Multifamily Housing: Improvements Needed in HUD's Oversight of Lenders That Underwrite FHA-Insured Loans (07/19/2002, GAO-02-680}

-------------------------Indexing Terms-------------------------
REPORTNUM:   GAO-02-680
    TITLE:   Multifamily Housing: Improvements Needed in HUD's Oversight of Lenders That Underwrite FHA-Insured Loans
     DATE:   07/19/2002



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entitled 'Multifamily Housing: Improvements Needed in HUDï¿½s Oversight 
of Lenders That Underwrite FHA-Insured Loans' which was released 
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United States General Accounting Office: 
GAO: 

Report to the Ranking Minority Member, Permanent Subcommittee on 
Investigations, Committee on Governmental Affairs, U.S. Senate: 

July 2002: 

Multifamily Housing: 

Improvements Needed in HUDï¿½s Oversight of Lenders That Underwrite FHA-
Insured Loans: 

GAO-02-680: 

Contents: 

Letter: 

Results in Brief: 

Background: 

HUD Had Reasonable Assurance that MAP Lenders Met Requirements for 
Financial Soundness and Lending Performance, but Not for Qualified 
Underwriters: 

Processes and Procedures for Reviewing and Monitoring MAP Lendersï¿½ 
Underwriting of Loans Were Not Always Effectively Implemented: 

HUD Has Held Some Lenders Accountable for Specific Violations, but Has 
Had a Limited Basis for Identifying Lenders with Patterns of 
Noncompliance: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

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

Appendix II: Objectives, Scope, and Methodology: 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Acknowledgments: 

Table: 

Table 1: Number of Loans Missing Required Review Documents: 

Figures: 

Figure 1: Value of MAP Loans Insured during Fiscal Year 2001, by Loan 
Type: 

Figure 2: Percentage of Underwriters Whose Resumes Did Not Demonstrate 
that They Met Qualifications for the MAP Program: 

Figure 3: MAP Team Workloads at Time of GAOï¿½s Visits Compared with 
HUDï¿½s Standard: 

Abbreviations: 

FHA: Federal Housing Administration: 

GAO: General Accounting Office: 

HUD: Department of Housing and Urban Development: 

MAP: Multifamily Accelerated Processing: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548: 

July 19, 2002: 

The Honorable Susan M. Collins: 
Ranking Minority Member: 
Permanent Subcommittee on Investigations: 
Committee on Governmental Affairs: 
United States Senate: 

Dear Senator Collins: 

Each year, the Department of Housing and Urban Developmentï¿½s (HUD) 
Federal Housing Administration (FHA) insures billions of dollars in
multifamily housing mortgage loans to facilitate the construction, 
substantial rehabilitation, purchase, and refinancing of apartments and
health care facilities. FHA mortgage insurance protects lenders against
financial losses stemming from a borrowerï¿½s default. When default 
occurs, a lender may elect to assign the mortgage to HUD and file an 
insurance claim with HUD for the unpaid principal balance of the loan. 
As of September 30, 2001, FHA had approximately 15,000 multifamily 
mortgages in its insured portfolio, with a total unpaid principal 
balance of about $55 billion. In May 2000, HUD implemented a program 
called Multifamily Accelerated Processing (MAP) to expedite and 
standardize the insurance application process for its most frequently 
used multifamily loan programs. Similar to HUDï¿½s Direct Endorsement 
program for single-family housing lenders, a key feature of the MAP 
program is its delegation of significant responsibilities to 
multifamily housing lenders for underwriting the loans that FHA 
insures. To mitigate its financial risks, HUD developed controls and 
procedures designed to ensure that lenders participating in the MAP 
program are qualified and are complying with FHAï¿½s underwriting 
standards. HUDï¿½s Office of Multifamily Housing and multifamily housing 
field offices are responsible for implementing these controls and 
procedures. 

In April 2000, we reported on weaknesses in HUDï¿½s oversight of single-
family lenders participating in the Direct Endorsement program. 
[Footnote 1] Concerned that similar problems might exist with 
multifamily lenders, you asked us to provide information on HUDï¿½s 
oversight of lenders participating in the MAP program. Accordingly, our 
report addresses the following questions: (1) How well does HUD ensure 
that lenders participating in the MAP program meet HUDï¿½s qualification 
requirements? (2) How well is HUD implementing its processes for 
reviewing and monitoring MAP lendersï¿½ underwriting of loans? (3) Has 
HUD held any MAP lenders accountable for noncompliance with program 
requirements? To address these questions, we reviewed the activities of 
HUDï¿½s Office of Multifamily Housing and 8 of its 51 multifamily field 
offices in Baltimore, Maryland; Chicago, Illinois; Cleveland, Ohio; 
Denver, Colorado; Fort Worth, Texas; Phoenix, Arizona; San Antonio, 
Texas; and San Francisco, California. Our work focused on the 35 new 
construction and substantial rehabilitation loans insured under the MAP 
program by these 8 offices between May 2000 and August 2001, and the 20 
lenders that made these loans. The 35 loans had a total value of 
approximately $500 million, or about 75 percent of the value of all new 
construction and substantial rehabilitation loans insured under the MAP 
program during that period. The 20 lenders accounted for about half of 
those that made MAP loans during that timeframe. Appendix II provides 
detailed information on our objectives, scope, and methodology. 

Results in Brief: 

HUD lacks assurance that the lenders approved to participate in the MAP
program always met all of HUDï¿½s qualification requirements. HUDï¿½s
guidance requires prospective MAP lenders to submit documents showing
that the lender is financially sound, has a satisfactory lending 
record, and has qualified underwriters. HUD uses this documentation, 
which includes audited financial statements and staffï¿½s resumes, as its 
primary basis for approving or rejecting a lender. Our review of HUDï¿½s 
approval files for 20 MAP lenders found that HUD followed its 
procedures in determining that these lenders met requirements for 
financial soundness and satisfactory lending. However, we also found 
that HUD did not always have a sufficient basis for determining that 
the lendersï¿½ underwriters met qualification standards. For example, the 
resumes for 22 of the lendersï¿½ 81 underwriters did not provide clear 
evidence that these individuals had at least 3 years of recent 
multifamily underwriting experience, as required by HUDï¿½s guidance. 
Finally, in approving MAP lenders, HUD did not determine whether the 
lenders had required quality control plans, an internal control 
mechanism designed to ensure compliance with HUDï¿½s underwriting 
requirements. In large part, these problems occurred because of HUDï¿½s
insufficient guidance to its own staff and to MAP lenders. 

HUD did not always comply with or effectively implement controls and
procedures for reviewing and monitoring MAP lendersï¿½ underwriting of
loans. HUDï¿½s procedures require field staff, prior to insuring a loan, 
to conduct and document reviews of lendersï¿½ mortgage insurance
applications and associated loan exhibits to ensure lendersï¿½ compliance
with HUD underwriting requirements. However, at the field offices we
visited, we found that the staff did not always properly document their
reviews. For example, we found that the staff did not prepare one or 
more of the required review documents for 28 of the 35 loans we 
examined. Furthermore, the field offices did not always ensure that 
lenders were adhering to HUDï¿½s underwriting requirements, including 
those for property appraisals. Among other things, the appraisal is to 
include estimates of the income and operating expenses of the property 
being insured. For 9 of the loans we found that the operating expenses 
for the insured properties were understated by 5 to 9 percent, because 
the field office did not enforce HUDï¿½s requirement to update the 
expense estimates to the date of the appraisal. The field offices 
attributed these problems, among other things, to unclear guidance and 
to the field officesï¿½ heavy workloads. HUD also instituted a process to 
monitor MAP lendersï¿½ underwriting of loans through quality assurance 
reviews of loans already approved for mortgage insurance. However, as 
of March 2002ï¿½almost 2 years after the MAP programï¿½s inceptionï¿½HUD had 
not fully staffed the division responsible for this function. As a 
result, the division conducted 24 reviews in fiscal year 2001, which, 
according to the division director, is only about one-third the number 
that a fully staffed division could have performed. In addition, the 
division has not developed written operating procedures or a systematic 
process for analyzing the results of its reviews. 

HUD has held some MAP lenders accountable for specific violations of
program requirements but has had a limited basis for identifying any
lenders that might exhibit patterns of noncompliance. To hold lenders
accountable for specific violations or for patterns of noncompliance,
HUDï¿½s Office of Multifamily Housing can suspend or terminate their 
ability to participate in the MAP program. As of March 2002, 
Multifamily Housing had suspended three MAP lenders for specific 
violations. In contrast, it had not sanctioned any lenders for 
exhibiting patterns of noncompliance, because weaknesses in its quality 
assurance process and the newness of the MAP program provided a limited 
basis for identifying such patterns. 

This report makes recommendations to the Secretary of HUD designed to
improve HUDï¿½s processes for approving lenders to participate in the MAP
program and for reviewing and monitoring these lendersï¿½ underwriting of
FHA-insured loans. HUD agreed with each of our recommendations. 

Background: 

Established by the National Housing Act, FHA administers several
programs that support multifamily housing for low- and moderate-income
families by insuring loans made by private lenders. Specifically, these
programs insure mortgage loans for the construction, purchase,
substantial rehabilitation, and refinancing of multifamily apartments 
and health care facilities. FHA insures most of its mortgages for 
multifamily housing under its General Insurance Fund and Special Risk 
Insurance Fund. To cover lendersï¿½ losses, FHA collects insurance 
premiums that borrowers pay to the lenders and deposits the premiums 
into the funds. In addition, because the funds were not designed to be 
self sustaining, Congress provides budget authority as part of FHAï¿½s 
budget each fiscal year to cover anticipated costsï¿½known as ï¿½credit 
subsidy costsï¿½ï¿½for some of the multifamily insurance programs. 
[Footnote 2] In fiscal year 2001, Congress provided $101 million in 
credit subsidy budget authority to FHA. 

When a default occurs on an insured loan, the lender may elect to assign
the mortgage to HUDï¿½effectively making the Department the new lender
for the mortgage [Footnote 3]ï¿½and file an insurance claim with HUD for 
the unpaid principal balance of the loan. [Footnote 4] As a result, the 
lender is protected from financial losses stemming from a borrowerï¿½s 
default. FHAï¿½s multifamily insurance programs also benefit borrowers by 
providing favorable financing terms. For example, under one of the 
programs, nonprofit borrowers can finance up to 100 percent of a 
projectï¿½s replacement costs, and for-profit borrowers can finance up to 
90 percent of these costs. As of September 30, 2001, FHA had about 
15,000 multifamily mortgages in its insured portfolio, with a total 
unpaid principal balance of approximately $55 billion. 

To obtain an FHA-insured loan, a prospective borrower must use a lender
approved by HUDï¿½s Lender Approval and Recertification Division, and the
HUD-approved lender, in turn, must submit a mortgage insurance
application to HUD. HUDï¿½s multifamily housing field officesï¿½comprising
18 ï¿½hubsï¿½ and their associated 33 program centersï¿½are responsible for
processing the applications and approving or rejecting them. 
Historically, these responsibilities included the bulk of the loan 
underwriting duties, such as preparation of the property appraisal, 
mortgage credit analysis, and other loan exhibits. Because this process 
was often slow and inefficient, in 1994 HUD developed an expedited 
approach for processing loan insurance applicationsï¿½known as ï¿½fast-
trackï¿½ï¿½that delegated certain underwriting functions to the lenders. 
About 30 of HUDï¿½s field offices eventually adopted fast-track 
processing, but, according to HUD, variations existed among the offices 
regarding the extent of the functions delegated to the lenders and the 
thoroughness of the officesï¿½ review of loan documents. 

In order to standardize the responsibilities of both lenders and the 
field offices, in May 2000, HUD implemented the Multifamily Accelerated
Processing (MAP) program for several of its insurance programs, 
including the most widely used programs. [Footnote 5] HUDï¿½s objective 
for the MAP program was to provide a consistent, reliable, and 
expedited process that would enable FHA to insure more loans while 
limiting risk to the FHA insurance funds. To accomplish this objective, 
HUD, among other things, developed a new guidebook for lenders and HUD 
staff and established set time frames for the mortgage insurance 
application and review process. In addition, although HUD delegated 
significant underwriting responsibilities to the lenders, it continued 
to retain the final underwriting decision authority. Under MAP, a 
lenderï¿½s insurance application goes through a two-stage review process. 
[Footnote 6] The first stage, called ï¿½pre-application,ï¿½ focuses on the 
overall eligibility and feasibility of the property to be insured (for 
example, whether a sufficient market exists for the property). If an
application passes this stage, HUD invites the lender to submit a 
complete set of underwriting exhibits as part of the second stage, 
known as ï¿½firm commitment.ï¿½ If the application passes this stage and 
the borrower agrees to accept the conditions of the FHA mortgage 
insurance agreement, the loan becomes FHA-insured. 

Although only about 30 percent of all multifamily loans insured by FHA 
in fiscal year 2001 were insured through the MAP program, HUD expects 
that in subsequent years the large majority of its insured multifamily 
loans will be MAP loans. During fiscal year 2001, HUD insured 212 loans 
under the MAP program, with a total value of about $1.5 billion. As 
shown in figure 1, this total was about equally divided between new 
construction and substantial rehabilitation loans and refinancing and 
acquisition loans. 

Figure 1: Value of MAP Loans Insured during Fiscal Year 2001, by Loan 
Type: 

[See PDF for image] 

This figure is a pie-chart, depicting the following data: 

Value of MAP Loans Insured during Fiscal Year 2001, by Loan Type: 
New construction or substantial rehabilitation of apartments: 44% 
($683,7 million); 
Refinancing or acquisition of existing health care facilities: 30% 
($461.7 million); 
Refinancing or acquisition of existing apartments: 21% ($325.7 
million); 
New construction or substantial rehabilitation of health care 
facilities: 5% ($72.2 million). 

Source: GAO analysis of data from HUD. 

[End of figure] 

To mitigate the financial risks of the MAP program, HUD established
controls and procedures covering the (1) approval of MAP lenders, (2)
review and monitoring of lendersï¿½ underwriting of loans, and (3)
sanctioning of poorly performing lenders. Specifically: 

* HUD requires HUD-approved lenders wanting to participate in the MAP
program to apply to the Lender Qualifications and Monitoring Division
within HUDï¿½s Office of Multifamily Housing. The division is responsible 
for reviewing documentation submitted by the lender and deciding 
whether or not the lender meets the MAP programï¿½s qualification 
standards. In addition, for every mortgage insurance application 
submitted by a MAP lender, the cognizant HUD multifamily field office 
is required to review the qualifications of the lenderï¿½s staff involved 
in making the loan. As of March 2002, HUD had approved about 100 
lenders to participate in the MAP program. 

* HUDï¿½s multifamily field offices are responsible for conducting and
documenting reviews of MAP mortgage insurance applications and
associated loan exhibits (for example, appraisal, market study) to 
ensure lendersï¿½ compliance with HUDï¿½s underwriting requirements. At 
both stages of the application process, a team of technical 
specialists, known as a MAP team, with expertise in the areas of 
architecture, property appraisal, mortgage credit, and building costs 
reviews the application and its associated underwriting exhibits. The 
MAP team may require the lender to correct underwriting deficiencies 
uncovered by the reviews. After each stage of review, the teamï¿½s 
supervisor, called the MAP team leader, is required to provide a 
recommendation to the field office director on whether to accept or 
reject the application. On the basis of the team leaderï¿½s 
recommendation, the field office director decides whether or not to 
insure the loan. The field offices are to complete each stage of their
reviews within 45 to 60 days, depending on the type of loan. To further
monitor MAP lendersï¿½ underwriting of loans and to oversee the work of
the field offices, teams of field staff assigned to HUDï¿½s Lender
Qualifications and Monitoring Division are to conduct comprehensive
reviews of samples of loans already approved for mortgage insurance.
These reviews focus on the same four technical areas that the field 
offices analyze in reviewing an insurance application. After completing 
a review, the teams are to document their findings and recommendations 
in written reports, which are to be reviewed and approved by the 
divisionï¿½s director. Upon approval, the reports are issued to the 
cognizant lender and multifamily field office. 

* If HUD determines that a lender is not complying with program 
requirements, HUDï¿½s Office of Multifamily Housing may take enforcement
actions against the lender. Specifically, Multifamily Housing has the
authority to suspend or terminate a lenderï¿½s participation in the MAP
program. 

HUD Had Reasonable Assurance That MAP Lenders Met Requirements for 
Financial Soundness and Lending Performance, but Not for Qualified 
Underwriters: 

HUDï¿½s guidance requires an FHA-approved lender wishing to participate in
MAP to submit documentation demonstrating, among other things, that it
is financially sound, has a satisfactory lending record, and has 
qualified underwriters. Our review of HUDï¿½s approval files for 20 MAP 
lenders found that HUD followed its procedures in determining that 
these lenders met the requirements for financial soundness and 
satisfactory lending. However, we also found that HUD sometimes lacked 
a sufficient basis for determining whether the lendersï¿½ underwriters 
met MAP qualification requirements. Furthermore, in approving MAP 
lenders, HUD did not ensure that the lenders had quality control plans 
in accordance with HUDï¿½s regulations. 

Lenders Met Qualifications for Financial Soundness and Lending 
Performance: 

According to HUDï¿½s guidance, a lender must, among other things, be
financially sound and have a satisfactory lending record to qualify for 
the MAP program. As evidence of its financial soundness, a prospective 
MAP lender must provide HUD with a recent audited financial statement
showing a net worth in excess of $250,000. As evidence of a satisfactory
lending record, a lender must submit information on the FHA-insured and
conventional multifamily housing loans it made during the previous 5
years. For the lenderï¿½s FHA-insured loans, the submission must include a
list of the loans that were assigned to HUD for insurance benefits and a
narrative explanation of why the assignments occurred. HUD uses this
information to (1) determine whether the lender has a recent history of
assignments that can be attributed to poor lending practices and (2) ask
cognizant multifamily field offices about their experience with the 
lender. 

To determine whether approved MAP lenders met HUDï¿½s requirements, we
examined HUDï¿½s approval files for the 20 lenders that made the 35 new
construction and substantial rehabilitation loans we reviewed during our
visits to eight of HUDï¿½s multifamily field offices. We found that all 20
lenders provided the required documentation and that the documentation
adequately supported HUDï¿½s conclusion that the lenders met the criteria
for financial soundness and satisfactory lending records. Specifically, 
we found that 19 of the 20 lenders we reviewed submitted the required
audited financial statements and that the statements showed the lenders
met the net worth requirement. In accordance with HUDï¿½s guidance, the
remaining lender was exempted from the requirement because its
accounts were insured by the Federal Deposit Insurance Corporation. 
[Footnote 7] With respect to lending performance, we used a HUD 
database containing assignment information to confirm that all 20 
lenders submitted complete lists of their assigned loans. The lenders 
either had no loans assigned to HUD or had few assignments relative to 
their total number of FHA-insured loansï¿½an indicator of sound lending 
practices, according to HUD. In addition, we reviewed the responses 
from HUDï¿½s field offices about each lenderï¿½s performance and found that 
the overwhelming majority of the responses supported approval of the 20 
lenders. 

HUD Lacked Assurance That Lendersï¿½ Underwriters Were Qualified: 

Although HUD retains the authority for the final underwriting decision 
for MAP loans, it relies heavily on the lendersï¿½ underwriters to ensure 
that the loans pose a reasonable financial risk. The underwriter is an 
employee of the lender, who is responsible for ensuring compliance with 
applicable requirements and for approving or rejecting a loan on the 
basis of a review and analysis of the loan exhibits. HUDï¿½s guidance 
sets forth experience and training requirements for underwriters and 
requires a prospective MAP lender to submit the resumes of those 
underwriters who will have responsibility for MAP loans. According to 
HUDï¿½s guidance, the resumes must demonstrate that these individuals 
have at least 3 years of recent experience in underwriting multifamily 
housing loans and have underwritten at least three loans that were 
funded. In evaluating a prospective MAP lender, the Lender 
Qualifications and Monitoring Division within HUDï¿½s Office of 
Multifamily Housing is required to review the resumes and approve those 
underwriters who meet the requirements. In addition, HUDï¿½s multifamily 
field offices may subsequently approve additional underwriters who are 
qualified. 

Lenders frequently have more than one individual who is authorized to
underwrite loans. Thus, HUD approved a total of 81 underwriters for the
20 lenders we reviewed. [Footnote 8] We found, however, that HUD 
sometimes approved underwriters without having a sufficient basis for 
determining whether the underwriters met the qualification requirements 
of the MAP program. Specifically, the resumes for 22 of the 81 
underwriters did not provide clear evidence of at least 3 years of 
recent underwriting experience; and the resumes for 30 did not provide 
evidence of 3 funded loans. Furthermore, 11 of the resumes did not 
provide clear evidence that either requirement had been met. (See fig. 
2.) 

Figure 2: Percentage of Underwriters Whose Resumes Did Not Demonstrate 
that They Met Qualifications for the MAP Program: 

[See PDF for image] 

This figure is a vertical bar graph. The vertical axis of the graph 
represents percentage of underwriters from 0 to 50. The horizontal axis 
of the graph represents qualification standard not demonstrated. The 
following data is approximated from the graph: 

Qualification standard not demonstrated: 3 years of experience; 
Percentage of underwriters: approximately 27%. 

Qualification standard not demonstrated: 3 funded loans; 
Percentage of underwriters: approximately 36%. 

Qualification standard not demonstrated: 3 years of experience or 3 
funded loans; 
Percentage of underwriters: approximately 12%. 

Source: GAOï¿½s analysis of resumes for 81 MAP underwriters approved by 
HUD. 

[End of figure] 

In some cases, the resumes showed some underwriting experience but
less than 3 years of experience. In other cases, the resumes cited
experience only in loan administration, processing, or originationï¿½
activities that can encompass a range of duties that may or may not
involve significant underwriting responsibilities. Although some HUD
officials told us that they knew from first-hand knowledge that the
underwriters met HUDï¿½s experience standards, others indicated that they
were not aware of the standards, had applied the standards loosely, or 
had drawn inferences about the underwritersï¿½ qualifications without 
knowing whether these inferences were accurate. By not applying the 
qualifications standards in a strict and consistent manner, HUD 
increases its chances of insuring loans underwritten by individuals who 
lack sufficient expertise in evaluating financial risk. 

HUDï¿½s guidance states that in addition to having proper experience, an
underwriter must attend a MAP training session before submitting a 
mortgage insurance application to HUD. The main objective of the 
training is to familiarize the underwriter with the MAP process and the 
roles and responsibilities of both the lender and HUD under this 
process. HUDï¿½s multifamily field offices are responsible for ensuring 
that the underwriters who submit insurance applications have met the 
training requirement. During our visits to HUDï¿½s multifamily field 
offices, we reviewed 35 loans submitted by 22 separate underwriters. 
Our review of HUDï¿½s training records indicated that only 10 of the 22 
underwriters attended MAP training. Without proper assurance that 
underwriters are trained, HUD increases the likelihood that MAP 
underwriters will not be familiar with the programï¿½s requirements and 
will make errors that increase HUDï¿½s review time and insurance risk. 
Field office officials acknowledged that they did not always verify 
whether underwriters had attended MAP training, citing incomplete local 
training records and the absence of a nationwide list of trained 
underwriters as factors that made this verification difficult. To help 
address this problem, the Lender Qualifications and Monitoring Division 
in January 2002 developed a nationwide list of trained underwriters. In 
addition, the division director told us that better attendance records 
would be kept at future MAP training sessions. 

HUD inconsistently applied its qualifications standards for the
underwriters we reviewed largely because of a lack of clear guidance. 
For example, HUDï¿½s guidance for approving underwriters does not clearly
define the meaning of ï¿½underwriting experience.ï¿½ As a result, the HUD
officials responsible for approving the underwriters interpreted the
guidance differently. One official, for example, said that work in ï¿½loan
originationï¿½ counted as underwriting experience; another official said 
it did not, because loan origination focuses on the marketing of loans.
Similarly, another official told us that he counted property appraising 
as underwriting experience; another did not. In addition, although HUDï¿½s
guidance authorizes the multifamily field offices to approve MAP
underwriters, that portion of the guidance does not cite the specific
requirements of 3 years of experience and three funded loans. 
Accordingly, staff at four of the eight field offices we visited told 
us they were not aware of these standards. 

HUD Did Not Require Quality Control Plans as a Condition of MAP
Approval: 

According to HUDï¿½s regulations, all FHA-approved lenders must implement 
a written quality control plan. A quality control plan is an important 
internal control mechanism because it sets forth a program of 
independent review designed, among other things, to ensure compliance
with HUDï¿½s requirements and to prompt corrective actions when 
deficiencies are found. For example, a quality control plan may require 
a lender to have a certain percentage of its loans reviewed either by 
external auditors or by individuals on the lenderï¿½s staff who are 
independent of the loan processing and underwriting functions. 

Although HUD has implemented specific written standards for single-
family housing lendersï¿½ quality control plans, it has not done so for 
lenders that make multifamily housing loans. According to the Director 
of HUDï¿½s Lender Approval and Recertification Divisionï¿½the office 
responsible for granting lenders HUD-approved statusï¿½establishing the 
standards had not been a high priority because, until the MAP program 
was implemented, HUD retained primary responsibility for underwriting 
the multifamily loans insured by FHA. He said that because of the lack 
of standards, most lenders applying for HUD approval did not submit 
quality control plans for their multifamily lending operations. 
Accordingly, in our examination of the divisionï¿½s files we found a 
multifamily quality control plan for 1 of the 20 lenders we reviewed. 

Multifamily Housing officials told us that their decision not to 
require a quality control plan as a condition of MAP approval was 
influenced by several factors, including (1) the Departmentï¿½s lack of 
standards for these plans, (2) the difficulty of developing standards 
that would be suitable for both large and small lenders, and (3) 
concerns that lenders would treat the plans as merely a paperwork 
requirement. In our view, however, the MAP programï¿½s delegation of 
greater underwriting responsibilities to lenders heightens the need for 
lenders to implement quality control measures. Furthermore, these 
problems could be overcome through consultation with large and small 
lenders in developing quality control standards, and through the 
Departmentï¿½s enforcement of these standards. 

Processes and Procedures for Reviewing and Monitoring MAP Lendersï¿½ 
Underwriting of Loans Were Not Always Effectively Implemented: 

HUD did not always comply with or effectively implement processes and
procedures for reviewing and monitoring MAP lendersï¿½ underwriting of
loans. HUDï¿½s procedures require field staff to conduct and document
reviews of lendersï¿½ mortgage insurance applications to ensure lendersï¿½
compliance with HUDï¿½s underwriting requirements before the loans are
insured. However, at the field offices we visited, we found that the 
staff did not always properly document their reviews. Furthermore, the 
field offices did not consistently ensure that lenders were adhering to 
HUD requirements for property appraisals, a critical element of the loan
underwriting process. To some extent, the offices attributed these
problems to their heavy workloads. In addition to the field officesï¿½
reviews, HUD has established a quality assurance process to review
samples of loans after they have been approved for insurance. However,
HUD has not fully staffed the division responsible for this function.
Consequently, the division conducted significantly fewer reviews than it
could have done if it had been fully staffed, according to the division
director. In addition, the division has not developed written operating
procedures or a systematic process for analyzing the results of its 
reviews. 

Field Offices Did Not Properly Document Reviews: 

HUDï¿½s guidance requires the multifamily field offices to perform reviews
of mortgage insurance applications and associated loan exhibits at both
the pre-application and firm commitment stages of the application 
process. In conducting these reviews, a team of technical specialists,
known as a MAP team, is required to use standardized checklists that
delineate the specific areas the review should cover. The checklists are
designed to document the specialistsï¿½ thorough review of the 
application, approval or rejection of the application, and 
recommendations to place conditions on the approval, if necessary. 
After each stage of review, the teamï¿½s supervisor, called the MAP team 
leader, is required to prepare a memo to the field officeï¿½s director 
that summarizes the results of the technical reviews and provides a 
recommendation to accept or reject the application. The memo should 
also indicate whether the team leader rejected or modified the 
recommendation of a technical reviewer. However, we found that field 
staff did not always prepare these checklists and memos as required. 

At the eight field offices we visited, we reviewed HUDï¿½s records for 35 
new construction and substantial rehabilitation loans insured between 
May 2000 and August 2001 to determine the field officesï¿½ compliance 
with MAP review procedures. We found that the field staff did not 
prepare one or more of the required review documents for 28 of the 35 
loans we examined. Specifically, 12 of the cases were missing one or 
more of the technical specialistsï¿½ checklists, and 25 cases were 
missing one or more team leader memos. (See table 1.) Furthermore, even 
when the checklists were used, they were not always signed by the 
reviewer or did not clearly indicate approval or rejection of the 
application. Quality assurance reviews by the Office of Multifamily 
Housingï¿½s Lender Qualifications and Monitoring Division have found 
similar problems with the field officesï¿½ documentation of reviews. 

Some field office staff told us these problems were attributable in some
cases to their lack of familiarity with the MAP programï¿½s documentation
requirements during the early stages of program implementation. 
However, other staff said they did not have time to document their 
reviews or did not think that use of the checklists and memos was 
mandatory. Without proper documentation, however, HUD lacks adequate 
assurance that technical staff are performing thorough reviews and that 
team leadersï¿½ recommendations to approve insurance applications are 
properly supported. 

Table 1: Number of Loans Missing Required Review Documents: 

Required review document: Technical review checklists; 
Cases missing one or more documents: 12; 
Cases with all documents on file: 23; 
Total cases: 35. 

Required review document: Team leader memos; 
Cases missing one or more documents: 25; 
Cases with all documents on file: 10; 
Total cases: 35. 

Source: GAOï¿½s review of HUDï¿½s documents for 35 MAP loans. 

[End of table] 

Field Offices Did Not Always Ensure Lendersï¿½ Compliance with HUDï¿½s
Requirements: 

In conducting their reviews of MAP insurance applications, field staff 
are expected to determine whether the lender complied with specific
underwriting requirements set forth in HUDï¿½s guidance. To determine the
extent to which the field offices ensured lendersï¿½ compliance, we 
focused on HUDï¿½s requirements for property appraisals, a critical 
component of loan underwriting. Among other things, HUDï¿½s guidance 
indicates that an appraisal should (1) use rent and expense information 
from at least three comparable properties as a basis for estimating the 
expected rental income and operating expenses of the subject property; 
(2) update the operating expense estimate for the subject property to 
the date of the appraisal; (3) account for comparable propertiesï¿½ 
occupancy rates and rent concessionsï¿½factors that affect rental 
incomeï¿½in estimating income for the subject property; and (4) be no 
more than 120 days old at the time the mortgage insurance application 
reaches the firm commitment stage. Despite this guidance, however, for 
the 35 loans we reviewed, we found that the field offices did not 
always ensure lendersï¿½ compliance with these requirements. The Lender 
Qualifications and Monitoring Division has also found problems with 
appraisals, as well as deficiencies in other aspects of the loan 
underwriting. 

Among other things, the appraisal estimates the income (generated
primarily from rents) and operating expenses of the property being
insured, or ï¿½subjectï¿½ property. As a basis for these estimates, the 
appraiser uses rent and expense data from existing propertiesï¿½known as
comparable propertiesï¿½that are as similar as possible to the subject
property in size, location, age, and other characteristics. Because no 
two properties are identical, the appraiser must make adjustments to 
these rent and expense data to account for differences between the 
comparable properties and the subject property, and must use the 
adjusted data as a basis for making estimates regarding the subject 
property. These estimates are important because a propertyï¿½s net income 
(that is, gross income minus expenses) is a major factor in determining 
the size of the mortgage the property can support and HUD will insure. 
In general, the higher a propertyï¿½s net income, the larger the mortgage 
it can qualify for. 

In accordance with HUDï¿½s guidance, we found that the appraisals for all 
35 loans provided rent and expense data from at least three comparable
properties as a basis for estimating the subject propertyï¿½s rental 
income and operating expenses. In addition, we found that the rent data 
in the appraisal were consistent with other data sources, [Footnote 9] 
and that these data supported the rental income estimate for the 
subject property. However, the same did not always hold true for the 
expense data and operating expense estimates. To corroborate the 
appraisalï¿½s expense data for the comparable properties, we used HUDï¿½s 
Financial Assessment Subsystemï¿½-a database containing audited financial 
statements for all HUD-insured and ï¿½assisted properties. [Footnote 10] 
The appraisals for 10 of the 35 loans we reviewed used one or more 
comparable properties that were HUD-insured or ï¿½assisted and for which 
corresponding expense information was available in HUDï¿½s database. 
[Footnote 11] In 9 of the 10 cases, we found that the appraisals cited 
lower expenses for the comparable properties than did the corresponding 
information in the database. [Footnote 12] The appraisalsï¿½ 
understatement of expenses for the comparable properties ranged from 
about $28,000 to $270,000 per year. This situation is problematic 
because an underestimation of expenses can lead to an overestimation of 
net income and approval of a higher mortgage amount than the property 
can support. The field office staff who reviewed the appraisals told us 
that they had not been aware of these discrepancies for most of the 
properties and, in any event, felt that the operating expense estimates 
for the subject properties were reasonable based on their experience 
and knowledge as professional appraisers. However, they also 
acknowledged that appraisers sometimes made estimates that were not
well supported by expense data from comparable properties, as required,
and that this practice raised questions about the quality of the 
appraisals. Some field office staff said they did not try to 
corroborate the expense data for the comparable properties against 
information in HUDï¿½s database because this was not a required part of 
their review and they did not have time to do it. Similarly, Office of 
Multifamily Housing officials told us that the field offices should not 
be performing this task because to do so would overstep HUDï¿½s role in 
relation to the lenders under the MAP program. However, given that HUD, 
and not the lender, bears the financial risk of a MAP loan, HUD should 
take reasonable steps to protect its financial interests. Given the 
importance of the subject propertyï¿½s estimated operating expenses in 
determining the mortgage amount that HUD insures, HUD would be prudent 
to use data in its Financial Assessment Subsystem to help ensure that 
the estimate is based on accurate information. 

According to HUDï¿½s guidance, the operating expense estimate for the
subject property should be updated by the lender to the date of the
appraisal. The updating procedure involves the application of an 
inflation rate to account for the age of the data used to develop the 
expense estimate. For example, if the data are current as of January 1, 
1999 (known as the dataï¿½s ï¿½effective dateï¿½), and the appraisal is 
conducted in January 1, 2001, the expense estimate should be adjusted 
upward to reflect 2 years of inflation. However, for 27 of the 35 loans 
we reviewed, we found that the lender did not properly update the 
expense estimate, and the field office did not require the lender to 
correct the error. As a result, the operating expense estimates for 9 
of these loans were 5 to 9 percent lower than if the updating procedure 
had been done correctly. [Footnote 13] When a propertyï¿½s actual 
operating expenses are higher than originally estimated, its ability to
support the mortgage may be weakened, thereby increasing HUDï¿½s
insurance risk. Some field staff told us they did not see a need to 
correct the errors or inform the lenders of these problems because they 
felt the magnitude of the understatement was too small to significantly 
affect HUDï¿½s risk. However, Office of Multifamily Housing officials 
told us that the operating expenses should always be updated. We also 
found that some field staff were unclear on how to perform the updating 
procedure because the instructions in MAP program guidance were vague. 
The instructions for the updating procedure are located in both a 
standard HUD appraisal form and in MAP program guidance. However, 
unlike the formï¿½s instructions, the MAP guidance does not indicate that 
the effective date of the expense data is the beginning date of the 
fiscal year in which the expenses were accrued. [Footnote 14] When the 
effective date used is not the beginning date of the fiscal year, the 
time period for which the data are updated is shortened, resulting in 
an understatement of the expense estimate for the subject property. 

HUDï¿½s guidance also requires that the appraisal account for the 
comparable propertiesï¿½ occupancy rates and rent concessions in 
estimating income for the subject property. Specifically, if the 
occupancy rate for the comparable property is lower than the occupancy 
rate estimated for the subject property, the guidance requires that a 
downward adjustment be made to the comparable propertyï¿½s rent to 
reflect this difference. Similarly, if a comparable property is 
offering rent concessions (for example, first monthï¿½s rent free), the 
rent should again be adjusted downward. When these downward adjustments 
are not made, the rental income for the subject property can be 
overestimated, which, in turn, can lead to an overestimation of the 
propertyï¿½s net income. Despite HUDï¿½s guidance, however, we found that 
the appraisals for 11 of the 35 loans did not make adjustments to 
account for lower occupancy rates at the comparable properties. 
Furthermore, in 5 cases, no adjustments were made for rent concessions 
at the comparable properties, even though these concessions were 
mentioned in the appraisal reports. Although the adjustments in these 
cases would have been minor and would not have affected the propertiesï¿½ 
net income, HUDï¿½s guidance does not make exceptions for such 
situations. Moreover, none of this noncompliance was documented in the 
field officeï¿½s reviews of the appraisals. Field office staff told us 
they generally did not bother documenting instances of minor 
noncompliance or notifying the lender of such problems because (1) doing
so would make it more difficult for them to stay within the required 
review time frames and (2) according to HUDï¿½s guidance, their role as 
reviewers is to require lenders to correct only those underwriting 
deficiencies that significantly affect HUDï¿½s insurance risk. 

Finally, HUD guidance states that an appraisal should be no more than 
120 days old at the time the lenderï¿½s insurance application reaches the 
firm commitment stage of HUDï¿½s review. When an appraisal is beyond the 
120-day point, the guidance permits the lender to update the appraisal 
in lieu of doing a new one. According to Office of Multifamily Housing 
officials, the purpose of this requirement is to ensure that the 
appraisalï¿½s conclusions reflect current market conditions. However, for 
7 of the 35 loans we reviewed, the age of the appraisals exceeded 120 
days and no update was submitted. Specifically, the 7 appraisals ranged 
from 121 to 251 days old at the firm commitment stage. HUD field office 
officials told us that they accepted the appraisals without an update 
because, to their knowledge, market conditions had not changed since 
the time the appraisal was originally performed. 

The Lender Qualifications and Monitoring Division has found similar
appraisal deficiencies that were not identified during the field 
officeï¿½s review. These problems included situations where operating 
expense estimates were not properly updated, rent concessions were not
accounted for in estimating income, and the appraisal was over 120 days
old. The division has also found deficiencies with other aspects of the 
field officesï¿½ review, including mortgage credit and architectural 
problems. These problems included unauthorized financial relationships 
between borrowers and lenders and noncompliance with building 
accessibility requirements for the disabled. 

Field Officesï¿½ Workloads Often Exceeded HUDï¿½s Standard: 

As previously noted, field office staff cited workload and time 
constraints as major reasons for some of the implementation problems we 
found. In addition, some field office managers told us that they needed 
additional staff to handle their assigned workload. HUDï¿½s risk 
assessment for the MAP program [Footnote 15] concluded that a MAP team 
should be able to review up to four mortgage insurance applications at 
a time and still meet required processing timeframes. To compare the 
teamsï¿½ workloads against this standard, we determined the number of 
applications that each MAP team was reviewing [Footnote 16] at the time 
of our visits to the eight field offices. Because two of the field 
offices had two MAP teams apiece, we reviewed a total of 10 teams. As 
shown in figure 3, we found that 9 of the 10 teams were reviewing more 
than four applications. For these 9 teams, the number of applications 
ranged from 5 in Denver and San Francisco to 10 in Baltimore and 
Phoenix. 

Figure 3: MAP Team Workloads at Time of GAOï¿½s Visits Compared with HUDï¿½s
Standard: 

[See PDF for image] 

This figure is a vertical bar graph. The vertical axis of the graph 
represents workloads from 0 to 10. The horizontal axis represents ten 
MAP Teams. The following data is depicted: 

MAP Team: Baltimore; 
Workload: 10; 
HUD standard: 4. 

MAP Team: Chicago; 
Workload: 6; 
HUD standard: 4. 

MAP Team: Cleveland; 
Workload: 3; 
HUD standard: 4. 

MAP Team: Denver team 1; 
Workload: 5; 
HUD standard: 4. 

MAP Team: Denver team 2; 
Workload: 5; 
HUD standard: 4. 

MAP Team: Fort Worth; 
Workload: 7; 
HUD standard: 4. 

MAP Team: Phoenix; 
Workload: 10; 
HUD standard: 4. 

MAP Team: San Antonio; 
Workload: 8; 
HUD standard: 4. 

MAP Team: San Francisco 1; 
Workload: 5; 
HUD standard: 4. 

MAP Team: San Francisco 2; 
Workload: 5. 
HUD standard: 4. 

Source: GAOï¿½s analysis of data from HUDï¿½s multifamily field offices. 

[End of figure] 

Office of Multifamily Housing officials told us that they were aware 
that some of the field offices had heavy workloads. To address this 
problem, the officials said that to a limited extent, they had shifted 
some of this work to staff in field offices with smaller workloads. 
However, they also acknowledged that as the MAP program grows, they 
might have to take this action more frequently to balance the workload 
among the field offices. 

HUD Has Not Fully Staffed and Developed Its Quality Assurance Function: 

In its risk assessment of the MAP program, HUD emphasized the 
importance of establishing a quality assurance process. The risk 
assessment indicated, among other things, that quality assurance efforts
would promote lendersï¿½ compliance with program requirements. However,
HUD has not fully implemented its quality assurance process. 
Specifically, although the Lender Qualifications and Monitoring 
Division is tasked with implementing this process, it has not (1) 
achieved its intended staffing level, (2) developed and implemented 
formal operating procedures, or (3) effectively used the results of its 
reviews to improve lendersï¿½ underwriting of loans. 

In developing the MAP program, HUD recognized that it had not committed 
sufficient resources to lender monitoring in the past. Despite this 
recognition, the Department has not fully staffed its Lender 
Qualifications and Monitoring Division, which is tasked with performing
quality assurance reviews of loans already approved for FHA insurance.
The divisionï¿½s staffing plan envisioned that the reviews would be
conducted by 15 field-based staff divided into three teams. However, as 
of March 2002ï¿½almost 2 years after the MAP programï¿½s inceptionï¿½only 4 of
the 15 positions had been filled. Although the division performed 24
quality assurance reviews in fiscal year 2001, it had to bring in 
volunteers from other HUD headquarters and field offices to assist in 
this work. The division director indicated that the volunteers were not 
as productive as the permanent staff because they were only temporary 
and lacked experience in performing reviews. Furthermore, he estimated 
that with 15 permanent full-time staff, the division could have 
conducted 75 reviews. The Department has taken steps to deal with the 
vacant field positions; in February 2002, the division received 
approval from HUDï¿½s Office of the Deputy Assistant Secretary for 
Multifamily Housing to fill its staff vacancies. According to HUD 
officials, the Department will begin hiring for these positions in May 
2002, but has not established a target date for filling all of the 
vacancies. The division also has a vacancy in a headquarters position 
slated to assist the division director with his responsibilities. 
However, an Office of Multifamily Housing official told us there was no 
plan to fill the position until other staffing needs in Multifamily 
Housing were addressed. 

According to the division director, these staffing problems have 
contributed to delays in the divisionï¿½s development of written operating
procedures addressing, among other things, how quality assurance 
reviews should be conducted and how loans and lenders should be 
targeted for review. Without such procedures, the division cannot ensure
that its reviews are performed in a systematic and consistent manner and
that its resources are focused on loans and lenders that pose the 
highest insurance risks to HUD. The division has been in the process of 
drafting operating procedures since October 2000, but it has relied on 
a series of individuals detailed from another part of Multifamily 
Housing to complete this task. According to the division director, 
turnover in these detailees, the fact that they are not directly 
accountable to him, competing work priorities, and his lack of an 
assistant have made it difficult for him to adequately supervise the 
development of the procedures. At the time of our review, one of the 
detailees was still working on the procedures but, according to the 
director, did not have an estimated completion date. 

A key objective of the quality assurance reviews is to improve the MAP
lenderï¿½s underwriting of loans by conveying findings and 
recommendations to the lenders through written reports and by
identifying serious or recurring underwriting deficiencies and program
violations that may require corrective action. In addition, the reviews 
are also intended to evaluate the field officeï¿½s compliance with 
procedures for approving lendersï¿½ mortgage insurance applications under 
the MAP program. However, the Lender Qualifications and Monitoring 
Division is not fully meeting this objective because it has been slow 
to communicate the results of its reviews to MAP lenders and field 
offices and has done limited analysis of the results. For example, 
during fiscal year 2001, staff completed 24 reviews and submitted draft 
reports for all of these reviews to the division director for approval 
and issuance. According to division field staff, conducting a review 
and drafting the associated report takes about 2 weeks. However, as of 
March 2002, the division had issued final reports for only 6 of the 24 
reviews, even though all 18 of the remaining reviews had been conducted 
over 6 months earlier. In two cases, the reviews were done over a year 
earlier. According to the division director, the remaining draft 
reports have not been finalized because he has not had time to review 
them. However, by not issuing the reports, HUD is not providing lenders 
and field offices with timely feedback on problems uncovered by these 
reviews that may increase HUDï¿½s insurance risk. In addition, the 
division has not developed a systematic process for aggregating and 
analyzing the results of its reviews to identify patterns of 
deficiencies. As a result, it has done limited analysis of the 24 
completed reviews to identify recurring underwriting errors and program 
violations committed by MAP lenders. Even these limited efforts 
demonstrate the benefits of this kind of analysis. For example, the 
division observed that several lenders had not, as required, determined 
whether the properties HUD was insuring complied with accessibility 
requirements mandated by the Fair Housing Act. Accordingly, the 
division sent a notice to all MAP lenders reemphasizing the lendersï¿½ 
responsibility for ensuring compliance with the accessibility 
requirements. However, further analysis of its reviews would be 
difficultï¿½particularly as the number of completed reviews 
increasesï¿½without storing the results in an automated spreadsheet or 
database. 

HUD Has Held Some Lenders Accountable for Specific Violations, but Has 
Had a Limited Basis for Identifying Lenders with Patterns of 
Noncompliance: 

To hold MAP lenders accountable for specific violations of program
requirements or for exhibiting patterns of noncompliance, HUDï¿½s Office 
of Multifamily Housing can suspend or terminate their ability to 
participate in the MAP program. Multifamily Housing has suspended some 
MAP lenders for specific violations. In contrast, it has neither 
terminated nor suspended any lenders for exhibiting patterns of 
noncompliance, because weaknesses in its quality assurance process and 
the newness of the MAP program have provided a limited basis for 
identifying such patterns. 

HUD Has Suspended Some Lenders for Specific Violations: 

HUDï¿½s guidance allows the Office of Multifamily Housing to suspend or
terminate a lenderï¿½s participation in the MAP program for specific
violations of program requirements. The type of penalty HUD imposes
against a lender depends on the severity of the violation and the 
degree to which it affects HUDï¿½s financial risk. According to HUDï¿½s 
guidance, violations that directly and adversely affect HUDï¿½s risk may 
result in termination; violations that do not pose such a risk may 
result in suspension. 

As of March 2002, HUD had not terminated any MAP lenders, but it had
suspended three. Two of the three lenders were suspended because they
had prohibited financial relationships with the borrowers. The third 
lender was suspended because it did not follow HUDï¿½s insurance 
application process for health care facilities. Specifically, it 
submitted mortgage insurance applications without first obtaining the 
required HUD approval of the management agent of these facilities. The 
duration of the suspensions range from 6 to 12 months. During the term 
of their suspensions, these lenders are prohibited from submitting 
additional mortgage insurance applications under the MAP program. The
suspensions do not affect insurance applications already being processed
by HUDï¿½s field offices. The three suspensions are a result of lender
noncompliance with MAP program requirements identified by Lender
Qualifications and Monitoring Division staff. 

Multifamily Housing officials told us that taking enforcement actions
consumes considerable staff time and effort, partly because the actions
must be supported well enough to withstand potential court challenges by
the lenders. According to HUD officials, two of the three lenders that 
HUD suspended have challenged the Departmentï¿½s actions in federal 
district court. In one case, the lender ultimately withdrew its 
challenge and served its suspension. In the other case, as of April 
2002, the court had not made a ruling, according to Multifamily Housing 
officials. The officials said they would continue to pursue enforcement 
actions against MAP lenders that do not comply with HUDï¿½s requirements 
because the success of the MAP program depends heavily on the integrity 
of the participating lenders. 

HUD Has Had a Limited Basis for Determining Any Patterns of 
Noncompliance: 

HUDï¿½s guidance emphasizes the importance of terminating or suspending
lenders that exhibit a pattern of noncompliance over several insurance
applications. According to the guidance, examples of noncompliance may
include: 

* failure to provide required loan exhibits, or submission of 
incomplete or inaccurate exhibits; 

* lack of appropriate documentation and analysis for underwriting
conclusions; 

* evidence that a lenderï¿½s unsound underwriting resulted in the 
assignment of an FHA-insured mortgage loan to HUD. 

Reviews conducted by the Lender Qualifications and Monitoring Division
have revealed instances where lenders made underwriting errors,
including missing and inaccurate loan exhibits and inadequately 
supported underwriting conclusions. However, as previously discussed, 
the division has issued final reports for only a few of its quality 
assurance reviews and lacks a systematic process for aggregating and 
analyzing the results of its reviews. Consequently, HUD has had a 
limited basis for identifying any patterns of noncompliance and, as of 
March 2002, had not taken enforcement actions against lenders for 
exhibiting such patterns. The newness of the MAP program has also 
limited HUDï¿½s ability to identify patterns of deficiencies, because 
patterns take time to emerge and may only become evident after HUD has 
performed quality assurance reviews on several of a lenderï¿½s loans. 
Furthermore, because no MAP loans have been assigned to HUD so 
farï¿½partly a consequence of the young age of loansï¿½-the Department has 
no evidence that unsound underwriting practices are resulting in failed 
loans. 

Conclusions: 

FHA insures several billion dollars in mortgages for multifamily housing
properties each year. Given the size of this financial commitment and 
the MAP programï¿½s delegation of significant loan underwriting 
responsibilities to lenders, it is important that HUD have sufficient 
controls to mitigate the programï¿½s financial risks. Although HUD has 
established processes and procedures for this purpose, it has not 
always consistently or effectively implemented them. Weaknesses in 
HUDï¿½s lender approval and monitoring efforts, in particular, underscore 
the need for improvements in its oversight of MAP lenders. 

HUD did not always ensure that the lenders it approved to participate in
the MAP program met HUDï¿½s qualification requirements for underwriters.
Because the Departmentï¿½s guidance does not provide clear standards for
assessing the experience of lendersï¿½ underwriters, HUD staff applied the
guidance inconsistently. In addition, HUD did not ensure that approved
underwriters attended required training sessions before submitting
insurance applications. When qualification standards are not clear and
strictly enforced, HUD increases the potential that MAP underwriters 
will not be familiar with program requirements and will make errors 
that could increase HUDï¿½s review time and insurance risk. Although the 
success of the MAP program rests heavily on the quality of its 
participating lenders, HUD did not require these lenders to implement 
quality control plans and did not establish standards for these plans. 
We believe that implementing such a requirement would help ensure that 
MAP lenders have the necessary policies and procedures to prevent 
underwriting deficiencies that could increase HUDï¿½s insurance risk. 

HUD could improve its implementation of processes for reviewing and
monitoring MAP lendersï¿½ underwriting of loans. Because field office 
staff did not always document their reviews of mortgage insurance
applications, as required, HUD lacked full assurance that the reviews 
were thorough and that its decisions to insure loans were properly 
supported. In addition, field staff did not enforce lendersï¿½ compliance 
with some requirements for property appraisals, including those 
designed to ensure that expense estimates for the property being 
insured are accurate. These problems occurred, in part, because of 
unclear guidance and heavy workloads. Because a propertyï¿½s income and 
expenses are major factors in determining the size of the mortgage, 
inaccurate estimates can increase HUDï¿½s risk of insuring mortgages that 
are higher than what the property can support. The consequence of this 
increased risk is higher potential program costs. Finally, HUDï¿½s 
monitoring of lenders and field offices through quality assurance 
reviews has several weaknesses. These weaknessesï¿½including insufficient 
staff, a lack of formal operating procedures, lengthy delays in issuing 
reports, and minimal analysis of review resultsï¿½have limited HUDï¿½s 
ability to oversee the MAP program. 

Recommendations for Executive Action: 

To improve HUDï¿½s oversight of MAP lenders and to reduce the financial
risks assumed by FHA, we recommend that the Secretary of HUD direct
the Assistant Secretary for Housing-Federal Housing Commissioner to do
the following: 

* Strengthen the process for approving MAP lenders by (1) issuing 
guidance that clarifies HUDï¿½s experience requirements for MAP 
underwriters and requires HUD staff to evaluate prospective MAP 
underwriters against these standards; and (2) issuing guidelines that 
establish standards for quality control plans and require MAP lenders 
to develop and maintain these plans as a condition of continued 
participation in the MAP program. 

* Improve field officesï¿½ implementation of procedures for reviewing
mortgage insurance applications submitted by MAP lenders, by (1) holding
MAP team leaders accountable for preparing required review memos, and
for ensuring that HUD field office staff consistently use review 
checklists in accordance with MAP guidance; (2) utilizing data in HUDï¿½s 
Financial Assessment Subsystem to corroborate expense data for HUD-
insured or - assisted properties used as comparable properties in 
appraisal reports; and (3) clarifying and enforcing HUDï¿½s requirement 
for updating the operating expense estimate for a subject property to 
the date of the appraisal. 

* Strengthen the Lender Qualifications and Monitoring Divisionï¿½s 
monitoring of lenders and HUD field offices, by (1) establishing a time 
frame for finalizing and issuing written operating procedures that 
include criteria for selecting loans and lenders for review that pose a 
high insurance risk to the Department; (2) issuing written reports on 
all quality assurance reviews conducted in fiscal year 2001 to the 
cognizant MAP lenders and HUD field offices; and (3) developing a 
process for aggregating and analyzing the results of quality assurance 
reviews to identify patterns of underwriting deficiencies and program 
violations by MAP lenders. 

Agency Comments: 

We provided HUD with a draft of this report for its review and comment.
HUD indicated that it agreed with each of the reportï¿½s recommendations
and that it had begun taking actions to address them. 

In response to our recommendations to strengthen the process for
approving MAP lenders, HUD said it (1) would centralize the authority 
for the initial approval of MAP underwriters within HUD headquarters, 
and would issue guidance to MAP lenders and HUD staff that clarifies 
HUDï¿½s experience requirements for underwriters; and (2) was working 
with the Mortgage Bankers Association of America to develop 
requirements and standards for quality control plans for MAP lenders. 
HUD also indicated that MAP lenders that failed to submit, maintain, or 
operate in accordance with an acceptable quality control plan would be 
removed from the program. 

In response to our recommendations to improve field officesï¿½ 
implementation of procedures for reviewing mortgage insurance 
applications submitted by MAP lenders, HUD indicated that it (1) had
instructed field office directors to ensure MAP team leadersï¿½ and 
technical specialistsï¿½ adherence to procedures for documenting reviews 
of MAP insurance applications, and would issue a notice to the field 
offices emphasizing the necessity of following these procedures; (2) 
would begin using data in HUDï¿½s Financial Assessment Subsystem to 
corroborate the expense data for HUD-insured properties used as 
comparable properties in appraisal reports; and (3) would issue 
guidance to MAP lenders detailing the correct method for updating a 
propertyï¿½s operating expenses. 

In response to our recommendations to strengthen the Lender 
Qualifications and Monitoring Divisionï¿½s monitoring of lenders and HUD
field offices, HUD said it (1) had established a target date of 
December 15, 2002, for issuing written procedures that include criteria 
for selecting lenders and loans that pose a high insurance risk to HUD; 
(2) would expedite the issuance of reports from quality assurance 
reviews conducted in fiscal year 2001; and (3) was developing a 
spreadsheet to aggregate and analyze findings from quality assurance 
reviews. The full text of HUDï¿½s letter is presented in appendix I. 

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 15 days 
after the date of this letter. At that time, we will send copies to the 
Secretary of Housing and Urban Development. We will make copies 
available to others on request. In addition, the report will be 
available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please call 
me at (202) 512-7631. Key contributors to this report are listed in 
appendix III. 

Signed by: 

Stanley J. Czerwinski: 
Director, Physical Infrastructure Issues: 

[End of section] 

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

U.S. Department Of Housing And Urban Development: 
Office Of The Assistant Secretary For Housing-Federal Housing 
Commissioner: 
Washington, D.C. 20410-8000: 

June 19, 2002: 

Mr. Stanley J. Czerwinski: 
Director: 
Physical Infrastructure Issues: 
United States General Accounting Office: 
Washington, DC 29548: 

Dear Mr. Czerwinski: 

We appreciate the opportunity to comment on the July 2002 draft of 
GAO's report on Multifamily Housing Improvements Needed in HUD's 
Oversight of Lenders that Underwrite FHA-Insured Loans (GAO-02-680), 
hereafter called "the GAO report." 

The GAO report reflected an excellent understanding of the procedures 
under HUD's Multifamily Accelerated Processing (MAP) for FHA's 
multifamily mortgage insurance programs. These comments do not question 
the findings in the GAO report. Instead, HUD's specific comments are 
devoted to the ways that HUD will implement the recommendations for 
executive action in the GAO report. 

We believe that the use of MAP assures a higher level of safety in 
underwriting than existed before MAP. For one reason, MAP Lenders must 
go through a strict approval process. Lenders without extensive 
multifamily underwriting experience will not be approved. Second, MAP 
established uniform standards of case review to be applicable in each 
Multifamily Hub and Program Center. Prior to the implementation of MAP, 
Hubs and Program Centers used "fast-track" procedures, which differed 
from field office to field office, resulting in uneven application of 
review procedures. Third, MAP has a monitoring staff which provides a 
post-review sampling of MAP closed loans to help assure careful 
underwriting by both Lenders and HUD staff. 

We are giving particular attention to the insurance on health care 
facilities. There are now new MAP requirements insuring an extra level 
of review of MAP underwriters who underwrite health care facilities, 
and there are detailed additional requirements for owners who seek to 
finance or refinance 11 or more of these projects with a total of $75 
million, or more. 

Design of MAP was based on the well established and proven multifamily 
underwriting systems of the Federal Home Loan Mortgage Corporation 
(Freddie Mac). and the Federal National Mortgage Association (Fannie 
Mae), both of which utilize a limited number of experienced lenders. 
MAP is more closely aligned to the Freddie Mac system, wherein the 
final approval is retained by Freddie Mac. Fannie Mae allows the lender 
to make this approval, but requires the lender to risk-share losses. 

Obtaining high quality loan applications depends on efficient 
processing. Processing of all multifamily insurance under the 
traditional FHA method resulted, in some field offices, in delays of as 
much as a year from application to closing. Allowing the Lenders to 
prepare and review many of the application documents under MAP made a 
sizeable difference in processing time. A condition of Lender 
application preparation and review is careful review of the Lender's 
actions by the HUD staff. 

We are confident that the review of MAP loans has been, and will 
continue to be, more than adequate to protect the FHA insurance fund. 
The GAO report, nevertheless, is particularly helpful in pointing out 
areas of review where greater care or additional documentation of 
actions taken is needed. The specific comments that follow explain the 
steps we have taken. or intend to take, to implement the GAO 
recommendations. 

Recommendation: 

Strengthen the process for approving MAP lenders by (I) issuing 
guidance that clarifies HUD's experience requirements for MAP 
underwriters and requires HUD staff to evaluate prospective MAP 
underwriters against these standards and (2) issuing guidelines that 
establish standards for quality control plans and require MAP lenders 
to develop and maintain these plans as a condition of continued 
participation in the MAP program. 

HUD's Response: 

The Department accepts the GAO recommendation to issue guidance that 
clarifies HUD's experience requirements for MAP underwriters and 
requires HUD staff to evaluate prospective MAP underwriters against 
these standards. We will issue a Mortgagee Letter providing this 
guidance. Furthermore, it is our intention to remove the Field Office 
authority to initially approve a MAP Lender's underwriter. In the 
future, only HUD Headquarters will be authorized to approve a MAP 
Underwriter. We estimate this task will be completed by October 15, 
2002. 

The Department accepts the GAO recommendation to issue guidelines that 
establish standards for MAP Lender quality control plans and require 
MAP lenders to develop and maintain these plans as a condition of 
continued participation in the MAP program. We asked the Mortgage 
Bankers Association of America (MBA) to establish a working group to 
recommend to the Department standards for quality control plans. The 
group has met and has a series of questions/discussion points for us to 
consider. Once the standards are developed, a Mortgagee Letter will be 
issued requiring that the standards be used in developing quality 
control plans. MAP Lenders will be required to submit a quality control 
plan based on these standards to the Department. Once the plan is 
approved by HUD, the MAP Lender will be required to maintain and 
operate it in accordance with its elements. Those MAP Lenders failing 
to submit, maintain, or operate in accordance with an acceptable 
quality control plan will be removed from the program. We estimate the 
task of promulgating the Mortgagee Letter will be completed by November 
15, 2002. 

Recommendation: 

Improve field offices' implementation of procedures for reviewing 
mortgage insurance applications submitted by MAP lenders by (1) holding 
MAP team leaders accountable for preparing required review memos and 
for ensuring that HUD field office staff consistently use review 
checklists in accordance with MAP guidance, (2) utilizing data in HUD's 
Financial Assessment Subsystem to corroborate expense data for HUD-
insured or assisted properties used as comparable properties in 
appraisal reports, and (3) clarifying and enforcing HUD's requirement 
for updating the operating expense estimate for a subject property to 
the date of the appraisal. 

HUD's Response: 

The Department accepts the GAO recommendation of holding MAP team 
leaders accountable for preparing required review memos and for 
ensuring that HUD field office staff consistently use review checklists 
in accordance with MAP guidance. To reinforce the importance that we 
place on performing these actions, the Department has taken the 
following steps: 

* The Department held a meeting for the HUD Multifamily Hub Directors 
in Washington, DC, May 21 through 23, 2002. During this meeting, the 
Headquarters staff shared the preliminary GAO draft MAP findings with 
the Hub Directors. The Directors also were given a refresher course on 
the MAP HUD review documentation procedures. They were instructed to 
take actions to ensure that all Team Leader memos and technical 
specialist review checklists were completed in accordance with the MAP 
Guide. 

* The Department held several video teleconferencing sessions (PicTel 
broadcasts) with small groups of Hubs and their respective Program 
Center MAP staff. In each of these sessions, the GAO preliminary draft 
findings were reviewed and completion of the memoranda and checklists 
was mandated of Team Leaders and technical staff participating in these 
sessions. The PicTel broadcasts with all of the Hubs and Program 
Centers were conducted between May 30 and June 14, 2002. 

* A Housing Notice will be published in the coming weeks and sent to 
the HUD field offices emphasizing the necessity of filing timely 
reports, memoranda and checklists on a consistent basis in accordance 
with the MAP Guide and Supplements. It will address the GAO findings 
and remind Team Leaders and technical staff of their responsibility to 
document MAP reviews in accordance with established policy.
The Department accepts the GAO recommendation of utilizing HUD's 
Financial Assessment Subsystem data to corroborate the expense data for 
HUD-insured properties used on comparable properties in appraisal 
reports. The Department has begun the process of assigning passwords to 
multifamily appraisers throughout HUD field offices to give them access 
to the Financial Assessment Subsystem. While not all data may be 
compatible on a line for line basis, we expect full field utilization 
will be completed by August 30, 2002 for intermediate groupings of 
items such as total utility costs and total maintenance costs. 

The Department accepts the GAO recommendation of enforcing the 
requirement for updating the operating expense estimate for a subject 
property to the date of the appraisal in accordance with the specific 
instructions contained in the MAP Guide. Accordingly, we have informed 
the Hub Directors to direct their staff to ensure that comparable 
expenses are appropriately updated in the process of deriving total 
estimated project expenses for MAP appraised properties. This was one 
of several items covered in the Hub Directors conference in May, during 
the PicTel broadcasts with field staff, and it will be covered again in 
a forthcoming Mortgagee Letter to all MAP Approved Lenders detailing 
the correct method of updating comparable expenses for all third party 
appraiser contractors. 

Recommendation: 

Strengthen the HUD Multifamily Development, Lender Qualifications and 
Monitoring Division's (LQMD) monitoring of lenders and HUD field 
offices by (1) establishing a time frame for finalizing and issuing 
written operating procedures that include criteria for selecting loans 
and lenders for review that pose a high insurance risk to the 
Department, (2) issuing written reports on all quality assurance 
reviews conducted in fiscal year 2001 to the cognizant MAP lenders and 
HUD field offices, and (3) developing a process for aggregating and 
analyzing the results of quality assurance reviews to identify patterns 
of underwriting deficiencies and program violations by MAP lenders. 

HUD's Response: 

The Department accepts GAO's recommendation to establish a time frame 
for finalizing and issuing written operating procedures that include 
criteria for selecting loans and lenders for review that pose a high 
insurance risk to the Department. We have established a completion date 
of December 15, 2002 for this monitoring guide. 

The Department accepts the GAO recommendation to issue written reports 
on all quality assurance reviews conducted in fiscal year 2001 to the 
cognizant MAP lenders and HUD field offices. As of June 19, 2002, 
fourteen LQMD Reports from FY 2001 remain to be finalized and issued. 
The Department expects to issue the remaining reports at a pace of two 
reports a week. Since February 2002, the LQMD team leaders send the 
draft report to the Hub/Program Center Director for review and comment. 
The Director is given 30 days to respond to the report, and the 
Director's comments are considered in the final report. 

The Department accepts the GAO recommendation to develop a process for 
aggregating and analyzing the results of quality assurance reviews to 
identify patterns of underwriting deficiencies and program violations 
by MAP lenders. LQMD is developing an Excel generated spreadsheet to 
aggregate and analyze the findings from LQMD monitoring reports. We 
will be able to analyze these findings by MAP Lender, MAP Underwriter 
or type of finding. 

We appreciate your comments and recommendations. 

Sincerely, 

Signed by: 

John C. Weicher: 
Assistant Secretary for Housing - Federal Housing Commissioner: 

[End of section] 

Appendix II: Objectives, Scope, and Methodology: 

Our objectives were to answer the following questions: (1) How well does
the Department of Housing and Urban Development (HUD) ensure that 
lenders participating in the Multifamily Accelerated Processing (MAP)
program meet HUDï¿½s qualification requirements? (2) How well is HUD
implementing processes for reviewing and monitoring MAP lendersï¿½
underwriting of loans? (3) Has HUD held any MAP lenders accountable for
noncompliance with program requirements? 

To determine how HUD ensures that MAP lenders meet HUDï¿½s qualifications 
requirements, we reviewed HUDï¿½s regulations, guidance, and procedures 
relating to its process for approving lenders to participate in the MAP 
program. We interviewed officials from HUDï¿½s Office of Lender 
Activities and Program Compliance, the Office of Multifamily Housingï¿½s
Lender Qualifications and Monitoring Division, and multifamily field
offices in Baltimore, Chicago, Cleveland, Denver, Ft. Worth, Phoenix, 
San Antonio, and San Francisco. To assess how HUD implemented its 
process for approving MAP lenders, we focused on the 20 lenders that 
made the 35 new construction and substantial rehabilitation loans 
insured under the MAP program by the eight field offices between May 
2000 and August 2001. For each of the 20 lenders, we reviewed its 
application and supporting documents for MAP approval; comments 
solicited from the field offices about it; and HUDï¿½s records showing 
the approval of the lender and its underwriters for participation in 
the program. In addition, we used information from HUDï¿½s F47 
databaseï¿½which provides current and historical information on the 
multifamily mortgage loans that FHA insuresï¿½to verify that the lenders 
reported all of their FHA-insured loans made during the previous 5 
years that were assigned to HUD. We also examined HUDï¿½s training 
records to determine whether the 22 underwriters who underwrote the 35 
loans we reviewed had received MAP program training. Finally, to 
determine whether HUD had obtained quality control plans from the 
lenders, we reviewed files maintained by the Departmentï¿½s Lender 
Approval and Recertification Division. 

To determine how well HUD implemented processes for reviewing and
monitoring MAP lendersï¿½ underwriting of loans, we reviewed HUDï¿½s
guidance and procedures for the field officesï¿½ review and approval of
mortgage insurance applications. We also interviewed officials from
HUDï¿½s Office of Multifamily Housing and each of the eight field offices 
we visited regarding how the reviews are conducted and documented, as 
well as workload and staffing issues. To assess how HUD implemented the
application review process, we focused on the 35 new construction and
substantial rehabilitation loans insured under the MAP program by the
eight field offices between May 2000 and August 2001. For each of these 
cases, we reviewed the lenderï¿½s mortgage insurance application and
associated underwriting exhibits and documentation of HUDï¿½s review and
approval of the applications, including review checklists and team 
leader memos. To assess the extent to which the field offices ensured 
lendersï¿½ compliance with HUDï¿½s underwriting requirements, we focused on 
four requirements for property appraisals, a critical aspect of loan
underwriting. Specifically, we determined whether the appraisals: 1) 
used rent and expense information from at least three comparable 
properties as a basis for estimating the expected rental income and 
operating expenses of the subject property; 2) updated the expense 
estimate for the subject property to the date of the appraisal; 3) 
accounted for the comparable propertiesï¿½ occupancy rates and rent 
concessions in estimating rental income for the subject property; and 
4) were no more than 120 days old at the time the insurance application 
reached the firm commitment stage. In making these determinations, we 
corroborated the rent data used in the appraisals using information in 
apartment rental guides and Web sites and by contacting apartment 
leasing offices. Similarly, we corroborated expense data for HUD-
insured or -assisted properties used in the appraisals against audited 
financial statements in HUDï¿½s Financial Assessment Subsystem. We 
discussed our findings with the field office staff responsible for 
reviewing the appraisals. Also, we compared the field officesï¿½ 
workloads at the time of our visits against the workload standard
set forth in HUDï¿½s risk assessment for the MAP program. In addition, we
reviewed the results of reviews conducted by the Lender Qualifications
and Monitoring Division to identify underwriting deficiencies uncovered
by HUDï¿½s quality assurance process. To determine how well HUD monitored 
lenders and field offices through its quality assurance process, we 
interviewed officials from the Office of Multifamily Housing and its
Lender Qualifications and Monitoring Division to discuss how the 
division conducts its reviews. In addition, we compared the divisionï¿½s 
planned staffing level with its actual level as of March 2002. We 
obtained data on the number and status of quality assurance reviews 
that the division planned and conducted in fiscal year 2001 and the 
number of these reviews for which the division issued reports to the 
cognizant MAP lenders and field offices. 

To determine whether HUD has held any MAP lenders accountable for
noncompliance with program requirements, we reviewed HUDï¿½s regulations 
and guidance to determine the enforcement options available to HUD. We 
interviewed officials from HUDï¿½s Office of Multifamily Housing to 
discuss the enforcement actions that had been taken against MAP lenders 
as of March 2002. We also reviewed documentation regarding the specific 
circumstances that led to these actions. 

We tested the data we obtained from HUD for reasonableness and 
completeness and found them to be reliable for the purpose of our
analyses. In addition, we reviewed existing information about the 
quality and controls supporting the data systems and discussed the data 
we analyzed with agency officials to ensure that we interpreted them
correctly. 

We conducted this review from April 2001 through April 2002 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Stanley J. Czerwinski, (202) 512-2834: 
Charles E. Wilson, Jr., (202) 512-2834: 

Staff Acknowledgments: 

In addition to those named above, Mark Egger, Tiffani Green, Rick Hale,
Laura Hogshead, Donna Leiss, Bill McDaniel, John McGrail, Andy 
Oï¿½Connell, Jerry Patton, Rose Schuville, Stewart Seman, Jim Vitarello,
Wendy Wierzbicki, and Steve Westley made key contributions to this 
report. 

[End of section] 

Footnotes: 

[1] U.S. General Accounting Office, Single-Family Housing: Stronger 
Oversight of FHA Lenders Could Reduce HUDï¿½s Insurance Risk, GAO/RCED-00-
112 (Washington, D.C.: Apr. 28, 2000). 

[2] The credit subsidy cost is the net present value of the estimated 
long-term costs to the federal government of extending or guaranteeing 
credit, calculated over the life of the loan and excluding 
administrative costs. Budget authority is the authority provided by law 
to enter into financial obligations that will result in immediate or 
future outlays involving federal funds. HUDï¿½s process for estimating 
credit subsidy costs is discussed in U.S. General Accounting Office, 
Multifamily Housing Finance: Funding FHAï¿½s Subsidized Credit Programs, 
GAO-02-323R (Washington, D.C.: Feb. 1, 2002). 

[3] HUDï¿½s policy is to attempt to restore the financial soundness of 
the mortgage through a workout plan. If a workout plan is not feasible, 
HUD may, as a last resort, foreclose on the mortgage. 

[4] The actual claim payment may reflect dollar amounts added to or 
subtracted from the unpaid principal balance of the loan. For example, 
any mortgage insurance premiums the lender paid to HUD after the date 
of loan default are added to the unpaid principal balance. 

[5] The programs included under MAP are Section 220 (construction or 
rehabilitation of rental housing for urban renewal and concentrated 
development areas), Section 221(d)(3) (construction or substantial 
rehabilitation of rental and cooperative housing with nonprofit or 
cooperative borrowers), Section 221(d)(4) (construction or substantial 
rehabilitation of rental and cooperative housing with for-profit 
borrowers), Section 223(f) (refinancing or acquisition of existing 
rental housing), Section 232 (construction or substantial 
rehabilitation of nursing homes, intermediate care, board and care, and 
assisted-living facilities), and Section 232/223(f) (refinancing or 
acquisition of existing nursing homes, intermediate care, board and 
care, and assisted living facilities). 

[6] Insurance applications for refinancing and acquisition loans start 
at the firm commitment stage. 

[7] HUD does not require certain lenders, known as ï¿½supervisedï¿½ 
lenders, to submit financial statements. A supervised lender is a 
financial institution that is a member of the Federal Reserve System or 
an institution whose accounts are insured by the Federal Deposit 
Insurance Corporation or the National Credit Union Administration. 

[8] Seventy-three of the underwriters were approved by the Office of 
Multifamily Housing, while the remaining eight were approved by the 
multifamily field offices. 

[9] We corroborated the rents for the comparable properties by checking 
apartment rental guides and Web sites and by contacting apartment 
leasing offices. 

[10] According to HUD officials, expense data for non-HUD properties 
are not readily available because property owners consider the data to 
be proprietary business information. 

[11] The appraisals for two other loans used HUD-insured nursing homes 
as comparable properties. However, according to Multifamily Housing 
officials, expenses for nursing homes and other health care facilities 
are accounted for differently in appraisal reports than they are in the 
financial statements in HUDï¿½s database. As a result, the expense data
from these two sources are not comparable. 

[12] In the remaining case, the expenses cited in the appraisal were 
higher than those reflected in the database. 

[13] For the remaining 18 loans, the estimates were understated by less 
than 5 percent. 

[14] For example, for expenses accrued during a fiscal year running 
from May 1, 2000, through April 30, 2001, the effective date of the 
corresponding expense data would be the beginning date of that fiscal 
year, or May 1, 2000. 

[15] HUDï¿½s guidance requires the Department to conduct risk assessments 
of new or substantially revised programs. The risk assessments are 
documented reviews by HUD management of a programï¿½s susceptibility to 
waste, fraud, abuse, and mismanagement. 

[16] In determining this number, we counted all mortgage insurance 
applications that were in either the pre-application or firm commitment 
stage of review at the time of our visits. We visited the Cleveland, 
San Francisco, Denver, Ft. Worth, and San Antonio field offices in 
October 2001, and the Chicago, Phoenix, and Baltimore field offices in 
November 2001. 

[End of section] 

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