of at least 10 percent for borrowers with credit scores 
of 500-579, and made anyone whose credit score was below 500 
ineligible for FHA-insured loans.[Footnote 31] FHA also has proposed 
reducing allowable seller contributions at closing, thereby helping to 
ensure that buyers put more of their own funds into the home purchase. 
In addition, FHA is in the process of revising its mortgage scorecard 
algorithm, known as the Technology Open to Approved Lenders (TOTAL) to 
recognize the effect of various risk elements not currently discerned 
by the scorecard and determine what cases warrant manual 
underwriting[Footnote 32]. According to FHA, these revisions are in 
the early stages, and no completion date has been set. 

FHA also has made recent changes to address risks posed by its 
counterparties (for example, lenders and appraisers) that have 
advantages and disadvantages for FHA, lenders, or consumers. For 
example, on May 20, 2010, FHA stopped approving new loan 
correspondents to participate in FHA programs.[Footnote 33] As of 
January 1, 2011, existing loan correspondents could no longer 
participate in FHA programs. Former loan correspondents can now 
participate in FHA programs only as third-party originators through 
sponsorship by FHA-approved lenders. According to FHA officials, one 
advantage of this rule change is that it reduces FHA's workload 
because the agency no longer has to approve and oversee loan 
correspondents. Prior to January 1, 2011, FHA had around 9,000 loan 
correspondents; thus, FHA drastically reduced the number of lenders it 
was responsible for overseeing. With this change, FHA can focus its 
resources on oversight of lenders that make underwriting decisions. 
These lenders make decisions on whether or not borrowers qualify for 
FHA-insured loans; thus, they potentially place FHA at higher risk if 
they do not properly underwrite these loans. However, this rule change 
could expose FHA to greater risk if sponsoring lenders do not 
adequately oversee third-party originators. Therefore, following 
through and rigorously assessing lenders' monitoring of third parties 
is important. In January 2011, FHA specified in a mortgagee letter (a 
written instruction to FHA-approved lenders) that it required 
sponsoring lenders to take steps to ensure they provide adequate 
oversight of third-party originators. Specifically, the sponsoring 
lenders are required to develop a quality control plan that includes 
procedures for reviewing and monitoring their third-party originators; 
this plan must be approved by FHA. In addition, FHA has drafted 
updated guidance for QAD staff on conducting lender reviews to 
incorporate the evaluation of a sponsoring lender's oversight of its 
third-party originators. FHA expects the homeownership centers to 
start implementing the updated guidance by December 2011. 

Furthermore, the agency has increased the net worth requirement for 
approved lenders. On May 20, 2010, FHA increased the net worth 
requirement for its new lenders from $250,000 to $1 million. On May 
20, 2011, FHA increased the net worth requirement for its existing 
lenders to $1 million, except for lenders classified as small under 
the Small Business Administration's size standards (their requirement 
increased to $500,000). As of May 20, 2013, FHA will require a net 
worth of $1 million irrespective of the size of the lender, plus 1 
percent of the total loan volume in excess of $25 million, up to a 
maximum required net worth of $2.5 million.[Footnote 34] This change 
is intended to help ensure that FHA-approved lenders are sufficiently 
capitalized to meet the potential needs associated with the financial 
services they provide. However, the rule change could disadvantage 
some program participants or borrowers. First, increasing the net 
worth requirement to $2.5 million could favor large lenders over 
smaller ones, including credit unions. According to Independent 
Community Bankers of America officials, one provision of the rule 
change requires all lenders to have audited financial statements. 
These officials stated that the audits are relatively expensive, and 
it may not make financial sense for small lenders that do not process 
many FHA loans to continue participating in the program. FHA has 
partially addressed this concern by issuing a 1-year waiver of the 
requirement to submit audited financial statements for supervised 
lenders with less than $500 million in assets.[Footnote 35] Instead, 
these lenders must submit an unaudited regulatory report on their 
financial condition, known as a Report of Condition and Income (or 
Call Report), that they currently submit to their regulators. However, 
these lenders are still required to submit an independent auditor's 
opinion of internal control and compliance with HUD programs. Second, 
some small lenders have raised concerns that higher requirements would 
result in lenders passing higher costs on to borrowers, thereby 
limiting the availability of mortgage credit in small communities and 
rural areas. When FHA finalized the revised net worth requirements, it 
stated that the changes were designed to ensure that FHA remains 
financially stable and strong. 

FHA also has made changes to several processes intended to help ensure 
that lenders and appraisers follow its policies and procedures. For 
example, FHA enhanced the criteria it uses to select loans for PETRs. 
Specifically, since May 3, 2010, the agency has considered high-risk 
loan or borrower characteristics, such as certain types of refinanced 
loans and loans to borrowers with low credit scores. Additionally, the 
current selection criteria are heavily weighted toward early payment 
defaults (loans at least 60 days delinquent in the first six 
payments). The previous standard for selecting loans subject to PETRs 
related to lender volume and the goal of reviewing 5-10 percent of 
FHA's loan volume, according to an FHA official. The agency also 
introduced a new approach on October 1, 2010, that requires FHA staff 
to use detailed review sheets to promote more thorough and analytical 
reviews by FHA underwriters and appraisers. Advantages of the revised 
approach include that the risk-based selection has resulted in fewer 
cases for FHA to review, thus decreasing staff workload. As of March 
31, 2011, FHA had reviewed 1.4 percent of the loans endorsed during 
the first 6 months of 2011. However, although FHA has been reviewing 
fewer loans, FHA officials told us that the loans selected have 
required in-depth scrutiny because they have one or more issues. In 
addition, as a result of identifying more problematic loans, staff 
have been referring a greater proportion of loans to QAD for 
indemnification. 

FHA has made several changes to its approach for conducting lender 
reviews. First, for 2011, the agency removed originating lenders as a 
review category, to account for the elimination of loan correspondents 
effective January 1, 2011. Second, FHA instituted a new methodology 
that increased the number of risk factors used to target lenders for 
review. The risk factors included loan volume, product type, process 
(for example, direct endorsement or lender insurance), performance, 
and peer group performance. This approach allows FHA to focus its 
limited resources on lenders posing the highest risk to the program. 
For 2011, FHA lowered its goal for lender reviews from 300 to 250 
lenders. The goal had been 300 for 2008-2010. 

Finally, FHA has revised its approach for overseeing appraisers. 
First, as of March 2010, appraisers were targeted using an algorithm 
based on nine criteria, which considered factors such as the 
appraiser's volume and past sanctions, as well as the type of property 
being appraised. According to FHA officials, the new algorithm has 
allowed FHA to improve its targeting of potential problem appraisers. 
Second, once an appraiser has been targeted for review, the targeting 
program identifies three appraisals to be pulled for review by the 
homeownership centers. In the past, the program targeted a higher 
number of appraisals per appraiser. Reducing the number of appraisals 
per appraiser allowed the agency to review a greater percentage of 
appraisers as the number of appraisers in the program grew (see figure 
8). 

Figure 8: Average Number of Appraisals Reviewed per Appraiser and 
Percentage of Appraisers Reviewed, 2006-2010: 

[Refer to PDF for image: combination vertical bar and line graph] 

Fiscal year: 2006; 
Average number of appraisals reviewed per appraiser: 7.0; 
Percentage of appraisers reviewed: 4%. 

Fiscal year: 2007; 
Average number of appraisals reviewed per appraiser: 6.1; 
Percentage of appraisers reviewed: 4%. 

Fiscal year: 2008; 
Average number of appraisals reviewed per appraiser: 5.4; 
Percentage of appraisers reviewed: 3%. 

Fiscal year: 2009; 
Average number of appraisals reviewed per appraiser: 3.9; 
Percentage of appraisers reviewed: 5%. 

Fiscal year: 2010; 
Average number of appraisals reviewed per appraiser: 2.6; 
Percentage of appraisers reviewed: 6%. 

Source: GAO analysis of FHA data. 

[End of figure] 

FHA Recently Started Modernizing Its Information Technology Systems: 

More than 40 information technology (IT) systems support FHA's single- 
family insurance programs. The systems are critical to FHA's mission 
and are used to process loans; monitor lenders and appraisers; manage 
mortgage billing, collection, and claims services; and report on 
financial and performance indicators. However, these systems are 
antiquated and have constraints that make it difficult for the agency 
to adjust to its current high-volume lending environment. FHA has 
reported that the IT systems its single-family programs use are 
outdated, unable to sustain the increasing volume of insurance 
applications, and costly to maintain. In addition, the agency, HUD's 
IG, and others have identified several problems with these systems. 
Specifically, 

* major systems operate on mainframe computers that cannot be scaled 
up easily to meet the performance requirements resulting from FHA's 
increasing volume of applications; 

* system software is antiquated and consequently not easy to upgrade 
to meet new legislative requirements without significant cost; 

* the large number of systems has resulted in hundreds of interfaces-- 
thus, a change in one system requires an extensive effort to ensure 
that interfaces can be appropriately maintained across systems; 

* the multiple systems and interfaces present challenges for 
maintaining appropriate accessibility levels, security controls, and 
privacy standards; 

* managers do not have the real-time information needed to monitor 
operational performance, balance workloads, redistribute resources, or 
evaluate risks; and: 

* homeownership center staff have had to create manual and offline 
processes for analysis and reporting and these processes are not 
necessarily consistent among the centers. 

Further, the recent increase in FHA's business volume has exacerbated 
its IT constraints. For example, the 2009 Risk Capacity Study reported 
that critical elements of FHA's IT infrastructure were at capacity, 
causing work slowdowns and poor customer service.[Footnote 36] This 
study highlighted significant performance issues such as network 
overloads that slowed systems in the afternoon, when work hours 
overlapped at the homeownership centers (which are in different time 
zones). To partially address these issues, HUD's Office of the Chief 
Information Officer upgraded the mainframe's system capacity and made 
changes to certain applications to improve response time and return 
the system to acceptable performance levels. Nevertheless, FHA had 
reached the limit of hardware and software capacity on those systems 
during a period in which transaction levels continued to increase. 

To address system constraints, in August 2009 FHA completed a study of 
strategic IT investments needed to address the agency's business needs 
and identified five critical initiatives for its single-family 
insurance programs (see table 6). 

Table 6: Five Most Critical Information Technology Initiatives for 
FHA's Single-Family Insurance Programs: 

Initiative: Automated underwriting system[A]; 
Description: Implementation of a standard automated underwriting 
system to evaluate loan applications and associated risk data to 
determine eligibility for insurance. 

Initiative: Automated valuation model; 
Description: Acquisition of a mathematical model and database that 
provides automated property valuations to provide more timely and 
accurate property valuations. 

Initiative: Electronic application submission; 
Description: Ability to electronically generate, transfer, sign, and 
store documents associated with the mortgage insurance process. 

Initiative: Fraud detection and prevention; 
Description: Acquisition of specialized business intelligence 
analytics software that would help the agency evaluate whether loan 
application data included errors or misrepresentation, or might 
indicate fraud. 

Initiative: New infrastructure/replace the Computerized Home 
Underwriting Management System (CHUMS); 
Description: Replace FHA's major underwriting system (CHUMS) with an 
off-the-shelf system that would enable the agency to decrease its 
processing times, increase data accuracy, and provide better service 
to its customers. 

Source: FHA's Information Technology Strategy and Improvement Plan. 

[A] An automated underwriting system allows lenders to enter 
information on potential borrowers into electronic systems that 
contain an evaluative formula, or algorithm, called a scorecard. The 
scorecard uses a variety of variables that include the borrower's 
characteristics (credit score and cash reserves, for example) and loan 
characteristics to calculate the applicant's creditworthiness. FHA-
approved lenders use automated underwriting systems in conjunction 
with TOTAL to underwrite FHA-insured loans. 

[End of table] 

In January 2010, FHA began planning and implementing key aspects of 
the identified initiatives as part of its FHA Transformation efforts, 
which HUD initially estimated would cost $281 million over the next 5 
years.[Footnote 37] Specifically, FHA began efforts to detect and 
prevent fraud, known as the Risk and Fraud Initiative. Under this 
initiative, FHA will award contracts to (1) install and use business 
intelligence software to assess counterparty risks; (2) acquire 
existing analytical tools for collateral risk management, borrower 
verification, and fraud detection; and (3) review and assess the 
revised PETR loan selection criteria. 

In addition, the agency began its Infrastructure Transformation 
Initiative, which is intended to replace CHUMS, the core case 
management system. In its place, the agency will use the Financial 
Industry Standard Platform, an off-the-shelf system. The system will 
allow FHA to implement a "case management" approach for monitoring a 
loan throughout its life cycle (e.g., initial data submission and 
approval and servicing of the loan) and utilize risk-related tools to 
help better understand market trends. Additionally, the system will 
allow FHA to leverage risk and fraud tools and capture critical data 
points at the front end of the loan process to help detect risk and 
prevent fraud. 

In February 2011, FHA established milestones of April 2011, October 
2011, and April 2012 for various deliverables under the FHA 
Transformation Initiative. According to project officials, FHA met the 
deadline for all April 2011 deliverables. Specifically, the agency: 

* incorporated the initial components of the Financial Industry 
Services Platform into HUD's IT environment; 

* developed an environment in the Financial Industry Services Platform 
that allows FHA to pilot applications before fully implementing them 
in the new infrastructure; 

* documented requirements via a pilot process for the Financial 
Industry Services Platform, including future goals and what components 
would be needed to achieve FHA's business objective; 

* acquired the means to migrate existing applications in CHUMS to the 
Financial Industry Services Platform; and: 

* enhanced the capability to identify loans for PETR selection and 
prepare better secondary reviews. 

Work continues on deliverables due in October 2011 and April 2012. The 
deliverables for October 2011 are (1) implementing counterparty risk 
management solutions in the Financial Industry Services Platform, 
including a tool to automate lender approval for single-family 
insurance programs and requirements for the annual recertification of 
approved lenders; (2) developing a plan for incorporating risk and 
fraud tools in the Financial Industry Services Platform; and (3) 
completing migration of one CHUMS application to the Financial 
Industry Services Platform. By April 2012, FHA plans to (1) develop 
portfolio modeling and scenario analysis and (2) increase business 
control over operational risk and fraud in the pre-endorsement and 
endorsement processes. As of September 22, 2011, project officials 
said that FHA is on track to meet these milestones. 

FHA has major components to complete. As indicated earlier, one goal 
of the initiative is to replace CHUMS with the Financial Industry 
Standard Platform. To meet this goal, FHA will need to migrate 
functions and applications associated with loan origination and 
underwriting, business partner (for example, lender) approval and 
monitoring, and components of loan account servicing and 
administration. As noted above, FHA expects to have one application in 
one CHUMS area operating from the new platform by April 2012. To 
illustrate the amount of work remaining, 5 functional areas and more 
than 30 subareas under loan origination and underwriting eventually 
will need to be migrated. In addition to these CHUMS components, 
several other IT systems will need to move to the new platform. FHA 
has been defining the steps it plans to take beyond April 2012 to 
complete its IT modernization and fully realize the benefits of these 
initiatives. 

Although FHA Has Addressed Some Staffing Issues, It Lacks Strategic 
Workforce and Succession Planning: 

FHA has taken steps to address staffing challenges associated with the 
increase in its business volume and workload, but lacks strategic 
workforce and succession plans. 

FHA Took Some Steps to Manage the Increased Business Volume: 

To handle the increased business volume, the homeownership centers 
hired more contractors, increased overtime, shared resources, and 
changed work processes. For example, to respond to dramatic increases 
in the number of FHA-insured loans and the inventory of foreclosed 
properties to be managed, the homeownership centers expanded their use 
of contractors hired to perform key functions in PUD and REO (see 
figure 9). These contracts provided the homeownership centers with 
flexibility and the capability to respond to spikes in volume. 

Figure 9: Selected FHA Single-Family Contractors, 2006-2010: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 2006; 
PUD Contractors: 89; 
REO Contractors: 360; 
Total contractors: 449. 

Fiscal year: 2007; 
PUD Contractors: 91; 
REO Contractors: 453; 
Total contractors: 542. 

Fiscal year: 2008; 
PUD Contractors: 123; 
REO Contractors: 555; 
Total contractors: 678. 

Fiscal year: 2009; 
PUD Contractors: 174; 
REO Contractors: 660; 
Total contractors: 834. 

Fiscal year: 2010; 
PUD Contractors: 148; 
REO Contractors: 980; 
Total contractors: 1128. 

Source: GAO analysis of FHA data. 

Note: The contractor FTE data provided by FHA were a head count of 
contractor employees for 2010 and estimates for 2006-2009 (based on 
the 2010 data). 

[End of figure] 

In addition to relying on contractors to address the increased 
workload caused by FHA's large increase in business volume, the 
homeownership centers also used more overtime, although the use of 
overtime varied by center. As figure 10 shows, the Atlanta and Santa 
Ana homeownership centers used the vast majority of overtime, while 
the Denver and Philadelphia homeownership centers relied on overtime 
to a much lesser extent. During our visit to the Philadelphia center, 
FHA officials told us that they discouraged the use of overtime. 
Atlanta officials told us that they needed to use overtime to keep up 
with the increased workload. 

Figure 10: FHA Single-Family Overtime Expenditures, 2006-2010: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 2006; 
Denver HOC: $31,012; 
Philadelphia HOC: $18,817; 
Single Family Headquarters: $17,422; 
Santa Ana HOC: $46,207; 
Atlanta HOC: $308,064; 
Total: $421,522. 

Fiscal year: 2007; 
Denver HOC: $1,824; 
Philadelphia HOC: $4,299; 
Single Family Headquarters: $6,763; 
Santa Ana HOC: $42,651; 
Atlanta HOC: $242,977; 
Total: $298,514. 

Fiscal year: 2008; 
Denver HOC: $88,337; 
Philadelphia HOC: $107,402; 
Single Family Headquarters: $103,908; 
Santa Ana HOC: $219,968; 
Atlanta HOC: $688,381; 
Total: $1,207,996. 

Fiscal year: 2009; 
Denver HOC: $22,167; 
Philadelphia HOC: $31,580; 
Single Family Headquarters: $39,628; 
Santa Ana HOC: $257,849; 
Atlanta HOC: $596,974; 
Total: $948,198. 

Fiscal year: 2010; 
Denver HOC: $31,862; 
Philadelphia HOC: $45,052; 
Single Family Headquarters: $41,324; 
Santa Ana HOC: $388,492; 
Atlanta HOC: $907,453; 
Total: $1,414,183. 

Source: GAO analysis of FHA data. 

[End of figure] 

Additionally, the homeownership centers shared resources to handle the 
increased workload. At some centers, staff from one division helped 
other divisions. For example, at the Denver homeownership center, PSD 
staff assisted REO with payments related to foreclosed properties. 
Some homeownership centers with available staff picked up overflow 
work from other centers. For example, Santa Ana took responsibility 
for two REO contracts from Denver; however, once Santa Ana's workload 
increased, it could no longer support these contracts. Finally, the 
Philadelphia homeownership center took the lead on condominium 
recertification processing for all of the homeownership centers, 
allowing staff in these centers to focus on other workload items. 
[Footnote 38] 

Finally, as previously noted, FHA revised some of its business 
processes. For example, it revised its method for targeting loans for 
PETRs, which reduced the percentage of loans reviewed. It also reduced 
the number of appraisals that were reviewed for each appraiser 
targeted for review from 10 to 3. 

FHA Lacks Strategic Workforce and Succession Plans: 

Although FHA has addressed staffing and training needs and succession 
planning to some extent, it lacks plans that strategically address 
future workforce needs, including the need to replace retiring staff. 
HUD guidance requires workforce planning that identifies the workforce 
needed to meet future challenges[Footnote 39]. Moreover, our internal 
control standards require that management take steps to ensure that 
skill needs are continually assessed and that the organization is able 
to obtain a workforce that has the required skills that match those 
necessary to achieve organizational goal[Footnote 40]s. We have also 
reported that workforce planning practices used by leading 
organizations include a process to (1) define the critical skills and 
competencies that will be needed to achieve current and future 
programmatic results (including critical skill gaps) and (2) develop 
strategies tailored to address gaps in the number, skills, and 
competencies of staff.[Footnote 41] In addition, internal control 
standards require that agencies, as part of their human capital 
planning, consider how best to retain valuable employees, plan for 
their eventual succession, and ensure continuity of needed skills and 
abilities. We have also reported that leading public organizations 
have adopted practices such as linking succession planning to 
strategic planning; emphasizing developmental assignments in addition 
to formal training; and addressing specific human capital challenges, 
such as diversity, leadership capacity, and retention.[Footnote 42] 
Further, HUD guidance calls for a succession plan that includes, among 
other things, projections for retirements in mission-critical 
positions. 

Although workforce planning practices used by leading organizations 
include defining critical skills and skill gaps, FHA's current 
approach to workforce planning does not have mechanisms for doing so. 
For the 4-year period from 2004 to 2008, FHA had a workforce plan that 
identified the critical competencies needed by employees over that 
period; analyzed skills and competencies, including gaps; and proposed 
comprehensive strategies to address these gaps.[Footnote 43] 
Specifically, the plan described the most critical competencies for 
staff and included calculations of the gap for each competency (that 
is, the shortfall or deficit that results when the supply of staff 
proficient in a competency is less than the demand for that 
competency). 

However, FHA has not created a multiyear workforce plan since then. 
Instead, it has relied on occasional REAP studies and annual 
managerial assessments of staffing and training needs. The most recent 
REAP study, completed in 2009, did not identify critical skills needed 
or strategies to address skill gaps. Rather, its purpose was to 
determine the proper staffing level for the four homeownership centers 
and the National Servicing Center.[Footnote 44] In addition, FHA asks 
each program office to annually identify mission-critical positions 
that need to be filled. As part of identifying these positions, 
managers are to take into account upcoming initiatives that may 
require new or increase existing positions, and current goals, 
workload, vacancies, and expected attrition. FHA officials told us 
that they also used the results of the most recent REAP study in 
determining staffing needs. The result of the process is a spreadsheet 
listing positions they would like to fill that year. In addition, 
FHA's program offices produce similar spreadsheets annually for 
training needs. The training needs identified are based on managers' 
assessments of staff skill gaps, performance, and employee interest. 
The spreadsheet links requests for training from the program offices 
and the homeownership centers to a list of general and technical 
competencies that FHA officials told us were pulled from the Office of 
Personnel Management website in 2005. 

FHA also does not currently have a succession plan as it has had in 
the past. In 2006, HUD developed a succession plan for 2006-2009 that 
covered various offices, including FHA. The plan: 

* identified all of the positions the program office deemed critical 
to meeting the goals and the objectives of its programs, 

* analyzed whether existing staff in the positions had the required 
competencies to perform the jobs, 

* assessed the number of retirement-eligible employees in critical and 
noncritical positions, and: 

* determined the probability of retirements over the next 3 years. 
[Footnote 45] 

Succession planning is particularly important because the Office of 
Single Family Housing could face numerous retirements. Almost 50 
percent of Single Family Housing headquarters staff are eligible to 
retire within the next 3 years (see table 7). The percentage of staff 
eligible to retire at the homeownership centers is even higher. For 
example, 63 percent of homeownership center staff are eligible to 
retire within the next 3 years. For the three divisions (PUD, QAD, and 
REO) in the homeownership centers that conduct key workload items, 51, 
65, and 60 percent, respectively, can retire in the next 3 years. 
During our visits to three of the four homeownership centers, 
officials consistently told us of the risk they faced with losing 
experienced staff to retirement. At one homeownership center, the PUD 
director told us that 80 percent of his staff were 45 or older. 

Table 7: Percentage of FHA Staff Eligible to Retire within the Next 1, 
2, and 3 Years, as of July 2011: 

Entity: Single-family headquarters staff; 
Eligible to retire within 1 year: 39; 
Eligible to retire within 2 years: 45; 
Eligible to retire within 3 years: 47. 

Entity: Homeownership centers: 

PUD; 
Eligible to retire within 1 year: 40; 
Eligible to retire within 2 years: 43; 
Eligible to retire within 3 years: 51. 

QAD; 
Eligible to retire within 1 year: 57; 
Eligible to retire within 2 years: 62; 
Eligible to retire within 3 years: 65. 

REO; 
Eligible to retire within 1 year: 47; 
Eligible to retire within 2 years: 53; 
Eligible to retire within 3 years: 60. 

Source: GAO analysis of FHA data. 

[End of table] 

While FHA has taken some steps to address succession planning, they 
have been limited. In recognition of the high percentage of staff 
eligible to retire, FHA implemented two initiatives focused on 
succession planning. The first initiative, known as the "three-deep" 
structure, was put in place in 2010. It is intended to help ensure 
that, at any given time, at least two additional supervisors, 
managers, or executives can perform the work of each supervisor, 
manager, or executive. However, this three-deep structure does not 
apply to other staff positions beyond management. The second 
initiative, the Foundation Leadership Program, also began in 2010. Its 
goal is to train and develop staff through a number of programs. They 
include the Student Intern Program, which exposes interns to the 
programmatic activities of the Office of Housing, and the Upward 
Mobility Program, which provides participants with a curriculum 
intended to expand their knowledge of the housing industry and enhance 
professional, analytical, and reasoning skills. Also included are the 
Management Development Program, which focuses on creating future 
leaders by providing targeted staff with essential leadership and 
management skills, and the Executive Development Program, which trains 
new supervisors and offers refresher courses and follow-on 
facilitative training to enhance leadership development of current 
managers. Neither initiative assesses the number of retirement-
eligible employees in critical positions as required by HUD guidance. 
According to FHA officials, as resources have dwindled they have 
considered all of their positions to be critical. 

According to FHA officials, plans to update their workforce and 
succession plans were suspended. In 2007-2009, FHA had a workforce 
planning process that was designed to identify critical skill gaps and 
a strategy for addressing these gaps. They stated that a contractor 
was hired to develop a database to store data collected on 
competencies and skill gaps. The intent was to use this information to 
identify training needs and conduct workforce and succession planning. 
According to the officials, HUD told FHA to stop this initiative in 
2009 because HUD was going to implement the Learning Management 
System, which would be a workforce planning process for the entire 
department. However, this system never came to fruition because of 
funding shortages. The FHA officials told us that they were not aware 
of any efforts to reinstate the workforce planning process in place 
from 2007 to 2009. Without a more comprehensive workforce planning 
process that includes succession planning, FHA's ability to 
systematically identify the workforce needed for the future and plan 
for upcoming retirements is limited. 

Conclusions: 

Through its single-family mortgage insurance programs, FHA has helped 
millions of families purchase homes. But the recent increased reliance 
on FHA mortgage insurance highlights the need for FHA to better ensure 
that it has the proper controls in place to minimize financial risks 
while meeting the housing needs of borrowers. Additionally, although 
FHA's single-family insurance programs historically have produced 
budgetary receipts for the federal government, a weakening in the 
performance of FHA-insured loans could increase the possibility that 
FHA will require additional funds to help cover its costs on insurance 
issued to date. Key factors in improving accountability and minimizing 
operational problems are implementing appropriate internal controls, 
regularly assessing them for effectiveness, and updating them as 
conditions change. Therefore, the need for a comprehensive risk 
assessment strategy, including quality control functions, has become 
more urgent as FHA's market role, business volume, and corresponding 
workload dramatically increased and staffing levels remained 
relatively constant. FHA has taken important steps toward developing a 
comprehensive risk assessment approach, including establishing an 
office of risk management, implementing a new system of management 
control in Single Family Housing, and identifying and addressing risks 
related to the rapid increase in business volume. However, key 
elements--such as the integration of separate risk assessment efforts, 
annual assessments of the risks from internal and external sources, 
and mechanisms to identify and address risks related to changing 
conditions--currently are missing from FHA's approach. For instance, 
one mechanism for identifying risks related to changing conditions 
could be to implement the template for reporting on major emerging 
risks that was recommended in the consultant's report commissioned by 
FHA. By incorporating these key elements, FHA could more effectively 
identify, plan for, and address risk. 

Additionally, FHA's continued prominence in the mortgage market 
highlights the importance of helping to ensure that the agency has 
adequate staff to effectively oversee key program participants, such 
as lenders and appraisers. However, the high percentage of staff 
eligible to retire within the next 3 years presents workforce and 
succession planning challenges. Although workforce planning practices 
used by leading organizations include defining critical skills and 
skill gaps, FHA's current approach to workforce planning does not have 
mechanisms for doing so. And although the agency has taken some steps 
to address succession planning, it lacks a succession plan that covers 
managers and staff and highlights projected shortfalls in critical 
positions. Strategic workforce and succession planning efforts can 
provide a structure to address these issues. A more structured 
approach could enhance FHA's ability to identify critical skills and 
gaps, plan for upcoming retirements, and meet future demands of the 
program. 

Recommendations for Executive Action: 

As FHA continues to implement its new risk assessment strategy, the 
Secretary of HUD should direct the Acting Assistant Secretary for 
Housing-Federal Housing Commissioner to take the following steps to 
comply with our internal control standards and HUD Handbook 1840.1: 

* integrate the internal quality control initiative of the Office of 
Single Family Housing into the operational risk processes of the 
Office of Risk Management; 

* conduct an annual risk assessment; and: 

* establish ongoing mechanisms--such as use of the report templates 
from the 2010 consultant's report--to anticipate and address risks 
that might be caused by changing conditions, including risks related 
to the rapid increase in single-family business volume. 

Further, to help ensure that FHA has sufficient staff in place with 
the appropriate skills to oversee single-family insurance programs 
during a period of continued program demand, the Secretary of HUD 
should direct the Acting Assistant Secretary for Housing-Federal 
Housing Commissioner to develop: 

* a workforce plan for the Office of Single Family Housing that 
identifies the critical skills and competencies the agency will need 
to meet its future program goals, defines skill gaps, and includes a 
process to develop strategies to address gaps in the number, skills, 
and competencies of staff; and: 

* a succession plan that outlines steps to help ensure that qualified 
employees succeed members of the workforce expected to retire over the 
next several years. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to HUD. The Acting Assistant 
Secretary for Housing-Federal Housing Commissioner provided written 
comments, which are reprinted in appendix II. The agency agreed with 
our recommendations and stated that it either was working toward 
achieving the recommendations or had plans to do so in the very near 
future. For example, FHA said it would leverage or integrate existing 
risk management efforts as soon as ORM's final governance structure 
and risk management strategies were in place. The agency also stated 
that ORM would conduct an annual risk assessment as a component of its 
overall risk management strategy. It stressed that ongoing mechanisms 
to anticipate and address risks related to changing conditions would 
be part of ORM's strategy. Finally, it noted that it would develop a 
formal workforce plan and had efforts underway to develop a succession 
plan. FHA also provided technical comments, which we incorporated into 
the report where appropriate. 

We will provide copies of this report to the Chairman and Ranking 
Member of the House Financial Services Committee and other interested 
congressional committees and to the Secretary of HUD. We also will 
make this report available at no charge on the GAO website at 
[hyperlink, http://www.gao.gov]. If you or your office have any 
questions about this report, please contact me at (202) 512-8678 or 
sciremj@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Key contributors to this report are listed in appendix III. 

Signed by: 

Mathew Scirè: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

We examined the Federal Housing Administration's (FHA) oversight 
capacity in light of the recent expansion in its single-family 
mortgage insurance programs. Specifically, we (1) identified recent 
changes in FHA's volume, workload, and resources; (2) evaluated FHA's 
risk assessment strategy, including the extent to which it is 
consistent with Department of Housing and Urban Development (HUD) and 
GAO internal control standards; and (3) assessed the steps FHA has 
taken to manage the risks in its single-family mortgage insurance 
programs. 

To determine changes in the volume of FHA's single-family business 
since 2006, we collected data on loan volume from FHA's quarterly 
reports to Congress on the Mutual Mortgage Insurance Fund and data on 
FHA's market share from HUD's quarterly reports on U.S. housing market 
conditions. To determine how FHA's workload has changed since 2006, we 
collected data for fiscal years 2006-2010 from the following systems: 

* Computerized Homes Underwriting Management System--data on post- 
endorsement technical reviews, appraiser reviews, and appraiser 
sanctions; 

* Approval Review and Recertification Tracking System--data on lender 
applications and lender reviews; 

* Single Family Acquired Asset Management System--information on FHA's 
real estate-owned properties; 

* HUD's Central Accounting and Program System--overtime expenditures; 
and: 

* Single Family Housing Data Enterprise Warehouse--data on loss 
mitigation actions. 

We also reviewed FHA management reports to determine annual workload 
goals and compared actual work completed with stated goals. To 
determine resource changes since 2006, we analyzed data on staff 
assigned to the Office of Single Family Housing in fiscal years 2006- 
2010 and contractor staff hired to perform selected functions in the 
same period. The Office of Single Family Housing provided headquarters 
staffing levels from the National Finance Center payroll database. 
Each homeownership center provided its staffing levels in the form of 
monthly management reports. FHA provided estimates of contractor full- 
time equivalent levels based on current contractor levels and past 
workload. To assess the reliability of these data, we reviewed 
documentation from FHA on internal controls, interviewed FHA officials 
who administer these systems and officials who routinely use the 
systems for workload management, and verified selected data across 
multiple sources (including annual FHA management reports). We 
determined that the data were sufficiently reliable for our purposes. 

To evaluate the extent to which FHA's risk assessment strategy is 
consistent with our and HUD's risk assessment requirements and 
guidelines, we reviewed (1) the Federal Managers' Financial Integrity 
Act requirements, (2) our internal control standards and evaluation 
tool, (3) HUD's management control handbook, and (4) Office of 
Management and Budget Circular No. A-123 requirements relating to an 
internal control structure for risk assessment.[Footnote 46] To 
identify FHA's risk assessment strategy, we reviewed HUD Inspector 
General audit reports, including a 2008 report on Single Family 
Housing's failure to fully implement an internal control structure in 
accordance with requirements.[Footnote 47] And we reviewed the 
independent auditor's report (which accompanied the audit of FHA 
financial statements for 2008-2010) on the agency's internal control 
deficiencies.[Footnote 48] Further, we reviewed (1) Single Family 
Housing's management plans for the quality control initiative and 
examples of risk assessment worksheets, quarterly status reports, and 
other documentation related to the quality control initiative, and (2) 
a consultant's report on options and recommendations for the proposed 
structure and functions of the Office of Risk Management in the Office 
of Risk Management and Regulatory Affairs.[Footnote 49] We interviewed 
single-family staff in headquarters, the quality control coordinators 
and other staff at the homeownership centers, and Office of Risk 
Management and Regulatory Affairs staff. We then compared FHA's 
existing and proposed risk assessment strategy with our internal 
control standards and the HUD handbook. 

To describe the steps FHA took to manage the risks it identified in 
the single-family insurance programs, we focused on efforts related to 
credit and counterparty risk, information technology, and human 
capital. 

Credit and Counterparty Risk: 

To determine the steps FHA took to address credit risk, we summarized 
enhancements the agency made or intends to make (as described in our 
prior report on the financial condition of the Mutual Mortgage 
Insurance Fund).[Footnote 50] We reviewed FHA program changes to 
account for any updates since we issued that report. We also reviewed 
information from the Office of Risk Management and Regulatory Affairs 
on more recent changes FHA made to address credit risk, such as those 
associated with FHA's Technology Open to Approved Lenders scorecard, 
which is used to assess a borrower's risk of default quickly and 
efficiently by examining the data the borrower provides on the loan 
application and the borrower's credit score. 

To identify the steps FHA took to address counterparty risk--that is, 
risks posed by lenders and appraisers--we reviewed changes to FHA's 
final rule related to prohibiting loan correspondents from directly 
participating in the single-family insurance programs and increasing 
the net worth requirement for FHA-approved lenders.[Footnote 51] The 
final rule included information on FHA's rationale for the changes and 
concerns program stakeholders raised. We also reviewed HUD mortgagee 
letters (written instructions to FHA-approved lenders) related to the 
rule changes. To determine how FHA changed its oversight of lenders 
and appraisers, we reviewed FHA's revised guidance on the post-
endorsement technical review process and documentation on changes to 
the risk-based criteria used to identify lenders and appraisers for 
review. We also interviewed FHA officials at headquarters and the four 
homeownership centers for more information. To describe the advantages 
and disadvantages of the changes FHA made, we interviewed FHA 
officials at headquarters and the homeownership centers and officials 
at the Mortgage Bankers Association and the Independent Community 
Bankers of America. 

Information Technology Risk: 

To determine the steps FHA took to manage the risks associated with 
its information systems, we reviewed documentation on challenges that 
FHA and the independent auditor identified in relation to major 
systems supporting the single-family programs. These include FHA's 
2009 Information Technology Strategy and Improvement Plan and 
Infrastructure Transformation Initiative Concept of Operations, and 
reports from the independent auditor for 2008-2010.[Footnote 52] To 
obtain information on the challenges rapid growth in business volume 
posed for FHA's information systems, we reviewed a consultant's 2009 
Risk Capacity Study on the single-family program and the 2009 Resource 
Estimation and Allocation Process (REAP) study.[Footnote 53] We 
interviewed Single Family Housing headquarters staff and staff at the 
four homeownership centers about how the information systems performed 
during the initial period of rapid growth and subsequently. To 
determine the steps FHA took to modernize its information systems, we 
reviewed numerous documents related to its Infrastructure 
Transformation Initiative, including the Concept of Operations and the 
Project Management Plan and our prior work on HUD's information 
systems.[Footnote 54] We met with FHA and HUD officials responsible 
for various aspects of the initiative to learn more about it, the 
deliverables for the first 18 months of the project, and any issues 
faced. To determine the steps FHA took to address risks and fraud 
related to use of information systems, we reviewed the request for 
proposals for the Risk and Fraud Initiative and task orders for some 
associated projects. To determine the status of FHA efforts for the 
initiative, we reviewed documents describing deliverables for the 
first 18 months of the project and interviewed FHA officials, 
including the FHA Transformation Initiative program manager.[Footnote 
55] 

Human Capital Risk: 

To assess the steps FHA took to address its staffing needs, we 
reviewed FHA guidance on factors managers should take into account 
when assessing annual staffing needs. We also reviewed the 2009 REAP 
study to find out recommended staffing levels for the Office of Single 
Family Housing. To determine the number of staff in the Office of 
Single Family Housing eligible to retire in the next 3 years, we 
analyzed National Finance Center data provided by FHA. To determine 
what initiatives FHA had in place to address succession planning, we 
reviewed documents from FHA that described its "three-deep" initiative 
and Foundation Leadership Program. We also interviewed officials from 
FHA's Office of Operations to learn more about workforce and 
succession planning. As part of these interviews, we obtained 
information on the workforce planning initiative FHA had in place 
during 2007-2009. To determine the extent to which FHA's current 
workforce and succession planning efforts were consistent with GAO and 
HUD human capital criteria, we reviewed our internal control standards 
related to workforce and succession planning, a GAO report on key 
principles for strategic workforce planning, and HUD's Strategic Human 
Capital Plan.[Footnote 56] We also reviewed prior HUD workforce and 
succession planning reports.[Footnote 57] 

We conducted this performance audit from October 2010 to November 2011 
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 
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: Comments from the Department of Housing and Urban 
Development: 

U.S. Department Of Housing And Urban Development: 
Assistant Secretary for Housing: 
Federal Housing Commissioner: 
Washington, DC 20410-0000: 

October 26, 2011: 

Mr. Mathew J. Scirè: 
Director: 
Financial Markets and Community Investment: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548-0001: 

Dear Mr. Scirè: 

Thank you for the opportunity to comment on the GAO Final Report 
entitled, "Federal Housing Administration: Improvement Needed in Risk 
Assessment and Human Capital Management." This letter conveys HUD's 
response to the audit. 

As detailed in the report, FHA has taken a number of proactive steps 
to improve its management of risk, and to leverage its limited 
resources to meet increased workload demands. FHA has implemented 
several significant policy and operational changes to its lender 
approval, monitoring and enforcement activities. And ongoing efforts 
to modernize HUD's information technology systems will further enhance 
FHA's ability to execute a robust counterparty risk management 
strategy. We are confident that the changes we have made, and the 
continued improvements that are still forthcoming, will better equip 
FHA to carry out its important role in a 21g century housing finance 
system. We are pleased that GAO has recognized our efforts in its 
report. 

In addition, both Bob Ryan, as the previous Deputy Assistant Secretary 
for Risk, and I have remained focused on risk management activities 
and staffing throughout this period. HUD has also made significant 
progress in filling leadership positions, and we will have our full 
senior management team in place very soon. We are confident that they 
will provide the ongoing leadership necessary to continue our efforts 
to ensure that FHA possesses the policies, processes, and systems 
necessary to effectively manage its risk at this important period in 
its history. 

With regard to the recommendations found in the report, FHA's specific 
responses to each are below. But at the outset, it should be noted 
that FHA agrees with the GAO's recommendations and is either currently 
working toward the achievement of those recommendations, or has plans 
to do so in the very near future. Indeed, even before this audit, in 
addition to its efforts to strengthen existing offices and processes, 
FHA has been working diligently to establish the new Office of Risk
Management and Regulatory Affairs, and to integrate its activities 
with those of FHA's program offices. And efforts to update and utilize 
FHA's workforce and succession plans are currently underway. 

Recommendation: 

Integrate the internal quality control initiative of the Office of 
Single Family Housing into the operational risk processes of the 
Office of Risk Management. 

HUD Response: 

As the risk management strategies and processes of the Office of Risk 
Management and Regulatory Affairs (ORM) continue to be developed, ORM 
will endeavor to leverage and/or integrate with existing risk 
management efforts. ORM's strategy is intended to be complementary to 
the activities of FHA's program offices, and where existing program 
office initiatives are sufficient for the purposes for which they are 
intended, they will be retained; where they are not, ORM will ensure 
that new mechanisms are employed. 

Such integration will take place as soon as ORM's final governance 
structure and risk management strategies are in place. 

Recommendation: 

Conduct an annual risk assessment. 

HUD Response: 

As a component of its overall risk management strategy, ORM will 
conduct an annual risk assessment. 

Recommendation: 

Establish ongoing mechanisms — such as use of the report templates 
from the 2010 consultant's report — to anticipate and address risks 
that might be caused by changing conditions, including risks related 
to the rapid increase in single-family business volume. 

HUD Response: 

As a part of the ORM governance policy, ORM will consider how risk 
assessments will be conducted, as well as appropriate report formats 
such as those recommended in the consultant's study. However, 
regardless of the specific formats and operational details, ongoing 
mechanisms to anticipate and address risks related to changing 
conditions will most certainly be a component of ORM's risk management 
strategy. 

Recommendation: 

Develop a workforce plan for the Office of Single Family Housing that 
identifies the critical skills and competencies the agency will need 
to meet its future program goals, defines skill gaps, and includes a 
process to develop strategies to address gaps in the number, skills 
and competencies of staff. 

HUD Response: 

A formal workforce plan as outlined in the recommendation will be 
developed. However, it should also be noted that FHA does presently 
engage in workforce planning activities, although without utilizing a 
plan as described in the GAO's recommendation. When developing yearly 
hiring plans, FHA looks at key indicators, including but not limited 
to, retirement eligibility, critical vacancies, and the previous 
year's training needs assessments to determine which positions it will 
recruit for and which can be filled through additional training of 
existing staff. Additionally, FHA faces significant resource 
limitations which have impacts on formal workforce planning. 

While FHA can endeavor to identify and compensate for skill gaps and 
competency needs, the ability to execute its plans is dependent upon 
requisite appropriations from Congress. As noted in the report, while 
FHA's workload has increased substantially over the past few years, 
its staffing levels have remained relatively constant. Although the 
realities of the appropriations process do not obviate the need for 
workforce planning, they do significantly constrain the effective 
utilization of the plans that are developed. 

Recommendation: 

Develop a succession plan that outlines steps to help ensure that 
qualified employees succeed members of the workforce expected to 
retire over the next several years. 

HUD Response: 

A succession plan will be developed, and efforts to achieve this are 
already underway. Building upon the work completed in 2007-2009 to 
develop a Departmental succession plan, FHA is currently updating its 
succession plan to identify and prioritize hiring to fill critical 
skill gaps, provide training to ensure staff possess key competencies, 
and prepare for expected retirements. This work will continue, 
resulting in the succession plan envisioned by GAO. 

Conclusion: 

We appreciate the efforts of the GAO to review our progress and 
suggest future recommendations to strengthen our risk management and 
human capital management processes. Ensuring FHA's soundness in these 
areas is of vital importance to our ability to efficiently and 
effectively meet the needs of American taxpayers — both when workload 
volumes are at normal levels, and even more so when they are at 
elevated levels such as we are now experiencing. That is why we have 
undertaken the large number of efforts to improve our policies, 
procedures, staffing and systems referred to in the report. We will 
continue to implement our initiatives so that FHA can continue to 
deliver the services our economy requires. 

Sincerely, 

Signed by: 

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

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Mathew J. Scirè, (202) 512-8678 or sciremj@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Paige Smith (Assistant 
Director), Dan Alspaugh, Rudy Chatlos, John McGrail, Marc Molino, 
Teresa Neven, José R. Peña, Beth Reed Fritts, and Barbara Roesmann 
made key contributions to this report. 

[End of section] 

Footnotes: 

[1] See 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). 

[2] As of August 31, 2011, FHA had about 7.3 million single-family 
mortgages in force with an outstanding balance of over $1.0 trillion. 

[3] Unless otherwise stated, the years shown in this report are fiscal 
years. 

[4] FHA also insures mortgages for multifamily properties and health 
care facilities. 

[5] Underwriting refers to a risk analysis that uses information 
collected during the origination process to decide whether to approve 
a loan. 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. 

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

[7] The market share data do not include reverse mortgages. 

[8] According to FHA officials, 18 employees assigned to the Office of 
the Deputy Assistant Secretary for Single Family Housing were actually 
located in the field. 

[9] The contractor FTE data presented here (and throughout the report) 
are a head count of contractor employees for 2010 and estimates for 
2006-2009 (based on the 2010 data). 

[10] Reviewers evaluate the quality of the mortgage credit evaluation 
of the borrower and the valuation of the mortgaged property. 

[11] Indemnification agreements require the lender to repay FHA for 
any losses that it incurs after a loan has gone into default and the 
property has been sold. 

[12] FHA's goal specifically refers to the number of appraisals 
reviewed, not to the number of appraisers reviewed. 

[13] The percentages do not add to 100 percent because of rounding. 

[14] The lenders deed the foreclosed homes to the Secretary of HUD in 
exchange for an insurance claim payment, and the contractors then 
manage and market the foreclosed (single-family) properties. 

[15] FHA awarded contracts for (1) a mortgagee compliance manager, who 
performs services such as reviewing property inspections and providing 
guidance to lenders; (2) field service managers, which are companies 
that provide property preservation and protection services such as 
inspecting the property, securing the property, performing cosmetic 
enhancements, and providing ongoing maintenance; and (3) asset 
managers, who are responsible for the marketing and sale of real 
estate-owned property. 

[16] REAP studies establish a staffing baseline for budget formulation 
and execution, strategic planning, organizational and management 
analyses, and ongoing management of staff resources. 

[17] Loss mitigation actions seek to minimize losses from potential 
foreclosures by finding alternatives to foreclosure and helping 
homeowners retain their homes, if possible. 

[18] FHA selects lenders for review using a risk-based approach. We 
will discuss this selection process in more detail later in this 
report. 

[19] Active lenders are those that have at least one loan underwritten 
or in their servicing portfolio as of July 31 of the prior fiscal year. 

[20] G&B Solutions and KPMG, Risk Capacity Study, Single Family 
Housing Application and Endorsement Processes, a report prepared at 
the request of the Department of Housing and Urban Development, Feb. 
2, 2009. 

[21] According to our internal control standards, risk assessment is 
the identification and analysis of risks. See GAO, Standards for 
Internal Control in the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: 
November 1999). 

[22] See [hyperlink, http://www.gao.gov/products/GAO-10-827R] for a 
discussion of the results of the independent actuarial report and some 
of the risk analyses the Office of Evaluation conducted (related to 
the credit quality of loans, trends in delinquency rates, and policy 
changes, such as in insurance premiums and underwriting). 

[23] McKinsey & Company, Building the ORM Organization, Close-out 
Materials, a report prepared at the request of the Department of 
Housing and Urban Development, December 2010. 

[24] See Department of Housing and Urban Development, Office of the 
Inspector General, HUD's Office of Single Family Housing Had Not Fully 
Implemented an Internal Control Structure in Accordance with 
Requirements, Audit Report 2008-KC-0006 (Washington, D.C.: Sept. 8, 
2008); [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]; 
and Department of Housing and Urban Development, Office of the Chief 
Financial Officer, Departmental Management Control Program, Handbook 
1840.1 Rev-3 (Washington, D.C.: 1999). 

[25] Risk Capacity Study, Single Family Housing Application and 
Endorsement Processes. 

[26] Department of Housing and Urban Development, Resource Estimation 
and Allocation Process (REAP), Office of Housing, DAS for Single 
Family Housing, Study #1: Office of Single Family Housing-Field 
(Washington, D.C.: September 2009). 

[27] Department of Housing and Urban Development, FHA Office of 
Housing Information Technology Strategy and Improvement Plan 
(Washington, D.C.: Aug. 13, 2009). 

[28] GAO, Internal Control Management and Evaluation Tool, [hyperlink, 
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August 
2001). 

[29] The ORM consultant's study relied on ad hoc Commissioner's 
retreats to identify the greatest risks to each program area. 

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

[31] Credit scores, which assign a numeric value to a borrower's 
credit history, have become a popular tool in assessing applications 
for loans. They are often called FICO scores because most scores are 
produced with software developed by the Fair Isaac Corporation. FICO 
scores generally range from 300 to 850, with higher scores indicating 
better credit history. The lower the credit score, the more 
compensating factors lenders might require to approve a loan, such as 
a higher down payment or greater borrower reserves. 

[32] The purpose of TOTAL is to objectively measure the borrower's 
risk of default quickly and efficiently by examining the data the 
borrower provides on the loan application and the borrower's credit 
score. 

[33] Loan correspondents were categorized as supervised and 
nonsupervised correspondents. Supervised loan correspondents were 
entities such as banks and credit unions that had to have one or more 
sponsors who underwrote the mortgages. Nonsupervised loan 
correspondents were nondepository financial entities that had as their 
principal activity the origination of FHA-insured mortgages for sale 
or transfer to one or more sponsors who underwrote the mortgages. 
Sponsors had to be direct endorsement lenders. 

[34] Loan volume is defined as FHA single-family insured mortgages 
originated, underwritten, purchased, or serviced during the prior 
fiscal year. 

[35] Supervised lenders are those institutions that are regulated by 
entities such as the Federal Deposit Insurance Corporation or the 
National Credit Union Administration. This waiver will expire on April 
7, 2012, but FHA officials stated that they are taking steps to make 
this waiver permanent. 

[36] Risk Capacity Study, Single Family Housing Application and 
Endorsement Processes. 

[37] We recently reviewed HUD's IT expenditure plan, which includes 
information on FHA's Transformation Initiative. See GAO, Information 
Technology: HUD's Expenditure Plan Satisfies Statutory Conditions, and 
Implementation of Management Controls Is Under Way, [hyperlink, 
http://www.gao.gov/products/GAO-11-762] (Washington, D.C.: Sept. 7, 
2011). The report included a recommendation related to HUD's 
enterprise architecture. 

[38] The Housing and Economic Recovery Act of 2008 required FHA to 
implement a new approval process for condominium projects and 
insurance requirements for mortgages on individual units. 

[39] Department of Housing and Urban Development, Strategic Human 
Capital Management: Revised Human Capital Plan, FY 2008-FY 2009 
(Washington, D.C.: March 2008). HUD has been revising this plan. 

[40] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[41] GAO, Human Capital: Key Principles for Effective Strategic 
Workforce Planning, [hyperlink, http://www.gao.gov/products/GAO-04-39] 
(Washington, D.C.: Dec. 11, 2003). 

[42] GAO, Human Capital: Insights for U.S. Agencies from Other 
Countries' Succession Planning and Management Initiatives, [hyperlink, 
http://www.gao.gov/products/GAO-03-914] (Washington, D.C.: Sept. 15, 
2003). 

[43] Department of Housing and Urban Development, Strategic Workforce 
Plan, FY04 to FY08, Office of Housing, (Washington, D.C.: July 2004). 

[44] The 2009 REAP study found that these centers were understaffed by 
about 175 FTEs. However, agency officials told us that the Office of 
Single Family Housing has not been able to reach the staffing levels 
recommended in the REAP study because of budgetary constraints. As of 
May 2011, the homeownership centers and the National Servicing Center 
had 811 staff, as opposed to the 1,000 staff recommended in the REAP 
study and the 823 staff they had when the REAP was conducted in 2009. 

[45] Department of Housing and Urban Development, Succession 
Management Plan, Fiscal Year 2006-2009, (Washington, D.C.: September 
2006). 

[46] See GAO, Standards for Internal Control in the Federal 
Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: 
November 1999); GAO, Internal Control Management and Evaluation Tool, 
GAO-01-1008G (Washington, D.C.: August 2001); and Department of 
Housing and Urban Development, Office of the Chief Financial Officer, 
Departmental Management Control Program, Handbook 1840.1 Rev-3 
(Washington, D.C.: 1999). 

[47] Department of Housing and Urban Development, Office of the 
Inspector General, HUD's Office of Single Family Housing Had Not Fully 
Implemented an Internal Control Structure in Accordance with 
Requirements, Audit Report 2008-KC-0006 (Washington, D.C.: Sept. 8, 
2008). 

[48] See Department of Housing and Urban Development, Office of the 
Inspector General, Audit of the Federal Housing Administration's 
Financial Statements for Fiscal Years 2010 and 2009, Audit Report 2011-
FO-0002 (Washington, D.C.: Nov. 5, 2010); Department of Housing and 
Urban Development, Office of the Inspector General, Audit of the 
Federal Housing Administration's Financial Statements for Fiscal Years 
2009 and 2008, Audit Report 2010-FO-0002 (Washington, D.C.: Nov. 13, 
2009); and Department of Housing and Urban Development, Office of the 
Inspector General, Audit of the Federal Housing Administration's 
Financial Statements for Fiscal Years 2008 and 2007, Audit Report 2009-
FO-0002 (Washington, D.C.: Nov. 7, 2008). 

[49] McKinsey & Company, Building the ORM Organization, Close-out 
Materials, a report prepared at the request of the Department of 
Housing and Urban Development, December 2010. 

[50] 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). 

[51] 75 Fed. Reg. 20718 (Apr. 20, 2010). 

[52] Department of Housing and Urban Development, FHA Office of 
Housing Information Technology Strategy and Improvement Plan 
(Washington, D.C.: Aug. 13, 2009), and Department of Housing and Urban 
Development, Infrastructure Transformation Initiative: Infrastructure 
for Transformed Operations Concept of Operations Version 2.0 
(Washington, D.C.: September 2010). 

[53] G&B Solutions and KPMG, Risk Capacity Study, Single Family 
Housing Application and Endorsement Processes, a report prepared at 
the request of the Department of Housing and Urban Development, Feb. 
2, 2009, and Department of Housing and Urban Development, Resource 
Estimation and Allocation Process (REAP), Office of Housing, DAS for 
Single Family Housing, Study #1: Office of Single Family Housing-Field 
(Washington, D.C.: September 2009). 

[54] Department of Housing and Urban Development, Project Management 
Plan: Transformation Initiative (Washington, D.C.: Aug. 17, 2011); 
GAO, Information Technology: HUD Needs to Better Define Commitments 
and Disclose Risks for Modernization Projects in Future Expenditure 
Plans, [hyperlink, http://www.gao.gov/products/GAO-11-72] (Washington, 
D.C.: Nov. 23, 2011); and GAO, Information Technology: HUD's 
Expenditure Plan Satisfies Statutory Conditions, and Implementation of 
Management Controls Is Under Way, [hyperlink, 
http://www.gao.gov/products/GAO-11-762] (Washington, D.C.: Sept. 7, 
2011). 

[55] Department of Housing and Urban Development, Appendix C: FHA 
Transformation (Washington, D.C.: February 2011). 

[56] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]; GAO, 
Human Capital: Key Principles for Effective Strategic Workforce 
Planning, GAO-04-39 (Washington, D.C.: Dec. 11, 2003); and Department 
of Housing and Urban Development, Strategic Human Capital Management: 
Revised Human Capital Plan, FY 2008-FY 2009 (Washington, D.C.: March 
2008). 

[57] Department of Housing and Urban Development, Strategic Workforce 
Plan: FY04 to FY08 (Washington, D.C.: July 2004), and Department of 
Housing and Urban Development, Succession Management Plan: Fiscal Year 
2006-2009 (Washington, D.C.: September 2006). 

[End of section] 

GAO’s Mission: 

The Government Accountability Office, the audit, evaluation, and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the 
performance and accountability of the federal government for the 
American people. GAO examines the use of public funds; evaluates 
federal programs and policies; and provides analyses, recommendations, 
and other assistance to help Congress make informed oversight, policy, 
and funding decisions. GAO’s commitment to good government is 
reflected in its core values of accountability, integrity, and 
reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO’s website [hyperlink, http://www.gao.gov]. Each 
weekday afternoon, GAO posts on its website newly released reports, 
testimony, and correspondence. To have GAO e mail you a list of newly 
posted products, go to [hyperlink, http://www.gao.gov] and select “E-
mail Updates.” 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of 
production and distribution and depends on the number of pages in the 
publication and whether the publication is printed in color or black 
and white. Pricing and ordering information is posted on GAO’s 
website, [hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 
MasterCard, Visa, check, or money order. Call for additional 
information. 

Connect with GAO: 

Connect with GAO on facebook, flickr, twitter, and YouTube.
Subscribe to our RSS Feeds or E mail Updates. Listen to our Podcasts.
Visit GAO on the web at www.gao.gov. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 
Website: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]; 
E-mail: fraudnet@gao.gov; 
Automated answering system: (800) 424-5454 or (202) 512-7470. 

Congressional Relations: 

Ralph Dawn, Managing Director, dawnr@gao.gov, (202) 512-4400
U.S. Government Accountability Office, 441 G Street NW, Room 7125
Washington, DC 20548. 

Public Affairs: 
Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, DC 20548.