Federal Housing Administration:

Opportunities Exist to Improve Defaulted Single-Family Loan Sales

GAO-19-228: Published: Jul 3, 2019. Publicly Released: Aug 2, 2019.

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Dan Garcia-Diaz
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GarciaDiazD@gao.gov

 

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The Federal Housing Administration helps increase homeownership by insuring mortgage loans that have less strict standards and lower down payments than conventional loans. The housing crisis of 2007-2011 led to historic rates of mortgage defaults, many of which were insured by FHA.

FHA can sell these loans in order to limit its losses from defaults. We found that the defaulted loans FHA sold were more likely to go into foreclosure than the defaulted loans FHA kept. In addition, about 3% of the loans FHA sold were not actually eligible for sale.

We made 9 recommendations, including that FHA establish a schedule for its eligibility checks.

[Map updated to correct the legend.]

Percentage of FHA defaulted loans sold, by state, 2010-2016

Map showing range of loans sold per 1,000 loans in default by state

Map showing range of loans sold per 1,000 loans in default by state

Additional Materials:

Contact:

Dan Garcia-Diaz
(202) 512-8678
GarciaDiazD@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

What GAO Found

The Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) uses multiple entities to check loan eligibility for the Distressed Asset Stabilization Program (DASP)—in which FHA accepts assignment of eligible, defaulted single-family loans from servicers in exchange for claim payments and sells the loans in competitive auctions. After servicers submit loans for sale, FHA and its contractors concurrently check loan data for completeness, validity, and eligibility. FHA relies on servicers to check eligibility a few weeks before and again after the bid date. The status of delinquent loans can be fluid, and a change in eligibility status close to this date may not be detected. GAO's analysis of fiscal year 2016 default data indicates about 2.67 percent of loans that FHA sold were ineligible based on length of delinquency or loss mitigation status. Without checking loan eligibility closer to bidding, FHA risks selling ineligible loans, and borrowers could lose access to benefits.

FHA does not evaluate outcomes for sold loans against similar unsold loans. GAO found that, in aggregate, sold defaulted loans were more likely to experience foreclosure than comparable unsold defaulted loans (see figure). However, GAO's analysis identified varying outcomes by purchasers and sales. For example, some purchasers' loans had higher probabilities of avoiding foreclosure, with borrowers making regular payments again by 24 months after the transfer of loans. Also, loans sold in 2016 sales were less likely to experience foreclosure compared to unsold loans. HUD policy states that the agency's evaluations isolate program effects from other influences. Evaluating outcomes for sold loans against similar unsold loans could help FHA determine whether DASP is meeting its objective of maximizing recoveries to the Mutual Mortgage Insurance Fund (MMI Fund) and understand the extent to which DASP helps borrowers.

Foreclosure and Foreclosure Avoidance Outcomes for Loans Sold through the Distressed Asset Stabilization Program and Similar, Unsold Loans, Fiscal Years 2013–2016

Foreclosure and Foreclosure Avoidance Outcomes for Loans Sold through the Distressed Asset Stabilization Program and Similar, Unsold Loans, Fiscal Years 2013–2016

Note: Graphs do not include loans that were unresolved, paid-in-full, and in some other statuses.

Changing some of FHA's auction processes may help the MMI Fund. FHA could increase participation and MMI Fund recoveries in its auctions by communicating upcoming sales earlier. One purchaser said that additional notice would allow it time to plan for the capital needed to bid. Also, FHA set reserve prices (minimum acceptable price) based on the amount it expected to recover after loans completed foreclosure—yet GAO estimates that some of these loans will avoid foreclosure (see figure). As a result, FHA risks recovering less for the MMI Fund in loan sales than if the loans had not been sold.

Why GAO Did This Study

HUD insures single-family mortgage loans and is authorized to sell defaulted loans under the National Housing Act. In fiscal years 2010–2016, FHA auctioned off approximately 111,000 loans to private purchasers under DASP. DASP helped reduce a backlog of federally insured defaulted loans stemming from the 2007–2011 financial crisis and was intended to protect the MMI Fund by paying insurance claims before the costly foreclosure process.

GAO was asked to evaluate DASP. This report examines, among other things, certain DASP procedures, including verifying loan eligibility criteria, and documentation; FHA's evaluation of the identified outcomes of sold loans and how these compare with similar, unsold loans; and the potential effects that changes to DASP might have on the MMI Fund. GAO reviewed FHA policies, contracts, and reports, and interviewed FHA officials, selected servicers and purchasers based on sales participation, and other stakeholders. GAO also conducted a statistical analysis comparing outcome data for sold loans and similar loans that remained FHA-insured and analyzed the effect of loan pool characteristics on bidder participation.

What GAO Recommends

GAO is making nine recommendations to FHA, including establishing specific time frames to check loan eligibility, evaluating loan outcome data, and changing auction processes to help protect the MMI Fund. FHA generally agreed with seven recommendations, and neither agreed nor disagreed with two. GAO maintains that all the recommendations are valid.

For more information, contact Dan Garcia-Diaz at (202) 512-8678 or GarciaDiazD@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: HUD developed Standard Operating Procedures for these sales and issued the procedures on October 17, 2019. Although we maintain that an eligibility check closer to the bid day would help prevent the sale of ineligible loans, these procedures outline the different parties involved in checking loan eligibility and note the timeframes throughout the sale process for which these checks should occur.

    Recommendation: The Commissioner of FHA should ensure that its eligibility checks are conducted throughout the DASP sale process, such as by establishing a schedule to check for eligibility at certain milestones. (Recommendation 1)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  2. Status: Closed - Implemented

    Comments: HUD developed Standard Operating Procedures for these sales that were published on October 17, 2019 that include a process for considering program changes. The procedures describe that HUD stakeholders (designees from the Office of Finance and Budget, Office of Asset Sales, Office of Risk Management, Office of General Counsel, and the FHA Commissioner's Office) will hold a policy decisions meeting at least 100 days prior to the bid day for an upcoming sale and continue to meet monthly. During this meeting, the stakeholders will (1) review the prior sale and proposed or implemented changes to determine whether the sale maximized recoveries, and (2) set policy objectives for the next sale. The Office of Asset Sales will create a Loan Sale Policy Memo following each meeting to capture discussions, decisions, or recommendations related to loan sale policy.

    Recommendation: In formalizing procedures for DASP, the Commissioner of FHA should document processes for timely consideration and review of program changes. (Recommendation 2)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  3. Status: Open

    Comments: HUD issued Standard Operating Procedures for these sales on October 17, 2019. We will continue to follow up with the agency on how it defines the DASP objectives and its development of measurable targets for the program objectives.

    Recommendation: The Commissioner of FHA should clearly define DASP objectives and develop measurable targets for all program objectives. (Recommendation 3)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  4. Status: Open

    Comments: HUD issued a Standard Operating Procedure for these sales on October 17, 2019. However, HUD has not yet developed criteria for when to hold a DASP sale based on performance criteria.

    Recommendation: The Commissioner of FHA should use performance data to develop criteria for when to hold DASP sales. (Recommendation 4)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  5. Status: Open

    Comments: HUD's contractor has performed a baseline analysis of the characteristics of loans that purchasers had reported as modified in the post-sale period. However, the analysis does not include a comparison to outcomes of similar, unsold loans. We will continue to follow up with the agency on this recommendation.

    Recommendation: The Commissioner of FHA should evaluate loan outcomes under DASP compared to outcomes for similar, unsold loans. (Recommendation 5)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  6. Status: Open

    Comments: HUD issued s Standard Operating Procedure for these sales on October 17, 2019. However, HUD has not yet addressed purchasers' compliance with FHA's modification requirements to ensure that purchasers submit the data needed to evaluate the sustainability of modifications. We will continue to follow up on the agency's response to this recommendation.

    Recommendation: The Commissioner of FHA should monitor individual purchasers' compliance with FHA's modification requirements and ensure the purchasers submit the data needed to evaluate the sustainability of modifications. (Recommendation 6)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  7. Status: Open

    Comments: HUD issued a Standard Operating Procedure for these sales on October, 17, 2019, which references developing a long-range sale planning timeline and an annual schedule that may be released to the public. We will continue to follow up on the agency's response to this recommendation.

    Recommendation: The Commissioner of FHA should communicate long-range notice to prospective bidders of upcoming DASP sales. (Recommendation 7)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  8. Status: Open

    Comments: HUD issued a Standard Operating Procedure for these sales on October, 17, 2019. The procedures address reserve pricing but we will continue to follow up with the agency on any plans to develop a methodology to assess the range of possible outcomes when setting the reserve prices.

    Recommendation: The Commissioner of FHA should develop a methodology to assess the range of possible outcomes for loans when setting DASP reserve prices. (Recommendation 8)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  9. Status: Open

    Comments: HUD issued Standard Operating Procedures for these sales on October 17, 2019. The procedures contained examples of loan eligibility criteria used in prior sales. We will continue to follow up with the agency on any plans to analyze the loan portfolio and market information prior to setting the criteria for future sales.

    Recommendation: The Commissioner of FHA should analyze FHA's loan portfolio and market information before setting loan eligibility criteria. (Recommendation 9)

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

 

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