Foreclosure Mitigation:

Agencies Could Improve Effectiveness of Federal Efforts with Additional Data Collection and Analysis

GAO-12-296: Published: Jun 28, 2012. Publicly Released: Jun 28, 2012.

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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.

What GAO Recommends

GAO recommends that: Treasury reevaluate the need for its financial support of FHA’s 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 report’s recommendations. USDA provided additional information in its comments. In response, we clarified the text and recommendation on USDA’s monitoring of servicers’ outreach efforts.

For more information, contact Mathew J. Scirè at (202) 512-8678 or sciremj@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  3. Status: Open

    Comments: In its 60-day response letter, USDA noted that currently, its Rural Housing Service (RHS) guaranteed loan servicers are required to perform outreach and early delinquency intervention and informal mitigation actions within agency-prescribed timeframes. Also, each servicer is required to maintain automated records of these contacts and attempted contacts. According to USDA. RHS will utilize both internal and external means to analyze data obtained periodically through loan servicers. Loan level data outlining foreclosure prevention efforts such as borrower contact, loss mitigation actions attempted, loss mitigation actions implemented, and failed loss mitigation actions will be assessed in order to better evaluate the effectiveness of RHS'foreclosure prevention guidance. Data will be collected from loan servicers via monthly reporting in conjunction with data obtained through compliance reviews conducted by RHS and its program compliance agent. Utilizing these compliance reviews, USDA stated that RHS will perform a management review of the results and will provide feedback to the servicers to increase compliance. In a September 2013 status update, USDA stated that it was developing manual processes that will provide clarity with respect to lender loss mitigation performance as recommended by GAO. USDA currently captures limited loss mitigation data that yields performance results, assisting the program in its efforts to mitigate risk. These manual processes will remain in effect until USDA has completed the build-out of the enhanced electronic data reporting requirements of lenders that participate in the program. In addition, USDA noted that it was finalizing a memorandum of understanding with Ginnie Mae to gain access to their program default data that will provide insight into the loss mitigation retention workout performance of 502 Guaranteed borrowers. This data, which will help evaluate the effectiveness of loss mitigation efforts on both borrower outcome and agency cost bases, will be gathered with the assistance of the consulting team now supporting lender compliance.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

  4. Status: Open

    Comments: In its 60-day response letter, USDA stated that it supported GAO's recommendation to require servicers to report their efforts to reach distressed borrowers and report, on a portfolio level, the extent to which servicers are complying with USDA's loss mitigation requirements. USDA also stated that data will be collected from loan servicers via monthly reporting in conjunction with data obtained through compliance reviews conducted by it Rural Housing Service (RHS) and its program compliance agent. Utilizing these compliance reviews, RHS will perform a management review of the results and will provide feedback to the servicers to increase compliance. In a September 2013 status update, USDA stated that it was developing manual processes that will provide clarity with respect to lender loss mitigation performance as recommended by GAO. USDA currently captures limited loss mitigation data that yields performance results, assisting the program in its efforts to mitigate risk. These manual processes will remain in effect until USDA has completed the build-out of the enhanced electronic data reporting requirements of lenders that participate in the program. In addition, USDA noted that it was finalizing a memorandum of understanding with Ginnie Mae to gain access to their program default data that will provide insight into the loss mitigation retention workout performance of 502 Guaranteed borrowers. This data, which will help evaluate the effectiveness of loss mitigation efforts on both borrower outcome and agency cost bases, will be gathered with the assistance of the consulting team now supporting lender compliance.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

  5. Status: Open

    Comments: In November 2012, FHA revised the types of mitigation actions and manner in which the actions are offered, and according to the FHA commissioner's July 2013 congressional testimony, the changes FHA has made to its loss mitigation efforts are reducing losses. FHA officials have begun to evaluate the effectiveness of these changes. For example, FHA is producing quarterly reports that look at redefault rates by type of loss mitigation assistance type (loan modification, FHA HAMP, repayment plan, etc.).

    Recommendation: 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.

    Agency Affected: Department of Housing and Urban Development: Federal Housing Administration

  6. Status: Open

    Comments: In response to GAO's recommendation, VA began researching the loan-level data available in its loan-servicing tool, VALERI (VA Loan Electronic Reporting Interface), and investigating other similarly veined research studies that could inform its analytic framework. After conducting an analysis of loan-level data in the VALERI tool, VA concluded that the data architecture of the tool does not support the analysis of redefault rates and loan/borrower characteristics required to satisfy the GAO study recommendation. As such, VA sought expert advice on other similar studies or reports from subject matter experts in the mortgage and servicing industry. VBA was able to identify one such study, the US Treasury?s Office of the Comptroller of the Currency (OCC) Mortgage Metrics Report, which appeared to provide data similar to what VA requires. Upon further investigation, VA was able to identify and contact the private-sector firm responsible for providing the redefault data contained in the OCC Mortgage Metrics report. Purchasing the data will provide VA with the ability to make data-driven policy decisions in these areas. Therefore, VA indicated that it was proceeding with the acquisition of the subscription and expects that the final procurement will be completed by the end of fiscal year 2014. Analysis will commence upon receipt of the data. VA will develop a project plan with milestones for completion at that time.

    Recommendation: 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.

    Agency Affected: Department of Veterans Affairs

  7. Status: Open

    Comments: In its 60-day response letter, USDA noted that its Rural Housing Service (RHS) will conduct periodic analyses of the effectiveness and long-term costs and benefits of its loss mitigation strategies and actions. Electronic and physical loan level data will be obtained from loan servicers and other entities in order to measure the effectiveness of existing and future loss mitigation guidance. Redefault rates will be assessed on home retention loss mitigation alternatives while taking into account loan and borrower characteristics. Data will be collected from loan servicers via monthly reporting in conjunction with data obtained through compliance reviews conducted by RHS and its program compliance agent. RHS will utilize this data to provide additional guidance to servicers to effectively target foreclosure mitigation actions in the most cost-effective manner and to determine the overall agency's success in its loss mitigation efforts. In its September 2013 status update, USDA stated that it had secured the funding needed to build the monthly data gathering and analysis capability necessary to begin implementing both of these GAO recommendations. Specifically, the Under Secretary has provided $1.5 million in funding to enhance the existing Data Interface Exchange, improving both data capture (more data elements) and data frequency (monthly rather than quarterly). The agency has launched this initiative with the expectation that the implementation will be fully realized by September 30, 2015. In the interim, USDA indicated that it was developing manual processes that will provide clarity with respect to lender loss mitigation performance as recommended by GAO. USDA currently captures limited loss mitigation data that yields performance results, assisting the program in its efforts to mitigate risk. These manual processes will remain in effect until USDA has completed the build-out of the enhanced electronic data reporting requirements of lenders that participate in the program. In addition, USDA stated that it was finalizing a memorandum of understanding with Ginnie Mae to gain access to their program default data that will provide insight into the loss mitigation retention workout performance of 502 Guaranteed borrowers. This data, which will help evaluate the effectiveness of loss mitigation efforts on both borrower outcome and agency cost bases, will be gathered with the assistance of the consulting team now supporting lender compliance.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

  8. Status: Closed - Implemented

    Comments: 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.

    Recommendation: FHFA should expeditiously finalize its analysis as to whether Fannie Mae and Freddie Mac will be allowed to offer HAMP principal forgiveness modifications.

    Agency Affected: Federal Housing Finance Agency

 

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