Even though a house is foreclosed does HUD have a right to list sell a legally condemned house without notifying of issue?

Under the laws of all states in this country, the seller of real property is required to disclose to all prospective buyers all things that would materially affect the desirability or price paid for the property if known.

If HUD's representative knew of the failed septic system on the property you are writing about and failed to disclose such to a buyer, then the buyer could very well have a cause of action for concealment. Potentially the buyer of the house that you are writing about was made aware of the septic issue that you have raised before close of escrow. If so, then the buyer would have no claim for concealment against the seller.