Under this provision, FHA insured over $20 billion in mortgages for  87,000 homeowners who were approved for FHA mortgage insurance in  2009. Office of Management and  Budget (OMB) Circular A-129 states that delinquent tax debtors are  ineligible for federal loan insurance, such as FHA mortgage insurance,  unless they repaid the debt or were in a valid repayment agreement with  IRS, but the FTHBC was available to those who qualified regardless of  their tax debt. FHA Insured over $1.44 Billion in Mortgages for Thousands of Recovery Act Beneficiaries with Federal Tax Debt

In 2009, FHA insured over $1.44 billion in mortgages for 6,327 borrowers  who at the same time had delinquent tax debt and benefited from the  Recovery Act. As  figure 1 illustrates, our analysis included tax debtors who either benefited  from FHA’s increased loan limits or who claimed the FTHBC and received  FHA mortgage insurance of any value. We could not determine the proportion of  borrowers who were ineligible because we could not systematically  identify which of the 6,327 borrowers had valid repayment agreements at  the time of the mortgage approval using IRS’s data; however, we found  that five of our eight selected borrowers were not in valid repayment  agreements at the time they obtained FHA mortgage insurance. In  addition, FHA records indicate that borrowers with tax debt had serious  delinquency (in default for 90 days or more) and foreclosure rates two to  three times greater than borrowers without tax debt, which potentially  represents an increased risk to FHA. Shortcomings in the Capacity of FHA- Required Documentation to Identify Tax Debts and in Certain Policies Allow Tax Debtors to Obtain Mortgage Insurance

Some ineligible tax debtors received FHA mortgage insurance, in part,  due to shortcomings in the capacity of FHA-required documentation to  identify tax debts and shortcomings in other policies that lenders may  misinterpret. Lenders are required by FHA policy to perform steps to  identify an applicant’s federal debt status, but the information provided by  these steps does not reliably indicate an applicant’s tax debt. Statutory  restrictions limit the disclosure of taxpayer information without the  taxpayer’s consent. Lenders are already required to obtain such consent  through an IRS form they use to validate the income of some applicants. This same form could also be used to obtain permission from applicants  to access reliable tax-debt information directly from IRS, but doing so is  not addressed in FHA’s policies. Further, FHA’s policies requiring  lenders to investigate whether tax liens indicate unresolved tax debt are  unclear and may be misinterpreted. The lenders we spoke with believed  they were in compliance with FHA policies when they provided FHA- insured loans to applicants with tax liens, but FHA officials indicated  otherwise. As a result of these shortcomings, lenders may approve  federally insured mortgages for ineligible applicants with delinquent tax  debt in violation of federal policies. Information That FHA Requires Lenders to Collect on Mortgage Applicants Does Not Reliably Indicate the Existence of Federal Tax Debt

Consistent with OMB policies, FHA has lender policies intended to  prevent ineligible tax debtors from obtaining FHA mortgage insurance;  however, the information the agency requires lenders to collect does not  reliably indicate the existence of federal tax debt. Credit reports. Provide FHA lenders with revised policies or additional guidance on  borrower ineligibility due to delinquent federal debts and tax liens to  more clearly distinguish requirements for lenders to investigate any  indication that an applicant has federal tax debt (such as a federal tax  lien) to provide reasonable assurance that ineligible borrowers do not  receive FHA mortgage insurance. Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine: (1) the extent to which tax debtors  benefited from the Recovery Act’s provisions for increased Federal  Housing Administration (FHA) loan limits and the First-Time Homebuyer  Credit (FTHBC); and (2) what challenges, if any, FHA faces in preventing  ineligible tax debtors from receiving mortgage insurance. We also obtained and analyzed tax debt data from the Internal Revenue  Service (IRS) as of June 30, 2010. FHA officials agreed with  this methodology. All of our cases were selected to illustrate the sizeable  amounts of taxes owed by some individuals who benefitted from the  Recovery Act.
Why GAO Did This Study

Under a Recovery Act provision that increased mortgage insurance loan limits, FHA insured $20 billion in mortgages for 87,000 homeowners. The Recovery Act also provided for the awarding of an estimated $12 billion of FTHBCs to 1.7 million individuals. GAO was asked to determine the (1) extent to which tax debtors benefited from the Recovery Acts provisions for increased FHA loan limits and the FTHBC, and (2) challenges, if any, FHA faces in preventing ineligible tax debtors from receiving mortgage insurance. Using IRS and FHA data, GAO identified Recovery Act recipients and compared them to federal tax debtors as of June 30, 2010. GAO reviewed relevant policies and interviewed agency officials and lenders. GAO also reviewed detailed IRS and FHA documents for a nonrepresentative selection of 18 individuals who received FHA mortgage insurance. These were selected based on a combination of factors, such as amount of taxes owed and number of delinquent tax periods. Due to data availability and other factors, GAO was able to completely evaluate only 8 of 18 individuals on their eligibility for FHA mortgage insurance. These cases cannot be generalized beyond those presented.

What GAO Found

The Federal Housing Administration (FHA) insured over $1.44 billion in mortgages for 6,327 borrowers with $77.6 million in federal tax debt who benefited from the 2009 American Recovery and Reinvestment Act. Of these borrowers, 3,815 individuals claimed and received $27.4 million in Recovery Act First-Time Homebuyer Credits (FTHBC). This analysis includes tax debtors who (1) benefited from FHAs increased loan limits, or (2) claimed the FTHBCs and received FHA mortgage insurance of any value. Federal policy makes delinquent tax debtors ineligible for FHA mortgage insurance unless they repay their debt or are in a valid repayment agreement with the Internal Revenue Service (IRS), but the FTHBC, like all tax credits, was available to those who qualified, regardless of their tax debt. GAO could not determine the proportion of borrowers who were ineligible for FHA insurance because GAO could not systematically identify which of the 6,327 borrowers were in valid repayment agreements using the data GAO received from IRS. However, GAO did find that 5 of the 8 borrowers completely evaluated were ineligible because they were not in valid repayment agreements at the time they obtained FHA mortgage insurance. In addition, GAO found that Recovery Act borrowers with unpaid taxes had foreclosure rates two to three times greater than borrowers without unpaid taxes, which potentially represents an increased risk to FHA.
Some ineligible tax debtors received FHA mortgage insurance, in part, due to shortcomings in the capacity of FHA-required documentation to identify tax debts, and shortcomings in other policies that lenders may misinterpret. Lenders must perform steps to identify an applicants federal debt status, but sources commonly used, such as the loan application and credit report, do not reliably indicate an applicants tax debt. Statutory restrictions generally prohibit the disclosure of taxpayer information, such as tax debt, without the taxpayers consent. Lenders are already required to obtain such consent through an IRS form they use to validate the income of some applicants. This same form could also be used to obtain permission from applicants to obtain reliable tax-debt information directly from IRS, but doing so is not addressed in FHA policies. Requiring lenders to collect more reliable information on tax debts could better prevent ineligible tax debtors from obtaining FHA mortgage insurance. Further, FHAs policies requiring lenders to investigate whether tax liens indicate unresolved tax debt are unclear and may be misinterpreted. The lenders GAO spoke with believed they were in compliance with FHAs policies when they provided FHA-insured loans to applicants with tax liens and no repayment agreements, but FHA officials indicated otherwise. As a result of these shortcomings, lenders may approve federally insured mortgages for ineligible applicants with delinquent tax debt in violation of federal policies.

What GAO Recommends

HUD should (1) consult with IRS to require lenders to collect more reliable tax debt information from applicants and (2) provide lenders with revised policies or guidance, including the consideration of tax liens, for approving FHA mortgage insurance. HUD agreed with the recommendations.