Foreclosures have remained a key hurdle to recovery from the U.S. economic slowdown. To help homeowners avoid preventable foreclosures, the Department of the Treasury (Treasury) allocated $29.9 billion for its Home Affordable Modification Program and other programs under the Making Home Affordable Program. The goal of the Home Affordable Modification Program is to help struggling borrowers stay in their homes by reducing their monthly mortgage payment to a more affordable amount. Since 2009, the Federal Housing Administration (FHA) and the Departments of Veterans Affairs (VA) and Agriculture (USDA)—which collectively insured or guaranteed about $248 billion in single-family home mortgages in fiscal year 2012—also expanded their foreclosure mitigation efforts. Evaluating the costs of various loan modification actions enables agencies to more effectively help borrowers keep their homes and protect taxpayers’ interests.
Research on the effectiveness of these efforts, however, has been limited, and the relationships between particular mitigation actions and loan and borrower characteristics on keeping loans current are not well understood. Information on the outcome of foreclosure mitigation efforts is central to helping ensure that these efforts efficiently and effectively preserve homeownership, prevent avoidable foreclosures, protect home values, and reduce taxpayers’ costs.
As noted in GAO’s June 2012 report, three of the six agencies reviewed had not incorporated analyses of long-term costs into their loss mitigation efforts. Treasury, Fannie Mae, and Freddie Mac analyzed the performance of modified loans and considered loan and borrower characteristics to better understand the long-term costs of various loan modification actions taken under its program. In contrast, GAO found that FHA had not updated its analysis of loan performance and long-term costs to reflect changes to its loss and foreclosure mitigation activities since 1996. In addition, FHA officials said that they had not assessed the extent to which individual servicers considered long-term costs in making decisions about which mitigation options to offer to borrowers. FHA collected limited data on loan and borrower characteristics at the time of a mitigation action, but not key information—such as borrower income and expenses—that could be analyzed to help identify which action would be most appropriate for the borrower and for minimizing losses to the federal government. More recently, FHA began to calculate redefault rates (becoming 90 days or more delinquent) for specific loss mitigation actions and planned to examine these data in the future.
USDA and VA also had not incorporated analyses of long-term costs into their loss mitigation efforts. USDA collected loan-level data from servicers on loan performance and type of action taken and separately collected data on certain loan and borrower characteristics, but had not matched or analyzed these separate data sets. Although VA collected some information about the performance of modified loans and modified loan characteristics, it had not analyzed its portfolio to understand differences in performance based on type of mitigation actions or for loan and borrower characteristics. VA also had not evaluated servicer-provided data on loan performance and other mitigation actions to determine redefault rates or used servicer-reported information on loan and borrower characteristics to determine the optimal change in monthly payment amounts for future modifications.
GAO’s analysis of loan-level data purchased from a private vendor identified certain loan and borrower characteristics that reduced the redefault rate after being modified. When controlling for observable borrower and loan characteristics, large reductions in monthly mortgage payments (specifically, reductions of 30-49 percent) resulted in lower 6-month redefault rates. But reductions in monthly payments of 50 percent or more did not result in further improvement in the 6-month redefault rate.
Because FHA did not analyze the performance of mitigation activities by loan and borrower characteristics and VA and USDA did not analyze these activities by type of mitigation action or loan and borrower characteristics, the agencies had a limited understanding of the ultimate costs and effectiveness of their foreclosure mitigation efforts. If the agencies better understood the performance and ultimate costs of each mitigation action, they could change the order in which mitigation options were offered or adjust their eligibility requirements to both improve the likelihood of borrower success and reduce losses. Conducting more comprehensive analyses could help ensure that federal foreclosure mitigation efforts are as effective as possible while limiting long-term costs.
Generally, federal agencies are responsible for helping ensure that foreclosure mitigation efforts reduce taxpayers’ costs. To more fully understand the strengths and risks of foreclosure mitigation actions and protect taxpayers from absorbing avoidable losses, GAO recommended in June 2012 that FHA, VA, and USDA periodically analyze the effectiveness and long-term costs and benefits of their mitigation strategies and actions. These analyses should consider (1) the redefault rates associated with each type of mitigation action and (2) the impact that loan and borrower characteristics have on the performance of different actions. The agencies should use analysis results to reevaluate their mitigation approaches and provide additional guidance to servicers to effectively target mitigation actions. If FHA, VA, and USDA do not maintain data needed to consider this information, they should require servicers to provide the information.
Estimating definitive cost savings in this area is challenging because such savings will depend on the extent to which the agencies use the analyses to reduce their losses associated with mitigation efforts. However, modest reductions in claims that would be associated with improvements to FHA’s, VA’s, and USDA’s loss mitigation efforts could achieve millions of dollars in savings. For example, in fiscal year 2012, FHA paid more than $17 billion in claims related to defaults. If changes to FHA’s loss mitigation program reduced claims related to defaults by 1 percent, potential costs savings would equal about $176 million. Given the size of the residential loan programs of VA and USDA, the potential cost savings would be smaller than for FHA.
This estimate is based on our review of various loan performance and cost information, including redefault rates for FHA and non-FHA modified loans, FHA’s historical loss mitigation expenses, and FHA’s reported claim losses.
The information contained in this analysis is based on the June 2012 report in the related GAO products section. To examine opportunities to enhance the effectiveness of current foreclosure mitigation efforts, GAO identified and reviewed the goals of federal foreclosure mitigation efforts as well as statutes, requirements, and guidance associated with these efforts. To describe the costs associated with the mitigation actions, GAO obtained summary data from Treasury, FHA, VA, and USDA. GAO did not independently confirm the accuracy of the summary data obtained, but took steps to ensure that the data used were sufficiently reliable for our purposes, such as interviewing officials familiar with the data. GAO also obtained viewpoints from a range of housing market participants and observers. For example, GAO met with officials from Treasury, FHA, VA, and USDA, to understand their foreclosure mitigation efforts, and representatives of housing market trade associations and consumer advocacy groups. Furthermore, GAO conducted an econometric analysis of redefault among modified loans by analyzing a sample of loan-level data purchased from a private vendor as well as loan-level data obtained from Treasury on Home Affordable Modification Program loans. GAO took steps to ensure that the data used were sufficiently reliable for our purposes.
Table 19 in appendix IV lists the programs GAO identified that might have opportunities for cost savings.
In commenting on the June 2012 report on which this analysis is based, FHA, VA, and USDA either agreed or generally concurred with GAO’s recommendations to consider (1) the redefault rates associated with each type of mitigation action and (2) the impact that loan and borrower characteristics have on the performance of different actions and subsequently have begun to take actions to implement GAO’s recommendation, as follows.
GAO provided a draft of this report section to FHA, VA, and USDA for review and comment. In emails received on February 10 and 7, 2014, FHA’s Special Projects Coordinator and Audit Liaison Officer and USDA’s GAO Liaison, respectively, stated that their agencies did not have any comments on this issue. In an email received on February 6, 2014, VA’s GAO Liaison indicated that VA continued to have action ongoing in response to our recommendation.
For additional information about this area, contact Mathew J. Scirè at (202) 512-8678 or email@example.com.