Single-Family Housing: Opportunities to Improve Federal
Foreclosure and Property Sale Processes (17-APR-02, GAO-02-305).
Federal programs in the Federal Housing Administration (FHA), the
Department of Veterans Affairs (VA), and the Rural Housing
Service (RHS) promote mortgage financing for low-income,
first-time, minority, veteran, and rural home buyers. Congress
has also chartered private corporations--Fannie Mae and Freddie
Mac--to provide mortgage lending and to promote homeownership
opportunities. Many homeowners fall behind in their mortgage
payments each year due to unemployment, health problems, or the
death of a provider. To avoid high cost forclosure proceedings
when home buyers fall behind on their obligations, FHA, VA, and
RHS instruct mortgage servicers, typically large financial
institutions, to assist the home buyers in bringing their
mortgage payments current. Despite these efforts, in 118,000
cases in 2000, the mortgage servicers engaged in various
foreclosure proceedings under the direction of the organizations.
FHA procedures delay the initiation of critical steps necessary
to preserve the value of foreclosed properties and to sell them
quickly. While Fannie Mae, Freddie Mac, VA, and RHS designate one
entity as responsible for the custody, maintenance, and sale of
foreclosed properties, FHA divides these responsibilities between
its mortgage servicers and management and marketing contractors,
which operate largely independently of one another. Determining
the organizations' comparative performance in selling foreclosed
properties is difficult because FHA and RHS do not collect all of
the data necessary for comparison. However, on the basis of
available data, it takes nearly 90 longer to acquire and sell FHA
foreclosed properties than VA properties, and about 130 to 145
days longer to acquire and sell FHA properties than RHS, Fannie
Mae, and Freddie Mac properties.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-305
ACCNO: A02937
TITLE: Single-Family Housing: Opportunities to Improve Federal
Foreclosure and Property Sale Processes
DATE: 04/17/2002
SUBJECT: Financial institutions
Foreclosures
Homeowners loans
Housing programs
Mortgage programs
Real estate sales
Real property
Risk management
Mutual Mortgage Insurance Fund
******************************************************************
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GAO-02-305
Report to the Honorable Paul S. Sarbanes Chairman, Committee on Banking,
Housing, and Urban Affairs, U. S. Senate
United States General Accounting Office
GAO
April 2002 SINGLE- FAMILY HOUSING
Opportunities to Improve Federal Foreclosure and Property Sale Processes
GAO- 02- 305
Page i GAO- 02- 305 Single- Family Housing Letter 1
Results in Brief 3 Background 5 The Organizations Conduct Foreclosures
within State and Federal
Guidelines 8 FHA Property Custody Procedures Delay Maintenance and
Marketing 14 FHA and VA Have Not Adequately Supported Title Insurance
Policy Expenditures 28 Available Data Suggest FHA Takes Longer to Sell
Foreclosed
Properties 32 Conclusions 37 Recommendations 38 Agency Comments and Our
Evaluation 39
Appendix I Scope and Methodology 41
Appendix II Comments from the Department of Housing and Urban Development 43
GAO Comments 47
Appendix III Comments from the Department of Veterans Affairs 49
Tables
Table 1: FHA, VA, RHS, and Fannie Mae and Freddie Mac Foreclosures, 2000 7
Table 2: The Organizations? Criteria for Initiating Foreclosures 11 Table 3:
Comparison of the Organizations? Foreclosure Procedures 12 Table 4: FHA
Servicer and Contractor Foreclosed Property
Maintenance Responsibilities 18 Table 5: Three Large Servicers? Performance
in Conveying FHA
Foreclosed Properties to Contractors within 30 Days of Obtaining Property
Possession, 2000 and 2001 22 Table 6: Average Number of Days Between
Foreclosure and
Property Sales in 2000 34 Contents
Page ii GAO- 02- 305 Single- Family Housing Figures
Figure 1: What Is Loss Mitigation? 7 Figure 2: Overview of the Foreclosure
Process 9 Figure 3: Comparison of the Organizations? Postforeclosure Sale
Property Responsibilities 16 Figure 4: Time Frame for FHA Servicers?
Preservation and
Protection Work 17 Figure 5: FHA Procedures for Exterior Debris Removal That
Exceeds Cost Limits 21 Figure 6: Example of Delays Associated with FHA?s
Procedures for
Work Exceeding Established Costs 23 Figure 7: Example of FHA Servicer/
Contractor Dispute over
Required Maintenance 25 Figure 8: Differences in FHA Debenture Interest Rate
and
Servicers? Cost of Funds, January 1980 through September 2001 36
Abbreviations
FHA Federal Housing Administration HUD Department of Housing and Urban
Development IG inspector general MMI Mutual Mortgage Insurance Fund VA
Department of Veterans Affairs RHS Rural Housing Service
Page 1 GAO- 02- 305 Single- Family Housing
April 17, 2002 The Honorable Paul S. Sarbanes Chairman, Committee on
Banking,
Housing, and Urban Affairs United States Senate
Dear Mr. Chairman: This report discusses opportunities to reduce the time
necessary to sell foreclosed properties and minimize costs to the federal
government. Federal programs in the Department of Housing and Urban
Development?s (HUD) Federal Housing Administration (FHA), 1 the Department
of Veterans Affairs (VA), and the Department of Agriculture?s Rural Housing
Service (RHS) promote mortgage financing for, among other groups, lowincome,
first- time, minority, veteran, and rural home buyers. Congress has also
chartered Fannie Mae and Freddie Mac, which are private corporations, to
facilitate mortgage lending and to promote homeownership opportunities.
Although these programs have expanded homeownership opportunities in the
United States, many homeowners fall behind in their mortgage payments each
year due to unemployment, health problems, or the death of a provider. When
home buyers fall behind on their mortgage obligations, FHA, VA, RHS, Fannie
Mae, and Freddie Mac (the organizations) instruct mortgage servicers,
typically large financial institutions, to assist the home buyers in
bringing their mortgage payments current, because foreclosure proceedings
can impose high costs on financial institutions and homeowners. 2 Despite
these efforts, in nearly 118,000 cases in 2000, the mortgage servicers
engaged in foreclosure proceedings under the direction of the organizations.
Once foreclosure proceedings have been completed, it is generally in the
best interests of the organizations and communities that foreclosed
properties are adequately maintained and resold as quickly as feasible. If
foreclosed properties are not properly secured and maintained in a timely
fashion, their condition can deteriorate, thereby resulting in lower sales
prices,
1 In this report, when we refer to FHA it should be understood that it is an
agency within HUD. It is FHA that is directly responsible for administering
HUD?s foreclosure and property sale programs.
2 These efforts are referred to as ?loss mitigation? and are discussed more
fully in this report.
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 02- 305 Single- Family Housing
which could limit the federal government?s ability to recover the costs that
it incurs. 3 In addition, vacant and poorly maintained foreclosed properties
that are on the market for extended periods contribute to neighborhood
decay.
To respond to your request that we discuss foreclosure and property sale
procedures, identify key differences in the federal programs that can delay
or add costs to foreclosures and property sales, and measure the comparative
performance of the organizations, we
provided a general overview of the foreclosure process as established by
state laws and organization procedures, compared and contrasted the
organizations? approaches to managing and
selling foreclosed properties, compared and contrasted the organizations?
approaches to establishing
title to foreclosed properties, and provided comparative data on the time
that it takes the organizations to
acquire and sell foreclosed properties and describe potential reasons for
any differences in these time frames.
To meet these objectives, we interviewed officials from the organizations,
mortgage servicers, and law firms that specialize in foreclosures. We also
reviewed state and federal statutes, the organizations? procedures and
regulations, and reports on the foreclosure processes. We compared and
contrasted the organizations? foreclosure and property sale procedures and
identified procedures in federal programs that can add time and costs
without clear, corresponding benefits. We also collected data on foreclosed
property sale timelines from large servicers and the organizations. Appendix
I provides a more detailed description of our scope and methodology.
We conducted our work from June 2001 through January 2002 in accordance with
generally accepted government auditing standards.
3 Generally, FHA, VA, and RHS pay claims to mortgage servicers to cover the
outstanding loan balances on foreclosed mortgages and interest and other
expenses. If foreclosed properties are resold at relatively low prices, then
the organizations? ability to recover their claim payments will be limited.
Page 3 GAO- 02- 305 Single- Family Housing
State laws establish the general framework for conducting foreclosures, and
within this framework, the organizations have established specific
foreclosure procedures that in some respects differ. State laws provide
certain protections to homeowners who have fallen behind in their mortgages,
such as requiring financial institutions to notify borrowers that they face
foreclosure proceedings. Several states have also enacted ?redemption? laws
that provide homeowners a period of time to pay the funds necessary to
reclaim their foreclosed properties. Several of the organizations? specific
procedures for conducting foreclosures are different. For example, Fannie
Mae and Freddie Mac believe it is costeffective to encourage servicers to
use specific law firms in certain states to conduct foreclosures, while FHA,
VA, and RHS allow servicers to choose their own law firms. On the other
hand, all of the organizations require servicers to complete foreclosure
proceedings within time frames that can vary by state.
FHA procedures can delay the initiation of critical steps necessary to
preserve the value of foreclosed properties and to sell them quickly. While
Fannie Mae, Freddie Mac, VA, and RHS designate one entity as responsible for
the custody, maintenance, and sale of foreclosed properties, 4 FHA divides
these responsibilities between its mortgage servicers and management and
marketing contractors, which operate largely independently of one another. 5
We found that FHA?s divided approach to foreclosed property custody can
prevent the initiation of critical maintenance necessary to make properties
attractive to potential buyers, such as the timely removal of all exterior
and interior debris. In addition, FHA?s divided approach delays the
development of property marketing strategies and generates disputes between
servicers and contractors. Because FHA?s divided approach delays maintenance
and other steps necessary to preserve the value and marketability of
foreclosed properties, the properties may be sold at lower prices than would
otherwise be the case. In this report, we make recommendations that would
help FHA streamline its procedures, ensure prompt property maintenance and
marketing strategies, and minimize foreclosure losses.
4 As measured from the date of the foreclosure sale until the foreclosed
properties are sold to home buyers or investors. 5 FHA?s management and
marketing contractors have certain maintenance responsibilities and sell
foreclosed properties to home buyers or investors. Results in Brief
Page 4 GAO- 02- 305 Single- Family Housing
FHA and VA together spent about $31.5 million in 2000 on new title insurance
policies to help establish that they had clear title to foreclosed
properties, while Fannie Mae, Freddie Mac, and RHS generally did not
purchase new title insurance policies during the foreclosure process. 6
Neither FHA nor VA collects data to determine the need for these
expenditures. However, available information suggests that FHA and VA?s
annual expenditures on title insurance policies are not cost- effective. In
1995, the VA?s Office of Inspector General issued a report that questioned
whether VA?s expenditures on title insurance offer value to the government,
and VA has not implemented a policy designed to assess the cost-
effectiveness of such expenditures. 7 In addition, Fannie Mae, Freddie Mac,
and RHS officials report few title- related problems when they sell
foreclosed properties. We make recommendations that FHA and VA collect
additional data and reevaluate the cost- effectiveness of their title
insurance expenditures.
Determining the organizations? comparative performance in selling foreclosed
properties is difficult because FHA and RHS do not collect all of the data
necessary to make such comparisons. However, on the basis of available data,
we estimate that it takes about 55 days longer to acquire and sell FHA
foreclosed properties than VA properties, and about 100 to 110 days longer
to acquire and sell FHA properties than RHS, Fannie Mae, and Freddie Mac
properties. 8 Several factors, such as FHA?s divided approach to foreclosed
property custody, likely contribute to FHA?s comparatively slow performance.
In addition, FHA?s requirements for compensating servicers for their
expenses may inadvertently provide them with financial incentives to take
the maximum time permitted to complete the foreclosure process. We cannot
estimate the amount of time each factor contributes to the time involved in
selling FHA properties. We make recommendations that FHA and RHS collect the
additional data necessary to better establish the time that it takes to sell
foreclosed properties.
6 Title insurance policies are issued by title insurance companies to
protect against defects in title to properties. FHA and VA, as described in
this report, reimburse servicers for purchasing title insurance policies
during foreclosures.
7 Audit of Title Insurance for Foreclosed Home Loans, Department of Veterans
Affairs, Office of Inspector General, Report No. 5R5- B10- 081, July 25,
1995. 8 As measured from the foreclosure sales date until the property is
sold to home buyers or investors.
Page 5 GAO- 02- 305 Single- Family Housing
We presented a draft of this report to officials from FHA, VA, RHS, Fannie
Mae, and Freddie Mac for their review and comment. FHA and VA officials
provided written comments while RHS, Fannie Mae, and Freddie Mac provided
oral comments. The organizations? comments are described later in this
report, and the FHA and VA written comments are reprinted in appendixes II
and III, respectively. FHA, VA, and RHS officials agreed to implement the
recommendations contained in this report.
Established by the National Housing Act of 1934, the FHA single- family
mortgage insurance program helps low- and moderate- income families,
minorities, and first- time home buyers become homeowners by providing
insurance on single- family mortgage loans. The mortgage insurance allows
private lenders to provide qualified borrowers with favorable mortgage
terms, such as a 3- percent down payment, and generally compensates lenders
for nearly all of the losses incurred on such loans. To support the program,
FHA imposes up- front and annual mortgage insurance premiums on home buyers.
9 FHA?s single- family mortgage program currently does not require a federal
credit subsidy to operate. 10 The Mutual Mortgage Insurance Fund (MMI),
which supports this program, is required by law to contain sufficient
reserves and funding to cover the estimated future payment of claims on
foreclosed mortgages and other costs. FHA?s current mortgage limits vary
across the country from $261,609 in high- cost areas to $144,336 in low-
cost areas. FHA uses management and marketing contractors to perform certain
maintenance on foreclosed properties and to sell the properties to home
buyers or investors. 11
VA?s mortgage loan program is an entitlement program that provides eligible
veterans with housing benefits. The VA guaranty program allows mortgage
lenders to extend loans to eligible veterans on favorable terms, such as a
no- down- payment loan, and provides lenders with substantial financial
protections against the losses associated with extending such
9 The up- front fee premium, which is charged when borrowers close on the
loan and can be included in the mortgage payment, is 1.5 percent. The annual
mortgage insurance premium, which is 0. 25 to 0.50 percent, depending on the
loan term, is automatically cancelled when the loan amount is reduced to the
lesser of 78 percent of either (1) the sale price or (2) the appraised value
at the time of origination.
10 Appropriations acts may limit the amount of the credit subsidy. 11 As
discussed in this report, FHA servicers also perform certain maintenance on
foreclosed properties. Background
Page 6 GAO- 02- 305 Single- Family Housing
mortgages. To help support the program, veterans are required to pay a
funding fee of 1.25 to 3.0 percent of the loan amount. In addition, the
program is financed by credit subsidy appropriations to the Veterans Housing
Benefit Program Account.
RHS operates a guaranteed loan program to help rural Americans with low and
moderate incomes purchase single- family homes. The RHS guaranteed loan
program does not require borrowers to make down payments or pay monthly
mortgage insurance fees. To help offset losses to the government associated
with providing financial protections to lenders who make RHS mortgages, RHS
currently requires lenders to pay a guarantee fee of 2 percent of the
mortgage principal loan amount, which they may pass on to borrowers.
Fannie Mae and Freddie Mac are private corporations chartered by Congress to
provide a continuous flow of funds to mortgage lenders and borrowers. 12 To
fulfill their responsibilities of stabilizing the nation?s mortgage markets
and expanding homeownership opportunities, Fannie Mae and Freddie Mac
purchase mortgages from lenders across the country and package them into
mortgage- backed securities. Most mortgages that Fannie Mae and Freddie Mac
purchase are conventional mortgages (i. e., mortgages with no government
mortgage insurance or guarantees). They purchase single- family mortgages up
to the ?conforming loan limit,? which is now set at $300,700. 13 Fannie Mae
and Freddie Mac typically require mortgage insurance from private companies
on any mortgage purchases with loan- to- value ratios that exceed 80
percent. 14 Fannie Mae and Freddie Mac finance their mortgage purchases
through borrowing or issuing mortgage- backed securities that are sold to
investors.
12 Their Charter Acts provide Fannie Mae and Freddie Mac with benefits such
as exemptions from fees charged on securities transactions by the Securities
and Exchange Commission. Federal laws also impose certain requirements on
Fannie Mae and Freddie Mac. For example, federal law requires Fannie Mae and
Freddie Mac to meet certain annual goals in purchasing mortgages that serve
low- income home buyers and other groups.
13 Referred to as the conforming loan limit because the mortgages conform to
underwriting standards established by Fannie Mae and Freddie Mac. 14 The
loan- to- value ratio generally refers to the percentage of the purchase
price that is financed. For a property costing $100, 000, an $80,000
mortgage with a $20,000 down payment would have a loan- to- value ratio of
80 percent.
Page 7 GAO- 02- 305 Single- Family Housing
Mortgage servicers, such as large mortgage finance companies or commercial
banks, typically service mortgages insured or guaranteed by FHA, VA, or RHS
or purchased by Fannie Mae or Freddie Mac. Mortgage servicers do not
necessarily finance the mortgages they service, but rather service mortgages
for a fee on behalf of those entities that own mortgages, such as lenders,
Fannie Mae, or Freddie Mac. Large servicers typically service FHA, VA,
Fannie Mae, and Freddie Mac mortgages, and some service RHS mortgages.
Mortgage servicing involves administrative activities such as collecting
monthly mortgage payments, maintaining escrow accounts for property taxes
and hazard insurance, and forwarding proper payments to purchasers of the
loans. Mortgage servicers also are generally responsible for ?loss
mitigation? (see fig. 1) and for conducting foreclosure proceedings. Table 1
shows the number of FHA, VA, RHS, Fannie Mae, and Freddie Mac foreclosures
that were ongoing in 2000.
Figure 1: What Is Loss Mitigation?
Source: GAO analysis.
Table 1: FHA, VA, RHS, and Fannie Mae and Freddie Mac Foreclosures, 2000
Organization Number of foreclosed properties
FHA 67,953 a VA 23,439 a RHS 2,575 b Fannie Mae and Freddie Mac 23,883 a
Total 117,850
a Represents foreclosed properties transferred from servicers to the
organizations in 2000. b Represents loss claims paid by RHS in 2000 for
foreclosed properties.
Sources: FHA, VA, RHS, Fannie Mae, and Freddie Mac.
Page 8 GAO- 02- 305 Single- Family Housing
Title insurance companies issue title insurance policies to protect
purchasers and lenders against unknown defects of title or against a loss
due to any lien or encumbrance that has not been disclosed when a property
is purchased or acquired. Title policies typically cover such matters as
defective or lost documentation, mistakes, maladministration, or forgery. In
addition, title policies typically list exclusions from title coverage for
certain defects of title.
State foreclosure laws establish the general framework and processes that
the organizations and mortgage servicers must follow when foreclosing on
defaulted mortgages. These state laws and the federal bankruptcy code
establish protections for residents and minimum time frames for conducting
foreclosures. Within the framework of applicable state and federal laws, the
organizations have developed specific procedures for conducting
foreclosures.
State foreclosure laws establish certain procedures that servicers must
follow in conducting foreclosures and establish minimum time periods for
various aspects of the foreclosure process (see fig. 2). Under state laws,
servicers are required to provide to borrowers and the public notices
associated with the initiation of the foreclosure process. For example,
servicers may be directed to mail a notice to the borrower, post a notice of
the foreclosure on the affected property, and publish notice of the
foreclosure in local newspapers. State laws also generally require servicers
or public officials to conduct foreclosure sales. At the foreclosure sale,
the servicer purchases the property by bidding the amount of the outstanding
debt or the property fair market value. 15 Then servicers, as described in
this report, transfer or convey the properties to the organizations for sale
or sell the properties themselves.
15 The purpose of a foreclosure sale is to ?foreclose? or eliminate the
rights of the borrower and all parties that have an interest junior to the
mortgage. A foreclosure sale is designed to give the purchaser at the sale a
title equivalent to that held by the borrower before the property was
mortgaged. A properly conducted foreclosure sale will extinguish any
mortgages or liens junior to the mortgage being foreclosed, but any liens
senior to the mortgage are unaffected. In all states, the servicer may
foreclose by having a court order the sale of the property. This is known as
judicial foreclosure. In about half the states, the primary method of
foreclosure is sale at a public auction without court involvement. These
sales are usually known as nonjudicial, but are sometimes known as
?trustee?s sales,? or ?private sales.? In both cases, state laws specify
procedures for conducting the sales. The Organizations
Conduct Foreclosures within State and Federal Guidelines
State and Federal Laws Establish Foreclosure Rules
Page 9 GAO- 02- 305 Single- Family Housing
Figure 2: Overview of the Foreclosure Process
Source: GAO analysis.
Several states have enacted ?redemption? laws that give borrowers the
opportunity to match the winning bids from the foreclosure sale and reclaim
their properties. During redemption periods, the organizations or servicers
16 are generally not permitted to pursue additional foreclosure proceedings,
such as evicting property residents or securing the properties. According to
a Freddie Mac official, state redemption periods range from 10 days to 9
months. If properties are vacant, some state laws may permit the shortening
of redemption periods and allow the organizations or servicers to take
control of foreclosed properties.
After foreclosure sales and applicable redemption periods, the organizations
or servicers typically proceed with eviction proceedings if foreclosed
properties are not already vacant. State laws generally govern eviction
proceedings and provide certain protections to the residents of foreclosed
properties. For example, state laws require servicers or the organizations
to notify property residents before the initiation of an eviction lawsuit.
For example, some states have notification periods that range from 3 to 7
days.
Homeowners may also file for bankruptcy proceedings under federal law, a
procedure that can extend foreclosure proceedings. 17 Filing a bankruptcy
petition automatically stays any pending or planned foreclosure proceedings.
Generally, a foreclosure conducted in violation of the stay is
16 Depending upon whether the organization or its servicers are responsible
for overseeing properties during redemption periods. 17 A Chapter 7 or
straight bankruptcy is designed to liquidate the assets of the borrower. In
a Chapter 7 bankruptcy, if the borrower has equity in the property, the
property may be sold by the bankruptcy court, either free and clear or
subject to existing mortgages. If the property is sold free and clear, then
the sales proceeds will be used to pay off the mortgages on the property. If
the borrower has no equity in the property, the trustee will lift the stay,
and the lender is free to proceed with foreclosure. A Chapter 13 bankruptcy
is designed to rehabilitate the debtor by extension and reduction of debts.
Filing under Chapter 13 usually gives the borrower time to bring mortgage
payments current.
Page 10 GAO- 02- 305 Single- Family Housing
void, and the lender can be liable for damages. Under certain conditions,
courts may lift stays and allow foreclosure proceedings to resume.
Within the framework of state and federal laws, the organizations have
established procedures for initiating foreclosure proceedings, conducting
foreclosures, and selling foreclosed properties to home buyers or investors.
Some procedures differ, such as the organizations? criteria for initiating
foreclosures, while others are similar. This section summarizes the
organizations? foreclosure procedures, while two key differences- FHA?s
approach to foreclosed property custody and FHA and VA title evidence
requirements- are discussed more fully later in the report.
Table 2 shows the criteria that the organizations have established for
initiating foreclosure proceedings. Fannie Mae and Freddie Mac direct their
servicers to initiate foreclosure proceedings at earlier stages than FHA,
VA, and RHS. According to Fannie Mae officials, while the organization
directs servicers to proceed with foreclosure at an earlier stage than the
government organizations, servicers are also required to continue pursuing
loss mitigation efforts. Fannie Mae officials said that the organization
directs foreclosures at an earlier stage to help minimize losses and because
borrowers are more likely to be receptive to loss mitigation efforts when
foreclosure is pending. Fannie Mae officials said that the simultaneous
approach of loss mitigation and foreclosure proceedings is advantageous
because it enables more borrowers to retain their homes and reduce losses in
the event loss mitigation is not successful. Freddie Mac officials also
stressed that loss mitigation efforts continue even after the initiation of
foreclosure proceedings. A Freddie Mac official told us that in some cases
the organization, servicers, and borrowers have worked out loss mitigation
agreements on the date of foreclosure sales. FHA, VA, and RHS officials said
that they have public missions and obligations to their customers, such as
low- income Americans, veterans, and rural residents, and take additional
time to initiate foreclosure proceedings. Like Fannie Mae and Freddie Mac,
each of these organizations also encourage their servicers to continue
pursuing loss mitigation efforts after the initiation of foreclosure
proceedings. Comparison of the
Organizations? Foreclosure and Property Sale Procedures
Criteria for Initiating Foreclosures Differ
Page 11 GAO- 02- 305 Single- Family Housing
Table 2: The Organizations? Criteria for Initiating Foreclosures Guidelines
for initiating foreclosure proceedings FHA VA RHS Fannie Mae Freddie Mac
Maximum time to begin foreclosure as measured from the first missed mortgage
payment
210 days 210 days 180 days 105 days 120 days Sources: FHA, VA, RHS, Fannie
Mae, and Freddie Mac.
Table 3 summarizes the procedures that the organizations have established to
conduct foreclosures. As shown in the first row of table 3, all of the
organizations expect servicers to follow established foreclosure time
frames, which can vary by state. 18 Organization officials said that they
have analyzed the foreclosure laws and bankruptcy laws in each state and
collected data on past foreclosure proceedings to determine how long it
should take servicers to complete the foreclosure process in each state. The
organizations may reward servicers financially for meeting or beating these
deadlines and may impose financial penalties where servicers fail to meet
the guidelines. For example, FHA generally does not compensate servicers for
their interest expenses if they exceed the established deadlines. 19
18 RHS state office personnel determine if liquidations are conducted
expeditiously based on their own knowledge and in conjunction with the other
organizations? analysis. RHS officials said that they are considering
adopting the timelines established in each state by Freddie Mac.
19 After FHA servicers convey properties, they file claims with FHA for
payment. FHA pays claims to reimburse servicers for their interest expenses,
the lost principal on outstanding mortgage balances, and maintenance costs.
The Organizations? Procedures
for Conducting Foreclosures
Page 12 GAO- 02- 305 Single- Family Housing
Table 3: Comparison of the Organizations? Foreclosure Procedures Procedure
FHA VA RHS Fannie Mae Freddie Mac
Time frames for completing foreclosures
Guidelines established by state Guidelines
established by state General guidelines established Guidelines
established by state Guidelines established by state Foreclosure attorneys
Servicers select own
attorneys Servicers select own attorneys Servicers select own
attorneys Retained attorneys in certain states; use of attorneys is optional
Designated attorneys in 14 states; use of attorneys is required for some
servicers Bidding at foreclosure sale Total outstanding
mortgage debt plus foreclosure expenses
Property fair market value less expected foreclosure costs
No formal bidding instructions; may encourage bid of 85 percent of fair
market value under certain conditions
Total outstanding mortgage debt plus foreclosure expenses
Lesser of 90- day fair market value a or total debt; bid can be as low as 90
percent of 90- day fair market value a The 90- day fair market value assumes
that the property will be sold relatively quickly and that no
discounts in price will be necessary to facilitate the sale. Sources: FHA,
VA, RHS, Fannie Mae, and Freddie Mac.
As shown in the second row of table 3, the organizations have developed
differing approaches regarding the law firms that mortgage servicers use to
conduct foreclosures. In certain states, Fannie Mae and Freddie Mac have
identified law firms that are available to servicers in conducting
foreclosures. Referred to as ?retained? or ?designated? attorneys, these law
firms conduct all of the legal procedures related to foreclosures. Fannie
Mae and Freddie Mac officials said that the designated attorneys have
significant experience in foreclosure work and can ensure that the process
is completed in the most efficient manner possible. VA, FHA, and RHS do not
designate attorneys but rather permit servicers to choose the law firms that
they will employ to carry out foreclosures. According to FHA, while the use
of designated attorneys may be more efficient than allowing servicers to
choose their own law firms, as a mortgage insurer FHA lacks the prerogative
to designate attorneys for its servicers. 20
Also, as noted in table 3, the organizations have established different
bidding instructions for servicers at foreclosure sales. 21 VA instructs
servicers to bid the property fair market value less foreclosure expenses,
20 FHA stated that Fannie Mae and Freddie Mac own mortgages and therefore
have the authority under their servicing contracts to appoint service
providers, such as attorneys. 21 Typically, the servicers borrow funds to
bid on properties at foreclosure sales. The bid proceeds are used to pay off
the lenders that issued the mortgages.
Page 13 GAO- 02- 305 Single- Family Housing
while Freddie Mac 22 instructs servicers to bid the outstanding debt on
foreclosed properties or the fair market value. In some cases, the
properties? fair market value may be less than the outstanding debt. 23
While RHS does not require servicers to follow specific bidding
instructions, the organization allows servicers to bid at 85 percent of the
fair market value when the property value is less than the outstanding loan
balance. According to organization officials, these instructions, by
allowing bids below the outstanding debt or fair market value, are designed
to encourage third parties such as investors to bid at foreclosure sales,
thus permitting the organizations to avoid the costs associated with selling
such properties. However, organization and servicer officials estimate that
only about 3 to 5 percent of foreclosed properties are sold to third
parties, because the properties are frequently occupied and investors are
not allowed to inspect the properties unless they are vacant. 24 Freddie Mac
officials also said that bidding below a property?s outstanding debt allows
financial institutions to pursue deficiency judgments against defaulted
borrowers. 25
In contrast, Fannie Mae and FHA generally instruct servicers to bid the
outstanding debt plus foreclosure expenses, an amount that may be
significantly higher than the fair market value. 26 Although Fannie Mae and
FHA bidding instructions deter third- party bids and result in the
22 Freddie Mac instructs servicers to start bidding at the statutory minimum
level prescribed in certain states. These states may require bidders to bid
two- thirds of a property?s value at the foreclosure sale. Freddie Mac
instructs its servicers to start bidding upward from the statutory minimums
until bids reach the 90- day fair market value or the outstanding debt,
whichever is less. The 90- day fair market value assumes that properties
will be sold quickly and that discounts will not be necessary to facilitate
sale.
23 In some cases, the fair market value of foreclosed properties may be
below the outstanding debt. Thus, requiring servicers to bid the outstanding
debt makes the properties less attractive to home buyers or investors, since
the bid is set above the properties? fair market value.
24 Representatives from one large RHS servicer said that in one state, Ohio,
third parties purchased approximately 40 percent of properties at
foreclosure sales. 25 According to Freddie Mac, some states allow financial
institutions to pursue deficiency judgments for the debts owed by defaulted
borrowers. The states may require financial institutions to bid below the
outstanding debt to preserve the right to pursue deficiency judgments.
26 Fannie Mae implemented these bidding instructions as a pilot program in
2000. The organization amended its permanent guidelines to incorporate these
bidding instructions in February 2002. Previously, Fannie Mae instructed
servicers to bid foreclosed properties? fair market value.
Page 14 GAO- 02- 305 Single- Family Housing
organizations themselves selling the properties, officials said that the
instructions were cost- effective. Fannie Mae and FHA officials said that
the costs associated with enticing third- party bids at foreclosure sales,
such as the costs for conducting appraisals to determine fair market value,
were not justified by the relatively low percentage of successful third-
party bids. FHA officials said that they rarely pursue deficiency judgments
because most defaulted borrowers have minimal, if any, recoverable assets.
VA, RHS, Fannie Mae, and Freddie Mac follow a similar approach in that the
organizations, or servicers in the case of RHS, have custody of and are
responsible for maintaining foreclosed properties from the time of the
foreclosure sale until the properties are sold to home buyers or investors.
FHA, on the other hand, divides foreclosed property custody between its
servicers and its management and marketing contractors from the time of the
foreclosure sale until the property is sold to purchasers. FHA procedures
(1) prevent the timely initiation of critical property maintenance and
marketing, as is practiced by the other organizations; (2) can delay
conveyance to FHA management and marketing contractors due to time-
consuming procedures necessary to perform maintenance that exceeds
established cost ceilings; and (3) result in disputes between FHA servicers
and management and marketing contractors after property conveyance. Because
of delayed property maintenance and marketing strategies, FHA may receive
lower property sales prices than would otherwise be the case. FHA officials
have recently considered proposals to streamline FHA?s foreclosed property
custody procedures.
As shown in figure 3, Fannie Mae, Freddie Mac, and VA maintain unified
custody of foreclosed properties from the time of the foreclosure sale until
the properties are sold to home buyers or investors. Fannie Mae and Freddie
Mac require servicers to convey properties to them within 24 hours of
foreclosure sales, while VA generally requires servicers to convey within 15
days. 27 The organizations and their vendors or contractors are
27 VA has the option to leave the foreclosed property with the servicer for
sale, if the cost of paying the guaranty is less than the estimated cost to
VA for taking possession of the property and reselling it. VA calls such a
situation a no bid. VA procedures also allow servicers to write down the
outstanding balance on foreclosed mortgages until the cost to VA of
guaranteeing the loan is more than VA?s estimated costs of taking possession
of the property and reselling it. VA?s most recent data for fiscal years
1997 through 1999 shows that no bids accounted for about 1.5 percent of all
loan terminations. FHA Property
Custody Procedures Delay Maintenance and Marketing
The Organizations? Approaches to Property Custody Differ
Page 15 GAO- 02- 305 Single- Family Housing
responsible for overseeing properties during redemption periods, evicting
property residents, performing necessary property maintenance, and selling
the properties. Although RHS?s approach differs in that servicers never
convey foreclosed properties, property custody is unified. RHS servicers are
responsible for overseeing properties throughout the foreclosure process,
maintaining the properties, and selling them. RHS establishes a 6- month
deadline for servicers to sell foreclosed properties, measured from the date
of the foreclosure sale, and will generally not compensate servicers for any
liquidation expenses incurred beyond the deadline. 28
28 A 1- month extension of the marketing period may be requested if needed
to close a sale.
Page 16 GAO- 02- 305 Single- Family Housing
Figure 3: Comparison of the Organizations? Postforeclosure Sale Property
Responsibilities
Source: GAO analysis.
In contrast, FHA divides property custody and maintenance responsibilities
between its servicers and contractors, which operate largely independently
of one another. FHA requires servicers to oversee properties during
postforeclosure sale redemption periods, to evict residents if properties
are occupied, and to perform critical maintenance on properties (also known
as ?preservation and protection?). 29 Under FHA procedures, servicers are to
initiate preservation and protection work on
29 In this report, the terms ?preservation and protection? and foreclosed
property ?maintenance? are used interchangeably.
Page 17 GAO- 02- 305 Single- Family Housing
the date that they obtain ?possession and control? of the properties,
typically the date that tenants are evicted or when the servicers determine
that the property is vacant (see fig. 4). Servicers have 30 days to complete
the preservation and protection work, convey the properties to FHA?s
management and marketing contractors, and then file claims with FHA to
recover the costs associated with the foreclosures. FHA typically reimburses
servicers for the costs associated with performing preservation and
protection work. 30
Figure 4: Time Frame for FHA Servicers? Preservation and Protection Work
Source: FHA.
The management and marketing contractors also have ongoing preservation and
protection responsibilities that can overlap those of the servicers (see
table 4). FHA pays the contractors a fee, generally ranging from 6 to 10
percent of the net sales price, as compensation for their work. FHA usually
does not reimburse contractors for the costs of performing basic
maintenance; they are generally expected to cover such costs from the fees
that they earn for selling the properties. 31
30 FHA, through its management and marketing contractors, may reconvey
properties to servicers when required maintenance is not performed. FHA
officials said that reconveyances are rare. As discussed in this report, FHA
and its contractors may also require servicers to reimburse FHA for failure
to perform required property maintenance.
31 FHA may reimburse contractors on a case- by- case basis for some of the
costs associated with completing preservation and protection work that
servicers failed to complete prior to conveyance.
Page 18 GAO- 02- 305 Single- Family Housing
Table 4: FHA Servicer and Contractor Foreclosed Property Maintenance
Responsibilities
Servicers? responsibilities Contractors? responsibilities
Inspect the property every 30 days if it is occupied.
Maintain lawn.
Remove interior and exterior debris that poses a health and safety hazard.
Protect plumbing and other operating systems against damage from freezing.
Boardup properties.
Convey properties undamaged by fire, flood, earthquake, hurricane, or
tornado (exceptions apply).
Perform other needed tasks.
Inspect the property at conveyance.
Maintain lawn.
Remove interior and exterior debris that does not pose health and safety
hazards.
Perform any protection and preservation neglected by servicers.
Perform other needed tasks. Source: FHA.
With unified property custody, Fannie Mae, Freddie Mac, RHS, and VA are able
to develop comprehensive and timely strategies that can help sell foreclosed
properties quickly. For example, Fannie Mae and Freddie Mac officials said
that with unified custody they can ensure that properties are inspected
routinely, vacant properties are immediately secured, 32 all needed
maintenance and repairs are initiated promptly, and marketing strategies are
developed at an early stage. VA and RHS officials we contacted expressed
similar views about the benefits of unified property custody.
In contrast, by dividing responsibility between servicers and contractors,
FHA procedures prevent the initiation of all maintenance necessary to
protect foreclosed properties and sell them quickly. Rather, FHA procedures
can prevent the initiation of critical maintenance until after servicers
convey foreclosed properties to management and marketing contractors- up to
30 days or more after the possession and control date. 33 Current FHA
guidance does not require servicers to clean up exterior and
32 Fannie Mae and Freddie Mac officials said that some states with
redemption periods allow for the shortening of the redemption periods if the
properties are vacant. In such cases, Fannie Mae and Freddie Mac routinely
inspect properties to determine whether they are vacant and whether
immediate steps to secure the properties can be taken.
33 As discussed later, servicers do not always convey foreclosed properties
within 30 days. FHA?s Divided Custody
Prevents Timely Property Maintenance and Marketing
Page 19 GAO- 02- 305 Single- Family Housing
interior debris left on properties unless it poses public health and safety
risks. The presence of such nonhazardous debris (such as discarded
furniture) for extended periods can reduce buyer interest in the properties
and negatively affect neighborhoods. Property maintenance is further
complicated by the fact that some local FHA offices require servicers to
clean up all exterior debris, regardless of whether it is a hazard or not,
while others require only hazardous debris removal. An FHA official we
contacted said that FHA is working on regulations that will require
servicers to remove all exterior debris. However, the FHA official said that
the revised regulations will not require servicers to remove nonhazardous
debris from property interiors.
FHA procedures can also require a substantial amount of interpretation by
servicers and management and marketing contractors. For example, servicers
are required to determine whether debris left on foreclosed properties poses
?immediate? health and safety risks and whether to remove such debris. 34 If
servicers determine that an object such as an abandoned vehicle does not
pose an immediate health risk, they may decide to leave it on the property.
An FHA official also said that since servicers are responsible for lawn
maintenance but are not responsible for removing nonhazardous exterior
debris, servicers would technically be within regulations to cut the grass
around debris left on the properties. An FHA official said that FHA?s new
regulations will require servicers to remove exterior debris and cut the
entire lawn.
FHA?s divided approach to property custody also prevents the immediate
development of marketing strategies. Representatives from management and
marketing contractors that we contacted said that they often do not learn
about foreclosed properties until servicers convey the properties to the
contractors, which could be months after the foreclosure sale. In contrast,
VA, Fannie Mae, and Freddie Mac officials and RHS servicers can begin
marketing strategies shortly after the foreclosure sale, since these
organizations have established unified property custody procedures.
34 FHA regulations state: ?For clarification, examples of health and safety
hazards are decaying organic matter, dead animals, animal feces, or anything
that poses an immediate threat to health or safety.?
Page 20 GAO- 02- 305 Single- Family Housing
FHA?s divided approach to property responsibility and custody can also
result in delays in conveyance when required preservation and protection
work exceeds established cost ceilings. Fannie Mae, Freddie Mac, VA, and FHA
have established locality- based cost ceilings for property maintenance. 35
Although establishing controls over maintenance expenditures is important,
FHA?s procedures for reviewing such proposed expenditures are more formal
and time consuming than those of the other organizations.
Fannie Mae, Freddie Mac, and VA officials have extensive information about
properties within days of foreclosure sales and can act in a coordinated
fashion with vendors and contractors to review proposals to exceed
established maintenance costs as quickly as is feasible. Fannie Mae and
Freddie Mac officials said that in cases in which required maintenance
exceeds established limits, vendors call the organizations or submit fax
requests. According to Fannie Mae and Freddie Mac officials, their staffs
work closely with their vendors and generally review and make final
decisions on requests within 1 or 2 days, frequently via E- mail or
telephone call. A VA official said that its 46 district offices have
maintenance cost guidelines that are set within prevailing local rates.
According to the VA official, when contractors determine that maintenance
will exceed established rates, they call VA officials or representatives for
decisions, which are typically granted within a day or two. The VA official
said that contractors are subsequently required to submit photographs or
other evidence to support these expenditures and VA performs audits to
assess the appropriateness of these costs.
Because FHA servicers and contractors act largely independently of one
another, rather than in a coordinated fashion, FHA maintains a comparatively
formal and time- consuming system for reviewing property maintenance
proposals that exceed established cost ceilings. FHA expects servicers to
complete preservation and protection work, including work exceeding
established cost limits, within the 30- day period between possession and
control and property conveyance. Servicers must submit written proposals to
management and marketing contractors for review, and FHA regional officials
must approve such requests as well. FHA allows the management and marketing
contractors 10 days to review the
35 RHS has not established specific maintenance cost guidelines. However, if
emergency advances exceeding $500 are needed to preserve the property?s
value, the servicers must first submit them to RHS for approval. FHA Has
Time- Consuming
Procedures for Reviewing Maintenance That Exceeds Established Cost Limits
Page 21 GAO- 02- 305 Single- Family Housing
servicers? requests and to respond in writing. 36 If contractors fail to
respond in writing within 10 days, FHA regulations require servicers to
follow up with the contractors until the servicers receive a written
response. FHA, through its contractors, may also require servicers to obtain
written bids from outside providers for work exceeding the established
limits. For example, a senior FHA official said that servicers are required
to obtain written bids when proposed removal of hazardous exterior debris
removal exceeds established cost ceilings (see fig. 5).
Figure 5: FHA Procedures for Exterior Debris Removal That Exceeds Cost
Limits
Source: FHA.
According to FHA servicer representatives we contacted, obtaining permission
from management and marketing contractors to do maintenance that exceeds
FHA?s cost ceilings can delay conveyance. In some cases, servicer
representatives said that the management and marketing contractors did not
respond to their requests on a timely basis, potentially preventing them
from completing necessary preservation and protection work within the 30-
day deadline. We asked three large FHA servicers to provide data on their
performance in conveying properties within the 30- day guidelines. Table 5
shows that these servicers conveyed
36 Management and marketing contractors may not be aware of a foreclosed
property until they receive a servicer?s request to exceed established costs
ceilings on preservation and protection work.
Page 22 GAO- 02- 305 Single- Family Housing
properties within the deadlines less than 80 percent of the time on average
in 2000 and 2001. 37
Table 5: Three Large Servicers? Performance in Conveying FHA Foreclosed
Properties to Contractors within 30 Days of Obtaining Property Possession,
2000 and 2001
Percent of properties conveyed within 30 days Servicers 2000 2001
Servicer A 78. 5% 81. 6% Servicer B 80. 6 89.4 Servicer C 70.2 67.5
Average 76. 4% 79. 5% Source: FHA servicers.
Figure 6 provides an example of the types of delays that servicer
representatives said can occur in attempting to obtain approval from
management and marketing contractors to perform preservation and protection
work that exceeds established cost limits.
37 FHA generally may not compensate servicers for foregone interest if they
fail to meet the 30- day conveyance guidelines.
Page 23 GAO- 02- 305 Single- Family Housing
Figure 6: Example of Delays Associated with FHA?s Procedures for Work
Exceeding Established Costs
Source: FHA servicer.
Management and marketing contractor representatives said they did not
believe that timeliness was generally a problem, but added that sometimes
servicers fail to provide required paperwork and that this can cause delays.
FHA officials we contacted cited other factors as responsible for servicers?
failure to convey all foreclosed properties within 30 days. The FHA
officials said that some servicers lack the staff necessary to ensure that
properties are maintained and conveyed in accordance with FHA standards.
As shown in table 4, FHA?s management and marketing contractors are
responsible for performing certain preservation and protection work on
conveyed properties, including work that servicers fail to complete.
Servicer compliance with FHA standards for completing required preservation
and protection work has been a source of continuing conflicts among FHA,
contractors, and servicers. Senior FHA officials and several management and
marketing contractor representatives that we contacted questioned servicer
compliance with required preservation and protection work on conveyed
properties and said that the failure to FHA Servicer and
Contractor Disputes Occur after Property Conveyance
Page 24 GAO- 02- 305 Single- Family Housing
perform such work can negatively affect foreclosed property values and
marketability. 38 Representatives of several large FHA servicers that we
contacted said that they generally perform preservation and protection work
within established guidelines. 39 Although FHA has instituted additional
layers of review to ensure adequate property maintenance, FHA?s divided
approach to property custody will likely result in continuing conflicts.
In March 2001, FHA instituted a program to improve servicer preservation and
protection work that subsequently encountered significant implementation
problems. FHA required its management and marketing contractors to identify
neglected maintenance on conveyed properties and demand that servicers
reimburse FHA for such work. 40 As a result of this program, management and
marketing contractors issued hundreds of ?demand letters? to servicers
requiring refunds within 10- day deadlines. In many cases, servicer
representatives we contacted said that the management and marketing
contractors (1) failed to provide the demand letters until the expiration of
the 10- day deadline or later, (2) demanded refunds to FHA on properties
that had been conveyed as long as 2 years prior to the date of the letter,
and (3) required refunds for maintenance that is not the servicers?
responsibility. Figure 7 provides an example of a dispute between an FHA
servicer and a management and marketing contractor.
38 FHA currently requires management and marketing contractors to accept
conveyed properties, regardless of their condition. 39 Previous GAO and HUD
Inspector General reports questioned the quality of management and marketing
contractors? oversight of FHA foreclosed properties. See U. S. General
Accounting Office, Single Family Housing: Stronger Measures Needed to
Encourage Better Performance by Management and Marketing Contractors, GAO/
RCED- 00- 117 (Washington, D. C.: May 12, 2000) and Single Family Property
Disposition Program,
Department of Housing and Urban Development, Office of Inspector General,
Report No. 99- AT- 123- 0001, Sept. 17, 1999.
40 Under the program, contractors were responsible for inspecting conveyed
properties and determining if servicers had filed claims with FHA and
received payment from FHA for preservation and protection work that had not
been completed. In such situations, FHA directed the contractors to send
?demand letters? to the servicers requiring reimbursement to FHA within 10
days. If the servicers did not provide reimbursement, FHA planned to
?offset? or reduce future servicer claim payments by the dollar amount that
the servicers had been paid for the neglected preservation and protection
work. FHA also provided contractors with a payment of 25 percent of the
maintenance costs as a financial incentive for identifying situations where
servicers had billed FHA for work that had not been completed. Contractors
are generally responsible for completing servicer- neglected work.
Page 25 GAO- 02- 305 Single- Family Housing
Figure 7: Example of FHA Servicer/ Contractor Dispute over Required
Maintenance
Source: FHA.
A senior FHA official acknowledged that the program experienced significant
implementation problems and said that revised procedures have been
initiated. According to the official, FHA did not provide the contractors
with adequate training on the types of maintenance deficiencies for which
contractors could demand refunds from servicers. FHA has taken several steps
to help clarify procedures and resolve disputes between contractors and
servicers:
FHA servicers can appeal contractor demand letters to the local regional
office and subsequently to HUD?s National Servicing Center in Oklahoma City
for a final decision. FHA is in the process of drafting additional
guidance to management and
marketing contractors that will clarify the circumstances under which the
contractors can demand refunds from servicers on neglected preservation and
protection work. FHA has instituted a pilot program in which independent
inspectors
examine properties at the time servicers obtain possession and control,
which will allow FHA to identify damage caused by occupants and note
preservation and protection work that must be completed prior to conveyance.
(FHA officials said that in fiscal year 2002 inspectors will review about
250 properties and noted that there are plans to expand the program to 6,000
properties by the latter part of fiscal year 2003.)
Page 26 GAO- 02- 305 Single- Family Housing
Despite FHA?s recent initiatives, divided custody will likely continue to
generate disputes between servicers and management and marketing
contractors. Continued disputes are likely between servicers and management
and marketing contractors due to the complexities of FHA?s property
maintenance procedures. 41 FHA?s appeals process and preconveyance
inspection program provide opportunities to resolve disputes between
servicers and contractors. However, these initiatives add layers of
oversight and review to FHA?s foreclosure and property sale processes, at
FHA?s expense, that are not present at the other organizations, which have
established unified property custody. 42
By delaying the initiation of critical maintenance and marketing and
generating disputes between servicers and contractors, FHA?s divided
property custody approach can place financial demands on the MMI. To the
extent that property values deteriorate as a result of such factors as
debris left on properties for extended periods or lawns left uncut due to
disputes between servicers and contractors, the properties may sell for
lower prices than would otherwise be the case. As a result of lower property
sales prices, FHA would recover less of what it had already paid in claims
to servicers. That is, revenues flowing into the MMI would be lower than
would otherwise be the case.
During 2000 and 2001, FHA considered proposals to revise procedures and
establish unified property custody and thereby help ensure prompt
maintenance and marketing strategies necessary to preserve property values.
Two large servicers made proposals to FHA under which the servicers would
sell foreclosed properties rather than conveying them to management and
marketing contractors. The servicers proposed to clean up all debris on
foreclosed properties immediately and develop strategies to market the
properties at an earlier stage than was currently the case. One large
servicer estimated that its proposal would shorten the sales time on FHA
foreclosed properties by about 59 days and save FHA
41 FHA will continue to require its management and marketing contractors to
demand refunds in cases in which servicers bill FHA for preservation and
protection work that is not performed according to standards. The potential
exists for contractors and servicers to continue to disagree in such
situations.
42 FHA is also responsible for assuming the costs associated with the
preconveyance inspection program. Delayed Maintenance and
Marketing Could Increase FHA?s Foreclosure Losses
FHA Has Considered Proposals to Establish Unified Property Custody
Page 27 GAO- 02- 305 Single- Family Housing
approximately $18 million annually. 43 In addition, a senior FHA official
said that FHA has considered implementing a pilot program under which
management and marketing contractors would assume responsibility for
foreclosed properties earlier in the process, perhaps as early as the
foreclosure sale. Although FHA officials said that they were supportive of
proposals to establish unified property custody, they have not established
firm time frames to test their feasibility. A senior FHA official said that
FHA and HUD must first resolve outstanding legal and contractual issues
before the proposals can be tested. More recently, FHA has proposed a pilot
program in which servicers would assign mortgages to FHA rather than
completing the foreclosure process and conveying the properties to
management and marketing contractors. FHA would then sell the defaulted
notes to the private sector for servicing and/ or sale, thereby permitting
one entity to control both the foreclosure and property sale processes. 44
FHA officials said that the program will likely reduce but not eliminate the
number of properties that the organization acquires through foreclosure
proceedings and becomes responsible for selling.
43 Estimate based on the number of foreclosed properties that the servicer
conveys to FHA annually. The servicer estimated a total annual savings of
$138 million if the servicer sold all FHA foreclosed properties. The other
servicer?s proposal estimated that it would save FHA $6 or $7 million on a
monthly basis.
44 Section 601 of the Departments of Veterans Affairs and Housing and Urban
Development and Independent Agencies Act, P. L. No. 105- 276, authorized FHA
to pay claims upon assignment of mortgages that had been in default at least
3 months. On February 5, 2002, HUD published a notice in the Federal
Register soliciting public comments on a demonstration project under section
601. FHA will assess the demonstration based on factors including reduced
loss rates, costs and time associated with claim disposition, and the
demonstration?s success in enhancing FHA?s ability to assess risk and manage
the FHA mortgage insurance fund.
Page 28 GAO- 02- 305 Single- Family Housing
FHA and VA together spent approximately $31.5 million in 2000 reimbursing
servicers for the costs associated with purchasing title insurance policies,
which are used to help establish that the organizations have title to
foreclosed properties that have been conveyed and can be resold to home
buyers or investors. 45 In contrast, Fannie Mae, Freddie Mac, and RHS do not
reimburse servicers for the purchase of new title insurance policies and
report few title- related problems in selling their foreclosed properties.
FHA and VA do not collect adequate data to determine whether their
expenditures on title insurance policies are cost effective.
Although title insurance policies can provide protection against certain
title defects to borrowers- and their lenders- when new mortgages are
originated, Fannie Mae, Freddie Mac, and RHS have determined that new title
policies are not necessary during the foreclosure process. 46 Fannie Mae and
Freddie Mac officials that we contacted said that servicer foreclosure
attorneys are responsible for identifying parties and resolving title issues
prior to the foreclosure sales. Organization officials said that the
foreclosure sales typically resolve the vast majority of title issues. The
officials also said that they do not purchase new title insurance policies
at conveyance. 47 Fannie Mae and Freddie Mac officials said that the
organizations may reconvey foreclosed properties to servicers if serious
title problems arise, but that such cases are very rare. Similarly, RHS does
45 Neither FHA nor VA could provide data on their annual title insurance
expenditures. Our estimate is based on an average cost of $500 per title
insurance policy and about 65, 000 FHA and 20, 000 VA foreclosed property
acquisitions in 2000. FHA typically reimburses servicers two- thirds of the
cost of a title insurance policy, or $330. Therefore, 65, 000 acquisitions
multiplied by $330 equals $21,450,000. VA could not tell us how many
district offices encourage the use of title insurance. So, we estimated that
85 percent of VA?s district offices encourage title insurance, since six of
the seven (or 85 percent) we contacted do. We then multiplied 23, 500 FHA
acquisitions by 85 percent to achieve an estimate of about 20, 000
acquisitions. VA also reimburses servicers the full cost of a title
insurance policy. Thus, 20, 000 acquisitions multiplied by $500 equals
$10,000, 00. FHA?s $21, 450,000 in expenditures plus VA?s $10, 000,00 equals
$31,450, 000.
46 Fannie Mae procedures provide for the purchase of title insurance
policies in Hawaii, which a Fannie Mae official said has unique and complex
foreclosure laws that make establishing title difficult. Thus, the Fannie
Mae official said a title policy may be justified in Hawaii.
47 A Fannie Mae official said that the deeds recorded from foreclosure sales
generally represent adequate evidence of title. FHA and VA Have Not
Adequately Supported Title Insurance Policy Expenditures
The Organizations? Approaches to Title Insurance Policies Differ
Page 29 GAO- 02- 305 Single- Family Housing
not require servicers to purchase title insurance policies at foreclosure
sales, 48 and RHS officials said that serious title- related problems are
rare.
FHA and VA statutes provide the organizations with discretion in
establishing what constitutes acceptable evidence of title. Although FHA and
VA have established several potential forms of evidence of title, title
insurance policies are the de facto standard. FHA and servicer officials
said that it is the standard practice for servicers to purchase title
insurance policies, which cost about $500, 49 and that FHA reimburses the
servicers for two- thirds of the costs of these policies. According to a VA
official, each of VA?s 46 field offices has the authority to determine
acceptable evidence of clear title, and available evidence suggests that the
majority of VA district offices require title insurance. For example, we
contacted a judgmental sample of seven VA district offices nationwide and
found that six require title insurance policies at conveyance. 50 VA
reimburses servicers for the full costs associated with these policies. FHA
also typically provides financing for new title insurance policies when its
foreclosed properties are sold to home buyers or investors, while some VA
offices may provide similar financing. 51
FHA and VA officials said that title insurance policies provide an extra
level of assurance that the organizations have title to foreclosed
properties. As discussed below, however, FHA and VA officials are
reconsidering the cost- effectiveness of their title insurance policy
expenditures.
48 RHS requires servicers to have loans secured by a first lien on the
property and to maintain that lien priority, but RHS does not require new
title insurance policies. Servicers ensure that title requirements are met,
but they may or may not require title insurance to guarantee that title.
49 Representatives from a large servicer stated that title insurance
policies cost $400 to $700 on average. 50 The VA 1995 IG report on title
insurance (5R5- B10- 081) found that 39 of the 46 district offices accepted
title insurance. 51 FHA may pay closing cost of up to 5 percent of the sales
price of foreclosed properties. Purchasers can use these funds to purchase
title insurance policies. Some VA district offices provide such assistance.
Fannie Mae and Freddie Mac may also provide financial assistance when
foreclosed properties are sold. RHS does not provide such assistance on the
foreclosed properties that its servicers sell.
Page 30 GAO- 02- 305 Single- Family Housing
Although FHA and VA generally expect servicers to purchase new title
insurance policies as evidence of title, they do not collect data necessary
to support these expenditures. An FHA official said that FHA does not
collect data on the number of times that title policies are invoked during
the foreclosure process, although the official said this rarely happens.
Several management and marketing contractor representatives that we
contacted also said that they do not collect data on how often FHA title
insurance policies are invoked after conveyance. However, the contractor
representatives also said that title insurance policies were rarely if ever
needed during the foreclosed property sale process.
Senior FHA officials said that they were not certain whether the costs
associated with purchasing title insurance policies were justified and were
considering revising these policies. FHA officials also stated that the
state foreclosure laws require servicers? attorneys to conduct title
searches 52 to ensure that all parties may be notified and the foreclosure
properly conducted. 53 These title searches are conducted prior to the
foreclosure sale, and FHA compensates servicers for the costs associated
with these title searches. FHA officials stated that the title insurance
policies that servicers subsequently purchase are based on the same title
searches. Therefore, the FHA officials stated that the title insurance
policies offer questionable additional value. We note that two large
servicers have made proposals to sell foreclosed properties for FHA, rather
than conveying them to management and marketing contractors. The servicers
proposed to sell FHA properties without obtaining new title insurance
policies.
VA officials have not implemented the recommendations in a 1995 VA inspector
general (IG) report 54 that questioned the cost- effectiveness of the
department?s title insurance policy expenditures. Although VA began to
encourage servicers to purchase title insurance policies in 1989 to
facilitate title reviews on foreclosed properties, the IG report concluded
that the policies did not meet this objective. The VA IG report found that
title defects were rare and could generally be easily corrected by VA staff.
The report also found that VA paid about $23.9 million in title insurance
52 A title search is an examination of the real property records in the
county where the land is located to discover title defects. The records
searched will generally be the county real estate indexes and state district
court, probate court, and tax lien records.
53 See appendix II, the FHA commissioner?s written comments on this report
dated March 5, 2002. 54 Report No. 5R5- B10- 081, July 25, 1995. FHA and VA
Do Not
Collect Data to Support the Need for Title Insurance Expenditures
Page 31 GAO- 02- 305 Single- Family Housing
premiums in fiscal years 1992 through 1994, but would have paid only about
$121, 169 to correct title defects if it had ?self- insured? (i. e., paid to
resolve these title defects) during the same period. The IG report
recommended that VA work with foreclosure attorneys to ensure that
foreclosures produce adequate evidence of title and discourage the purchase
of title insurance policies. VA agreed in 1995 to direct its district
offices to review their title evidence requirements annually and to document
that new title insurance policies are cost effective in establishing title.
Despite this 1995 VA policy, five of the six VA offices we contacted that
encourage the purchase of title insurance policies at conveyance could not
produce the required memorandum on cost- effectiveness. One VA district
office produced a memorandum, which merely stated that it would be cost
effective to encourage the purchase of title insurance policies to
facilitate title reviews. However, an official at the VA district office in
Houston, which does not require a new title insurance policy as evidence of
title, said that its servicers generally provide a copy of a title search,
which costs about $75, as evidence of title. The VA official said that title
searches save time and money associated with obtaining new title policies
and that the office rarely encounters title problems when selling foreclosed
properties to home buyers or investors.
Because they do not collect additional data on the cost- effectiveness of
title requirements, VA and its district offices cannot determine whether
similar strategies to lower the costs of purchasing title insurance policies
could be used successfully. According to VA officials, they are in the
process of reviewing their approach to foreclosed property management. As
part of this review, VA officials said that they are reviewing the
costeffectiveness of the organization?s title insurance expenditures. VA
officials said that they expect to make a decision regarding whether to
continue expending funds on title insurance policies by early in calendar
year 2003.
Page 32 GAO- 02- 305 Single- Family Housing
Determining the organizations? comparative performance in selling foreclosed
properties is difficult because FHA and RHS do not collect all of the data
necessary to do so. 55 On the basis of available data, we estimate that it
takes about 55 to 110 days longer to sell foreclosed FHA properties than is
the case for the other organizations. We note that it is also difficult to
determine the extent to which FHA?s divided approach to foreclosed property
custody contributes to FHA?s comparatively slow performance. Other factors,
such as FHA?s approach to compensating servicers for their foreclosure
expenses, may also play a role. Under certain conditions, FHA may
inadvertently provide servicers with financial incentives to use the maximum
allotted time to complete the foreclosure process.
Fannie Mae, Freddie Mac, and VA 56 collect data on the time that it takes to
sell foreclosed properties from the date of the foreclosure sale until the
properties are sold to home buyers or investors. Although FHA does collect
data on the time foreclosed properties are in management and marketing
contractors? inventory (from the date servicers convey properties to the
contractors until the date they are sold to home buyers or investors), this
period represents only a portion of the entire postforeclosure sale
timeline. 57 The data FHA collects does not measure
55 Comparative performance is measured from the time of the foreclosure sale
until the property is sold to home buyers or investors. We did not include
the period prior to the foreclosure sale because organization officials said
that loss mitigation efforts may continue up until foreclosure sales. The
officials also said that loss mitigation is more cost effective than
foreclosure under most circumstances. Therefore, we did not want to imply
that the organizations should move any faster than currently is the case to
proceed to foreclosure sales. In addition, the period of time from the
foreclosure sale until the property is sold is a common measure of
performance in the real estate industry.
56 The VA data consists of the time that VA receives custody of foreclosed
properties until properties are sold. VA procedures allow servicers up to 15
days to convey properties. VA could not provide data on the average time
that elapses from the date of the foreclosure sale until conveyance.
However, VA officials said that servicers have strong incentives to convey
within a limited period of time after the foreclosure sale because VA does
not reimburse them for interest expenses beyond the date of the foreclosure
sale, and because they are responsible for any damages that occur to
properties prior to conveyance. Because of these financial incentives, it is
likely that servicers convey properties to VA on approximately the
foreclosure sales date.
57 FHA does collect data on specific dates during the time that servicers
maintain property custody. For example, FHA collects data on the ?possession
and control date.? However, FHA does not use this data in estimating the
entire time necessary to acquire and sell foreclosed properties. Rather, FHA
reports the time for which management and marketing contractors are
responsible for properties: the date of conveyance until the properties are
sold. Available Data
Suggest FHA Takes Longer to Sell Foreclosed Properties
FHA and RHS Do Not Collect Data on the Time Used To Sell Foreclosed
Properties
Page 33 GAO- 02- 305 Single- Family Housing
the time that servicers have custody of properties, including the
redemption, eviction, and preservation and protection periods. An RHS
official said that RHS currently does not maintain centralized and automated
data on the time that it takes their servicers to sell properties, from the
time of the foreclosure sales until properties are sold. 58
Senior FHA and RHS officials told us that they plan to collect additional
data. As discussed earlier, FHA officials said that they plan to conduct
preconveyance inspections on about 250 properties in fiscal year 2002 and
hope to expand the program in the future to include as many as 6,000
properties by the latter part of fiscal year 2003. As part of these
inspections, FHA officials said that they plan to collect information on
property foreclosure sales dates. The FHA officials said that they would use
the information to help assess servicer performance. Beginning in fiscal
year 2002, RHS officials said servicers will report on the time necessary to
sell their foreclosed properties. RHS officials said that collecting the
data in a centralized and accessible manner would allow them to better
monitor servicer performance. RHS officials expect the automated system to
be in place by February 2003.
Table 6 provides available data on the time that elapsed in acquiring and
selling FHA, VA, RHS, Fannie Mae, and Freddie Mac foreclosed properties in
2000, and the data indicates that FHA properties took the longest to sell,
at 292 days. Although the Fannie Mae, Freddie Mac, and VA data are more
comprehensive, we had to collect data and estimate comparable time frames
for FHA and RHS. We collected state- by- state averages of the number of
days from the foreclosure sale until property conveyance from four large
servicers. We then added these data to data provided by FHA on the average
number of days that it takes management and marketing contractors to sell
foreclosed properties. 59
58 RHS staff responsible for analyzing loss claims have this information for
individual cases. 59 We present the combined foreclosure- to- sale average
of 292 days in table 6. To arrive at this figure, we first determined an
average conveyance time of 107 days from foreclosure sale to conveyance
across four large FHA servicers by weighting each servicer?s state- bystate
averages by the number of foreclosures that servicer had in that state. We
added to that 107- day average the 185 days, on average, that management and
marketing contractors had properties in their inventories (acquisition date
to property sale), according to FHA. Available Data Suggest
FHA Foreclosed Property Sales Performance Is Comparatively Slow
Page 34 GAO- 02- 305 Single- Family Housing
Table 6: Average Number of Days Between Foreclosure and Property Sales in
2000 Organization Days in inventory
FHA 292 a VA 237 b RHS 196 c Fannie Mae and Freddie Mac 180 d a Based on
data provided by four large FHA servicers on the average time from
foreclosure sale until properties are conveyed to management and marketing
contractors. These servicers initiated about 30 percent of all FHA
foreclosures in 2000. The resulting servicer average was combined with data
provided by FHA on the average number of days that management and marketing
contractors take to sell foreclosed properties. b VA data include the time
from the date VA receives custody of the property until the property is
sold. VA requires servicers to convey within 15 days of foreclosure sales,
although servicers have financial incentives to convey as soon after the
foreclosure sale as possible. c Based on data provided by the two largest
RHS servicers.
d Represents a simple average for the two organizations. Sources: Four large
FHA servicers, FHA, VA, the two largest RHS servicers, Fannie Mae, and
Freddie Mac.
We also contacted the two largest RHS servicers, 60 and they provided data
on the time their staffs took to sell foreclosed properties, as measured
from the foreclosure sale until the properties were sold to home buyers or
investors.
While FHA?s divided approach to foreclosed property custody likely
contributes to the length of time needed to sell FHA properties, other
factors may contribute as well. We could not, however, determine the amount
of time each factor contributes to FHA?s lengthy foreclosure sale to
property sale process. These other contributing factors may include the
strength of real estate markets and FHA?s sale of foreclosed properties to
nonprofit organizations. 61 In addition, the compensation that FHA is
required to provide to servicers may help explain the comparatively long
period that it takes to sell FHA?s foreclosed properties. 62 Potentially,
FHA?s
60 These two servicers service about 30 percent of the RHS mortgage
portfolio. 61 FHA management and marketing contractors sold about 11 percent
of FHA?s foreclosed property inventory in 2001 to nonprofit organizations at
discounted prices. According to a senior FHA official, these sales take
additional time to complete and add a few days to the overall average time
taken to sell properties.
62 FHA is required to pay servicers a debenture interest rate, which is
established by statute. Servicer Compensation
Requirements May Inadvertently Provide Financial Incentives to Take the
Maximum Time Allotted to Complete the Foreclosure Process
Page 35 GAO- 02- 305 Single- Family Housing
process for compensating servicers for expenses associated with foreclosures
inadvertently provides servicers with financial incentives to take the
maximum time that FHA allows to complete foreclosure proceedings.
Servicers typically use borrowed funds to finance the payment of outstanding
debt on mortgages in the process of foreclosure. 63 When servicers bid on
properties at foreclosure sales, they continue to use borrowed funds to
finance the recovered properties. Servicers pay interest on these
borrowings, which is referred to as the cost of funds, until they file
claims with FHA when properties are conveyed. FHA compensates servicers for
their interest expenses at what is known as the debenture interest rate,
which is set slightly below the rate at which the foreclosed mortgages were
originated. We found that the difference between the servicers? cost of
funds, and the debenture interest rate that these servicers receive, can be
significant. 64 Our analysis shows that, from 1985 through the first half of
2001, the FHA debenture rate average consistently exceeded the cost of funds
(see fig. 8). In September 2001, during a period of declining interest
rates, the difference between this average rate and the cost of funds was
about 4.5 percentage points. Given that FHA?s compensation system provides
servicers with a potentially significant profit, these servicers appear to
have financial incentives to take the maximum time allotted to complete
foreclosure proceedings.
63 Typically, mortgages are recorded in the name of the servicer. The
servicer then becomes the owner of the property after successfully bidding
at the foreclosure sale. In some instances, however, the servicer acts on
the behalf of a mortgagee.
64 For this analysis, we used the average debenture interest rate that had
been in effect during the prior 4- to 7- year period, as mortgage defaults
and foreclosures typically occur at the highest rates 4 to 7 years after the
mortgages are issued. For estimating the cost of funds for servicers, we
used the interest rate on commercial paper, or short- term business loans,
because that is a proxy for the interest rate at which large servicers
borrow funds.
Page 36 GAO- 02- 305 Single- Family Housing
Figure 8: Differences in FHA Debenture Interest Rate and Servicers? Cost of
Funds, January 1980 through September 2001
Source: Federal Reserve Board and FHA.
Conversely, Fannie Mae, Freddie Mac, and VA servicers do not receive any
interest after foreclosure sales because they convey properties immediately
after the foreclosure sales. Therefore, Fannie Mae, Freddie Mac, and VA bear
the interest costs associated with holding properties themselves and have
financial incentives to complete proceedings and sell properties as quickly
as possible. We note that RHS?s compensation system for servicers is similar
to that of FHA and may provide its servicers with financial incentives to
take the maximum time allotted to complete foreclosure and property sale
proceedings. 65 However, RHS has also set strict deadlines for servicers to
complete foreclosure proceedings and sell properties. RHS generally requires
servicers to sell properties within 6
65 RHS compensates servicers at the interest rate at which the mortgages
were originated. In contrast, the FHA debenture rate is set slightly below
the rate at which the mortgages were originated.
Page 37 GAO- 02- 305 Single- Family Housing
months of foreclosure sales and will not pay any interest on loss claims
beyond that date. As noted earlier, FHA has established time frames for
servicers to complete foreclosure proceedings and will not pay interest
expenses if servicers exceed these guidelines. The FHA guidelines are not
directly comparable to the RHS guidelines because FHA servicers are not
required to sell properties.
FHA?s divided approach to foreclosed property custody is inefficient, delays
critical maintenance and marketing necessary to preserve property values,
results in disputes between servicers and contractors, and likely
contributes to the lengthy period of time that available data suggest it
takes to sell FHA properties. As a result of the inefficiencies in FHA
procedures, the organization maintains or has initiated several complex
layers of oversight, such as an appeals process and preconveyance
inspections, to ensure that properties are properly maintained. FHA
officials have appropriately considered alternative procedures to establish
unified property custody, but have not yet implemented pilot programs to
test their feasibility. Although unified property custody would streamline
FHA?s procedures, it need not come at the expense of current FHA policies
that encourage servicers to pursue loss mitigation, and it need not result
in foreclosure proceedings being initiated faster than is currently the
case. Nor would unified custody affect state and federal laws that provide
protections to homeowners. If properly designed, unified custody procedures
would have built- in financial incentives that preserved foreclosed property
values and resulted in faster sales to the benefit of the MMI and to
neighboring communities.
FHA and VA cannot provide information on either the costs of purchasing
title insurance policies during the foreclosure process or their benefits.
We estimate that FHA and VA spent $31.5 million on new title insurance
policies in 2000. We also found that the limited evidence that is available
suggests purchasing new title policies is not cost- effective and that less
expensive options may be available. In particular, the VA IG report 66
questioned the cost- effectiveness of title insurance policies, and
management and marketing contractor representatives we contacted reported
few if any instances when title policies were necessary. Further, Fannie
Mae, Freddie Mac, and RHS do not encourage servicers to purchase new title
insurance policies during foreclosures and report few title- related
problems.
66 Report No. 5R5- B10- 081, July 25, 1995. Conclusions
Page 38 GAO- 02- 305 Single- Family Housing
FHA and RHS do not collect data necessary to measure the time that elapsed
in acquiring and selling foreclosed properties. Specifically, neither
organization collects data on the foreclosure sales date. Without such data,
the organizations cannot assess the performance of servicers in fulfilling
their obligations in either managing or selling foreclosed properties. FHA
officials stated that collecting the foreclosure sale date would be helpful
in measuring the performance of servicers in completing foreclosure sales
and in obtaining control of properties. Likewise, RHS officials have stated
that collecting such data would be useful in measuring servicer performance
in selling properties. Both organizations plan to collect data on
foreclosure sales dates. Collecting such data should not pose an undue
burden on FHA and RHS servicers, given that we were able to collect it from
several large servicers.
To provide for the most effective acquisition and sale of FHA?s foreclosed
properties, we recommend that the secretary of the Department of Housing and
Urban Development (HUD) establish unified property custody as a priority for
FHA. The HUD secretary should determine the optimal method of unified
property custody. That is, the HUD secretary should determine the method of
unified custody that best ensures FHA borrowers continuing benefits from
loss mitigation and homeowner protections under state and federal laws,
provides appropriate incentives for limiting the time and expense of
acquiring and selling properties, and ensures that properties are maintained
to the benefit of the FHA insurance fund and communities. The HUD secretary
should then implement the optimal method for establishing unified custody.
If this optimal method requires additional statutory authority, the HUD
secretary should seek it. We also recommend that the HUD secretary and the
secretary of the
Department of Veterans Affairs (VA) immediately assess the costeffectiveness
of their expenditures on title insurance purchases. The HUD secretary and VA
secretary should revise these policies if the costs of purchasing these
title insurance policies are not clearly justified by their benefits and
less expensive alternative means of establishing title are available.
Finally, to improve the quality of information available to FHA and RHS on
the time necessary to sell foreclosed properties, we recommend that the HUD
secretary and the secretary of the Department of Agriculture collect
additional data from their servicers. Specifically, the HUD secretary should
collect data on foreclosure sales dates, and the secretary of agriculture
should collect data on foreclosure sales dates and the dates that foreclosed
properties are sold to home buyers or investors, and maintain this data in a
format that is easily accessible by RHS managers. Recommendations
Page 39 GAO- 02- 305 Single- Family Housing
We obtained written comments on a draft of this report from FHA and VA
officials. The written comments are presented in appendixes II and III,
respectively. In addition, we sought and obtained further clarification of
FHA?s written comments from a senior FHA official. RHS, Fannie Mae, and
Freddie Mac officials chose to provide oral comments on a draft of the
report. All of the organizations provided technical comments, which have
been incorporated into the final report as appropriate.
FHA agreed with our recommendations to establish unified property custody as
a priority, assess its title insurance policy expenditures, and collect
additional data. First, FHA stated that unified custody could streamline
processes and oversight, reduce holding time, and increase the net return on
the sale of foreclosed properties. FHA also stated that there were statutory
explanations for the current divided approach to foreclosed property
custody, and that statutory changes are necessary to implement specific
approaches to unified custody. FHA stated that it would continue research to
determine the feasibility of unified custody within the framework of
existing statutes and to identify regulatory and contractual issues that
would be necessary to facilitate such a change. Further, FHA stated that it
would explore statutory changes that could increase the efficiency of its
property sale program. Second, FHA agreed that its expenditures on title
insurance policies during the foreclosure process add questionable value.
FHA stated that it is reviewing these expenditures and has begun to
investigate alternative approaches. Third, FHA stated that it agreed with
our recommendation to collect data from all servicers on foreclosure sales
dates, although it may take a year or more to implement the recommendation
for several reasons, such as the need to change computer systems. We believe
that collecting data on foreclosure sales dates is crucial for FHA to assess
servicer performance in managing foreclosed properties and in assessing the
various approaches to establishing unified property custody.
VA agreed with the report?s conclusions and the recommendation that the
organization immediately assess the cost- effectiveness of its expenditures
on title insurance policies. VA said that it would review its title
insurance expenditures as part of its ongoing analysis of its loan- guaranty
related business processes and policies. VA expects to complete this review
early in calendar year 2003.
RHS stated that it agreed with our recommendation that the organization
collect data on foreclosure sales dates and the dates that foreclosed
properties are sold to home buyers or investors, and it also agreed that the
data be maintained in a format that is easily accessible by RHS managers.
Agency Comments
and Our Evaluation
Page 40 GAO- 02- 305 Single- Family Housing
RHS said that it has plans to collect the additional data and is in the
process of developing a comprehensive, fully automated system that will be
used to support both payment and monitoring of loss claims. RHS estimates
that the automated system will be in place by February 2003.
Fannie Mae and Freddie Mac officials said that the draft report accurately
portrayed their foreclosure, property sale, and data collection programs.
As agreed with your offices, unless you publicly release its contents
earlier, we plan no further distribution of this report until 30 days after
its issuance date. At that time, we will send copies of this report to the
Ranking Minority Member of the Senate Committee on Banking, Housing, and
Urban Affairs and other interested members of Congress and congressional
committees. We will also send copies to the HUD secretary, the VA secretary,
the secretary of agriculture, the chief executive officer of Fannie Mae, and
the chief executive officer of Freddie Mac. We will also make copies
available to others upon request.
Please contact me or Mathew J. Scire at (202) 512- 6794 if you or your staff
have any questions concerning this report. Key contributors to this report
were Andrew E. Finkel, Diana Gilman, Rachel DeMarcus, Jill M. Johnson, Kyong
H. Lee, Wesley M. Phillips, Barbara M. Roesmann, and Richard Vagnoni.
Sincerely yours, Davi M. D?Agostino Director Financial Markets and
Community Investment
Appendix I: Scope and Methodology Page 41 GAO- 02- 305 Single- Family
Housing
To provide information on state foreclosure laws and compare the
organizations? procedures, we interviewed officials from the organizations,
mortgage servicers, FHA management and marketing contractors, law firms that
specialize in foreclosures, the Mortgage Bankers Association, the American
Land Title Association, and Mortgage Insurance Companies of America. We also
contacted other experts in housing market finance and foreclosures and three
banks in the Boston area that hold mortgages in their portfolios and manage
foreclosures and property sales. We reviewed relevant rules and regulations
provided by the organizations, reports and studies, state and federal
statutes pertaining to foreclosures, and statistics on mortgage defaults and
foreclosures. We also developed summaries of the organizations? foreclosure
and property sale procedures.
To identify the effects of FHA?s procedures on property maintenance and
marketing, we contrasted FHA?s procedures to those of the other
organizations and identified procedures that can delay steps necessary to
sell properties and that offer no clear and corresponding benefits. We
discussed FHA?s procedures with organization officials, servicer
representatives, management and marketing contractor officials, and experts
in real estate management. We also collected data and examples from FHA
officials and large mortgage servicers that demonstrate the effects of FHA?s
procedures. In particular, we asked three large servicers to provide data on
their performance in conveying foreclosed properties within deadlines
established by FHA, which they agreed to do.
To assess the cost- effectiveness of FHA and VA title insurance
expenditures, we reviewed their policies regarding the evidence necessary to
establish title to foreclosed properties. We also requested that FHA and VA
provide data on the benefits of their title insurance expenditures. In
addition, we reviewed a relevant VA IG report 1 on VA?s title evidence
policies, and we contacted seven VA district offices to assess their
compliance with a VA policy that was implemented in response to the report?s
recommendations.
To estimate the time that it takes to acquire and sell foreclosed
properties, we collected data from Fannie Mae, Freddie Mac, and RHS. To
estimate the time necessary to acquire and sell FHA properties, we collected
data from four large servicers who conducted about 30 percent of all FHA
foreclosures in 2000. We judgmentally selected these servicers on the basis
1 Report No. 5R5- B10- 081, July 25, 1995. Appendix I: Scope and Methodology
Appendix I: Scope and Methodology Page 42 GAO- 02- 305 Single- Family
Housing
of their size and willingness to provide data. Specifically, the servicers
agreed to provide data on the average amount of time that they held custody
of FHA foreclosed properties (from the time of the foreclosure sale until
conveyance to FHA management and marketing contractors). We combined these
data with national data provided by FHA on the time that it takes its
contractors to sell foreclosed properties. Because RHS does not yet collect
data on the time that it takes to sell foreclosed properties, we collected
data from the two largest RHS mortgage servicers, which service about 30
percent of all RHS mortgages. We focused our analysis on the time from the
foreclosure sale until properties are sold to homeowners or investors,
because the organizations encourage servicers to pursue loss mitigation
strategies until foreclosure sales. The organizations generally consider
loss mitigation as the best means to minimize the cost and disruptions
associated with foreclosures, and we did not want to imply that the
completion of foreclosure sales should proceed any faster than is currently
the case. The period of time from foreclosure sale until properties are sold
to investors is also a common measure of performance in the real estate
industry. We did not independently verify the data provided by the
organizations or servicers.
Due to data limitations, we were not able to estimate the number of days
that various factors, such as FHA?s approach to foreclosed property custody
and the strength of real estate markets, contribute to the total number of
days that are taken to acquire and sell FHA foreclosed properties. To
discuss another potential contributing factor, we collected historical data
that shows the differences between FHA?s debenture interest rate and large
servicers? cost of funds. To estimate large servicers? cost of funds, we
used the interest rate on commercial paper.
We conducted our work in Washington, D. C.; Boston; Dallas; Manchester, N.
H.; and Oklahoma City between June 2001 and January 2002 in accordance with
generally accepted government auditing standards. We obtained written
comments on a draft of this report from FHA and VA, which are reprinted in
appendixes II and III, respectively. RHS, Fannie Mae, and Freddie Mac
officials decided to provide oral comments on a draft of this report. Each
of the organizations provided technical comments, which have been
incorporated into this report where appropriate.
Appendix II: Comments from the Department of Housing and Urban Development
Page 43 GAO- 02- 305 Single- Family Housing
Appendix II: Comments from the Department of Housing and Urban Development
Note: GAO comments supplementing those in the report text appear at the end
of this appendix.
See comment 2. See comment 1.
Appendix II: Comments from the Department of Housing and Urban Development
Page 44 GAO- 02- 305 Single- Family Housing
See comment 4. See comment 3.
Appendix II: Comments from the Department of Housing and Urban Development
Page 45 GAO- 02- 305 Single- Family Housing
See comment 10. See comment 9. See comment 8.
See comment 7. See comment 6.
See comment 5.
Appendix II: Comments from the Department of Housing and Urban Development
Page 46 GAO- 02- 305 Single- Family Housing
See comment 13. See comment 12.
See comment 11.
Appendix II: Comments from the Department of Housing and Urban Development
Page 47 GAO- 02- 305 Single- Family Housing
The following are GAO?s comments on the Department of Housing and Urban
Development?s March 5, 2002, letter.
1. We agree that FHA data show a significant decline in the average time
that management marketing contractors held properties between 1999 and 2001.
In fact, FHA data show that nearly all of the improvement in inventory time
occurred by 2000. Specifically, data that FHA provided subsequent to the
official comment letter show that the average inventory time declined from
270 days in calendar year 1999 to 185 days in calendar year 2000, and 173
days in calendar year 2001. According to a senior FHA official, the 219- day
figure cited for 1999 in the comment letter is incorrect. Because we used
data for calendar year 2000, the report reflects the significant decline in
inventory times that FHA has reported. Therefore, we believe that the report
fairly describes the time that it takes to sell FHA properties.
2. This footnote has been deleted. 3. The FHA comment letter paraphrases our
recommendation differently
than the way the full recommendation was written in the draft report. We
recommended that the HUD secretary establish unified property custody as a
priority for FHA and determine the optimal method of unified property
custody. FHA paraphrased our recommendation as stating that HUD should
determine if unified property custody represents the optimal method of
property custody and, if so, implement it after seeking any required
statutory authority. We contacted a senior FHA official to obtain
clarification on FHA?s position on our recommendation. The FHA official said
that FHA, in paraphrasing the recommendation in the draft report, did not
mean to change the recommendation?s meaning. FHA agrees with our
recommendation that it should establish unified property custody as a
priority. FHA is conducting analysis to determine the feasibility of
establishing unified custody within the existing statutory framework and to
identify regulatory and contractual changes that would have to be resolved
to implement unified property custody.
4. We do not agree with FHA that actions taken to suspend foreclosure
proceedings in these 7,800 cases contributed to the time taken to sell FHA
properties in 2000. The timeline we provided measures from the date of the
foreclosure sale until properties are sold to homebuyers or investors.
Because suspension of foreclosure proceedings on these GAO Comments
Appendix II: Comments from the Department of Housing and Urban Development
Page 48 GAO- 02- 305 Single- Family Housing
mortgages occurred prior to the completion of the foreclosure sale, the
suspension would not add time to the period measured in this report.
5. We revised the figure. 6. We revised the table. 7. We added language to
the report body. 8. The final report notes that FHA is developing guidance
to clarify the
circumstances under which management and marketing contractors can demand
refunds from servicers for preservation and protection work that has not
been completed according to standards.
9. We have revised the report language. 10. As stated in the report body,
the section 601 authority may allow for
unified property custody. While FHA?s Accelerated Claims Disposition Program
could reduce the number of properties that FHA acquires through foreclosure,
it is too early to judge its ultimate success. Further, as the FHA
commissioner states, even if the demonstration program is successful and
expanded to the majority of defaulted mortgage loans, it will not eliminate
FHA?s responsibility for acquiring and selling foreclosed properties
entirely. We believe that FHA should established unified custody as a
priority for any such foreclosed properties for which it becomes responsible
in the future.
11. We disagree with FHA that the draft report stated that FHA does not
retain data on the number of properties that are reconveyed due to
irresolvable title defects. The draft report stated that FHA does not
collect data on the number of times that title insurance policies are used
during the foreclosure process or the types of problems that require title
insurance. Therefore, we made no changes in response to this comment.
12. As stated in the report draft, the debenture rate can significantly
exceed servicers? cost of funds. In fact, the debenture rate has exceeded
servicers? cost of funds since 1985. In a rising interest rate environment,
such as last occurred in 1984, servicers? cost of funds may exceed the
debenture rate.
13. We added further language to the final report noting that FHA has
established time frames in each state for completing foreclosures.
Appendix III: Comments from the Department of Veterans Affairs
Page 49 GAO- 02- 305 Single- Family Housing
Appendix III: Comments from the Department of Veterans Affairs
(250041)
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