Recovery Act: Tax Debtors Have Received FHA Mortgage Insurance and First-Time Homebuyer Credits
Published: 2012-05-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 Acts 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.
section_title: What GAO Found
paragraphs: 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 FHAs 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 applicants federal debt status, but sources commonly used, such as the loan application and credit report, do not reliably indicate an applicants tax debt. Statutory restrictions generally prohibit the disclosure of taxpayer information, such as tax debt, 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 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, FHAs 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 FHAs 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.
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: As of September 30, 2011, individuals, businesses, and other entities  owed the U.S. government over $350 billion in known unpaid taxes,  including interest and penalties, according to the Internal Revenue  Service (IRS). Beyond this amount of known tax debt, the amount of  unknown tax debts is substantial. This is because the inventory of tax  debts excludes underreported amounts filed by taxpayers and taxes owed  by taxpayers who do not file tax returns. Given the many challenges that  IRS faces, the enforcement of the tax laws continues to be on our list of  high-risk areas. We have previously reported that many individuals with  tax debt take advantage of government programs, such as federal loan  insurance, thereby reaping benefits from these programs while failing to  pay their own taxes.
The American Recovery and Reinvestment Act of 2009 included  numerous provisions aimed at spurring economic activity and shoring up  the declining housing market. Under a provision that increased the  maximum loan limits for mortgage insurance in 2009, the Federal  Housing Administration (FHA), part of the Department of Housing and  Urban Development (HUD), insured more than $20 billion in mortgages  for 87,000 borrowers. In addition, as of July 3, 2010, over 1.7 million  individuals were awarded over $12 billion in First-Time Homebuyer  Credits (FTHBC) under the Recovery Act for homes purchased in 2009,  according to IRS.either increased limits on their FHA mortgage insurance or the FTHBC in  2009 as Recovery Act beneficiaries.
In this report, we refer to individuals who received  Federal policy makes delinquent tax debtors ineligible for FHA mortgage  insurance at the time of application, unless they repaid the debt or were in  a valid repayment agreement with IRS, while the FTHBC, like all tax  credits, was available to those who qualified regardless of their tax debt.  The Recovery Act made no exceptions to these federal policies. You  asked us to review several issues concerning individuals with unpaid  federal taxes who benefited from the Recovery Act. This is the second in  a series of reports that respond to your request. In the first report, we  identified thousands of Recovery Act contract and grant recipients that   In this report, we  owed hundreds of millions of dollars in federal taxes. determined the (1) extent to which tax debtors benefited from the  Recovery Act’s 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.
GAO, Recovery Act: Thousands of Recovery Act Contract and Grant Recipients Owe  Hundreds of Millions in Federal Taxes, GAO-11-485 (Washington, D.C.: Apr. 28, 2011). as of June 2010. The FHA data allowed us to identify all those who  received FHA insurance under the Recovery Act’s increased loan limits.  However, limitations in the FTHBC data we received from IRS did not  allow us to isolate all individuals who benefited from the FTHBC under the   To address this limitation, we used the FHA data to assist  Recovery Act.us in isolating FTHBCs awarded under the Recovery Act. As a result, we  were unable to analyze any credits for individuals who did not use FHA  mortgage insurance in the financing of their home, and therefore we  estimate that our analysis included 43 percent of all FTHBCs awarded  under the Recovery Act. Our analysis includes two groups:  1.  individuals who received FHA mortgage insurance under the higher  limits authorized under the Recovery Act, and  2.  individuals who received the FTHBC under the Recovery Act and  obtained FHA mortgage insurance of any value.
We electronically matched IRS tax debt data to these groups using Social  Security numbers (SSN) as unique identifiers. We included only those  individuals with tax debts of $100 or more from tax years 2008 and earlier  to eliminate small tax debts and debts that may involve matters that are  routinely resolved between the taxpayers and IRS, with the taxes paid or  abated within a short time. We excluded any debts that were assessed by  IRS after the mortgage insurance was received because those debts  would not have been included in IRS records at the time the mortgage  insurance was issued. We determined that the data were sufficiently  reliable to address the report’s objectives by performing electronic testing  on the data, speaking with agency officials, and reconciling data to  published figures and source documents.
The value of mortgage insurance was not a criterion in selecting cases for borrowers  who obtained FHA mortgage insurance under the Recovery Act because all of these  mortgages resulted from increased FHA loan limits in high-cost areas. For each of the two  groups included in our analysis, we selected two cases with IRS civil penalties for  noncompliance and two cases in which the home had been foreclosed.
To mask the identities of the tax debtors included in our case studies, we requested  additional files from FHA that were not tax debtors.
FHA and IRS provided us some information on an additional three cases; however, we  found that two of these cases did not have outstanding debt at the time they obtained FHA  mortgage insurance, because they were either deemed an innocent spouse (granted relief  from a joint tax liability) or had satisfied the repayment portion on an offer in compromise  (an agreement to settle the debt for less than the amount owed).The third case’s debt had  been removed from IRS because it was beyond the 10-year statutory collection period at  the time we received the IRS records, therefore we did not include them in our analysis.  We did not receive FHA mortgage files from FHA for the remaining seven case because  the lenders for these files had either gone out of business or were not otherwise required  to provide the mortgage file, according to FHA officials. cases were selected to illustrate the sizeable amounts of taxes owed by  some individuals who benefitted from the Recovery Act but cannot be  generalized beyond the cases presented.
To understand how private lenders interpret and implement FHA’s  guidelines for preventing individuals with delinquent federal tax debt from  receiving mortgage insurance, we interviewed FHA officials and reviewed  relevant federal laws and policies, FHA regulations, policy manuals, and  other FHA documents related to mortgage insurance. We also  interviewed officials from three large, private, FHA-approved lenders,  which together endorsed 15 percent of all FHA mortgages for homes  purchased in 2009, and reviewed and discussed their policies for  determining FHA mortgage insurance applicants’ tax debt status and  preventing ineligible tax debtors from obtaining FHA mortgage insurance.  A more detailed description of the scope and methodology can be found  in appendix I.
We conducted this performance audit from April 2011 through May 2012  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  audit findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The Recovery Act of 2009 was enacted in response to significant  weakness in the economy to, among other things, help promote economic  recovery and assist those most affected by the recession. The  Congressional Budget Office (CBO) estimated the Recovery Act’s cost at  $825 billion as of August 2011. The Recovery Act included provisions to  help stimulate the housing market, including increasing loan limits for  FHA-insured mortgages in 669 high-cost counties in calendar year   The provision allowed FHA to insure mortgages at a higher  2009.amount than would have been authorized without the Recovery Act.  Under this provision, FHA insured over $20 billion in mortgages for  87,000 homeowners who were approved for FHA mortgage insurance in  2009. The Recovery Act also adapted and extended the FTHBC through  November 2009. Through July 3, 2010, IRS reported that about 1.7  million individuals claimed more than $12 billion in FTHBCs under the  Recovery Act for homes purchased 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.
subsections: section_title: FHA Mortgage Insurance
paragraphs: FHA’s single-family programs insure private lenders against 100 percent  of the value of the loan for foreclosures on mortgages that meet FHA  criteria, including mortgages for initial home purchases, construction  rehabilitation, and refinancing. As of September 2011, almost 3,700  lenders were approved to participate in these programs. The insurance  covers the principal, interest, and associated foreclosure costs, among  other things. Lenders usually require mortgage insurance when a home  buyer makes a down payment of less than 20 percent of the value of the  home. FHA mortgage insurance allows a home buyer to make a modest  down payment—as low as 3.5 percent—and obtain a mortgage for the  balance of the purchase price. As the recent housing and economic  recession set in, FHA’s share of the market for home purchase  mortgages grew sharply due to the contraction of other mortgage market  segments—rising from about 5 percent in 2006 to nearly 30 percent in  2009. FHA insured almost 2 million single-family mortgages valued at  more than $300 billion in mortgage insurance in 2009. FHA generally is  thought to promote stability in the market by ensuring the availability of  mortgage credit in areas that may be underserved by the private sector or  that are experiencing economic downturns. It has played a particularly  large role among minority, lower-income, and first-time home buyers;  almost 80 percent of FHA-insured home purchase loans in 2010 went to  first-time home buyers.
The FHA home mortgage insurance programs are funded by the FHA  Mutual Mortgage Insurance Fund (MMIF), which is supported by  insurance premiums charged to borrowers. The MMIF is used to cover  claims on foreclosed mortgages, among other things. The Omnibus  Budget Reconciliation Act of 1990 required the Secretary of HUD to take  steps to ensure that the MMIF attained a capital ratio (i.e., economic  value divided by the unamortized insurance-in-force) of at least 2 percent  by November 2000 and maintain a 2 percent ratio at all times thereafter.The act also required an annual independent actuarial review of the  economic net worth and soundness of the MMIF. The actuarial review  estimates the economic value of the MMIF as well as the capital ratio to  determine whether the MMIF has met the capital standards in the act.  The capital ratio has dropped sharply in recent years due to declines in  home prices and increases in seriously delinquent loans and  foreclosures. The most recent actuarial study shows that the capital ratio  is currently below the statutorily mandated level, at 0.24 percent,  representing $2.6 billion in estimated capital resources against an active  portfolio of $1.08 trillion. The MMIF has historically been sufficient to  fund the FHA home mortgage insurance programs without additional  funding from the federal government, but if the reserve were to be  depleted, FHA would need to draw on permanent and indefinite budget  authority to cover additional increases in estimated losses. A weakening  in the performance of FHA-insured loans could increase the possibility  that FHA will require additional federal funds. Our work has previously  shown that the increased reliance on FHA mortgage insurance highlights  the need for FHA to ensure that it has the proper controls in place to  minimize financial risks to the federal government while meeting the  housing needs of borrowers.
Lenders are responsible for underwriting the loans to determine an  applicant’s eligibility for FHA mortgage insurance in accordance with FHA  policies. Underwriting is a risk analysis that uses information collected  during the loan origination process to decide whether to approve a loan  for FHA insurance. Lenders employ automated underwriting— the  process by which lenders enter information on potential borrowers into  electronic systems that contain an evaluative formula, or algorithm,  known as a scorecard. The scorecard attempts to quickly and objectively  measure the borrower’s risk of default by examining data such as  application information and credit score. Since 2004, FHA has used its own scorecard called Technology Open to Approved Lenders (TOTAL).  FHA lenders now use TOTAL in conjunction with automated underwriting  systems to determine the likelihood of default. Although TOTAL can  assess the credit risk of a borrower, it does not reject a loan outright.  Rather, TOTAL will assign a risk assessment of either “accept” or “refer”  for each borrower. FHA requires lenders to manually underwrite loans  that are assessed as “refer” by TOTAL to give a final determination if the  loan should be accepted or rejected. According to FHA policy, a lender  remains accountable for compliance with FHA eligibility requirements,  regardless of the risk assessment provided by TOTAL.
Virtually all of the lenders that participate in FHA’s mortgage insurance  programs for single-family homes have direct endorsement authority.  These lenders can underwrite and close mortgage loans without FHA’s  prior review or approval. FHA insures lenders against nearly all losses  resulting from foreclosed loans and covers 100 percent of the value of the  loan. In general, foreclosure may be initiated when three monthly  installments are due and unpaid, and it must be initiated when six monthly  installments are due and unpaid, except when prohibited by law. To  minimize the number of FHA loans entering foreclosure, servicers are  responsible for pursuing various loss mitigation strategies, including  suspended payments, loan modification, reduced mortgage payments,  and sale of the property by the borrower. If, despite these loss mitigation  strategies, the lender forecloses on the loan, the lender can file an  insurance claim with FHA for the unpaid balance of the loan and other  costs. However, FHA reviews a selection of insured loans, including  early payment defaults (loans at least 60 days delinquent in the first six  payments), in part to minimize potential FHA losses and ensure the  underwriting for these mortgages met FHA guidelines. Reviews revealing  serious deficiencies may result in FHA requiring the lenders to  compensate the department for financial losses, known as  indemnification, which requires the lender to repay FHA for any losses  that it incurs after a loan has gone into default and the property has been  sold.
Congress, through legislation, sets limits on the size of loans that may be  insured by FHA. These loan limits vary by county and can change from  year to year. To mitigate the effects from the economic downturn and the  sharp reduction of mortgage credit availability from private sources,  Congress increased FHA loan limits. The Economic Stimulus Act (ESA)  enacted in February 2008 stipulated that FHA loan limits be set  temporarily at 125 percent of the median house price in each area, with  a maximum loan limit of $729,750 for a one-unit home. Immediately  prior to ESA’s enactment, the limits had been set at 95 percent of area  median house prices. In July 2008, 5 months after passing ESA,  Congress passed the Housing and Economic Recovery Act (HERA),  which established new statutory limits of 115 percent of area median  home prices. Then, in February 2009, Congress passed the Recovery  Act, which stipulated that FHA loan limits for 2009 be set in each county  at the higher dollar amount when comparing loan limits established under  2008 ESA requirements and limits for 2009 under HERA.
section_title: First-Time Homebuyer Credit
paragraphs: Congress passed the FTHBC to assist the struggling real estate market  and encourage individuals to purchase their first home. The credit was  initially enacted by HERA and later revised by the Recovery Act. The  2008 HERA FTHBC provided taxpayers a credit of up to $7,500 to be  paid back over 15 years, essentially serving as an interest-free loan. In  2009, the Recovery Act was enacted and increased the maximum credit  for the 2009 FTHBC to $8,000, with no payback required unless the home  is sold or ceases to be the taxpayer’s principal residence within 3 years of  the purchase. The credit of up to $8,000 was a refundable tax credit  paid out to the claimant if there was no tax liability or the credit exceeded  the amount of any federal tax due. In July 2010, the Homebuyer  Assistance and Improvement Act (HAIA) of 2010 extended the date to  close on a home purchase to September 30, 2010.
section_title: Federal Policies on Tax Debtors Receiving Federal Loan Insurance
paragraphs: To protect federal government assets and minimize unintended costs to  the government, OMB Circular A-129 states that individuals with  delinquent federal debts are ineligible for loan insurance and prohibits  federal agencies from issuing loans to such applicants; however, OMB’s  policy allows individuals with delinquent federal taxes or other federal  debt to attain eligibility by repaying their debt in full or entering into a valid  repayment plan with the agency they owe. The policy states that  agencies should determine if the applicant is eligible by including a  question on loan applications asking applicants if they have such  delinquencies. The policy also (1) requires agencies and lenders to use  credit bureaus as screening tools, because tax liens resulting from  delinquent tax debt typically appear on credit reports, and (2) encourages  agencies to use HUD’s Credit Alert Interactive Voice Response System  (CAIVRS), a database of delinquent federal debtors. CAIVRS contains  delinquent debt information for six federal agencies; however, it does not   According to OMB policy, if delinquent  contain any tax debts from IRS.federal debts are discovered, processing of applications must be  suspended until the applicant attains eligibility.
FHA’s policies for lenders dictate that an FHA mortgage insurance  applicant must be rejected if he or she is delinquent on any federal debt,  including tax debt, or has a lien placed against his or her property for a  debt owed to the federal government. Like OMB’s policy, FHA policy  states that an applicant with federal debt may become eligible for  mortgage insurance by repaying the debt in full or by entering into a valid  repayment agreement with the federal agency owed, which must be  verified in writing. Such repayment plans include IRS-accepted  installment agreements and offers in compromise. To identify individuals  with tax debt, FHA requires mortgage insurance applicants to declare  whether they are delinquent or in default on any federal debt on their  insurance application, the Uniform Residential Loan Application (URLA).  As printed on the application, knowingly making any false statement on  the URLA is a federal crime punishable by fine or imprisonment. FHA  also requires that lenders review credit reports for all applicants to identify  tax liens and other potential derogatory credit information.
section_title: FHA Insured over $1.44 Billion in Mortgages for Thousands of Recovery Act Beneficiaries with Federal Tax Debt
paragraphs: 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. According to IRS records, these borrowers had an  estimated $77.6 million in unpaid federal taxes as of June 30, 2010. 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. Although federal policies did not  prohibit tax debtors from claiming the FTHBC, they were ineligible for  FHA mortgage insurance unless their delinquent federal taxes and other  federal debt had been fully repaid or otherwise addressed through a  repayment agreement. 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.
In 2009, FHA insured $759.3 million in mortgages for 2,646 individuals  who owed $35.5 million in unpaid federal taxes as of June 30, 2010,  under the Recovery Act’s provision for increased loan limits. These  borrowers and coborrowers obtained 1,913 insured mortgages with a  median value of $352,309 and had a median tax debt of $6,290 per  person. Their mortgages accounted for 3.7 percent of the 52,006  mortgages FHA insured under Recovery Act provisions for increased  limits in 2009, which in turn represented 2.5 percent of all mortgages  insured by FHA in 2009. Our analysis likely understates the amount of  unpaid federal taxes because IRS data do not cover individuals who fail  to file tax returns or who understate their income. Of the 18 selected  individuals who benefitted from increased loan limits for FHA mortgage  insurance or received the FTHBC under the Recovery Act, we found that  11 had not filed all of their federal tax returns.
Using IRS data, we cannot systematically determine which of these  individuals was in a valid repayment agreement at the time of the  mortgage, and therefore cannot determine whether insuring each of these  1,913 mortgages was improper, but it is possible that borrowers with tax  debt represent a greater financial risk to the federal government. As illustrated in figure 2, serious delinquency and foreclosure rates among  Recovery Act borrowers with unpaid federal taxes were at least twice as   high as the rates for other borrowers. As of September 2011, 32 percent  of the 1,913 mortgages made to borrowers with tax debt were seriously  delinquent on their payments, compared with 15.4 percent of other FHA- insured mortgages. About 6.3 percent of the mortgages for borrowers  with tax debt went into foreclosure since the home was purchased in  2009, compared with 2.4 percent for others. The homes foreclosed  after they were purchased by tax debtors were insured for $44.9 million,  potentially leaving FHA responsible for paying claims for the remaining  loan balance and certain interest and foreclosure costs. FHA recovers  some of these costs when it sells the property.
Finally, FHA’s increased exposure to risk from insuring tax debtors is  unlikely to be limited to Recovery Act beneficiaries. Because FHA uses  identical methods to insure non-Recovery Act mortgages, it is reasonable  to assume that some portion of FHA borrowers for the remaining 97.5  percent of mortgages we did not analyze as part of this review are tax  debtors.
subsections: section_title: $717.2 Million in FHA Mortgage Insurance Was Provided to Tax Debtors Who Claimed $27.4 Million in Recovery Act FTHBCs
paragraphs: In 2009, $717.2 million in FHA mortgage insurance and $27.4 million in  Recovery Act FTHBCs were provided to 3,815 individuals who owed an  estimated $43.5 million in unpaid federal taxes. These borrowers  obtained 3,812 insured mortgages with a median value of $167,887 and  had a median unpaid tax amount of $5,044 per person. Their mortgages  represented 0.5 percent of the 700,003 mortgages insured by FHA for  borrowers who claimed the FTHBC. As discussed above, we were  unable to determine the proportion of the mortgage insurance that was  provided to borrowers who were, in fact, eligible as a result of entering  into a valid repayment agreement with IRS. We found that three of our  eight selected borrowers were in valid repayment agreements at the time  they obtained FHA mortgage insurance.
As illustrated in figure 3, we found that serious delinquency and  foreclosure rates for mortgages obtained by FHA borrowers with federal  tax debts who received the FTHBC were two to three times higher than  the rates for other borrowers. As of September 2011, 26.9 percent of the  3,812 mortgages made to borrowers with unpaid tax debts were seriously  delinquent on their payments, compared with 11.9 percent of borrowers  without tax debt who received the FTHBC and FHA mortgage insurance.  About 4.7 percent of the mortgages of borrowers with tax debt were  foreclosed, compared with 1.4 percent for other borrowers. The 181  foreclosed homes purchased by tax debtors had a total mortgage  insurance value of $36.5 million, potentially resulting in a loss to the  MMIF.
The FTHBC is a refundable credit, meaning taxpayers could receive  payments in excess of their tax liability. Federal law typically requires that  any federal tax refund be offset to pay down an individual’s unpaid  taxes. Of the 3,815 borrowers we identified with tax debt, 233 received  a federal tax refund after claiming the FTHBC. We selected 9 of these  borrowers for a detailed review and found that all 9 were issued refunds  in accordance with federal law. For example, three of these cases had  filed bankruptcy prior to receiving the refund. Federal bankruptcy law  prevents IRS from taking collections actions, such as offsetting  postpetition refunds, against individuals undergoing bankruptcy  proceedings.
The amounts of unpaid federal taxes, mortgage insurance, and FTHBCs  we identified are likely understated for the following reasons:
Certain individuals did not file tax returns or underreported their  income, and therefore are not included in our analysis.
Data limitations in the FTHBC data prevented us from isolating all  individuals who benefitted from the FTHBC under the Recovery Act.
Any Recovery Act FTHBC recipient whose FTHBC was greater than  their outstanding tax liability would not be included in our analysis  because the refundable credit would have offset their outstanding tax  liability. Federal law generally requires that IRS offset any refund  against an individual’s tax liability.
section_title: Shortcomings in the Capacity of FHA- Required Documentation to Identify Tax Debts and in Certain Policies Allow Tax Debtors to Obtain Mortgage Insurance
paragraphs: 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. Requiring lenders to collect more reliable  information on tax debts could better prevent ineligible tax debtors from  obtaining FHA mortgage insurance. 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.
subsections: section_title: Information That FHA Requires Lenders to Collect on Mortgage Applicants Does Not Reliably Indicate the Existence of Federal Tax Debt
paragraphs: 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. The three sources of  information FHA requires lenders to obtain each have shortcomings in  their capacity to identify borrowers’ tax debts:
Uniform Residential Loan Application (URLA). The URLA requires that  applicants declare any federal debt that is delinquent or in default.  The URLA also requires applicants to disclose any liabilities, including  tax debt, so a lender can assess the applicant’s ability to repay the  proposed mortgage. While knowingly making false statements on an  URLA is a federal crime and may deter some from lying about their  tax debt, much of our work has focused on the inadequacies of self- reported information without independent verification. In fact, our  comparison of the URLAs in eight mortgage files with IRS tax data  revealed that five borrowers wrongly declared they were not, by FHA’s  definition, delinquent or in default on federal tax debt (e.g., not in a  valid IRS repayment agreement). In addition, six of the borrowers  did not properly disclose the tax debts on the liabilities section of the  URLA. Because of the federal statute that prohibits the disclosure of  taxpayer information, we are unable to refer these cases to FHA for  further investigation. Excerpts of the URLA where applicants are  required to disclose any debts that may affect their eligibility for FHA  mortgage insurance or their ability to repay the proposed mortgage  are illustrated in appendix II.
CAIVRS. FHA requires that lenders check all applicants against  CAIVRS, HUD’s database of delinquent federal debtors, to identify  federal debts. While it contains delinquent debt information from six  agencies, such as the Department of Education and the Small  Business Administration, CAIVRS does not contain federal tax  information from IRS because statutory restrictions generally prohibit  IRS from disclosing taxpayer information without the taxpayer’s  consent. Two of the three lenders we spoke with mistakenly believed  CAIVRS could be used to identify federal tax debt.
Credit reports. Lenders told us that credit reports, which contain public  records such as federal tax liens, were a primary method of identifying  liens to indicate certain tax debts. However, delinquent federal taxes  do not always appear on credit reports because IRS does not file liens  on all tax debtors with property. In addition, many FHA borrowers are  first-time home buyers and may not have real property on which IRS  can place a lien. IRS records indicated that only two of our eight  selected borrowers had tax liens filed against them at the time they  obtained FHA mortgage insurance.
Lenders using only these FHA-required methods for identifying tax debt  are missing an opportunity to more accurately determine whether  applicants are eligible for FHA-insured mortgages, in part, because they  do not have access to certain information. Access to the federal tax  information needed to obtain the tax payment status of applicants is  restricted under section 6103 of the Internal Revenue Code, which  prohibits disclosure of taxpayer data to lenders in most instances.  However, lenders may request information on federal tax debts directly  from IRS if the applicant provides consent. To verify the income of self- employed and commission-income applicants, FHA requires that lenders  obtain an applicant-signed consent form allowing the lender to verify the  applicant’s income directly with IRS.
The three lenders we spoke with indicated they use IRS form 4506-T  Request for Transcript of Tax Return to satisfy this requirement. FHA  could also compel lenders to use this form or otherwise obtain borrower  consent to identify tax debts. Files for four of our eight selected  borrowers had a copy of the IRS Form 4506-T in their FHA mortgage  files. The lenders for these borrowers used the 4506-T only to validate  income by requesting federal tax return transcripts and did not use the  form to request account transcripts that would have disclosed tax debt  information. None of the eight mortgage files contained IRS tax account  transcripts. Officials from each of the lenders we interviewed said it is  their policy to use the 4506-T only to validate the income of these  applicants, as this is the requirement under FHA policies. Officials from   In  two of the lenders used the form to verify income for all borrowers.contrast, officials from the third lender stated that they executed this form  for a random sample of additional applicants for income verification, but  noted that doing so for every applicant would be too burdensome.
As shown in figure 4, checking box 6a on the form allows a lender to  obtain tax return transcripts for applicants, which do not disclose tax debt  information. Checking box 6b would allow a lender to request and receive  account transcripts. Account transcripts contain information on the  financial status of the account, including information on any existing tax   These transcripts would allow a lender to identify federal taxes  debts. owed by any applicant, including debts not found on credit reports  because a federal tax lien does not exist. Checking box 6c would allow a  lender to obtain both tax return transcripts and account transcripts, which  the lender could use to verify the income of an applicant as well as  identify whether the applicant has federal tax debt. The lender may  request account transcripts only for the current year and up to 3 prior  years and must state the requested years on the form; transcripts beyond  this are generally unavailable. Despite this limitation, the IRS form 4506-T  could serve as a method for lenders to identify loan applicants with  unpaid debt. Without such a method, lenders may approve federally  insured mortgages for ineligible applicants with delinquent tax debt in  violation of OMB and FHA policies.
IRS returns the information requested on IRS form 4506-T within 10 business days at no  expense to the requester, or within 48 hours through the IRS Income Verification Express  Service (IVES) at an expense of $2.00, according to IRS officials.
section_title: Shortcomings in FHA Policies May Have Led to Ineligible Tax Debtors Obtaining Mortgage Insurance
paragraphs: All three lenders we spoke with unknowingly violated FHA policies on  requirements to investigate tax liens. Federal tax liens remain on a  property until the associated tax debt has been paid in full or otherwise  satisfied. The presence of a lien does not prevent an applicant from  receiving FHA mortgage insurance because, per OMB and FHA policies,  applicants are eligible for mortgage insurance if they are in a valid  repayment agreement. However, according to FHA officials, FHA requires  lenders to investigate whether the tax debt that caused the lien has been  resolved or brought current under a repayment plan. If it has not,  insurance must be denied. Lenders understood these policies to have  exemptions for some applicants. FHA officials told us that endorsing a  mortgage without determining applicant eligibility by investigating the  status of tax debts related to federal tax liens for any applicant is improper  due diligence.
Specifically, officials from two of the three lenders said they would  approve FHA insurance for applicants with a federal tax lien on their  credit report if IRS agreed to subordinate the lien to FHA. The lenders  believed this was in accordance with FHA policy that indicates that tax  liens may remain unpaid if the lien holder subordinates the lien to FHA.  One of the lenders told us that this policy could potentially allow ineligible  applicants with delinquent federal tax debt to obtain FHA mortgage  insurance. However, FHA officials told us that this policy is only  applicable if the lender has previously determined the applicant is eligible  by investigating the lien (i.e., requesting verification from IRS that they  have repaid their debt or are in a repayment agreement). See figure 5 for  FHA policy excerpts.
Officials from the third lender said they would approve any applicant rated  as “accept” by TOTAL without additional review or manual underwriting,  even if the applicant’s credit report showed a tax lien. The officials  believed this was consistent with FHA policy because TOTAL would not  have granted an “accept” unless the application met FHA requirements.  However, FHA officials told us that while TOTAL considers an applicant’s  credit score in its risk evaluation, it does not consider other factors such  as tax liens. FHA guidance states that the lender remains accountable for  compliance with FHA eligibility requirements, regardless of the risk  assessment provided by TOTAL.
Due to potential shortcomings in FHA policies, lenders may misinterpret  them, which could result in lenders approving federally insured mortgages  for ineligible applicants with delinquent tax debt in violation of OMB and  FHA policies. Our review was limited to mortgages obtained under the  Recovery Act provisions; however, these policies are the same for all  FHA mortgages. Our review included only a small percentage of all  mortgages insured by FHA in 2009, and it is likely that FHA’s unclear  policies may negatively affect some of the other mortgages.
section_title: Conclusion
paragraphs: FHA has helped millions of families purchase homes through its single- family mortgage insurance programs. As more and more Americans turn  to FHA to finance their homes, it is critical for FHA to ensure that it has  policies in place to minimize financial risks to the federal government  while meeting the housing needs of borrowers. Tax debtors who were  ineligible for FHA mortgage insurance were still able to obtain insurance,  despite FHA policies intended to prohibit this. Our review focused  exclusively on individuals who benefitted from the Recovery Act, which  only accounted for a small percentage of FHA borrowers in 2009;  nevertheless we were able to identify thousands of tax debtors who  obtained insurance. These debtors became seriously delinquent in their  payments and lost their homes to foreclosures at a higher rate than those  without tax debt.
Current shortcomings we found in the capacity of available information  sources to identify applicants’ tax debts could be addressed by improved  access to federal tax information. But because FHA’s underwriting  policies apply equally to all mortgage insurance applicants, it is likely that  loans we did not review also included tax debtors. To ensure compliance  with the confidentiality requirements associated with the disclosure of  taxpayer information, FHA would need to consult with IRS to take action  to identify tax debtors who are ineligible for FHA mortgage insurance, as  has been done to verify the income of certain applicants. This would  include developing appropriate criteria and safeguards to ensure taxpayer  privacy and minimize undue approval delays. In addition, strengthening  FHA policies and their interpretation by lenders can help prevent ineligible  tax debtors from continuing to receive the benefit of FHA insurance. To  the extent that borrowers with tax debt represent additional risk, FHA  could minimize the potential for this risk by taking steps to address the  issues identified in this report.
section_title: Recommendations for Executive Action
paragraphs: The Secretary of HUD should direct the Assistant Secretary for Housing  (Federal Housing Commissioner) to implement the following two  recommendations:
Consult with IRS to develop written policies requiring lenders to collect  and evaluate IRS documentation appropriate for identifying ineligible  applicants with unpaid federal taxes, while fully complying with the  statutory restriction on disclosure of taxpayer information. For  example, FHA could require lenders to obtain consent from borrowers  to allow FHA and its lenders to verify with IRS whether recipients of  FHA insurance have unpaid federal taxes.
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.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to IRS and HUD for review and  comment. IRS did not have any comments in response to the draft report.  The Acting Assistant Secretary for Housing (Federal Housing  Commissioner) provided a written response which is reprinted in  appendix III.
In HUD’s response, the agency agreed with our recommendations and  acknowledged that current policies and procedures may fail to identify all  potential borrowers with delinquent tax debt. To address our  recommendations, FHA stated that it would contact IRS in an effort to  establish executable policy that may identify delinquent tax debtors.  Further, the agency affirmed that it would execute changes to current  FHA requirements for lenders in order to address the concerns  discovered through the audit. Included in its written response, HUD  provided technical comments which were incorporated into this report.  Specifically, HUD recommended that we change the terminology used to  characterize federal tax debts. According to HUD, this suggested change  would provide clarity and avoid the appearance that FHA knew of  delinquent tax debts. We agreed to make the recommended change.  However, for certain cases included in our review, evidence indicates that  FHA-approved lenders were aware of tax debts.
As agreed with your offices, unless you publicly release its contents  earlier we plan no further distribution of this report until 30 days from its  issue date. At that time, we will send copies of this report to interested  congressional committees, the Secretary of the Treasury, the Secretary of  Housing and Urban Development, the Commissioner of Internal Revenue,  the Acting Assistant Secretary for Housing (Federal Housing  Commissioner), and other interested parties. The report is also available  at no charge on the GAO Web site at http://www.gao.gov. If you have any  questions concerning this report, please contact Gregory D. Kutz at (202)  512-6722 or kutzg@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Major contributors to this report are acknowledged in  appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.
To determine the extent to which individuals with unpaid tax debt  benefited from the Recovery Act’s provision for increased loan limits on  FHA mortgage insurance, we obtained and analyzed electronic data from  FHA’s Single Family Data Warehouse (SFDW) as of September 2011.  We also obtained and analyzed tax debt data from the Internal Revenue  Service (IRS) as of June 30, 2010. Using the taxpayer identification  numbers (TIN) present in these data, we electronically matched IRS’s tax  debt data to the population we identified of Recovery Act borrower Social  Security numbers (SSN) from the SFDW. The Recovery Act stipulated  that revised FHA loan limits for 2009 be set in each county at the higher  of the loan limits established under the Economic Stimulus Act of 2008  (ESA) or those established under the Housing and Economic Recovery  Act of 2009 (HERA). Since loan limits would have reverted to HERA- established rates if the Recovery Act had not been promulgated, we  considered an FHA borrower to be part of our Recovery Act population if  he or she obtained mortgage insurance in 2009 at a value greater than  would have been authorized under HERA. FHA officials agreed with  this methodology.
To determine the extent to which individuals with unpaid taxes received  the FTHBC under the Recovery Act, we obtained and analyzed FTHBC  transaction data from IRS as of July 10, 2010, and then electronically  matched IRS’s tax debt data to the population of individuals who claimed  the FTHBC under the Recovery Act. Since IRS’s FTHBC data do not  contain home purchase dates, we were unable to isolate all individuals  who benefitted from the FTHBC under the Recovery Act. As a result, we  used the SFDW to obtain home purchase dates to determine which  FTHBCs were awarded under the Recovery Act. We electronically  matched the FTHBC transaction data TINs with the SSNs in the SFDW  and extracted mortgages with closing dates from January 1, 2009,  through November 30, 2009, to identify a population of Recovery Act  FTHBC recipients with FHA mortgage insurance. We identified 722,003  FTHBC claims associated with the Recovery Act for individuals who  financed their home using FHA mortgage insurance, and in our prior work  we found that there were 1,669,081 FTHBC claims filed under the  Recovery Act.approximately 43 percent of all FTHBCs claimed under the Recovery Act.
Therefore, our analysis includes two groups:  1.  individuals who received FHA mortgage insurance under the higher  limits authorized under the Recovery Act, and  2.  individuals who received the FTHBC under the Recovery Act and  obtained FHA mortgage insurance of any value.
Further, to determine the extent to which these Recovery Act FTHBC  recipients with unpaid tax debt received federal tax refunds in the same  year they claimed the FTHBC, we obtained and analyzed federal tax  refund data from IRS from fiscal years 2009 and 2010.matched the refund data TINs with the TINs we identified to be FHA   We electronically  mortgage insurance borrowers who claimed the FTHBC under the  Recovery Act while having unpaid federal tax debt.
To avoid overestimating the amount owed by borrowers who benefitted  from the increased loan limits for FHA mortgage insurance under the  Recovery Act and FTHBC recipients with unpaid federal tax debts, and to  capture only significant tax debts, we excluded from our analysis tax  debts meeting specific criteria to establish a minimum threshold in the  amount of tax debt to be considered when determining whether a tax debt  is significant. The criteria we used to exclude tax debts are as follows:  tax debts IRS classified as compliance assessments or memo  accounts for financial reporting,  tax debts from calendar years 2009 and 2010 tax periods,  tax debts that were assessed by IRS after the mortgage insurance  was issued, and  tax debts from individuals with total unpaid taxes of less than $100.
The criteria above were used to exclude tax debts that might be under  dispute or generally duplicative or invalid, and tax debts that were  recently incurred. Specifically, compliance assessments or memo  accounts were excluded because these taxes have neither been agreed  to by the taxpayers nor affirmed by the court, or these taxes could be  invalid or duplicative of other taxes already reported. We also excluded  tax debts from calendar years 2009 and 2010 tax periods to eliminate tax  debt that may involve matters that are routinely resolved between the  taxpayers and IRS, with the taxes paid or abated within a short time. We  excluded any debts that were assessed by IRS after the mortgage  insurance was received because those debts would not have been  included in IRS records at the time the mortgage insurance was issued.  We also excluded tax debts of less than $100  because we considered  them insignificant for the purpose of determining the extent of taxes owed  by Recovery Act recipients. Using these criteria, we identified at least  6,327 Recovery Act recipients with federal tax debt.
To provide examples of Recovery Act recipients who have unpaid federal  taxes, we selected a non-probability sample of Recovery Act beneficiaries  for a detailed review. We used the selection criteria below to provide  examples that illustrate the sizeable amounts of taxes owed by some  individuals who benefitted from the Recovery Act:
We selected nine individuals who benefitted from increased FHA  mortgage limits who had (1) large amounts of unpaid federal tax debt  (at least $100,000), (2) at least three delinquent tax periods, and (3)  indications of IRS penalties or home foreclosures.
We also selected nine individuals who benefitted from the FTHBC and  obtained FHA mortgage insurance of any value who had (1) large  amounts of unpaid federal tax debt (at least $50,000), (2) at least five  delinquent tax periods, (3) FHA mortgage insurance of $200,000 or  more, and (4) indications of IRS penalties or home foreclosures.
We requested IRS notes, detailed account transcripts, and other records  from IRS as well as mortgage files from FHA for these 18 individuals. Of  the 18 total requested cases, FHA provided us information that only  allowed us to fully analyze 8 of them. Although we did not receive  complete information necessary to fully analyze the remaining cases, we  were able to assess all 18 for limited purposes (e.g., nonfiling of tax  returns). We also selected 9 additional cases of FTHBC recipients who  received tax refunds to determine how they were able to receive federal  tax refunds while having unpaid federal taxes. For these 9, we selected  individuals who had (1) at least $5,000 in unpaid federal tax debt, (2) at  least three delinquent tax periods, and (3) a federal tax refund value of at  least $5,000. All of our cases were selected to illustrate the sizeable  amounts of taxes owed by some individuals who benefitted from the  Recovery Act. None of our case selections provide information that can  be generalized beyond the specific cases presented.
To analyze the controls FHA has in place to prevent ineligible individuals  with unpaid federal tax debt from receiving mortgage insurance, we  reviewed FHA’s lender credit analysis and underwriting handbook,  mortgagee letters, and reports from GAO and HUD’s Office of Inspector  General. We also interviewed officials from FHA’s Office of Single  Family Housing and Office of the Chief Information Officer.
To understand how private lenders interpret and implement FHA’s  guidelines for preventing individuals with delinquent federal tax debt from  receiving mortgage insurance, we interviewed senior-level officials from  three large FHA-approved lenders. We selected four lenders based on  the following criteria: (1) we selected the two largest lenders in terms of  the number of FHA loans approved in 2009, and (2) we selected 2 of the  top 10 largest FHA lenders that approved a comparable number of FHA  loans in 2009 but varied in proportion of loans awarded to individuals with  federal tax debt. However, the lender chosen for having a high proportion  of loans awarded to individuals with federal tax debt declined to speak  with GAO officials. In total, the three lenders we interviewed endorsed  about 15 percent of all FHA mortgages for homes purchased in 2009.
subsections: section_title: Data Reliability Assessment
paragraphs: To assess the reliability of record-level IRS unpaid assessments and  FTHBC data, we relied on the work we performed during our annual audit  of IRS’s financial statements and interviewed knowledgeable IRS officials   We also performed electronic testing of  about any data reliability issues.required FTHBC elements. While our financial statement audits have  identified some data reliability problems associated with tracing IRS’s tax  records to source records and including errors and delays in recording  taxpayer information and payments, we determined that the data were  sufficiently reliable to address this report’s objectives.
To assess the reliability of record-level FHA mortgage insurance data, we  reviewed documentation from FHA, interviewed FHA officials who  administer these information systems and officials who routinely use  these systems for mortgage insurance management, verified selected  data across multiple sources, and performed electronic testing of required  elements. We determined that the data were sufficiently reliable for our  purposes.
We conducted this performance audit and related investigations from  April 2011 through May 2012. We performed this performance audit in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  audit findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Excerpts of the Uniform Residential Loan Application
paragraphs: Two of the three figures below represent sections of the Uniform  Residential Loan Application (URLA) where applicant’s are required to  disclose any debts that may affect their eligibility for FHA mortgage  insurance or their ability to repay the proposed mortgage. The third  excerpt lists the consequences of making a false statement on the URLA.  Knowingly making any false statement on the URLA is a federal crime  punishable by fine or imprisonment.
section_title: Appendix III: Comments from the Federal Housing Administration
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Matthew Valenta, Assistant  Director; Emily C.B. Wold, Analyst-in-Charge; Jamie L. Berryhill; Jeff  McDermott; Maria McMullen; Wayne Turowski; Susan B. Wallace; and  Timothy Walker made significant contributions to this report.