GAO-19-228, Accessible Version, FEDERAL HOUSING ...

July 2019

United States Government Accountability Office

Report to the Chairwoman, Committee on Financial Services, House of Representatives

FEDERAL HOUSING ADMINISTRATION

Opportunities Exist to Improve Defaulted Single-Family Loan Sales

Accessible Version

GAO-19-228

Highlights of GAO-19-228, a report to the Chairwoman, Committee on Financial Services, House of Representatives

July 2019

FEDERAL HOUSING ADMINISTRATION

Opportunities Exist to Improve Defaulted SingleFamily Loan Sales

Why GAO Did This Study

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

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

What GAO Recommends

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

View GAO-19-228. For more information, contact Dan Garcia-Diaz at (202) 512-8678 or GarciaDiazD@.

What GAO Found

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

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

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

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

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

United States Government Accountability Office

Letter

Contents

1

Background

5

Program Requirements and Processes for DASP Have Changed

over Time

18

FHA Lacks Specific Time Frames for Its Loan Eligibility Checks,

Criteria for Holding Sales, and Documentation of Key

Procedures and Performance Measures

22

FHA Does Not Evaluate Loan Outcomes, and Sold Loans

Experienced Foreclosure at a Higher Rate Than Unsold Loans

in Some Cases

31

FHA's Current Practices May Not Optimize Savings to the MMI

Fund, and the Effect of Some Changes Is Unclear

52

Conclusions

64

Recommendations for Executive Action

66

Agency Comments and Our Evaluation

67

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GAO-19-228 FHA Distressed Asset Stabilization Program

Appendix I: Objectives, Scope, and Methodology

71

Appendix II: DASP Servicers, Purchasers, and Characteristics of Sold Loans

88

Appendix III: Federal Housing Administration Documents Guiding the Distressed Asset Stabilization Program 95

Appendix IV: Reported Postsale Modification Actions

97

Appendix V: Additional Information on Matching and Outcomes Analysis

99

Appendix VI: Data for Selected Outcome Figures and Additional Outcome Estimates

112

Appendix VII: Additional Auction Structure Information and Evaluation

124

Appendix VIII: Comments from the Department of Housing and Urban Development

127

Appendix IX: GAO Contact and Staff Acknowledgments

132

Appendix X: Accessible Data

133

Data Tables

133

Agency Comment Letter

164

Tables

Table 1: Federal Housing Administration (FHA) Loan Disposition

Methods and Expenses Included in Claim Payment

11

Table 2: Federal Housing Administration (FHA) Data Sets That

We Used to Assess the Distressed Asset Stabilization

Program (DASP)

71

Table 3: Robust Regression Estimates for Number of Bidders for

FHA Loan Pools, Fiscal Years 2011?2016, and Enterprise

Loan Pools, Calendar Years 2015?2017

85

Table 4: List of Federal Housing Administration (FHA) Documents

Guiding the Distressed Asset Stabilization Program

95

Table 5: Postsale Modification Actions for Loans Sold in the

Distressed Asset Stabilization Program and Expected

Effect on Monthly Payment, Fiscal Years 2013?2016

97

Table 6: Descriptive Statistics on Continuous Covariates in

Unmatched and Matched Samples

100

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GAO-19-228 FHA Distressed Asset Stabilization Program

Figures

Table 7: Transitions between Outcomes in the Matched Analysis

Sample

106

Table 8: Transition Estimates in Percentage Points from Models

with and without Piecewise-Constant Time Covariates

110

Table 9: Foreclosure and Foreclosure Avoidance Outcomes for

Loans Sold through Distressed Asset Stabilization

Program Sales and Similar, Unsold Loans, Fiscal Years

2013?2016

112

Table 10: Out-of-Home and In-Home Outcomes for Loans Sold

through Distressed Asset Stabilization Program Sales and

Similar, Unsold Loans, Fiscal Years 2013?2016

113

Table 11: Loan Outcomes 12 Months after Transfer by Distressed

Asset Stabilization Program (DASP) Sale and Similar,

Unsold Loans, Fiscal Years 2013?2016

113

Table 12: Loan Outcomes 24 Months after Transfer by Distressed

Asset Stabilization Program (DASP) Sale and Similar,

Unsold Loans, Fiscal Years 2013?2016

115

Table 13: Data for Additional Outcomes for Loans Sold through

the Distressed Asset Stabilization Program and Similar,

Unsold Loans, Fiscal Years 2013?2016

118

Table 14: Some Characteristics of a Successful Auction Design

and Evaluation of the Federal Housing Administration's

(FHA) Distressed Asset Stabilization Program (DASP)

124

Figure 1: Numbers of Defaulted Loans Sold in Distressed Asset

Stabilization Program Sales, Fiscal Years 2010?2016

7

Figure 2: Share of FHA Defaulted Loans Sold out of the Total

Number of FHA Defaulted Loans by State, 2013?2016

8

Figure 3: Presale Phase of FHA's Distressed Asset Stabilization

Program

13

Figure 4: Due Diligence and Bid Phase of FHA's Distressed Asset

Stabilization Program

15

Figure 5: Postsale Phase of FHA's Distressed Asset Stabilization

Program

17

Figure 6: FHA-Insured Loans 6 or More Months Past Due and

Number of Loans Sold in the Distressed Asset

Stabilization Program, Fiscal Years 2010?2017

30

Figure 7: Foreclosure and Foreclosure Avoidance Outcomes for

Loans Sold through Distressed Asset Stabilization

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GAO-19-228 FHA Distressed Asset Stabilization Program

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