Federal Housing Administration: Improving Disposition and Oversight Practices May Increase Returns on Foreclosed Property Sales
Highlights
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, FHA’s 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 FHA’s 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’ performance—a 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, FHA’s REO properties may continue to remain on the market longer and sell for lower prices than properties held by the enterprises.
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 FHA’s REO dispositions, GAO examined (1) FHA’s disposition goals, strategies, practices, and effectiveness in disposing of properties compared with those of the enterprises and private servicers; and (2) FHA’s 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 entity’s oversight of its REO dispositions.
Recommendations
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.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Federal Housing Administration |
Priority Rec.
To increase the potential for higher financial returns from FHA's disposition of REO properties, the Secretary, Department of Housing and Urban Development (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. |
Although FHA previously allowed only the use of appraisals to set initial list prices for its REO properties, its staff conducted pilot tests to use multiple valuation tools--including appraisals, automated valuation models, and broker price opinions--to determine initial list prices for REO properties. After this showed that setting list prices using more than one tool could increase returns for some properties, FHA executed contract modifications with the asset manager contractors responsible for disposition of its REO properties that require initial list prices to be based on any combination of these various valuation tools. These contracts also include a performance criterion that indicates that at least 95 percent of property valuations should be based on at least two sources. As of the end of June 2016, contracts with these terms were in place for all these contractors.
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| Federal Housing Administration | 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 considering whether conducting repairs could increase the amount of net proceeds from specific property sales. |
As part of exploring how to increase potential returns on REO dispositions, FHA conducted a pilot repair program in one of its regions that involved making limited repairs to properties, but determined by September 2015 that undertaking up to $7,000 of repairs did not result in higher net recoveries nor did it generally decrease holding times.
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| Federal Housing Administration |
Priority Rec.
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 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. |
As of the end of June 2016, all FHA asset manager contractors responsible for REO dispositions are required to re-analyze properties that fail to sell within 45 days from initial listing and base any price reductions on asset-level market data rather than using a predetermined price reduction schedule. These contractors are also directed to not disclose to the public their strategies for price reductions.
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| Federal Housing Administration | 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. |
As part of updating all of its outdated handbooks, FHA hired a vendor to assist with preparing a new handbook that includes a section on REO property disposition procedures. FHA published this new handbook in March 2016, and its provisions are to be effective by September 30, 2016.
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| Federal Housing Administration | To improve its oversight of the REO disposition program, the Secretary, HUD, should direct the Commissioner, FHA, to 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. |
To establish a process for analyzing differences in disposition performance and practices across homeownership centers, FHA staff indicated that information from their contractor monitoring activities may identify best practices and that REO program directors for the four FHA regions hold formal meetings on a quarterly basis to discuss best practices. As part of this effort, FHA regional and headquarters staff review monthly scorecards that assess contractor performance. FHA's REO leadership also has additional discussions on a bi-weekly basis as necessary to identify performance issues. Identified best practices are to be communicated to all of the regions and the REO disposition and maintenance contractors within them. In addition, FHA engaged a consulting firm that conducted operational assessment reviews of nine of the contractors that maintain or market REO properties. The contractors findings may identify industry proven practices that FHA could require its contractors to perform across the country to mitigate performance problems. One recommended best practice was using listing brokers to conduct more frequent inspections. This practice will become effective in the contracts by December 31, 2015.
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| Federal Housing Administration | To improve its oversight of the REO disposition program, the Secretary, HUD, should direct the Commissioner, FHA, to implement a mechanism for systematically reviewing contractors' compliance with minimum performance requirements through the use of standard metrics. |
FHA has implemented a monitoring plan that FHA regional staff are to use to oversee performance of the contractors responsible for real estate-owned (REO) property disposition and maintenance. In addition, FHA implemented scorecards with performance requirements that its staff can use to evaluate contractors as of June 2014.
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| Federal Housing Administration | To improve its oversight of the REO disposition program, the Secretary, HUD, should direct the Commissioner, FHA, to 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. |
FHA has implemented a monitoring plan that FHA regional staff are to use to oversee performance of the contractors responsible for real estate-owned (REO) property disposition and maintenance. In addition, FHA implemented scorecards with performance requirements that its staff can use to evaluate contractors as of June 2014.
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| Federal Housing Administration | To improve its oversight of the REO disposition program, the Secretary, HUD, should direct the Commissioner, FHA, to determine more effective ways, including increased use of in-person inspections, to better ensure that contractors comply with expected requirements. |
Although budgetary and resource restraints had previously limited the feasibility of increasing the number of in-person inspections conducted, FHA's increased use of alternative disposition means for foreclosed properties has reduced the inventory of real estate-owned (REO) properties and allowed the staff to inspect a greater proportion of REO properties, with in person inspections of its inventory increasing from 6.49 percent in fiscal year 2013 to 9.13 percent of its properties in 2014. FHA is also modifying monitoring plans to increase the amount of qualitative checks performed by contractor monitors in each HOC. FHA also has introduced new communication controls in the case management system to better monitor third party assessments of property maintenance and condition. According to FHA officials, these checks and controls include manual reviews of qualitative information from third party property inspection reports and other sources, including photographs documenting a property's condition.
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| Federal Housing Administration | To improve its oversight of the REO disposition program, the Secretary, HUD, should direct the Commissioner, FHA, to implement controls to ensure that listing brokers are located within close enough proximity to their listed properties to effectively market REO properties. |
As of the end of June 2016, all FHA asset manager contractors responsible for REO dispositions are required to use selling brokers whose place of business is within 30 miles of the subject property and such brokers can have only one primary place of business. In addition, FHA modified the monitoring plans its staff use to require them to review whether these contactors are using listing brokers within 30 miles of the property.
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| Federal Housing Administration | To improve its oversight of the REO disposition program, the Secretary, HUD, should direct the Commissioner, FHA, to take steps to develop a legally acceptable means of assigning work to REO contractors that uses more frequent assessments of past performance. |
To promote competition and better use performance as a criterion for assigning work, FHA has included a realignment clause in its REO property disposition and maintenance contracts that would allow the agency to increase or decrease the service areas of these contractors as their performance warrants and contracting funding allows. FHA intends this clause as incentivizing exceptional performance by allowing the highest performing contractors the opportunity to expand their geographic contract areas and, at the same time, providing a disincentive to lower performing contractors by reducing their geographic footprint. FHA plans to use the results of the scorecards it is developing to aid in the review of these contractors' performance on a quarterly basis. FHA has developed standard operating procedures that note that contractors unable to improve deficient performance may have the number of properties assigned to them reduced or have their contracts terminated. Officials said that they worked with FHA's procurement office and General Counsel staff to develop contract terms, including incorporation of results from contractor performance scorecards, that are compliant with existing laws and regulations. FHA staff stated that these provisions have been incorporated into the contracts of its property maintenance and disposition contractors.
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