Rural Housing Service:

Actions Needed to Strengthen Management of the Single Family Mortgage Guarantee Program

GAO-16-193: Published: Mar 31, 2016. Publicly Released: May 2, 2016.

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What GAO Found

The estimated credit subsidy costs (expected net lifetime costs) of single-family mortgages guaranteed by the Department of Agriculture's (USDA) Rural Housing Service (RHS) substantially increased in recent years, partly due to high losses from the 2007 through 2011 housing crisis. For example, the fiscal year 2013 and 2014 reestimates (which federal agencies must do annually) indicated higher expected costs of $804 million and $615 million, respectively, compared with the prior reestimates (see fig.). To improve the current estimation method (which relies on average historical losses), RHS hired a contractor to develop statistical models that will predict losses based on loan, borrower, and economic variables.

Rural Housing Service Guaranteed Single-Family Mortgage Portfolio and Annual Net Credit Subsidy Reestimates for the Portfolio, Fiscal Years 2004-2014

Rural Housing Service Guaranteed Single-Family Mortgage Portfolio and Annual Net Credit Subsidy Reestimates for the Portfolio, Fiscal Years 2004-2014

RHS's policies and procedures are not fully consistent with all Office of Management and Budget (OMB) standards for managing credit programs (OMB Circular A-129). RHS's policies and procedures are consistent with the OMB standards in most areas, including loan documentation, collateral requirements, and aspects of applicant screening and lender oversight. However, RHS

has not established and published all required lender eligibility standards such as principal officer qualifications (e.g., experience level) and financial standards (e.g., minimum net worth);

lacks written policies and procedures for a committee responsible for analyzing and addressing the credit quality (default risk) of guaranteed loans;

has not established a position independent of program management to help manage the risks of its guaranteed portfolio;

has not established risk thresholds (for example, maximum portfolio- or loan-level loss tolerances) and uses certain loan performance benchmarks that have limited value for risk management; and

has not incorporated a discussion of areas needing increased management focus into its “dashboard” reports.

These and other inconsistencies occurred in part because RHS has not completed an ongoing assessment of its policies and procedures against Circular A-129. Furthermore, the Office of Rural Development (which oversees RHS) has not established procedures for prioritizing Circular A-129 reviews of its credit programs based on risk. More fully adhering to Circular A-129 standards would enhance RHS's effectiveness in managing the risks of its guarantee program.

Why GAO Did This Study

In recent years, RHS's single-family mortgage guarantee program has grown significantly, and RHS currently manages a guaranteed portfolio of more than $100 billion. RHS helps low- and moderate-income rural residents purchase homes by guaranteeing mortgages made by private lenders.

GAO was asked to examine the program's cost estimation methodology and risk-management structure. This report discusses (1) recent trends in the credit subsidy costs of RHS's guarantee program and the process for estimating those costs and (2) the extent to which RHS's policies and procedures for the program are consistent with federal standards for managing credit programs. GAO analyzed RHS budget data for fiscal years 2004 through 2014, examined RHS policies and procedures, reviewed OMB standards, and interviewed RHS officials.

What GAO Recommends

GAO is making 11 recommendations to USDA to help ensure that RHS's policies and procedures are consistent with OMB standards and to strengthen management of the guarantee program and other credit programs. Areas on which the recommendations focus include overseeing lenders, formalizing or establishing key risk management functions, and assessing and reporting on portfolio risk and performance. RHS agreed with or said it was acting on five of the recommendations. RHS neither agreed nor disagreed with the rest but said it generally recognized the underlying risk implications. GAO maintains that the recommendations are valid, as discussed in the report.

For more information, contact Mathew Scirè at (202) 512-8678 or sciremj@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to enhance screening of loan guarantee applicants, the Secretary of Agriculture should direct the Undersecretary for Rural Development to complete steps to obtain access to Treasury's Do Not Pay portal and establish policies and procedures to deny loan guarantees to applicants who are subject to administrative offsets for delinquent child support payments.

    Agency Affected: Department of Agriculture

  2. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to strengthen oversight of lenders and servicers, the Secretary of Agriculture should direct the Undersecretary for Rural Development to develop and publish in the Federal Register qualification requirements for the principal officers of lenders and servicers seeking initial or continued approval to participate in the guarantee program.

    Agency Affected: Department of Agriculture

  3. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to strengthen oversight of lenders and servicers, the Secretary of Agriculture should direct the Undersecretary for Rural Development to develop and publish in the Federal Register capital and financial requirements for guarantee program lenders that are not regulated by a federal financial institution regulatory agency.

    Agency Affected: Department of Agriculture

  4. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to strengthen oversight of lenders and servicers, the Secretary of Agriculture should direct the Undersecretary for Rural Development to establish standing policies and procedures to help ensure that the agency reviews the eligibility of lenders and servicers participating in the guarantee program at least every 2 years.

    Agency Affected: Department of Agriculture

  5. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to enhance and formalize the guarantee program's risk-management structure, the Secretary of Agriculture should direct the Undersecretary for Rural Development to finalize and adopt policies and procedures for the guarantee program's Credit Policy Committee.

    Agency Affected: Department of Agriculture

  6. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to enhance and formalize the guarantee program's risk-management structure, the Secretary of Agriculture should direct the Undersecretary for Rural Development to document lines of communication between the different components of the risk-management structure for the guarantee program.

    Agency Affected: Department of Agriculture

  7. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to enhance and formalize the guarantee program's risk-management structure, the Secretary of Agriculture should direct the Undersecretary for Rural Development to complete steps to create and fill a Chief Risk Officer position for Rural Development (RD) as soon as practicable.

    Agency Affected: Department of Agriculture

  8. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to strengthen risk assessment and reporting, the Secretary of Agriculture should direct the Undersecretary for Rural Development to improve performance measures comparing RHS and the Federal Housing Administration loan performance, potentially by making comparisons on a cohort basis and limiting comparisons to loans made in similar geographic areas.

    Agency Affected: Department of Agriculture

  9. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to strengthen risk assessment and reporting, the Secretary of Agriculture should direct the Undersecretary for Rural Development to develop risk thresholds for the guarantee program, potentially in the form of maximum portfolio- or loan-level loss tolerances.

    Agency Affected: Department of Agriculture

  10. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to strengthen risk assessment and reporting, the Secretary of Agriculture should direct the Undersecretary for Rural Development to identify issues for increased management focus in high-level dashboard reports.

    Agency Affected: Department of Agriculture

  11. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To improve compliance with OMB Circular A-129 standards and strengthen management and oversight of the guarantee program, and to more effectively fulfill the requirements for conducting program reviews described in OMB Circular A-129, the Secretary of Agriculture should direct the Undersecretary for Rural Development to develop procedures for selecting RD credit programs for review based on risk and establish a prioritized schedule for conducting the reviews.

    Agency Affected: Department of Agriculture

 

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