Mortgage Financing:

HUD Could Realize Additional Benefits from Its Mortgage Scorecard

GAO-06-435: Published: Apr 13, 2006. Publicly Released: May 15, 2006.

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Along with private mortgage providers, the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) has been impacted by technological advances that began in the mid-1990s and that have significantly affected the way the mortgage industry works. As a result, in 2004, FHA implemented Technology Open to Approved Lenders (TOTAL) Scorecard--an automated tool that evaluates the majority of new loans insured by FHA. However, questions have emerged about the effectiveness of TOTAL. Given these concerns, you asked GAO to evaluate the way the agency developed and uses this new tool. This report looks at (1) the reasonableness of FHA's approach to developing TOTAL and (2) the potential benefits to HUD of expanding its use of TOTAL.

Some of the choices that FHA made during the development process could limit TOTAL's effectiveness, although overall the process was reasonable. Like the private sector, FHA and its contractor used many of the same variables, as well as an accepted modeling process, to develop TOTAL. However, the data that FHA and its contractors used to develop TOTAL were 12 years old by the time FHA implemented the scorecard, and the market has changed significantly since then. Also, FHA, among other things, (1) did not develop a formal plan for updating TOTAL on a regular basis; (2) did not include all the important variables that could help explain expected loan performance; and (3) selected a type of model that limits how the scorecard can be used. Despite potential problems with TOTAL, HUD could still see added benefits from it. As a result of TOTAL, FHA lenders and borrowers have seen two new benefits--less paperwork and more consistent underwriting decisions. However, FHA could gain additional benefits if, like private lenders and mortgage insurers, it put TOTAL to other uses. These uses include relying on TOTAL to help inform general management decision making, price products based on risk, and launch new products. Adopting these scorecard uses from the private sector could potentially generate three other benefits for FHA, including the ability to react to changes in the market, more control over its financial condition, and a broader customer base. Additionally, HUD's Government National Mortgage Association, a government corporation that guarantees securities of federally insured or guaranteed mortgage loans, could use credit scores that are used by TOTAL to help improve the transparency of the secondary mortgage market.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In August 2006, HUD developed a policy and procedures manual that calls for annual (1) monitoring of the Technology Open to Approved Lenders (TOTAL) scorecard's ability to predict loan default, (2) testing of additional predictive variables to include in the scorecard, and (3) updating the scorecard with recent loan performance data.

    Recommendation: To improve how HUD uses and benefits from TOTAL, the Secretary of HUD should develop policies and procedures for updating TOTAL on a regular basis, including using updated data, testing additional variables, exploring hazard model benefits, and testing other cut points.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: HUD explored an additional use for the Technology Open to Approved Lenders (TOTAL) scorecard as part of a 2006 proposal to price FHA insurance premiums based on borrower risk. As we reported in June 2007 (GAO-07-708), FHA planned to use TOTAL scorecard to place borrowers in six different risk categories. FHA implemented a limited version of risk-based pricing in July 2008 but discontinued the practice in response to a Congressional moratorium that went into effect in October 2008.

    Recommendation: To improve how HUD uses and benefits from TOTAL, the Secretary of HUD should explore additional uses of TOTAL and the credit data it utilizes, including to help adjust cut points, implement risk-based pricing, develop new products, and enable Ginnie Mae to disclose more information about securities backed by FHA-insured loans.

    Agency Affected: Department of Housing and Urban Development


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