Foreclosure Mitigation: Agencies Could Improve Effectiveness of Federal Efforts with Additional Data Collection and Analysis
Highlights
What GAO Found
In an effort to help the millions of homeowners struggling to keep their homes, a range of federal programs have offered relief in the form of loan modifications and refinancing into loans with lower interest rates, among other things. Under Treasury’s Home Affordable Modification Program (HAMP), initiated in early 2009, servicers have modified almost 1 million loans between 2009 and 2011. During the same period, servicers modified nearly 1 million additional loans under programs administered by the Departments of Agriculture (USDA) and Veterans Affairs (VA), Federal Housing Administration (FHA), and Fannie Mae and Freddie Mac (the enterprises). Servicers have also modified about 2.1 million loans under nonfederal loan modification programs resulting in a total of about 4 million modifications between 2009 and 2011. However, a large number of borrowers have sought assistance, but were unable to receive a modification. For example, approximately 2.8 million borrowers had their HAMP loan modification application denied or their trial loan modification canceled. Further, the volume of federal modifications has declined since 2010. Recent efforts have expanded refinancing programs. However, low participation rates in FHA’s program raise questions about the need for Treasury’s financial support, which could reach a maximum of $117 million.
In spite of these efforts, the number of loans in foreclosure remains elevated, and key indicators suggest that the U.S. housing market remains weak. GAO’s analysis of mortgage data showed that in June 2011 (most current data available for GAO’s use and analysis) between 1.9 and 3 million loans still had characteristics associated with an increased likelihood of foreclosure, such as serious delinquency and significant negative equity (a loan-to-value ratio of 125 percent or greater). These loans were concentrated in certain states, such as Nevada and Florida. Further, more recent indicators such as home prices and home equity remain near their postbubble lows. As of December 2011, total household mortgage debt was $3.7 trillion greater than households’ equity in their homes—representing a significant decline in household wealth nationwide.
Despite the scope of the problem, most stakeholders GAO interviewed said that enhancing current foreclosure mitigation efforts would be preferable to new ones. GAO found that agencies could take steps to make their programs more effective. Collectively, FHA and the enterprises had 1.8 million loans in their portfolios that were 90 days or more past due as of December 2011. GAO found that most of the agencies and enterprises, with the exception of USDA, had stepped up their efforts to monitor servicers’ outreach to struggling borrowers. However, not all the agencies were conducting analyses to determine the effectiveness of their foreclosure mitigation actions. Experiences of Treasury and the enterprises and GAO’s econometric analysis strongly suggest that such analyses can improve outcomes and cut program costs. For example, GAO’s analysis showed that the size of payment change, delinquency status, and current loan to value ratio, can significantly influence the success of the foreclosure mitigation action taken. In contrast, not all federal agencies consider redefault rates and long-term costs when deciding which loan modification action to take. Nor have they assessed the impact of loan and borrower characteristics. In some cases, agencies do not have the data needed to conduct these analyses. GAO found some evidence to suggest that principal forgiveness could help some homeowners—those with significant negative equity—stay in their homes, but federal agencies and the enterprises were not using it consistently and some were not convinced of its merits. In addition, there are other policy issues to consider in how widely this option should be used, such as moral hazard. The Federal Housing Finance Agency (FHFA), for instance, has not allowed the enterprises to offer principal forgiveness. Treasury recently offered to pay incentives to the enterprises to forgive principal, and FHFA is reevaluating its position. Until agencies and the enterprises analyze data that will help them choose the most effective tools and fully utilize those that have proved effective, foreclosure mitigation programs cannot provide the optimal assistance to struggling homeowners or help curtail the costs of the foreclosure crisis to taxpayers.
Why GAO Did This Study
Historically high foreclosure rates remain a major barrier to the current economic recovery. To assist policymakers and housing market participants in evaluating foreclosure mitigation efforts, GAO examined (1) the federal and nonfederal response to the housing crisis, (2) the current condition of the U.S. housing market, and (3) opportunities to enhance federal efforts. To address these objectives, GAO analyzed government and mortgage industry data, including loan-level data purchased from a private vendor; reviewed academic and industry literature; examined federal policies and regulations; and interviewed housing industry participants and observers.
Recommendations
GAO recommends that: Treasury reevaluate the need for its financial support of FHAs refinance program; USDA increase its efforts to monitor servicers outreach tostruggling borrowers; FHA, VA, and USDA collect and analyze
information needed to fully assess the effectiveness and costs of their foreclosure mitigation efforts; andFHFA expeditiously finalize analysis on whether to allow the enterprises to offer HAMP principal forgiveness modifications. Treasury, FHA, VA and FHFA agreed to consider or concurred with the reports recommendations. USDA provided additional information in its comments. In response, we clarified the text and recommendation on USDAs monitoring of servicers outreach efforts.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of the Treasury | To help ensure Treasury is making effective and efficient use of its resources, Treasury and FHA should update their estimates of participation in the FHA Short Refinance program given current participation rates and recent changes to the program. Treasury should then use these updated estimates to reassess the terms of the letter of credit facility and consider seeking modifications in order to help ensure that it meets Treasury's needs cost-effectively. |
Closed – Implemented
In a letter responding to the report's recommendation, HUD stated that FHA would provide Treasury with updated participation estimates for the FHA refinance program by March 2013. After receiving the updated participation estimates from FHA, Treasury amended the purchase agreement for the letter of credit facility in March 2013, reducing the amount by $7 billion--from $8 billion to $1 billion--and reducing the cap on administrative fees that could be charged by $92 million--from $117 million to $25 million. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376 (2010), prohibited Treasury, under the Emergency Economic Stabilization Act of 2008 (which established the Troubled Asset Relief Program), from incurring any additional obligations for a program or initiative unless the program or initiative had already been initiated prior to June 25, 2010. As a result, by amending the letter of credit facility purchase agreement, Treasury deobligated approximately $7.1 billion, returning that amount to the general fund during fiscal year 2013.
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| Federal Housing Administration | To help ensure Treasury is making effective and efficient use of its resources, Treasury and FHA should update their estimates of participation in the FHA Short Refinance program given current participation rates and recent changes to the program. Treasury should then use these updated estimates to reassess the terms of the letter of credit facility and consider seeking modifications in order to help ensure that it meets Treasury's needs cost-effectively. |
Closed – Implemented
In a letter responding to the report's recommendation, HUD stated that FHA would provide Treasury with updated participation estimates for the FHA refinance program by March 2013. After receiving the updated participation estimates from FHA, Treasury amended the purchase agreement for the letter of credit facility in March 2013, reducing the amount by $7 billion--from $8 billion to $1 billion--and reducing the cap on administrative fees that could be charged by $92 million--from $117 million to $25 million. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376 (2010), prohibited Treasury, under the Emergency Economic Stabilization Act of 2008 (which established the Troubled Asset Relief Program), from incurring any additional obligations for a program or initiative unless the program or initiative had already been initiated prior to June 25, 2010. As a result, by amending the letter of credit facility purchase agreement, Treasury deobligated approximately $7.1 billion, returning that amount to the general fund during fiscal year 2013.
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| Department of Agriculture | In order to better ensure that servicers are effectively implementing the agency's loss mitigation programs and that distressed borrowers are receiving the assistance they need as early as possible before they become seriously delinquent, the Secretary of the Department of Agriculture should require servicers to report information about their efforts to reach distressed borrowers. For example, servicers could report on their efforts to reach borrowers and whether borrowers have responded to outreach from the servicer regarding early delinquency interventions and are receiving informal foreclosure mitigation actions. |
Closed – Implemented
USDA addressed this recommendation by implementing its Electronic Status Reporting (ESR) project in 2018. The ESR project enhanced servicer reporting to USDA's Rural Housing Service on loan status and servicing actions. Required reporting fields include information on whether the servicer sent a delinquent borrower a solicitation letter for loss mitigation, whether the borrower responded to loss mitigation solicitations, and whether the borrower was approved for an informal forbearance plan.
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| Department of Agriculture | The Secretary of USDA should determine the extent to which distressed borrowers have not been reached and assess whether changes are needed to help ensure servicers are complying with USDA's loss mitigation requirements. |
Closed – Implemented
Consistent with our recommendation, the Loan Servicing Branch of USDA's Rural Housing Service (RHS) generates reports to monitor the delinquency status and servicing actions for RHS loans, by servicer. Among other things, the reports include information on the number and percentage of delinquent loans for which the servicer sent the borrower a solicitation letter for loss mitigation, as well as cases where the borrower did not respond to loss mitigation solicitations. The reports also contain information on the frequency with which servicers use various loss mitigation tools and the performance of borrowers in loss mitigation. Responsibilities of the Loan Servicing Branch include reviewing these reports to oversee servicer implementation of loss mitigation policies, identifying potential program improvements, and helping to implement changes in loss mitigation policies through development of pilot programs, regulatory plans, or other actions.
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| Federal Housing Administration |
Priority Rec.
To more fully understand the strengths and risks posed by foreclosure mitigation actions and protect taxpayers from absorbing avoidable losses to the maximum extent possible, the FHA, VA, and USDA should conduct periodic analyses of the effectiveness and the long-term costs and benefits of their loss mitigation strategies and actions. These analyses should consider (1) the redefault rates associated with each type of home retention action and (2) the impact that loan and borrower characteristics have on the performance of different home retention actions. The agencies should use the results from these analyses to reevaluate their loss mitigation approach and provide additional guidance to servicers to effectively target foreclosure mitigation actions. If FHA, VA, and USDA do not maintain data needed to consider this information, they should require services to provide them. |
Closed – Implemented
HUD/FHA has taken several actions to implement this recommendation. In November 2012, FHA revised the types of mitigation actions and manner in which the actions are offered. FHA officials subsequently have been evaluating the effectiveness of these changes. Specifically, FHA has been conducting quarterly analysis of the redefault and failure rates associated with its various loss mitigation options. In addition, HUD contracted with the Urban Institute to conduct a comprehensive study of FHA's loss mitigation program which was completed in December 2016. In October 31, 2018, FHA reported that it has evaluated and plans to take various actions in response to recommendations made by the Urban Institute to improve the performance of its loss mitigation programs, such as exploring ways to expand FHA's loss mitigation toolkit during periods of higher interest rates. Additionally, FHA has submitted a $26.7 million budget request to modernize and replace its information technology systems intended, in part, to improve FHA's ability to analyze the effectiveness of its loss mitigation and foreclosure prevention processes.
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| Department of Veterans Affairs | To more fully understand the strengths and risks posed by foreclosure mitigation actions and protect taxpayers from absorbing avoidable losses to the maximum extent possible, the FHA, VA, and USDA should conduct periodic analyses of the effectiveness and the long-term costs and benefits of their loss mitigation strategies and actions. These analyses should consider (1) the redefault rates associated with each type of home retention action and (2) the impact that loan and borrower characteristics have on the performance of different home retention actions. The agencies should use the results from these analyses to reevaluate their loss mitigation approach and provide additional guidance to servicers to effectively target foreclosure mitigation actions. If FHA, VA, and USDA do not maintain data needed to consider this information, they should require services to provide them. |
Closed – Implemented
In July 2022, VA implemented its redesigned electronic loan reporting interface to evaluate loan-level performance over time and track the effectiveness of its loss mitigation efforts. The system's data dashboards enable VA staff to analyze the types of loss mitigation actions taken; the performance of these loans following mitigation; and certain characteristics of those loans, such as geographic location, servicer, and the local area unemployment rate. According to VA staff, VA plans to use this new information to conduct ongoing evaluations of its loss mitigation approach and, as appropriate, provide guidance to servicers.
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| Department of Agriculture | To more fully understand the strengths and risks posed by foreclosure mitigation actions and protect taxpayers from absorbing avoidable losses to the maximum extent possible, the FHA, VA, and USDA should conduct periodic analyses of the effectiveness and the long-term costs and benefits of their loss mitigation strategies and actions. These analyses should consider (1) the redefault rates associated with each type of home retention action and (2) the impact that loan and borrower characteristics have on the performance of different home retention actions. The agencies should use the results from these analyses to reevaluate their loss mitigation approach and provide additional guidance to servicers to effectively target foreclosure mitigation actions. If FHA, VA, and USDA do not maintain data needed to consider this information, they should require services to provide them. |
Closed – Implemented
USDA has taken action to implement this recommendation. In December 2017, USDA indicated that it was conducting periodic analyses of the effectiveness and long-term costs and benefits of its loss mitigation strategies and actions. USDA representatives stated that it had allocated funding to build monthly data gathering and analysis capability. USDA representatives also told GAO that the agency completed the basic development and internal testing of the new software in December 2015 and began testing and implementing the software with lenders in September 2016. According to USDA, the new Electronic Status Reporting (ESR) was implemented on July 1, 2018, adding 50 new data elements to those already available. USDA stated that the new data elements enable the agency to analyze redefault rates associated with each type of home retention action as well as the impact that loan and borrower characteristics have on the performance of different home retention actions. USDA indicated that the new analysis enables the agency to reevaluate loss mitigation actions with the aim of providing additional guidance to servicers.
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| Federal Housing Finance Agency | FHFA should expeditiously finalize its analysis as to whether Fannie Mae and Freddie Mac will be allowed to offer HAMP principal forgiveness modifications. |
Closed – Implemented
In a July 31, 2012 letter to Congress, FHFA's Acting Director provided the results of FHFA's analysis of HAMP principal reduction alternative (PRA) as a loss mitigation option for Fannie Mae and Freddie Mac for homeowners whose homes are worth less than the amount they on their mortgages and in danger of losing their homes to foreclosure. The letter stated that in conducting this analysis, FHFA took into consideration current loss mitigation tools; costs and benefits of using principal forgiveness including the economic benefit or costs to the two enterprises as well as to taxpayers; the impact on borrower behavior; direct and indirect implementation costs; and, the overall impact on the mortgage market. In the letter, the FHFA Acting Director concluded that Fannie Mae's and Freddie Mac's adoption of HAMP PRA would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers.
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