HUD failed to follow procedure in $18B of note programs – report

by Francis Monfort08 Aug 2017
The U.S. Department of Housing and Urban Development (HUD) did not properly create rules or come up with formal processes for its single-family note sales program, according to an audit by the Office of Inspector General (OIG) for the department.

The Office of Housing under HUD has sold single-family mortgage notes under various programs since 2002. Under the Distressed Asset Stabilization Program (DASP), the assignment of eligible, defaulted single-family mortgage loans were accepted in exchange for claim payment and then sold in a variety of pooled note sales. The sale of pooled notes to investors terminates the Federal Housing Administration (FHA) insurance on the mortgages.

From 2010 to 2016, the office’s sales programs expanded from 2,055 notes with approximate unpaid principal balance of $387 million before DASP to more than 108,000 notes with approximate unpaid principal balance of $18.4 billion. The OIG said it initiated the audit because of the large amount of FHA claims paid on note sales.

The OIG found that HUD did not conduct rulemaking or develop formal procedures for its single-family note sales program. Although the department issued an advance notice of proposed rulemaking in 2006 to solicit comments on its note sales program, the comment process was never finalized nor the program for a final rule prepared. Additionally, the OIG said that HUD did not develop formal guidance or procedures for its note sales program.

The OIG also found that HUD’s Accelerated Claims Disposition Demonstration program in 2002, which was intended to have only a limited duration, did not have a formalized assessment and transition plan for an official and nationwide implementation.

“As a result of HUD’s not conducting rulemaking, public officials, citizens, and industry participants were not given the opportunity to provide comments for a more than $18 billion program. Additionally, with no formal procedures or guidebooks, HUD lacked a consistent standard for administering its program. When HUD expanded its notes sales to a nationwide level, it did so without a formal plan to transition from a demonstration to an official program. Because HUD already operates its note sales nationwide, it should complete the rulemaking process and develop formal guidance for administering the program,” the OIG said in its audit report.

In response to a draft of the report, Susan Betts, acting deputy assistant secretary for finance and budget with the Office of Housing, said that although procedures were never formalized into a single document, the note sales were guided by a series of internal and external documented procedures. Betts concurred with the OIG’s recommendation and said the office is working on an Asset Sales Handbook.


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