A federal watchdog found that the Department of Housing and Urban Development failed to properly service the majority of a sampled set of federally backed loans meant to help struggling homeowners keep their homes, raising the risk that the government will never collect debts owed to it, according to an audit released June 25.

The HUD Office of Inspector General reported that the department’s National Servicing Center did not service all due-and-payable “partial claims” in line with agency rules, regulations and procedures. In a statistical sample of 81 loan files tied to FHA-insured mortgages that were terminated in fiscal years 2021 through 2024, auditors found servicing or collection problems in 74 of them.

The errors included missing loan documents, demand letters that were never sent, and the late delivery and uploading of paperwork, the report said. Auditors attributed the failures to a surge in the volume of partial claims, weak oversight of the private contractor that handles the loans and the servicing center’s continued reliance on manual processes to execute, service and close out the claims.

“As a result, there is an increased risk that FHA will not collect the debts, ultimately impacting the FHA insurance fund,” the report stated.

A partial claim is a loss-mitigation tool in which HUD advances money to bring a delinquent FHA-insured mortgage current, allowing the borrower to stay in the home. The borrower signs a note and mortgage payable to HUD, and the debt comes due when the primary mortgage is paid off, refinanced out of the FHA program, or the property is sold. The government has paid more than 1.8 million partial claims since the program started in 1997.

The audit’s universe covered 343,801 partial claims valued at more than $7.7 million that were tied to FHA mortgages terminating between fiscal 2021 and 2024. Auditors drew a stratified sample of 81 cases from that pool.

Among the specific problems, auditors found that complete and accurate servicing files were not maintained in 72 of the 81 files reviewed, nearly 89 percent. In 37 files, roughly 46 percent, the contractor did not submit lien releases for recording on time, with delays running from 11 to 594 business days. A lien release is needed for a borrower to close on a sale or refinance, and the report warned that delays could cost homeowners those opportunities.

Payoff checks were deposited late in 14 files, with delays ranging from two to 25 business days and no explanation logged in the system, the report said. Demand letters for missing documents were not sent or were sent months late in nine files; in two of those, letters due at day 61 went out 251 and 277 days after the partial claim was executed. Auditors said those cases should have been referred to HUD’s Office of Program Enforcement to reclaim the claim amounts from the lender.

The servicing center contracts out the work of servicing, collecting and managing partial claims to a national Loan Servicing Contractor. Auditors said the contract lacked clearly defined performance requirements for tracking and collecting the claims, and did not specify how many claims the contractor was expected to process or a timeline for clearing a backlog. Quarterly monitoring reviews by HUD’s contracting officer representative between October 2021 and February 2025 flagged no problems with partial-claim servicing, the report noted.

Both the prior contractor, whose contract ended in October 2021, and the current one contributed to the discrepancies, auditors found. At least 35 of the 81 files had problems linked to the current contractor. The report tied much of the backlog to the COVID-19 pandemic, when court closures halted the recording of releases and reduced staffing, disrupting the transfer of claims to HUD’s Financial Operations Center for collection.

The Inspector General made three recommendations: that HUD develop procedures to notify borrowers of outstanding partial-claim amounts and their obligation to pay; that it work with the Office of the Chief Procurement Officer to build formal contractor-monitoring procedures with performance metrics; and that it upgrade its tracking systems, including automating letters and linking to its Single Family Insurance System.

In a June 10 memo, Matthew Jones, HUD’s deputy assistant secretary for single-family housing, agreed with all three recommendations, contingent on funding. The office said it would submit action plans and target dates after the final report is issued.

The audit is a follow-up to a 2016 OIG report that flagged uncollected partial claims. Auditors said the corrective actions from that earlier review did not fix the underlying problem. The new report also noted that recommendations from three other partial-claim audits, dating to 2018 and 2019, remain open.

The audit was conducted from April 2025 to March 2026 out of the OIG’s field office in Kansas City, Kansas.