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Cover
================================================================ COVER

High-Risk Series

February 1997

DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT

GAO/HR-97-12

HUD

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

  HUDCAPS -
  CAPS -
  PIH -
  TRACS -
  IDIS -
  FHAMIS -
  CFO - Chief Financial Officer
  CPD - Community Planning and Development
  FHA - Federal Housing Administration
  FMFIA - Federal Managers' Financial Integrity Act
  GAO - General Accounting Office
  GNMA - Government National Mortgage Association
  HUD - Department of Housing and Urban Development
  IRM - information resource management
  OMB - Office of Management and Budget
  REAM - Real Estate Asset Manager

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

February 1997

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 its work identified as
high risk because of vulnerabilities to waste, fraud, abuse, and
mismanagement.  This effort, which was supported by the Senate
Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight, brought a much-needed focus on
problems that were costing the government billions of dollars. 

In December 1992, GAO issued a series of reports on the fundamental
causes of problems in high-risk areas, and in a second series in
February 1995, it reported on the status of efforts to improve those
areas.  This, GAO's third series of reports, provides the current
status of designated high-risk areas. 

This report addresses the Department of Housing and Urban Development
(HUD), which we designated as a high-risk area in January 1994.  The
report discusses the corrective actions that HUD has taken or
initiated since our February 1995 report (GAO/HR-95-11) and further
actions that are needed.  HUD's Secretary and top management team
have continued to give high priority to correcting the deficiencies
that led to our high-risk designation.  They and other HUD directors
and staff have made substantial efforts over the past 2 years in
continuing to plan and starting to implement significant changes in
the way the Department is managed.  Our recent survey of key program
directors in HUD field offices and our recent work involving specific
HUD programs and management initiatives indicate that some of the
actions that HUD has implemented thus far are having a positive
effect. 

While HUD has formulated approaches and initiated actions to address
its Department-wide deficiencies, its efforts are far from reaching
fruition, and HUD's programs continue to pose a high risk to the
government in terms of their vulnerability to waste, fraud, abuse,
and mismanagement.  To reduce the risks associated with the agency's
wide spectrum of operations, we believe that HUD can and should take
several actions, including taking additional steps to eliminate major
internal control weaknesses, completing its plans for major
improvements to its automated information systems, completing its
current plans for reorganizing field and headquarters offices, and
completing its efforts to assess the skills of its staff members and
develop appropriate training to address the skills needed for new job
responsibilities.  The Congress has an opportunity to help HUD
successfully eliminate the deficiencies that make it a high-risk area
by working with the Department on various proposals for restructuring
the agency and consolidating, reducing, and/or reengineering many of
its major programs. 

Copies of this report series are being sent to the President, the
congressional leadership, all other Members of the Congress, the
Director of the Office of Management and Budget, and the heads of
major departments and agencies. 

James F.  Hinchman
Acting Comptroller General
of the United States

OVERVIEW
============================================================ Chapter 0

Since our 1995 high-risk report, the Department of Housing and Urban
Development (HUD) has made some progress in overhauling its
operations to correct the management deficiencies that led us to
designate HUD as a high-risk area.  However, many corrective actions
are far from complete and problems continue. 

HUD is the principal federal department responsible for programs
dealing with housing, community development, and fair housing
opportunities.  Its missions range from making housing affordable by
insuring loans for multifamily rental housing properties and
providing rental assistance for about 4.5 million lower-income
residents, to helping revitalize over 4,000 localities through
community development programs, to encouraging homeownership by
providing mortgage insurance to about 7 million homeowners who might
not have been able to qualify for conventional loans.  According to
an analysis performed by the HUD Office of Inspector General in
December 1994, HUD was responsible for 240 programs/activities.  HUD
is one of the nation's largest financial institutions, with
significant commitments, obligations, and exposure.  It is
responsible for managing more than $400 billion worth of insured
mortgages, $485 billion in outstanding mortgage-backed securities,
and about $180 billion in prior years' budget authority for which it
has future financial commitments. 

   THE PROBLEM
---------------------------------------------------------- Chapter 0:1

We designated HUD as a high-risk area in 1994 because of four
long-standing, Department-wide management deficiencies that make the
agency vulnerable to waste, fraud, abuse, and mismanagement.  First,
internal control weaknesses, such as a lack of necessary data and
management processes, were a major factor leading to the HUD scandals
of 1989.  Second, poorly integrated, ineffective, and generally
unreliable information and financial management systems failed to
meet program managers' needs and weakened their ability to provide
management control over housing and community development programs. 
Third, HUD had organizational problems, such as overlapping and
ill-defined responsibilities and authorities between HUD headquarters
and field organizations and a fundamental lack of management
accountability and responsibility.  Finally, an insufficient mix of
staff with the proper skills hampered the effective monitoring and
oversight of HUD's programs and the timely updating of procedures. 

   PROGRESS
---------------------------------------------------------- Chapter 0:2

While HUD has formulated approaches and initiated actions to address
the four Department-wide management deficiencies, HUD's planned
actions are far from complete.  In the area of internal controls, HUD
has made limited progress, but major problems persist.  In 1995, HUD
fully implemented its new management planning and control program,
which is intended to identify and rank the major risks in each
program and to devise strategies to abate those risks.  Furthermore,
at the end of fiscal year 1995, HUD reported that it had only 9
material internal control weaknesses--down from over 51 in the early
1990s.  HUD's Office of Inspector General, however, has questioned
the (1) effectiveness of the Department's management control program
in identifying material weaknesses and assessing front-end risks and
(2) the Department's process for closing out three of eight material
weaknesses during fiscal year 1995.  Also, while the Department has
greatly reduced its total number of material weaknesses, those
remaining are significant and long-standing, and over the past 2
years, auditors have been unable to render opinions on HUD's
financial statements because of weaknesses involving internal
controls and financial systems.  According to HUD officials, as of
December 1996, four material weaknesses had final actions completed
pending verification reviews.  Finally, despite its importance as a
management control tool, HUD's monitoring of program participants
continues to be a problem area. 

HUD continues to make progress in improving its information and
financial management systems, but much work remains.  It has moved
beyond the planning phase, and portions of major new systems are
becoming operational.  Despite these efforts, some of the projects
that involve major improvements to HUD's financial and information
management systems will not be completed before the year 2000. 
Furthermore, HUD still has 93 systems that do not comply with the
Federal Managers' Financial Integrity Act (FMFIA) and therefore
cannot be relied upon to provide timely, accurate, and reliable
information and reports to management.  According to HUD officials,
many of these systems will be replaced or enhanced as part of HUD's
plan to integrate its financial systems.  HUD's efforts to improve
its systems have been hampered by problems with systems development,
funding constraints, and data conversion problems. 

To improve organizational structure, the Department completed a field
reorganization that eliminated its regional office structure and
transferred direct authority for staff and resources to the Assistant
Secretaries and plans additional reorganization efforts.  Although
HUD has not evaluated the effects of this reorganization, most field
directors we surveyed rated it successful overall and believed that
the reorganization had achieved most of HUD's intended goals--namely,
eliminating previously confused lines of authority within programs,
enhancing communications, reducing levels of review and approval, and
improving customer service.\1 HUD, however, realized that the
reorganization had, to some extent, impaired communications across
program lines at field offices and is taking actions it believes will
alleviate the situation.  HUD still plans additional efforts to
empower field office personnel and to streamline headquarters and
reduce HUD's total staff by 29 percent (from about 10,500 to 7,500)
by the year 2000. 

HUD has made some progress in addressing the problems with staff
members' skills and with resource management.  The Department has
increased staff training since our 1995 report.  Also, HUD has begun
to implement a needs assessment process to plan future training. 
Although HUD has just begun to evaluate the effectiveness of its
stepped-up training efforts, the directors we surveyed generally
believed that the skills of their staff have improved over the past 2
years.  However, 40 percent of these directors rated the Department's
current training as less than good.  The directors also said that
more training is needed in the use of information systems,
implementation of program regulations, HUD-related technical skills,
and interpersonal skills.  Moreover, we and HUD's Office of Inspector
General have continued to identify staff resource problems in HUD's
major program areas, specifically in public housing and at the
Department's Federal Housing Administration (FHA). 

Since our 1995 report, HUD has also continued efforts to restructure
and consolidate its current wide array of programs--an outcome we
believe is important to reducing HUD's risks to an acceptable level. 
These efforts will take on added importance over the next few years
when coupled with the continued downsizing of HUD headquarters and
field office staffs.  The HUD Inspector General, in a March 1996
report, pointed out that staff reductions and redeployments have
resulted in many critical program functions not being adequately
performed and continuing imbalances in staffing-to-workload ratios
from office to office.  In our telephone survey, 77 percent of the
directors pointed out that they had fewer staff than needed.  The
problems of inadequate staff resources to monitor and administer
HUD's current array of programs likely will be compounded as the
Department implements its downsizing plans over the next 4 years,
unless actions are taken to consolidate, reduce, and/or reengineer
HUD's existing programs. 

HUD has updated its "Reinvention Blueprint," now known as "Blueprint
II," which also includes a major proposal to "reengineer" its
portfolio of multifamily rental properties with both FHA mortgage
insurance and Section 8 project-based rental subsidies.  In addition
to HUD's reinvention and reengineering proposals, others have made a
wide range of proposals, including to completely dismantle HUD. 
Although limited improvements to HUD's existing program structure
have been made, no substantial changes to program-authorizing
legislation have been enacted. 

--------------------
\1 HUD:  Field Directors' Views on Recent Management Initiatives
(GAO/RCED-97-34, Feb.  12, 1997).  The survey, conducted during
August 1996, obtained opinions on HUD's progress in correcting its
four Department-wide management deficiencies.  We surveyed 155
persons serving as Directors of Single-Family Housing, Directors of
Multifamily Housing, Directors of Community Planning and Development
(CPD), and Directors of Public Housing in the 40 largest HUD field
offices in terms of staff.  Included in the total are Directors of
Housing, who are located in only 14 of the 40 field offices. 

   FURTHER ACTION NEEDED
---------------------------------------------------------- Chapter 0:3

HUD's programs will continue to remain highly vulnerable to fraud,
waste, abuse, and mismanagement until the agency completes more of
its planned corrective actions and until the administration and the
Congress reach closure on a strategy to either consolidate, reduce,
and/or reengineer HUD's programs to bring the Department's management
responsibilities in line with its capacity. 

Although HUD may not have total authority to eliminate its
fundamental deficiencies, the Department should (1) take steps to
eliminate major internal control weaknesses, fully implementing its
management control program and ensuring the proper balance between
program delivery and program monitoring; (2) complete the efforts to
integrate its major information and financial management systems and
continue to take actions to meet the requirements of FMFIA; (3)
complete its current plans for reorganizing headquarters and field
offices, including redeploying staff and consolidating program
activities and similar functions; and (4) complete its efforts to
assess the skills of its staff, develop appropriate training to meet
the need for certain skills, and increase the number of staff
receiving training. 

In our view, the Congress now has an excellent opportunity to help
HUD to eliminate its high-risk designation and to align the agency's
management responsibilities and capacity by authorizing a major
restructuring strategy that focuses HUD's mission and significantly
consolidates, reduces, and/or reengineers its many separate program
activities.  HUD and others have proposed various reforms, but thus
far substantial permanent reforms have not been enacted.  What is
needed now is for the administration and the Congress to agree on the
future direction of federal housing and community development policy
and put in place the organizational and program delivery structures
that are best suited to carry out that policy. 

BACKGROUND
============================================================ Chapter 1

The diversity of HUD's missions has resulted in a Department that is
intricately woven into the nation's financial and social framework
and that interacts with a number of diverse constituencies, such as
public housing authorities, private property owners, and nonprofit
groups.  HUD also spends a significant amount of tax dollars in
carrying out its missions.  The discretionary budget outlays for
HUD's programs were estimated at close to $31.8 billion in fiscal
year 1995, over three-fourths of which were spent on public and
assisted housing programs.  In addition, HUD is one of the nation's
largest financial institutions, with significant commitments,
obligations, and exposure.  It is responsible for managing more than
$400 billion worth of insured mortgages, $485 billion in outstanding
mortgage-backed securities,\2 and about $180 billion in prior years'
budget authority for which it has future financial commitments. 

Our February 1995 report discussed the four long-standing,
Department-wide management deficiencies that first led us to
designate HUD as a high-risk area in January 1994.  We reported that: 

1.  Internal controls were weak.  This was a major factor leading to
the 1989 HUD "scandals" and their highly publicized incidents of
waste, fraud, abuse, and mismanagement.  Financial audits required by
the Chief Financial Officers Act of 1990 found that material internal
control weaknesses continued during fiscal year 1993 in HUD programs
that insure, back, or provide lender capital for billions of dollars
in home and multifamily rental housing mortgages.  These material
weaknesses included problems such as lack of staff and administrative
resources for managing troubled assets, inadequate emphasis on
providing early warning of and preventing loss through defaults,
inadequate and unreliable automated management information systems,
and inadequate monitoring of contractors.  In December 1993, HUD
identified its entire management control system as a material
weakness under FMFIA. 

2.  Information and financial management systems were inadequate. 
These systems were poorly integrated, ineffective, and generally
unreliable.  They neither satisfied management's needs nor provided
adequate control over HUD's housing and community development
programs.  These problems occurred because historically HUD's
information resources had not been planned or managed to meet the
Department's missions and strategic objectives.  HUD also lacked (a)
a standard framework (architecture) to govern the management and use
of information and information resources, (b) a data management
program, (c) adequate security controls for its computer systems, and
(d) contingency plans for the recovery and continued processing of
critical systems in the event of a major disruption or disaster. 

3.  HUD's organizational structure was ineffective.  Organizational
problems included overlapping and ill-defined responsibilities and
authorities in HUD headquarters, regional offices, and field offices;
disagreement on program priorities; and poor communication of policy
updates and management directives.  A fundamental problem was the
lack of management accountability and responsibility caused by the
Assistant Secretaries' lack of direct line authority over the field
office staff who implemented their programs. 

4.  HUD had an insufficient mix of staff with the proper skills.  The
number and qualifications of staff had proven inadequate to perform
essential functions, such as effectively monitoring programs and
updating procedures.  For example, inadequate staff and resources had
hampered the performance of fundamental FHA activities, such as
monitoring insured mortgage loans, servicing HUD-held mortgages, and
managing foreclosed properties.  Concluding that its methods of
utilizing resources and formulating needs were inadequate, HUD
designated resource management Department-wide as an FMFIA high-risk
area in fiscal year 1993. 

This report describes HUD's progress, since our February 1995
high-risk series, toward correcting its four Department-wide
management deficiencies by (1) updating the status of the plans,
proposals, and actions included in our last report; (2) describing
the major new initiatives that HUD has begun or proposed since our
last report; and (3) providing indications of the effectiveness of
the actions HUD has implemented thus far through the perceptions of
key program directors and examples from our recent work involving
specific HUD programs and management initiatives.  The report also
discusses our reasons for continuing HUD's high-risk designation and
further corrective actions that we believe are needed in order for us
to remove that designation. 

--------------------
\2 Mortgage-backed securities are those insured or guaranteed by FHA,
the Rural Housing Service, or the Department of Veterans Affairs. 

HUD'S PROGRESS TOWARD CORRECTING
THE FOUR DEPARTMENT-WIDE
MANAGEMENT DEFICIENCIES
============================================================ Chapter 2

HUD directors and staff have continued to give high priority to
correcting the deficiencies that led to our high-risk designation. 
Since our last report, the Department has completed some planned
actions, continued to work toward implementing others, and formulated
some new initiatives.  However, many corrective actions are far from
reaching fruition and problems continue. 

   INTERNAL CONTROLS
---------------------------------------------------------- Chapter 2:1

A strong internal control system provides the framework for the
accomplishment of management objectives, accurate financial
reporting, and compliance with laws and regulations.  Effective
internal controls serve as checks and balances against undesired
actions, thereby providing reasonable assurance that resources are
effectively managed and accounted for.  The lack of good internal
controls puts an entity at risk of mismanagement, waste, fraud, and
abuse. 

In February 1995, we reported that HUD was in the process of
implementing a management planning and control program as part of its
strategic performance system.  Each of HUD's major program areas was
to develop annual plans that contained management control elements
which identified and ranked the risks in each program and then
described how the risks would be abated.  We also reported that
actions were being taken on the internal control weaknesses
identified in independent audits of FHA's and the Government National
Mortgage Association's (GNMA) financial statements but that all
actions were not complete and that all of the weaknesses had not been
eliminated.  The following subsections update and assess HUD's
subsequent actions to address weak internal controls. 

      QUESTIONS ABOUT THE
      EFFECTIVENESS OF HUD'S
      ACTIONS TO REDUCE INTERNAL
      CONTROL WEAKNESSES
-------------------------------------------------------- Chapter 2:1.1

Management control programs for federal agencies are mandated by
FMFIA and by supplemental requirements from the Office of Management
and Budget (OMB).  Each year, the federal Departments are to report
whether their management control systems provide reasonable assurance
that the requirements of FMFIA are being met, any new material
weaknesses and nonconformance, and any corrective actions taken on
previously existing material weaknesses.  An agency's internal
accounting and administrative controls generally should provide
reasonable assurance that obligations and costs are in compliance
with applicable laws; that funds, property, and assets are adequately
safeguarded; and that revenues and expenditures are properly and
reliably accounted for and reported.  FMFIA also requires that
accounting systems conform to the accounting principles and standards
mandated by the Comptroller General of the United States. 

In July 1994, HUD began implementing its new management planning and
control program.  According to a memorandum prepared by HUD's Chief
Financial Officer (CFO) on the design of the new program, the process
should be based on front-end risk assessments of new and
substantially revised programs and ongoing monitoring of existing
programs.\3 Fiscal year 1995 was HUD's first full year of
implementing its strategic performance system, which includes the
management planning and control program.  In its March 1996 report to
the Congress and the President on compliance with FMFIA, HUD stated
that improved financial management, coupled with strategic program
planning and performance, had enabled the Department to report no new
material weaknesses for fiscal year 1995.\4 The report also stated
that on the basis of the substantial improvements that management had
made during fiscal year 1995 and the progress achieved in reducing
the number of material weaknesses and correcting material
nonconformance, HUD could provide reasonable assurance that the
objectives of FMFIA for management controls and financial systems
were being met, with the exception of the material weaknesses and
nonconformance specifically outlined in the report. 

In August 1996, HUD's Office of Inspector General reported that it
disagreed with the Department's statement on compliance with FMFIA's
requirements.  The Office disagreed because it believed that the
Department had failed to consider (1) the magnitude of the problems
acknowledged in its own FMFIA report and (2) additional material
weaknesses pertaining to (a) inadequate verification of rental
assistance payments, (b) the need to improve efforts to monitor
public housing authorities, and (c) its inability to properly
reconcile HUD's Fund Balance account with the Department of the
Treasury.\5 In addition, the Inspector General's report stated that
weaknesses existed in the management planning and control program
because HUD's major program areas were not performing front-end risk
assessments on new or substantially modified programs, as required. 

Also, of the eight material weaknesses reported closed by HUD during
fiscal year 1995, the Inspector General found that three material
weaknesses had been closed without following HUD's policy and the
intent of OMB's Circular A-123.\6 Although the circular does not
mandate that a verification review be performed before closing a
material weakness, these sources call for a determination that
sufficient corrective actions have been taken and that the desired
results have been achieved before a material weakness can be
considered corrected.  From fiscal year 1993 through fiscal year
1995, HUD's verification reviews have been performed by the Inspector
General or an independent contractor to determine if the actions have
been implemented and the weakness abated.  CFO officials told us that
they had waived the formal verification reviews in two instances on
the basis of the certification and documentation provided by program
management that the problems were corrected and no longer material
and in one instance because the program was targeted for future
consolidation or elimination.  Also, three other weaknesses that HUD
reported as closed were simply merged into other larger, open
material weaknesses because of an overlap of remaining corrective
actions for two or more weaknesses. 

To determine the prevalence of closing weaknesses without a
verification review or by merging them into other open weaknesses, we
examined HUD's stated procedures for closing material weaknesses in
fiscal years 1992 through 1995 and found that, except in the three
cases cited above, either the Inspector General or a contractor had
performed verification reviews before closing material weaknesses. 
Also, we found that two weaknesses reported closed in fiscal year
1992 and four weaknesses reported closed in fiscal year 1993 were
merged into other open weaknesses. 

We are also concerned about the effectiveness of the management
planning and control program in assessing risks and developing the
abatement strategies to reduce them.  We noted in our review of the
management plans prepared by single-family and multifamily housing,
public and Indian housing, and CPD for fiscal years 1995 and 1996
that (1) the only risks identified in the management control section
of each of the management plans were previously identified material
weaknesses and (2) the abatement actions were those outlined in HUD's
report on compliance with FMFIA.  We noted that HUD has not
identified a new material weakness since its FMFIA report on fiscal
year 1993 activities.  According to an August 1996 OMB memorandum,
failure to identify any new material weaknesses over the span of
several years is reason to question a Department's assessment
efforts.  According to CFO officials, the Department will be adding
several new material weaknesses for fiscal year 1996 within its FMFIA
certification. 

While acknowledging that the risks identified in the management
control sections of the plans were previously identified material
weaknesses, CFO officials noted that some of the program performance
priorities and the strategies to reach the goals would reduce the
Department's risks.  Officials noted that in developing instructions
for the fiscal year 1997 management plans, they hoped to provide a
better link between the management plans, goals, and priorities and
the management control elements associated with the risks in the
programs. 

Officials from HUD's Office of Housing-FHA Comptroller's Office and
the Office of Public and Indian Housing told us that they rely
primarily on financial audits and other audits by HUD's Inspector
General to identify new material weaknesses.  We believe, however,
that the best qualified individuals to fulfill the requirements of
FMFIA to identify existing or potential problems with the agency's
programs are the federal directors of these programs.  As of the end
of September 1996, the Office of Housing had performed two front-end
risk assessments.  One assessment, dated October 18, 1995, was a
limited review of the impact of Housing's reorganization on internal
controls and corrective actions; the other, dated March 7, 1996,
assessed HUD's hospital risk-sharing program, which provides mortgage
and loan insurance for nonprofit and public hospitals.  According to
HUD officials, Housing expects to complete front-end risk assessments
for three additional programs during fiscal year 1997.  According to
Office of Public and Indian Housing officials, that office has not
yet had any new or substantially revised programs requiring front-end
risk assessments.  In September 1996, the Deputy Secretary issued a
memorandum to program managers giving the CFO authority to delay
program implementation when front-end risk assessments were not
performed in accordance with established guidelines. 

HUD's total number of open material weaknesses has decreased from 51
in fiscal year 1991 to 9 reported in the fiscal year 1995 FMFIA
report.  HUD also stated in the 1995 report that it considers itself
to be in compliance with FMFIA but recognizes that it still faces
serious problems, as identified by the remaining nine material
weaknesses.  Although HUD has reduced the total number of material
weaknesses, those remaining are long-standing and involve large sums
of money, and progress to abate them has been slow.  The remaining
open material weaknesses, as of the end of September 1996, are the
(1) management and control of staff resources, (2) Section 8 subsidy
payment process, (3) community development block grant entitlements,
(4) Section 236 excess rental income, (5) Section 235 accounting
system, (6) single-family housing resources and asset management, (7)
multifamily housing resources and asset management strategy, (8)
Section 8 bond refunding program, and (9) title II prepayment and
preservation program.\7

These material weaknesses, which were first identified in fiscal
years 1983 through 1993, involve key HUD programs and billions of
dollars.  For example, material weaknesses affect more than $18
billion in the subsidy funds that HUD disburses annually, primarily
through its Section 8 and Section 236 programs. 

Legislation enacted in January 1996 eliminated a program that OMB had
designated as a high-risk area.  OMB had considered FHA's mortgage
assignment program--a program designed to help borrowers in
default--to be a high-risk area because the program's controls did
not protect the financial interests and resources of the government. 
In October 1995, we issued a report raising concerns about the
program, concluding that it had mixed results and high costs.\8 As a
result, the legislation eliminated the program and provided HUD with
the authority to assist borrowers in default by other means. 

--------------------
\3 Front-end risk assessments of new and revised programs are
designed to define the control environment, identify control risks,
describe the systems needing additional controls, and document the
actions required to reduce control risks. 

\4 Report on Compliance With the Federal Managers' Financial
Integrity Act for Fiscal Year 1995, HUD (Washington, D.C.:  Mar. 
1996). 

\5 U.S.  Department of Housing and Urban Development Report on Fiscal
Year 1995 Financial Statements, Office of Audit, HUD, Office of
Inspector General (96-FO-177-0003, Aug.  16, 1996). 

\6 In response, HUD's CFO stated that HUD had complied with the
guidelines pursuant to FMFIA; the contention that the Department
closed material weaknesses without appropriate documentation was
erroneous. 

\7 According to HUD officials, as of December 1996, four of these
material weaknesses--the Section 236 excess rental income, Section
235 accounting system, community development block grant
entitlements, and title II prepayment and preservation program-- have
final actions completed and have effectively resolved the material
weaknesses with verification reviews pending.  The Section 8 program
provides tenant-based and project-based rental assistance; the
Section 236 program is a rental housing assistance program; and the
Section 235 program is a homeownership assistance program. 

\8 Homeownership:  Mixed Results and High Costs Raise Concerns About
HUD's Mortgage Assignment Program (GAO/RCED-96-2, Oct.  18, 1995). 

      FINANCIAL AUDITS CONTINUE TO
      IDENTIFY INTERNAL CONTROL
      WEAKNESSES
-------------------------------------------------------- Chapter 2:1.2

The Chief Financial Officers Act of 1990 required HUD and some other
agencies to report annually to the Congress through OMB on their
financial status and any other information needed to fairly present
the agencies' financial position and results of operations.  To meet
this requirement, either contracted public accounting firms or HUD's
Office of Inspector General conducts annual financial audits of
FHA's, GNMA's, and HUD's consolidated financial statements.  These
audits continue to identify material internal control weaknesses in
FHA and other HUD programs.  However, the fiscal year 1995 financial
audit of GNMA found no remaining internal control material
weaknesses. 

The public accounting firm KPMG Peat Marwick LLP, in conducting the
audit of FHA's financial statements for fiscal year 1995, found the
statements were presented fairly, in all material aspects, in
accordance with generally accepted accounting principles.  However,
the audit found continued material weaknesses in FHA's internal
controls.\9 The weaknesses reported included the lack of staff and
administrative resources for such tasks as performing loss mitigation
functions, managing troubled assets, and implementing new automated
systems; inadequate emphasis on providing early warning of, and
preventing loss through, defaults; the need to quickly resolve
HUD-held multifamily and single-family mortgage notes so that
additional resources are available for monitoring; and the need to
continue improving the accounting and financial management systems. 
The report added that given the complexity of the issues,
implementing sufficient changes to mitigate the internal control
weaknesses noted is a multiyear effort. 

In August 1996, the Inspector General reported that it was not able
to express an opinion on the reliability of HUD's consolidated
financial statements covering fiscal year 1995.  The Inspector
General's reasons for not expressing an opinion were that material
weaknesses prevent HUD from ensuring that federally subsidized
housing units, for which more than $18 billion in funds are
disbursed, are occupied by eligible families and that those families
living in such units are paying the correct rents and, as a result,
that the expenditures reported in the financial statements for these
programs are fairly stated in all material respects or that
expenditures comply, in all material respects, with applicable laws
and regulations.  CFO officials said that only a portion of the $18
billion in disbursements represents "excess subsidies." The officials
said that the Department has initiated efforts to estimate the amount
of excess subsidies for the fiscal year 1996 consolidated audit. 
This work, expected to be completed in February 1997, is being
performed on a statistical sample of tenants from a database of the
Department's assisted housing tenants. 

Another reason that the Inspector General did not express an opinion
on the financial statements was that HUD has not been able to
reconcile a net difference of $190 million between its fund balance
and the Treasury account.  In December 1996, CFO officials provided
us with documentation that shows that the difference between HUD's
records and the Treasury has been subsequently reduced to about
$35,000.  HUD's Office of Inspector General told us that it could not
verify the difference, but that $35,000 was approximately correct. 

The report also identified the need to improve the monitoring of
public housing authorities and multifamily projects as a material
internal control weakness for fiscal year 1995.\10 The Inspector
General's report stated that to improve its internal control
environment, HUD, among other things, needs to upgrade financial
systems and improve resource management.\11

Weak controls continue to subject HUD to the risk of waste, fraud,
abuse, and mismanagement.  Often, these are discovered during audits
or investigations, rather than being discovered from the routine
operations of management controls in place.  For example: 

  -- A March 1996 Inspector General report stated that the lack of
     effective controls over software maintenance left HUD unable to
     (1) make informed decisions on replacing systems, (2) control
     the quality of software changes because the necessary data are
     not collected, and (3) hold contractors accountable for the
     quality and cost of their services performed because standards
     have not been developed.\12

  -- The Office of Inspector General during fiscal year 1996 found
     cases of potential fraud or mismanagement in multifamily housing
     that included the following:  (1) the general partner of a
     multifamily housing project made over $4 million in loans to his
     affiliated company without HUD's authorization between January
     1994 and December 1995 and (2) contrary to a Regulatory
     Agreement, the agent/owners of another group of properties
     withdrew funds totaling over $1.1 million in excess of surplus
     cash, thus contributing to the default of one project and
     reducing the amount of operating cash for other projects. 

  -- Between October 1, 1994, and March 31, 1996, 1,360 recipients of
     HUD funds were indicted on criminal charges; 412 were convicted
     and given prison sentences totaling 752 years and probation or
     suspended sentences totaling 335 years.  Much of the information
     that led to these penalties was uncovered by Operation Safe
     Home, a federal law enforcement task force that includes HUD's
     Office of Inspector General. 

--------------------
\9 Federal Housing Administration, Audit of Fiscal Year 1995
Financial Statements, prepared by KPMG Peat Marwick LLP for the
Office of Inspector General (June 7, 1996). 

\10 In response, HUD's CFO said that he did not believe that the
deficiencies cited in the Inspector General's report provided a
sufficient basis to prevent the Inspector General from expressing an
opinion on HUD's financial statements. 

\11 The independent audit firm of Price Waterhouse reported that it
was unable to express an opinion on HUD's consolidated financial
statements covering the previous fiscal year due to many of the same
problems.  See Audit of the U.S.  Department of Housing and Urban
Development Fiscal Year 1994 Financial Statements Price Waterhouse
(95-FO-177-0004, Aug.  28, 1995). 

\12 Controls Over Software Maintenance Must Be Significantly
Strengthened, HUD, Office of Inspector General (96-DP-166-0001, Mar. 
5, 1996). 

      DIRECTORS' VIEWS ON INTERNAL
      CONTROLS
-------------------------------------------------------- Chapter 2:1.3

Although, a majority of the HUD field program directors we surveyed
believed that internal controls generally were good, a significant
percentage of them viewed the adequacy of internal controls on
various activities as fair or poor.  For example, directors rated
internal controls as fair or poor in protecting resources from fraud
(38 percent), ensuring that resources were used efficiently and
effectively (31 percent), ensuring compliance with laws and
regulations (44 percent), and ensuring that reported data are
reliable (50 percent).  About 78 percent of the directors believed
that HUD headquarters has put a medium or high emphasis on reducing
the risks of fraud and abuse, but they were split concerning the
amount of emphasis needed.  About 56 percent of the directors thought
that the amount of emphasis was correct, and about 44 percent thought
that it should be greater. 

      MONITORING OF EXISTING
      PROGRAMS
-------------------------------------------------------- Chapter 2:1.4

Despite its importance as a management control tool, monitoring
continues to be a problem area for HUD.  The Department Management
Control Program Handbook recognizes that monitoring program
participants, either by on-site audit activities or remote
monitoring, is a critical management control.  In addition, a
memorandum from HUD's CFO about HUD's efforts to design a new
management planning and control program stated that controls over
existing programs would be based upon monitoring.  However, financial
audits, our recent survey of HUD's field program directors, and our
recent case study work at HUD's Massachusetts and St.  Louis offices
showed that adequate monitoring is not being carried out.  A lack of
staff resources, travel funds, and headquarters emphasis were cited
by many of the field office directors we surveyed as reasons why
monitoring is not being carried out.  The following three examples
from these various sources illustrate the monitoring deficiencies. 
We also found that a lack of monitoring was a problem in HUD's CPD
programs. 

  -- We and HUD's Inspector General found problems with field offices
     conducting the required annual physical inspections of
     multifamily properties identified as troubled or potentially
     troubled projects.  We found that the St.  Louis office had not
     inspected 20 of 44 troubled projects and 7 of 30 potentially
     troubled projects during the year preceding our case study work. 
     Fifteen of these projects had not been inspected for at least 2
     years.  On the other hand, all nine projects that we looked at
     in the Massachusetts State Office had been inspected in 1995 or
     1996, and the average time between the most current inspection
     and the previous one was about 14 months.  HUD's Inspector
     General found that the required annual physical inspections were
     made for only 98 of 176 projects during fiscal year 1995 and
     that only 63 received a follow-up on identified deficiencies. 

  -- Monitoring the performance of contracted Real Estate Asset
     Managers (REAM)\13 has also been a problem.  At the
     Massachusetts State Office, which has a history of inadequate
     monitoring, we found that the contractors were not reviewing 10
     percent of the REAM-managed single-family properties each month,
     which is HUD's expectation if adequate staff, travel funds, and
     time are available.  In a June 1996 report, the Inspector
     General stated that the Massachusetts State Office had not
     developed controls to ensure that its REAM contractors were
     adequately carrying out their responsibilities.\14 The Inspector
     General found that in spite of repeated problems with the
     timeliness and lack of submission of inspection reports by three
     REAM contractors, the HUD Office still had not established a
     system of procedures and controls to monitor the timely
     submission of the reports, track complaints, or perform on-site
     inspections.  In November 1996, the Director of the
     Massachusetts State Office's Single-Family Housing Division said
     that since July 1996, the Division has established tighter
     controls over REAM activity.  The Director added that the
     Division's Chief of Production and Real Estate Officer completed
     an on-site inspection of the REAM in August and that the monthly
     10-percent reviews are now being done.  In addition, a manual
     and computerized complaint log has been established and staff
     are tracking the resolution of complaints. 

  -- During our case study work at the Massachusetts State Office, we
     selected 10 projects initially funded by the Community
     Improvement Assistance Program between 1986 and 1992 to
     determine if HUD was monitoring them.  For five projects, we
     found no documentation in the files that any monitoring had
     taken place.  In addition, none of the 10 project files
     contained all of the required housing authority semiannual
     progress reports showing program fund expenditures and progress
     against approved implementation schedules.  In September 1996, 1
     month after we reviewed the files, officials provided us with
     additional documentation in the form of monitoring logs for
     fiscal years 1990 through 1993.  The logs indicate that all but
     one of the 10 projects we had selected had been monitored at
     least once.  However, the officials could provide only two
     additional monitoring reports that indicated the outcome of the
     site visits.  No documentation was provided for any monitoring
     subsequent to fiscal year 1993. 

HUD's field program directors believed that monitoring needs to be
increased and given more emphasis by HUD headquarters.  Seventy-one
percent of the directors we surveyed said HUD needs to increase its
use of on-site inspections, 58 percent said that HUD headquarters
placed a low or medium emphasis on completing essential monitoring,
and 42 percent said that headquarters should place a higher emphasis
on monitoring, especially the on-site monitoring of HUD's clients and
the monitoring of HUD's contractors.  In December 1996, HUD officials
said that to address these concerns, the Inspector General, along
with a program office, issued a Compliance Supplement that directs
independent auditors to address compliance areas of importance to HUD
directors.  According to these officials, with diminishing and
stretched resources, directors should use independent auditors and
related reports as a primary compliance monitoring tool. 

--------------------
\13 HUD hires REAM contractors to perform day-to-day property
management, including physical inspections, elimination of imminent
hazards to the public, and preservation and protection of the
property. 

\14 Controls Over Real Estate Asset Manager (REAM) Contracts,
Massachusetts State Office, HUD, Office of Inspector General
(96-BO-123-0001, June 12, 1996). 

   INFORMATION AND FINANCIAL
   MANAGEMENT SYSTEMS
---------------------------------------------------------- Chapter 2:2

In February 1995, we reported that HUD had (1) set up an information
resource management (IRM) planning structure to give high priority to
correcting long-standing problems with information and financial
management systems; (2) clarified accountability by making Assistant
Secretaries responsible for managing the information and financial
systems in their program areas; (3) issued data administration
standards; (4) taken some actions to strengthen computer security
controls; (5) developed detailed plans for projects to improve
financial systems; and (6) begun revising its transition plan for
integrating its overall financial systems.\15 We also reported that
HUD needed to continue to improve support of its missions by
strengthening planning for its strategic business and information
resources management and by establishing a strategic information
architecture and Department-wide data management program. 

Since our 1995 report, problems with information and financial
management systems have continued to negatively affect HUD's ability
to effectively manage its programs.  For example: 

  -- In a June 1996 report on FHA's fiscal year 1995 financial
     statements, independent auditors continued to list FHA's
     automated systems as a material internal control weakness
     because some systems either did not provide needed management
     information or did not provide reliable information. 

  -- In March 1996, HUD reported to the Congress that 93 of its
     information and financial management systems did not meet the
     requirements of the FMFIA and therefore could not be relied upon
     to provide timely, accurate, and reliable financial information
     and reports to management. 

  -- According to the Inspector General, problems with financial
     systems have also impaired FHA's ability to comply with the
     Credit Reform Act of 1990, which was enacted to better capture
     the government's cost of extending credit.  FHA's single-family
     systems that account for periodic premiums are not capable of
     generating the case-specific cash flow data needed to comply
     with the act.  HUD officials said that they have developed an
     action plan to have all systems comply with credit reform
     requirements by 1998. 

--------------------
\15 HUD's projects to integrate financial systems include redesigning
or developing its financial, information, and mixed financial/program
information systems to meet the Department's business needs.  Once
the integration projects are completed, the data are supposed to be
fully integrated either through a common database or through the
ability to transfer data from one system to another electronically. 

      STATUS OF PLANS FOR
      IMPROVING HUD'S INFORMATION
      RESOURCE MANAGEMENT
-------------------------------------------------------- Chapter 2:2.1

HUD has continued taking steps to improve its IRM activities since
our 1995 report.  Many of these steps respond to specific
recommendations made in our April 1994 report on HUD's IRM
program.\16 For example, in June 1995 HUD released the first edition
of its transition plan for integrating financial systems and issued a
revised plan in August 1996.  HUD's program offices have developed
business strategy plans and information strategy plans to identify
their strategic business and information needs.  HUD recently
completed a Department-wide information strategy plan and expects to
publish a strategic IRM plan in early 1997.  According to an official
in the Office of Information Technology, HUD also recognizes the need
to tie together the various planning activities so that the
Department's strategic IRM plan and other plans are clearly linked
together.  A Systems Integration Steering Committee was established
to oversee the implementation of the IRM plan.  Other actions that
HUD has taken over the past 2 years include (1) preparing an initial
version of a Department-wide information architecture in September
1995; (2) establishing a Central Information Management function,
establishing revised data administration standards and procedures,
and providing a central data administrator with the authority to
ensure compliance with Department-wide standards; (3) establishing a
central data repository, issuing standards and procedures governing
the repository, and providing training to program area and systems
development personnel; and (4) partially installing security software
on its mainframe computers to conform with the federal and
departmental requirements for access to sensitive information and
systems. 

--------------------
\16 HUD Information Resources:  Strategic Focus and Improved
Management Controls Needed (GAO/AIMD-94-34, Apr.  14, 1994). 

      CONTINUING CHALLENGES TO
      INTEGRATING FINANCIAL
      SYSTEMS
-------------------------------------------------------- Chapter 2:2.2

The lack of integrated financial systems has been a major part of
HUD's long-standing IRM problems.  Recognizing this lack, HUD is
working to create a network of flexible, integrated computer systems
that will enable program staff to oversee the financial and
programmatic integrity of their operations.  The efforts include
establishing Department-wide financial systems with standardized data
to meet the requirements of good financial management. 

HUD has progressed beyond just planning for integrating its financial
systems and is now beginning to bring some portions of the new
systems into operation.  Beginning with fiscal year 1995
appropriations, HUD's core accounting system has been processing
administrative accounting functions.  In addition, in August 1995 the
Office of Public and Indian Housing implemented its portion of this
system that will account for $8 billion to $9 billion of rental
assistance provided to public and Indian housing authorities and the
state agencies that administer the program.  CPD also has begun to
implement the Integrated Disbursement and Information System to
account for the disbursement and track the use of funds under its
four formula grant programs.  Funding for these programs totaled
about $6.7 billion for fiscal year 1995.  As of December 1996, 106
grantees are operating on the system, and CPD had planned to have the
remainder of the more than 900 grantees on the system by the end of
calendar year 1998, according to a CPD official responsible for
implementing the system.  Recently, however, the Assistant Secretary
for CPD agreed to delay the implementation of the system for some
grantees until various problems cited by the grantees are addressed. 

According to departmental information, HUD had a total of 116 systems
classified as either financial or mixed (providing both financial and
program information), as of March 1996.\17 Many of these systems will
be replaced, and HUD will upgrade others to resolve integration
problems, data problems, and deficiencies in the support provided to
managers.  However, for a number of systems HUD has yet to develop
upgrade or replacement plans.  A number of system integration
projects are still in progress and are not scheduled to be completed
for another 1 to 4 years.  According to CFO officials, although HUD's
systems are not currently fully integrated, HUD is able to record its
financial transactions in its core financial system through a
combination of system interfaces and manual transactions.  These
officials believe that this lack of integration does not impede the
Department's ability to generate its financial statements in a timely
and accurate manner or preclude the Department from obtaining an
audit opinion on the consolidated financial statements.  Table 1
shows HUD's major systems integration projects, the number of current
systems that each will replace, and estimated completion dates. 

                                     Table 1
                     
                     HUD's Major Systems Integration Projects

                                                                        Estimate
                                                                No. of         d
                                                HUD         systems to  completi
System name                                     office     be replaced   on date
----------------------------------------------  --------  ------------  --------
HUDCAPS-Central Accounting and Program System   CFO                 30      2000
Office of Public and Indian Housing-CAPS        PIH                N/A      9/97
Office of Public and Indian Housing-            PIH                  5     12/98
 Integrated Business System
TRACS-Tenant Rental Assistance and              Housing              2      9/99
 Certification System
IDIS-Integrated Disbursement and Information    CPD                  5     12/98
 System
FHAMIS-Federal Housing Administration Mortgage  Housing              4      2001
 Insurance System
--------------------------------------------------------------------------------
Note:  N/A= Not applicable because it is part of HUDCAPS.  Each of
HUD's systems integration projects currently has major modules
operational.  The estimated completion dates reflect the final
phase-in for each of these systems. 

Although HUD has made progress since our 1995 high-risk report,
integration efforts have been hampered by systems development and
data conversion problems.  The Office of Inspector General reported
in March 1996 that the systems development problems and delays were
largely attributable to a combination of funding constraints and a
continuing need for program management's stronger commitment to
systems development and better project management.\18 Officials
responsible for systems integration told us that data conversion has
been another delaying factor.  According to these officials,
converting data from old systems to the new systems and ensuring that
it is accurate have been more complicated and time consuming than
anticipated. 

Another challenge to HUD's future systems integration efforts,
according to one official, will be to maintain consistent and
adequate funding in a downsizing environment.  Approved funding for
the systems integration projects over recent years was $30.5 million
for fiscal year 1994, $44.4 million for fiscal year 1995, and $33
million for 1996.  HUD's budget request for fiscal year 1997 was $47
million.  A final challenge may be that systems requirements could
change once final decisions are made on restructuring HUD and its
programs.  (See later section that discusses the proposals to reform
or "reinvent" HUD.) Once those decisions are made, some currently
planned information and financial management systems may not be
needed and/or there may be a need for completely new systems. 

--------------------
\17 The actual number of systems in HUD's inventory may be counted
differently, depending on whether systems and subsystems are counted
separately.  The 116 counts both systems and subsystems. 

\18 Semiannual Report to the Congress, HUD, Office of Inspector
General (Washington, D.C.:  Mar.  1996). 

   ORGANIZATIONAL STRUCTURE
---------------------------------------------------------- Chapter 2:3

In 1995, we reported that HUD had an ineffective organizational
structure that included overlapping and ill-defined responsibilities
and authorities between HUD headquarters and field organizations and
a fundamental lack of management accountability and responsibility. 
We pointed out that HUD was in the process of reorganizing its field
office structure and was just beginning to implement a plan for
streamlining its headquarters organization, a plan which OMB had
approved in October 1994.  In September 1995, HUD completed the field
office reorganization, which was intended to eliminate previously
confused lines of authority, enhance communications, reduce levels of
review and approval, and improve customer service.  This action
eliminated HUD's 10 regional offices, transferred direct authority
for field program staff and resources to the Assistant Secretaries in
HUD headquarters, and restructured the Department's 81 field offices. 
HUD plans to continue its reorganization efforts by reducing
headquarters staff, redeploying staff, and further streamlining and
consolidating field activities. 

In our recent telephone survey, program directors in the state and
area offices highly rated the success of the 1995 field office
reorganization.  Almost three-fourths of them rated the
reorganization's overall success as either good (49 percent) or
excellent (25 percent).  They gave similar high marks to its success
in achieving most of HUD's intended outcomes.  Between 69 and 85
percent of the directors we surveyed rated progress as good or
excellent in the categories of improving the lines of program
management authority and accountability, empowering staff and field
directors, and improving communications between the field and
headquarters and between HUD and its customers. 

Some directors commented that the new structure of field program
directors reporting directly to higher-level program directors in
headquarters had inhibited communication between program staffs at
the field offices.  They said that because there were now fewer
reasons for the different program staffs to interact, they tended to
be less informed about the developments in one another's programs. 
According to its Director, HUD's Field Reorganization Task Force
became aware of this situation and by June 1996 had taken actions to
correct it.  Among other things, the task force granted
"coordinators" in the state and area offices more authority to
coordinate across program lines and added program integration
requirements to senior managers' performance expectations and
appraisals. 

In January 1996, HUD announced additional efforts to reduce
headquarters staff and further streamline its field organizational
structure.  A management action plan issued in April 1996 calls for,
among other things, reducing headquarters staff from 3,500 to 3,000
by the end of fiscal year 1997, consolidating many program operations
and processing functions into service centers, redeploying and
training headquarters and field staff to better balance staff with
service delivery needs, and closing up to 10 of HUD's 81 field
offices by the end of fiscal year 1997.  According to the Director of
the Office of Departmental Operations and Coordination, HUD expects
by the year 2000 to reduce total staffing from about 10,500, its
level at the end of fiscal year 1996, to about 7,500 (a 29-percent
reduction) and is currently studying closing additional field
offices. 

One of HUD's objectives in this further reorganization is to make
itself a "community-first" Cabinet-level Department by, among other
things, creating a smaller, decentralized workforce that is highly
trained and that has a dramatically changed mandate to respond to
local priorities.  As part of this effort, HUD plans not only to
reduce headquarters staff but also to restructure headquarters
functions to those that are logically Washington based (e.g., policy
development, budgeting, and congressional relations) and to transfer
program delivery functions and staff to the field.  HUD also plans to
(1) give field staff more flexibility and authority to work with
communities, (2) give the positions of Secretary Representatives and
Office Coordinators at its state and area offices more power to solve
problems and to make customer service a priority, and (3) redeploy
and train up to 1,000 field office employees to help correct staffing
imbalances and to place program delivery and decision-making
authority nearer to communities. 

In its March 1996 report, HUD's Office of Inspector General stated
that while HUD's newly implemented field reorganization could provide
more accountability within the existing program structure, it is not
well-suited for carrying out this new vision of a "community-first,
place-based" program delivery structure.  The Inspector General was
of the opinion that creating Secretary Representative and Office
Coordinator functions with limited authorities over field program
directors would be inefficient and noted that this idea had been
tried with limited effectiveness at other federal agencies. 

Consolidating program operations is another objective of HUD's
further reorganization plans.  To help cope with decreasing resources
and correct historical staff and workload imbalances, HUD is
consolidating various field operations and processing functions into
field service centers.  For example, HUD established a regional
center in Denver to process applications for FHA mortgage insurance
on single-family homes that had formerly been handled by nine HUD
field offices.  HUD expanded operations of the Denver center and
established additional centers in Atlanta and Philadelphia in fiscal
year 1996.  Ultimately, HUD hopes to consolidate all single-family
processing functions into five regional service centers located in
Denver, Philadelphia, Atlanta, San Francisco, and Chicago. 

HUD's April 1996 management action plan also calls for creating
"administrative" service centers and for consolidating accounting
functions into service centers.  HUD plans to consolidate a number of
administrative service functions (such as facility and property
management, procurement, supply management, printing, and records
management) into three centers.  HUD's Chief Financial Officer also
has proposed to consolidate accounting functions and close HUD's
current 10 field accounting divisions (located in HUD's former
regional offices) by the end of fiscal year 1998.  The CFO plans to
establish two administrative accounting centers (located in Atlanta
and Fort Worth) that would centrally process all travel and
procurement payments and one program accounting center (located in
Denver) that would control funds and process payments for HUD's
programs currently handled by the field accounting divisions located
in Atlanta, Denver, and Fort Worth.  Assuming that the planned
integration of program accounting systems proceeds as scheduled, the
CFO anticipates that workloads will be reduced to the point where the
program center could gradually replace the remaining seven field
accounting divisions by the end of fiscal year 1998, resulting in
estimated savings of $6 million annually. 

We also reported in 1995 that FHA was studying its organization.  HUD
subsequently formulated a legislative proposal designed to
consolidate numerous FHA multifamily insurance authorities into one
more flexible authority, provide more flexible products and pricing,
reduce the government's insurance risks, provide multifamily loans
through capable industry partners (such as housing finance agencies),
and enable FHA to continue offering direct credit enhancements to
serve unmet multifamily housing needs.  The Congress has not yet
enacted any legislative restructuring of FHA.  However, while it is
still seeking legislative changes, HUD notes that it has taken
actions under its existing authority to improve FHA's business
practices--for example, revising underwriting standards for insured
single-family loans, entering into risk-sharing partnerships, and
conducting asset sales to reduce its notes inventory and increase
returns to the FHA insurance fund. 

   STAFF AND SKILLS
---------------------------------------------------------- Chapter 2:4

In our February 1995 high-risk series, we reported that HUD has had
an insufficient mix of staff with the proper skills, which has
hampered the effective monitoring and oversight of HUD's programs and
the timely updating of procedures.  We reported that 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.  We commended the Department's efforts to upgrade
the skills of its staff through establishing a Training Academy in
January 1994, developing a "distance learning" or satellite training
curriculum, and creating individual development plans for employees. 
However, we also noted that both the National Academy of Public
Administration and HUD's Inspector General had expressed concerns
about the adequacy of the resources committed to these efforts. 

Since our 1995 report, the Department has taken steps to increase the
effectiveness of its staff training by beginning to implement a needs
assessment process to plan future training, promoting the use of
individual development plans for employees, expanding its use of
distance learning, forming partnerships with colleges and
universities to create new educational opportunities for staff, and
substantially increasing expenditures for training.  The needs
assessment plan calls for (1) identifying the skills essential to
HUD's mission, (2) surveying employees to assess the level of those
skills in its workforce, and (3) planning a cost-efficient delivery
system to satisfy the workforce's training needs.  The Department's
expenditures on training increased from $5 million in 1994 to $16
million in 1996.  These steps increased the amount of training HUD
provided its staff in fiscal years 1994 through 1996. 

HUD's management of staff resources over the past 2 years also has
been criticized.  In a report to the Congress issued in March 1996,
the Inspector General noted that HUD made decisions about staff
reductions and redeployments in connection with its recent
reorganization efforts without an adequate analysis of the impact
these decisions would have on the Department's ability to administer
its programs.  The report stated that as a result, "many critical
program functions are not being adequately performed, and .  .  . 
there are continuing imbalances in staffing-to-workload ratios from
office to office." Consequently, the report concluded that ".  .  . 
there is little assurance that HUD's $1 billion for annual salaries
and expenses budget is efficiently and effectively used to further
HUD's mission and minimize program risks."

Over the past 2 years, we have reported on the continuing skill and
resource management problems related to HUD's public housing program. 
In March 1996, we testified on the Department's recent efforts to
deal with large, chronically troubled housing authorities that
provide substandard or unsafe housing, such as those in Chicago, New
Orleans, and San Francisco.  We commended HUD's efforts but noted
that requiring HUD to take over additional housing authorities in the
future would overtax staff resources.\19 Moreover, we cautioned that
focusing its already-stretched management resources on a handful of
troubled authorities would prevent HUD from providing appropriate
oversight of the majority of authorities that were not chronically
troubled.\20

Notwithstanding the above problems, our recent survey of HUD field
program directors indicates that HUD's efforts may be producing some
positive effects, but pockets of problems remain.  Although 71
percent of the directors said the overall quality of training had
improved over the last 2 years, about 40 percent of these directors
rated the Department's current training as only fair or poor.  The
directors we surveyed generally believed that the skills of their
staff have improved over the last 2 years.  About 85 percent of the
directors said that the skills of their staff had improved at least
somewhat during that time.  The directors were especially satisfied
with their staffs' technical job skills and their knowledge of new
programs.  Although a majority of the directors were also satisfied
with the skills of their staff, in three other areas, 27 percent of
the directors were not satisfied with their staffs' knowledge of new
regulations, 28 percent were not satisfied with their staffs'
interpersonal skills, and 42 percent were not satisfied with their
staffs' knowledge of information systems. 

About 40 percent of the directors rated the quality of HUD's training
curriculum as only fair or poor.  A majority of the directors
believed that training should be increased in each of the areas we
asked about, particularly in the use of information systems (88
percent) and technical job skills (73 percent).  One director
commented that because HUD employees are now expected to do more than
process forms and ensure compliance with agency regulations, they
need training in marketing, outreach, finance, and monitoring.  Other
needs, according to one or more other directors, include training in
credit underwriting, real estate appraisal, asset management,
negotiation, and interpersonal skills. 

We and other auditors also have continued to identify problems with
staff members' skills and resource problems in specific HUD programs. 
For example, in June 1996 an independent audit firm cited limited
staff and administrative resources as a material weakness that
prevented FHA from devoting adequate resources to preventing losses,
properly managing troubled assets, and quickly implementing new
automated systems.  In 1995, we also reported that FHA's ability to
correct historical deficiencies in the management and oversight of
loans to nursing homes and retirement centers could be negatively
affected by FHA's planned restructuring and staff reductions.\21 In
1996, we also reported that FHA staff did not have sufficient health
care expertise to manage the key program functions related to
hospital mortgages and had to rely on the experience of Department of
Health and Human Services staff to monitor hospitals' financial
performance.\22

Most of the HUD field program directors we surveyed considered the
current staffing levels inadequate.  The majority (77 percent)
believed that they had fewer staff than needed to administer their
programs.  This was particularly true for the directors in
multifamily housing and CPD.  The directors said that staff
reductions over the past 2 years had increased the remaining staff
members' workload and that where program activities were not
receiving adequate monitoring, lack of staff is a major reason.  Most
directors also cited staff members' lack of skills as a major or
minor reason that some needed monitoring was not being performed. 

Some directors in our survey also expressed concern that the recent
organizational improvements could be undermined by planned staff
reductions.  Staffing levels, which were 12,800 in 1993 and reduced
to about 10,500 at the end of fiscal year 1996, are expected to fall
to 7,500 by the year 2000.  In addition, some directors expressed
concern that the Department's training efforts may not be able to
keep pace with changing expectations for the skills needed by HUD
staff--particularly given the likelihood of further reorganizations. 

No matter how successful HUD's current efforts to address staffing
and skill mix problems prove to be, they may not be enough to fully
correct the Department's long-standing problems in the absence of a
major effort to consolidate, reduce, or restructure HUD's current
programs.  The problems of inadequate staff resources to monitor and
administer HUD's current array of programs likely will be compounded
as the Department implements its plan to downsize to 7,500 by the
year 2000, unless actions are taken to consolidate, reduce, and/or
reengineer HUD's existing programs. 

--------------------
\19 Housing and Urban Development:  Limited Progress Made on HUD
Reforms (GAO/T-RCED-96-112, Mar.  27, 1996). 

\20 Housing and Urban Development:  Public and Assisted Housing
Reform (GAO/T-RCED-96-25, Oct.  13, 1995). 

\21 HUD Management:  Greater Oversight Needed of FHA's Nursing Home
Insurance Program (GAO/RCED-95-214, Aug.  25, 1995). 

\22 FHA Hospital Mortgage Insurance Program:  Health Care Trends and
Portfolio Concentration Could Affect Program Stability
(GAO/HEHS-96-29, Feb.  27, 1996). 

   PROPOSALS TO REFORM OR
   "REINVENT" HUD
---------------------------------------------------------- Chapter 2:5

According to a December 1994 analysis done by the Inspector General,
HUD had the responsibility for 240 programs/activities.  During that
same month, HUD announced a proposal, known as the "Reinvention
Blueprint," which called for consolidating programs, devolving
responsibility for program design and implementation to states and
localities, and HUD's assuming the role of overseer and clearinghouse
for national models.  In 1995, HUD drafted a legislative proposal
designed to implement its Reinvention Blueprint; however, it was
never introduced as a bill in the Congress.  HUD has since drafted a
revised, but similar, plan known as "Blueprint II."

HUD's Blueprint II incorporates HUD's "mark-to-market" and later
"portfolio reengineering" proposals, which were designed to address
the long-standing problems in HUD's insured multifamily Section 8
portfolio amounting to about $18 billion.  The portfolio suffers from
three basic problems--high subsidy costs, high exposure to insurance
loss, and the poor physical condition of some properties.  To address
these problems, HUD in 1995 proposed a "mark-to-market" strategy to
(1) eliminate project-based subsidies as contracts expired; (2) let
the market set rents and restructure mortgages as necessary, (3)
terminate FHA's insurance on refinanced mortgages; and (4) provide
assisted residents with portable tenant-based subsidies. 

In addition, others have made a wide variety of proposals for
reforming or reinventing HUD, including proposals to completely
dismantle the Department.  While some limited, yet significant,
improvements to HUD's existing program structure have been made, a
comprehensive redesign of HUD's overall mission and program delivery
structure has not occurred.  Likewise, various bills to fundamentally
restructure HUD's programs to subsidize multifamily rental housing
also have been proposed, but thus far none has been enacted. 

FURTHER ACTION NEEDED
============================================================ Chapter 3

HUD deserves credit for its continued emphasis on, and progress
toward, addressing its long-standing management deficiencies.  While
HUD has completed some actions, initiated other actions, and
formulated some new approaches since our last report, many of its
planned and proposed corrective actions are still far from reaching
fruition.  As a result, the Department's fundamental problems remain. 
Of particular concern is the persistence of material internal control
weaknesses in some of HUD's largest dollar programs and the
Department's lack of integrated information and financial management
systems.  Although the systems are being implemented in phased
releases, until HUD completes integrating these data systems, which
by its own estimates is years away, the lack of good information will
continue to have a negative impact on the Department's operations and
limit its capacity to adequately control and monitor funds. 

HUD's programs will remain at high risk to fraud, waste, abuse, and
mismanagement until the agency completes more of its planned
corrective actions and until the administration and the Congress
agree on and implement a strategy to either restructure, consolidate,
reengineer, and/or reduce HUD's programs so as to bring the
Department's management responsibilities in line with its management
capacity.  While it may not be totally within HUD's power to
eliminate its fundamental deficiencies, it is nevertheless important
for HUD to sustain and build on the corrective momentum it has
generated thus far.  While working toward the resolution of the
broader issues of policy and structure, HUD needs to continue taking
what actions it can to reduce to acceptable levels the risks
associated with its wide spectrum of operations and to make
substantial progress.  Specifically, HUD needs to

  -- (1) take steps to eliminate major internal control weaknesses,
     (2) fully implement its management planning and control program
     and ensure that it meets the requirements of FMFIA, and (3)
     ensure the proper balance between program delivery/results and
     program monitoring;

  -- complete its efforts to integrate major information and
     financial management systems and continue to take actions to get
     all of its systems in compliance with FMFIA and improve their
     usefulness to managers in overseeing programs and monitoring
     day-to-day program activities;

  -- complete its current plans for reorganizing headquarters and
     field offices, including redeploying staff and consolidating
     program activities and like functions within its current
     legislative authority; and

  -- complete its efforts to assess its employees' skills, develop
     appropriate training to meet employees' needs for skills, and
     increase the number of staff receiving training. 

In our view, the Congress now has an excellent opportunity to help
HUD eliminate the deficiencies that make it a high risk and to align
the agency's management responsibilities and capacity by authorizing
a major restructuring strategy that focuses HUD's mission and
significantly consolidates, reduces, and/or reengineers its many
separate program activities.  HUD and others have proposed various
bills to reform or reinvent the agency, but thus far no major,
permanent changes have been enacted.  What is needed now is for the
administration and the Congress to agree on the future direction of
federal housing and community development policy and the
organizational and program delivery structures that are best suited
to carry out that policy.  Given the high stakes involved (tens of
billions of federal dollars each year), the inherent trade-offs
involved in understanding and ranking the needs of those seeking
HUD's assistance, and the other demands on the total federal budget,
coming to closure on federal housing policy and the structure of HUD
will likely take some time.  Given the magnitude of the many tasks at
hand, we believe that HUD continues to pose a high risk to the
government in terms of its vulnerability to waste, fraud, abuse, and
mismanagement. 

RELATED GAO PRODUCTS
============================================================ Chapter 4

HUD:  Field Directors' Views on Recent Management Initiatives
(GAO/RCED-97-34, Feb.  12, 1997). 

Multifamily Housing:  Effects of HUD's Portfolio Reengineering
Proposal (GAO/RCED-97-7, Nov.  1, 1996). 

Housing and Urban Development:  Limited Progress Made on HUD Reforms
(GAO/T-RCED-96-112, Mar.  27, 1996). 

FHA Hospital Mortgage Insurance Program:  Health Care Trends and
Portfolio Concentration Could Affect Program Stability
(GAO/HEHS-96-29, Feb.  27, 1996). 

Homeownership:  Mixed Results and High Costs Raise Concerns About
HUD's Mortgage Assignment Program (GAO/RCED-96-2, Oct.  18, 1995). 

Housing and Urban Development:  Public and Assisted Housing Reform
(GAO/T-RCED-96-25, Oct.  13, 1995). 

HUD Management:  Greater Oversight Needed of FHA's Nursing Home
Insurance Program (GAO/RCED-95-214, Aug.  25, 1995). 

High-Risk Series:  Department of Housing and Urban Development
(GAO/HR/95-11, Feb.  1995). 

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

1997 HIGH-RISK SERIES
============================================================ Chapter 5

An Overview (GAO/HR-97-1)

Quick Reference Guide (GAO/HR-97-2)

Defense Financial Management (GAO/HR-97-3)

Defense Contract Management (GAO/HR-97-4)

Defense Inventory Management (GAO/HR-97-5)

Defense Weapon Systems Acquisition (GAO/HR-97-6)

Defense Infrastructure (GAO/HR-97-7)

IRS Management (GAO/HR-97-8)

Information Management and Technology (GAO/HR-97-9)

Medicare (GAO/HR-97-10)

Student Financial Aid (GAO/HR-97-11)

Department of Housing and Urban Development (GAO/HR-97-12)

Department of Energy Contract Management (GAO/HR-97-13)

Superfund Program Management (GAO/HR-97-14)

The entire series of 14 high-risk reports can be ordered by using the
order number GAO/HR-97-20SET. 

*** End of document. ***