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entitled 'Mortgage Foreclosures: Additional Mortgage Servicer Actions 
Could Help Reduce the Frequency and Impact of Abandoned Foreclosures' 
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Report to the Chairman, Subcommittee on Economic Policy, Committee on 
Banking, Housing, and Urban Affairs, U.S. Senate: 

United States Government Accountability Office:
GAO: 

November 2010: 

Mortgage Foreclosures: 

Additional Mortgage Servicer Actions Could Help Reduce the Frequency 
and Impact of Abandoned Foreclosures: 

GAO-11-93: 

GAO Highlights: 

Highlights of GAO-11-93, a report to the Chairman, Subcommittee on 
Economic Policy, Committee on Banking, Housing, and Urban Affairs, 
U.S. Senate. 

Why GAO Did This Study: 

Entities responsible for managing home mortgage loans—-called 
servicers-—may initiate foreclosure proceedings on certain delinquent 
loans but then decide to not complete the process. Many of these 
properties are vacant. These abandoned foreclosure—-or “bank walkaway”—-
properties can exacerbate neighborhood decline and complicate federal 
stabilization efforts. GAO was asked to assess (1) the nature and 
prevalence of abandoned foreclosures, (2) their impact on communities, 
(3) practices that may lead servicers to initiate but not complete 
foreclosures and regulatory oversight of foreclosure practices, and 
(4) actions some communities have taken to reduce abandoned 
foreclosures and their impacts. GAO analyzed servicer loan data from 
January 2008 through March 2010 and conducted case studies in 12 
cities. GAO also interviewed representatives of federal agencies, 
state and local officials, nonprofit organizations, and six servicers, 
among others, and reviewed federal banking regulations and exam 
guidance. 

What GAO Found: 

Using data from large and subprime servicers and government-sponsored 
mortgage entities representing nearly 80 percent of mortgages, GAO 
estimated that abandoned foreclosures are rare—representing less than 
1 percent of vacant homes between January 2008 and March 2010. GAO 
also found that, while abandoned foreclosures have occurred across the 
country, they tend to be concentrated in economically distressed 
areas. Twenty areas account for 61 percent of the estimated cases, 
with certain cities in Michigan, Ohio, and Florida experiencing the 
most. GAO also found that abandoned foreclosures most frequently 
involved loans to borrowers with lower quality credit-—nonprime loans—-
and low-value properties in economically distressed areas. 
Although abandoned foreclosures occur infrequently, the areas in which 
they were concentrated are significantly affected. Vacant homes 
associated with abandoned foreclosures can contribute to increased 
crime and decreased neighborhood property values. Abandoned 
foreclosures also increase costs for local governments that must 
maintain or demolish vacant properties. Because servicers are not 
required to notify borrowers and communities when they decide to 
abandon a foreclosure, homeowners are sometimes unaware that they 
still own the home and are responsible for paying the debt and taxes 
and maintaining the property. Communities are also delayed in taking 
action to mitigate the effects of a vacant property. 

Servicers typically abandon a foreclosure when they determine that the 
cost to complete the foreclosure exceeds the anticipated proceeds from 
the property’s sale. However, GAO found that most of the servicers 
interviewed were not always obtaining updated property valuations 
before initiating foreclosure. Fewer abandoned foreclosures would 
likely occur if servicers were required to obtain updated valuations 
for lower-value properties or those in areas that were more likely to 
experience large declines in value. Because they generally focus on 
the areas with greatest risk to the institutions they supervise, 
federal banking regulators had not generally examined servicers’ 
foreclosure practices, such as whether foreclosures are completed; 
however, given the ongoing mortgage crisis, they have recently placed 
greater emphasis on these areas. 

GAO identified various actions that local governments or others are 
taking to reduce the likelihood or mitigate the impacts of abandoned 
foreclosures. For example, community groups indicated increased 
counseling could prevent some borrowers from vacating their homes too 
early. Some communities are requiring servicers to list properties 
that become vacant properties on a centralized registry as a way to 
identify properties that could require increased attention. In 
addition, by creating entities called land banks that can acquire 
properties from servicers that they otherwise cannot sell, some 
communities have provided increased incentives for services to 
complete instead of abandon foreclosures. However, these actions can 
require additional funding, have unintended consequences, such as 
potentially encouraging servicers to walk away from properties before 
initiating foreclosure, and may not be appropriate for all communities. 

What GAO Recommends: 

Among other things, GAO recommends that the Federal Reserve and Office 
of the Comptroller of the Currency (OCC) require servicers they 
oversee to notify borrowers and communities when foreclosures are 
halted and to obtain updated valuations for selected properties before 
initiating foreclosure. The Federal Reserve neither agreed nor 
disagreed with these recommendations. OCC did not comment on the 
recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-11-93] or key 
components. For more information, contact A. Nicole Clowers at (202) 
512-8678 or clowersa@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Abandoned Foreclosures Are Uncommon, but Are Concentrated in Certain 
Areas and Usually Involve Nonprime Loans and Low-Value Properties: 

Like Other Vacant Properties, Abandoned Foreclosures Contribute to 
Various Negative Effects on Neighborhoods, Local Governments, and 
Homeowners: 

Some Servicer Practices Increase Likelihood of Abandoned Foreclosures 
and Regulatory Oversight Has Been Limited: 

Various Actions Are Being Taken by Some Communities to Prevent or 
Mitigate the Effects of Abandoned Foreclosures, but Each Presents 
Tradeoffs: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from Federal Reserve: 

Appendix III: Comments from Treasury: 

Appendix IV: Selected Federally Funded Foreclosure-Related Programs: 

Appendix V: Text for Figure 4, Areas Where Abandoned Foreclosures Are 
Concentrated, January 2008 through March 2010: 

Appendix VI: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Numbers of Charge-offs in Lieu of Foreclosure by Foreclosure 
and Occupancy Status, January 2008 through March 2010: 

Table 2: Estimated Abandoned Foreclosures as a Percent of Various 
Nationwide Housing Measures, January 2008 through March 2010: 

Table 3: MSAs with the Most Abandoned Foreclosures, January 2008 
through March 2010: 

Table 4: Selected Federally Funded Foreclosure Related Programs: 

Figures: 

Figure 1: Share of Total Residential Mortgage Debt Outstanding by Type 
of Participant as of June 30, 2010: 

Figure 2: Flow of Payments in a Basic Securitized Transaction: 

Figure 3: Typical Judicial and Statutory Foreclosure Processes: 

Figure 4: Areas Where Abandoned Foreclosures Are Concentrated, January 
2008 through March 2010: 

Figure 5: Examples of Abandoned Foreclosures and Vacant Properties in 
Various Parts of the Country: 

Figure 6: Economically Struggling Cities: 

Figure 7: Distressed Urban Areas within Areas Experiencing Housing 
Booms: 

Figure 8: Areas That Experienced Significant House Price Increases 
Followed by Declines: 

Abbreviations: 

ARM: adjustable-rate mortgages: 

AVM: automated valuation models: 

BPO: broker's price opinion: 

FDIC: Federal Deposit Insurance Corporation: 

FHFA: Federal Hosing Finance Agency: 

FTC: Federal Trade Commission: 

GSE: government-sponsored enterprise: 

HAMP: Home Affordable Modification Program: 

HERA: Housing and Economic Recovery Act: 

HFA: housing finance agencies: 

HUD: U.S. Department of Housing and Urban Development: 

MBS: mortgage-backed securities: 

MERS: Mortgage Electronic Registration System: 

MSA: Metropolitan Statistical Area: 

NSP: Neighborhood Stabilization Program: 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision: 

PSA: pooling and servicing agreement: 

RESPA: Real Estate Settlement Procedures Act of 1974: 

SEC: Securities and Exchange Commission: 

TILA: Truth in Lending Act: 

USPS: U.S. Postal Service: 

VA: U.S. Department of Veterans Affairs: 

[End of section] 

November 15, 2010: 

The Honorable Sherrod Brown: 
Chairman: 
Subcommittee on Economic Policy: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

Dear Mr. Chairman: 

With record numbers of borrowers defaulting on loans and facing the 
loss of their properties through foreclosure sale, the ongoing 
foreclosure crisis has resulted in a large inventory of vacant 
properties in neighborhoods across the country. As of June 2010, an 
estimated 4.6 percent of the over 52 million first lien mortgages 
outstanding nationwide were in some stage of foreclosure--an increase 
of almost 370 percent since the first quarter of 2006, when just 1 
percent of mortgages were in foreclosure.[Footnote 1] Foreclosure 
actions can result in vacant and unattended properties that attract 
crime, cause blight, and threaten neighborhood stability. In response 
to the effects of foreclosures and vacant properties on neighborhoods, 
the federal government has implemented a number of programs intended 
to prevent foreclosures by, for example, encouraging financial 
institutions to modify borrowers' loans or providing funding to assist 
communities and local groups with purchasing, rehabilitating, or 
demolishing properties affected by foreclosures. 

Homeowners generally make their mortgage payments to an entity known 
as a mortgage servicer, which accepts payments from borrowers and 
manages mortgage loans on behalf of banks and other mortgage owners. 
If the borrower becomes delinquent on a loan, the servicer generally 
may initiate a foreclosure action on behalf of the mortgage owner 
through a court or administratively to have the property sold at 
auction to a third party. If no third party purchases the property at 
the foreclosure sale, the mortgage owner (such as a bank) generally 
takes title to the home, maintains it in marketable condition, and 
tries to resell it. However, in some cases, the mortgage servicer 
initiates the foreclosure process but then does not complete it, in 
effect walking away from the property. If homeowners have already left 
the property with the belief that they have lost the home through 
foreclosure or for other reasons, servicers abandoning the foreclosure 
process can result in vacant, unmaintained properties that can become 
problems for neighborhoods, local governments, and homeowners. 
[Footnote 2] 

With another wave of additional foreclosures potentially ahead, 
increased numbers of abandoned foreclosures could further negatively 
affect communities already harmed by the current crisis.[Footnote 3] 
In response to your request, this report focuses on the prevalence, 
causes, and effects of abandoned foreclosures, which, for the purposes 
of this report, we define as properties (a) for which the servicer 
initiates foreclosure but subsequently opts not to complete the 
foreclosure and (b) that are vacant. Specifically, this report 
addresses (1) the nature and prevalence of abandoned foreclosures, 
including how they occur; (2) the impact of abandoned foreclosures on 
communities and state and federal efforts to mitigate the effects of 
foreclosure; (3) certain practices that may contribute to why mortgage 
servicers initiate but not complete foreclosures and the extent of 
federal regulatory oversight of mortgage foreclosure practices; and 
(4) the various actions some communities are taking to reduce 
abandoned foreclosures and their impacts.[Footnote 4] 

To address these objectives, we analyzed data reported to us by 
selected mortgage servicers and two government-sponsored enterprises 
(GSE) that purchase home loans, as well as information collected from 
literature, regulatory guidance, and interviews. We obtained data on 
loans covering the period January 2008 through March 2010 from six 
servicers--including some of the largest firms and those that 
specialized in subprime loans and from Fannie Mae and Freddie Mac, the 
two primary GSEs that purchase loans from originators. In total, our 
data represents roughly 80 percent of all mortgages 
outstanding.[Footnote 5] Using this data and information on property 
vacancies from the U.S. Postal Service (USPS), we conducted analysis 
to estimate a potential range of the extent to which abandoned 
foreclosures were occurring and the characteristics of these 
properties. 

To supplement this data analysis and assess the impacts of abandoned 
foreclosures and potential actions to address them, we conducted case 
studies in 12 locations that we selected to provide a range of states 
from different geographical regions, with varying local economic 
conditions. These locations were also in states that had different 
requirements for foreclosure, with some requiring actions to be 
approved by courts (judicial states) and some using other processes 
(statutory states). These locations were Atlanta, Georgia; Baltimore, 
Maryland; Buffalo, New York; Chula Vista, California; Chicago, 
Illinois; Cleveland, Ohio; Detroit, Michigan; Lowell, Massachusetts; 
and Cape Coral, Fort Myers, Manatee County, and Hillsborough County, 
Florida. Although we selected the case study locations to provide 
broad representation of conditions geographically and by type of 
foreclosure process, the number of locations may not necessarily be 
representative of all the localities. As a result, we could not 
generalize the results of our analysis to all the states and 
localities. We conducted interviews with city and county officials, 
government stabilization program grantees, community development 
organizations, academic researchers, foreclosure assistance providers, 
state banking supervisors, and representatives of the regulators of 
banks and other mortgage market participants, including the Board of 
Governors of the Federal Reserve System (Federal Reserve), Federal 
Deposit Insurance Corporation (FDIC), Office of the Comptroller of the 
Currency (OCC), Office of Thrift Supervision (OTS), Department of 
Housing and Urban Development (HUD), Department of Veterans Affairs 
(VA), Federal Housing Finance Agency (FHFA), and Securities and 
Exchange Commission (SEC). In addition, we contacted the housing 
finance agencies (HFA) in the 10 states that the Department of the 
Treasury had identified as hardest hit by the foreclosure 
crisis.[Footnote 6] We also reviewed literature related to the impacts 
of vacant properties and foreclosures and analyzed servicer 
foreclosure policies and procedures from Fannie Mae and Freddie Mac 
and compared them to other guidance that servicers follow. We reviewed 
federal regulatory guidance that covers the examination process for 
reviewing bank foreclosure and loss reserve processes. Appendix I 
contains more information about our scope and methodology. 

We conducted this performance audit from December 2009 through 
November 2010 in accordance with generally accepted government 
auditing standards. Those standards require that we plan and perform 
the audit to obtain sufficient, appropriate evidence to provide a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

Background: 

Over the last few decades, the number of participants and the 
complexity of the market for home mortgage loans in the United States 
has increased. In the past, a borrower seeking credit for a home 
purchase would typically obtain financing from a local financial 
institution, such as a bank, a savings association, or a credit union. 
This institution would normally hold the loan as an interest-earning 
asset in its portfolio. All activities associated with servicing the 
loan including accepting payments, initiating collection actions for 
delinquent payments, and conducting foreclosure if necessary would 
have been performed by the originating institution. 

Over the last few decades, however, the market for mortgages has 
changed. Now, institutions that originate home loans generally do not 
hold such loans as assets on their balance sheets but instead sell 
them to others. Among the largest purchasers of home mortgage loans 
are Fannie Mae and Freddie Mac, but prior to the surge in mortgage 
foreclosures that began in late 2006 and continues today, private 
financial institutions also were active buyers from 2003 to 
2006.[Footnote 7] Under a process known as securitization, the GSEs 
and private firms then typically package these loans into pools and 
issue securities known as mortgage-backed securities (MBS) that pay 
interest and principal to their investors, which included other 
financial institutions, pension funds, or other institutional 
investors.[Footnote 8] As shown in figure 1, as of June 30, 2010, 
banks and other depository institutions that originate and hold 
mortgages accounted for about 28 percent of all U.S. mortgage debt 
outstanding. Over 50 percent of the mortgage debt was owned or in MBS 
issued by one of the housing GSEs or covered by a Ginnie Mae 
guarantee.[Footnote 9] About 13 percent were in MBS issued by non-
GSEs--known as private-label securities, with the remaining 5 percent 
being held by other entities, including life insurance companies. 

Figure 1: Share of Total Residential Mortgage Debt Outstanding by Type 
of Participant as of June 30, 2010: 

[Refer to PDF for image: pie-chart] 

Banks, savings institutions,and credit unions: 27.8%; 
Fannie Mae: 27.0%; 
Freddie Mac: 17.6%; 
Private label ABS pools and trusts: 13.0%; 
Ginnie Mae: 9.5%; 
Finance companies: 2.8%; 
Other: 2.2%. 

Source: GAO analysis of Federal Reserve data. 

[End of figure] 

As a Result of Securitization, Various Entities Participate in 
Mortgage Markets: 

With the increased use of securitization for mortgages, multiple 
entities now perform specific roles regarding the loans, including the 
mortgage servicer, a trustee for the securitized pool, and the 
investors of the MBS that were issued based on the pooled loans. After 
a mortgage originator sells its loans to another investor or to an 
institution that will securitize them, another financial institution 
or other entity is usually appointed as the servicer to manage payment 
collections and other activities associated with these loans. Mortgage 
servicers, which can be large mortgage finance companies or commercial 
banks, earn a fee for acting as the servicing agent on behalf of the 
owner of a loan. In some cases, the servicer is the same institution 
that originated the loan and, in other cases, it may be a different 
institution. The duties of servicers for loans securitized into MBS 
are specified in a contract with investors called a pooling and 
servicing agreement (PSA) and are generally performed in accordance 
with certain industry-accepted servicing practices--such as those 
specified in the servicing guidelines issued by the GSEs. Servicing 
duties can involve sending borrowers monthly account statements, 
answering customer service inquiries, collecting monthly mortgage 
payments, maintaining escrow accounts for property taxes and hazard 
insurance, and forwarding proper payments to the mortgage owners. In 
exchange for providing these services, the servicer collects a 
servicing fee, usually based on a percentage of at least 0.25 percent, 
of the loans' unpaid principal balance annually.[Footnote 10] In the 
event that a borrower becomes delinquent on loan payments, servicers 
also initiate and conduct foreclosures in order to obtain the proceeds 
from the sale of the property on behalf of the owners of the loans, 
but servicers typically do not receive a servicing fee on delinquent 
loans. 

When loans are sold, they are generally packaged together in pools and 
held in trusts pursuant to the terms and conditions set out in the 
underlying PSA. These pools of loans are the assets backing the 
securities that are issued and sold to investors in the secondary 
market. Another entity will act as trustee for the securitization 
trust. Trustees act as asset custodians on behalf of the trust, 
keeping records of the purchase and receipt of the MBS and holding the 
liens of the mortgages that secure the investment. Trustees are also 
the account custodians for the trust--pass-through entities that 
receive mortgage payments from servicers and disperse them among 
investors according to the terms of the PSA. Although trustees are the 
legal owners of record of the mortgage loans on behalf of the trust, 
they have neither an ownership stake nor a beneficial interest in the 
underlying loans of the securitization. However, any legal action a 
servicer takes on behalf of the trust, such as foreclosure, generally 
is brought in the name of the trustee. The beneficial owners of these 
loans are investors in MBS, typically large institutions such as 
pension funds, mutual funds, and insurance companies. Figure 2 shows 
how the mortgage payments of borrowers whose loans have been 
securitized flow to mortgage servicers and are passed to the trust for 
the securitized pool. The trustee then disburses the payments made to 
the trust to each of the investors in the security. 

Figure 2: Flow of Payments in a Basic Securitized Transaction: 

[Refer to PDF for image: illustration] 

Borrowers A, B, C: funds to: 

Services: Flow of payments for a “pool” of three mortgages securitized 
into a single mortgage-backed security: 

Trust managed by a trustee: 
Assets: Mortgage 1; Mortgage 2; Mortgage 3. 
Liabilities: Mortgage-backed securities; 
funds to: 

Investors. 

Source: GAO analysis; Art Explosion. 

[End of figure] 

Types of Mortgage Loans: 

The mortgage market has four major segments that are defined, in part, 
by the credit quality of the borrowers and the types of mortgage 
institutions that serve them. 

* Prime--Serves borrowers with strong credit histories and provides 
the most attractive interest rates and mortgage terms. This category 
includes borrowers who conform to the prime loan standards of either 
Fannie Mae or Freddie Mac and are borrowing an amount above the GSE 
federally mandated upper limit, known as "jumbo loans." 

* Nonprime--Encompasses two categories of loans: 

- Alt-A--Generally serves borrowers whose credit histories are close 
to prime, but loans have one or more high-risk features such as 
limited documentation of income or assets or the option of making 
monthly payments that are lower than required for a fully amortizing 
loan. 

- Subprime--Generally serves borrowers with blemished credit and 
features low down payments and higher interest rates and fees than the 
prime market. 

* Government-insured or government-guaranteed--Primarily serves 
borrowers who may have difficulty qualifying for prime mortgages but 
features interest rates competitive with prime loans in return for 
payment of insurance premiums or guarantee fees. The Federal Housing 
Administration and Department of Veterans Affairs operate the two main 
federal programs that insure or guarantee mortgages. 

Across all of these market segments, two types of loans are common: 
fixed-rate mortgages, which have interest rates that do not change 
over the life of the loan; and adjustable-rate mortgages (ARM), which 
have interest rates that can change periodically based on changes in a 
specified index. The nonprime market segment recently featured a 
number of nontraditional products.[Footnote 11] For example, the 
interest rate on Hybrid ARM loans is fixed during an initial period 
then "resets" to an adjustable rate for the remaining term of the 
loan. Another type of loan, payment-option ARM loans, allowed 
borrowers to choose from multiple payment options each month, which 
may include minimum payments lower than what would be needed to cover 
any of the principal or all of the accrued interest. This feature is 
known as "negative amortization" because the outstanding loan balance 
may increase over time as any interest not paid is added to the loan's 
unpaid principal balance. 

The Foreclosure Process: 

If a borrower defaults on a mortgage loan secured by the home, the 
mortgage owner is entitled to pursue foreclosure to obtain title to 
the property in order to sell it to repay the loan. The mortgage owner 
or servicer generally initiates foreclosure once the loan becomes 90 
days or more delinquent. Once the borrower is in default, the servicer 
must decide whether to pursue a home retention workout or other 
foreclosure alternative or to initiate foreclosure.[Footnote 12] 

State foreclosure laws establish certain procedures that mortgage 
servicers must follow in conducting foreclosures and establish minimum 
time periods for various aspects of the foreclosure process. These 
laws and their associated timelines may vary widely by state. As shown 
in figure 3, states generally follow one of two methods for their 
foreclosure process: judicial, with a judge presiding over the process 
in a court proceeding, or statutory, with the process proceeding 
outside the courtroom in accordance with state law.[Footnote 13] 
Because of the additional legal work, foreclosure generally takes 
longer and is more costly to complete in the states that primarily 
follow a judicial foreclosure process. 

Figure 3: Typical Judicial and Statutory Foreclosure Processes: 

[Refer to PDF for image: illustration] 

Judicial foreclosure: Involves a judge or court official that presides 
over the case: (State average optimal days: 191 days) 

1) Borrower: 
Misses payments. 

2) Workout period: 
Servicer and borrower may pursue loss mitigation and home retention 
strategies. 

3) Notice of default: 
Written notice to borrower that there has been a default and legal 
action is possible. 

Services initiates foreclosure lawsuit: 

4) Foreclosure initiation: 
Servicer initiates formal foreclosure action by filing a lawsuit 
through court. 

5) Judgment: 
Judge grants servicer right to dispose of property, and schedules the 
foreclosure sale. 

6) Foreclosure sale: 
Property is sold to a third party through an auction or conveyed to 
the servicer; 
Cancel/Reschedule: Servicer may cancel or reschedule foreclosure sales. 

7) Possible redemption period: 
For specified period of time, the borrower may reclaim his/her 
property by matching the winning bid at the foreclosure sale. 

Statutory foreclosure: Without court action but in accordance with 
state law (also called “nonjudicial” or “power-of-sale”): (State 
average optimal days: 95 days) 

1) Borrower: 
Misses payments. 

2) Workout period: 
Servicer and borrower may pursue loss mitigation and home retention 
strategies. 

3) Notice of default: 
Written notice to borrower that there has been a default and legal 
action is possible. 

Services initiates publication of sale: 

4) Foreclosure initiation: 
Servicers are required to publish the notice of foreclosure or sale in 
accordance with state law. 

5) Foreclosure sale: 
Property is sold to a third party through an auction or conveyed to 
the servicer; 
Cancel/Reschedule: Servicer may cancel or reschedule foreclosure sales. 

6) Possible redemption period: 
For specified period of time, the borrower may reclaim his/her 
property by matching the winning bid at the foreclosure sale. 

Source: GAO (analysis); Art Explosion (images); U.S. Foreclosure 
Network (timelines). 

Notes: Loss mitigation steps could be occurring throughout these 
steps. Timelines reflect state average optimal days to complete 
foreclosure (measured from foreclosure initiation to foreclosure sale). 

[End of figure] 

Federal Regulation of Institutions That Originate and Service Loans: 

Several federal agencies share responsibility for regulating the 
banking industry and securities markets in relation to the origination 
and servicing of mortgage loans. Chartering agencies oversee federally 
and state-chartered banks and their mortgage lending subsidiaries. At 
the federal level, OCC oversees federally chartered banks. OTS 
oversees savings associations (including mortgage operating 
subsidiaries).[Footnote 14] The Federal Reserve oversees insured state-
chartered member banks, while FDIC oversees insured state-chartered 
banks that are not members of the Federal Reserve System. Both the 
Federal Reserve and FDIC share oversight with the state regulatory 
authority that chartered the bank. The Federal Reserve also has 
general authority over lenders that may be owned by federally 
regulated holding companies but are not federally insured depository 
institutions. Many federally regulated bank holding companies that 
have insured depository subsidiaries, such as national or state-
chartered banks, also may have nonbank subsidiaries, such as mortgage 
finance companies. Under the Bank Holding Company Act of 1956, as 
amended, the Federal Reserve has jurisdiction over such bank holding 
companies and their nonbank subsidiaries that are not regulated by 
another functional regulator.[Footnote 15] Other regulators are also 
involved in U.S. mortgage markets. For example, Fannie Mae's and 
Freddie Mac's activities are overseen by the Federal Housing Finance 
Agency.[Footnote 16] Staff from the Securities and Exchange Commission 
also review the filings made by private issuers of MBS. 

Federal banking regulators have responsibility for ensuring the safety 
and soundness of the institutions they oversee and for promoting 
stability in the financial markets and enforcing compliance with 
applicable consumer protection laws. To achieve these goals, 
regulators establish capital requirements for banks, conduct on-site 
examinations and off-site monitoring to assess their financial 
condition, and monitor their compliance with applicable banking laws, 
regulations, and agency guidance. Among the laws that apply to 
residential mortgage lending and servicing are the Fair Housing and 
Equal Credit Opportunity Acts, which address credit granting and 
ensuring non-discrimination in lending; the Truth in Lending Act 
(TILA), which addresses disclosure requirements for consumer credit 
transactions; and the Real Estate Settlement Procedures Act of 1974 
(RESPA), which requires transparency in mortgage closing documents. 
[Footnote 17] 

Entities that service mortgage loans that are not depository 
institutions are called nonbank servicers. In some cases these nonbank 
servicers are subsidiaries of banks or other financial institutions, 
but some are also not affiliated with financial institutions at all. 
Nonbank servicers have historically been subject to little or no 
direct oversight by federal regulators.[Footnote 18] We have 
previously reported that state banking regulators oversee independent 
lenders and mortgage servicers by generally requiring business 
licenses that mandate meeting net worth, funding, and liquidity 
thresholds.[Footnote 19] The Federal Trade Commission is responsible 
for enforcing certain federal consumer protection laws for brokers and 
lenders that are not depository institutions, including state-
chartered independent mortgage lenders. However, the Federal Trade 
Commission is not a supervisory agency; instead, it enforces various 
federal consumer protection laws through enforcement actions when 
complaints by others are made to it. 

Abandoned Foreclosures Are Uncommon, but Are Concentrated in Certain 
Areas and Usually Involve Nonprime Loans and Low-Value Properties: 

Using data from large and subprime servicers and government-sponsored 
mortgage entities representing nearly 80 percent of mortgages, we 
estimated that abandoned foreclosures are rare--the total from January 
2008 to March 2010 represents less than 1 percent of vacant homes. 
When servicers' efforts to work out repayment plans or loan 
modifications with borrowers who are delinquent on their loans are 
exhausted, staff from the six servicers we interviewed said they 
analyze certain loans to determine whether foreclosure will be 
financially beneficial. Based on our analysis of loan data provided by 
these six servicers covering the period of January 2008 through March 
2010, servicers most often made this decision before initiating 
foreclosure, but in many cases did not discover that foreclosure would 
not be financially beneficial until after initiating the process. 
While we estimated that instances in which servicers initiate but then 
abandon a foreclosure without selling or taking ownership of a 
property had not occurred frequently across the United States, certain 
communities experienced larger numbers of such abandoned foreclosures. 
Specifically, we found abandoned foreclosures tended to be for 
properties in economically distressed communities and low-value 
properties and nonprime and securitized loans. 

After Efforts to Keep Borrowers in Their Homes Fail, Servicers Analyze 
the Financial Benefits of Proceeding to Foreclosure on Certain Loans: 

When borrowers default on their loans, home mortgage loan servicers 
take a variety of actions in an effort to keep them in their homes, 
by, for example, working out repayment plans and loan modifications. 
The stakeholders that we interviewed--including servicers, regulators, 
and government and community officials--agreed that pursuing efforts 
to keep borrowers in their homes were preferable to 
foreclosure.[Footnote 20] According to servicers' representatives, 
servicers engage in various efforts to reach borrowers during the 
delinquency period through letters, phone calls, and personal visits. 
For example, representatives of one servicer noted that on a typical 
foreclosure company representatives make over 120 phone calls and send 
10 to 12 inquiries to borrowers in an effort to bring payments up to 
date or modify the loan. As borrower outreach continues, servicers 
also send "breach" letters after borrowers have missed a certain 
number of payments warning borrowers of the possibility of 
foreclosure.[Footnote 21] 

However, if these initial efforts to bring the borrower back to a 
paying status are not successful, staff from the six servicers we 
contacted--representing about 57 percent of U.S. first-lien mortgages--
told us they typically determine whether to initiate foreclosure as a 
routine part of their collections and loss mitigation process after a 
loan has been delinquent for at least 90 days. Representatives of 
servicers told us that they might decide to initiate foreclosure even 
though they were still pursuing loan workout options with a borrower. 
One noted that the initiation of foreclosure, in certain instances, 
might serve as an incentive for the borrower to begin making mortgage 
payments again. 

According to the staff of the six servicers we interviewed, they 
usually conduct an analysis of certain loans in their servicing 
portfolio before initiating foreclosure to determine if foreclosure 
will be financially beneficial. These analyses--often called an equity 
analysis--compare the projected value the property might realize in a 
subsequent sale against the sum of all projected costs associated with 
completing the foreclosure and holding the property until it can be 
sold. Servicers use the results of these equity analyses to decide 
whether to foreclose on a loan or conduct a charge-off in lieu of a 
foreclosure.[Footnote 22] In general, if the equity analysis indicates 
that the projected proceeds from the eventual sale of the property 
exceeds that of the projected costs of reaching that sale by a certain 
amount, the servicer will proceed with the foreclosure. However, when 
the costs of foreclosure exceed the expected proceeds from selling the 
property, servicers typically decide that foreclosure is not 
financially beneficial. In these cases servicers will usually cease 
further foreclosure-related actions, operationally charging off the 
loan from its servicing roles, and advising the mortgage owner--GSEs 
or other private securitized trusts--that the loan should be 
acknowledged as a loss by the loan's owner.[Footnote 23] In 
determining which loans to charge off in lieu of foreclosure, some 
servicers maintain thresholds for property values or potential income 
from pursuing foreclosure. For example, some of the servicers we 
interviewed told us that they usually, but not always, considered 
charge-offs in lieu of foreclosure on properties with values roughly 
below $10,000 to $30,000. Freddie Mac servicing guidance requires a 
review for charge off in lieu of foreclosure when the unpaid principal 
balance of a loan is below $5,000 on conventional mortgages or less 
than $2,000 on government insured or guaranteed loans, such as Federal 
Housing Administration or Department of Veterans Affairs mortgages. 

Based on our reviews of bank regulatory guidance and discussions with 
federal and state officials, no laws or regulations exist that require 
servicers to complete foreclosure once the process has been initiated. 
Therefore, servicers can abandon the foreclosure process at any point. 
Furthermore, according to staff from the servicers we interviewed, 
initiating foreclosure can cost as little as $1,000, and these costs 
may be recovered from the proceeds of any subsequent sale of the 
property. 

Majority of Loan Charge-offs in Lieu of Foreclosure Occurred Prior to 
Foreclosure Initiation, Although Many Occurred Afterwards Increasing 
the Likelihood of an Abandoned Foreclosure: 

Based on our analysis of servicer data, servicers most often charged 
off loans in lieu of foreclosure without initiating foreclosure 
proceedings. However, in many cases the decisions to charge off loans 
in lieu of foreclosure were made after foreclosure initiation, and a 
significant portion of these represented abandoned foreclosures. We 
obtained data from six servicers including four of the largest 
servicers and two servicers that specialized in nonprime loans. These 
six servicers collectively serviced about 30 million loans, 
representing 57 percent of outstanding first-lien home mortgage loans 
as of the end of 2009. According to our analysis of the servicer- 
reported data, these six servicers decided to conduct charge-offs in 
lieu of foreclosure for approximately 46,000 loans between January 
2008 and March 2010, as shown in table 1. For over 27,600 loans, or 
about 60 percent, the servicers made the decision to charge off in 
lieu of foreclosure without initiating foreclosure proceedings. Of 
these loans, over 19,400, or 70 percent of the properties, were 
occupied by the borrower or a tenant. As will be discussed later in 
this report, when properties remain occupied they are less likely to 
contribute to problems in their neighborhoods generally associated 
with foreclosed and vacant properties. 

Table 1: Numbers of Charge-offs in Lieu of Foreclosure by Foreclosure 
and Occupancy Status, January 2008 through March 2010: 

Total charge-offs in lieu of foreclosure; 
Foreclosure not initiated: 27,620; 
Percent: 60%; 
Foreclosure initiated: 18,379; 
Percent: 40%; 
Total: 45,999; 
Percent: 100%. 

Occupancy status of properties from point of charge-off in lieu of 
foreclosure to June 2010: 

Property occupied; 
Foreclosure not initiated: 19,412; 
Percent: 70%; 
Foreclosure initiated: 9,603; 
Percent: 52%; 
Total: 29,015; 
Percent: 63%. 

Property vacant; 
Foreclosure not initiated: 8,208; 
Percent: 30%; 
Foreclosure initiated: 8,776; 
Percent: 48%; 
Total: 16,984; 
Percent: 37%. 

Source: GAO analysis of data reported by six servicers. 

Note: This data covers roughly 57 percent of all first liens 
outstanding. It does not include all loans captured in our database of 
GSE loans. We considered a property to be vacant if (1) either the 
servicers reported it as vacant at time of charge-off in lieu of 
foreclosure or (2) if USPS data indicated that the property became 
vacant between the time the charge-off in lieu of foreclosure occurred 
and June 2010. 

[End of table] 

However, in other cases, servicers initiated foreclosure but later 
decided to conduct a charge-off in lieu of foreclosure. Charge-offs in 
lieu of foreclosure that occurred after a foreclosure was initiated 
were more likely to result in a vacant property than charge-offs that 
occurred without a foreclosure initiation. As shown in table 1 
earlier, these six servicers initiated foreclosure on over 18,300 
loans between January 2008 and March 2010 that they later decided to 
charge off in lieu of foreclosure. For over 8,700, or 48 percent of 
these loans, this decision was associated with a vacancy and, 
therefore, an abandoned foreclosure-that is, a property for which 
foreclosure was initiated but not completed and is vacant.[Footnote 
24] We found a statistically significant association between 
foreclosure initiation and vacancy for the charge-offs in lieu of 
foreclosure in our sample. That is, we found that initiating and then 
suspending foreclosure was associated with a higher probability that a 
property will be vacant.[Footnote 25] A potential reason that 
vacancies occur more frequently when servicers decide to pursue a 
charge-off in lieu of foreclosure after initiating foreclosure than 
before is confusion among borrowers about the impact of the 
foreclosure initiation. Specifically, local and state officials, 
community groups, and academics told us that borrowers may be confused 
about their rights to remain in their homes during foreclosure and 
vacate the home before the process is completed. Alternatively, 
servicers could be more likely to pursue a charge-off in lieu of 
foreclosure if a property becomes vacant before foreclosure initiation 
since the value of the property may deteriorate rapidly.[Footnote 26] 
Nevertheless, as the data show even when servicers opt to conduct a 
charge-off in lieu of foreclosure before initiating foreclosure, some 
borrowers may still vacate the home. Anecdotally, we heard from a 
variety of stakeholders that this decision could be due to financial 
hardship or pressure exerted by the lender in collecting delinquent 
mortgage payments, among other reasons.[Footnote 27] 

In the Absence of Overall Data on Instances of Abandoned Foreclosures, 
Our Estimates Indicated That It Occurs Infrequently: 

Data indicating the overall number of abandoned foreclosures in the 
United States did not exist nor was such information being collected 
by the federal government agencies we contacted or by organizations in 
the states or local communities that we reviewed. Local governments, 
bank regulators, and private organizations collect information on 
foreclosures, vacancies, and housing market conditions, but for 
various reasons the phenomenon of abandoned foreclosures goes largely 
unrecorded. Local officials we spoke with in Baltimore, Chicago, 
Cleveland, Detroit, and Lowell, Massachusetts, identified similar 
difficulties in tracking abandoned foreclosures. For example: 

* Accurately identifying the lender and borrower on a given property 
is often difficult due to outdated or incorrect mortgage information. 

* Ascertaining which properties are abandoned foreclosures is often 
difficult because formal data on the foreclosure status of properties 
often do not exist. 

* Determining whether properties are actually vacant is often 
difficult if a house has been used seasonally or as a rental. 

Nonetheless, researchers in some cities we visited are attempting to 
compile data. In Cleveland, academic researchers have used court 
documents in an attempt to ascertain the reason a sample of 
foreclosure cases have stalled. In a number of cities, such as Chula 
Vista, California, the city governments have enacted ordinances that 
require lenders to register homes that become vacant. In Buffalo, a 
nonprofit organization has collected information on the status of 
foreclosure cases in Erie county, where Buffalo is located. 

Although subject to uncertainty, we estimated that the number of 
abandoned foreclosures that occurred in the United States between 
January 2008 and March 2010 was between approximately 14,500 and 
34,600.[Footnote 28] As will be discussed, although the potential 
number of abandoned foreclosures creates significant problems for 
certain communities, they represent less than 1 percent of vacant 
properties and an even smaller percentage of the total housing stock. 
Table 2 shows abandoned foreclosures as a percent of various housing 
market metrics.[Footnote 29] 

Table 2: Estimated Abandoned Foreclosures as a Percent of Various 
Nationwide Housing Measures, January 2008 through March 2010: 

Total estimated abandoned foreclosures: As a percentage of: Vacant 
properties not being actively marketed for sale or rental; 
Low 14,500: 0.20%; 
High 34,600: 0.49%. 

Total estimated abandoned foreclosures: As a percentage of: Vacant 
properties not being actively marketed for sale or rental excluding 
those known to be used as seasonal or occasional use properties; 
Low 14,500: 0.40%; 
High 34,600: 0.95%. 

Total home loans outstanding: 
Low 14,500: 0.03%; 
High 34,600: 0.07%. 

Total housing stock: 
Low 14,500: 0.01%; 
High 34,600: 0.03%. 

Source: Estimates based on GAO analysis and modeling of data reported 
by six servicers, Fannie Mae, and Freddie Mac. Housing measures based 
on GAO estimates using U.S. Census and Mortgage Bankers Association 
data. 

[End of table] 

To determine the prevalence of abandoned foreclosures in the entire 
U.S. market, we estimated the number of properties (1) were charged 
off in lieu of foreclosure after a foreclosure was initiated and (2) 
that are vacant. In developing our estimate, we used the data from the 
six mortgage servicers and data from Fannie Mae and Freddie Mac--which 
together represent roughly 80 percent of outstanding U.S. mortgages-- 
and augmented this information with vacancy data from USPS. Using this 
information, we estimated the total number of abandoned foreclosures 
nationwide under varying assumptions about the remaining 20 percent of 
the mortgages outstanding.[Footnote 30] 

Abandoned Foreclosures Exist Throughout the Country, but Are Likely to 
Be Clustered in a Few Communities: 

According to the data reported to us, abandoned foreclosures represent 
a small portion of overall vacancies in the United States, but are 
highly concentrated in a small number of communities. Based on our 
analysis of servicer data from January 2008 to March 2010, we found 
abandoned foreclosures in 2,452 of the approximately 43,000 postal zip 
codes throughout the country, but only 167 of those zip codes have 10 
or more of these properties. From January 2008 through March 2010, 
several zip codes in Chicago, Cleveland, Detroit, Indianapolis, and 
other large cities had 35 or more abandoned foreclosures. We found 
several zip codes in Detroit that had over 100 abandoned foreclosures. 
In addition, several smaller areas contain zip codes with high 
concentrations of the properties, such as those including Toledo, 
Akron, and Youngstown, Ohio; Flint, Michigan; Fort Myers, Florida; and 
Gary and Fort Wayne, Indiana. 

Analyzing abandoned foreclosures at the U.S. Census-designated 
Metropolitan Statistical Area (MSA) level also suggests that such 
cases are likely to be concentrated in a limited number of 
communities. According to our analysis, 80 percent of the total 
abandoned foreclosures that we identified in our servicer data were in 
50 of the roughly 400 MSAs; 20 MSAs account for 61 percent of the 
properties; and 30 MSAs account for 72 percent. Table 3 shows the MSAs 
with the most abandoned foreclosures. Because the data we used to 
produce these estimates may not be generalizeable, the location of the 
remaining abandoned foreclosures could differ from that suggested in 
table 3. For example, the Flint, Michigan; Orlando-Kissimmee, Florida; 
South Bend-Mishawaka, Indiana; and Canton-Massillon, Ohio, MSAs are 
notable examples just outside the top 20. Although not having a large 
number of abandoned foreclosures, some small MSAs throughout the 
Midwest are likely to be similarly challenged by the existence of such 
properties given their size. 

Table 3: MSAs with the Most Abandoned Foreclosures, January 2008 
through March 2010: 

MSA: Detroit-Warren-Livonia, MI; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 1,500; 
Vacant Properties: Charged off without foreclosure initiation: 1,957; 
Vacant Properties: Total housing stock: 1,561,961. 

MSA: Chicago-Naperville-Joliet, IL-IN-WI; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 499; 
Vacant Properties: Charged off without foreclosure initiation: 361; 
Vacant Properties: Total housing stock: 2,797,890. 

MSA: Cleveland-Elyria-Mentor, OH; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 497; 
Vacant Properties: Charged off without foreclosure initiation: 382; 
Vacant Properties: Total housing stock: 769,283. 

MSA: Indianapolis-Carmel, IN; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 396; 
Vacant Properties: Charged off without foreclosure initiation: 303; 
Vacant Properties: Total housing stock: 606,834. 

MSA: Memphis, TN-AR-MS; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 232; 
Vacant Properties: Charged off without foreclosure initiation: 287; 
Vacant Properties: Total housing stock: 438,545. 

MSA: Atlanta-Sandy Springs-Marietta, GA; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 206; 
Vacant Properties: Charged off without foreclosure initiation: 137; 
Vacant Properties: Total housing stock: 1,659,052. 

MSA: Akron, OH; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 184; 
Vacant Properties: Charged off without foreclosure initiation: 156; 
Vacant Properties: Total housing stock: 257,560. 

MSA: Columbus, OH; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 182; 
Vacant Properties: Charged off without foreclosure initiation: 118; 
Vacant Properties: Total housing stock: 627,580. 

MSA: Miami-Fort Lauderdale-Pompano Beach, FL; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 180; 
Vacant Properties: Charged off without foreclosure initiation: 64; 
Vacant Properties: Total housing stock: 1,427,458. 

MSA: St. Louis, MO-IL; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 175; 
Vacant Properties: Charged off without foreclosure initiation: 317; 
Vacant Properties: Total housing stock: 1,022,950. 

MSA: Tampa-St. Petersburg-Clearwater, FL; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 164; 
Vacant Properties: Charged off without foreclosure initiation: 64; 
Vacant Properties: Total housing stock: 896,181. 

MSA: Kansas City, MO-KS; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 155; 
Vacant Properties: Charged off without foreclosure initiation: 197; 
Vacant Properties: Total housing stock: 726,356. 

MSA: Dayton, OH; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 139; 
Vacant Properties: Charged off without foreclosure initiation: 106; 
Vacant Properties: Total housing stock: 323,097. 

MSA: Fort Wayne, IN; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 135; 
Vacant Properties: Charged off without foreclosure initiation: 125; 
Vacant Properties: Total housing stock: 146,102. 

MSA: Jacksonville, FL; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 134; 
Vacant Properties: Charged off without foreclosure initiation: 84; 
Vacant Properties: Total housing stock: 431,125. 

MSA: Youngstown-Warren-Boardman, OH-PA; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 133; 
Vacant Properties: Charged off without foreclosure initiation: 79; 
Vacant Properties: Total housing stock: 225,395. 

MSA: Cape Coral-Fort Myers, FL; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 126; 
Vacant Properties: Charged off without foreclosure initiation: 67; 
Vacant Properties: Total housing stock: 244,349. 

MSA: Cincinnati-Middletown, OH-KY-IN; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 121; 
Vacant Properties: Charged off without foreclosure initiation: 96; 
Vacant Properties: Total housing stock: 722,182. 

MSA: Toledo, OH; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 117; 
Vacant Properties: Charged off without foreclosure initiation: 72; 
Vacant Properties: Total housing stock: 241,293. 

MSA: Pittsburgh, PA; 
Vacant Properties: Charged off after foreclosure initiation (abandoned 
foreclosures): 114; 
Vacant Properties: Charged off without foreclosure initiation: 122; 
Vacant Properties: Total housing stock: 925,347. 

Source: GAO analysis of servicer, GSE, and USPS data; Global Insight. 

Note: Although the sample we used to identify these properties was 
large, covering about 60 percent of all loans serviced, it is likely 
nonrandom, and therefore it should not be used in making inferences 
about abandoned foreclosure activity for the entire United States at 
the MSA level. In addition, our abandoned foreclosure estimates should 
not be viewed as definitive or precise given that the matching 
exercise used to determine these figures is subject to error. Other 
MSAs may actually rank higher or lower, depending on the geographical 
profile of the loans serviced by the remaining servicers not covered 
in our dataset and the extent to which vacancies may have been 
understated in particular areas due to a higher matching error rate. 

[End of table] 

As shown above in table 3, these 20 MSAs had roughly 5,090 properties 
that were charged off in lieu of foreclosure by the servicer without 
initiating foreclosure but were also vacant in our sample. Because 
these also are properties on which the servicer will no longer be 
conducting any maintenance or attempting to sell to a new owner, the 
properties can create similar problems for their communities as those 
resulting from abandoned foreclosures. 

Concentrations of Abandoned Foreclosures Are Associated with Various 
Community, Property, and Loan Characteristics: 

Certain community, property, and loan characteristics may help to 
explain some of the concentrations of abandoned foreclosures. In 
particular, based on our sample, abandoned foreclosures occurred most 
frequently in economically struggling areas and distressed urban areas 
of particular cities We also found these properties in areas that 
experienced significant recent booms and declines in housing. In 
general abandoned foreclosures are also more likely to involve low- 
value properties and nonprime and securitized loans. 

* Economically struggling cities appear to experience the greatest 
number of charge-offs in lieu of foreclosure and therefore, abandoned 
foreclosures. As shown in figure 4, most of the abandoned foreclosures 
have occurred in Midwestern industrial MSAs. In particular, our 
analysis of servicer data indicates that over 50 percent of all the 
abandoned foreclosures we identified were in Michigan, Indiana, and 
Ohio. Seven of the 20 MSAs with the most abandoned foreclosures are 
located in Ohio. Recent research also supports that this type of 
phenomenon is occurring largely in industrial Midwestern 
states.[Footnote 31] Although the deterioration of economic conditions 
in 2008 and 2009 has impacted the entire nation, these Midwestern 
areas have been especially hard hit with population declines, high 
unemployment, and decreases in housing values. For example, Detroit 
lost about 28 percent of its population from 1980 to 2006 and the 
unemployment rate in Michigan was 13.0 percent versus 9.6 percent 
nationally as of September 2010. According to a recent report, 
although Michigan did not seem to experience a dramatic appreciation 
in housing prices before the surge in mortgage foreclosures that began 
in late 2006, it did witness a significant decline in housing prices 
after 2006, largely because the automobile manufacturing industry was 
severely hit by the current crisis.[Footnote 32] Like many areas in 
the United States, several of the MSAs in table 3 experienced 
significant increases in unemployment rates. For example, the 
unemployment rate in the Detroit-Warren-Livonia MSA increased from 4.2 
percent in December 2000 to 16.1 percent in December 2009. Similarly, 
in the Flint, Michigan, MSA, the unemployment rate increased by more 
than 10 percentage points between 2000 and 2009. High unemployment may 
have exacerbated the negative consequences of nonprime lending 
activity. For example, community development officials in Detroit 
explained that many people who did not have mortgages on their homes 
were enticed to obtain a home equity loan to make repairs, then lost 
their homes to foreclosure because they lost their jobs or the 
payments were not sustainable. However, many of the economic problems 
facing areas such as Cleveland, Detroit, and other Midwest cities 
where we identified large numbers of abandoned foreclosures predate 
the economic turmoil that started around 2008. For example, in 2007, 
the poverty rate in Flint, Michigan, was 16.8 percent, the poverty 
rate in Memphis, Tennessee, was 18.8 percent, and the poverty rates in 
both Toledo and Youngstown, Ohio, were 14.8 percent. Consequences of 
these challenges include weak real estate markets and other 
characteristics that are associated with abandoned foreclosures. 

Figure 4: Areas Where Abandoned Foreclosures Are Concentrated, January 
2008 through March 2010: 

[Refer to PDF for image: illustrated U.S. map] 

This categorization is based in part on judgment and trends in the 
data for the MSAs with the most abandoned foreclosures in these 
states. Because other researchers may posit alternative 
categorizations which may also fit the data and other types of 
abandoned foreclosures exist, this analysis should not be considered 
definitive. 

Top 12 states by number of abandoned foreclosures: 
Michigan: 1,791; 
Ohio: 1,544; 
Indiana: 1,104; 
Florida: 895; 
California: 386; 
Illinois: 421; 
Missouri: 331; 
Georgia: 273; 
Tennessee: 268; 
Pennsylvania: 233; 
Texas: 161; 
New York: 128. 

Top 20 MSAs by number of abandoned foreclosures: indicated by location 
on the map. 

Source: GAO analysis; map (MapInfo). 

For the electronic version of this graphic, move cursor over the map 
to view additional information. For printed version see Appendix V for 
more information. 

[End of figure] 

* Abandoned foreclosures are also likely concentrated in distressed 
urban areas. Our analysis shows that distressed urban areas within 
MSAs had significant numbers of abandoned foreclosures. In cities with 
high property values like Chicago, we found that abandoned 
foreclosures were largely driven by activity in a few zip codes. Our 
analysis also shows that, on average, the zip codes with the most 
abandoned foreclosures had larger declines in home prices (37 percent) 
compared to the national average of 32 percent following peak levels 
in 2005. Some distressed zip codes in Detroit, Michigan, had an over 
60 percent drop in home prices from the peak levels between 2004 and 
2006. Stakeholders also told us that abandoned foreclosures were most 
often associated with urban areas with largely minority populations, 
high foreclosure rates, blight, crime, and vandalism. For example, one 
academic speculated that there may be pockets of distressed housing in 
the inner parts of cities whose housing markets as a whole may not be 
so bad; these areas likely have low value houses that may end up as 
abandoned foreclosures. In addition, one servicer representative said 
that abandoned foreclosures could be found in the urban core of any 
large city. 

* Concentrations of abandoned foreclosures have also occurred in areas 
that experienced significant house price increases followed by 
declines. States such as California, Florida, Nevada, and Arizona 
experienced the largest increase in property values prior to 2006 also 
have experienced the largest decreases in property values in the last 
few years. For example, according to a recent report, property values 
in these states spanned 47 percent from peak to trough.[Footnote 33] 
As a result, these states have many underwater borrowers--that is, 
borrowers who owe more on their mortgages than their properties are 
worth (negative equity). Significant overdevelopment and 
overspeculation prior to the economic crisis also may have caused 
investors to abandon their properties after housing prices declined. 
For example, representatives of a community group in Atlanta told us 
that starting in 2000 in a neighborhood close to downtown Atlanta 
investors increasingly constructed new housing on speculation. 
Representatives said that some of this new construction was never 
occupied, and after house prices began to decline in early 2007, much 
of it was vandalized. Without a market for these properties servicers 
may have subsequently abandoned foreclosures on many of these 
properties because they would not earn enough at foreclosure sale to 
cover losses associated with foreclosure and disposition of these 
properties. Among the 20 MSAs in table 3, Jacksonville, Cape Coral-
Fort Myers, Tampa-St. Petersburg-Clearwater, Miami-Fort Lauderdale-
Pompano Beach, and, to a lesser extent, Atlanta, appear to fit into 
the category of housing boom-related abandoned foreclosures. For 
example, according to Global Insight estimates, average home prices in 
the Miami-Fort Lauderdale-Pompano Beach increased 144 percent from the 
end of 2000 to the second quarter of 2007 before declining by 40 
percent from 2007 to the third quarter of 2010. 

* Regardless of the city or neighborhood, most abandoned foreclosures 
occur on low-value properties. Data from servicers, Fannie Mae, and 
Freddie Mac indicate that foreclosures are most often not completed on 
properties with low values. Evidence from the econometric model that 
we applied to GSE loan-level data also suggests that lower property 
values increased the likelihood that a loan would be charged off in 
lieu of foreclosure rather than being subject to alternative 
foreclosure actions such as a deed-in-lieu of foreclosure or short 
sale.[Footnote 34] For example, the median value of the properties 
Freddie Mac decided to charge of in lieu of foreclosure was $10,000 
compared to $130,000 for deeds in lieu of foreclosure, $158,000 for 
modifications and $160,000 for short sales. Similarly, the median 
value of loans for which the six servicers decided to charge off in 
lieu of foreclosure in Michigan and Ohio was $25,000.[Footnote 35] In 
addition, servicer representatives told us properties with low values--
such as those valued under $30,000--were the most likely candidates 
for decisions to not pursue foreclosure.[Footnote 36] Some properties 
may even have negative values because of the liabilities attached to 
them. For example, a property in Cleveland valued at $5,000 may have 
an $8,000 demolition lien levied against it; therefore, it may 
actually cost more to pay off the demolition lien than the property is 
worth. 

* Abandoned foreclosures also occurred most frequently on nonprime 
loans. Our analysis shows that about 67 percent of all abandoned 
foreclosures that we identified were associated with nonprime loans. 
[Footnote 37] Adjustable rates were also a prominent feature of these 
loans. Anecdotally, stakeholders also told us that abandoned 
foreclosures most likely occurred on properties where borrowers had 
nonprime loans and unstable financing. For instance an official for a 
community development corporation in greater Cleveland told us he had 
seen about 12 instances of abandoned foreclosures in the past year, 
and many of the borrowers in these cases had two mortgages or subprime 
loans originated in 2003 or later. 

* The vast majority of abandoned foreclosures were loans that involved 
third-party investors including those that were securitized into 
private label MBS. GSE-purchased loans account for a very small 
portion of our estimated number of abandoned foreclosures. Although 
the GSE loans made up roughly 63 percent of the data we collected from 
servicers, they accounted for less than 8 percent of the total 
abandoned foreclosures during 2008 through the first quarter of 2010. 
Similarly, we found that only about 0.3 percent of abandoned 
foreclosures were associated with FHA, VA, and Ginnie Mae insured 
loans. The potential for abandoned foreclosures to occur on loans 
associated with Fannie Mae also appears to have been reduced as Fannie 
Mae representatives told us that as of April 2010 they have instructed 
servicers to complete all foreclosures pending Fannie Mae's revision 
of its charge-off in lieu of foreclosure procedures to make sound 
economic decisions as well as stabilize neighborhoods. About 66 
percent of the total abandoned foreclosures were associated with non-
GSE third-party investors. We estimate that a significant portion of 
these loans were securitized into residential MBS, although data 
issues precluded us from distinguishing between private label MBS and 
whole loans held by third parties in some cases.[Footnote 38] 

Like Other Vacant Properties, Abandoned Foreclosures Contribute to 
Various Negative Effects on Neighborhoods, Local Governments, and 
Homeowners: 

Abandoned foreclosures, similar to other vacant properties, further 
contribute to various negative impacts for the neighborhoods in which 
they occur, for the local governments, and for the homeowners. In 
addition, because local governments are not aware of servicers' 
decisions to no longer pursue foreclosure on these properties, they 
cannot take expedited actions to return the properties to productive 
use. 

Without Notification of Servicers' Decisions to Abandon Foreclosures, 
Local Governments Cannot Act Quickly to Address the Negative Effects 
of These Properties: 

Properties for which the mortgage servicers have abandoned the 
foreclosure proceedings are often left without any party conducting 
routine care and maintenance, which often results in properties with 
poor appearance and sometimes unsafe conditions. As a result, 
abandoned foreclosures can create unsightly and dangerous properties 
that contribute to neighborhood decline. Academics, housing and 
community groups representatives, local government officials, and 
others in the 12 locations we collected information from generally 
told us that, like other vacant and abandoned properties, abandoned 
foreclosures often deteriorated quickly. They explained what types of 
damage can result, including structural damage, mold, broken windows, 
and trash, among other things. Representatives of a national community 
reinvestment organization described the impact of vacant homes 
nationwide, from swimming pools filled with dirty, discolored water in 
Florida to homes in the Midwest that have sustained damage from 
falling trees that no one removes. A Cleveland official said that, in 
a 2-year period, about 20 vacant homes in one ward had caught fire and 
that people used vacant properties to dump trash and asphalt. 

While touring abandoned foreclosures in some of the neighborhoods in 
the communities we visited, we observed several vacant and abandoned 
properties that showed various signs of property deterioration, 
including overgrown grass, accumulated trash or other debris, and 
broken windows. Because abandoned foreclosures, by definition, are 
vacant properties, they create similar problems as other vacant 
properties do for communities. Figure 5 presents pictures of abandoned 
foreclosures and other vacant properties in several of the communities 
we visited. 

Figure 5: Examples of Abandoned Foreclosures and Vacant Properties in 
Various Parts of the Country: 

[Refer to PDF for image: 5 photographs and associated data] 

Manatee County, Florida: 
Vacant property in Manatee County, Florida. According to a county 
official, two juveniles were arrested in 2010 for vandalism that 
damaged doors, windows, and the interior; and neighbors reported that 
the dwelling had been vacant for 2 years. Foreclosure was initiated in 
July 2009 and was still active as of May 2010. 

Manatee County, Florida: 
Abandoned foreclosure in Manatee County, Florida. According to a 
county official, there was an arson fire on this property in July 
2010. Foreclosure was initiated in December 2008 and dismissed in 
February 2010. Since the servicer never completed foreclosure, the 
liability for the fire remains with the owner of record. 

Detroit, Michigan: 
Vacant and abandoned property in Detroit, Michigan. This property has 
sustained structural damage to the roof. 

Baltimore, Maryland: 
Vacant and abandoned property in Baltimore, Maryland. This picture 
shows trash piled up in the back yard and the rear balcony door open. 
According to data provided to us by a servicer, this property was 
charged off in October 2009, and was vacant at that time. As of May 
2010, there has not been a foreclosure initiated on this property. 

Baltimore, Maryland: 
Abandoned foreclosure in Baltimore, Maryland. This structure has 
sustained fire damage and has broken windows in the front, as well as 
a broken window in the rear. According to data we received from a 
servicer, foreclosure was initiated in May 2007, at which time the 
property was vacant, and the loan was charged-off in September 2009. 

Source: Manatee County, Florida, Nuisance Abatement Division (middle 
left photo); GAO (all other photos). 

[End of figure] 

Abandoned foreclosures also create problems in communities because 
homes in foreclosure proceedings that become vacant in certain 
neighborhoods are often quickly stripped of valuable materials, 
further depressing their value. Housing and community group 
representatives, and local government officials, told us that looters 
strip vacant houses of copper piping, wiring, appliances, cabinets, 
aluminum siding, and other valuables, usually within a few weeks of 
the time at which the property became vacant, but sometimes within 24 
hours. An official from a foreclosure response organization in one 
Midwestern city told us that a thriving industry of home salvage 
thieves exists in the city and an official from a non-profit housing 
organization in another Midwestern city told us that junkyards in the 
area accept things they should not, such as aluminum siding and 
refrigerators--and this provides an incentive for criminals to strip 
houses of any materials of potential salvage value. Representatives 
from a national property maintenance company that operates across the 
country told us a house can be secured, including having its windows 
and doors boarded up and entrances locked, only to be broken into and 
stripped of any valuable parts. Similarly, a local official told us 
that many houses in Chicago are secured with steel grates, but vandals 
will bypass these and cut a hole in the roof or brick to gain access--
and, once inside, they will rip the house apart by sawing into the 
walls and cutting out the wiring and piping. A local official in 
another city reported that several gas explosions have occurred at 
vacant properties there recently due to vandals stealing pipes while 
the gas was still flowing to the home. Staff from a national property 
maintenance company told us that mortgage servicers contract with them 
to inspect the properties of homeowners whose loans become delinquent 
and that in certain locations, they often have to re-secure properties 
at every monthly inspection because such properties are constantly 
being broken into and damaged. In addition, a code enforcement 
official told us that vandalism had become such an issue for the city 
that a sign left on a property's door indicating that it had a code 
violation would serve as a flag to thieves to strip the house. 
Finally, representatives from two national community revitalization 
organizations told us that, as a result of vandalism, exposure, and 
neglect, vacant properties can become worthless. 

Similar to other vacant and uncared for properties, abandoned 
foreclosures also can create public safety concerns. Staff from an 
entity that advises local governments on community development 
explained that abandoned foreclosures that remain vacant for extended 
periods pose significant public health, safety, and welfare issues at 
the local level. Although unable to identify which properties were 
abandoned foreclosures, local government officials in Detroit said 
that safety issues associated with vacant properties were the primary 
reason they had identified 3,000 vacant properties that were to be 
demolished in 2010. Of these, they said that 2,100 had been deemed 
dangerous and that 400 were considered so hazardous that they were 
considered emergency situations, noting that a firefighter had 
recently been killed when he entered a vacant property and a floor 
caved in. Likewise in Fort Myers, Florida, officials told us that 
1,200 to 1,300 of the city's 1,600 vacant and abandoned properties 
were considered unsafe. A Cleveland official told us that, when 
housing inspectors discovered a vacant property with a code violation, 
the city was compelled to act to address the potential danger, or it 
may be liable for any subsequent injuries. Officials from this same 
office further noted that the public money that is used to fund the 
land bank--which may take in unsafe and abandoned properties--may have 
otherwise been used for civic uses, such as teacher salaries. 

Like other vacant properties, abandoned foreclosures also contribute 
to neighborhood decline by providing venues for a wide variety of 
crimes. Local government and other officials told us that vacant and 
abandoned properties were subject to break-ins, drug activity, 
prostitution, arson, and squatting, among other things. A study of the 
City of Chicago noted that some vacant building fires were the result 
of arson by owners seeking to make insurance claims and that others 
were started by squatters making fires to keep warm.[Footnote 39] 
Other empirical studies have found relationships between vacant or 
foreclosed properties and crime. For example, a national organization 
representing municipal governments reports that crime is moderately 
correlated with vacant and abandoned properties, deteriorating housing 
and high divestments in the neighborhood.[Footnote 40] Another study 
of central city Chicago found that a 2.87 percentage point increase in 
the foreclosure rate would yield a 6.68 percent increase in the rate 
of violent crimes such as assault, robbery, rape, and murder.[Footnote 
41] The author of this study explains the weaker positive relationship 
between foreclosure and property crimes, such as theft and vandalism, 
may be due to an under-reporting of such crimes in lower-income areas. 

Another impact of abandoned foreclosures is that, like other vacant 
and uncared for properties, they negatively affect the value of 
surrounding properties. Although property values have fallen sharply 
in many regions around the country as part of the recent economic 
recession, many of those we interviewed said that vacant properties 
and abandoned foreclosures compounded this problem. One local official 
explained that, once a few properties in a neighborhood became vacant, 
the negative effects tended to spiral and lead to further foreclosures 
and vacancies, particularly in low-income neighborhoods. In addition, 
empirical studies have found that vacant and abandoned properties, 
together with foreclosures, can cause neighboring property values to 
decline. For example, using data from 2006 in Columbus, Ohio, a recent 
study found that each vacant property within 250 feet of a nearby home 
could decrease its sales price by about 3.5 percent, whereas the 
impact from each foreclosure was less severe, but had a wider impact 
out into the neighborhood.[Footnote 42] In addition, an author for a 
federal research organization reviewed several research papers on 
foreclosure's price-depressing impact on sales of nearby properties 
and reported that, according to the literature, this impact can range 
from as little as 0.9 percent to as much as 8.7 percent.[Footnote 43] 

Because local government officials are not aware that foreclosure 
actions are no longer being pursued, these properties remain vacant 
and contribute to neighborhood decline for longer periods of time. 
Instead of learning that servicers are charging off loans in lieu of 
foreclosure and will not assume responsibility for maintenance, local 
government staff responsible for enforcing housing codes told us they 
typically find out about vacant and abandoned properties through 
citizen complaints, vacant property registration ordinances, or on 
their own initiative. They noted that, by the time they become aware 
of a property for which a servicer is no longer taking responsibility, 
the property may have been vacant and deteriorating for months or 
years, which exacerbates the overall neighborhood decline. Several 
stakeholders noted that, if local governments were made aware of 
properties for which servicers were charging off the loans in lieu of 
foreclosure, they may be able to take more timely action. For example, 
they could take expedited actions to acquire the vacant property--such 
as through the use of a land bank--and return it to productive use. 

Abandoned Foreclosures also Increase Costs for Local Governments: 

Abandoned foreclosures also increase costs for local governments 
because they must expend resources to inspect properties and mitigate 
their unsafe conditions. Within local communities, code enforcement 
departments are largely responsible for ensuring that homeowners 
maintain their properties in accordance with local ordinances 
regarding acceptable appearance and safety. In cases in which such 
ordinances are not being complied with, code enforcement departments 
can typically fine violating property owners or take actions 
themselves, such as making repairs or boarding up doors or windows and 
billing the property owner for these expended costs. However, code 
enforcement and other officials told us that it is often difficult to 
locate the owners of abandoned foreclosures because they have left 
their homes; they also told us that it is difficult to locate current 
mortgage lien holders--who generally have an interest in maintaining 
the properties. Officials said that one reason identifying lien 
holders is difficult is because they often fail to record changes in 
ownership with local jurisdictions. To address the challenge, the code 
enforcement manager of one of the cities we visited told us that he 
had made one of his field staff a full-time "foreclosure specialist" 
whose job it was to research owners and lien holders of foreclosed 
properties with identified code violations. The new foreclosure 
specialist told us that he uses several different avenues to find 
property owners and lien holders, including county court records, 
local realtors, property managers, property maintenance companies, and 
the Mortgage Electronic Registration Systems (MERS®).[Footnote 44] In 
addition, another code enforcement manager told us that he had 
developed a team of investigators trained in skip tracing to increase 
the division's ability to identify and locate violators.[Footnote 45] 

Local governments are often burdened by having to pay for the 
maintenance or demolition of abandoned foreclosures. In the interest 
of public safety, code enforcement departments will often take action 
when they cannot identify or contact another responsible party. 
Researchers tallied total costs of over $13 million for code 
enforcement activities to address and maintain all vacant and 
abandoned properties for eight Ohio cities in 2006.[Footnote 46] In 
addition, the City of Cleveland, Ohio, has budgeted over $8 million of 
federal grant money for demolition and has already expended nearly $5 
million. Recent literature, as well as our interviews with local 
officials, further revealed the burden some local governments are 
experiencing due to an increase in the amount of vacant and abandoned 
properties: 

* A 2005 report estimated the direct municipal costs of an abandoned 
foreclosure to be $19,227 in the City of Chicago--and if it is a 
severe case with a fire, the cost can be as high as $34,199. 

* The same study reported that the cost of boarding up a single-family 
home one time was $900, but noted that, because most units were 
boarded up multiple times, the true cost was $1,445.[Footnote 47] 

* In a 2008 study, the City of Baltimore reported that the cost per 
block of police and fire services showed an annual increase of $1,472 
for each vacant and unsafe property on that block.[Footnote 48] 

* Code enforcement officials for a city in Florida reported that they 
spent over $120,000 to mow lawns of vacant properties in 2008; this 
was up from less than $30,000 in 2006 and prior years. 

* Code enforcement officials for another city in Florida told us they 
have $850,000 in outstanding code invoices for boarding up or mowing 
lawns for abandoned properties. 

* Code enforcement officials for a county in Florida reported that 
prior to 2007, the number of code enforcement cases against properties 
in foreclosure was not significant enough to warrant tracking; 
however, in 2008, after the department began to identify and track 
these properties because of the noticeable increase in citizen 
complaints, statistics reveal that 25 percent of all their cases 
involved properties in foreclosure--and as of May 2010, they had 443 
active cases against properties in foreclosure. 

* A Cleveland official reported an approximately $80,000 increase in 
personnel costs for code enforcement over the prior year. She said 
these costs were related to hiring additional staff to support 
existing staff with research, documentation, and court testimony. 

When local governments maintain or demolish properties, they typically 
may place liens against the properties for the associated costs. In 
some jurisdictions, these liens may have the same first-priority 
status as tax liens and may, therefore, be relatively easily 
recovered, but in other jurisdictions these liens may have lower 
priority. In one jurisdiction, we were told that code enforcement 
liens were wiped out when the foreclosure was completed. A case study 
of Chicago estimated that between 2003 and 2004 the city recovered 
only about 40 cents on each dollar it spent for demolition.[Footnote 
49] 

Abandoned foreclosures also burden local governments with reduced 
property tax revenues. Local jurisdictions directly lose tax revenue 
from vacant and abandoned properties in two ways: (1) property taxes 
owed by the property owner sometimes go unpaid and are not recouped, 
(2) a loss of tax value of a property when a structure is demolished. 
In addition, abandoned foreclosures contribute to falling housing 
values, which further erode the property tax base. For example, 
researchers calculated that in 2006, the City of Cleveland lost over 
$6.5 million due to the tax delinquency on vacant and abandoned 
structures, and over $409,000 because structures were demolished. 
[Footnote 50] Moreover, one local official told us that every 1 
percent decline in home values costs the City of Cleveland $1 million 
in tax revenue. 

Abandoned foreclosures also contribute to an increased demand for city 
services. As discussed, abandoned foreclosures result in an increased 
demand for code enforcement related services--including demolition, 
boarding of windows, removing trash, mowing the lawn, and a range of 
other activities intended to keep the unit from becoming an eyesore. 
Abandoned foreclosures also result in a variety of other municipal 
costs, including increased policing and firefighting, building 
inspections, legal fees, and increased demand for city social service 
programs. 

Abandoned foreclosures also increase the difficulty of transferring 
the property to another owner, which can increase the potential for 
the property to contribute to problems within a community. If a 
borrower remains in the home or in contact with the servicer, title to 
the property can be transferred to a new owner through short sales or 
deed-in-lieu of foreclosure actions. If homeowners vacate their 
properties and cannot be reached, these alternative means of 
transferring title cannot occur. However, in these cases, the servicer 
can complete the foreclosure process where title is transferred to a 
new owner--either a third party buyer or the lien holder where the 
property is then held in its or the servicer's real estate-owned 
inventory. However, when the servicer abandons the foreclosures, this 
transfer of title does not occur. Without this transfer, abandoned 
foreclosures may remain vacant for extended periods of time, with 
recent media and academic reports labeling such properties as being in 
"legal limbo" or having a "toxic title." One academic we interviewed 
said abandoned foreclosures result in property titles that lack 
transparency and cannot be easily transferred; another academic told 
us that uncertainty about a property's ownership and status may make 
it hard for neighborhood groups or cities to determine what actions 
can be taken to dispose or sell such property. According to a recent 
report by a national rating agency, most properties associated with 
charged-off loans will ultimately be claimed by municipalities for 
back taxes, which according to stakeholders may not be an efficient 
process. 

Lack of Transparency of Foreclosure Decisions May Cause Confusion 
among Homeowners and Increase the Number of Abandoned Foreclosures: 

Abandoned foreclosures can also create confusion among the borrowers 
over the status of their properties and their responsibilities for 
such properties. According to representatives of counseling agencies, 
community groups, and some of the homeowners we interviewed, borrowers 
are often surprised to learn that the servicer did not complete the 
foreclosure and take title to the house--and that they still own the 
property and are responsible for such things as maintenance, taxes, 
and code violations. A nonprofit law firm representative said that 
borrowers who thought that they had lost their homes through 
foreclosure were sometimes brought to housing court for code 
violations. For example, a court record from Buffalo City indicates 
that one individual appeared in court to address code violations 3 
years after receiving a judgment of foreclosure. According to the 
record, after the judgment of foreclosure, there was no sale of the 
property. While in court, this individual claimed that she did not 
believe that she still owned the property. 

Because servicers typically do not notify borrowers when they decide 
to charge off loans in lieu of foreclosure, borrowers may not be aware 
that they do not need to vacate their homes and that they are still 
responsible for maintaining their properties. Representatives from 
four servicers told us that they did not notify borrowers of this 
decision. Servicer and regulatory officials said that borrowers did 
not need to be aware when servicers decided to charge off loans in 
lieu of foreclosure because these were internal decisions that did not 
affect borrowers' obligations to pay on their mortgages. Some 
servicers also expressed concern that they would not want borrowers to 
interpret such notices to mean that they do not still owe money on the 
mortgage. However, recent research indicates that notifying borrowers 
that the servicer is charging off their loans in lieu of foreclosure 
could increase the likelihood that owner-occupants or tenants will 
remain in the properties in cases where the servicer does not intend 
to take title, and thus reduce the number of abandoned foreclosures. 
[Footnote 51] In addition, several interviewees suggested that 
servicers should notify homeowners about decisions to charge off loans 
in lieu of foreclosure because homeowners often do not understand 
their rights to remain in their homes and responsibility to maintain 
the property going forward. 

Abandoned Foreclosures Have Not Significantly Affected Federal and 
State Foreclosure-Related Programs: 

Although creating various negative impacts on neighborhoods and 
communities, abandoned foreclosures have not significantly affected 
state and federal foreclosure-related programs because most of these 
programs try to prevent foreclosure and some only apply to properties 
still occupied by homeowners. In response to the surge in mortgage 
foreclosures that began in late 2006 and continues today, several 
states created task forces to address the crisis. According to a 2008 
report by a national trade association, the main objectives of almost 
every task force created as of March 2008 was to get practical help 
directly to "at risk" homeowners by, for example, creating consumer 
hotlines, and developing outreach and educational programs designed to 
encourage homeowners to get counseling.[Footnote 52] In addition, we 
spoke with a legislative analyst for a national organization who told 
us that over the past 3 years state legislatures have enacted many 
laws focusing on such topics as payment assistance and loan programs, 
regulating foreclosure scam artists, ensuring homeowners and tenants 
receive proper foreclosure notice, shortening or lengthening the 
foreclosure process, and implementing mediation or counseling 
programs. The federal government has also implemented several 
foreclosure-related programs, most of which focus on foreclosure 
prevention and require that borrowers live in their homes.[Footnote 
53] For example, the federal Home Affordable Modification Program 
(HAMP) is a program designed to help borrowers avoid foreclosure and 
stay in their homes by providing incentives for servicers to perform 
loan modifications; however, HAMP requires as a pre-condition that 
borrowers currently live in their homes. 

Abandoned foreclosures have also not significantly impacted the 
federal Neighborhood Stabilization Program (NSP) according to those 
grantees we interviewed and surveyed. The NSP program, unlike most 
other federal programs we reviewed, does not focus on keeping 
borrowers in their homes; rather, it focuses on stabilizing 
communities that have suffered from foreclosures and abandonment. 
[Footnote 54] Congress has appropriated NSP monies in two rounds thus 
far (NSP 1 and NSP 2) to help states and local governments purchase 
and redevelop foreclosed and vacant properties; and in September 2010, 
the U.S. Department of Housing and Urban Development (HUD) allocated a 
third round of NSP grants.[Footnote 55] Prior to April 2010, the NSP 
program limited grantees' ability to intervene when a servicer 
initiated but did not complete foreclosure; therefore, abandoned 
foreclosures may have limited the pool of available properties for 
acquisition prior to this time. However, in April 2010, HUD announced 
it had modified the NSP program, expanding the definition for 
"foreclosure," to allow grantees to more easily acquire properties 
after foreclosure has been initiated and before it has been completed. 
HUD also expanded the definition of "abandoned" to allow access to 
more properties under NSP.[Footnote 56] Therefore, there is no longer 
a programmatic barrier preventing NSP grantees from acquiring 
abandoned foreclosures. 

NSP grantees we received information from reported that abandoned 
foreclosures have not significantly impacted their acquisition 
efforts, although HUD's NSP programmatic change--enabling grantees to 
more easily acquire properties prior to foreclosure sale--has helped 
some grantees acquire multifamily properties. We received responses 
from 25 NSP 1 and NSP 2 grantees (including subrecipients) regarding 
the extent to which abandoned foreclosures were impacting their 
programs.[Footnote 57] Of the 25 grantees, 23 indicated that abandoned 
foreclosures had not impacted their programs--and of the two remaining 
grantees, neither one reported that abandoned foreclosures had a 
significant impact. We also spoke with an additional 12 NSP 1 grantees 
to assess the extent to which HUD's programmatic change--expanding the 
definitions of "foreclosed" and "abandoned" to enable grantees to more 
easily acquire properties prior to foreclosure sale--impacted their 
acquisitions.[Footnote 58] Some grantees with whom we spoke said the 
change announced in April 2010 would not have a significant impact on 
their acquisition efforts because they had a large inventory of fully 
foreclosed homes available, or they had already made many acquisitions 
prior to the programmatic change. However, several grantees that we 
spoke with said that the programmatic change assisted them in 
acquiring multifamily properties. HUD officials also reported that 
they had heard from grantees that the programmatic change assisted in 
their efforts to acquire multifamily homes; however HUD officials had 
not heard from grantees that they had applied the expanded definitions 
to address any single family properties for which foreclosure had not 
been completed. The expanded definitions may have more of an impact 
for the more recent rounds of funding of NSP, (NSP 2 and NSP 3), 
because they are in earlier stages of planning and implementation. 

Some Servicer Practices Increase Likelihood of Abandoned Foreclosures 
and Regulatory Oversight Has Been Limited: 

Various servicer practices may be contributing to the number of 
abandoned foreclosures. These practices include initiating foreclosure 
without obtaining updated property valuations and obtaining valuations 
that did not always accurately reflect property or neighborhood 
conditions or other costs, such as delinquent taxes or code violation 
fines. 

Without Updated Property Valuations That Consider Property and 
Neighborhood Conditions, Servicers May Abandon Foreclosures on Certain 
Properties: 

By not always obtaining updated property valuations at foreclosure 
initiation, servicers appeared to increase the potential for abandoned 
foreclosures to occur. As described earlier, after a certain period of 
loan delinquency--usually around 90 days--has passed, officials from 
the six servicers that we interviewed representing about 60 percent of 
the nation's home mortgages told us that they make a determination 
about whether to initiate foreclosure. Representatives of servicers 
told us they take into account various information about the property 
when deciding whether to initiate foreclosure and some servicers 
conduct an equity analysis on certain loans to determine if the 
expected proceeds from a sale will cover foreclosure costs. However, 
the valuations used in these analyses might be outdated at the time of 
foreclosure initiation and staff from four of the six servicers told 
us that they did not always obtain updated information on the value of 
the property at the time they conducted this analysis and initiated 
foreclosure. The representatives from one servicer told us that the 
company performs an equity analysis on loans in its own portfolio 
before foreclosure initiation. However, for loans serviced for Fannie 
Mae, Freddie Mac, or third-party investors, this servicer follows the 
applicable servicing agreement or guidance, which may not require such 
analyses or updated property valuations. Instead, the company 
initiates foreclosure automatically when one of these loans reaches a 
certain delinquency status. Only two of the six servicers we 
interviewed reported updating property valuations on all loans before 
initiating foreclosure. 

Even when servicers obtain updated property valuations, this 
information does not always reflect actual property or neighborhood 
conditions, which can also increase the likelihood of servicers 
commencing foreclosure but then abandoning it. Representatives of the 
six servicers we interviewed said that property inspections begin in 
the early stages of delinquency and continue on a regular basis, but 
that information collected during inspections--information relevant to 
the resale value of a property, such as vacancy status and property 
damage--is not used in developing property valuations. Most of the 
servicers we interviewed reported using automated valuation models 
(AVM) to estimate property values, not necessarily taking into 
consideration property-specific conditions. Furthermore, servicers we 
interviewed said they do not incorporate information on property and 
neighborhood conditions obtained from property inspections in their 
valuations. Simply using a BPO or AVM without consideration of up-to- 
date property or neighborhood conditions may result in abandoned 
foreclosures because the actual resale value and accurate expected 
proceeds from foreclosure sale may not be reflected in the valuation. 

Another servicer practice that appeared to increase the potential for 
an abandoned foreclosure was that servicers generally were not 
considering local conditions that can affect property values prior to 
initiating foreclosure. Our interviews with the six servicers 
indicated that they did not always adjust property valuations to take 
into consideration potential steep declines in value due to factors 
specific to neighborhoods or city blocks. Staff from most of the 
servicers we interviewed reported that in some areas a property that 
was occupied and well-maintained when foreclosure was initiated could 
become vacant and be vandalized and decline in value. Similarly, local 
government officials said that homes with resale value could be 
stripped of raw building materials during the foreclosure process, 
leaving them practically worthless. As previously discussed, 
representatives of community groups and local governments told us that 
properties are sometimes vandalized within 24 hours of becoming 
vacant. In Detroit, for example, according to officials, property 
values can be seriously impacted by vacancy due to vandalism and rapid 
decay of vacant properties. Data from one property maintenance company 
contracted to inspect and secure homes undergoing foreclosure 
indicated that 29 percent of the properties it oversaw nationwide had 
some property damage in the 6 months from January to June 2010. In 
Detroit, about 54 percent of its properties had incurred damage. 

In addition, not considering other costs, such as local taxes and 
potential for code violation fines, associated with a property before 
initiating foreclosure can increase the likelihood that a foreclosure 
would be abandoned. For example, local taxes owed or code violations 
and fines can add significant costs to the foreclosure process. 
Servicers told us that they may abandon foreclosures because of the 
amount of tax owed on the property. Tax liens are commonly placed on 
delinquent properties when borrowers are unable to pay property taxes. 
Unattended properties or those with damage can often accumulate local 
municipality code violation fines that can also decrease the net 
proceeds that the servicer will gain from completing a foreclosure. 
These fines vary widely, but in some cities fines may accrue while a 
property is in delinquency and foreclosure, and over time the assessed 
fines can exceed a property's value. The unpaid taxes and code 
violation fees that may accumulate during foreclosure can encourage 
servicers to abandon the foreclosure because they serve to reduce the 
net proceeds that the servicer would realize in completing the 
foreclosure. 

In some cases, the circumstances that lead to servicers initiating but 
then abandoning a foreclosure appeared to be those that could not have 
been anticipated at the time the decision to initiate foreclosure was 
being made. For example, property inspections and valuations usually 
include only information about external conditions of properties, 
potentially leaving internal damage or conditions such as lead paint 
or contaminated drywall undetected. Addressing these internal problems 
could be costly. Unexpected fires or other natural disasters can also 
leave properties with very low values. If such damages are discovered 
or occur after foreclosure was initiated, servicers may decide that 
completing the foreclosure is not warranted. 

When servicers do not have updated or complete information about 
property and neighborhood values and conditions before initiating 
foreclosure, the likelihood that they will commence then abandon 
foreclosures increases. Representatives of servicers said that they 
did not always obtain updated valuations before initiating foreclosure 
because they did not think it was necessary or because they were not 
required to do so. Instead, they generally obtained more current 
information only after foreclosure initiation, such as when preparing 
for the foreclosure sale. In cases where this valuation indicates that 
the value of the property was insufficient to justify completing the 
foreclosure process, the servicers generally stop the foreclosure and 
charge off the loan in lieu of foreclosure. However, by that time the 
property may already be vacant and negatively impacting the 
neighborhood. As previously discussed, our servicer data indicates 
that charge-offs in lieu of foreclosure that occurred after 
foreclosure was initiated were associated with a higher rate of 
vacancy than when the charge-off occurred prior to foreclosure 
initiation. 

Views on Whether Servicers Have Financial Incentives to Initiate but 
then Abandon Foreclosures Were Mixed: 

Academics, local government officials, community groups, servicers, 
and others expressed mixed views on whether mortgage servicers have 
financial incentives to initiate foreclosure even in cases in which 
they were unlikely to complete the process. For example, accounting 
requirements for mortgage loans do not appear to provide incentives 
for servicers to initiate foreclosures but then not complete them. 
First, most mortgage loans that servicers are managing are being 
serviced on behalf of other owners. As a result, any accounting 
requirements applying to such loans do not financially affect the 
servicer's financial statements because these loans are not their 
assets. However, servicers that service loans for other owners do 
carry the expected value of the servicing income they earn on such 
loans on their own financial statements as an asset. The reported 
value of this servicing rights asset would be reduced if a serviced 
loan is charged off and no more servicing income is expected from it. 
However, this reduction would occur regardless of whether foreclosure 
has been initiated or not. 

If the servicer of a mortgage loan is also the holder (owner) of the 
loan, accounting requirements also do not appear to provide incentive 
to initiate foreclosure. For the six servicers from whom we obtained 
data, 7 percent of the loans were owned by the servicing institution, 
meaning accounting decisions made by the servicer directly affect the 
institution financially. For these loans, bank regulatory rules 
require servicers to mark the value of delinquent loans down to their 
collateral value (or charge off the loan) after the loan is 180 days 
past due, regardless of whether foreclosure has been initiated or not. 
As a result, servicers then cannot avoid recognizing the loss by, for 
example, abandoning the foreclosure, because the loan's loss of value 
is already reflected in their accounting statements. Furthermore, 
financial institutions holding loans in their own portfolio must 
develop reserve accounts for expected losses on their books. Thus, 
they have to anticipate any declines in property values for loans in 
their portfolio and start setting aside funds to cover any losses at 
specific points in the delinquency cycle. Whether the property is 
carried to foreclosure sale or charged off, the loss has already been 
reflected in their loan value accounts. 

For private label securitized loans that are being sold to private 
investors and serviced in pools, servicers do not appear to have 
incentives to delay or abandon foreclosure due to investors' potential 
motivation to postpone accounting for losses on those securities. 
According to OCC officials, a single charge-off for a loan held in a 
pool would not necessarily lead to a devaluation or write-down of the 
value of the overall pool of loans. In addition, they said that 
whether the value of a security is written down depends on several 
factors, including overall losses to the pool, liquidity, and interest 
rate changes. Thus, investors have some discretion under accounting 
guidance in deciding when to write down securitized assets. Further, 
public accounting standards require investors holding mortgage-backed 
securities to either set aside loss reserves and write down the value 
of impaired assets. Therefore, abandoning or postponing foreclosure 
completion would be unlikely to have an advantage to the security. 

Some academics or local government officials we interviewed were 
concerned that servicers may have an incentive to initiate 
foreclosures even though they might later abandon the process in order 
to continue profiting from servicing mortgages. However, in servicers' 
and experts' descriptions of servicing practices, such incentives were 
called into question. Servicers can derive part of their revenue from 
imposing fees to borrowers who are past due with payments, and do not 
need to forward this revenue on to investors. Therefore, some 
stakeholders suggested servicers might initiate foreclosure in an 
effort to accrue late fees and other charges associated with servicing 
the loan during the foreclosure process. In addition, some 
stakeholders suggested that servicers might continue earning income 
from other financial interests they might own on the property, such as 
a second lien mortgage. However, five of the six servicers we 
interviewed reported that they stopped charging fees once a loan 
enters foreclosure as assessed fees are unlikely to be fully collected 
on loans in foreclosure. In addition, servicers might not continue 
yielding profits on second-lien mortgages because second-lien 
mortgages were much less prevalent on subprime first lien mortgages, 
which were often found in areas with very low housing values, such as 
Detroit and Cleveland, compared to high-price areas, such as 
California, according to a 2005 study.[Footnotes 59, 60] Finally, 
servicers and other experts told us that servicers do not have to 
initiate foreclosure in order to stop advancing payments on loans. 

While servicers might begin pursuing foreclosure in order to receive 
mortgage insurance claims, we found that such insurance likely reduces 
the number of foreclosures that are abandoned because servicers must 
complete the process to be reimbursed. To collect on insurance claims, 
government and private mortgage insurance and guarantees require that 
foreclosure be completed before claims are paid. For example, FHA 
mortgage insurance and VA guarantees, which cover a portion of 
potential losses from loan defaults, require a claimable event, such 
as a foreclosure sale, short sale, or deed-in-lieu of foreclosure 
before servicers can collect on a claim. Representatives of mortgage 
insurers also said that they could not pay an insurance claim on an 
abandoned foreclosure because the bank did not hold the title. 
[Footnote 61] Similarly, the GSEs may provide servicers incentives to 
complete foreclosures in order to receive reimbursements. Fannie Mae 
requires servicers to submit final requests for reimbursement of 
advances after the foreclosure sale and after any claims have been 
filed with other insurers or guarantors.[Footnote 62] 

Past Oversight of Servicer Foreclosure Practices Had Generally Been 
Limited, Although Bank Regulatory Agencies Have Recently Conducted 
Additional Reviews Addressing Practices: 

Mortgage servicers' foreclosure activities were not always a major 
focus of bank regulatory oversight, although federal banking 
regulators have recently increased their attention to this area, 
including the extent to which servicers were abandoning foreclosures. 
Various organizations have regulatory responsibility for most of the 
institutions that conduct mortgage servicing, but some of these 
institutions do not have a primary federal or state regulator. 
According to industry data, OCC--which oversees national banks--is the 
primary regulator for banks that service almost two-thirds of loans 
serviced by the top 50 servicers.[Footnote 63] The Federal Reserve 
oversees entities that were affiliated with bank holding companies or 
other state member banks that represented about 7 percent of these 
loans. Entities that are not chartered as or owned by a bank or bank 
holding company accounted for about 4 percent of the top 50 servicers' 
volume. Some states require mortgage servicers (including state-
chartered banks) to register with the state banking department, 
according to state banking supervisors we interviewed. These 
supervisors also told us that most banks that were chartered in their 
states did not service mortgage loans. According to our analysis, only 
a few of the top 50 servicers were state-chartered banks that were not 
members of the Federal Reserve System. 

According to our interviews with federal banking regulators, mortgage 
servicers' practices, including whether they were abandoning 
foreclosures, have not been a major focus covered in their supervisory 
guidance in the past. The primary focus in these regulators' guidance 
is on activities undertaken by the institutions they oversee that 
create the significant risk of financial loss for the institutions. 
Because a mortgage servicer is generally managing loans that are 
actually owned or held by other entities, the servicer is not exposed 
to losses if the loans become delinquent or if no foreclosure is 
completed. As a result, the extent to which servicers' management of 
the foreclosure process is addressed in regulatory guidance and 
consumer protection laws has been limited and uneven. For example, 
guidance in the mortgage banking examination handbook that OCC 
examiners follow when conducting examinations of banks' servicing 
activities notes that examiners should review the banks' handling of 
investor-owned loans in foreclosure, including whether servicers have 
a sound rationale for not completing foreclosures in time or meeting 
investor guidelines.[Footnote 64] In contrast, the guidance included 
in the manual Federal Reserve examiners use to oversee bank holding 
companies only contained a few pages related to mortgage servicing 
activities, including directing examiners to review the income earned 
from the servicing fee for such operations, but did not otherwise 
address in detail foreclosure practices. 

In addition, until recently, the extent to which these regulators 
included mortgage servicing activities in their examinations of 
institutions was also limited. According to OCC and Federal Reserve 
staff, they conduct risk-based examinations that focus on areas of 
greatest risk to their institutions' financial positions as well as 
some other areas of potential concern, such as consumer complaints. 
Because the risks from mortgage servicing generally did not indicate 
the need to conduct more detailed reviews of these operations, federal 
banking regulators had not regularly examined servicers' foreclosure 
practices on a loan-level basis, including whether foreclosures are 
completed. For example, OCC officials told us their examinations of 
servicing activities were generally limited to reviews of income that 
banks earn from servicing loans for others and did not generally 
include reviewing foreclosure practices. Staff from the federal 
banking regulators noted that no federal or state laws or regulations 
require that banks complete the foreclosure process; therefore, banks 
are not prohibited from abandoning foreclosures. In addition, many of 
the federal laws related to mortgage banking, such as the TILA, are 
focused on protecting borrowers at mortgage origination, and Federal 
Reserve officials reported that none of the federal consumer 
protection laws specifically addressed the process for foreclosure. 
[Footnote 65] As a result, the Federal Reserve staff who conduct 
consumer compliance exams also have not focused on how servicers 
interact with borrowers during the default and foreclosure process. 
Further, OCC officials said that, even if examiners observed banks 
they supervised abandoning the foreclosure process, the practice would 
not negatively impact the bank's overall rating for safety and 
soundness. These officials said that a bank's need to protect its 
financial interest might override concerns about walking away from a 
home in foreclosure. 

However, in recognition of the ongoing mortgage crisis in the United 
States, staff from OCC and the Federal Reserve told us that their 
examiners have been focusing on reviewing servicers' loan modification 
programs, including those servicers participating in the federal 
mortgage modification program, HAMP. As potential problems with 
foreclosure-related processes and documentation at major servicers 
emerged, these two regulators have also increased examination of 
servicer foreclosure practices. OCC staff responsible for examinations 
at one of the large national banks that conducts significant mortgage 
servicing activities told us that they had obtained data on loans that 
were charged-off and foreclosure was not pursued and found that the 
practice was very rare and typically involved loans on low-value 
properties. OCC examiners acknowledged that abandoned foreclosures-- 
due to their association with neighborhood crime and blight--could 
pose a reputation and litigation risk to the bank. For example, we 
found that some servicers and lenders have been sued by various 
municipalities over their servicing or lending activities.[Footnote 66] 

The Federal Reserve has also recently increased its attention to 
mortgage servicing among the institutions over which it has oversight 
responsibility. In the past, the Federal Reserve has not generally 
included nonbank subsidiaries of bank holding companies that conduct 
mortgage servicing in their examination activity because the 
activities of these entities were not considered material risks to the 
bank holding company. However, in 2007, the Federal Reserve announced 
a targeted review of consumer compliance supervision at selected 
nonbank subsidiaries that service loans. Additionally, in October 
2009, the Federal Reserve began a loan modification initiative, 
including on-site reviews, to assess whether certain servicers under 
its supervisory authority--including state member banks and nonbank 
subsidiaries of bank holding companies--were executing loan 
modification programs in compliance with relevant federal consumer 
protection laws and regulations, individual institution policies, and 
government program requirements.[Footnote 67] In addition, as part of 
its ongoing consumer compliance examination program, the Federal 
Reserve incorporated loan modification reviews into regularly 
scheduled examinations of state member banks, as appropriate. Federal 
Reserve officials noted that as of October 2010 these reviews and 
examinations were still in progress; however, initial work identified 
two institutions that were engaging in abandoned foreclosure 
practices. Federal Reserve officials reported that, in general, no 
federal regulation or law explicitly requires that servicers notify 
borrowers when they decide to stop pursuing a foreclosure after the 
foreclosure process had been initiated.[Footnote 68] Nevertheless, 
Federal Reserve staff instructed the servicers to do so as a prudent 
banking practice. According to Federal Reserve officials, the 
institutions agreed to do so. Because abandoned foreclosures do not 
necessarily violate any federal banking laws, supervisors did not take 
any actions against the institutions. 

Other Regulators and Entities That Review Servicers' Activities also 
Do Not Oversee Servicers' Foreclosure Practices: 

Other federal and state regulators that review servicers' activities 
also reported having little insight into servicers' foreclosure 
practices and decisions to abandon foreclosures, particularly those 
with non-GSE loans, which account for the greatest numbers of 
abandoned foreclosures. Officials from the Securities and Exchange 
Commission, which receives reports on publicly traded residential 
mortgage-backed securities, told us that they did not examine 
servicers' policies or activities for these securitized assets. 
Furthermore, SEC's accounting review of publicly traded companies 
engaged in mortgage servicing included aggregate trends in foreclosure 
activity but not incomplete foreclosures on individual loans. While 
the Federal Housing Finance Agency Federal Property Manager's Report 
includes data on charge-offs in lieu of foreclosure, FHFA also does 
not routinely examine whether Fannie Mae and Freddie Mac are 
abandoning foreclosures. Like the banking regulators, they also said 
they had focused most of their oversight on the institutions' loan 
modification and pre-foreclosure efforts. In addition, the Federal 
Trade Commission (FTC) may also pursue enforcement actions against 
nonbank institutions that violate the FTC Act or consumer protection 
laws. However, FTC staff told us they did not think that either the 
unfair and deceptive acts and practices provision of the FTC Act or 
the Fair Debt Collections Practices Act would apply to an institution 
that walked away from a home in foreclosure, as a general matter. 
State banking regulators that we interviewed said that they conduct 
little oversight of servicers' foreclosure practices given the limited 
number of state-chartered banks that conduct mortgage servicing 
activities. However, several examiners and industry association 
officials we interviewed acknowledged the need to obtain further 
information about the foreclosure process and improve their 
examination process for nonbank mortgage servicers. 

Other entities that review servicers' activities also do not review 
servicers' foreclosure practices or decisions to abandon foreclosures. 
Representatives from private rating agencies that evaluate mortgage 
servicers' told us that although they review servicers' handling of 
loans in default and the overall average length of time servicers take 
to complete foreclosure, they do not track specific loans to see if 
foreclosure was completed because it would not be a specific trigger 
for downgrading that security's rating. In addition, representatives 
of institutions that serve as trustees for large numbers of pooled 
assets in an MBS pool told us that they sought to ensure that 
servicers forwarded payments to investors and noted that trustees did 
not provide management oversight of servicers' decisions on how to 
handle loans. 

Various Actions Are Being Taken by Some Communities to Prevent or 
Mitigate the Effects of Abandoned Foreclosures, but Each Presents 
Tradeoffs: 

We identified various actions that some communities are taking to 
reduce the likelihood of abandoned foreclosures occurring or reduce 
the burden such properties create for local governments and 
communities. Communities dealing with abandoned foreclosures may 
benefit from implementing similar actions, but they may need to weigh 
the appropriateness of the various actions for their local 
circumstances as these actions can require additional funding, have 
unintended consequences, and may not be appropriate for all 
communities. In addition, these actions generally were designed to 
address vacant properties overall; therefore, they may not fully 
address the unique impacts of abandoned foreclosures. 

Some Communities Are Taking Steps to Increase Borrowers' Awareness of 
Available Counseling: 

Officials from local governments, community groups, and academics told 
us that borrowers often leave their homes before the foreclosure sale 
even though they are entitled to stay in their homes at least until 
the sale. Although borrowers may leave for a variety of reasons, we 
consistently heard that many borrowers leave because they believe that 
servicers' initial notices of delinquency and foreclosure initiation 
mean that they must immediately leave the property. For example, a 
representative of a counseling group in Chicago told us that many 
people, especially the elderly and non-native English speakers, do not 
understand notices that they receive from servicers and think that 
they are being told to leave their homes. 

Some jurisdictions are taking steps to increase borrowers' awareness 
of their rights during foreclosure through counseling. A variety of 
counseling and mediation resources are already available to borrowers. 
For example, HUD sponsors housing counseling agencies throughout the 
country to provide free foreclosure prevention assistance and provides 
references to foreclosure avoidance counselors.[Footnote 69] In 
addition, according to a national research group, at least 25 
foreclosure mediation programs were in operation in 14 states across 
the country as of mid-2009 to encourage borrowers and servicers to 
work together to keep people in their homes and avoid foreclosure. 
[Footnote 70] Officials from local governments and community groups, 
servicers, and an academic noted that increasing the use, visibility, 
and resources of counseling efforts could provide avenues to educate 
borrowers about their rights to remain in their homes during the 
foreclosure process and prevent vacancies. To increase the visibility 
and use of counseling resources, the state of Ohio implemented a 
hotline phone number to help refer borrowers to counselors and a Web 
site to provide information about foreclosure.[Footnote 71] In 
addition, local officials have credited a recent law in Michigan with 
helping to educate borrowers about their rights during the foreclosure 
process. The Michigan law allows borrowers a 90-day delay in the 
initiation of foreclosure proceedings if they request a meeting with a 
housing counselor and a servicer representative to try to arrange for 
a loan modification.[Footnote 72] 

Representatives of community groups, local governments, and servicers 
were generally supportive of efforts to educate borrowers about their 
rights during foreclosure, and a recent study has demonstrated the 
effectiveness of such counseling on keeping people in their homes. In 
our interviews, representatives of a servicer and local government and 
a researcher noted that counseling could be more effective at 
educating borrowers about their rights than servicers' efforts because 
borrowers might be more willing to talk to a counselor than to a bank 
representative. Representatives of a law firm also noted that local 
staff might reach more borrowers and achieve better results than bank 
representatives because the local individuals have a better 
understanding of local conditions and homeowners could work with the 
same individual rather than with bank representatives who change with 
each contact. Community group and servicer representatives also noted 
that counseling is most effective at keeping people in their homes if 
it is offered soon after a borrower first becomes delinquent because 
they are more likely to leave their homes later in the foreclosure 
process. In addition, a November 2009 study found that homeowners who 
received counseling were about 1.6 times more likely to get out of 
foreclosure and avoid a foreclosure sale--possibly allowing them to 
remain in their homes--with counseling than without.[Footnote 73] 

Local community representatives noted that increased counseling may 
not completely prevent abandoned foreclosures for several reasons. 
First, counselors cannot reach every borrower needing assistance. For 
example, officials from a community group and counseling agencies said 
that some borrowers might not be aware that counseling is available or 
might be too embarrassed about their situation to seek assistance. 
Second, the quality of counseling may limit its effectiveness. 
Researchers noted that the quality of counseling can be uneven and 
organizations that are not HUD-approved or foreclosure rescue scams 
could mislead borrowers about their rights.[Footnote 74] Third, 
representatives of research and advocacy groups we interviewed also 
noted that increased funding for counseling efforts would allow 
counseling agencies to expand and help more homeowners. 

Many Jurisdictions Have Implemented Vacant Property Registration 
Systems: 

Another action that some local governments are taking to address the 
problems of vacant properties, including abandoned foreclosures, is to 
require servicers to register vacant properties. As previously 
discussed, one of the major challenges confronting code enforcement 
officials is identifying those responsible for maintaining vacant 
properties. Vacant property registration systems can attempt to 
address this problem by requiring servicers to provide the city with 
specific contact information for each vacant property they service. 
According to a national firm that contracts with servicers to maintain 
properties, nearly 288 jurisdictions have enacted vacant property 
registration ordinances as of February 2010. Although the structures 
of these ordinances vary, researchers generally classify them into two 
types. The first type of systems tracks all vacant and abandoned 
properties and their owners. For example, among the cities we studied, 
Baltimore, Maryland has implemented this type of registration system. 
The second type of systems attempts to hold the lender and servicer 
responsible for maintenance of vacant properties during the 
foreclosure process. According to the Fannie Mae and Freddie Mac 
uniform mortgage documents, although these mortgage contracts 
typically give servicers the right to secure abandoned properties and 
make repairs to protect property values, they do not necessarily 
obligate them to do so. The cities of Chula Vista, California, Cape 
Coral and Fort Myers, Florida, and Chicago, Illinois, for example, 
have implemented this second type of ordinance. New York state also 
enacted a similar law statewide.[Footnote 75] 

According to some local officials and researchers, the contact 
information in vacant property registration systems makes it easier 
for local code enforcement officials to identify the parties 
responsible for abandoned foreclosures and that holding mortgage 
owners accountable for vacant properties can reduce the negative 
impact of these properties on the community. For example, local 
officials we interviewed in some cities with vacant property 
registries said that most owners complied with their city's registry 
requirements and noted that the registries had been effective at 
providing contacts for officials to call to resolve code violations on 
vacant properties. Several stakeholders, including local officials, 
researchers, and representatives of a community group also recommended 
the type of vacant property ordinance that holds servicers accountable 
for maintaining vacant properties during foreclosure. They noted that 
these types of ordinances could provide servicers with needed 
incentives to keep up vacant properties to avoid incurring additional 
costs and help them in determining whether to initiate foreclosure. 
[Footnote 76] 

Local officials and industry representatives told us that, while 
vacant property registration systems can help local governments 
identify some owners, they might not capture all owners, and some 
servicers found certain requirements overly onerous and outside of 
their legal authority to perform. Local officials in a couple of 
cities and one servicer representative told us that these systems 
might not capture all owners because those who did not want the 
responsibility of maintaining certain properties would choose not to 
register. Further, systems that do not require that properties be 
registered until after the foreclosure sale would not help officials 
identify those responsible for maintaining abandoned foreclosures. In 
addition, servicers' representatives told us that complying with these 
ordinances can be burdensome. For example, servicers consider 
ordinances that require them to secure doors and windows with steel, 
install security systems, and perform capital improvements to vacant 
properties as onerous, according to an industry association. Servicers 
also reported having difficulty tracking and complying with multiple 
systems and said that they would prefer a uniform system with 
consistent requirements. Further, servicers and other industry 
representatives we spoke to believe servicers' authority to perform 
work on properties they did not yet own as limited. Holding a mortgage 
on a property does not give the servicer right of possession or 
control over the property. Therefore, servicers argue that they cannot 
be held liable for conducting work on properties because they are not 
the titleholders until after a foreclosure sale. For example, 
representatives of one servicer told us that the company would take 
steps to prevent a property from deteriorating but was cautious about 
going onto a property it did not own. In addition, community groups, 
researchers, and other industry analysts have expressed concerns that 
such laws could have the unintended consequence of encouraging 
servicers to walk away from properties before initiating foreclosure 
to avoid the potential maintenance and related costs, which could have 
the same negative effects on neighborhoods and communities as 
abandoned foreclosures do now.[Footnote 77] 

Some Areas Are Reducing the Time Required for Foreclosing on Vacant 
Properties or Requiring Foreclosures to Be Completed Once Initiated: 

State or local actions to streamline the foreclosure process for 
vacant properties could also reduce the number of abandoned 
foreclosures by decreasing servicers' foreclosure costs and preserving 
the value of vacant properties. As we have seen, the length of the 
foreclosure process affects servicers' foreclosure costs as well as 
the condition and value of a property.[Footnote 78] Some areas are 
implementing streamlining efforts. For example, a law was recently 
enacted in Colorado allowing servicers to choose a shortened statutory 
foreclosure process for vacant properties that provides for a 
foreclosure sale to be scheduled in half the time of the typical 
process, according to a state press release on the new law.[Footnote 
79] In addition, some courts in Florida have created expedited 
foreclosure court dockets for uncontested cases in order to move a 
higher number of cases forward in the process. Shortening the time it 
takes to complete foreclosure could result in less decrepit properties 
that servicers could resell more easily and at a higher price than 
they might have been able to otherwise--thereby encouraging servicers 
to abandon fewer foreclosures. 

However, some stakeholders raised concerns about streamlined actions. 
First, servicers and other industry analysts note that determining 
whether properties were actually vacant could be difficult. Second, 
shortening foreclosure times is contrary to the trend among state and 
local governments across the country to enact laws such as foreclosure 
moratoriums that extend foreclosure timelines. Therefore, some raised 
concerns about ensuring that homeowners had appropriate opportunities 
to work out a solution within a shortened time frame. Third, another 
potential unintended consequence is that in judicial states, 
shortening the time frame for foreclosing on vacant properties by 
moving these cases to the head of the queue could lengthen the time 
frames for other cases, increasing servicers' carrying costs on those 
properties. 

Other jurisdictions have attempted to require servicers to complete 
foreclosures once they have initiated them. For example, staff in one 
court we visited told us the judge requires a foreclosure sale to be 
scheduled within 30 days after the court enters a foreclosure 
judgment. If servicers do not comply, they can be held in contempt of 
court, fined, and perhaps serve jail time. Many local officials and 
researchers we interviewed suggested that foreclosure cases should be 
dismissed, that servicers should face fines, or that servicers should 
lose their right to foreclose or take other actions on a property if 
they do not take action on foreclosure proceedings or schedule a sale 
within a certain amount of time. These actions could reduce abandoned 
foreclosures because servicers would more thoroughly consider the 
benefits and costs of foreclosure before initiating the process, and 
once initiated, foreclosures would be completed in a timely manner. 
Others also said that these actions would quickly move properties out 
of the foreclosure process and into the custody of a servicer that 
local officials could then hold responsible for the property's upkeep. 

However, others noted that such a requirement could result in missed 
opportunities to work out solutions with the borrower and that it 
could be difficult to enforce. For example, representatives of 
servicers and others told us that borrowers often sought such 
alternatives at the last minute before a foreclosure sale and that 
requiring servicers to complete all foreclosures would limit their 
ability to explore alternatives late in the foreclosure process. 
[Footnote 80] An academic and regulatory officials expressed concerns 
that servicers would incur additional expenses if they had to complete 
sales and take ownership of properties when doing so was not in their 
best interest and they would not be able to recover their costs. In 
addition, regulatory staff cautioned that such a requirement could 
cause servicers to walk away from properties before initiating 
foreclosure. This type of action also would be difficult to implement 
in a state with a statutory foreclosure process because there is not 
the same degree of public records tracking foreclosures in these 
states. 

Certain Communities Are Establishing Outlets for Servicers to Dispose 
of Low-Value Properties: 

Local actions to establish reliable outlets for servicers to easily 
and cheaply dispose of low-value properties could reduce the number of 
abandoned foreclosures by providing incentives for servicers to 
complete the process. As previously discussed, servicers told us that 
many properties that were abandoned foreclosures were those that would 
likely have been either too costly for servicers to take ownership of 
or not likely to have resulted in sufficient sale proceeds. Taking 
foreclosed properties into their own real estate ownership inventories 
can be costly to servicers as they must continue to pay for taxes and 
insurance, maintain a deteriorating property, and hire a broker to 
market the property for sale. According to a recent report, if 
servicers and their investors know that they will not be further 
burdened by costs for the property, they may be more willing to take 
title and transfer it to a government or nonprofit entity that will be 
able to begin moving the property back into productive use.[Footnote 
81] 

The use of land banks is one alternative that some jurisdictions are 
attempting to use to address problems arising from large numbers of 
foreclosures and vacant properties.[Footnote 82] Land banks are 
typically governmental or quasi-public entities that can acquire 
vacant, abandoned, and tax-delinquent properties and convert them to 
productive uses, hold them in reserve for long-term strategic public 
purposes such as creating affordable housing, parks, or green spaces, 
or demolish them. Land banks can reduce the incidence of abandoned 
foreclosures by providing servicers a way to dispose of low-value 
properties that they might otherwise abandon. Sales or donations to 
land banks could help servicers reduce their foreclosed property 
inventories. For example, Fannie Mae and the Cuyahoga County Land 
Reutilization Corporation have an agreement whereby on a periodic 
basis Fannie Mae sells pools of very low-value properties to the land 
bank for 1 dollar, plus a contribution toward the cost of demolition. 
This agreement allows Fannie Mae to reliably dispose of pools of 
properties in a recurring transaction at pre-defined terms. Land bank 
officials from Cuyahoga County noted that they are in the process of 
negotiating similar agreements with several large servicers. Once it 
has acquired the properties, a land bank can help stabilize 
neighborhoods, such as by reducing excess and blighted properties 
through demolition or transferring salvageable properties to local 
nonprofits for redevelopment. According recent research, the Genesee 
County Land Bank in Flint, Michigan, has been credited with acquiring 
thousands of abandoned properties, developing hundreds of units of 
affordable housing, and being the catalyst for increasing property 
values in the community by more than $100 million between 2002 and 
2005 through its demolition program.[Footnote 83] 

Although land banks can help reduce abandoned foreclosures or their 
negative effects, our interviews revealed potential challenges of 
implementing these banks. First, many of the local government 
officials we interviewed noted that land banks did not have enough 
resources to manage a large volume of properties. Land banks may be 
dependent on local governments for funding, and without a dedicated 
funding source it may be difficult for land banks to engage in long-
term strategic planning. However, recently created land banks, such as 
those in Genesee and Cuyahoga counties, have developed innovative 
funding mechanisms that do not depend on appropriations from local 
governments.[Footnote 84] Second, some mentioned that contributions 
from servicers--such as the agreement between Fannie Mae and the 
Cuyahoga County Land Reutilization Corporation--could help defray land 
banks' property carrying costs. Second, land banks may be limited in 
their authority to acquire or dispose of properties. For example, by 
design land banks tend to passively acquire and convert abandoned 
properties with tax delinquencies into new productive use. However, 
land banks can also be designed to actively and strategically acquire 
properties from multiple sources. The Cuyahoga County Land 
Reutilization Corporation, for example, has the authority to 
strategically acquire properties from banks, GSEs, federal or state 
agencies, and tax foreclosures. Third, some municipalities face 
political challenges in establishing land banks or local officials 
question whether they are needed. For example, according to an advisor 
to local governments on establishing land banks and a representative 
of a community group, the Maryland state legislature authorized the 
creation of a land bank in Baltimore, but its implementation fell 
through due to political differences at the city level. Further, some 
local officials we interviewed in Florida did not think land banks 
were needed in their areas because they expected the housing market to 
recover so that vacancies would not be a long-term problem. 

Similar to land banks, other methods for cities to acquire properties 
before or following foreclosure could also provide incentives to 
servicers to complete the foreclosure process for low-value properties 
rather than abandoning it.[Footnote 85] Some cities have negotiated 
specialized sale transactions with Fannie Mae and HUD. For example, 
HUD recently announced a partnership with the National Community 
Stabilization Trust (NCST) and leading financial institutions that 
account for more than 75 percent of foreclosed property inventory to 
provide selected state and local governments and nonprofit 
organizations the first opportunity to purchase vacant properties 
quickly, at a discount, and before they are offered on the open 
market.[Footnote 86] In addition, some cities have worked with Fannie 
Mae to purchase foreclosed and low-value properties. According to 
Fannie Mae, the City of St. Paul, Minnesota, has purchased 45 
properties from the entity and has access to review Fannie Mae's 
available properties to be able to submit an offer for a pool of 
properties before they are marketed. And, according to a 
representative of a national community development organization, with 
the broadened definitions of abandoned and foreclosed properties under 
the NSP program, local governments and other grantees will be able to 
work with servicers earlier in the foreclosure process to acquire such 
properties through short-sales, for example, which could discourage 
abandoned foreclosures. For example, one organization in Oregon is 
pursuing purchasing notes prior to foreclosure using some of the 
state's Hardest Hit Fund money, which would save the servicer the 
costs of initiating and completing foreclosure. However, the ability 
of these types of programs to fully address the issue of abandoned 
foreclosures may be limited. For example, local officials and 
researchers said cities' capacity to receive donations or acquire 
properties was limited because they did not have enough resources to 
manage properties. According to recent research, capacity constraints 
prevent most community development organizations from redeveloping 
enough vacant homes to reverse the decline of neighborhood home 
values.[Footnote 87] In addition, according to industry observers, and 
HUD and local government officials, local governments have not pursued 
many pre-foreclosure acquisitions, such as short sales and note sales, 
because they can be time-consuming and technically difficult to 
complete.[Footnote 88] 

Conclusions: 

The overall estimated number of abandoned foreclosures nationwide is 
very small. However, the communities in which they are concentrated 
often experience significant negative impacts, including producing 
vacant homes that can be vandalized, reduce surrounding neighborhood 
property values, and burden local government with the costs associated 
with maintenance, rehabilitation, or demolition. Given the large 
number of homeowners experiencing problems in paying their mortgages 
and the negative impacts on communities when properties become vacant, 
avoiding additional abandoned foreclosures would help reduce any 
further potential problems that another vacant and uncared for 
property can create for communities already struggling with the 
impacts of the current mortgage crisis. 

Various servicer practices appear to be contributing to the potential 
for additional abandoned foreclosures. First, no requirement currently 
exists for mortgage servicers to notify borrowers facing foreclosure 
of their right to continue to occupy their properties during this 
process or of their responsibilities to pay taxes and maintain their 
properties until any sale or other title transfer activity occurs, and 
regulatory officials told us that they were not sure they had the 
authority to require servicers to do so. The lack of awareness among 
borrowers about their rights and responsibilities contributes to the 
problems associated with abandoned foreclosures. With such 
information, more borrowers might not abandon their homes, reducing 
the problems that vacancies create for neighborhoods, their 
surrounding communities, and the local government of the community in 
which the property exists. Second, no requirement exists for servicers 
to notify the affected local government if they abandon a foreclosure. 
Without such notices, local government officials often are unaware of 
properties that are now at greater risk of damage and create potential 
problems for the surrounding neighborhood. With such information, 
local governments could move more quickly to identify actions that 
could ensure that such properties are moved to more productive uses. 

Third, servicers are not always obtaining updated property value 
information that consider local conditions that can affect property 
values when initiating foreclosure. As a result, the likelihood that 
servicers may initiate foreclosure only to later abandon it after 
learning that the likely proceeds from the sale of the property would 
not cover their costs is increased. If servicers had more complete and 
accurate information on lower-value properties that were more at risk 
for such declines in value, they may determine that foreclosure is not 
warranted prior to initiating the process for some properties. Having 
servicers improve the information they use before initiating a 
foreclosure could result in fewer vacant properties that cause 
problems for communities. 

Recommendations for Executive Action: 

To help homeowners, neighborhoods, and communities address the 
negative effects of abandoned foreclosures, we recommend that the 
Comptroller of the Currency and the Chairman of the Board of Governors 
of the Federal Reserve System take the following four actions: 

* require that the mortgage servicers they oversee notify borrowers 
when they decide to charge off loans in lieu of foreclosure and inform 
borrowers about their rights to occupy their properties until a sale 
or other title transfer action occurs, responsibilities to maintain 
their properties, and their continuing obligation to pay their debt 
and taxes owed; 

* require that the mortgage servicers they oversee notify local 
authorities, such as tax authorities, courts, or code enforcement 
departments, when they decide to charge off a loan in lieu of 
foreclosure; and: 

* require that the mortgage servicers they oversee obtain updated 
property valuations in advance of initiating foreclosure in areas 
associated with high concentrations of abandoned foreclosures. 

* As part of taking these actions, the Comptroller of the Currency and 
the Chairman of the Board of Governors of the Federal Reserve System 
should determine whether any additional authority is necessary and, if 
so, work with Congress to ensure they have the authority needed to 
carry out these actions. 

Agency Comments and Our Evaluation: 

We requested comments on a draft of this report from the Board of 
Governors of the Federal Reserve System, Department of Housing and 
Urban Development, Department of the Treasury, Department of Veterans 
Affairs, Fannie Mae, Federal Deposit Insurance Corporation, Federal 
Housing Finance Agency, Freddie Mac, Federal Trade Commission, Office 
of Comptroller of Currency, Office of Thrift Supervision, and 
Securities and Exchange Commission. We received technical comments 
from Federal Reserve, FDIC, FHFA, FTC, OCC, and OTS, which we 
incorporated where appropriate.[Footnote 89] The Comptroller of the 
Currency did not comment on the recommendations addressed to him. 

We also received written comments from Treasury and the Federal 
Reserve that are presented in appendices II and III. The Acting 
Assistant Secretary for Financial Stability at the Department of the 
Treasury noted that, although the number is small, abandoned 
foreclosures are a serious problem that underscores the importance of 
holding servicers accountable. The Director of the Division of 
Consumer and Community Affairs at the Board of Governors of the 
Federal Reserve System agreed with our findings but neither agreed nor 
disagreed with our recommendations. Instead, the Director's letter 
described ongoing actions the Federal Reserve is taking to address 
these issues and noted that the agency is concerned about the effects 
abandoned foreclosures may have in communities where they are 
concentrated. In response to our recommendation that the agency 
require the servicers the Federal Reserve oversees to notify borrowers 
that their loans are being charged off in lieu of foreclosure, the 
Director's letter states they agreed that such notification represents 
a responsible and prudent business practice and will advise 
institutions they supervise to notify affected borrowers in the event 
of abandoned foreclosures. While this would ensure that borrowers are 
notified in cases where examiners identify instances of abandoned 
foreclosures, we believe that a more affirmative action by the Federal 
Reserve to communicate this expectation to all servicers it supervises 
would be more effective at reducing the impact of abandoned 
foreclosures on homeowners. 

Regarding our recommendation that the Federal Reserve require mortgage 
servicers to notify local authorities when loans are being charged off 
in lieu of foreclosure, the Consumer and Community Affairs Division 
Director stated that the Federal Reserve expects servicers to comply 
with any local laws requiring registration of vacant properties. While 
this would ensure that local authorities are notified in those 
communities, we reiterate that the Federal Reserve should take steps 
to ensure that the servicers it oversees are notifying local 
authorities that would likely be in a position to take action to 
mitigate the impact of an abandoned property, such as tax authorities 
or code enforcement departments, in all areas--not just those with 
existing vacant property registration systems--to ensure that all 
communities have such information that could help them better address 
the potential negative effects of abandoned foreclosures. We also 
encourage the Federal Reserve, along with other banking regulators 
with responsibilities to oversee mortgage servicers, to work with 
Congress to seek any additional authority needed to implement such a 
requirement. 

In response to our recommendation that the Federal Reserve require 
servicers to obtain updated property valuations in advance of 
initiating foreclosure in certain areas, the Consumer and Community 
Affairs Division Director letter notes they agree with the importance 
of servicers having the most up-to-date information before taking such 
actions, but noted that servicers' ability to obtain optimal 
information could be limited. Even without the ability to conduct 
interior inspections of properties, having servicers take additional 
steps to improve the accuracy of their valuations prior to initiating 
foreclosure would still be possible. We acknowledge that updating 
property valuations can be challenging, which is why our 
recommendation encourages a risk-based approach to identifying 
properties where an updated evaluation could assist servicers in 
making a more well-informed decision about initiating foreclosure. The 
Director's letter also cites existing Federal Reserve guidance 
outlining expectations for obtaining property valuations, which, 
according to Federal Reserve staff, applies to actions that 
institutions should take before and after they have acquired 
properties through foreclosure. According to this guidance, an 
individual who has appropriate real estate expertise and market 
knowledge should determine whether an existing property valuation is 
valid or whether a new valuation should be obtained because of local 
or property-specific factors including the volatility of the local 
market, lack of maintenance on the property, or the passage of time, 
among others. Having the Federal Reserve take further steps to ensure 
that servicers understand and implement this guidance and evaluate 
properties in advance of initiating foreclosure would likely help to 
reduce the prevalence of abandoned foreclosures as well. 

We are sending copies of this report to interested congressional 
committees, the Board of Governors of the Federal Reserve System, 
Federal Deposit Insurance Corporation, Federal Housing Finance Agency, 
Office of Controller of Currency, Office of Thrift Supervision, 
Department of Housing and Urban Development, Department of the 
Treasury, Department of Veterans Affairs, and Securities and Exchange 
Commission, and other interested parties. The report is also available 
at no charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributors to this report are 
listed in appendix VI. 

Sincerely yours, 

Signed by: 

A. Nicole Clowers: 
Acting Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report focuses on the prevalence, causes, and effects of 
abandoned foreclosures. Specifically, this report addresses (1) the 
nature and prevalence of abandoned foreclosures, including how they 
occur; (2) the impact of abandoned foreclosures on communities and 
state and federal efforts to mitigate the effects of foreclosure; (3) 
certain practices that may contribute to why mortgage servicers 
initiate but not complete foreclosures and the extent of federal 
regulatory oversight of mortgage foreclosure practices; and (4) the 
various actions some communities are taking to reduce abandoned 
foreclosures and their impacts. 

To determine the nature and prevalence of abandoned foreclosures--
where servicers initiated but decided not to complete foreclosure and 
the property is vacant--we analyzed mortgage loan data from January 
2008 to March 2010 reported to us from selected servicers and two 
government-sponsored enterprises (GSE). We obtained aggregated and 
loan-level data from six servicers--including large servicers and 
those that specialize in servicing nonprime loans--Fannie Mae, and 
Freddie Mac on loans that were categorized as charge-offs in lieu of 
foreclosure (loans that were fully charged off instead of initiating 
or completing a foreclosure). After eliminating overlapping loans, the 
institutions contributing data to our sample collectively account for 
nearly 80 percent of all first-lien mortgages outstanding.[Footnote 
90] The database we have assembled is unique and, therefore, difficult 
to cross-check with other known sources to check its reliability. 
Because we were able to cross-check the loan level information 
provided by the GSEs with official reports submitted by Federal 
Housing Finance Agency (FHFA) to Congress we believe that these data 
are sufficiently reliable for our reporting purposes.[Footnote 91] 
However, because some of the servicers compiled the information 
requested differently or were reporting information that is not a part 
of their normal data collection and retention apparatus, our dataset 
contains various degrees of inconsistency, missing data and other 
issues. In reviewing these data we found a number of concerns with 
some elements of the database and some sources of the data. For 
example, we believe that some servicers (1) submitted data that 
included second liens, (2) contained elements that appeared to be 
irregular or (3) may not have provided the total charge-offs in lieu 
of foreclosure associated with their servicing portfolio. While the 
number of potential second liens were not significant especially among 
those that we identified as abandoned foreclosures, it is difficult to 
know with certainty how the remaining issues impacted our results 
including the descriptive statistics report. For this reason, we have 
characterized our results in a manner that minimizes the reliability 
concerns and emphasizes the uncertainty regarding the total number of 
abandoned foreclosures in the United States. Moreover, we conducted a 
variety of tests on this data. For example, we were able to use GSE 
data as a reliability check on some elements of the servicer database. 
We also cross-checked some of the properties in our database against 
property tax records for a portion of the data for Baltimore and 
Chicago. We were able to visually inspect some properties in a few 
cities. Given these and other steps we have taken, we believe the data 
is sufficiently reliable for the purposes used in this study. 

We used two methods to code the data as vacant or occupied in our 
database. First, the servicers provided data on whether the property 
was vacant at the time the loan was charged off in lieu of 
foreclosure. We found this data to be reliable based on cross-checks 
with property tax records and visual inspection for a small sample of 
the database. However, 32 percent of the field was either blank or the 
servicer indicated that occupancy status was unknown. Moreover, an 
occupied property may eventually become vacant weeks or even months 
after charge-off in lieu of foreclosure. Therefore, we augmented this 
information by using a second method. The second method involved 
determining occupancy status using U.S. Postal Service (USPS) 
administrative data on address vacancies. These data represent the 
universe of all vacant addresses in the United States. We obtained 
lists of vacant properties from USPS for 6-month increments from June 
30, 2008, through June 30, 2010. The USPS codes a property as vacant 
if there has been no mail delivery for 90 days.[Footnote 92] The data 
also included properties the USPS codes as a "no-stat" for urban 
areas. A property is considered a "no-stat" if it is under 
construction, demolished, blighted and otherwise identified by a 
carrier as not likely to become active for some time. We matched these 
USPS data on address vacancies to actual addresses in our loan 
database. Therefore, we considered a property vacant if it was either 
coded as vacant at the time of charge-off in lieu of foreclosure by 
the servicers or was coded as vacant based on the vacancy lists 
obtained from USPS. 

Users of the report should note the difficulty in determining vacancy 
and that our exercise may have resulted an understatement or 
overstatement of the number of vacant properties in our sample. 
[Footnote 93] In particular, determining vacancy by matching to USPS 
data has limitations including, (1) long lags before vacancy is 
determined, (2) mail carrier delays in reporting vacancies, (3) coding 
seasonal and recreational properties as vacant, and (4) matching 
errors due to differences in address formats or incomplete addresses 
in the loan file.[Footnote 94] Due to privacy concerns we were not 
able to leverage USPS expertise to ensure a higher quality match based 
on lists that included all known delivery points. As a result, our 
analysis will miss any property that was demolished upon the 
determination of vacancy or any property deemed a "no-stat" in rural 
areas. Because of the 90-day lag in determining vacancy and the fact 
that we are dealing with properties from 2008 to 2010 largely in major 
metropolitan areas, this is not likely to have a significant impact on 
our estimates of vacant properties. It should be noted that the data 
collected by the USPS are designed to facilitate the delivery of mail 
rather than make definitive determinations about occupancy status. For 
example, USPS residential vacancy data do not differentiate between 
homeowner and rental units nor identify seasonal or recreational units. 

Once vacancy is determined and the number of abandoned foreclosures is 
estimated, our projections of the prevalence of abandoned foreclosures 
in the United States are based on an extrapolation designed to 
highlight the uncertainty in the results. While we estimated the total 
number of abandoned foreclosures directly for a large portion of the 
mortgage market, we simulated the total number based on assumptions 
about the remaining mortgage loans not covered in our sample. To form 
estimates of prevalence we conducted several analyses. First, we 
formed base prevalence estimates using information from the servicer 
and GSE databases alone. Second, we combined servicer and GSE 
databases to produce some estimates of prevalence based on information 
contained in both databases. Third, we made a determination of the 
possible error rate in determining vacancy through various runs of our 
matching analysis to USPS data and examining the output. Lastly, we 
conducted a series of simulations to extrapolate our findings to the 
20 percent of the mortgage market not covered in our database and to 
capture the uncertainty inherent in our data. Although the loans 
reflected in this report represent servicers that service a large 
percentage of the overall mortgage industry, they likely do not 
represent a statistically random sample of all charge-offs in lieu of 
foreclosure. Rather than assume the large sample can be generalized 
and produce a point estimate with confidence interval, we simulated 
the likely number of abandoned foreclosures for the remaining loans 
under a number of different assumptions about the characteristics of 
the population. For example, in some runs we assumed a 10 percent 
error matching rate and that the remaining servicers resemble some 
combination of the subprime specialty lenders and the large servicers 
in our sample. In some cases we assumed no error in our matching 
analysis but formed our estimates eliminating a servicer that raised 
some concern over the reliability of their data. Lastly, we produced 
estimates combining elements of both of these sets of assumptions. In 
extrapolating the findings from our sample we provided a range of 
estimates that reflect the fact that the characteristics of these 
loans may differ from the remaining population of mortgages as well as 
our concerns over data reliability and potential matching error in 
determining vacancy. We believe these simulations properly 
characterized the sources and nature of uncertainty in the results. We 
also acknowledged, throughout the report, cases in which data issues 
may have affected the results. 

To supplement this data analysis and to determine the impacts of 
incomplete foreclosures on communities and homeowners, we conducted 
case studies and a literature review. We selected 12 locations to 
provide a range of states with judicial and statutory foreclosure 
processes, from different regions of the country, and that had 
variations in local economic circumstances and responses to abandoned 
foreclosures. Our case study locations were Atlanta, Georgia; 
Baltimore, Maryland; Buffalo, New York; Chula Vista, California; 
Chicago, Illinois; Cleveland, Ohio; Detroit, Michigan; Lowell, 
Massachusetts; and Cape Coral, Fort Myers, Manatee County, and 
Hillsborough County, Florida. We conducted in person site visits or 
phone calls with city and county officials, community development 
organizations, academic researchers, foreclosure assistance providers, 
and state banking supervisors in these locations to gain perspectives 
on the impact and prevalence in each location. Although we selected 
the case study locations to provide broad representation of conditions 
geographically and by type of foreclosure process, these locations may 
not necessarily be representative of all localities nationwide. As a 
result, we could not generalize the results of our analysis to all 
states and localities. In two of the locations we visited, officials 
provided us with pictures and examples of abandoned foreclosures and 
vacant properties. In Detroit, Baltimore, and Florida, we visited 
selected vacant and abandoned properties and took pictures to document 
property conditions. After the conclusion of our fieldwork, we 
analyzed the information obtained during the interviews to find common 
themes and responses. To supplement our case study interviews, we 
reviewed various relevant journal articles, reports, law review 
articles, and other literature on the impacts of vacant and abandoned 
properties. We consulted with internal methodologists to ensure that 
any literature we used as support for our findings was 
methodologically sound. 

To determine what impacts abandoned foreclosures were having on state 
foreclosure mitigation efforts, we reviewed the findings and 
recommendations of several state foreclosure task forces and 
interviewed staff from a national policy research organization who 
tracks state foreclosure-related legislation. We also contacted the 
housing finance agencies in the 10 states that were determined as of 
March 2010 to have been hardest hit by the foreclosure crisis. These 
states received funding from the Department of the Treasury through 
its Housing Finance Agency Innovation Fund for the Hardest Hit Housing 
Markets (HFA Hardest-Hit Fund), and included Arizona, California, 
Florida, Michigan, Nevada, North Carolina, Ohio, Oregon, Rhode Island, 
and South Carolina. 

To determine what impacts abandoned foreclosures were having on 
federal foreclosure mitigation efforts, we reviewed current federal 
foreclosure efforts and obtained information from Neighborhood 
Stabilization Program (NSP) grantees. The current federal foreclosure 
efforts we reviewed include the Home Affordable Modification Program 
(HAMP), Federal Housing Administration HAMP, Veterans Affairs HAMP, 
Second Lien Modification Program, Home Affordable Refinance Program, 
Home Affordable Foreclosure Alternatives Program, Housing Finance 
Agency Innovation Fund for the Hardest-Hit Housing Markets, Hope for 
Homeowners, Hope Now, Mortgage Forgiveness Debt Relief Act and Debt 
Cancellation, and the Neighborhood Stabilization Program. In 
conjunction with a separate GAO review of the first phase of the 
Neighborhood Stabilization Program (NSP 1), we interviewed officials 
from 12 of the 309 NSP 1 grantees that were selected based on factors 
including the magnitude of the foreclosure problem in their area, 
geographic location, and progress made in implementing the program. 
The grantees were Orange County, Lee County, and City of Tampa 
(Florida); State of Nevada, Clark County, City of Las Vegas, City of 
North Las Vegas, and City of Henderson (Nevada); State of Indiana, 
City of Indianapolis, and City of Fort Wayne (Indiana); and City of 
Dayton (Ohio). Additionally, we worked with a national nonprofit 
organization to obtain written responses to structured questions on 
the extent to which abandoned foreclosures have impacted their efforts 
to acquire properties from an additional 25 NSP 1 and NSP 2 grantees 
and subrecipients from across the country. These grantees may not 
necessarily be representative of the all grantees. As a result, we 
could not generalize the results of our analysis to all NSP grantees. 

To identify the reasons financial institutions decide to not complete 
foreclosures, we interviewed six servicers, including some of the 
largest and those that specialize in subprime loans. These servicers 
represented 56 percent of all mortgages outstanding. We also analyzed 
Fannie Mae and Freddie Mac policies and procedures for servicers in 
handling foreclosures and compared them to other guidance servicers 
follow, such as pooling and servicing agreements (PSA). We did not do 
a systematic analysis of a sample of PSAs ourselves, rather we relied 
on interviews with servicers and academics who research PSAs, relevant 
literature, and reports to better understand how the terms of PSAs 
might influence servicers' decisions to pursue or abandon foreclosure 
under different circumstances, and how losses associated with 
delinquency and foreclosure are accounted for. Thus, descriptions 
contained in this report are the opinions of these academics and 
authors only about those specific PSAs they provided to us or were 
discussed in their reports. While there may be things that are similar 
across PSAs, they are contracts between two parties--the trust and the 
servicer--and the terms apply to just these parties. We reviewed 
federal regulatory guidance that covers the examination process for 
reviewing institutions' foreclosure and loss reserve process. We also 
reviewed whether abandoned foreclosures may violate consumer 
protection laws such as the Fair Debt Collections Practices Act, and 
the Federal Trade Commission Act (Unfair or Deceptive Acts or 
Practices). In addition, we interviewed representatives of Board of 
Governors of the Federal Reserve System, Federal Deposit Insurance 
Corporation, Office of Controller of Currency, Office of Thrift 
Supervision, Department of Housing and Urban Development, Department 
of Veterans Affairs, and Securities and Exchange Commission. 

To determine what actions have been taken or proposals offered to 
address abandoned foreclosures, we reviewed academic literature and 
interviewed academics, representatives of nonprofit organizations, 
local, state, and federal officials, and other industry participants. 
We also obtained information about the advantages and disadvantages of 
these actions through our literature review and interviews. We 
summarized these potential actions and conducted a content analysis of 
interviewee viewpoints on their advantages and disadvantages. 

We conducted this performance audit from December 2009 through 
November 2010 in accordance with generally accepted government 
auditing standards. Those standards require that we plan and perform 
the audit to obtain sufficient, appropriate evidence to provide a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

[End of section] 

Appendix II: Comments from Federal Reserve: 

Board Of Governors Of The Federal Reserve System: 
Sandra F. Braunstein, Director: 
Division Of Consumer And Community Affairs
Washington, D.C. 20551: 

November 1, 2010: 

A. Nicole Clowers: 
Acting Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Clowers: 

Thank you for the opportunity to comment on the draft report entitled 
"Mortgage Foreclosures: Additional Mortgage Servicer Actions Could 
Help Reduce the Frequency and Impact of Abandoned Foreclosures," GAO-
11-93. The draft report finds that there are only a small number of 
"abandoned foreclosures," less than one percent of vacant homes 
nationally in recent years. The report, however, goes on to note that 
abandoned foreclosures, when they do happen, are clustered 
geographically and can significantly affect the areas in which they 
occur. 

Based on the information that we have obtained through our supervisory 
reviews and outreach efforts, the GAO report's findings are generally 
consistent with the Board's understanding of abandoned foreclosures. 
In late 2009, based largely on anecdotal but recurring concerns about 
abandoned foreclosures, Board staff spoke with issue experts, Reserve 
Bank staff in hard-hit geographies, and pursued a number of leads with 
individuals and organizations that said they had first-hand knowledge 
of abandoned foreclosures. 

We also incorporated questions about abandoned foreclosures into our 
loan modification initiative. Through this initiative, Federal Reserve 
examiners are assessing whether servicers we supervise — including 
state member banks and nonbank subsidiaries of bank holding companies —
are executing loan modification programs in full legal and regulatory 
compliance. As the report notes, through this initiative, we 
identified two institutions that sometimes abandoned the foreclosure 
process, and we advised the institutions to amend their practices to 
proactively alert the consumer that foreclosure proceedings had been 
curtailed. Both institutions agreed to do so. 

The results of our review to date reinforces the GAO's findings that 
the number of instances of such cases is likely to be small 
nationally, but may be concentrated in certain markets where housing 
demand is weak and home prices are very low. For these communities, 
abandoned foreclosures may have significant effects, and the Federal 
Reserve takes these concerns seriously. 

The draft report recommends three actions that the Chairman of the 
Federal Reserve Board should take, and also advises that he should 
work with Congress should he determine that the Board lacks sufficient 
authority to carry out the three actions. First, the report recommends 
that the Board should require mortgage servicers to notify borrowers 
when they decide not to pursue foreclosure action, and to inform them 
of other obligations and responsibilities.[Footnote 1] The Board 
agrees that, while such action may not be required by law, such 
notification represents a responsible and prudent business practice. 
In the instances in which the Board has identified institutions 
abandoning foreclosures, we have advised that they provide similar 
notifications to the affected borrowers and our intent is to continue 
doing so with other institutions that we supervise. 

The second recommendation is that the Board require mortgage servicers 
to notify local authorities when they decide not to pursue a 
foreclosure action. As the report notes, some communities are already 
requiring servicers to report such properties to a centralized 
registry. In areas that have enacted such requirements, we fully 
expect servicers to comply with local laws. 

The third recommendation is that the Board require mortgage servicers 
to obtain updated property valuations in advance of initiating 
foreclosures in areas associated with high concentrations of abandoned 
foreclosures. We agree that having the best possible information, 
including up-to-date valuations, before initiating such actions is 
important and may reduce the Frequency of abandoned foreclosures. It 
should be noted, however, that there may be practical limitations that 
hinder a servicer's ability to obtain optimal information. For 
instance, the servicer may not have the legal right to send someone 
inside the property prior to the completion of the foreclosure 
process, which can significantly limit the accuracy of an updated 
valuation. 

Given these factors, the Board's existing guidance sets forth 
supervisory expectations on collateral valuation requirements for 
properties obtained through foreclosure.[Footnote 2] Moreover, a 
regulated institution is expected to have appropriate policies and 
procedures for updating collateral valuation information on foreclosed 
properties. 

We will continue to monitor these issues and instruct our supervised 
institutions to take reasonable steps to mitigate the problems caused 
by abandoned foreclosures. We appreciate the professionalism of the 
GAO's review team in conducting this study. 

Sincerely, 

Signed by: 

Sandra F. Braunstein 

Footnotes: 

[1] For this and the following recommendation, the GAO report actually 
advises that such notification be given when servicers decide to 
"charge off" loans. Based on conversations with GAO staff, we believe 
the issue in question is the decision not to pursue foreclosure, not 
charging off the loan, which we consider to be a specific accounting 
action that may or may not apply. 

[2] Refer to SR Letter 95-16, Real Estate Appraisal Requirements for 
Other Real Estate Owned. 

[End of section] 

Appendix III: Comments from Treasury: 

Department Of The Treasury: 
Assistant Secretary: 
Washington, D,C. 20220: 

November 1, 2010: 

Thomas J. MeCool: 
Director, Center for Economics Applied Research and Methods: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. McCool: 

Thank you for providing the Department of Treasury ("Treasury") an 
opportunity to review and comment on your draft report on abandoned 
foreclosures, entitled Mortgage Foreclosures: Additional Mortgage 
Servicer Actions Could Help Reduce the Frequency and Impact of 
Abandoned Foreclosures ("Draft Report"). 

The Draft Report is informative and helpful in describing the extent 
and nature of abandoned foreclosures. Although they are relatively 
uncommon--the Draft Report estimates that abandoned foreclosures 
affect less than one percent of vacant homes—they are a serious 
problem. The Draft Report highlights the potential negative impact of 
vacant homes on economically distressed areas and provides suggestions 
to help address the issue. 

As you know, the statutory goal of Treasury's housing programs is to 
prevent avoidable foreclosures. As a result, the recommendations in 
the Draft Report are not directly relevant. Nonetheless, the recent 
reports of improper foreclosure documentation and other alleged 
misconduct have underscored the importance of holding servicers 
accountable. Treasury is working with numerous other federal agencies 
to ensure that servicers improve their practices and follow the law. 
Your study is timely and helpful in this regard, and we look forward 
to reviewing the final report. 

Thank you again for your attention to this important issue. 

Sincerely, 

Signed by: 

Tim Massad: 
Acting Assistant Secretary for Financial Stability: 

[End of section] 

Appendix IV: Selected Federally Funded Foreclosure-Related Programs: 

As part of our assessment of how abandoned foreclosures (properties on 
which a foreclosure has been initiated but not completed and are 
vacant) might affect federal foreclosure-related programs, we reviewed 
several current programs and their eligibility requirements. Most 
programs listed below were designed to help homeowners avoid 
foreclosure and require that those who receive assistance be owner- 
occupants of their homes. 

Table 4: Selected Federally Funded Foreclosure Related Programs: 

Institution: Treasury: 

Program: HAMP First-Lien Modification; 
Purpose/description: Prevent foreclosure through first-lien loan 
modifications; 
Owner occupancy requirement: Must be owner-occupant of a one to four 
unit home. 

Program: HAMP Second-Lien Modification; 
Purpose/description: Institution: Modify second liens for borrowers 
participating in HAMP first-lien modification; 
Owner occupancy requirement: Institution: Must be owner-occupant of a 
one to four unit home. 

Program: HAMP Principal Reduction Alternative; 
Purpose/description: Institution: Address negative equity by allowing 
principal reduction for HAMP-eligible borrowers with high loan-to-
value ratios; 
Owner occupancy requirement: Institution: Must be owner-occupant of a 
one to four unit home. 

Program: HAMP Unemployed Borrowers; 
Purpose/description: Institution: Provide relief for unemployed 
borrowers through temporary principal forbearance; 
Owner occupancy requirement: Institution: Must be owner-occupant of a 
one to four unit home. 

Program: Home Affordable Foreclosure Alternatives; 
Purpose/description: Institution: Prevent foreclosure by providing 
incentives for short sales or deeds-in-lieu of foreclosure; 
Owner occupancy requirement: Institution: Must be owner-occupant of a 
one to four unit home. 

Program: HFA Hardest-Hit Fund; 
Purpose/description: Institution Housing and Urban Development: 
Prevent foreclosure and improve housing market stability by providing 
funding for selected state housing finance agencies; 
Owner occupancy requirement: Institution Housing and Urban 
Development: Determined by state housing finance agencies. 

Institution: Housing and Urban Development: 

Program: HOPE for Homeowners; 
Purpose/description: Preserve homeownership by reducing principal and 
refinancing into Federal Housing Authority (FHA) insured loans with a 
shared equity agreement[A]; 
Owner occupancy requirement: Must be owner-occupant and cannot own a 
second home. 

Program: Federal Housing Administration (FHA) Short Refinance; 
Purpose/description: Institution: Preserve homeownership by reducing 
principal and refinancing underwater borrowers into FHA loans[B]; 
Owner occupancy requirement: Institution: Must occupy 1-4 unit 
property as primary residence. 

Program: Neighborhood Stabilization Program; 
Purpose/description: Institution Government-Sponsored Enterprises 
(Fannie Mae and Freddie Mac): Stabilizing communities through the 
purchase and redevelopment of foreclosed and abandoned homes and 
residential properties; 
Owner occupancy requirement: Institution Government-Sponsored 
Enterprises (Fannie Mae and Freddie Mac): Not applicable, target 
population is communities that have suffered from foreclosure and 
abandonment. 

Institution: Government-Sponsored Enterprises (Fannie Mae and Freddie 
Mac): 

Program: Home Affordable Refinance Program; 
Purpose/description: Preserve homeownership by refinancing borrowers 
with loans owned or guaranteed by Fannie Mae or Freddie Mac into fixed 
rate loans at the current market rate; 
Owner occupancy requirement: Must be owner of a one-to-four unit home. 

Source: GAO analysis. 

[A] HOPE for Homeowners requires that borrowers share a portion of any 
newly created equity with FHA. 

[B] "Underwater" refers to borrowers who owe more money on their 
mortgage than their loan is worth. 

[End of table] 

[End of section] 

Appendix V: Text for Figure 4, Areas Where Abandoned Foreclosures Are 
Concentrated, January 2008 through March 2010: 

The following information appears as interactive content in the body 
of the report when viewed electronically. The content associated with 
various states on the map describes housing market conditions that 
likely explain the elevated levels of abandoned foreclosures in three 
different groups of states. The content appears in print form below. 
This categorization is based in part on judgment and trends in the 
data for the MSAs with the most abandoned foreclosures in these 
states. Because other researchers may posit alternative 
categorizations that may also fit the data and other types of 
abandoned foreclosure exist, this analysis should not be considered 
definitive. 

Figure 6: Figure 6: Economically Struggling Cities: 

[Refer to PDF for image: photograph and associated data] 

Economically struggling cities (OH, MI, IN, MO, PA, TN): 
Based on our analysis, the elevated levels of abandoned foreclosures 
likely results from the distressed nature of several MSAs in these 
states. Some of the economic challenges in these MSAs predate the 
financial crisis. Although these MSAs did not experience significant 
home price increases, some suffered significant home price declines 
after 2006, which contributed to an increase in the proportion of low-
value homes on which it was not financially prudent for servicers to 
foreclose. Some MSAs also may have experienced increases in nonprime 
mortgage lending. 

Source: GAO. 

[End of figure] 

Figure 7: Distressed Urban Areas within Areas Experiencing Housing 
Booms: 

[Refer to PDF for image: photograph and associated data] 

Distressed urban areas within areas experiencing housing booms (IL, 
GA): 
Based on our analysis, the elevated levels of abandoned foreclosures 
in these states likely results from a combination of the distressed 
nature of certain urban areas in the identified MSAs and the effects 
of the housing boom and collapse. 

Source: GAO. 

[End of figure] 

Figure 8: Areas That Experienced Significant House Price Increases 
Followed by Declines: 

[Refer to PDF for image: photograph and associated data] 

Areas that experienced significant house price increases followed by 
declines (FL, CA): 
Based on our analysis, the elevated levels of abandoned foreclosures 
in these states likely results from the effects of the housing boom 
and collapse. Specifically, certain MSAs in these states experienced 
substantial increases in home prices and mortgage originations 
followed by significant declines in home prices. These areas are 
likely to have abandoned foreclosures as a result of strategic 
defaults, higher priced homes that lose value due to vacancy, and 
instances where the properties were significantly overvalued when 
loans were originated. In addition, abandoned foreclosures also may 
have occurred on properties that are second or vacation homes or those 
that had nonprime loans. 

Source: GAO. 

[End of figure] 

[End of section] 

Appendix VI: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Nicole Clowers (202) 512-8678 or clowersa@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Cody Goebel (Assistant 
Director); Emily Chalmers; William R. Chatlos; Kate Bittinger Eikel; 
Lawrance Evans, Jr.; Simon Galed; Jeff R. Jensen; Matthew McHale; 
Courtney LaFountain; Tim Mooney; Marc Molino; Jill Naamane; Rhiannon 
Patterson; Linda Rego; Jeff Tessin; and Jim Vitarello made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] A home mortgage is an instrument by which the borrower (mortgagor) 
gives the lender (mortgagee) a lien on residential property as 
security for the repayment of a loan. A first lien mortgage creates a 
primary lien against real property and has priority over subsequent 
mortgages, which are generally known as junior mortgages. First liens 
are the first to be paid when the property is sold. 

[2] In some cases borrowers voluntarily stop paying on their mortgages 
even though they are still able to, so-called "strategic defaults." 
These borrowers may also walk away from properties even before lenders 
initiate formal foreclosure actions; however, this report does not 
address this phenomenon. 

[3] Kelly D. Edmiston, Characteristics of High-Foreclosure 
Neighborhoods in the Tenth District, Federal Reserve Bank of Kansas 
City Economic Review, 51-75 (Kansas City, Mo.: Second Quarter 2009). 
As a result of declining property values and economic turmoil, this 
paper notes that foreclosures on other types of loans are also 
expected to increase. For example, some loans with variable interest 
rates that allowed borrowers the option to pay a minimum monthly 
amount for the first 5 years of the mortgage have recently begun to 
reset to higher interest rates and will continue to reach considerably 
higher rates through 2012. 

[4] This report does not examine the recent concerns over the 
processing of foreclosure documents. We have recently begun work on 
this topic and anticipate reporting our findings next year. 

[5] We conducted a number of tests on this data and found a number of 
concerns with some elements of the database and some sources of the 
data. However, we believe we have taken steps to render the data 
sufficiently reliable for our limited purposes and to characterize our 
results in a manner that minimizes the reliability concerns. For 
additional information on this study's scope and methodology, see 
appendix I. 

[6] As of March 2010, the states in the Department of Treasury's HFA 
Hardest-Hit Fund program were Arizona, California, Florida, Michigan, 
Nevada, North Carolina, Ohio, Oregon, Rhode Island, and South Carolina. 

[7] Investment banks have played an increased role in recent years of 
purchasing loans and selling them to investors. As the volume of 
subprime lending grew dramatically from around 2003 through 2006, 
investment firms took over a substantial share of the mortgage 
securitization market. See GAO, Financial Regulation: A Framework for 
Crafting and Assessing Proposals to Modernize the Outdated U.S. 
Financial Regulatory System, [hyperlink, 
http://www.gao.gov/products/GAO-09-216] (Washington, D.C.: Jan. 8, 
2009). 

[8] Fannie Mae and Freddie Mac share a primary mission that has been 
to stabilize and assist the U.S. secondary mortgage market and 
facilitate the flow of mortgage credit. To accomplish this goal, the 
enterprises issue debt and stock and use the proceeds to purchase 
conventional mortgages that meet their underwriting standards, known 
as conforming mortgages, from primary mortgage lenders such as banks 
or thrifts. The enterprises held some of the mortgages that they 
purchased in their portfolios. However, most of the mortgages were 
packaged into MBS, which were sold to investors in the secondary 
mortgage market. 

[9] The Government National Mortgage Association (Ginnie Mae) is a 
wholly owned government corporation that guarantees the timely payment 
of principal and interest on securities issued by private institutions 
and backed by pools of federally insured or guaranteed mortgage loans. 
Securities guaranteed by Ginnie Mae finance the vast majority of loans 
backed by the Federal Housing Administration and Department of 
Veterans Affairs, among other federal agencies. 

[10] The servicing fee is usually based on the outstanding unpaid 
principal balance of the loan and is generally between 25 and 50 basis 
points, according to recent research. 

[11] For more information about some of these products, see GAO, 
Alternative Mortgage Products: Impacts on Defaults Remains Unclear, 
but Disclosure of Risks to Borrowers Could Be Improved, [hyperlink, 
http://www.gao.gov/products/GAO-06-1021] (Washington, D.C.: Sept. 16, 
2006). 

[12] Home retention workouts are employed when the borrower has a 
desire to keep the home and the capacity to carry payments under the 
workout plan. These include: repayment plans--a contracted plan to 
make up past due amounts; forbearance--a defined period where no or 
only partial payments are required followed by a repayment plan to 
make up the arrearage; and loan modifications--a permanent altering of 
one or more of the loan terms. Other foreclosure alternatives include 
voluntary home-loss workouts that avoid foreclosure but the borrower 
gives up the home. These are deed-in-lieu transfers--the borrower 
essentially gives the investor the keys and title to terminate the 
debt; and short sales--the lender agrees to accept proceeds from the 
sale of the home to a third party even though the sales price is less 
than the principal and accrued interest and other expenses owed. 

[13] According to the Department of Housing and Urban Development, as 
of July 2008, 25 states use a statutory process as their normal method 
of foreclosure, 19 states use judicial, and 6 states use both. 

[14] 12 U.S.C. § 1813(q). OCC will assume oversight responsibility of 
savings associations from OTS in July 2011. 

[15] 12 U.S.C. § 1844(c)(2)(A). 

[16] On September 6, 2008, the Federal Housing Finance Agency placed 
Fannie Mae and Freddie Mac in conservatorship out of concern that 
their deteriorating financial condition and potential default on $5.4 
trillion in outstanding financial obligations threatened the stability 
of financial markets. 

[17] Fair Housing Act, 42 U.S.C. §§ 3601 - 3619; Equal Credit 
Opportunity Act, 15 U.S.C. §§ 1691 - 1691f; Truth in Lending Act, 15 
U.S.C. §§ 1601 - 1667f; Real Estate Settlement Procedures Act of 1974 
12 U.S.C. §§ 2601-2617. 

[18] Under the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. No. 111-203, title X, § 1024, 124 Stat. 1376 (2010) (Dodd-
Frank Act), a new entity--the federal Bureau of Consumer Financial 
Protection--will oversee mortgages along with other financial products 
and services, including having authority over the practices of large 
bank and non-bank mortgage lenders, mortgage brokers, and servicers, 
among others. 

[19] GAO, Alternative Mortgage Products: Impact on Defaults Remains 
Unclear, but Disclosure of Risks to Borrowers Could Be Improved, 
[hyperlink, http://www.gao.gov/products/GAO-06-1021] (Washington, 
D.C.: Sept. 19, 2006). 

[20] For example, Treasury's Home Affordable Modification Program was 
designed to enable borrowers that meet eligibility requirements to 
avoid foreclosure by modifying loans to reduce their monthly payments. 
The program provides loan modification guidelines that participating 
servicers must use and includes incentives for borrowers, servicers, 
and investors. For information on this program, see GAO, Troubled 
Asset Relief Program: Further Actions Needed to Fully and Equitably 
Implement Foreclosure Mitigation Programs, GAO-10-634 (Washington, 
D.C.: June 24, 2010). 

[21] A breach letter or demand letter is a notice to the borrower(s) 
requesting that the total amount of the delinquency be paid no later 
than a specific date, usually 45 days from the date of the letter, 
with failure to pay resulting in the loan being referred to an 
attorney to initiate foreclosure. 

[22] While the term charge off can denote an accounting treatment of a 
loan, we use the term charge off in lieu of foreclosure to mean the 
action servicers take when they decide to no longer pursue foreclosure 
on the property as a means of recovering value on the unpaid loan. 
They may still pursue recovery through other means, such as by selling 
the debt to a bill collector. In addition, the lien against the 
property may remain in place and must be satisfied if the borrower 
subsequently attempts to sell the property. 

[23] An operational charge off means that the servicer is expecting 
the amount to be collected from the loan to be zero. If the loan being 
serviced is in the servicer's own asset portfolio--when a bank 
originates and holds the loan--then regulatory and accounting policies 
would require it to write down the value of its total loans by the 
charged-off amount. If the loan is being serviced for a third-party 
owner, including an MBS trust, how the owner of the loan accounts for 
the charged-off amount would depend on whether the owner must prepare 
financial statements. Servicers might also decide to conduct a charge 
off in lieu of foreclosure when properties have hazardous conditions, 
such as environmental contamination, that would be risky for servicers 
to remediate. 

[24] We asked the six servicers to provide us data on loans they had 
charged off in lieu of foreclosure in 2008, 2009, and the first 
quarter of 2010 as we have defined the term. Because some of the 
servicers compiled the information requested differently or were 
reporting information that is not a part of their normal data 
collection and retention apparatus, our dataset contains various 
degrees of inconsistency, missing data and other issues. However, we 
believe we have taken steps to render the data sufficiently reliable 
for our purposes. A limitation of our analysis is that our data did 
not allow us to determine when a property became vacant; therefore, we 
do not always know if the property became vacant before or after the 
foreclosure was initiated. We considered a property to be vacant if 
(1) either the servicers reported it as vacant at time of charge off 
or (2) if USPS data indicated that the property became vacant between 
the time the charge off occurred and June 2010. According to the data 
they provided to us, the servicers reported that about 19 percent of 
the properties were known to be vacant at the time the charge-off 
decision was made. However, for 32 percent of the properties, the 
servicers did not provide an occupancy status at the time of charge-
off, but we were able to determine that an additional 18 percent of 
these were vacant using the USPS data. Although USPS vacancy data 
allowed us to make a determination on occupancy status more 
appropriate for our purposes, we discuss some limitations inherent in 
our matching exercise later in this report. Consequently, these 
vacancy estimates should be not be considered definitive. 

[25] While the association between foreclosure initiation and vacancy 
was clear, we further attempted to address the potential bi-causal 
relationship between vacancy and foreclosure initiation using a two- 
stage linear probability model. However, these results should be 
interpreted with caution given the limitations associated with the 
econometric procedure and lack of important control variables. 

[26] As result, servicers may have initiated foreclosures more quickly 
on properties that became vacant in an attempt to salvage value or 
were less likely to foreclose if the value has deteriorated 
significantly upon vacancy. This implies a causal link from vacancy to 
foreclosure initiation and complicates the ability to determine 
whether the foreclosure status impacts the occupancy status of a 
property. 

[27] Other reasons interviewees gave us for why borrowers might leave 
their homes include: to find a better home and plan for the future, to 
secure housing before their credit is negatively impacted by 
foreclosure, embarrassment, servicer representatives told them to 
leave, they may owe more on the house than it is worth, they may not 
want a foreclosure action hanging over their head, or the fear that 
they will end up homeless if they wait too long to secure new housing. 
In addition, some properties may be investor-owned that were not 
occupied by a tenant. 

[28] The relative width of this range--despite the fact that we 
obtained data from entities representing about 80 percent of the U.S. 
first lien mortgages--stems from the inherent uncertainty and 
imprecision of using a large but nonrandom sample to project the 
number of abandoned foreclosures likely among the loans being serviced 
by entities from whom we did not collect data, and from adjusting for 
potential errors in determining the occupancy status of the properties 
in our dataset, or in potential inaccuracies in the data reported to 
us by the servicers. 

[29] Although not included in table 2, even when we factored in a 
significant error rate in determining vacancy, excluded the servicer 
with the lowest abandoned foreclosure rate, and made extreme 
assumptions about the remaining servicers that our database did not 
cover, we produced estimates that were just 2.6 percent of unmarketed 
vacancies excluding seasonal and occasional use properties. We assumed 
in many simulations that in matching the addresses in our loan 
database to the USPS vacancy data that we understated the vacancy rate 
by 10 percent. However, in this extreme simulation we also dropped the 
servicer with the lowest abandoned foreclosure rate and assumed that 
it and the other servicers not covered in the database had rates of 
abandoned foreclosure that approximated those of subprime lenders. 
Therefore, even if we assumed a similar scale of activity in 2007 and 
for the rest of 2010, abandoned foreclosures would still be considered 
a rare phenomenon. For example, based on more limited data for 2007, 
we were able to produce very rough estimates of 1,000 to 3,200 
additional properties. 

[30] The GSE dataset and the servicer dataset represent residential 
mortgage loans covering 58 percent and 57 percent of all mortgages 
respectively. In total, eliminating double coverage, the dataset 
compiled represents data covering roughly 80 percent of mortgages 
nationwide. The remaining 20 percent of the mortgage market were 
estimated via extrapolation and varying the assumptions about the 
characteristics of the remaining mortgages. We also considered a 10 
percent error rate associated with our matching of the data to USPS 
vacancy data. The data did not allow us to determine whether a second 
lien was involved or whether the property was investor-owned. 

[31] Standard & Poor's, Severe Loss Severities: Which States Suffer 
Most From the Housing Bust? (New York, N.Y.: Aug. 17, 2009).   

[32] Yanan Zhang, Lu Ji, and Fei Liu, "Local Housing Market Cycle and 
Loss Given Default: Evidence from Sub-Prime Residential Mortgages," 
International Monetary Fund Working Paper 10/167(Washington, D.C.: 
July 2010). 

[33] Standard & Poor's, Severe Loss Severities: Which States Suffer 
Most from the Housing Bust? (New York, N.Y.: Aug. 17, 2009). 

[34] In a deed-in-lieu of foreclosure, the borrower agrees to transfer 
title to the property to loan owner instead of going through the 
foreclosure process and a foreclosure sale. In a short sale, the 
servicer agrees to allow another buyer to purchase the property for 
less than the amount owed by the borrower. 

[35] According to Global Insight, the average home price in Cleveland 
in 2010 was $146,800, and the average in the Detroit MSA was $124,800. 

[36] Our servicer data show that foreclosures were not completed and 
loans were charged off in lieu of foreclosure on some very high-value 
properties, including some worth $500,000 or more. Servicer 
representatives told us they had charged off loans and not pursued 
foreclosure on such properties because the property might not sell 
owing to environmental and safety hazards, such as lead paint, 
significant property damage from vandals or fire, or a low unpaid 
principal balance. 

[37] We excluded data from two servicers that specialize in nonprime 
loans from this analysis. Including data from the nonprime specialist 
servicers increases the proportion to nearly 78 percent. 

[38] To derive these percentages, we dropped one servicer that only 
provided information on loans held in its own portfolio. Including 
these loans did not change the results materially. When we also 
dropped the two subprime servicers, the results still suggested that 
the majority (53 percent) of the abandoned foreclosures were 
associated with non-GSE third-party investors. 

[39] William C. Apgar, Mark Duda, and Rochelle Nawrocki Gorey, The 
Municipal Cost of Foreclosures: A Chicago Case Study, Housing Finance 
Policy Research Paper 2005-1, Homeownership Preservation Foundation 
(Minneapolis, Minn.: 2005). [hyperlink, 
http://www.995hope.org/content/pdf/Apgar_Duda_Study_Full_Version.pdf]. 

[40] Christiana McFarland, Casey Dawkins, and C. Theodore (Ted) 
Koebel, "Local Housing Conditions and Contexts: A Framework for Policy 
Making" (Washington: National League of Cities, 2007) [hyperlink, 
http://www.nlc.org/ASSETS/29106477103E49EBB9BEFD49588362E5/PAR2007SoACHo
usingrpt.pdf]. 

[41] Dan Immergluck and Geoff Smith, "The Impact of Single-family 
Mortgage Foreclosures on Neighborhood Crime," Housing Studies 21, no. 
6 (2006): 851 - 866. [hyperlink, 
http://www.prism.gatech.edu/~di17/HousingStudies.pdf]. 

[42] Brian A. Mikelbank, "Spatial Analysis of the Impact of Vacant, 
Abandoned and Foreclosed Properties," study conducted for the Office 
of Community Affairs, Federal Reserve Bank of Cleveland, 2008. 
[hyperlink, 
http://www.clevelandfed.org/Community_Development/publications/Spatial_A
nalysis_Impact_Vacant_Abandoned_Foreclosed_Properties.pdf]. This study 
looked at the impact on sales price separating the effect of pre-
foreclosed properties and vacant/abandoned properties using a spatial 
factor. Using the spatial model, the authors found that (1) each 
vacant/abandoned property within 250 feet could decrease the sales 
price of a home by 3.5 percent with rapid decreasing impact as the 
distance increases and (2) each foreclosure has a less severe impact 
on the sales price of a home close by but tends to have a robust 
impact on sales price even farther out into the neighborhood. 

[43] Kai-yan Lee, "Foreclosure's Price-Depressing Spillover Effects on 
Local Properties: A Literature Review," Community Affairs Discussion 
Paper, Federal Reserve Bank of Boston, (Boston: 2008), [hyperlink, 
http://www.bos.frb.org/commdev/pcadp/2008/pcadp0801.pdf]. 

[44] MERS is an electronic system that is designed to record 
assignments when trading residential and commercial mortgage loans. 

[45] Skip tracing refers to services in locating debtors who have 
disappeared. 

[46] Community Research Partners and ReBuild Ohio, "$60 Million and 
Counting: The cost of vacant and abandoned properties to eight Ohio 
cities" (Columbus: Community Research Partners, 2008). [hyperlink, 
http://communityresearchpartners.org/uploads/publications//FullReport_No
nembargoed.pdf]. 

[47] William C. Apgar, Mark Duda, and Rochelle Nawrocki Gorey, The 
Municipal Cost of Foreclosures: A Chicago Case Study (Minneapolis: 
Homeownership Preservation Foundation, 2005) [hyperlink, 
http://www.995hope.org/content/pdf/Apgar_Duda_Study_Full_Version.pdf]. 

[48] Winthrop, B., and R. Herr, “Determining the COST of Vacancies in 
Baltimore,” Government Finance Review (June 2009) [hyperlink, 
http://www.proquest.com/] (accessed Oct. 7, 2010). 

[49] William C. Apgar, Mark Duda, and Rochelle Nawrocki Gorey, “The 
Municipal Cost of Foreclosures.” 

[50] Community Research Partners and ReBuild Ohio, “$60 Million and 
Counting.” 

[51] Stergios Theologides, Servicing REO Properties: The Servicer's 
Role and Incentives, REO & Vacant Properties, Strategies for 
Neighborhood Stabilization, a joint publication of the Federal Reserve 
Banks of Boston and Cleveland and the Federal Reserve Board (Sept. 1, 
2010). 

[52] American Financial Services Association, Mortgage Task Force 
Report (March 2008). [hyperlink, 
http://www.afsaonline.org/other_information/search.cfm?cx=00002701160686
6024496%3A_2nm6bkqhwg&cof=FORID%3A11&ie=UTF-
&q=task+force+report#1023]. This organization has a matrix of state 
executive foreclosure task forces updated as of September 2010, which 
indicates similar trends. 

[53] See appendix IV for a list of federal programs. 

[54] NSP money may also be used to create land banks and to demolish 
blighted structures, among other things; however, NSP money may not 
currently be used to directly support local code enforcement efforts. 

[55] NSP 1, a term that references the NSP funds authorized under 
Division B, Title III of the Housing and Economic Recovery Act (HERA) 
of 2008, provides grants to all states and selected local governments 
on a formula basis. Pub. L. No. 110-289, 122 Stat. 2654 (2008), 
codified at 42 U.S.C. § 5301 note. NSP 2, a term that references the 
NSP funds authorized under the American Recovery and Reinvestment Act 
(the Recovery Act) of 2009, provides grants to states, local 
governments, and nonprofits on a competitive basis. Pub. L. No. 111-5, 
123 Stat. 115 (2009). NSP 3 funding is provided under the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, and, like NSP 1, will 
provide grants to states and local governments on a formula basis. 
Effective October 1, 2010, section 1497 of the Dodd-Frank Act made 
available to HUD $1,000,000,000 for the Neighborhood Stabilization 
Program; specifically for HUD to use the funds for assistance to 
states and local government for the redevelopment of abandoned and 
foreclosed homes. 

[56] The term “abandoned” was originally defined as a property that 
had been foreclosed upon and was vacant for at least 90 days. HUD 
expanded the definition to include properties where (a) mortgage, 
tribal leasehold, or tax payments are at least 90 days delinquent, or 
(b) a code enforcement inspection has determined that the property is 
not habitable and the owner has taken no corrective actions within 90 
days of notification of the deficiencies, or (c) the property is 
subject to a court-ordered receivership or nuisance abatement related 
to abandonment pursuant to state, local, or tribal law or otherwise 
meets a state definition of an abandoned home or residential property. 

[57] On behalf of GAO, a national nonprofit organization e-mailed 
structured questions to 25 NSP grantees, including NSP 1 and NSP 2 
grantees, and their subrecipients. 

[58] In conjunction with a separate GAO review of the first phase of 
the Neighborhood Stabilization Program (NSP 1) (report forthcoming), 
we obtained information from 12 NSP 1 grantees on the impact of HUD's 
modification to certain NSP definitions. The grantees were: Orange 
Country, Lee County, and City of Tampa (Florida); State of Nevada, 
Clark County, City of Las Vegas, City of North Las Vegas, and City of 
Henderson (Nevada); State of Indiana, City of Indianapolis, and City 
of Fort Wayne (Indiana); and City of Dayton (Ohio). 

[59] Sean Dobson, Laurie Goodman, Mortgage Modifications: Where Do We 
Go From Here, Amherst Securities Group LP (July 2010). 

[60] Charles A. Calhoun, The Hidden Risks of Piggyback Lending 
(Annandale, Va.: June 2005). 

[61] Private mortgage insurance protects a lender or investor against 
loss if a borrower stops making mortgage payments. Lenders and 
investors generally require mortgage insurance for loans with down 
payments of less than 20 percent. 

[62] As of April 2010 Fannie Mae has instructed servicers to complete 
all foreclosures pending Fannie Mae’s revision of its charge-off in 
lieu of foreclosure procedures to make sound economic decisions as 
well as stabilize neighborhoods. 

[63] We identified institutions’ share of mortgage servicing market as 
reported in an industry publication, Inside Mortgage Finance. Based on 
our analysis, the top 50 institutions that service home mortgages 
accounted for about 80 percent of all loans. OCC oversees servicers 
that have 63 percent of the market share. The Federal Reserve oversees 
servicers with 7.1 percent of the market. The Office of Thrift 
Supervision, whose functions are scheduled to be transferred to OCC on 
July 21, 2011, oversees servicers accounting for 5.5 percent of the 
volume of the top 50. The Federal Deposit Insurance Corporation acts 
as the primary regulator for servicers that represent 1.2 percent of 
the market. 

[64] OCC, Mortgage Banking: Comptroller’s Handbook (Washington, D.C.: 
1998). 

[65] Federal Reserve consumer affairs officials said that the only 
federal oversight of the foreclosure process they had identified was 
the Protecting Tenants at Foreclosure Act of 2009, 12 U.S.C. §§ 5201 
note, 5220 note, which protects tenants from immediate eviction by new 
owners throughout the foreclosure process. The law expires December 
31, 2014. Section 1418 of the recently passed Dodd-Frank Act amends 
TILA to require servicers to notify borrowers of impending interest 
rate changes on adjustable rate mortgages and section 1420 amends TILA 
to require certain disclosures in monthly statements to borrowers. 

[66] See for example, City of Buffalo v. ABN AMRO Mortgage Group, 
Inc., Case Index No. 002200/2008 (N.Y. Sup. Ct. Erie County: 2010). 

[67] Recognizing the critical need to conduct on-site reviews of the 
credit practices of nonbank lenders, in July 2007 the Federal Reserve 
initiated a multi-agency partnership to conduct targeted consumer 
compliance reviews of selected nonbank lenders that had significant 
subprime mortgage operations. See [hyperlink, 
http://www.federalreserve.gov/newsevents/press/bcreg/20070717a.htm]. 
As a result of this pilot, in 2009 the Federal Reserve introduced a 
framework for routine consumer compliance supervision of non-bank 
subsidiaries of the largest bank holding companies. See [hyperlink, 
http://www.federalreserve.gov/boarddocs/caletters/2009/0908/caltr0908.ht
m]. 

[68] Federal Reserve officials, however, noted that in certain 
circumstances, a servicer’s failure to notify borrowers that it 
stopped pursuing a foreclosure could potentially raise concerns 
related to fair lending or unfair and deceptive practices. 

[69] The National Foreclosure Mitigation Counseling Program was 
created by the Consolidated Appropriations Act, 2008 (Pub. L. No. 110-
161, 121 Stat. 1844, 2441 (2007)) in December 2007 to address the 
nonprime foreclosure crisis. The legislation named NeighborWorks 
America administrator of the $180 million program. On July 30, 2008, 
section 2305 of the Housing and Economic Recovery Act of 2008 (Pub. L. 
No. 110-289, 122 Stat. 2654, 2854 (2008)) appropriated an additional 
$180 million to the NFMC Program, including $30 million for legal 
assistance. An additional $50 million was appropriated to the program 
on March 11, 2009, through the Omnibus Appropriations Act, 2009 (Pub. 
L. No. 111-8, 123 Stat. 524 (2009)), and an additional $65 million was 
appropriated to the program on December 16, 2009, through the 
Consolidated Appropriations Act, 2010 (Pub. L. No. 111-117, 123 Stat. 
3034 (2009)). 

[70] National Consumer Law Center, “State and Local Foreclosure 
Mediation Programs, Can They Save Homes?” (Boston, Mass.: September 
2009). 

[71] The Web site is: [hyperlink, http://www.savethedream.ohio.gov]. 

[72] Mich. Comp. Laws Ann. § 600.3205a(e), which became effective on 
July 5, 2009. 

[73] The Urban Institute, National Foreclosure Mitigation Counseling 
Program Evaluation, Preliminary Analysis of Program Effects 
(Washington, D.C.: Nov. 2, 2009). The study considers as positive 
program outcomes, cases where homeowners were able to remain in their 
homes by becoming current on their loan, possibly through a loan 
modification or refinancing, as well as cases where homeowners lost 
their homes through a property sale, including a short sale. For our 
purposes, the latter case likely also resulted in an occupied property 
and, therefore, could be considered a positive outcome for the 
community. 

[74] See also [hyperlink, http://www.gao.gov/products/GAO-10-787]. 

[75] Section 6 of the Foreclosure Prevention, Tenant Protection and 
Property Maintenance Act of 2009 (N.Y. Real Prop. § 1307) was signed 
into law on December 15, 2009. Among other things, this law requires 
that lenders maintain abandoned properties. Effective April 14, 2010, 
a plaintiff who obtains a judgment of foreclosure and sale involving 
residential real property that is vacant, or becomes vacant post-
judgment, or is abandoned by the mortgagor but occupied by a tenant, 
must maintain the property until ownership is transferred (either 
through the closing of the title in foreclosure, or otherwise) and the 
deed is recorded. 

[76] As an alternative to state or local ordinances, an industry trade 
association has suggested that MERS, which tracks the ownership and 
servicing of loans that are registered on its system, could serve as a 
vacant property registry. MERS was created by the mortgage banking 
industry to streamline the mortgage process by using electronic 
commerce to eliminate paper. MERS acts as nominee in the county land 
records for the lender and servicer. Lenders or servicers generally do 
not record transfers of loans registered on the system. 

[77] Stergios Theologides, Servicing REO Properties: The Servicer’s 
Role and Incentives, REO & Vacant Properties, Strategies for 
Neighborhood Stabilization, a joint publication of the Federal Reserve 
Banks of Boston and Cleveland and the Federal Reserve Board (Sept. 1, 
2010). 

[78] According to research from Standard and Poor’s, foreclosure 
moratoriums and other state or local measures that lengthen the time a 
servicer has to wait before initiating foreclosure in an effort to 
reduce the rate of foreclosures seem to be delaying foreclosure sales 
and increasing servicing costs and losses. Standard & Poor’s, Severe 
Loss Severities: Which States Suffer Most From the Housing Bust? (New 
York, N.Y.: Aug. 17, 2009). 

[79] Colorado House Bill No. 1249 was signed into law by the Governor 
on April 29, 2010. 

[80] In the court mentioned above, however, court staff told us that 
the judge allows extensions for servicers that are working with 
borrowers on a loan modification. 

[81] Stergios Theologides, Servicing REO Properties: The Servicer’s 
Role and Incentives, REO & Vacant Properties, Strategies for 
Neighborhood Stabilization, a joint publication of the Federal Reserve 
Banks of Boston and Cleveland and the Federal Reserve Board (Sept. 1, 
2010). 

[82] Land banks generally may be created at the city or county level, 
like the Fulton County/City of Atlanta Land Bank Authority in Georgia 
and the Cuyahoga County Land Reutilization Corporation in Ohio. They 
may also be created at the state level, like the State of Michigan 
Land Bank Fast Track Authority. 

[83] Nigel G. Griswold and Patricia E. Norris, Economic Impacts of 
Residential Property Abandonment and the Genesee County Land Bank in 
Flint, Michigan, MSU Land Policy Institute Report #2007-05 (East 
Lansing, Mich.: April 2007). 

[84] According to a recent report, land banks in Michigan are funded 
primarily by retaining proceeds from all properties sold out of 
inventory, either by recapturing a portion of the real property taxes 
on every property it puts back into productive use for the first 5 
years, or by renting properties that are held in inventory. The report 
also notes, and land bank officials confirmed, that the Cuyahoga 
County Land Reutilization Corporation in Ohio is funded by advancing 
taxing districts the principal value of real property taxes when they 
are due, based on historic collection rates. There are multiple ways 
to fund this advance, for instance: borrowing from the county or 
issuing unpaid and delinquent tax anticipation securities. When taxes 
are collected, their principal value, plus some interest, goes to pay 
down the line of credit or security holders. The penalties on 
delinquent real property taxes, which are increased in counties with 
land banks, remain in the land bank to fund operations. This provides 
for a stable revenue stream for land bank operations. See Thomas J. 
Fitzpatrick IV, How Modern Land Banking Can Be Used to Solve REO 
Acquisition Problems, REO & Vacant Properties, Strategies for 
Neighborhood Stabilization, a joint publication of the Federal Reserve 
Banks of Boston and Cleveland and the Federal Reserve Board (Sept. 1, 
2010). 

[85] Banking regulators announced a proposed rule on June 24, 2010, 
that, in combination with these local actions, could provide further 
incentive for servicers to complete foreclosures and donate 
properties. The rule aligns Community Reinvestment Act requirements 
with Neighborhood Stabilization Program activities. As a result, under 
this proposal an institution could receive favorable CRA consideration 
for donating foreclosed properties to nonprofit housing organizations 
in eligible areas. 12 U.S.C. §§ 2901 – 2908; 75 Fed. Reg. 36016 (June 
24, 2010). 

[86] The National First Look Program was announced on September 1, 
2010. See HUD press release at: [hyperlink, 
http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_
advisories/2010/HUDNo.10-187]. 

[87] Daniel Fleischman, Nonprofit Strategies for Returning REO 
Properties to Effective Use, REO & Vacant Properties, Strategies for 
Neighborhood Stabilization, a joint publication of the Federal Reserve 
Banks of Boston and Cleveland and the Federal Reserve Board (Sept. 1, 
2010). 

[88] Further, HUD officials told us that note sales were not an 
allowable use of NSP funds. 

[89] HUD, VA, and SEC responded that they did not have any comments on 
the report. Technical comments from Fannie Mae and Freddie Mac were 
combined with those from FHFA. 

[90] A portion of the servicer and GSE databases result in a 
duplication of coverage because some of the GSE loans are also 
serviced by the servicers in the servicer database. 

[91] The GSE data represent the loan level information underpinning 
the aggregate data reviewed by FHFA and presented in the FHFA’s 
periodic foreclosure prevention and refinance reports for Congress. 

[92] The USPS defines “vacant” as an urban delivery point that was 
active in the past, but is not currently occupied (in most cases 
unoccupied over 90 days) and not currently receiving delivery. An 
address is considered vacant if that house or apartment has not been 
occupied in at least 90 days. 

[93] Outside of visually inspecting each of the properties over a 
reasonable length of time there is no error-free way of determining 
vacancy. 

[94] Some properties’ addresses were either missing too much vital 
information to be standardized or had extremely complicated address 
and therefore were not able to be matched to USPS data. For example, 
our dataset included a significant number of condominiums and duplex 
properties, some which may have not matched due to non-standard coding 
of the address. 

[End of section] 

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