Government-Backed Loans Went to 6,300 Delinquent Taxpayers

By Sarah Portlock

More than 6,300 homeowners who owed millions of dollars in federal taxes received government-backed mortgages in violation of a federal policy, according to a report by a federal watchdog.

The Government Accountability Office study, viewed by Dow Jones Newswires, was conducted from April 2011 through last month and examined loans made in 2009 that were guaranteed by the Federal Housing Administration, a federal agency that backs loans made to buyers with low down payments. The report also found that borrowers with unpaid taxes had foreclosure rates two to three times higher than those who had paid taxes.

The agency insured over $1.44 billion in mortgages for borrowers who faced $77.6 million in federal tax debt, the GAO report said. Of those borrowers, about 3,800 received $27.4 million in tax credits for first-time homebuyers under a federal economic stimulus program that expired around two years ago.

The report blamed “shortcomings in the capacity of FHA-required documentation to identify tax debts, and shortcomings in other policies that lenders may misinterpret.”

Consumers who owe back taxes are not eligible for FHA-backed loans, unless the borrowers repay their debt or are in a valid repayment plan with the Internal Revenue Service. However, the first-time homebuyer tax credit was available to those who qualified, regardless of their tax debt.

The amounts of unpaid federal taxes, mortgage insurance and first-time homebuyer tax credits the GAO identified are “likely understated” because of limitations in the tax credit data and because some people either did not file tax returns or underreported their income and were not included in the analysis.

In a statement attached to the report, the Department of Housing and Urban Development — which oversees FHA — said it bars borrowers with tax liens from getting government-backed loans.

However, the FHA’s acting commissioner, Carol Galante, said the agency “agrees that current policies and procedures may fail to identify all potential borrowers with delinquent tax debt” and plans to clarify the issue with lenders.

Due to confidentiality requirements, Ms. Galante said it is difficult to discover delinquent tax debt and the FHA would benefit from better access to information on loan applicants’ tax debts. The GAO report recommended that FHA and the Internal Revenue Service develop written policies that require lenders to collect and evaluate tax documentation that would identify ineligible applicants.

The report looked at FHA mortgage insurance data as of September 2011, IRS data on first-time homebuyer tax credit transactions as of July 2010, and IRS data on unpaid federal tax debts as of June 2010.

–Alan Zibel contributed to this article.