High Risk Series: Department of Housing and Urban Development (Letter
Report, 02/95, GAO/HR-95-11).

In 1990, GAO began a special effort to identify federal programs at high
risk of waste, fraud, abuse, and mismanagement.  GAO issued a series of
reports in December 1992 on the fundamental causes of the problems in
the high-risk areas.  This report on the Department of Housing and Urban
Development is part of the second series that updates the status of this
high-risk area. Readers have the following three options in ordering the
high-risk series: (1) request any of the individual reports in the
series, including the Overview (HR-95-1), the Guide (HR-95-2), or any of
the 10 issue area reports; (2) request the Overview and the Guide as a
package (HR-95-21SET); or (3) request the entire series as a package
(HR-95-20SET).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HR-95-11
     TITLE:  High Risk Series: Department of Housing and Urban 
             Development
      DATE:  02/01/95
   SUBJECT:  Public housing
             Internal controls
             Management information systems
             Financial management systems
             Federal agency reorganization
             Human resources training
             Human resources utilization
             Strategic planning
             Public administration
             Housing programs
IDENTIFIER:  GNMA Mortgage Backed Securities Program
             High Risk Series 1995
             
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Cover
================================================================ COVER


High-Risk Series

February 1995

DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT

GAO/HR-95-11

HUD


Abbreviations
=============================================================== ABBREV

  FHA - Federal Housing Administration
  GNMA - Government National Mortgage Association
  HUD - Department of Housing and Urban Development
  NAPA - National Academy of Public Administration

Letter
=============================================================== LETTER



February 1995

The President of the Senate
The Speaker of the House of Representatives

In 1990, the General Accounting Office began a special effort to
review and report on the federal program areas we considered high
risk because they were especially vulnerable to waste, fraud, abuse,
and mismanagement.  This effort, which has been strongly supported by
the Senate Committee on Governmental Affairs and the House Committee
on Government Reform and Oversight, brought much needed focus to
problems that were costing the government billions of dollars. 

In December 1992, we issued a series of reports on the fundamental
causes of problems in designated high-risk areas.  We are updating
the status of our high-risk program in this second series.  Our
Overview report (GAO/HR-95-1) discusses progress made in many areas,
stresses the need for further action to address remaining critical
problems, and introduces newly designated high-risk areas.  This
second series also includes a Quick Reference Guide (GAO/HR-95-2)
that covers all 18 high-risk areas we have tracked over the past few
years, and separate reports that detail continuing significant
problems and resolution actions needed in 10 areas. 

This report discusses the fundamental deficiencies that led us to
designate the Department of Housing and Urban Development (HUD) as a
high-risk area in January 1994, the actions HUD has taken or
initiated to correct them, and further actions that are needed. 
HUD's Secretary and top management team have given high priority to
correcting these deficiencies.  They, and other HUD managers and
staff, committed substantial effort during 1994 to formulating and
planning significant changes in the way the agency is managed.  We
applaud HUD's efforts but note that the mammoth task of effectively
implementing these plans still lies ahead.  Continued focus,
commitment, and consistent follow-up by HUD's leadership over the
coming years will be needed to sustain the enthusiasm and momentum
generated thus far and to successfully transform HUD into a
well-managed federal agency. 

Copies of this report series are being sent to the President, the
Republican and Democratic leadership of the Congress, congressional
committee chairs and ranking minority members, all other members of
the Congress, the Director of the Office of Management and Budget,
and the Secretary of Housing and Urban Development. 

Charles A.  Bowsher
Comptroller General
of the United States


OVERVIEW
=========================================================== Appendix 0

The Department of Housing and Urban Development (HUD) is one of the
nation's largest financial institutions, insuring some $400 billion
in loans, and guaranteeing more than $400 billion in outstanding
securities for single-family and multifamily housing for a large
segment of Americans.  It also spends about $25 billion each year
furthering the social objectives of providing affordable housing,
rent subsidies, and other services to low- and moderate-income
persons (including the homeless) and of helping finance local
community development activities. 


   THE PROBLEM
--------------------------------------------------------- Appendix 0:1

Four long-standing departmentwide deficiencies led to our designation
of HUD as a high-risk area.  These deficiencies were weak internal
controls, an ineffective organizational structure, an insufficient
mix of staff with the proper skills, and inadequate information and
financial management systems. 

Internal control weaknesses, such as a lack of necessary data and
management processes, were a major factor leading to the incidents of
fraud, waste, abuse, and mismanagement that have come to be known as
the 1989 HUD scandals.  Organizational problems have included
overlapping and ill-defined responsibilities and authorities between
HUD headquarters and field organizations and a fundamental lack of
management accountability and responsibility.  Having an insufficient
mix of staff with the proper skills has hampered the effective
monitoring and oversight of HUD programs and the timely updating of
procedures.  Poorly integrated, ineffective, and generally unreliable
information and financial management systems have failed to meet
program managers' needs and have not provided adequate control over
housing and community development programs. 


   PROGRESS
--------------------------------------------------------- Appendix 0:2

HUD has made a start in correcting these long-standing deficiencies. 
HUD's top management team has focused much attention and energy on
overhauling the way the agency is operated.  The agency has
formulated an entirely new management approach and philosophy,
balancing risks with results; is implementing a substantial field
reorganization; and has initiated a number of other actions that
begin to address the four fundamental management deficiencies. 
Recently, there have been discussions on changing HUD that have
ranged from major restructuring to total elimination of the agency. 
The Secretary recently announced a proposal to further "reinvent" the
agency over the next 4 years by (1) consolidating individual housing
assistance and community development programs into three
performance-based block grant funds, (2) transforming public housing,
and (3) changing the Federal Housing Administration (FHA) into an
entrepreneurial government-owned corporation.  Because many of these
actions are either still in the conceptual or planning stage, it is
much too early to assess their effectiveness.  Nevertheless, HUD will
need to continue working to address the overall deficiencies. 


   OUTLOOK FOR THE FUTURE
--------------------------------------------------------- Appendix 0:3

HUD has plans and has initiated actions to begin to address the
deficiencies we identified.  However, HUD now faces the formidable
challenges of completing its plans, translating its plans into
effective actions, and implementing its new management approach into
the fabric of the agency's day-to-day operations.  Regardless of the
form the above restructuring or reinventing proposals take, sustained
focus, commitment, and consistent follow-up by HUD's leadership will
be needed-- something that has not accompanied past reform attempts
and was recently reported as a concern by HUD's Inspector General. 

In addition, to further ensure that risks are reduced to acceptable
levels throughout its wide spectrum of operations, HUD needs to
complete its efforts to address the internal control weaknesses
reported in the financial audits of FHA and the Government National
Mortgage Association (GNMA), as well as continue with the full
implementation of its plans to reorganize and streamline HUD
headquarters.  The following actions are also needed to help HUD deal
with staff and resource constraints:  (1) undertake an extensive
legislative overhaul and consolidation of programs, (2) give HUD
legislative authority to use more innovative techniques to leverage
private investment in community development and affordable housing,
and (3) free GNMA from HUD's personnel ceilings.  Much work also
remains before information resources adequately support HUD's
mission, such as strengthening business and information resources
management planning and establishing an information architecture and
a departmentwide data management program. 

HUD's recent "reinvention" proposal calls for a fundamental overhaul
of HUD programs and the way they are delivered.  If implemented, the
proposal would shift to states and localities much more of the
responsibility for designing and implementing specific programs to
more effectively accomplish HUD's mission in their jurisdictions, and
it would make HUD more of an overseer and clearing house for
information on model programs.  Because the proposal is still in the
conceptual stage and implementation details are not available, it is
difficult to predict how the proposal might affect the corrective
actions and plans that HUD already has under way.  The extent to
which this or some other restructuring alternative is implemented
will have to be decided by the Congress through the legislative and
appropriation processes.  However, no matter what form HUD finally
takes, strong internal controls, an effective organizational
structure, a sufficient mix of properly skilled staff, and adequate
information and financial management systems will remain key
ingredients to the proper management and control of risks.  The
dialogue on how best to "reinvent" HUD presents the agency, the
Office of Management and Budget, and the Congress with an excellent
opportunity to work together to eliminate HUD's four fundamental
management deficiencies. 


HUD'S FUNDAMENTAL DEFICIENCIES
=========================================================== Appendix 1

The highly publicized HUD scandal that surfaced in 1989 played a
significant role in our decision to establish a special series of
reports on high-risk areas across the federal government.  We
initially excluded HUD from this series because intense congressional
scrutiny and legislative reform followed in the scandal's wake. 
Although HUD began addressing the numerous and severe problems
affecting its program management and service delivery, it made slow
progress, leaving billions of dollars at risk.  We therefore decided
in January 1994 that HUD, as an agency, warranted the focused
attention that comes with designation as a high-risk area. 

Four long-standing departmentwide deficiencies led to our designation
of HUD as a high-risk area.  These deficiencies are weak internal
controls, an ineffective organizational structure, an insufficient
mix of staff with the proper skills, and inadequate information and
financial management systems. 


   INTERNAL CONTROLS
--------------------------------------------------------- Appendix 1:1

In 1992, we reported that internal control problems led to the 1989
scandal and its attendant highly publicized and embarrassing
incidents of fraud, waste, abuse, and mismanagement.  In the most
infamous of these, known as the "Robin HUD" incident, FHA did not
have accounting data and internal controls in place to reconcile
funds from the sales of government-owned properties with deposits to
the U.S.  Treasury.  As a result, private real estate agents were
able to steal millions of dollars by simply retaining the proceeds
from the sale of FHA-owned properties rather than transferring the
funds to the Treasury. 

As part of the annual financial audits required by the Chief
Financial Officers Act of 1990, the public accounting firm of Price
Waterhouse found that material weaknesses continued in FHA's and
GNMA's internal controls during fiscal year 1993.  Price Waterhouse
attributed these weaknesses, in part, to a lack of staff resources. 
The weaknesses reported for FHA included lack of staff and
administrative resources for such tasks as systems maintenance and
development, management of troubled assets, and implementation of new
automated systems; inadequate emphasis on providing early warning of
and preventing loss through defaults; and inadequate automated
systems to provide needed management information or reliable
information.\1 The weaknesses reported for GNMA were inadequate
monitoring of subservicers and contractors and inadequate controls
over systems development, operation, and maintenance.\2

In January 1994, the Office of Management and Budget added GNMA's
Mortgage Backed Securities Program to HUD's inventory of high-risk
areas because of inadequate monitoring of major contract operations. 
In addition, on the basis of a joint recommendation from HUD's
Inspector General and Chief Financial Officer, the Secretary of HUD
identified the agency's entire management control system as a
material weakness in the Department's December 1993 "Report on
Compliance With the Federal Managers' Financial Integrity Act."


--------------------
\1 Federal Housing Administration Audit of Fiscal Year 1993 Financial
Statements, HUD, Office of Inspector General, 94-FO-131-0002
(Washington, D.C.:  June 8, 1994). 

\2 Government National Mortgage Association Audit of Fiscal Year 1993
Financial Statements, HUD, Office of Inspector General,
94-FO-171-0001 (Washington, D.C.:  Mar.  30, 1994). 


   ORGANIZATIONAL STRUCTURE
--------------------------------------------------------- Appendix 1:2

An ineffective organizational structure also has contributed to
management problems throughout HUD.  Organizational problems have
included overlapping and ill-defined

responsibilities and authorities in the agency's headquarters, 10
regional offices, and 81 field offices; disagreement on program
priorities; and poor communication of policy updates and management
directives.  A fundamental problem has been lack of management
accountability and responsibility caused by assistant secretaries'
lack of direct line authority over the field office staff who
implement their programs.  As a result, program responsibilities and
authority within HUD organizational units have sometimes been
fragmented, creating redundancies and conflicting duties. 
Headquarters and field management often have denied responsibility or
blamed each other for program failures and scandals. 


   STAFF AND SKILLS
--------------------------------------------------------- Appendix 1:3

HUD's staff decreased from 17,041 in 1980 to 12,823 in 1993 (a 25-
percent decrease).  Coupled with the lack of adequate financial and
management information systems, which could have helped staff oversee
operations, the number and qualifications of HUD staff have proved to
be inadequate to perform essential functions, such as efficiently
monitoring programs and updating procedures.  For example, HUD's
Office of Inspector General and HUD staff have noted repeatedly that
inadequate staffing and resources have hampered the performance of
fundamental FHA activities, such as monitoring the insured loan
portfolio, servicing HUD-held mortgages, and managing foreclosed
properties.  As mentioned above, Price Waterhouse also noted these
deficiencies in its 1993 financial statement audit.  As we reported,
a lack of monitoring staff was one reason why FHA was unable to
develop workout plans\3 or institute foreclosure procedures for its
large number of delinquent multifamily loans.  Concluding that its
methods of utilizing resources and formulating needs were inadequate,
HUD designated resource management departmentwide as a high-risk area
in its fiscal year 1993 "Report on Compliance With the Federal
Managers' Financial Integrity Act."


--------------------
\3 When a borrower defaults on an insured loan, the lender may assign
the loan to HUD and file an insurance claim.  HUD should then work
with the borrower to try to bring the loan current under the mortgage
terms.  This is generally done by developing a workout plan, which
outlines the steps that both HUD and the borrower can take to restore
the project's financial health. 


   INFORMATION SYSTEMS
--------------------------------------------------------- Appendix 1:4

In 1984 and 1992, we reported that problems with HUD's information
and financial management systems impaired departmental operations. 
In April 1994, we reported that HUD continued to be plagued by poorly
integrated, ineffective, and generally unreliable information systems
that have not satisfied management needs or provided adequate control
over housing and community development programs. 

HUD's information and financial management systems dilemma has
endured because, historically, the Department has not planned and
managed its information resources to meet its missions and strategic
objectives.  HUD also has lacked (1) a departmentwide information
architecture to provide a standard framework to govern the management
and use of information and information resources, (2) a data
management program to ensure that departmentwide systems provide
program managers with the information they need to effectively
accomplish their missions, (3) adequate security controls for its
computer systems that process sensitive and privacy data, and (4)
contingency plans to provide for the recovery and continued
processing of critical systems in the event of a major disruption or
disaster.  In addition, HUD's efforts to develop and implement
integrated financial systems have been impeded by ineffective
planning and management oversight. 


HUD IS BEGINNING TO IMPLEMENT A
CORRECTIVE STRATEGY
=========================================================== Appendix 2

HUD's top management team has focused much attention on overhauling
the way the agency is managed.  It has formulated a new management
approach and philosophy that HUD officials believe will provide the
framework needed to eventually resolve the long-standing systemic
problems that we believe put the agency's programs at risk.  The
Department recently established a Management Committee that is
responsible for ensuring the implementation of the new management
approach and philosophy.  HUD has also initiated a number of more
specific actions that address these deficiencies.  Like HUD's broader
management changes, these actions are either still in the planning
stage or still being implemented.  Consequently, it is much too early
to assess their effectiveness. 


   HUD'S NEW MANAGEMENT APPROACH
--------------------------------------------------------- Appendix 2:1

HUD calls its new approach "balanced management" because the
objective of this approach is to strike a balance between management
based on financial integrity (which seeks to ensure that funds are
spent for the purpose intended and that fraud, waste, and abuse are
minimized) and management based on performance (which seeks to ensure
that planned outcomes are achieved).  The idea behind the balanced
approach is to combine the advantages, while avoiding the pitfalls,
of these two previously used approaches. 

HUD also has created what it calls a "strategic performance system"
as a tool for achieving balanced management and transforming HUD into
a customer- and results-oriented organization.  This system consists
of three components, which are in various stages of development. 

The first component (called the "strategic framework") consists of
HUD's long- and short-term commitments--the factors that managers
must consider when making strategic or major resource use decisions. 
The strategic framework includes items such as the Department's
mission statement, the Secretary's objectives, HUD's performance
agreement with the President, organizational plans, and customer
service plans.  Annual management plans form the second component. 
The first set of these (covering fiscal year 1995) is still in
various stages of development and is scheduled to be completed by the
end of January 1995.  When completed, a management plan for each of
HUD's major program areas will include performance goals and outcome
indicators for tracking progress in achieving the goals; estimates of
the resources needed to achieve the goals; and a clear identification
of risks, efforts intended to abate the risks, and management control
elements.  The final component of the new performance system is the
Secretary's performance report--a quarterly report that will track
the incremental achievement of performance indicators, the risks that
have been encountered, and the abatement efforts that have been
devised and implemented.  HUD's major program management areas have
been charged with the responsibility of developing information
strategy plans in conjunction with the strategic performance system. 
These plans will identify business and information needs. 

In addition to redesigning its overall management approach, HUD has
initiated actions addressing the four fundamental management
deficiencies that we identified. 


   INTERNAL CONTROLS
--------------------------------------------------------- Appendix 2:2

HUD began an internal management controls "laboratory" project during
the latter months of 1993.  The project, conducted in the Office of
Multifamily Housing, sought to develop and demonstrate a new method
of integrating management controls into the program delivery and
budget formulation processes.  (Previously, HUD spent a great deal of
time and money separately reviewing internal controls and identifying
problems that were already known to most managers.) The project led
in July 1994 to the incorporation of a "management planning and
control program" into HUD's strategic performance system (described
above).  HUD's Office of Inspector General participated in the
development of the program and supports its concept.  Implementation
of the new process will not be completed, however, until sometime in
fiscal year 1995. 

The new management planning and control program will be carried out
through two principal components of the strategic performance system: 
the management plans that each program area is to develop and the
Secretary's performance report.  Each management plan will contain
management control elements that identify and prioritize the major
risks in each program and then describe how these risks will be
abated, how management controls will be built into any new programs
being created, and how the effectiveness of controls for existing
programs will be ensured.  HUD provided training on the new process
to about 300 field program managers in August 1994, and, as of
October 1994, HUD's Chief Financial Officer's staff were working with
the major program management groups to develop their plans.  HUD
expects to have these plans completed and the adequacy of their
management control elements reviewed by the Chief Financial Officer
by the end of January 1995.  Each program area also must develop
performance indicators for its management controls--a process that
had begun by October 1994 and is expected to continue during fiscal
year 1995.  Once developed, these and other management performance
indicators will be reported quarterly in the Secretary's performance
report. 

Actions are being taken to address the internal control weaknesses
identified in the Price Waterhouse audits of FHA's and GNMA's
financial statements, according to the audit reports.  All actions
are not complete and all of the weaknesses have not been eliminated,
however.  HUD officials stated that in June 1994 the Office of
Management and Budget removed two areas from HUD's inventory of
high-risk areas--FHA's single-family property disposition and GNMA's
oversight of contractors.  According to one official, HUD management
believes the agency now has a process that, once implemented, will
eliminate most internal control weaknesses. 


   ORGANIZATIONAL STRUCTURE
--------------------------------------------------------- Appendix 2:3

In April 1994, HUD began implementing a reorganization plan.  The
Secretary decided to give the assistant secretaries direct line
authority over their field staff resources and to abolish a layer of
management and oversight that existed in the Department's 10 regional
offices.  The Secretary took this action to address what he
characterized as a basic lack of accountability that was the single
major cause for the failure of HUD's management controls. 

Besides eliminating the 10 regional offices and realigning staff, the
reorganization restructured HUD's 81 field offices into a new
arrangement of state and area offices.  Fifty-two of HUD's previous
field offices (one in each state plus the District of Columbia and
Puerto Rico) were designated as state offices, each of which is
headed by a new position of state coordinator.  The remaining 29
field offices were designated as area offices to serve major
metropolitan areas.  Each of these offices is headed by a new
position of area coordinator.  Functions previously performed by the
regional offices are to be transferred to either HUD headquarters or
the state/area offices or are to be abolished. 

Unlike HUD's former regional and field office managers, the new state
and area coordinators are administratively responsible for running
their offices but not for managing program budgets or making
personnel decisions.  Responsibility for program management at the
local level now resides directly with the heads of the divisions in
each state and area office that parallel HUD's major program
groupings:  Housing, Public and Indian Housing, Community Planning
and Development, and Fair Housing and Equal Opportunity.  These
division directors now report directly to their corresponding
assistant secretaries in HUD headquarters.\4 The state and area
coordinators, however, are to serve as HUD's customer service
representatives. 

Although HUD's 10 regional offices were eliminated, 10 new secretary
representative positions were created to serve as the Secretary's
"eyes and ears" in the same geographic areas.  Unlike the former
regional directors, these representatives have no line authority over
the field program office staff; instead, they are to act as liaisons
to governors, other state officials, and broad-based interest groups. 

HUD expects that the reorganization will eliminate previously
confused lines of authority, enhance communications, reduce layers of
review and approval, and improve customer service.  It believes the
new field structure and lack of regional bureaucracy will make HUD
more responsive to the people it serves.  By delegating more
programmatic and administrative authority to its restructured offices
in the field, HUD expects to empower them to provide timely and
high-quality service to its customers.  HUD also expects its field
staff to assume more responsibility for coordinating HUD programs
locally, for maintaining closer contact with local communities, and
for being more responsive to local concerns.  HUD recognizes,
however, that these roles are nontraditional for HUD staff and must
be carefully developed. 

If implemented as HUD envisions, these organizational changes could
make a positive difference.  However, it will be important for HUD to
ensure that the changes do not unduly weaken the coordination of
program services or reduce staffing flexibility at the local level. 
In a recent congressionally directed study of HUD, the National
Academy of Public Administration (NAPA) noted that the reorganization
would clarify lines of authority and improve program accountability;
however, it concluded that the new field structure might diminish
rather than improve HUD's coordination of program services at the
local level.\5 Because responsibility for program coordination and
community outreach rests with staff who have no decision-making
authority (the state/area coordinators and the 10 secretary
representatives), the NAPA study panel believed that it would be
difficult to gain support for a single local plan of action or to
resolve differences of opinion among HUD's major program management
groups or between HUD and the local community.  The panel also was of
the opinion that HUD could lose its flexibility to reallocate staff
among programs at the local level. 

Not only has NAPA reported concerns about the reorganization, but the
Office of Inspector General also recently reported that the
reorganization efforts were behind schedule.\6 The report further
stated that HUD needed to streamline and reorganize headquarters
operations to support field operations and free resources for
effective program delivery.  HUD officials told us that the agency
submitted a plan for streamlining its headquarters organization to
the Office of Management and Budget in October 1994.  The plan was
subsequently approved and HUD is implementing the plan, expecting the
changes to eliminate layers of management and expedite
decision-making. 

While HUD's field staff reorganizes and gets acclimated to its new
customer service role in the community, FHA is also studying its
organization.  A business plan along with a legislative proposal is
being developed, and according to officials, is expected to be
released in February as part of the President's budget.  FHA's
mission is to increase housing opportunities by providing insurance
to encourage private lenders to underwrite mortgages they would
otherwise consider too risky.  FHA's insurance programs are thus
designed to balance the social goal of helping more risky borrowers
obtain mortgage financing with the business goal of protecting the
government's financial interests. 


--------------------
\4 As part of the reorganization, HUD also restructured field
divisions that administer programs in the Housing group (FHA mortgage
insurance programs) to match the organization in headquarters. 
Formerly organized along the functional lines of housing management
and housing development, the field divisions are now organized along
single-family and multifamily program lines. 

\5 Renewing HUD:  A Long-Term Agenda for Effective Performance,
Report by a Panel of the National Academy of Public Administration
(Washington, D.C.:  July 1994). 

\6 Semiannual Report to the Congress for the Period Ending September
30, 1994, HUD, Office of Inspector General (Washington, D.C.:  Oct. 
1994). 


   STAFF AND SKILLS
--------------------------------------------------------- Appendix 2:4

HUD has taken several definitive actions to upgrade the skills of its
staff.  It established a Training Academy and increased its capacity
to carry out "distance learning" (classroom training that links
teachers and students in different locations via video/audio
transmission).  Beginning in fiscal year 1994, HUD instituted
individual development plans for all employees.  The Secretary also
established additional priorities for upgrading HUD's training
efforts, which include developing a comprehensive needs assessment
and improving the career development program.  Both the NAPA study
and HUD's Inspector General, however, have expressed concerns about
the adequacy of the resources committed to these efforts so far. 

Given the reality of today's federal budget constraints, HUD has
attempted to address the problem of staff and resource shortages
primarily by initiatives designed to make more effective and
efficient use of existing resources.  It provided its principal staff
with a new resource management manual, which features a "tool kit" of
methods for assessing resource requirements, improving key business
processes, allocating and assigning staff, and tracking performance. 
The kit includes items such as the "business process reengineering
tool" and the "staff management and assignment resource tool." In May
1994, HUD also transmitted to the Congress what it called a
"transformation plan." Part of the plan's purpose was to clarify
HUD's mission and announce an agenda for consolidating and
streamlining programs. 

The plan established six priorities that are to guide all decisions,
including those on resource allocation and program consolidation. 
The priorities are (1) reducing homelessness, (2) revitalizing
severely distressed public housing, (3) expanding housing
opportunities, (4) opening housing markets, (5) empowering
communities, and (6) bringing excellence to HUD's management.  The
plan announced HUD's consolidation of its disparate operations into
17 program areas, which HUD recommended become the basis of its
budget beginning in fiscal year 1996.  In connection with the plan,
HUD also proposed legislation to consolidate or discontinue 59
programs and announced that 47 other programs were undergoing
intensive review in an effort to achieve further consolidation and
streamlining.  Although HUD's proposed legislation was not enacted in
1994, HUD planned to propose legislation again in 1995. 

HUD's legislative package included proposals to consolidate the
McKinney Act programs for assisting the homeless and to merge the
section 8 voucher and certificate programs.  In two separate May 1994
reports, we endorsed these ideas.  However, we cautioned that merging
the voucher and certificate programs could pose a temporary workload
burden on HUD and the local housing agencies that administer these
rent subsidies for low-income households.  We therefore cautioned
policymakers to ensure in advance that HUD has sufficient capacity to
complete the merger. 

In 1994, the Congress enacted legislation that should help FHA
address resource constraints that have impaired its ability to
prevent defaults on insured multifamily loans.  As we testified in
May 1993, the lack of funding to preserve low-income housing, as
required in then-existing law, had restricted HUD's ability to
dispose of HUD-owned multifamily properties and had limited HUD's
ability to make foreclosure and sales decisions on the basis of
housing needs and objective comparisons of costs with benefits.  As a
result, HUD had become the landlord for a huge inventory of
properties--a role that it was never intended to play or adequately
staffed to fulfill.  In April 1994, the Congress enacted the
Multifamily Housing Property Disposition Reform Act of 1994, which
provides HUD with more flexibility in disposing of multifamily
properties.  HUD believes that the new law will enable it to reduce
its multifamily inventory at savings to the taxpayer that, in turn,
will free staff to better manage its multifamily program assets and
focus on preventing defaults.  HUD is also selling a substantial
portion of the multifamily loans that have been assigned to it as a
way to further reduce the workload of field office staff. 


   INFORMATION SYSTEMS
--------------------------------------------------------- Appendix 2:5

In response to our April 1994 report, the Secretary stated that he is
committed to developing and implementing a strategic business plan
that focuses on HUD's long-term objectives and the approaches needed
to achieve its missions, goals, and objectives.  In addition, the
Secretary committed HUD to correcting its long-standing information
systems problems and to making the information resources management
program more responsive to HUD's mission. 

HUD clarified accountability by making assistant secretaries
responsible for managing the information and financial systems in
their program areas.  HUD also established a Technology Investment
Board to set priorities among systems projects and to review and
allocate the Department's information resources budget.  In November
1993, HUD published its data administration standards, which describe
HUD's policies and guidelines for establishing common data and data
standards.  The Department plans to expand the data management
program to emphasize program area responsibilities and departmentwide
management concerns. 

The Department has also taken some actions to strengthen computer
security controls and contingency plans for critical information
systems.  These actions include issuing a revised automated data
processing security program handbook, installing access control
software for one group of computer mainframe systems, working to
upgrade the access control software for the other computer mainframe
systems, and preparing a business resumption plan to provide for the
recovery and continued processing of critical systems in the event of
a major disruption or disaster. 

The Chief Financial Officer has overall responsibility for the
financial integration plan and monitors and reports project status to
the Management Committee.  According to HUD, this provides assurance
that significant problems are brought to the attention of senior
managers and are corrected in a timely manner.  During fiscal year
1994, HUD prepared detailed plans for all financial systems
integration projects and implemented the agency's accounting system
to support administrative accounting functions. 

HUD will update its plan for the transition to the new integrated
systems.  The plan will include individual project plans and will
address new roles, responsibilities, procedures, systems and
information security, and communication and coordination of overall
integration efforts. 


   HUD'S RECENT REINVENTION
   PROPOSAL
--------------------------------------------------------- Appendix 2:6

Recently, there have been discussions on changing HUD that have
ranged from major restructuring of the agency to its total
elimination.  In December 1994, the Secretary of HUD announced a
proposal calling for restructuring the agency to improve its
performance in delivering housing and community development programs. 
Under this "reinvention" proposal, programs would be consolidated,
their design and implementation would devolve to states and
localities, and HUD would assume an oversight role and serve as a
clearing house for national models.  The reinvention plan consists of
three components: 

Consolidate programs and move to performance-based funding. 
Reinvention would consolidate 60 HUD programs into three flexible,
performance-based funds--Housing Certificates for Families and
Individuals, the Affordable Housing Fund, and the Community
Opportunity Fund.  Under all three funds, the federal government
would require performance measures and accountability in return for
the devolution of substantial authority and resources to local and
state governments.  Performance would be evaluated annually. 

Transform public housing.  Operating and capital subsidies now
provided to local housing authorities would be converted to Housing
Certificates for Families and Individuals.  Housing authorities would
have to compete in the marketplace for low-income residents with
other providers of affordable housing.  In addition, HUD would
deregulate more than 3,000 of the housing authorities that were
performing well; break up the worst large, troubled housing
authorities and divest parts of their portfolios to nonprofit owners
and managers; and demolish thousands of severely deteriorated units
for which there is no market demand. 

Create an entrepreneurial government-owned FHA corporation.  The new
corporation would consolidate FHA's staff and offices under two
general insurance activities--single-family and multifamily.  The new
corporation would provide federal credit enhancement to finance
expanded homeownership opportunities and the development of
affordable rental housing.  The new corporation would rely on
public/private partnerships and market mechanisms to provide a
variety of products to meet housing credit needs.  The new
corporation would also sell the existing note portfolio where
possible. 


FURTHER ACTIONS ARE NEEDED FOR
HUD'S TRANSFORMATION
=========================================================== Appendix 3

HUD has started to correct its long-standing deficiencies by
initiating a new management strategy, a new organizational alignment,
and numerous plans.  HUD now faces the formidable challenges of
completing its plans, translating its plans into effective action,
and implementing its balanced management approach into the fabric of
its day-to-day operations.  Sustained focus, commitment, and
consistent follow-up by HUD's leadership will be needed--something
that has not accompanied HUD's past attempts at reform and was
recently reported as a concern by HUD's Inspector General. 

HUD has initiated many actions that address the four fundamental
management deficiencies that put its programs at risk.  In addition,
to further ensure that risks are reduced to acceptable levels
throughout HUD's wide spectrum of operations, HUD needs to take the
following actions: 

Complete efforts to address internal control weaknesses reported in
the financial audits of FHA and GNMA. 

Continue with the full implementation of its efforts to reorganize
and streamline HUD headquarters to support field operations and free
resources for more effective program delivery. 

Continue to work with the Office of Management and Budget and the
appropriate committees of the Congress to enact legislation to (1)
help the agency deal with staff and resource constraints through an
extensive legislative overhaul and consolidation of programs that
will give communities greater flexibility in applying for funds and
reduce administrative burdens both within HUD and among its program
users, (2) give HUD legislative authority to use more innovative
initiatives to leverage substantially more private investment in
community development and affordable housing, and (3) free GNMA from
HUD's personnel ceilings so that it can better focus on the risk
presented by the more than $400 billion worth of mortgage-backed
securities it guarantees. 

Continue to improve support of its missions by (1) strengthening
strategic business and information resources management planning and
developing linked strategic plans and (2) establishing a strategic
information architecture and departmentwide data management program. 

HUD has plans to address many of these issues, but it is much too
early to assess their effectiveness.  Because HUD's recent
reinvention proposal is still in the conceptual stage and
implementation details are not available, it is difficult to predict
how the proposal will affect the corrective actions and plans that
HUD already has under way.  The extent to which this or some other
restructuring alternative is implemented will have to be decided by
the Congress through the legislative and appropriation processes. 
The 104th Congress is examining HUD's mission, operations, and future
funding levels.  However, no matter what form HUD finally takes,
strong internal controls, an effective organizational structure, a
sufficient mix of properly skilled staff, and adequate information
and financial management systems will remain key ingredients to the
proper management and control of risks.  The debate on how best to
"reinvent" HUD presents the agency, the Office of Management and
Budget, and the Congress with an excellent opportunity to work
together to eliminate HUD's four fundamental management deficiencies. 


RELATED GAO PRODUCTS
=========================================================== Appendix 4

Housing and Urban Development:  Major Management and Budget Issues
(GAO/T-RCED-95-86, Jan.  19, 1995, and GAO/T-RCED-95-89, Jan.  24,
1995). 

Federally Assisted Housing:  Expanding HUD's Options for Dealing With
Physically Distressed Properties (GAO/T-RCED-95-38, Oct.  6, 1994). 

Federally Assisted Housing:  Condition of Some Properties Receiving
Section 8 Project-Based Assistance Is Below Housing Quality Standards
(GAO/T-RCED-94-273, July 26, 1994). 

Public Housing:  Information on Backlogged Modernization Funds
(GAO/RCED-94-217FS, July 15, 1994). 

Homelessness:  McKinney Act Programs Provide Assistance but Are Not
Designed to Be the Solution (GAO/RCED-94-37, May 31, 1994). 

Section 8 Rental Housing:  Merging Assistance Programs Has Benefits
but Raises Implementation Issues (GAO/RCED-94-85, May 27, 1994). 

Lead-Based Paint Poisoning:  Children in Section 8 Tenant-Based
Housing Are Not Adequately Protected (GAO/RCED-94-137, May 13, 1994). 

Housing and Urban Development:  Management and Budget Issues in HUD's
Fiscal Year 1995 Appropriation (GAO/T-RCED-94-206, May 12, 1994, and
GAO/T-RCED-94-218, May 12, 1994). 

HUD Information Resources:  Strategic Focus and Improved Management
Controls Needed (GAO/AIMD-94-34, Apr.  14, 1994). 

Multifamily Housing:  Status of HUD's Multifamily Loan Portfolios
(GAO/RCED-94-173FS, Apr.  12, 1994). 

Improving Government:  Actions Needed to Sustain and Enhance
Management Reforms (GAO/T-OGC-94-1, Jan.  27, 1994). 

Assisted Housing:  Evening Out the Growth of the Section 8 Program's
Funding Needs (GAO/RCED-93-54, Aug.  5, 1993). 

Government National Mortgage Association:  Greater Staffing
Flexibility Needed to Improve Management (GAO/RCED-93-100, June 30,
1993). 

Multifamily Housing:  Impediments to Disposition of Properties Owned
by the Department of Housing and Urban Development (GAO/T-RCED-93-37,
May 12, 1993). 

Letter on FHA Internal Controls to the Ranking Minority Member,
Subcommittee on Housing and Community Development, House Committee on
Banking, Finance, and Urban Affairs (B-249052, Sept.  30, 1992). 

HUD Reforms:  Progress Made Since the HUD Scandal, but Much Work
Remains (GAO/RCED-92-46, Jan.  31, 1992). 

Federal Housing Administration:  Monitoring of Single-Family
Mortgages Needs Improvement (GAO/RCED-91-11, Feb.  7, 1991). 

GAO Audits of Accounting and Financial Management Systems at the
Federal Housing Administration (GAO/T-AFMD-89-14, Sept.  13, 1989). 

Increasing the Department of Housing and Urban Development's
Effectiveness Through Improved Management (GAO/RCED-84-9, Vols.  I
and II, Jan.  10, 1984). 


1995 HIGH-RISK SERIES
=========================================================== Appendix 5

An Overview (GAO/HR-95-1)

Quick Reference Guide (GAO/HR-95-2)

Defense Contract Management (GAO/HR-95-3)

Defense Weapons Systems Acquisition (GAO/HR-95-4)

Defense Inventory Management (GAO/HR-95-5)

Internal Revenue Service Receivables (GAO/HR-95-6)

Asset Forfeiture Programs (GAO/HR-95-7)

Medicare Claims (GAO/HR-95-8)

Farm Loan Programs (GAO/HR-95-9)

Student Financial Aid (GAO/HR-95-10)

Department of Housing and Urban Development (GAO/HR-95-11)

Superfund Program Management (GAO/HR-95-12)

The entire series of 12 high-risk reports can be ordered by using the
order number GAO/HR-95-20SET. 

