How can you make a billion-dollar mistake and still come out ahead? When you are a federal agency that botches payouts to financially strapped homeowners.
No, this is not a trick question. But it is the trick that the Department of Housing and Urban Development thinks it pulled off when it neglected to adequately supervise its Preforeclosure Sales Program, costing taxpayers millions of dollars.
According to estimates by HUD's own Office of Inspector General (OIG), the department paid out $1.06 billion in claims for 11,693 preforeclosure sales that failed to meet the criteria for participation in the program, which allowed borrowers in default to sell their homes at less than what was owed on them.
But here's the kicker: While HUD deputy assistant secretary Charles Coulter agreed that execution was "inconsistent," HUD maintained in a statement that "absent the short-sale option, many of the loans would have gone into foreclosure, resulting in a far more costly conveyance claim" to the government.
According to Coulter, the claims the OIG says were paid erroneously may have resulted in a net benefit to the government of as much as $170 million.
The inspector general, which is an independent audit and investigative office within HUD that promotes efficiency and roots out fraud and waste, sees it a bit differently.
While it is "reasonable to assume" that some of these loans would have gone into foreclosure, and therefore that the ultimate cost to the government would likely be more than the $1 billion estimate, the OIG says in its report, "It is also reasonable to assume that at least some of these would have resulted in no claim or reduced claims due to alternative loss mitigation procedures."
The OIG arrived at its estimates by examining a small but statistically selected sample of 80 claims made to the program during the 12 months ended Aug. 31, 2011.
During that time, the Federal Housing Administration, the agency within HUD that insures lenders against losses should borrowers default on their mortgages, paid claims on nearly 20,000 preforeclosure sales.
The audit focused on the 16,976 preforeclosure sales claims submitted by the nine largest lenders participating in the program. Of the 80 claims in the sample, 61 -- or 76.3 percent -- did not meet the rules.
Coulter took exception to the quality of the sample, noting that the borrowers had an average credit score of 596 and an average delinquency of 8.7 months.
Given this profile, he said, it is likely that most of the 80 loans would have gone into foreclosure had their borrowers not been allowed to take part in the short-sale program. And since the recovery rate is greater in the preforeclosure program, he added, the claims paid were lower than they might otherwise have been.
Whether you accept Coulter's reasoning or the OIG's, there seems to be no question that HUD failed miserably in enforcing the program requirements. As a direct result, borrowers who otherwise may have been able to sustain their obligations were inappropriately relieved on their debt using FHA insurance fund reserves.
Specifically, the OIG found that claims were paid to borrowers who:
-- Had at least $5,000 in cash assets. In some cases, borrowers had bank balances that could cover up to nine months' worth of house payments. Yet they weren't required to put those funds toward their delinquent balances, even when it would have brought them current.
-- Did not show they had experienced an adverse and unavoidable hardship. In one instance, the borrower claimed his income had been declining, when in actuality it was rising.
-- Did not live in the property. In some instances, the borrowers' tax returns listed the property as a rental for several years. In others, borrowers reported their properties as rentals to their lenders.
The report also noted that lenders failed to verify the borrowers' income or calculate it properly.
HUD paid by far the largest number of claims in instances where the lender did not adequately verify expenses and subtract them from income to determine if borrowers had enough surplus to pay at least part of what they owed under some kind of repayment arrangement.
"In nearly all cases," the OIG found, "expenses claimed by the borrowers exceeded those verified by the lender."
The investigation also found that in some cases, lenders calculated income based on the earnings of only one co-borrower or determined borrower income without actually verifying it.
The OIG recommends that HUD go after the lenders involved in the improper claims. But here's the other kicker: Many of them are going to skate.
Of the 61 bad claims, 55 were submitted by the five major lenders involved in the big national mortgage settlement. In exchange for providing $25 billion in relief for distressed borrowers, the five were pardoned for misconduct in loan servicing in the settlement with state and federal authorities.