Watchdog: Some FHA-Approved Homes in Flint Had Unsafe Water

The Housing and Urban Development Department did not properly oversee water testing of Flint, Mich., homes approved for federal mortgage insurance -- and some of those properties subsequently showed unsafe levels of lead and copper in the water, according to a newly released report.

The department’s inspector general reviewed 17 loan files for homes located in Flint, and found that 11 of them did not include any evidence of water testing by the Federal Housing Administration-approved lender. At least four out of those 11 properties later tested positive for lead and copper levels above the Environmental Protection Agency’s safety level—one property had lead levels that were 50 times higher.

“This condition occurred because HUD’s existing controls were not designed to specifically detect whether the loan files contained evidence of water testing,” said the audit, which covered the period between April 2014 and May 2016, and was released in late July. “The issues identified represent an ongoing safety concern.”

The loan files the IG reviewed were part of 144 FHA loans with unpaid balances of more than $11 million approved after the Genesee County (where Flint is located) health department declared a public health emergency and a “do not drink” water advisory in October 2015. “Based on the results of our review, we believe that the files for the additional 127 loans not reviewed may not contain evidence of water testing and the related properties may have high levels of lead and copper,” the watchdog said.

The city of Flint switched its water source from the Detroit Water and Sewerage Department to the Flint River in April 2014 to save money, which sparked a health crisis because the Flint River water caused lead in aging pipes to leak into the public’s drinking water. Lead in drinking water can cause a host of health problems in adults, including cardiovascular issues and kidney damage, as well as learning disabilities, hearing problems and slowed development in children.

While HUD has other reviews and controls in place to ensure FHA properties are safe and habitable, the department wasn’t required to make sure lenders did water testing before the loan was approved.

“Relative to water quality, HUD indicated that the requirement for local competency puts the burden on each appraiser to know whether water testing is necessary,” the report said. “Based on the results of our audit, we do not believe that lenders and underwriters met their responsibility to ensure that properties in Flint, Mich., had a safe and potable water supply and that appraisers had a consistent understanding of when water testing was necessary.”

After President Obama declared an emergency in Flint in January, HUD “took several steps to remind lenders and appraisers of the applicable requirements,” the IG said. But prior to the president’s directive, the department didn’t have “specific guidance for its FHA Resource Center to use when answering inquiries about public water contamination issues,” the report noted.

The watchdog recommended HUD direct lenders to provide evidence of water testing for loans related to Flint properties approved after Oct. 1, improve its oversight of water testing, and take “appropriate administrative action against the lenders and appraisers for any cases where it finds that they did not take appropriate steps to ensure that properties had a safe and potable water source.”

In a four-page response, HUD said it generally agreed with the IG, noting it had been providing guidance to lenders outlining their responsibilities since February, and reviewing loan files submitted after that date to ensure compliance (the FHA has not found any evidence to date of those properties having unsafe water). The agency also said that the timeframes of the crisis and access to information mattered.

“FHA believes that mortgage loans endorsed for FHA insurance during the period Oct. 1, 2015 through Jan. 16, 2016—and the information provided in those loan files by appraisers and lenders regarding the water supply for the subject housing unit—should be considered individually, relative to the changing landscape of circumstances and information provided by state and local authorities about the condition of publicly-sourced water in Flint.”

The department said that as a result of its efforts, it now was “confident” that water testing was happening in Flint for any property “with a questionable water supply” seeking FHA mortgage insurance.

But the IG pushed back on that claim.

“As HUD indicated during a June 28, 2016, meeting, several of the 50 loan files that it was reviewing did not contain evidence of water testing, similar to the 11 loan files discussed in the finding that did not contain evidence of water testing to show that the water was safe,” the watchdog said in comments to HUD’s response. “Without evidence of water testing, HUD cannot 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.”

HUD has taken other action in the wake of the Flint crisis, including ensuring that public housing units and other HUD-supported housing have water filters, and working with a local provider to test lead levels in children living in public housing.