Under federal policy, those who are behind on their taxes are ineligible for FHA mortgage insurance unless they repay their debt or are in a valid repayment agreement with the IRS.[IMAGE]
However, the ""Government Accountability Office"":http://www.gao.gov/ (GAO) released a ""report"":http://www.gao.gov/ that revealed FHA insured over $1.44 billion in mortgages for 6,327 borrowers who had a total of $77.6 million in federal tax debt. The watchdog group explained that the borrowers benefited from the 2009 American Recovery and Reinvestment Act, which includes a provision that increased mortgage insurance loan limits and provided an estimated $12 billion in Recovery Act First-Time Homebuyer Credits (FTHBCs) to 1.7 million individuals.
Among the 6,327, 3,815 claimed and received $27.4 million in Recovery Act First-Time Homebuyer Credits (FTHBC). Unlike eligibility requirements for an FHA-insured mortgage, FTHBC was available to those who did have tax debt.
GAO acknowledged that it could not determine which of the 6,327 borrowers were on valid repayment plans with the IRS, and so it could not state the proportion of borrowers who were actually ineligible for FHA insurance. The GAO did evaluate eight borrowers and found that five were ineligible at the time they received FHA mortgage insurance.
The report also stated that mortgages obtained by FHA borrowers with federal tax debts who received the FTHBC posed a greater risk to FHA because they had foreclosure rates that were two to three times higher than those who were not behind on taxes. As of September 2011, the report stated that 26.9 percent of the 3,815 mortgages with those characteristics were seriously delinquent on their payments compared with 11.9 percent of borrowers without tax debt who also received the FTHBC and FHA mortgage insurance. About 4.7 percent of the borrowers with tax debt were foreclosed, compared with 1.4 percent for borrowers with no tax debt.
The report stated that some ineligible borrowers who owed taxes received FHA mortgage insurance because of shortcomings related to FHA requirements regarding documentation to identify tax debts.
For example, the report points out that while lenders must take steps to find out an applicant's federal debt status, commonly used sources such as the loan application and credit report do not always have reliable information on an applicant's tax debt.
Legal restrictions prohibit disclosure of taxpayer information in most instances, and so lenders must receive consent from the taxpayer through an IRS form.
As a recommendation, GAO suggested two changes for HUD: consult with IRS to require lenders to collect more reliable tax debt information from applicants and provide lenders with revised policies or guidance for approving FHA mortgage insurance.