A recent audit of the Department of Housing and Urban Development’s Office of Single Family Housing found that Single Family had not fully implemented an internal control structure in accordance with Government Accountability Office (GAO) internal control standards and HUD requirements. The audit was performed due to concerns over the expected increase in Federal Housing Administration (FHA)-insured loans generated by newly implemented and proposed FHA programs.

The report, released Sept. 8, stated that reverse mortgages contributed to part of the increased federal insurance exposure due to the segments rapid growth.  GAO concluded that as a result of this increase, Single Family would be challenged to develop adequate systems to account for increase in reverse mortgage loans.

The independent auditor’s report on FHA’s fiscal year 2007 financial statements (OIG report #2008-FO-0002, issued November 2007) identified two material weaknesses related to home equity conversion mortgages (reverse mortgages), caused in part by

• A lack of a comprehensive, documented, program-level risk assessment;
• A lack of an effective process to document FHA’s conclusions
  regarding results of its validation review; and
• A lack of employee understanding of system security responsibilities due to an ineffective organizational authority and insufficient staff resources.

The report noted that while most of the control weaknesses were specific to the reverse mortgage program; however, the weaknesses may indicate systemic problems within FHA due to the level of inadequate risk assessments and lack of documentation within this program. .  Single Family should have employed an overall risk-based monitoring strategy to help ensure:

1. Homeownership centers resolved loan deficiencies consistently.
2. Nonperforming lenders were not inadvertently allowed to remain in the lender insurance program.
3. The reverse mortgage program operated efficiently and effectively,
   particularly since this program had dramatically increased in loan volume
   in recent years.

According to the Reverse Mortgage Report, Federal Housing Commission Brian D. Montgomery responded to the report by establishing a board consisting of senior management at headquarters and the homeownership centers. The board met weekly for nine months to identify weaknesses and implement policies to ensure its internal control structure would include the inspector general’s recommendations.

Audit Report No.: 2008-KC-0006

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