Federal Housing Administration: Improved Procedures and Assessment Could Increase Efficiency of Foreclosed Property Conveyances
Fast Facts
An empty house caught up in foreclosure can deteriorate or be vandalized—bringing down neighborhood property values.
When a property with an FHA-insured mortgage is foreclosed, loan servicers fix it up and convey it to FHA for resale. We looked at whether this process effectively and efficiently gets vacant houses back on the market.
FHA has improved its process, but more can be done. For example, FHA could give loan servicers more detailed instructions on how to determine if a property is in "conveyable condition." Our recommendations address this and other shortcomings we found.
Example of a property conveyed to the Federal Housing Administration in 2018
A brick rowhouse with notices in the front window and a crooked porch light
Highlights
What GAO Found
From July 2010 through December 2017, the process for conveying foreclosed properties to the Federal Housing Administration (FHA) took a median of 70 days. The conveyance process—which GAO measured from a mortgage servicer's obtaining title to and possession of the property to FHA's marketing of the property—involves servicers making repairs, transferring ownership, and filing a mortgage insurance claim, and FHA inspecting the property. FHA attributes the length of time to complete the process partly to foreclosure processing delays that left properties vulnerable to damage and vandalism, which can increase the time servicers need to bring properties into conveyance condition. Property damage also may increase the likelihood that FHA will reconvey a property (transfer it to the servicer) for not complying with condition standards, further extending the conveyance process. For about 55 percent of properties conveyed in July 2010–December 2017, servicers exceeded the required time to obtain title and possession of a foreclosed property and convey it to FHA. For 2017 alone, the corresponding figure was 72 percent. As a result, servicers were not eligible to be reimbursed for all repairs and interest expenses for those properties when filing insurance claims with FHA.
In recent years, FHA changed aspects of its conveyance process to help address some of the execution challenges the agency and servicers have faced. For example, in 2016, FHA enhanced its data system for conveyed properties to reduce manual administrative processing. FHA also began a pilot program in 2017 to decrease the number of properties FHA reconveys by inspecting properties before conveyance. However, GAO found shortcomings in FHA policies, procedures, and assessment efforts that are inconsistent with federal evaluation criteria and internal control standards, as follows:
- FHA's policies and procedures lack detail that could help servicers and contractors determine if a property is in compliance, and the agency has not examined alternative methods of communicating this information. Fifteen of the 20 servicers GAO interviewed said existing policies, procedures, and communications often were not clear or specific enough to address property conditions or repair decisions they encountered. FHA also relies on brief written policies to explain standards and makes limited or no use of other methods, such as photographs or industry-wide calls.
- FHA has not provided written direction on when to use alternatives to reconveyance—such as agreements under which servicers make repairs or repay FHA for any repair costs after conveyance—for properties not meeting condition standards. In the absence of such direction, FHA may not be addressing these properties in the most consistent or effective manner.
- FHA has not developed a plan to assess the outcome of its inspection pilot. Without rigorous assessment, FHA risks making decisions about the future of the pilot based on inaccurate or incomplete information.
Addressing these shortcomings could help improve the efficiency and effectiveness of FHA's property conveyance process.
Why GAO Did This Study
FHA insures hundreds of thousands of single-family home mortgages annually. When an FHA borrower defaults, the mortgage servicer in many cases forecloses, obtains title to the property, and conveys ownership to FHA. FHA inspects the property, acquires it if it complies with condition standards and title requirements, and lists the property for sale. FHA may reconvey noncompliant properties to servicers. During conveyance, homes may sit vacant for months and can deteriorate, contributing to neighborhood blight.
Senate Report 114-243 included a provision for GAO to review FHA's effectiveness and efficiency in reaching determinations of conveyable condition. This report discusses (1) timelines for FHA property conveyances in 2010–2017 and whether servicers and FHA met time requirements, and (2) changes FHA has made to the conveyance process in recent years and any ongoing process challenges. GAO analyzed FHA data on properties conveyed in 2010–2017, reviewed FHA's policies and procedures, and interviewed 20 randomly selected mortgage servicers accounting for more than one-third of active FHA mortgages.
Recommendations
GAO recommends that FHA (1) enhance the content and communication of policies and procedures on conveyance condition, (2) provide written direction on alternatives to reconveyance, and (3) develop a plan to assess a pilot program. FHA agreed with the second and third recommendations and did not agree or disagree with the first.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Federal Housing Administration | The Commissioner of FHA should enhance the content and communication of FHA's policies and procedures on conveyance condition, including by considering the program stakeholder views discussed in this report and other stakeholder input. (Recommendation 1) |
Consistent with our recommendation, FHA made some clarifications to its policies and procedures for conveyance condition as part of an October 2021 update to the agency's Single Family Policy Handbook. For example, FHA reorganized the information under the Acceptable Conveyance Condition section into separate "definitions" and standards" subsections. FHA also clarified a key date affecting a mortgage servicer's liability for property conditions by more explicitly tying the date to the First Time Vacant Property Inspection. In addition, FHA addressed an ambiguity in its definition of broom-swept condition by adopting a standard term for personal property. FHA solicited public comments on the handbook changes.
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| Federal Housing Administration | The Commissioner of FHA should provide written direction to HOC REO directors on factors to consider when determining whether to reconvey a property with condition issues, issue a demand letter, or enter into a bypass agreement with the servicer. (Recommendation 2) |
In December 2019, HUD's Office of the Chief Procurement Officer issued a memorandum that describes the criteria and approvals necessary to initiate demand letters, bypass agreements, or reconveyances for properties with condition or title issues. The memorandum includes a matrix that describes the condition or title issue, the appropriate action, and the official who must approve the action. The memorandum is effective as of January 2020.
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| Federal Housing Administration | The Commissioner of FHA should develop a formal plan for evaluating the outcomes of the preconveyance inspection pilot that includes key elements of evaluation design—such as evaluation objectives and measures—and utilizes participant feedback and control groups, as appropriate. (Recommendation 3) |
Consistent with the intent of our recommendation, in August 2023, FHA conducted an outcome evaluation of the preconveyance inspection pilot (which ran from March 2017 through March 2021) that incorporated elements of evaluation design. The evaluation concluded that the pilot reduced the share of properties FHA reconveyed to mortgage servicers due to property-related issues to 2 percent (compared to a 65 percent baseline), and potentially saved servicers an average of more than $10,000 for each avoided reconveyance. The evaluation also concluded that FHA was able to sell properties in the pilot an average of five days faster than other properties, saving FHA approximately $300 per property. HUD also collected feedback from participating servicers and identified challenges that could be addressed by future training, guidance, or oversight procedures. Because FHA's assessment included evaluation design elements such as quantitative measures, comparison groups, and use of participant feedback, we consider the recommendation closed as implemented.
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