(WASHINGTON, D.C.) - A new report from the Government Accountability Office (GAO) found that thousands of home-buyers with significant tax debt were given one-time mortgage help under the American Recovery and Reinvestment Act (ARRA), despite federal rules that make tax cheats ineligible for federal mortgage insurance. The report found that “many individuals with tax debt take advantage of government programs, such as federal loan insurance, thereby reaping benefits from these programs while failing to pay their own taxes.” The report also found tax cheats that took advantage of the program were two-to-three times more likely to default on home loans, posing a much higher risk for the program. The report was done at the request of Senators Tom Coburn, M.D. (R-OK), Carl Levin (D-MI), Max Baucus (D-MT), Orrin Hatch (R-UT) and Charles Grassley (R-IA).
“In the name of ‘stimulus,’ the federal government gave mortgage insurance to thousands of people who were tax cheats and had a bad track record paying their debts. No one would handle their own money that way. Yet, the federal government needlessly put taxpayers on the line to help tax cheats buy homes. Congress needs to ensure that tax cheats are no longer allowed to take advantage of FHA programs,” Dr. Coburn said.
“We need to do more, not less, to help America’s housing recovery and keep people in their homes,” said Levin. “But we can’t allow tax cheats to benefit from important federal programs. The FHA should, as GAO suggests, strengthen protections to make sure assistance goes to those who qualify.”
“As this report demonstrates, the trillion dollar stimulus has never lived up to the President’s promises,” said Hatch. “Not only has it funded things like turtle-tunnels and skateboard parks, but now we find out that known tax cheats are abusing a home ownership program. Give me a break. The American people deserve better than this – they deserve better than to have their hard-earned tax dollars flushed down the drain to benefit scam artists and tax cheats.”
“The stimulus spending program was ill-conceived, with far too little oversight,” Grassley said. “It shouldn’t surprise anyone, unfortunately, that tax dollars have gone to tax cheats. It’s another one of many negative consequences of writing checks without enough checks and balances.”
According to GAO, at least 6,327 tax delinquents, owing nearly $78 million in federal tax debt, received more than $1.44 billion in Federal Housing Administration (FHA) mortgage insurance for loans issued under the Recovery Act. More than half of these individuals also received a total of $27.4 million First-Time Homebuyer Tax Credits. Tax cheats, by law, are prevented from obtaining federal subsidies for mortgage insurance. The Recovery Act raised the limit on the loans FHA was allowed to insure, resulting in FHA insurance of more than $20 billion in for 87,000 households.
Tax cheats can legitimately receive mortgage insurance, but only after entering an approved repayment plan set up with the Internal Revenue Service (IRS). However, the GAO sampled eight of these tax delinquency cases and found that five did not have valid IRS repayment plans. The number of tax cheats receiving mortgage assistance was in part “due to shortcomings in the capacity of FHA required documentation to identify tax debts” and other policies that lenders may misinterpret.
One of the tax cheats profiled in the report owed $10,000 in taxes, but still received over $700,000 in mortgage insurance. At the same time, the tax cheat claimed the earned income tax credit (EITC). The tax cheat later filed bankruptcy, defaulted on his federally insured home loan, and lost the house in foreclosure.
The report found that it is critical that the FHA has enforceable policies in place to reduce tax cheats receiving mortgage insurance so that the agency can “minimize the financial risks to the federal government while meeting the housing needs of borrowers.”
GAO estimated that the impact of giving mortgage insurance to known tax cheats could weaken the already precarious financial condition of the FHA Mutual Mortgage Insurance Fund (MMIF), which funds its programs. FHA insures lenders against the costs from foreclosures. The fund currently has only $2.6 billion in reserves to protect its entire $1.08 trillion mortgage portfolio, well below statutorily mandated levels. And since tax cheat borrowers are two to three times more likely to be foreclosed upon, the trust fund is likely only to weaken further. Tax-cheat owned foreclosed properties approved under the Recovery act have already potentially cost the (MMIF) over $81 million.
Read the full report here: GAO-12-592 "Recovery Act: Tax Debtors Have Received FHA Mortgage Insurance and First-Time Homebuyer Credits"
Read The Washington Times' reporting on GAO's findings.