HUD criticized for sloppy management of automated underwriting

Introduction

Serious flaws in the Federal Housing Administration’s automated underwriting process resulted in more than $6.1 billion in loans winning automatic approval for FHA insurance even though those borrowers had too much debt and posed a greater risk of default, according to a new inspector general report.

In fiscal 2009, nearly 1.4 million FHA home mortgages were approved through the automated underwriting process, accounting for nearly three-quarters of all FHA loans, the Housing and Urban Development (HUD) inspector general said.

The automation process uses a mathematical algorithm, dubbed the “Technology Open to Approved Lenders Scorecard,” to calculate the creditworthiness of an applicant for FHA mortgage insurance. But HUD made changes to the Scorecard’s review rules in 2005 and 2007 “without properly assessing the potential risk” or documenting the changes made, the watchdog said. HUD also failed to monitor the automation program with spot checks or data comparisons to detect any unexpected problems, it said.

Worst, HUD could not explain how or why automatic approval was eventually given to 1,073 loans after the automation software kicked them out for human review. “We conservatively estimated that the projected loss to the FHA Fund was $1.8 million for the outstanding balance of more than $249 million for insured loans that did not undergo further review, and if indicated, manual underwriting because of the program office’s lack of monitoring,” the inspector general said.

FAST FACT: Six loans kicked out by the automation software for human review either had post-endorsement changes or had the manual underwriting decision overridden by management to allow automated underwriting approval, the watchdog report said. The 28-page report had a half-dozen paragraphs blacked out.

Other new watchdog reports released by the Government Accountability Office (GAO), various federal Offices of Inspector General (OIG), and other government entities:

FINANCE

• Congress could amend the Economic Espionage Act to allow companies to file private lawsuits when trade secrets are stolen (Congressional Research Service).

NATIONAL SECURITY

• A “significant number” of FBI agents and employees cheated on test of investigations procedures; more than 200 employees finished the 90-minute exam in less than 20 minutes and received high passing scores (OIG).
• Pentagon’s latest strategic employee plan does not identify the target mix of its acquisition workforce, which currently includes about 118,000 civilian employees out of the department’s total civilian workforce of 718,000 (GAO).

ENVIRONMENT

• Congress could give EPA more authority to regulate the disposal of coal ash waste produced by coal-fired utilities, or it could expand an existing law to specifically address the issues unique to coal ash (Congressional Research Service).

MISC.

• Education Dept. should do better job assessing if data submitted by recipients supported the $53.6 billion in stimulus money awarded to states for fiscal stabilization (OIG)
• Hong Kong consulate’s 313-member staff includes jobs that should be eliminated or downgraded, and it no longer needs extra office space in expensive nearby building (OIG).

Note: The Congressional Research Service reports, which are usually not released to the public, were obtained by the Federation of American Scientists’ Secrecy News blog.