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The Federal Housing Administration's monitoring of its direct endorsement lenders is failing to detect substantial underwriting deficiencies or mortgage fraud that could damage loan performance, according to a report by the Office of Inspector General of the Department of Housing and Urban Development.

"We found that in 70 of the 151 cases we reviewed, substantial underwriting errors were not detected by the post-endorsement technical review process and 32 cases (21%) with significant fraud indicators were not identified," the OIG report says.

Even when problems were detected, "little, if any, corrective action was taken," according to the OIG report.

Auditors from the Office of Inspector General also reported that FHA's on-site monitoring of lenders does not consistently target high risk lenders or high risk loans.

"As a result, many of the worst performing lenders (high risk) were not reviewed," the OIG report says.

HUD refused to officially comment on the OIG report, but a HUD official said that the report is "highly inaccurate."

FHA special assistant Matt Franklin said the agency "precisely" targets high risk lenders by using its Credit Watch system which tracks lenders with high default and claim rates. "And we use the results of our lender monitoring reviews as part of our targeting," he added.

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