	Background

		History of the Distressed Asset Stabilization Program

The National Housing Act authorized HUD’s Office of Housing to accept  assignment of and sell defaulted single-family mortgage loans. In 2017, FHA insured over $1 trillion in single- family mortgage loans, including more than 200,000 loans in default. Before initiating  foreclosure actions, FHA requires servicers to contact the borrower,  collect information on the borrower’s finances, and evaluate the borrower  using the following ordered steps, referred to as the waterfall of loss  mitigation priorities:  informal forbearance through an oral agreement allowing for reduced  or suspended payments for a period of 3 months or less;  formal forbearance with written repayment plans, which combine a  suspension or reduction in monthly mortgage payments with a  repayment period;  special forbearance of up to 12 months for borrowers who are  unemployed;
FHA-Home Affordable Modification Program (HAMP), which works to  get a borrower to return to making regular payments (reperforming);  FHA-HAMP offers qualified borrowers a loan modification that results  in an affordable monthly payment amount that does not exceed 40  percent of the borrower’s gross monthly income by reamortizing the  debt for a new 30-year term at a fixed interest rate at or below the  market rate and, under certain circumstances, deferring the payment  of principal through the use of a partial claim; and non-retention disposition methods, including a preforeclosure sale  (also known as a short sale) in which the borrower sells a property  and the mortgage is satisfied for less than the amount that is owed, or  deed-in-lieu of foreclosure in which the borrower voluntarily transfers  a property to FHA to release all mortgage obligations; FHA may also  provide move-out incentive payments to borrowers for short sales and  deeds-in-lieu of foreclosure. FHA also  changed loan eligibility criteria and bidding processes to increase  recoveries to the MMI Fund. According to the officials,  this was because these loans had a higher probability of modification by  purchasers. Further, they said that the changes in eligibility criteria related  to delinquency and LTV ratio were intended to decrease losses to the  MMI Fund. FHA Lacks Specific Time Frames for Its Loan Eligibility Checks, Criteria for Holding Sales, and Documentation of Key Procedures and Performance Measures

		Multiple Entities Check Loan Eligibility, but the Timing of FHA’s Checks May Allow Ineligible Loans to Be Sold

Servicers identify eligible loans for inclusion in a DASP sale, certify  eligibility, and update loan information and remove ineligible loans prior to  bid day. In particular, about 2.67 percent of these loans did not  meet eligibility criteria based on their default status on the bid date. FHA officials told us that FHA relies on the  servicers to perform eligibility checks a few weeks before bid day and  again after the sale when the servicer submits the claim. However, the  status of delinquent loans can be very fluid. Likewise, borrowers could lose access to benefits such as reevaluation  for the suite of FHA loss mitigation options. Our  analysis of FHA outcome data found that in aggregate, sold loans were  less likely to avoid foreclosure than similar, unsold loans. Furthermore, HUD policy states that its evaluations  use methods that isolate to the greatest extent possible the effects of the  program from other influences. A  process to evaluate outcomes for sold loans relative to similar, unsold  loans could help FHA determine whether DASP is meeting its financial  objective of maximizing recoveries to the MMI Fund and understand the  extent to which DASP is helping struggling homeowners. Although we found that sold loans were more likely to experience  foreclosure in aggregate, for later sales, after about 12 months, rates of  avoiding foreclosure were similar or greater for sold loans compared to  unsold loans, and for some purchasers rates of foreclosure were similar  or smaller for sold loans compared to unsold loans. One  purchaser told us that additional notice of FHA sales would allow it the  time to plan or raise additional capital needed to participate in a DASP  sale. Similarly, by communicating long- range notice of upcoming sales to market participants, FHA could  encourage bidder participation and potentially help meet its objective of  maximizing recoveries to the MMI Fund. See figure 13 for an illustrative example of how reserve prices  could be affected based on different expectations of loan dispositions. Without considering other disposition methods in its reserve  pricing, FHA risks recovering less for the MMI Fund in loan sales than if  the loans had not been sold and risks not meeting its objective. Evaluating outcomes. FHA generally  agreed with seven recommendations and did not explicitly agree or  disagree with two recommendations. Appendix I: Objectives, Scope, and Methodology

The objectives of our report were to examine (1) the changes the Federal  Housing Administration (FHA) has made to the Distressed Asset  Stabilization Program (DASP) over time; (2) certain DASP procedures,  including those associated with loan eligibility, and documentation; (3)  FHA’s evaluation of the identified outcomes for loans that have been sold  through DASP and how these compare with similar, unsold loans; and (4)  the potential effects that changes to DASP might have on the Mutual  Mortgage Insurance Fund (MMI Fund). To select servicers and purchasers to interview, we analyzed the bid day  pool-level data and postsale data, respectively. Year of the loan’s origination. We also provide additional outcome figures and  data, as well as outcome data for sold loans and unsold loans by some  loan-level characteristics.
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 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.
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.

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.