REO Program Structures and Use of Contractors

Since 1999, FHA has been outsourcing to private sector contractors the  maintenance and disposition of its REO properties. RHS  uses both contractors and its own staff to dispose of REO properties,  according to agency officials. We also found that,  in making these sales, FHA did not follow several practices that other  entities used in disposing of REO properties that could potentially  increase the agency’s returns, including repairing properties to increase  their market value, using multiple inputs to set list prices, and using  market-based information to make subsequent list price reductions. FHA and Other Federally Related Entities Have Similar Goals and Strategies for Disposing of REO Properties

FHA’s goals for disposing of its REO properties were similar to those of  the other entities we reviewed. FHA’s Returns on REO Sales Slightly Lagged Those of the Enterprises and Dispositions Took Substantially Longer to Complete

FHA’s returns from selling its REO properties generally have trailed the  returns of the two enterprises but its performance has improved recently. FHA also took longer to dispose of properties than the enterprises but  showed recent improvement in this area. To account for the possibility that the performance differences were  attributable to differences in the property characteristics of each of these  entities’ REO inventories, we developed a regression model to control for  the effects on the net execution rates of certain property characteristics— such as location, value, and local real estate market conditions—that  were beyond the entities’ control. FHA took significantly longer to sell its properties than the enterprises and  VA, but the differences decreased in the first half of 2012. We found that if  FHA’s average number of days from foreclosure sale to REO disposition  had equaled those of the enterprises, it could have avoided around $600  million in extra holding costs for 2011 alone. For example, FHA’s independently assessed value and initial list price  execution rates (net sales proceeds as a share of property values or list  prices) were both 30 percent higher for its retail sales than for its mission  program dispositions for sales from January 2007 through June 2012. The Santa Ana  and Atlanta centers lagged the enterprises by 2 to 6 percentage points for  dispositions in their respective states, while the Philadelphia center  lagged the enterprises by 8 and 11 percentage points (fig. FHA Has Yet to Implement a Uniform System for Evaluating Contractor Performance

Under the new contract structure—known as M&M III—created in 2010,  FHA expected that its staff and an oversight contractor would conduct a  number of specific activities to monitor its REO maintenance and  marketing contractors’ performance, including (1) assessing whether its  contractors are meeting minimum contractual requirements, and (2) using  standard metrics in a scorecard to evaluate the level of contractors’  performance. In addition,  staff from one of the private mortgage servicers we interviewed told us  that its own field agents inspected about 40 percent of its properties,  while two other private mortgage servicers said that they inspected about  7 and 10 to 12 percent of their properties on a monthly basis throughout  the year. In addition, FHA does not have the procedures that the enterprises have  to ensure that properties are assigned to listing brokers located close  enough to the properties to have sufficient knowledge of the local market. We found that FHA’s  disposition performance and the time required to complete sales of REO  properties lagged the performance of the government-sponsored  enterprises. Recommendations for Executive Action

To increase the potential for higher financial returns from FHA’s  disposition of REO properties, the Secretary, HUD, should direct the  Commissioner, FHA, to identify and implement changes in current  practices or requirements that could improve REO disposition outcomes,  including  requiring the use of multiple estimates of market value when  determining initial list prices,  considering whether conducting repairs could increase the amount of  net proceeds from specific property sales, and ensuring that the timing and amount of price reductions for its listed  properties are made on the basis of an evaluation of market  conditions rather than on standardized schedules. To improve its oversight of the REO disposition program, the Secretary,  HUD, should direct the Commissioner, FHA, to update its REO program disposition handbook, or equivalent  document, to include a current and consolidated set of policies and  procedures for managing and disposing of FHA’s REO properties; establish a process for analyzing differences in disposition  performance and practices across homeownership centers that can  be used to periodically update this handbook or equivalent  documentation to reflect current policy and procedures;  implement a mechanism for systematically reviewing contractors’  compliance with minimum performance requirements through the use  of standard metrics; ensure the completion and implementation of the scorecard currently  being developed, including ensuring that performance metrics  included in the scorecard are consistent with those used to review  contractors’ compliance with minimum performance requirements; determine more effective ways, including increased use of in-person  inspections, to better ensure that contractors comply with expected  requirements;  implement controls to ensure that listing brokers are located within  close enough proximity to their listed properties to effectively market  REO properties; and  take steps to develop a legally acceptable means of assigning work to  REO contractors that uses more frequent assessments of past  performance. To examine the disposition practices, we reviewed REO program  regulations, requirements, and policies to determine the goals and  strategies for these activities of FHA and other federally related housing  entities, including the Department of Veterans Affairs (VA), the  Department of Agriculture’s Rural Housing Service (RHS), and two  housing government-sponsored enterprises (the enterprises)—Fannie  Mae and Freddie Mac. To assess the effectiveness of FHA’s REO dispositions, we obtained and  analyzed REO disposition data from FHA and the other federally related  housing entities, including all REO properties disposed of from January 1,  2007, through June 30, 2012, as well as properties in inventory at the end  of the period.
Why GAO Did This Study

With mortgage foreclosures at historic levels in recent years, FHA is faced with disposing of a high volume of REO properties. The enterprises, other federal agencies, and private sector mortgage servicers also dispose of REO properties from their foreclosures. To assess the relative effectiveness of FHAs REO dispositions, GAO examined (1) FHAs disposition goals, strategies, practices, and effectiveness in disposing of properties compared with those of the enterprises and private servicers; and (2) FHAs oversight of the contractors that maintained and marketed its REO properties. GAO analyzed REO disposition data from FHA and the enterprises, including modeling to control for property differences across the entities. GAO also collected requirements, policies, and interviews on each entitys oversight of its REO dispositions.

What GAO Found

The Federal Housing Administration's (FHA) performance in selling its foreclosed properties--known as real estate-owned (REO) properties--lagged the performance of both of the government-sponsored enterprises (enterprises), Fannie Mae and Freddie Mac. FHA disposed of more than 400,000 properties from January 2007 through June 2012. Its combined 2007-2012 returns, measured by the net execution rate (net sales proceeds divided by independently assessed property values) were about 4 to 6 percentage points below the enterprises' returns. After controlling for certain differences in their properties' characteristics (e.g., value, location, and local market conditions), differences in combined returns between FHA and the enterprises persisted at an estimated 2 to 5 percentage points.
Further, while the enterprises took an average of around 200 days after foreclosure to dispose of REO properties, FHA took about 340 days--more than 60 percent longer . A similar pattern persisted even after controlling for certain property differences. FHA also took longer than the Department of Veterans Affairs (VA). For FHA, unlike the others, a significant part of the time between the foreclosure sale and REO sale is taken by loan servicers who must complete certain activities before conveying title to FHA. In the first half of 2012, FHA's disposition returns and timelines generally improved relative to the enterprises'. All three entities use similar strategies to dispose of their REO properties, but FHA does not use some practices that the enterprises and private mortgage servicers use that may have the potential to improve its sales performance. For example, FHA does not repair its properties to increase their marketability, something both enterprises do. And unlike the enterprises, FHA does not incorporate information from multiple sources in setting list prices or consistently take into account market conditions when reducing prices. Instead, it relies on one appraisal in setting initial prices and often reduces them by set amounts. GAO found that if FHA's execution rate and disposition time frame had equaled those of the enterprises in 2011, it could have increased its proceeds by as much as $400 million and decreased its holding costs--which can include items such as taxes, homeowners' association fees, and maintenance costs--by up to $600 million for the year.
In addition, FHAs oversight of the contractors that it uses to maintain and dispose of REO properties has weaknesses, and it does not use some of the oversight tools other entities use that might prove effective. First, government internal control standards require complete, updated policies and procedures to guide program oversight. But FHA has not updated its REO disposition handbook since 1994, even though the agency implemented a different program and contractor structure in 2010. In the absence of a central source of updated guidance, GAO and FHA internal auditors found inconsistencies in both contractor activities and staff oversight across FHAs four regional homeownership centers. Second, FHA has not implemented a uniform system for evaluating contractor performance. For instance, FHA has yet to implement a proposed version of the type of scorecard that the enterprises use to assess differences in contractor performance. Also, its planned incentive structure for contractors has been found not to comply with federal contracting rules. These two shortcomings have prevented FHA from assigning work according to contractors performancea key quality control in its new REO program structure. Further, FHA aims to inspect 2 to 6 percent of its REO properties annually, although other entities with REO properties report inspecting between 25 and 35 percent monthly, or between 7 and 40 percent annually. Finally, FHA has not taken steps to ensure that the listing brokers marketing its REO properties are located close enough to the properties to have adequate knowledge of local markets. Without implementing more effective activities to evaluate contractor performance and ensure compliance with program requirements, FHAs REO properties may continue to remain on the market longer and sell for lower prices than properties held by the enterprises.

What GAO Recommends

GAO makes 10 recommendations intended to increase FHAs returns on the disposition of REO properties, including considering repairs that increase net proceeds, requiring the use of additional information for setting initial and subsequent listing prices; and improving its oversight of its contractors, including updating and maintaining comprehensive guidance, implementing a performance inspections, and ensuring that listing brokers are appropriately located. FHA reviewed a draft of this report and agreed with GAOs recommendations.