How HUD got off 'high-risk' list

Information technology that lets officials use risk-based monitoring, as well as new statutory authority to match names against an employment database, helped the Housing and Urban Development Department to escape a high-risk designation this year for the first time since 1994.

In January, the Government Accountability Office released its latest report on federal programs at high risk for fraud, waste, abuse and mismanagement. In what Comptroller General David Walker called a "historic achievement," HUD's programs for rental housing assistance and single-family mortgage assistance fell from the list to erase the agency entirely from the rolls.

Jim Martin, HUD's deputy chief financial officer, explained in an interview that most of the problems in the rental assistance programs stemmed from improper payments. Together, those programs disburse about $27 billion per year to 4.8 million households across the country, he said, collectively making them HUD's largest program area. The programs are income-sensitive, so they are vulnerable to errors where beneficiary data is inaccurate or out of date.

In late 2004, Congress granted HUD the right to draw on a Health and Human Services Department database on new hiring, Martin said. "To date, Congress has selectively chosen which programs get the authority to use that internal control tool, and which don't," he said.

For HUD, which already was authorized by beneficiary release forms to verify employment information, the ability to check against the HHS database eliminated the large administrative burden of calling individual employers. "It actually gives a degree of dignity to the beneficiaries, because they don't need to tell their employer they're getting a HUD subsidy," Martin said.

In the early phases of focus on the payments problem, the department saw gains just from talking with rental industry groups and tenant advocates about the plan, Martin said. "The industry groups don't want those few outliers who are fraudulently reporting incomes to bring their program down," he said, so voluntary compliance went up as participants learned of the impending crackdown. Later, the benefits of data matching started to kick in.

Martin said IT also has played into improvements in the programs' housing stock, thanks to a remote, automated system that collects annual physical inspection information on the entire housing portfolio. The system lets officials analyze the rental stock at an aggregate level, and target corrective action at problem performers, he said. "In 1994, we couldn't tell you anything about the quality of the housing stock. Today, we have information on 100 percent of it."

To get the single-family mortgage insurance program off the list, HUD instituted new strategies for risk-based monitoring of borrower credit and participating appraisers.

HUD works with about 11,000 lenders who process more than a million mortgages annually on behalf of the department. "If you deal with that large of a vendor population. . . you have to do a lot more [monitoring] in an automated fashion," said HUD CFO John Cox. "By monitoring them electronically, using algorithms to figure out where those risks are, it works."

At GAO's urging, the department improved the factors used to predict loan defaults and developed a process to regularly test other variables that could improve its risk modeling, according to a GAO report on the improvements.

Cox, who previously has worked at technology companies, said he's been impressed with how the department uses IT. He said one of his missions has been to get more money for the department's technology budget.

In that, as in other aspects of the risk remediation plans, top-level support has been key, he said. Evaluations for the President's Management Agenda quarterly score card have required HUD to update its progress on getting off the high-risk list. "Being part of the PMA certainly puts it out there, [because] every quarter you have to report on it," Cox said.

He also credits the agency's cooperative relationship with its reviewers. "Typically auditors will be evasive," claiming they'll know progress when they see it but refusing to identify the measures, the CFO said. But clear direction from GAO and HUD's inspector general helped the agency past being, as GAO's Walker put it recently, "the face of the high-risk list."

Cox said he expects that dramatic progress will give the agency credibility in upcoming congressional debate on how to modernize HUD's Federal Housing Administration, which handles mortgage insurance. "With those changes in the legislation, yes, there will be areas of increased risk, and there are questions of [whether] FHA can manage that risk," he said. "And we say 'yes.' "