During its audit of HUD’s oversight of the Federal Housing Administration (FHA), the Office of the Inspector General (OIG) determined that HUD did not ensure that lenders verified that the properties in Flint, Mich., that were approved for FHA mortgage insurance had a continuing and sufficient supply of safe and potable water.
HUD had insured loans on properties in Flint that closed after the city began using the Flint River as its water source in April 2014. This included 144 HUD-insured loans with unpaid balances totaling $11.2 million that were endorsed after the health department first declared a public health emergency on Oct. 1, 2015.
“Specifically, 11 of the 17 files reviewed did not contain evidence of water testing to show that the water was safe, and subsequent testing performed by the state of Michigan showed that at least four of the 11 properties had lead and copper levels above the Environmental Protection Agency’s (EPA) action levels. This condition occurred because HUD’s existing controls were not designed to specifically detect whether the loan files contained evidence of water testing,” the OIG stated. “The issues identified represent an ongoing safety concern.
“Further, HUD and homeowners also face an increased risk of loss if property values decrease due to the water safety issues, and homeowners may not have sufficient resources needed to attain and maintain safe water,” the OIG added.
The EPA, which is required under the Safe Drinking Water Act to determine levels of contaminants in drinking water at which no adverse health effects are likely to occur, has set the maximum contaminant level goal for lead in drinking water at zero because lead is a toxic metal that can be harmful to human health, even at low exposure levels.
The OIG recommended HUD to direct the applicable lenders to provide evidence showing that the properties had a safe and potable water source at the time the loans closed and were endorsed. If the lenders cannot provide this evidence, the OIG recommended that HUD direct them to either perform water testing and any necessary remediation to ensure that the properties currently have a safe and potable water source, or indemnify HUD against any future loss.
The OIG further recommended that HUD take appropriate administrative action against the parties involved for any cases where they did not take appropriate steps to ensure that properties in Flint, Mich., had a safe and potable water source, and improve its controls to ensure that it does not insure additional loans in Flint for properties that do not have a safe and potable water source.
“To be eligible for an FHA-insured loan, borrowers must meet certain credit qualifications. Additionally, the properties must meet minimum property requirements. HUD Handbook 4000.1, section II, paragraph A.3.a.ii(F) establishes standards and provides guidance on minimum property requirements, including that properties have a sufficient supply of safe and potable water. Further, regulations at 24 C.F.R. 200.926d(f) state that properties must contain a safe water supply and 24 C.F.R. 203.52 discuss requirements for loans on properties where public water systems do not meet basic requirements,” the OIG stated.
The contamination in Flint is believed to be a result of the city’s switching its water supply to the Flint River on April 25, 2014, which it did as a cost-saving measure. As of March 25, 2016, Michigan had tested 16,955 water samples from residential properties. Of those samples, 1,305 had tested above the EPA action level for lead, and 78 samples had tested above the EPA action level for copper.
“As of March 31, 2016, HUD had more than 13,362 actively insured loans in Genesee County, including 4,701 loans for properties located in Flint,” the OIG stated. “Since April 25, 2014, when the city switched its water source to the Flint River, HUD had endorsed 616 loans for properties in Flint with unpaid balances totaling $45.8 million. Of the 616 loans, 144 were endorsed after the health department first declared a public health emergency on Oct. 1, 2015. The unpaid balances for these 144 loans total more than $11.2 million.”
In February 2016, HUD issued a question-and-answer document that recognized the water contamination crisis in Flint and reminded lenders and other stakeholders involved with FHA transactions of the requirements for properties to be eligible for insurance.
The guidance stated that if a property was located in an area serviced by an unacceptable water system with unacceptable levels of contaminants, including lead, a water test must be completed.
The OIG found that HUD’s existing controls were not designed to specifically detect whether loan files contained evidence of water testing. Although it was found that HUD took steps to remind lenders and appraisers of the water-testing requirements – after President Obama signed the emergency declaration in January 2016 – HUD did not always document its efforts and did not proactively reach out to individual lenders.
“If HUD directs the lenders for the 11 loans reviewed and the additional 127 loans not selected for review to provide evidence showing that the properties had a safe and potable water source at the time the loan closed, or, if the lenders cannot provide this evidence, directs them to perform water testing and any necessary remediation to ensure that the properties currently have a safe and potable water source, or indemnify HUD against any future loss, it could put up to $10.8 million to better use,” the OIG stated.
The OIG found that at least four properties had lead and copper levels above the EPA action level, adding that although the state’s testing was performed after the loans closed and were endorsed, “the lenders may have detected the water contamination issues if they had tested the water.”
“While HUD had several controls in place, such as its post endorsement technical review and regular monitoring review processes, these controls were not designed to specifically address the issue of required water testing of properties in areas serviced by a public water system with known issues,” the OIG stated.
For example, loans insured through the Lender Insurance Program are not reviewed by HUD before endorsement. Although loans not insured through the program are reviewed by a HUD contractor before endorsement to check for the presence of certain documents, evidence of water testing was not among them.
Also, the OIG found that HUD’s post endorsement technical review process was not designed to specifically detect whether the loan files contained evidence of water testing.
The Quality Assurance Division’s Desk Guide did not include steps to verify that lenders followed requirements to ensure that properties had a safe and potable water source. Although the Single Family Loan Review Basis for Ratings guide contained a finding code for properties that did not meet minimum property requirements or standards, there were no examples regarding water contamination issues.
HUD had performed two reviews after Oct. 1, 2015, for lenders that had approved loans for properties located in Flint since the first emergency declaration; however, its findings did not discuss water contamination issues.
“HUD did not ensure that lenders verified that properties in Flint, Mich., that were approved for FHA mortgage insurance had a continuing and sufficient supply of safe and potable water. This condition occurred because HUD’s existing controls were not designed to specifically detect whether the loan files contained evidence of water testing. Further, while HUD took steps to remind lenders and appraisers of the requirements after the president signed the emergency declaration, it did not always document its efforts and did not proactively reach out to individual lenders,” the OIG concluded.