The Federal Housing Administration insured over $1.44 billion in mortgages for 6,327 borrowers with $77.6 million in federal tax debt who benefited from the 2009 American Recovery and Reinvestment Act. Of these borrowers, 3,815 individuals claimed and received $27.4 million of First-Time Homebuyer Credits from the Recovery Act., according to a report by the Government Accountability Office.

Tax debtors, by law, are prevented from obtaining federal subsidies for mortgage insurance. The Recovery Act raised the limit on the loans the FHA was allowed to insure, however, resulting in FHA insurance of more than $20 billion in for 87,000 households.

Tax debtors can legitimately receive mortgage insurance, but only after entering an approved repayment plan set up with the Internal Revenue Service. 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 delinquent taxpayers 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. The tax cheat later filed for 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.”

The 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, 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 FHA’s MMIF over $81 million.

“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,” said the report. 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-Okla., Carl Levin, D-Mich., Max Baucus, D-Mont., Orrin Hatch, R-Utah, and Charles Grassley, R-Iowa.

“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,” Coburn said in a statement. “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.”

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