Department of Veterans Affairs: Improved Measures Needed to	 
Assess Supplemental Loan Servicing Program (04-MAY-01,		 
GAO-01-610).							 
								 
The Department of Veterans' Affairs (VA) Loan Guaranty Program,  
which guarantees mortgage loans for qualified lenders, provides  
additional assistance to those who face financial hardship and	 
possible foreclosure.  This report discusses VA's supplemental	 
loan servicing program. GAO (1) assesses VA's implementation of  
its policies and procedures for servicing troubled loans and (2) 
analyzes VA's measures for assessing the effectiveness of its	 
supplemental servicing program and ability to generate meaningful
data for overseeing and improving loan servicing. GAO found that 
the three regional loan centers it visited generally conformed	 
with VA policies and procedures and had procedures in place to	 
ensure that VA's loan servicing representatives comply with VA	 
policies and procedures. VA's ability to effectively manage its  
supplemental servicing program has been affected by two issues.  
First, VA lacks meaningful performance measures that would allow 
it to accurately assess the effectiveness of its program. Second,
VA's computer system has been unable to generate useful and	 
timely management reports that regional loan center managers and 
headquarters staff could use to manage their supplemental loan	 
servicing program.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-610 					        
    ACCNO:   A00957						        
  TITLE:     Department of Veterans Affairs: Improved Measures Needed 
             to Assess Supplemental Loan Servicing Program                    
     DATE:   05/04/2001 
  SUBJECT:   Delinquent loans					 
	     Foreclosures					 
	     Government guaranteed loans			 
	     Loan accounting systems				 
	     Loan defaults					 
	     Mortgage loans					 
	     Mortgage programs					 
	     Performance measures				 
	     Program evaluation 				 
	     VA Home Loan Guaranty Program			 
	     VA Loan Servicing and Claims Systems		 
	     VA Statistical Quality Control System		 

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GAO-01-610
     
Report to the Honorable Bob Stump House of Representatives

United States General Accounting Office

GAO

May 2001 DEPARTMENT OF VETERANS AFFAIRS

Improved Measures Needed to Assess Supplemental Loan Servicing Program

GAO- 01- 610

Page i GAO- 01- 610 Supplemental Loan Letter 1

Appendix I Objectives, Scope, and Methodology 28

Appendix II Background Information on the VA Single- Family Mortgage
Guaranty Program 30

Appendix III Information on the FHA Single- Family Mortgage Insurance
Program and the Performance of VA and FHA Mortgage Loans 36

Appendix IV Comparisons of VA and HUD Policies for Servicing Troubled Loans
41

Appendix V Data on VA?s Supplemental Servicing 44

Appendix VI Comments From the Department of Veterans Affairs 48

Appendix VII GAO Contacts and Staff Acknowledgments 52

Tables

Table 1: VA Loan Guaranty Rate (as of March 2001) 31 Table 2: VA- Guaranteed
Loan Funding Fee (as of July 2000) 33 Table 3: Alternatives to Foreclosure
Offered by VA and HUD Loan

Servicing Programs and Cash Incentives Paid to Lenders (as of March 2001) 43
Table 4: VA?s Supplemental Servicing Activities 44 Table 5: VA?s
Supplemental Servicing Activities at Each Regional

Loan Center (Average: Fiscal Years 1996- 2000) 45 Contents

Page ii GAO- 01- 610 Supplemental Loan

Table 6: Percentage Change in Full Time Employees (FTE) Dedicated to Loan
Servicing and Percentage Change in NODs Per FTE at Each Regional Loan Center
46 Table 7: Foreclosure Avoidance Through Servicing (FATS) Ratio at

Each Regional Loan Center 47

Figures

Figure 1: Example of a Time Line for a Delinquent VA Loan 7 Figure 2:
Simplified Illustration of VA?s Consideration of

Alternatives to Foreclosure 10 Figure 3: What Happened to Defaulted VA Loans
(1996 - 2000) 13 Figure 4: Alternatives to Foreclosure Completed by VA (1996
-

2000) 14 Figure 5: Loan Servicing Employees and Defaults Serviced Per

Employee at VA Regional Loan Centers (Fiscal Year 2000) 15 Figure 6: Changes
in VA Staff Dedicated to Supplemental Loan

Servicing (1996- 2000) 16 Figure 7: Nationwide FATS Ratio for Fiscal Years
1996 - 2000 19 Figure 8: FATS Ratio at VA Regional Loan Centers (Fiscal Year

2000) 20 Figure 9: Number of Loans Guaranteed by VA 34 Figure 10: Average
Loan Amount of VA- Guaranteed Loans 35 Figure 11: Percentage of Outstanding
VA and Fixed- Rate FHA

Loans Delinquent 30 Days or More 38 Figure 12: Percentage of Outstanding VA
and Fixed- Rate FHA

Loans for Which Foreclosures Were Started During the Quarter 39

Page iii GAO- 01- 610 Supplemental Loan Abbreviations

ARM Adjustable rate mortgage FATS Foreclosure Avoidance Through Servicing
FHA Federal Housing Administration FTE Full time employee HUD Department of
Housing and Urban Development LCS Liquidation and Claims System LS& C Loan
Service and Claims LTV Loan to value MBA Mortgage Bankers Association MBS
Mortgage- backed securities NOD Notice of Default SLMP Servicer Loss
Mitigation Program SQC Statistical Quality Control VA Department of Veterans
Affairs VHBPF Veterans Housing Benefit Program Fund

Page 1 GAO- 01- 610 Supplemental Loan

May 4, 2001 The Honorable Bob Stump House of Representatives

Dear Mr. Stump: Every year, thousands of veterans default on mortgage loans
guaranteed by the Department of Veterans Affairs (VA). When veterans default
on these loans, lenders may foreclose on the loans and file claims against
the VA loan guaranty program. In fiscal year 2000, VA paid claims on over
24,000 foreclosed loans. To help veterans retain their homes and minimize
their financial losses, VA has a policy of providing additional assistance
through its supplemental loan servicing program.

This report responds to your request that we review VA?s supplemental loan
servicing program. Our objectives were to

 describe VA?s policies and procedures for servicing troubled loans,

 assess VA?s implementation of its policies and procedures for servicing
troubled loans, and

 analyze VA?s measures for assessing the effectiveness of its supplemental
servicing program and ability to generate meaningful data for overseeing and
improving loan servicing.

To help us describe VA?s policies for servicing troubled home loans, we
reviewed VA manuals and other related documents. To assess VA?s
implementation of its policies for servicing troubled loans, we visited
three of the nine VA regional loan centers. We obtained information on their
supplemental servicing activities and interviewed VA officials, including
loan servicing representatives responsible for providing supplemental
servicing. We also reviewed VA?s quality- control procedures. To analyze
VA?s measures for assessing the effectiveness of its supplemental loan
servicing program and ability to generate meaningful data for overseeing and
improving its loan servicing performance, we reviewed VA?s performance
measures and VA data on loan status for the nine VA regional loan centers.
Although we identified inconsistencies in data provided by VA, we did not
assess the accuracy of the data. We also compared VA?s performance measures
to those employed by the Department of Housing and Urban Development (HUD)
for its Federal Housing Administration

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 610 Supplemental Loan

(FHA) insured loan program. We conducted our work in Washington, D. C.;
Cleveland, OH; St. Petersburg, FL; and Phoenix, AZ, between July 2000 and
March 2001, in accordance with generally accepted government auditing
standards. Written comments from the Secretary of Veterans Affairs on a
draft of this report are presented in appendix VI. A detailed description of
our scope and methodology is presented in appendix I.

VA performs its own supplemental servicing of defaulted loans to ensure that
each veteran- borrower 1 is afforded the maximum opportunity to continue as
a home owner during periods of temporary financial distress. Lenders have
the primary responsibility for servicing delinquent loans, including
notifying borrowers of past due payments and making efforts to resolve
delinquencies. VA?s supplemental servicing is intended to protect the
interests of the veteran and the government when these efforts fail and a
loan goes into default. VA?s loan servicing representatives are to work with
veterans and sometimes lenders to arrange or assist in arranging a number of
possible alternatives to foreclosure. For example, VA loan servicing
representatives might encourage a lender to extend reasonable forbearance,
which enables a veteran to suspend mortgage payments for up to 12 months,
followed by a lump- sum payment or higher monthly payments. In another
example, VA might purchase a defaulted loan from a lender and modify the
terms of the loan to make it easier for a veteran to continue to make
payments. VA loan servicing representatives make these and four other types
of alternatives to foreclosure available to veterans with defaulted loans.

The practices of the three regional loan centers we visited generally
conformed with VA policies and procedures. The management and staff of VA?s
nine regional loan centers implement VA policies related to supplemental
loan servicing. The loan servicing representatives follow standard VA
procedural manuals for supplemental loan servicing and conduct work using
VA?s Loan Servicing and Claims (LS& C) computer system, which is standard
across the regional offices. The regional loan centers we visited also had
procedures in place to ensure that VA?s loan servicing representatives
comply with VA policies and procedures. However, the operations of VA?s
regional loan centers were temporarily affected by consolidations in certain
regions.

1 In this report, we refer to all those eligible for VA- guaranteed loans as
veteran- borrowers. Results in Brief

Page 3 GAO- 01- 610 Supplemental Loan

A lack of meaningful performance measures and useful and timely management
reports hinders VA?s ability to effectively manage its supplemental
servicing program. VA?s key performance measure for its supplemental
servicing program is the Foreclosure Avoidance Through Servicing (FATS)
ratio. 2 The FATS ratio has not been a meaningful measure of VA?s
supplemental servicing performance for a variety of reasons. For example,
the measure is not very sensitive to changes in the quality of servicing.
During the temporary interruption in service caused by the regional loan
center consolidation, the FATS ratio was only minimally impacted. In
addition, VA does not have a meaningful performance measure for the cost
savings associated with supplemental servicing. Moreover, VA?s computer
system has not been able to generate useful and timely management reports
that regional loan center managers and VA?s headquarters staff can use in
managing their supplemental servicing program. During our review, we also
found that VA could not efficiently generate reliable aggregate data on its
supplemental servicing program.

This report contains two recommendations to the Secretary of Veterans
Affairs to improve VA?s loan servicing performance measures and its computer
system. VA agreed with our recommendation to improve its computer system,
but disagreed with our recommendation to improve its performance measures.

The VA loan program is an entitlement program for eligible veterans, service
members, reservists, and surviving spouses. The program provides single-
family, residential mortgage loan guarantees for purchasing, constructing,
repairing, or refinancing homes. The loan guaranty provides private- sector
mortgage lenders, such as banks, thrifts, or mortgage companies, with a
partial guaranty on mortgage loans when these loans go into foreclosure. In
exchange for the guaranty, VA encourages lenders to offer loans to veterans
on terms more favorable than those available with conventional financing-
for instance, requiring a small down payment, or none at all.

The VA loan guaranty program was initially established in 1944 as an
adjustment benefit for veterans who had served in the Armed Forces

2 The FATS ratio is VA?s measure of the percentage by which foreclosures
would have been greater if VA had not pursued alternatives to foreclosure.
Background

Page 4 GAO- 01- 610 Supplemental Loan

during World War II. Its objectives have evolved over time. The main
objective of the current program is to provide a long- range housing benefit
to veterans that will help them finance the purchase of homes on favorable
loan terms and retain ownership of their homes. Over the years, the VA loan
guaranty program has been amended in an effort to increase home ownership
among veterans. These amendments have extended eligibility to all parties on
active duty or honorably discharged from military service, increased the
maximum loan term and guaranty amount, and allowed borrowers and lenders to
negotiate loan interest rates.

The basic features of the VA loan guaranty program are set by law.
Currently, the maximum amount of a guaranty or entitlement is $50,750. VA
places no limits on the size of loans, but lenders generally limit the loan
amount to $203,000, owing to secondary mortgage market requirements. 3 In
exchange for protection against financial losses when VA- guaranteed loans
end in foreclosure, lenders are encouraged to provide eligible borrowers
with loans that do not require a down payment. Lenders originating VA
guaranteed mortgages are subject to VA?s underwriting standards. The
standards are meant to ensure that borrowers have the ability to pay and are
creditworthy. The interest rate on VA- guaranteed loans can be negotiated
based on prevailing mortgage rates. Borrowers also have obligations to VA.
They must meet VA?s eligibility requirements and pay VA funding fees of 1.25
to 2.75 percent of the loan amount, depending on the size of down payment
and the type of military service completed. Veterans disabled while in
service are exempt from payment of the funding fee. Appendix II provides
more detailed background information on VA?s loan guaranty program.

In addition to helping borrowers finance the purchase of homes, the VA loan
program helps them retain ownership of their homes by providing assistance
to those in default through its supplemental servicing program. The
supplemental servicing performed by VA?s loan servicing

3 The secondary mortgage market is the market in which mortgage loans and
mortgagebacked securities (MBS) are bought and sold. The secondary mortgage
market agents, such as the Federal National Mortgage Association (Fannie
Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) or private
mortgage companies, purchase mortgage loans as an investment or issue MBS
backed by cash flows from the mortgage loans. In addition to Fannie Mae and
Freddie Mac, the secondary mortgage market is served by the Government
National Mortgage Association (Ginnie Mae), which is a government
corporation within HUD. Ginnie Mae guarantees the timely payment of interest
and principal on MBS backed by cash flows from pools of federally guaranteed
mortgage loans, such as VA- guaranteed and FHA- insured loans.

Page 5 GAO- 01- 610 Supplemental Loan

representatives is a unique feature of VA?s loan guaranty program. Other
federally insured loan programs do not provide such servicing. For example,
HUD delegates all servicing responsibilities to the lenders in its program
for FHA insured loans. 4 FHA lenders are required by law to engage in loss
mitigation action to provide alternatives to foreclosure. See appendix III
for a comparison of the VA and HUD servicing programs.

The VA provides supplemental loan servicing through its nine regional loan
centers in Atlanta, Cleveland, Denver, Houston, Manchester, Roanoke,
Phoenix, St. Paul, and St. Petersburg. 5 Prior to 1996, the VA?s 45 regional
offices administered loans, provided full- scale loan servicing, processed
claims, and handled property management. However, according to VA officials,
the agency decided to consolidate loan processing, servicing, and claims
functions into the nine regional loan centers after a comprehensive review
of its loan guaranty program. The consolidation, which began in 1997 and was
completed in June 2000, was intended to improve services to veterans and
reduce costs by increasing efficiency and economies of scale. The 45
regional offices provide services related to property appraisal and
foreclosed properties, as well as services related to other veterans?
programs.

VA?s loan servicing representatives conduct work using the LS& C computer
system. The LS& C system was implemented throughout the regional loan
centers during August and September 1999. The LS& C system is an on- line,
production- oriented system, which was intended to help the loan servicing
representatives to provide better supplemental servicing capabilities. The
LS& C system also was intended to help VA reduce costs by allowing servicing
personnel to service loans rather than spend time entering basic data and
status updates into their old batchoriented system.

4 FHA is a government corporation within HUD. FHA provides federal mortgage
insurance on residential mortgages. FHA?s single- family mortgage program
shares some characteristics with VA?s guarantee program, most notably in
requiring a small or no down payment from the borrower. Generally,
conventional mortgages, which are mortgages without federal insurance or
guarantees, require larger down payments.

5 Hawaii and Puerto Rico also have their own regional offices that perform
supplemental servicing.

Page 6 GAO- 01- 610 Supplemental Loan

While lenders have primary responsibility for servicing delinquent loans, VA
performs its own supplemental servicing of defaulted loans to ensure that
each veteran- borrower is afforded the maximum opportunity to continue as a
home owner during periods of temporary financial distress. VA?s supplemental
servicing is intended to protect the interests of the veteran and the
government when the lender has not been able to arrange for the
reinstatement of a delinquent loan. VA?s loan servicing representatives are
to work with veterans and sometimes lenders to arrange or assist in
arranging a number of possible alternatives to foreclosure. These
alternatives include

 encouraging lenders to extend reasonable forbearance,

 encouraging lenders to modify the terms of the original loan agreement,

 purchasing the defaulted loan from the lender and then reamortizing the
loan to eliminate a delinquency,

 encouraging the private sale of a property,

 arranging a compromise claim payment to the lender if an offer to purchase
the property is received but the proceeds will not be enough to pay off the
loan, and

 accepting a deed in lieu of foreclosure. Private lenders that hold loans
guaranteed by VA are responsible for servicing them. Their loan servicing
responsibilities generally include collecting monthly mortgage payments,
maintaining loan records, and making collection efforts for delinquent
loans. According to VA?s Servicing Guide, a lender?s delinquent loan
servicing system must include (1) an accounting system that promptly alerts
servicing personnel when a loan becomes delinquent, (2) staff trained in
servicing loans and counseling delinquent borrowers, (3) procedural
guidelines for analyzing each delinquency, and (4) a quality- control system
for managing and reporting collection efforts.

When a borrower?s loan payments are delinquent, the lender is responsible
for contacting the borrower, determining the reason for the delinquency, and
making arrangements for repayment of the delinquency, if possible. VA
requires lenders to take several steps to resolve the problem. First, a
lender must provide written notice to borrowers requesting immediate payment
if a loan installment has not been received within 17 days of the due date.
This notice must be mailed within 3 days and must include the amount of any
late charges due. Second, the lender must try to contact the borrower by
telephone to determine why the borrower has not made the payment and to make
arrangements for resolving the delinquency. Third, if the borrower has not
made a payment within 30 days after the payment VA Performs Its Own

Supplemental Servicing of Defaulted Loans

Lenders? Loan Servicing Responsibilities

Page 7 GAO- 01- 610 Supplemental Loan

was due and cannot be contacted by telephone, VA requires the lender to send
a personal letter to the borrower. Fourth, if the lender cannot work out
arrangements for repayment by the time that three installments are due, the
default is to be reported to VA. The lender must send a Notice of Default
(NOD) to VA within 45 days of the third missed payment. This notice must
explain why the loan has gone into default and provide a summary of the
lender?s servicing efforts. If the lender does not notify VA within 45 days
of the borrower?s third missed payment, VA may adjust any claim under the
guaranty.

Figure 1 provides an example of a time line showing a lender?s servicing
responsibilities for a delinquent loan. For example, if a borrower misses a
payment on January 1, the lender must send a delinquency notice to the
borrower by January 20. If the lender has not received a payment by March 1-
the third missed loan payment- the lender must send an NOD to VA by April
15.

Figure 1: Example of a Time Line for a Delinquent VA Loan

Source: GAO analysis. Notice of default must be sent to VA

within 45 days of the 3rd month of delinquency

Mar. 1: 60 days delinquent

Apr. 1: 90 days delinquent

Jan. 20: 20 days delinquent

(Notice of delinquency must be mailed)

May 1: Feb. 1: 30 days delinquent

(Personal letter must be mailed)

January February March April Jan. 1: Payment due

(Borrower misses the payment)

Apr. 15: 105 days delinquent

May A

Page 8 GAO- 01- 610 Supplemental Loan

VA?s policies require that its loan servicing representatives begin
supplemental servicing immediately after receiving a NOD from the lender. VA
loan servicing representatives are to closely review the lender?s servicing
of the account and follow up by contacting the borrower. Based on the
information provided by the borrower, regarding present and future income,
employment status, and other relevant case- specific facts, the VA loan
servicing representatives may attempt to arrange or assist in arranging one
of the following alternatives for borrowers:

 Forbearance: VA?s policy is to encourage lenders to extend reasonable
forbearance when a borrower is unable to begin making payments immediately.
VA loan servicing representatives may intercede with the lender on behalf of
the veteran to work out a plan for forbearance and repayment that is
acceptable to both parties. Payments are allowed to remain delinquent for a
reasonable amount of time- usually not more than 12 months. 6 After that
time, the borrower reinstates the loan either by making a lump- sum payment
or by increasing monthly payments.

 Modification: In some cases, VA also encourages lenders to modify the
terms of the original loan agreement- e. g., by extending the loan period.
Modifications can succeed when the borrower cannot maintain the original
monthly payments or pay off delinquencies, but can keep the loan current on
less stringent terms. VA loan servicing representatives may also intercede
with the lender on behalf of the borrower to help arrange modification
agreements. 7

 Refunding: When a lender is not willing to extend further forbearance or
modify the terms of the loan, but the borrower has the ability- or will have
the ability in the near future- to make payments, VA may refund the loan. 8
In these cases, VA purchases the defaulted loan from the lender.

6 According to VA officials, it is unlikely that VA will propose a
forbearance period of 12 months with no payments, and it is even less likely
that a lender will agree to such a proposal. Much more common is a 2 or 3
month forbearance period or a 6 or 12 month period with payments of one
regular installment plus a portion of another installment.

7 VA refers to both loan modifications and the extension of forbearance as
?successful

interventions if the loan reinstates.? 8 More specifically, VA considers a
loan eligible for refunding when it is determined that (1) the lender is
unwilling to grant further forbearance, (2) the veteran desires to retain
and occupy the property, (3) the veteran has shown an ability to care for
and maintain the property, (4) the veteran has a present or potential
ability to satisfactorily resume regular payments within a reasonable time
and to repay the loan, (5) the estimated net value of the property exceeds
the unguaranteed portion of the loan, and (6) the veteran is willing to
accept modifications to the loan that make it nontransferable without prior
approval of the Secretary of VA. VA?s Supplemental

Servicing Policies

Page 9 GAO- 01- 610 Supplemental Loan

When VA refunds a loan, the loan becomes a part of VA?s direct portfolio and
is serviced by VA?s loan portfolio service contractor. VA may reamortize the
loan to eliminate a delinquency and reduce the interest rate. The law giving
VA this authority does not vest borrowers with any right to have their loans
refunded or to apply for refunding. Nevertheless, VA?s policy is to consider
in every case before foreclosure whether refunding is in the best interests
of the veteran and the government.

 Private sale of property: When a borrower has no realistic prospects for
maintaining even reduced mortgage payments, VA encourages the private sale
of property to avoid foreclosure. Counseling by VA loan service
representatives about the benefits of a private sale may allow a borrower to
salvage any equity in the home and reduce or eliminate losses to all
interested parties. When the borrower has equity in the home, VA?s policy is
to encourage lenders to grant the borrower reasonable forbearance to permit
a sale.

 Compromise claim: In some cases, a borrower in default may not be able to
arrange a private sale because the value of the property is less than the
total amount owed on the loan. This might be the case, for example, in areas
with depressed housing markets. In such a situation, VA may consider
providing a ?compromise claim? payment to the lender if an offer to purchase
the property is received, but the proceeds will not be sufficient to pay off
the loan. For example, if a veteran finds a buyer who will purchase the
property for its fair market value and the proceeds of the sale are applied
to the existing indebtedness, a compromise agreement would enable VA to pay
a claim to the lender to cover the difference between the sale price and the
amount remaining on the loan. VA is to consider this if the difference
between the loan payoff amount and the purchase price is less than the
amount of VA?s maximum guaranty.

 Deed in lieu of foreclosure: When a borrower is unable to resolve a
default, refunding is not appropriate, and a private sale cannot be
arranged, VA may consider accepting a deed in lieu of foreclosure. VA will
accept a deed if it is in the best interests of both the borrower and VA.
Accepting a voluntary deed saves on foreclosure costs, cuts down on possible
decreases in the value of the security, avoids having a foreclosure on the
borrower?s credit record, and reduces or eliminates the amount of the
borrower?s indebtedness. However, obtaining a deed must be legally feasible,
and the borrower must be willing to cooperate. A deed in lieu will usually
not be accepted if there are any junior liens on the property or if the
claim amount under the deed in lieu is more than under foreclosure.

Page 10 GAO- 01- 610 Supplemental Loan

Figure 2 provides a simplified example of the decisionmaking process VA loan
servicing representatives use when considering alternatives to foreclosure.

Figure 2: Simplified Illustration of VA?s Consideration of Alternatives to
Foreclosure

Source: GAO analysis of VA procedures. Borrower becomes

delinquent Lender attempts

to reinstate the delinquent loan

Reinstated within 60 days of

delinquency?

Yes

Lender sends VA a Notice of

Default VA contacts the borrower

and the lender to determine the borrower?s financial

condition

No

Is the borrower?s financial

condition temporary?

Yes (? Private sale of property?)

VA may recommend that the borrower sell the house and pay off the loan
indebtedness

Loan may be reinstated

Yes No

(? Deed in lieu of foreclosure?)

If the borrower is unable to sell the house, even at a lowered price, VA may
recommend that the borrower convey the title of

the property to the lender

(? Refunding?)

VA purchases the loan from the lender and modifies the refunded loan

for the borrower Does the

lender accept VA?s recommendation?

(? Compromise claim?)

If the sale price of the property is insufficient to pay off the loan

indebtness, VA may pay the difference between the offered sale price and
outstanding loan

indebtness, to help the borrower sell the property

(? Forbearance? or

?Modification?)

VA may recommend that the lender grant forbearance, or

modify the loan

No

Reinstated by either borrower initiative or

lender?s collection efforts

A

Page 11 GAO- 01- 610 Supplemental Loan

VA or the lender may implement any of the alternatives to foreclosure
discussed above, except only VA may implement refunding. Additionally, VA
must approve in advance lender initiated compromise claims and deeds in lieu
of foreclosure, unless a lender participates in VA?s Servicer Loss
Mitigation Program (SLMP). Participation in SLMP allows lenders to not only
initiate, but also perform most of the analyses involved in approving
compromise claims or deeds in lieu of foreclosure. 9 VA pays lenders a fee
for processing such alternatives to foreclosure. 10 The purpose of VA?s SLMP
program is to (1) reduce the cost of the loan guaranty program to the
taxpayer by decreasing the length of time required to implement these
alternatives, (2) reduce the workload of VA?s regional offices by paying
authorized servicers to perform the analysis and approval functions usually
completed by VA, and (3) increase the number of these alternatives used by
providing servicers with an incentive to consider a compromise sale or deed
in lieu of foreclosure at earlier stages of default, when these alternatives
are more often feasible. Lenders must apply to VA to obtain approval to
participate in this program. VA officials told us that approximately 130
lending institutions are currently participating in VA?s SLMP program and
that these institutions process most of the compromise claims and deeds in
lieu of foreclosure.

If it is not feasible for VA or the lender to process any of the
alternatives to foreclosure discussed above, the lender will generally
proceed with foreclosure.

9 Lenders must obtain a ?determination of insolubility? from VA before
proceeding with a compromise claim or deed in lieu of foreclosure. A
determination of insolubility means that the borrower?s circumstances
indicate that he or she does not have the ability to prevent foreclosure of
the loan while continuing to provide for the family?s basic needs.

10 VA pays a lender that participates in the SLMP a flat $200 processing fee
for every compromise sale or deed in lieu of foreclosure completed. The
lender also receives money for completing the compromise process ahead of
schedule-$ 200 per month of time saved from the scheduled completion date.

Page 12 GAO- 01- 610 Supplemental Loan

The practices of the three regional loan centers we visited generally
conform to VA policies and procedures. VA?s 351 loan servicing
representatives worked with veterans and lenders to complete more than
10,500 alternatives to foreclosure in fiscal year 2000. However, the
operations of VA?s regional loan centers were temporarily affected by
consolidations in certain regions.

The practices of the three regional loan centers we visited generally
conform to VA policies and procedures. The loan servicing representatives
follow standard VA policies and procedural manuals for supplemental loan
servicing and conduct work using VA?s LS& C computer system, which is also
standard across the regional offices. These standard policies, manuals, and
computer system serve to create uniformity among the nine regional loan
centers.

The regional loan centers we visited also had procedures in place to ensure
that loan servicing representatives comply with VA?s policies and
procedures. These quality control procedures are also standard across all of
VA?s regional loan centers. The primary objective of VA?s quality control is
to promote and maintain a high level of quality and consistency in services
and end products. VA?s Statistical Quality Control (SQC) reviews are to be
conducted on a monthly basis. Cases are to be selected randomly and reviewed
for compliance with VA?s quality criteria. VA?s procedures contain specific
guidance and criteria for reviewing each case. VA uses the SQC index to
measure the number of appropriate actions found during SQC reviews,
calculated as a percentage of total actions reviewed. This index is provided
in VA?s performance report and is intended to reflect the accuracy of VA
processing, which can affect both customer satisfaction and VA?s efficiency.
VA?s Supplemental

Servicing Practices Generally Conform to its Policies and Procedures

Supplemental Servicing Practices

Page 13 GAO- 01- 610 Supplemental Loan

Over the past 5 years, VA has received an average of nearly 122,000 NODs per
year. A large majority- on average, nearly 70 percent- of defaulted loans
are reinstated without the VA intervention. VA?s loan servicing
representatives have been able to implement VA?s alternatives to foreclosure
in an average of about 10 percent of the cases in which loans default
annually. On average, another 20 percent of defaulted VA loans have gone to
foreclosure each year. (See fig. 3.)

Figure 3: What Happened to Defaulted VA Loans (1996 - 2000)

Note: Some defaulted loans have unknown status because they were neither
cured nor foreclosed in the year they defaulted.

Source: GAO analysis of VA data.

Over the past 5 years, VA has completed an average of about 12,400
alternatives to foreclosure each year. The most common alternative VA?s loan
servicing representatives implement is what VA calls a successful
intervention, which includes VA involvement in lenders granting either
forbearance or modifying the delinquent loan. These successful interventions
account for an average of 42 percent of all alternatives to foreclosure
implemented by VA over the past 5 years. The next most Supplemental
Servicing

Activity

2% Unknown Defaulted loans foreclosed

10% 20% 68%

Defaulted loans reinstated by borrower initiative Defaulted loans made
current by

VA?s alternatives to foreclosure A

Page 14 GAO- 01- 610 Supplemental Loan

frequent alternative implemented was the compromise claim, followed by
refunding, and then deed in lieu of foreclosure. (See fig. 4.) Appendix V
provides additional data on supplemental loan servicing by regional loan
centers.

Figure 4: Alternatives to Foreclosure Completed by VA (1996 - 2000)

Source: GAO analysis of VA data.

At the end of fiscal year 2000, VA?s nine regional loan centers had a total
of 351 full- time employees working specifically on the loan service and
claims functions. The Cleveland Regional Loan Center was the largest, with a
total of 52 employees; and the Manchester center was the smallest, with 12
employees. Employees at the nine regional loan centers handled an average of
294 NODs each, during fiscal year 2000. The Atlanta Regional Loan Center had
the highest number- 361 NODs per employee. The Cleveland center had the
lowest number- 237 NODs per employee. Figure 5 shows the number of loan
servicing employees and the number of NODs per employee in fiscal year 2000
at each regional loan center. It also shows the state jurisdictions serviced
by each regional loan center, as well as the year of each center?s
consolidation. Regional Loan Center

Consolidations Temporarily Affected Service

Deed in lieu of foreclosure Refunding Compromise claim Successful
intervention

20% 7%

31% 42%

A

Page 15 GAO- 01- 610 Supplemental Loan

Figure 5: Loan Servicing Employees and Defaults Serviced Per Employee at VA
Regional Loan Centers (Fiscal Year 2000)

Source: GAO analysis of VA data.

Both the number of employees and average number of NODs they handle have
varied over the years, mostly because of the consolidation of the regional
loan centers. In fiscal year 1996, before the consolidation of the regional
loan centers, VA had a total of 430 employees performing loan service and
claims functions. In fiscal 2000, after the consolidation was completed,
that number fell to 351 - a decrease of approximately 18 percent from 1996.
The average number of NODs per employee rose from 292 in fiscal year 1996 to
397 in fiscal year 1998. However, in fiscal year 2000, the number of NODs
per employee dropped to 294, the level prior to consolidation in 1996. (See
fig. 6.)

TX AZ

NM CA

NV OK

AR LA

MS AL FL GA

SC NC

TN KY

VA WV IN

OH PA MI

NY NE

ND SD

MN NB

KS IA

MO WI

IL CO UT WY MT

ID WA

OR AK

Houston (1999) 48 328

Denver (1999) 29 247

Phoenix (2000) 47 305

St. Paul (1998) 36 266

St. Petersburg (1999) 41 312 Atlanta (1999)

40 361 Roanoke (1998)

45 281 MD

Cleveland (1997) 52 237 Manchester (1998)

12 (number of employees) 307 (number of NODs per

employee) A

Page 16 GAO- 01- 610 Supplemental Loan

Figure 6: Changes in VA Staff Dedicated to Supplemental Loan Servicing
(1996- 2000)

0 100

200 300

400 500

1996 1997 1998 1999 2000 0 100

200 300

400 500

Number of defaults serviced per staff ( )

Fiscal year Number of staff

( )

A Source: GAO analysis of VA data.

As figure 6 indicates, consolidation ultimately reduced the number of
employees handling loan servicing and claims; although the average number of
NODs per employee remained about the same. However, the consolidation left
some offices short staffed for a period of time, and this temporarily
affected service. For example, officials at the St. Petersburg Regional Loan
Center told us that it took their center nearly a year to catch up with the
backlog of loan cases, some of which were transferred from other regional
loan offices. VA?s officials in St. Petersburg also told us that they
expected their office to be permanently closed; and they completely stopped
servicing loans for a period of time, as they prepared for the move. In
addition, officials at the Phoenix Regional Loan Center told us that at one
point during consolidation, two of its loan service representatives were
responsible for servicing approximately 2,300 defaulted loans- six times the
workload that is considered reasonable because few employees of the closed
offices were willing to relocate to Phoenix after the consolidation.
However, we have since learned that the Phoenix Regional Loan Center, which
was the last to complete its consolidation in July 2000, is now almost fully
staffed and has achieved a

Page 17 GAO- 01- 610 Supplemental Loan

reasonable number of NODs per employee. The Phoenix center, however,
continues to have a large number of relatively new loan servicing
representatives, and it will take time for them to be fully trained.

While the consolidation helped to centralize the loan servicing function,
each regional loan center we visited still had a high degree of
administrative autonomy from the VA headquarters in Washington, D. C. As a
result, administrative practices vary somewhat among centers. For example,
the St. Petersburg center management told us that they follow a

?case management? approach to supplemental loan servicing. This center has
teams that are responsible for all aspects of loan administration- from
servicing to processing foreclosures. Teams at the Phoenix center, however,
are organized more along the lines of a functional structure where each team
is responsible for a particular loan administration function. Additionally,
teams in various regional loan centers may have different internal
management structures. For example, managers in the St. Petersburg center
told us that their five loan servicing teams operate autonomously. Each team
has ?empowered? loan servicing representatives that rotate within the team
and serve as the team leader. These team leaders serve as a focal point for
the team and review the work of other team members. They are also empowered
to approve all alternatives to foreclosure without further supervisory
approval. This was not the case, for example, at the Cleveland center.
Additionally, the management of the St. Petersburg center told us that the
teams, rather than individuals, are responsible for meeting internal
performance goals. They said the teams have become competitive among
themselves and that this has improved performance. VA headquarters managers
told us that they plan to complete a comprehensive review of their loan
servicing program in the near future that will include a review of such
administrative practices at the regional loan centers.

Page 18 GAO- 01- 610 Supplemental Loan

VA?s ability to effectively manage its supplemental servicing program is
hindered by a lack of meaningful performance measures and useful and timely
management reports. VA?s FATS ratio 11 has not been a meaningful measure of
VA?s supplemental servicing performance. The shortcomings of this measure
include its (1) insensitivity to the quality of loan servicing, (2)
inability to account for regional differences in economic conditions, and
(3) inability to reflect the ultimate disposition of a particular loan. In
addition, VA does not have a meaningful performance measure to account for
the costs associated with alternatives to foreclosure compared with
foreclosure.

Moreover, VA?s computer system has not been able to generate useful and
timely management reports that regional loan center managers and VA?s
headquarters staff can use in managing their supplemental servicing program.
During our review, we also found that VA could not efficiently generate
reliable aggregate data on its supplemental servicing program.

The FATS ratio is equal to the number of cases resolved through direct VA
intervention, divided by this number plus foreclosures. The total number of
cases resolved through direct VA intervention is the sum of all cases
involving any of the alternatives to foreclosure.

According to VA?s fiscal year 2001 Performance Plan, VA has set a goal of
raising the FATS ratio to 40 percent. This would mean that VA?s
interventions helped 40 percent of veterans facing foreclosure resolve their
defaulted loans using one of VA?s alternatives to foreclosure. In fiscal
year 2000, the FATS ratio was 30 percent.

Before fiscal year 1999, VA calculated the FATS ratio by a different method,
weighting the various alternatives to account for the difficulty of
implementing them and the benefits they offered. After a review of the FATS
ratio in September of 1999, VA officials said they decided to drop the
weighting system because it encouraged the use of alternatives that may not
have been the best choice and distorted the number of actual interventions
taken. To present comparable data over time, we calculated the unweighted
FATS ratio- the measure VA currently uses- based on the

11 The FATS ratio is VA?s measure of the percentage by which foreclosures
would have been greater if VA had not pursued alternatives to foreclosure.
VA Does Not Have

Meaningful Performance Measures Nor Useful and Timely Management Reports for
Its Supplemental Servicing Program

VA Does Not Have Meaningful Performance Measures

Page 19 GAO- 01- 610 Supplemental Loan

aggregate data VA provided to us. 12 Figure 7 shows the nationwide FATS
ratio for fiscal years 1996 through 2000. Figure 8 shows the FATS ratio at
each of VA?s regional loan centers in fiscal year 2000.

Figure 7: Nationwide FATS Ratio for Fiscal Years 1996 - 2000 37. 5

32. 1 33. 4 30. 0 35.0

0 5

10 15

20 25

30 35

40

FATS ratio (nationwide) 2000 1999 1998 1997 1996 Fiscal year

A Source: GAO analysis of VA data.

12 VA provided data for the areas that were eventually consolidated into
each regional loan center, even though the loan center consolidation
occurred gradually over the past few years.

Page 20 GAO- 01- 610 Supplemental Loan

Figure 8: FATS Ratio at VA Regional Loan Centers (Fiscal Year 2000)

Source: GAO analysis of VA data.

While the FATS ratio is intended to reflect the level of activity performed
by VA on behalf of veterans, it presents a number of problems. First, it is
not sufficiently sensitive to changes in servicing levels, and thus it has
not varied much over time. It has not been possible, in some cases, to
observe changes in the FATS ratio due to loan servicing difficulties
associated with the regional office consolidation at the time the servicing
was affected. For example, when the St. Petersburg Regional Loan Center
stopped servicing loans, the impact on the FATS ratio appeared to be
minimal. However, the ratio is actually lower for fiscal year 2000 than for
the period that includes the consolidation. Representatives from the Phoenix
center told us that they had similar problems during the regional office
consolidation. (Appendix V provides specific information on the FATS ratio
at each regional loan center over the past 5 years.) A VA headquarters
official said that processing alternatives to foreclosures requires a long
time; and such a time lag could allow VA to take credit for loan servicing
provided much earlier, evening out the FATS ratio over time. Additionally,
other factors

FATS ratio (fiscal year 2000) Atlanta

Cleveland Denver

Houston Manchester

Phoenix Roanoke

St. Paul St. Petersburg VA regional loan centers

22. 3 35. 9 37. 3

35. 3 20. 3

27. 5 27. 5 30. 2 30. 3

0 5

10 15

20 25

30 35

40 A

Page 21 GAO- 01- 610 Supplemental Loan

that are unrelated to the actual performance of VA loan servicing
representatives may also affect the FATS ratio. For example, when lenders
participate in the SLMP program, VA loan servicing representatives must
provide the lenders with a determination of insolubility; and, because of
this involvement, these alternatives are still counted in the FATS ratio.

Second, the FATS ratio does not account for regional differences in economic
conditions, although regional economic conditions may affect the ability of
loan servicing representatives to implement various alternatives to
foreclosure. For example, according to VA regional loan center officials,
recent economic conditions in southern California resulted in lower home
prices, making it nearly impossible for loan servicing representatives to
arrange compromise claims. This occurs because decreases in home prices
increase the amount needed to pay a claim, and VA will not offer a
compromise claim if the amount of the payout under the compromise claim is
greater than the claim under a foreclosure. According to VA documents,
during VA?s September 1999 review of the FATS ratio, two regional loan
center directors expressed concern about using the FATS ratio as a
performance measure, primarily because they believed that economic factors
could severely affect it. For instance, if there is a substantial increase
in the number of foreclosures, the directors maintained that even a loan
center with experienced, productive loan servicing representatives might not
be able to significantly raise the number of alternatives to foreclosure
counted in the FATS numerator. In this case, the FATS ratio would decline.

VA officials said that when VA managers look at the FATS ratio for
individual regional loan centers, local teams, or individual loan servicing
representatives, they must take into account the local economic conditions,
which impact that performance, as well as other factors such as staffing and
training levels. We note, however, that VA does not have a systematic method
to account for the impact of regional economic conditions or other such
factors.

Third, the FATS ratio does not take into account the ultimate disposition of
a particular loan. It only accounts for individual servicing events, so a
loan, which had a successful intervention at one point, could ultimately
default. VA provided data on previous interventions on loans that eventually
ended in foreclosure, and the percentage appeared to be small- an average of
1.6 percent over the past 5 years. Nevertheless, if this number were to
increase in the future for any reason, this consideration may be important
when reviewing the performance of regional loan centers. In other words, the
benefit to the veteran from the intervention

Page 22 GAO- 01- 610 Supplemental Loan

depends on the duration over which the veteran remains in the home due to
the intervention.

In addition, the FATS ratio is intended to measure the benefits of VA?s loan
servicing program but omits another important component: cost reduction. In
fact, VA officials told us that they have not tracked the costs associated
with the various alternatives to foreclosure. To provide a very broad
estimate of the cost- effectiveness of VA?s supplemental servicing, VA
officials told us that they multiply the average claim paid by the number of
cases in which VA intervention prevents foreclosure. In the last few fiscal
years, VA officials said they have made claim payments averaging around
$19,000 and arranged some 6,000 successful interventions. They concluded,
based on these rough calculations, that the government had saved more than
$100 million by avoiding the payment of claims in these cases, even after
personnel and overhead costs were factored in.

VA officials said that their previous computer system did not have reports
designed for tracking average claims paid on deeds in lieu of foreclosure,
and the amount paid for compromise claims was not captured within the
system. Officials said that the LS& C computer system tracks these amounts,
but it is still undergoing development; and reports are still being
developed.

VA?s FATS ratio reflects the level of activity performed by VA on behalf of
veterans. However, VA does not have an effective way to measure the cost
savings its supplemental servicing program generates. Other agencies, such
as FHA, do have such a measure. FHA, for example, calculates a lender
performance score based, in part, on the lender?s success in holding down
costs to FHA while reinstating or terminating defaulted mortgages. FHA
effectively creates a benchmark by comparing the performance of each FHA
lender with the performance of other lenders in the same jurisdiction.
Although VA cannot use FHA?s benchmark, because the unit of observation for
VA is the regional loan center, VA could create benchmarks that account for
variations in economic conditions; legal requirements, such as different
state foreclosure laws; and other factors that vary among its nine regions.

Once it is fully implemented, the LS& C system appears to provide the
potential for VA to significantly improve its ability to assess the costs
and benefits and improve the management of its supplemental servicing
program. Over time, as VA?s LS& C computer system obtained extensive data on
defaulted loans, the system could be used to create measures for

Page 23 GAO- 01- 610 Supplemental Loan

data items such as the average cost of the various alternatives to
foreclosure. The system could also be used to create benchmarks. For
example, VA could use its database to analyze how trends in alternatives to
foreclosure and foreclosures over time and across regions are related to
economic conditions in those regions. 13 Economic conditions in a region at
each point in time can be measured by variables such as an unemployment
rate. In addition, we have identified another potentially useful variable to
establish benchmarks. The Office of Federal Housing Enterprise Oversight,
the safety and soundness regulator of the two governmentsponsored housing
enterprises, Fannie Mae and Freddie Mac, has created a quarterly housing
price index for regions, states, and metropolitan areas. With such
resources, VA could take into account, for example, how a decline in
regional housing prices contributes to higher VA costs, rather than
necessarily attributing higher costs strictly to the performance of the
regional loan center?s supplemental servicing activity.

To date, regional loan center managers and headquarters staff have not had
useful and timely reports that would help in managing the supplemental
servicing program. Managers at each of the three regional loan centers we
visited told us that since VA implemented the LS& C system, such management
reports were not available. They said that VA headquarters staff had been
working with the regions to reach a consensus on the types of management
reports that would be most useful, however. Regional loan center managers
also described problems with the quality of the data generated by the LS& C
system. They said that the LS& C had been undercounting the number of
alternatives to foreclosures completed. For example, a Phoenix manager said
that the regional loan center was not credited for about 30 compromise
claims processed by one service representative. VA headquarters asked
regional office managers to collect information on loan servicing manually
from November 2000 through February 2001 for comparison with data generated
from the LS& C system.

We also found that VA?s computer system could not efficiently generate
timely and reliable aggregate data. During this engagement, we requested
that VA provide us with basic data on its supplemental servicing program.

13 Statisticians and economists often use a statistical technique called
regression to explain variation in a dependent variable based on variation
in independent variables. Regression techniques could also be used to
explain variation in qualitative choice dependent variables involving
discrete categorization (i. e., in contrast to variables with continuous
measurement), such as alternatives to foreclosure and foreclosure. VA?s
Computer System

Does Not Generate Useful, Timely Management Reports

Page 24 GAO- 01- 610 Supplemental Loan

VA took more than 4 months to provide the data, and some data could not be
provided within our time frame. We identified numerous inconsistencies in
the data VA initially provided to us and had to request revisions even to
basic data on the numbers of alternatives to foreclosures processed and the
FATS ratio.

VA headquarters management said that the lack of a reporting capability has
been the largest single issue that it has had to address in the LS& C
system. VA headquarters management told us that the decision to implement
the system in September of 1999 was made with assurances from VA?s Office of
Information Technology that a reporting mechanism would be in place within 3
months of implementation. This deadline passed with no reporting system. Six
months after implementation, a short- term reporting mechanism was developed
that extracted data from the production database, reformatted it as a legacy
Liquidation and Claims System 14 master record, and then used legacy report
programs to generate reports. VA officials said that this effort resulted in
some inaccurate reports, which caused regional loan center managers to be
skeptical about the results of all of the reports.

By the fall of 2000, about 1 year after implementing the LS& C system, VA
officials told us the LS& C reporting mechanism became available. However,
VA officials said they are still in the process of feeding data into the
data warehouse. Officials said they are also working on getting business
language data definitions and calculations defined, written, published, and
concurred upon. These data definitions and calculations, once agreed upon
and implemented, would help ensure consistency in the way regional loan
centers account for their work. VA officials told us they expect to have
some reports in place by the end of April 2001.

VA?s supplemental servicing program seeks to help veterans when they cannot
pay their mortgages. The program offers a range of alternatives to
foreclosure that are intended to protect the interests of the veteran and
the government. VA recently completed the consolidation of 45 regional
offices into 9 regional loan centers that provide supplemental servicing.

14 VA used the Liquidation and Claims System before the implementing the LS&
C system in September 1999. According to VA officials, Liquidation and
Claims System was a batchoriented statistical data collection and reporting
application with limited operation support. Conclusions

Page 25 GAO- 01- 610 Supplemental Loan

This consolidation resulted in some temporary disruptions in service, but
the centers are now fully operational.

VA?s ability to effectively manage its supplemental servicing program has
been affected by two issues. First, VA does not have meaningful performance
measures that allow it to accurately assess the effectiveness of its
program. The full implementation of the LS& C computer system appears to
provide the potential for VA to significantly improve its ability to assess
both the benefits and costs of its supplemental servicing program. This
system could be used to create benchmarks that would help mitigate some of
the shortcomings of the FATS ratio. It could also be used to create a
measure of cost savings. While not the primary goal of the program, costs
savings should be a consideration in the program?s management. Other
agencies, such as HUD?s FHA loan program, have such a measure.

Second, VA?s computer system has not been able to generate useful and timely
management reports that regional loan center managers and headquarters staff
can use in managing their supplemental loan servicing program. VA managers
have acknowledged that this has been the largest, single issue that they
have had to address with the LS& C system and said they are working to
correct this problem. However, there have been numerous delays in the
development of management reports that have affected their ability to
effectively manage their supplemental servicing program.

We recommend that the Secretary of the Veterans Affairs direct VA?s Under
Secretary for Benefits to develop meaningful performance measures for the
nine regional loan centers. The overall framework could include creating
performance benchmarks that take into account the impact of economic
conditions and legal requirements on VA?s ability to reduce the number of
foreclosures while holding down costs. The overall framework could also take
into account the benefits of alternatives to foreclosure for veteran-
borrowers, perhaps using a FATS ratio in conjunction with performance
benchmarks.

We also recommend that the Secretary of the Veterans Affairs direct VA?s
Under Secretary for Benefits to take action to ensure that improvements are
made in a timely fashion to its computer system so that it can generate
accurate and useful management reports. These actions would include current
initiatives to provide consistent business definitions of the alternatives
to foreclosure. In addition, to implement the first Recommendations

Page 26 GAO- 01- 610 Supplemental Loan

recommendation, the actions would include compilation of data- such as
average costs of alternatives to foreclosure and house price movements in
the region- that could be used to assess benefits from supplemental
servicing and to create benchmarks for regional loan center performance.

The Secretary of Veterans Affairs (the VA Secretary) provided written
comments on a draft of this report, and these comments are reprinted in
appendix VI. VA and HUD also provided technical comments, which we
incorporated into this report where appropriate. In particular, we clarified
the report and our recommendation to reflect that VA?s LS& C system itself
does not produce management reports, but that data from the LS& C system are
entered into a data warehouse from which reports are produced.

The VA Secretary agreed with our recommendation that VA improve its computer
system so that it can generate accurate and useful management reports. He
stated that VA is strongly committed to this effort and discussed a number
of steps VA is taking to improve the system that should lead to improved
management reports.

The VA Secretary disagreed with our recommendation that VA develop
meaningful performance measures, including considerations of cost savings,
for the nine regional loan centers. He said that the FATS ratio is a
meaningful national measure of supplemental servicing performance and that
VA did a recent study confirming this. He also said VA has concluded that it
is not wise to include cost savings in a performance measure that is
intended to reflect assistance to veterans.

As demonstrated in our report, while the FATS ratio is intended to reflect
the level of activity performed by VA on behalf of veterans, it has a number
of shortcomings. The full implementation of the LS& C computer system,
however, appears to provide the potential for VA to improve upon this
measure of benefits. An improved performance measure with appropriate
benchmarks could provide a systematic way for regional managers to assess
and improve the outcome of their work in providing benefits to veterans.

Additionally, VA?s policy states that supplemental servicing is intended to
protect the interests of the veteran and the government. While not the
primary goal of the program, costs and cost savings- or protecting the
interests of the government- should be a consideration in the program
management. We have clarified the language in the report to reflect that
Agency Comments

Page 27 GAO- 01- 610 Supplemental Loan

the FATS ratio should not necessarily be adjusted to account for costs or
cost savings, but rather that some more accurate measure of costs and cost
savings should be developed and considered. The full implementation of the
LS& C system also appears to provide the potential for VA to develop such a
measure.

We will send copies of this report to the Chairmen and Ranking Minority
Members, House Committee on Veterans? Affairs and Subcommittee on Benefits,
House Committee on Veterans? Affairs; Chairman and Ranking Member, Senate
Veterans? Affairs Committee; Secretary, Department of Veterans Affairs; and
other interested parties. We will also make copies available to others upon
request.

Please contact me or William B. Shear at (202) 512- 8678 if you or your
staff have any questions. Major contributors to this report are listed in
appendix VII.

Sincerely yours, Davi M. D?Agostino Director, Financial Markets and
Community Investment

Appendix I: Objectives, Scope, and Methodology

Page 28 GAO- 01- 610 Supplemental Loan

The objectives of this report are to (1) describe the Department of Veterans
Affair?s (VA) policies and procedures for servicing troubled home loans, (2)
assess VA?s implementation of its policies and procedures for servicing
troubled home loans, and (3) analyze VA?s measures for assessing the
effectiveness of its program for servicing troubled loans and ability to
generate meaningful data for overseeing and improving loan servicing.

To describe VA?s policies for servicing troubled home loans, we reviewed VA
manuals and documents and interviewed officials from the VA, the Mortgage
Bankers Association, three veteran?s service organizations, and the Reni Mae
Corporation. We reviewed materials provided to us by the Reni Mae
Corporation related to a proposal to assist VA in helping veterans who faced
possible foreclosure. For purposes of comparison, we interviewed officials
from the Department of Housing and Urban Development (HUD) about the
agency?s policies for servicing Federal Housing Administration (FHA)
insured, single- family residential mortgage loans. We did not assess these
policies.

To assess VA?s implementation of policies for servicing troubled home loans,
we visited regional loan centers in Cleveland, OH; St. Petersburg, FL; and
Phoenix, AZ. We obtained information on their supplemental servicing
activities and interviewed VA officials, including loan servicing
representatives. We also reviewed VA?s quality- control procedures.

To analyze both VA?s measures for assessing the effectiveness of its
supplemental servicing program and the agency?s ability to generate
meaningful data that can be used in its overseeing and improving its loan
servicing program, we reviewed VA?s performance measures and requested data
on defaults, foreclosures, and alternatives to foreclosure for the nine VA
regional loan centers. In addition to analyzing this data, we interviewed VA
regional loan center and Washington headquarters officials about data
collection and performance measures for the supplemental servicing program.
While we identified inconsistencies in VA data during our review, we did not
assess the accuracy of the data. For the purposes of comparison, we reviewed
the performance measures HUD uses to assess the effectiveness of its FHA
program for servicing troubled loans. We did not analyze HUD?s performance
measures.

We conducted our work in Washington, D. C.; Cleveland, OH; St. Petersburg,
FL; and Phoenix, AZ between July 2000 and March 2001, in accordance with
generally accepted government auditing standards. We requested comments on a
draft of this report from the Secretary of Appendix I: Objectives, Scope,
and

Methodology

Appendix I: Objectives, Scope, and Methodology

Page 29 GAO- 01- 610 Supplemental Loan

Veterans Affairs. His written comments are presented in appendix VI. We also
obtained technical comments from VA, which we incorporated in this report as
appropriate. In addition, we obtained technical comments from HUD officials
on our description of HUD policies for servicing FHAinsured single- family
residential mortgage loans. We incorporated HUD?s technical comments in this
report where appropriate.

Appendix II: Background Information on the VA Single- Family Mortgage
Guaranty Program

Page 30 GAO- 01- 610 Supplemental Loan

The first section of this appendix provides general background information
on the VA single- family mortgage guaranty program. The second section
provides information on the number and average amount of loans VA has
guaranteed since 1996.

The VA loan program is an entitlement program that provides singlefamily,
residential mortgage loan guarantees for eligible veterans, service members,
reservists, and surviving spouses. VA loans cover the purchase,
construction, repair, and refinancing of homes. The loan guaranty provides
private sector mortgage lenders, such as banks, thrifts, and mortgage
companies with a partial guarantee on mortgage loans when loans go into
foreclosure. In exchange for the protection that the VA guaranty provides
lenders, VA encourages lenders to provide small or no- down- payment loans
to veterans. Currently, the maximum guaranty on a VA loan is $50,750. While
VA places no limits on the maximum loan amount that a veteran may obtain,
lenders generally limit the amount to $203,000 because of secondary market
requirements. To obtain the loan, veterans must meet VA?s eligibility and
underwriting requirements. To help support the program, VA requires that
veterans pay a funding fee to VA. The subsidy cost of VA loan guarantees and
direct loans are financed by credit subsidy appropriations to the Veterans
Housing Benefit Program Fund. The details of the basic features of the VA
loan program are described below.

Although VA generally encourages lenders to provide no- down- payment loans
to veterans, in certain cases a down payment is still required. According to
the VA Lender?s Handbook, lenders usually require that a veteran make a down
payment when the purchase price of the property exceeds a ?reasonable value?
or the loan is a graduated payment mortgage in which the monthly mortgage
payments gradually increase. In addition, lenders usually require a down
payment if the amount of the guaranty is less than 25 percent of the loan
amount. In such cases, the down payment will equal the difference between
the amount of the guarantee and 25 percent of the loan- a requirement
imposed by the secondary mortgage market, in which VA loans and other types
of mortgage loans and mortgage- backed securities (MBS) are bought and sold.

Most VA- guaranteed loans are pooled to support MBS guaranteed by the
Government National Mortgage Association (Ginnie Mae), a government
corporation within HUD. Ginnie Mae guarantees the timely payment of interest
and principal on MBS backed by cash flows from pools of Appendix II:
Background Information on the

VA Single- Family Mortgage Guaranty Program

General Description of VA?s Single- Family Mortgage Guaranty Program

Terms and Conditions

Appendix II: Background Information on the VA Single- Family Mortgage
Guaranty Program

Page 31 GAO- 01- 610 Supplemental Loan

federally guaranteed mortgage loans, such as VA- guaranteed and FHAinsured
loans. The MBS are sold to private investors, including pension funds, life
insurance companies, and individuals.

VA currently allows veterans and lenders to negotiate the interest rate on
VA- guaranteed loans based on prevailing mortgage rates. The maximum loan
term is 30 years and 32 days.

The amount of the guaranty depends on the original loan amount and whether
the veteran has previously used the entitlement to housing loan benefits.
(See table 1.) Currently, the maximum guaranty is $50,750. In addition, the
law allows a veteran who has previously obtained a VAguaranteed loan, but
has not used the maximum entitlement, to obtain another loan using the
amount remaining under the entitlement.

Table 1: VA Loan Guaranty Rate (as of March 2001) VA loan amount VA loan
guarantee rate

Up to $45,000 50% of the loan amount Between $45,001-$ 56,250 $22,500
Between $56,251-$ 144, 000 Lesser of $36,000 or 40% of the loan amount
Greater than $144,000 Lesser of $50,750 or 25% of the loan amount

Source: VA.

While VA places no limits on the size of loans veterans obtain, lenders
generally limit VA- guaranteed loans to $203,000, or four times the VA
guaranty, the limit used by the secondary mortgage market.

Eligibility for a VA- guaranteed loan is based on active duty service after
September 15, 1940. At least 90 days of active duty service is required for
wartime veterans; 181 days for peacetime veterans; and 2 years for veterans
who enlisted after September 7, 1980, or entered as an officer after October
16, 1981. Members of the Reserves and National Guard are also eligible if
they have completed at least 6 years of service. In addition, the unmarried
surviving spouse of a veteran who has died or is missing owing to service-
connected causes is considered eligible. However, because there are numerous
exceptions to the service requirements, VA requires that veterans apply to
VA to determine their eligibility. Veterans are also responsible for
selecting a lender that will honor the certificate of eligibility. Guaranty
Rates and Loan

Amount Eligibility

Appendix II: Background Information on the VA Single- Family Mortgage
Guaranty Program

Page 32 GAO- 01- 610 Supplemental Loan

Lenders of VA- guaranteed loans are required to follow VA?s general
underwriting guidelines for evaluating and verifying an applicant?s
financial status. Lenders must calculate an applicant?s residual income and
debt- to- income ratio when making a loan decision. According to the VA
Lender?s Handbook, the residual income is the amount of net income remaining
after deducting debts, obligations, and monthly living expenses such as
food, health care, and clothing. The debt- to- income ratio is the ratio of
total monthly debt payments (i. e., housing expenses and debts) to gross
monthly income. To qualify for a VA- guaranteed loan, VA requires that an
applicant?s residual income be equal to or greater than a required minimum
for the applicant?s loan size, family size, and region of the country, and
that the applicant?s debt- to- income ratio be generally less than 41
percent. According to the VA Lender?s Handbook, VA advises that lenders
exercise flexibility and sound judgment in making loan decisions.

To help support the program, veterans are required to pay a funding fee to
obtain a VA- guaranteed loan. Currently, veterans who have served on active
duty are required to pay 2 percent of the loan amount, while those who have
served in the Reserves or National Guard pay 2.75 percent of the loan
amount. (See table 2.) Congress periodically changes the funding fee rates
to reflect changes in the cost of administering the program or to assist a
certain class of veterans. The funding fee rates also vary by loan type and
down payment amount. In addition, veterans who have previously used the
entitlement pay higher funding rates than those using it for the first time.
Veterans with service- connected disabilities or their surviving spouses are
exempt from paying funding fees. Underwriting

Requirements Funding Fee

Appendix II: Background Information on the VA Single- Family Mortgage
Guaranty Program

Page 33 GAO- 01- 610 Supplemental Loan

Table 2: VA- Guaranteed Loan Funding Fee (as of July 2000) Type of loan Type
of veteran Down payment

Funding fee for first- time use

Funding fee for subsequent use

Regular military None 5% or more 10% or more

2.00% 1.50 1.25

3.00% 1.50 1.25 Purchase and construction loans

Reserves/ National Guard None 5% or more 10% or more

2.75 2.25 2.00

3.00 2.25 2.00 Regular military Not applicable 2. 00 3. 00 Cash- out
refinancing loans Reserves/ National Guard Not applicable 2. 75 3. 00
Interest rate reduction refinancing loans Not applicable Not applicable 0.
50 0. 50 Manufactured home loans Not applicable Not applicable 1. 00 1. 00
Loan assumptions Not applicable Not applicable 0. 50 0. 50

Source: VA.

Under the Federal Credit Reform Act of 1990, loans guaranteed after
September 30, 1991 are financed by credit subsidy appropriations to the
Veterans Housing Benefit Program Fund (VHBPF) Program Account. 1 This
account also receives an appropriation for administrative expenses. Funding
fees paid by veteran borrowers are deposited in the VHBPF Guaranteed Loan
Financing Account, a nonbudget account that records all nonsubsidized cash
flows of credit transactions.

In fiscal year 2000, VA guaranteed approximately 199,000 loans, a
significant drop from the previous year?s figure of approximately 486,000
loans. (See fig. 9.) Meanwhile, the average amount of a VA- guaranteed loan
has steadily increased from approximately $102, 000 in 1996 to $117,000 in
2000. (See fig. 10.)

1 The Federal Credit Reform Act of 1990 changed the budgetary treatment of
federal credit programs to make the system consistent with and comparable to
noncredit transactions. The intent of credit reform was to separate the
subsidy costs (costs to the government) from the nonsubsidized cash flows of
credit transactions and to focus on the former for budgeting and analysis.
Program Fund

Number and Average Amount of VA Guaranteed Loans

Appendix II: Background Information on the VA Single- Family Mortgage
Guaranty Program

Page 34 GAO- 01- 610 Supplemental Loan

Figure 9: Number of Loans Guaranteed by VA 318,909

257,916 343,957

485,625 199,161

0 100,000

200,000 300,000

400,000 500,000

600,000

Number of loans

2000 1999 1998 1997 1996

Fiscal year

A Source: VA.

Appendix II: Background Information on the VA Single- Family Mortgage
Guaranty Program

Page 35 GAO- 01- 610 Supplemental Loan

Figure 10: Average Loan Amount of VA- Guaranteed Loans

Source: VA.

Average loan amount of VA- guaranteed loans

2000 1999 1998 1997 1996

Fiscal year $101, 767

$104, 549 $110, 207 $111, 381

$117, 353

$90,000 $95,000

$100, 000 $105, 000

$110, 000 $115, 000

$120, 000

Appendix III: Information on the FHA SingleFamily Mortgage Insurance Program
and the Performance of VA and FHA Mortgage Loans

Page 36 GAO- 01- 610 Supplemental Loan

The first section of this appendix provides general background information
on the FHA mortgage insurance program. The FHA mortgage insurance program,
administered by HUD, shares some characteristics with VA?s loan guarantee
program. Appendix IV provides a comparison of VA and FHA policies for
servicing troubled loans. The second section compares the loan performance
of VA- guaranteed loans with that of FHAinsured loans. This comparison is
intended to provide further perspective on VA and FHA loan programs, and not
to define any linkages. The second section also briefly discusses a number
of factors that affect the probability that a borrower will default on a
mortgage.

Established by the National Housing Act of 1934, FHA insures mortgages made
by qualified lenders for the purchase or refinancing of homes. A primary
goal of the FHA mortgage insurance program is to assist households that may
be underserved by the private market, many of them low- income and first-
time homebuyers. Like the VA guarantee, FHA mortgage insurance helps reduce
financing costs for borrowers by protecting lenders against the risk of loan
default. FHA- insured loans generally sell on the secondary mortgage market
in the form of MBS guaranteed by Ginnie Mae. FHA loans are protected by
FHA?s Mutual Mortgage Insurance Fund, which is funded by borrower premiums.

As with a VA mortgage guaranty, the main advantage of FHA mortgage insurance
is that the criteria for qualifying for credit are not as strict as they are
for conventional financing. FHA generally allows potential home owners to
finance approximately 97 percent of the value of their home purchase through
their mortgage. Thus, borrowers can make a minimum down payment of 3 percent
of the value of their home. FHA insurance also allows borrowers to finance
many closing costs, so that actual loan amounts can exceed 97 percent of
home value.

Like the VA program, FHA insurance also limits some of the fees lenders may
charge borrowers for making loans. The origination fee, charged by the
lender for the administrative cost of processing the loan, may not exceed 1
percent of the mortgage amount. FHA sets limits on the dollar value of the
mortgage loan. Borrowers seeking mortgages that exceed FHA loan limits can
increase their down payment or obtain financing under a conventional
mortgage. Borrowers pay an up- front insurance premium at the time of
purchase that is generally added to the mortgage and regular mortgage
payment. Appendix III: Information on the FHA SingleFamily

Mortgage Insurance Program and the Performance of VA and FHA Mortgage Loans

General Description of the FHA SingleFamily Mortgage Insurance Program

Terms and Conditions

Appendix III: Information on the FHA SingleFamily Mortgage Insurance Program
and the Performance of VA and FHA Mortgage Loans

Page 37 GAO- 01- 610 Supplemental Loan

While the VA program guarantees fixed- rate residential mortgage loans, up
to 30 percent of the mortgages FHA insures annually can be adjustablerate
mortgages (ARM). ARMs insured by FHA have had higher delinquency and
foreclosure rates than fixed- rate mortgages.

To cover the costs of FHA loans, HUD imposes up- front and annual mortgage
insurance premiums on home buyers. The up- front premium, which is charged
when borrowers close on the loan and can be included in the mortgage
payment, is 1.5 percent. The annual mortgage insurance premium, which is
0.25 to 0.50 percent, depending on the loan term, is automatically canceled
when the loan amount is reduced to 78 percent of the sales price or
appraised value at time of loan origination, whichever is less. 1

The VA- guaranteed loans and FHA insured loans tend to perform similarly.
(See figs. 11 and 12.) We did not compare VA- guaranteed loans with
conventional private loans because VA- guaranteed loans generally require no
down payment. Our comparisons of VA and FHA loan performance are based on
data we collected from the Mortgage Bankers Association (MBA). 2 The MBA
reports the percentage of loans outstanding during each quarter of a
calendar year. We used data for VA and fixed- rate FHA residential mortgage
loans, because VA currently guarantees only fixedrate mortgages. According
to VA officials, VA had authorization to guarantee ARMs during fiscal years
1993, 1994, and 1995. However, MBA does not report separate data for VA
ARMs. VA officials told us that in fiscal year 1993 about 2 percent of their
guaranteed loans were ARMS. This number increased to 11 percent in 1994 and
20 percent in 1995.

1 FHA has recently revised its insurance premium structure for loans
originated on or after January 1, 2001, that are insured under the Mutual
Mortgage Insurance Fund. The revisions include reduction in the up- front
premium, from 2.25 percent to 1.5 percent, and automatic cancellation of
annual mortgage insurance premium when the loan reaches a certain loanto-
value ratio. In the past, some FHA borrowers were required to pay annual
mortgage insurance premiums throughout the mortgage life.

2 MBA conducts the quarterly National Delinquency Survey. The MBA Survey
collects data from over 180 lenders, including mortgage bankers, commercial
banks, saving banks, saving and loan associations, and life insurance
companies. The MBA Survey includes about 25 million mortgage loans on
single- family residential properties. Data on fixed- rate FHA loans are
reported by a smaller sample of lenders. Fees

The Loan Performance of Fixed- Rate Mortgages is Similar for VA and FHA
Borrowers

Appendix III: Information on the FHA SingleFamily Mortgage Insurance Program
and the Performance of VA and FHA Mortgage Loans

Page 38 GAO- 01- 610 Supplemental Loan

Figure 11: Percentage of Outstanding VA and Fixed- Rate FHA Loans Delinquent
30 Days or More

Source: MBA. 0

1 2

3 4

5 6

7 8

1992 1993 1994 1995 1996 1997 1998 1999

FHA VA

Percent 2000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 A

Appendix III: Information on the FHA SingleFamily Mortgage Insurance Program
and the Performance of VA and FHA Mortgage Loans

Page 39 GAO- 01- 610 Supplemental Loan

Figure 12: Percentage of Outstanding VA and Fixed- Rate FHA Loans for Which
Foreclosures Were Started During the Quarter

Source: MBA. 0

0.1 0.2

0.3 0.4

0.5 0.6

0.7 FHA VA

Percent 1992 1993 1994 1995 1996 1997 1998 1999 2000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 A

Appendix III: Information on the FHA SingleFamily Mortgage Insurance Program
and the Performance of VA and FHA Mortgage Loans

Page 40 GAO- 01- 610 Supplemental Loan

Several factors affect both the probability that a borrower will default on
a mortgage and the severity of the loss when foreclosure occurs. These
factors include the following:

 Negative borrower equity- a condition that occurs when the current loan
balance is greater than the current value of the mortgaged property.
Negative borrower equity can occur if home prices decline in a particular
geographic area.

 The age of the mortgage- the age of the mortgage affects the current loan
balance, due to amortization of outstanding loan principal. Mortgage
defaults and foreclosures tend to peak between the fourth and seventh years
after mortgage origination.

 Original loan to value (LTV)- loans with a higher LTV at origination are
more likely to experience negative equity when house values decline.

 Adverse conditions that affect a borrower?s ability to repay- the loss of
a job, divorce, or the death of spouse can trigger borrower?s failure to
make scheduled mortgage payments. These conditions, combined with severe
negative borrower equity, increase the likelihood of foreclosure and large
loss severity.

Appendix IV: Comparisons of VA and HUD Policies for Servicing Troubled Loans

Page 41 GAO- 01- 610 Supplemental Loan

To provide a general perspective on VA policies for servicing troubled
loans, we compared VA policies with HUD?s. This appendix highlights major
differences and similarities between VA and HUD policies for servicing
troubled loans. HUD administers the Loss Mitigation Program for servicing
FHA- insured loans. A general description of the FHA singlefamily mortgage
insurance program may be found in appendix III.

The loan servicing programs of VA and HUD have similar objectives: (1) to
help their borrowers avoid foreclosure and (2) to minimize financial losses.
However, the agencies use different means to achieve these objectives. They
differ in the level of servicing responsibilities that are placed on their
lenders and in the types of alternatives to foreclosure they offer.

While VA performs its own supplemental servicing, FHA lenders are required
to engage in loss mitigation for the purpose of providing alternatives to
foreclosure. 1 FHA lenders have full authority to offer any of HUD?s
alternatives to foreclosure without prior HUD approval. In contrast, VA
lenders are free to discuss all alternatives with borrowers, but they must
obtain prior VA approval before processing some of VA?s alternatives to
foreclosure.

The VA?s Servicer Loss Mitigation Program (SLMP), introduced in 1993, gave
participating lenders authority to offer both the deed in lieu of
foreclosure option and compromise claims. SLMP thus provides lenders with
much the same level of authority HUD lenders enjoy. However, participation
in the SLMP is optional, but participation in HUD?s Loss Mitigation Program
is mandatory. Additionally, VA must provide a

?determination of insolubility? before SLMP lenders can proceed with either
a deed in lieu of foreclosure or compromise claim.

Both VA and HUD encourage their lenders to utilize alternatives to
foreclosure, which are less costly and time consuming than foreclosure
proceedings. These alternatives include forbearance, loan modification,

1 In 1998, the National Housing Act was amended to add a triple penalty for
failure to engage in loss mitigation. (12 U. S. C. sect. 1715u) The penalty is
to be three times the amount of any insurance benefits claimed by the lender
on the mortgage. (12 U. S. C. sect. 1730f. 14( a)( 2)) Appendix IV: Comparisons
of VA and HUD

Policies for Servicing Troubled Loans Overview Lenders? Responsibilities for
Servicing Troubled Loans

Alternatives to Foreclosure

Appendix IV: Comparisons of VA and HUD Policies for Servicing Troubled Loans

Page 42 GAO- 01- 610 Supplemental Loan

and private sale of property. In addition, each agency offers alternatives
to foreclosure that the other does not.

One alternative that HUD offers for its loans that VA does not is called the
partial claim. (See table 3.) Using this alternative, HUD essentially
provides the borrower with an interest- free second loan on the property in
the amount necessary to reinstate the delinquent loan. The borrower is not
required to repay this loan until the first mortgage is paid in full or the
property is sold.

Refunding is one VA alternatives to foreclosure that HUD does not use. Under
this alternative, VA may purchase a defaulted loan from a lender and then
reamortize the loan to eliminate a delinquency.

Reflecting the different roles lenders play in servicing troubled loans,
cash incentives lenders receive from VA and HUD for offering alternatives to
foreclosure also differ. (See table 3.) VA pays cash incentives only to SLMP
lenders that process compromise claims and deeds in lieu of foreclosure. HUD
pays lenders cash incentives for offering any of its alternatives to
foreclosure.

Appendix IV: Comparisons of VA and HUD Policies for Servicing Troubled Loans

Page 43 GAO- 01- 610 Supplemental Loan

Table 3: Alternatives to Foreclosure Offered by VA and HUD Loan Servicing
Programs and Cash Incentives Paid to Lenders (as of March 2001)

Offered by:

Cash incentives paid to lenders:

Type of alternative to foreclosure VA HUD VA HUD Forbearance None $100 c
Loan modification None $500 Private sale of property None $1,000 Deed- in-
lieu of foreclosure $200 $250 Refunding Not

offered None Not applicable

Compromise claim a $200 b $1,000 Partial claim Not

offered Not applicable $250

a VA uses the term ?compromise claim? while HUD uses ?preforeclosure sale?
when referring to this type of alternative. b VA pays an additional $200 for
each month a compromise claim is completed prior to a deadline.

c HUD pays additional $200 to lenders in the top 25th percentile
performance. Source: GAO analysis of VA and HUD documents.

Appendix V: Data on VA?s Supplemental Servicing

Page 44 GAO- 01- 610 Supplemental Loan

This appendix provides details of the data we presented in the report. Table
4 provides details of VA?s supplemental servicing activities from fiscal
years 1996 to 2000; table 5 lists such details by each regional loan center.
Table 6 provides details of changes in loan servicing staff and the Notice
of Defaults (NOD) per employee at each regional loan center, from fiscal
years 1996 to 2000. Finally, table 7 provides details of the Foreclosure
Avoidance Through Servicing (FATS) ratio at each regional loan center, from
fiscal years 1996 to 2000.

Table 4: VA?s Supplemental Servicing Activities Type of loan activity 1996
1997 1998 1999 2000 Average (1996-

2000)

Number of loans guaranteed 318,909 257,916 343,957 485,625 199,161 321,114
Average loan amount $101,767 $104,549 $110,207 $111,381 $117,353 $109,051
Number of NODs received by VA 125,695 131,740 135,445 113,758 103,050
121,938 Percentage of NODs made current by borrower initiative and VA's
alternatives to foreclosure 73.2% 70.2% 71.2% 87.5% 91.8% 77.9%

By borrower initiative 63.3 60.2 61.4 76.4 81.6 67.7 By VA's alternatives to
foreclosure: 9.9 10.0 9. 9 11.1 10.2 10.2

Successful intervention 4. 5 4. 6 4. 1 5. 4 2. 8 4. 3 Compromise claim 2. 9
3. 0 3. 7 3. 2 2. 8 3. 1 Refunding 1. 5 1. 5 1. 5 2. 0 4. 0 2. 0 Deed- in-
lieu of foreclosure 1. 0 0. 8 0. 7 0. 5 0. 6 0. 7 Percentage of NODs
foreclosed 16.5 18.5 20.9 22.1 23.9 20.2 Percentage of NODs with unknown
status a 10.4 11.3 7. 9 -9.6 -15.6 1. 9

a Some defaulted loans have unknown status because they were neither cured
nor foreclosed in the year they defaulted. Source: GAO analysis of VA data.

Appendix V: Data on VA?s Supplemental Servicing

Appendix V: Data on VA?s Supplemental Servicing

Page 45 GAO- 01- 610 Supplemental Loan

Table 5: VA?s Supplemental Servicing Activities at Each Regional Loan Center
(Average: Fiscal Years 1996- 2000) Type of Loan Activity Atlanta Cleveland
Denver Houston Manchester Phoenix Roanoke St. Paul

St. Petersburg Average

Number of loans guaranteed

39,747 34,153 38,681 39,712 13,040 49,386 40,846 32,250 33,298 35,679
Average loan amount $99,881 $99,932 $122,734 $89,884 $109,588 $133,997
$122,796 $96,535 $95,286 109,051 Number of NODs received by VA

16,367 13,777 7,797 19,862 4, 351 19,074 14,279 11,337 15,093 13,549
Percentage of NODs made current by borrower initiative and VA?s
altnernatives to foreclosure

76.8% 84.3% 74.6% 80.4% 72.3% 73.9% 69.9% 83.4% 81.7% 77.9% By borrower
initiative 69.9 74.9 63.7 69.9 61.8 58.8 61.3 75.3 71.6 67.7% By VA?s
alternatives to foreclosure:

7.0 9. 5 11.0 10.5 10.5 15.1 8. 7 8.1 10.1 10.2% Successful Intervention

3.8 6. 1 4.0 5. 0 3.2 2. 9 2.8 4. 6 5.7 4. 3% Compromise Claim

0.9 1. 5 3.1 2. 0 4.8 9. 8 3.1 1. 5 1.1 3. 1% Refunding 2.0 1. 0 2.9 2. 9
0.9 1. 7 2.1 1. 2 2.6 2. 0% Deed- in- lieu of foreclosure

0.3 0. 9 0.9 0. 5 1.6 0. 8 0.7 0. 8 0.7 0. 7% Percentage of NODs foreclosed

19.7 15.2 16.9 16.1 22.8 29.5 25.5 15.9 17.9 20.2% Percentage of NODs with
sunknown status a

3.5 0. 4 8.4 3. 4 5.0 -3.4 4. 6 0.7 0. 3 1.9% a Some defaulted loans have
unknown status because they were neither cured nor foreclosed in the year
they defaulted. Source: GAO analysis of VA data.

Appendix V: Data on VA?s Supplemental Servicing

Page 46 GAO- 01- 610 Supplemental Loan

Table 6: Percentage Change in Full Time Employees (FTEs) Dedicated to Loan
Servicing and Percentage Change in NODs Per FTE at Each Regional Loan Center

VA Regional Loan Center 1996- 1997 1997- 1998 1998- 1999 1999- 2000 1996-
2000

Atlanta Change in FTEs (%) -1.6% -25.0% 6.9% 5.4% -16.7% Change in NODs per
FTE (%) 6.2 43.7 -19.0 -12.4 8. 3 Cleveland -12.8 -12.4 -6.8 12.6 -19.8

15.2 14.6 0. 9 -18.4 8. 7 Denver -20.8 -15.1 17.2 9. 0 -14.1

32.8 37.5 -27.7 -12.7 15.2 Houston -3.0 3. 1 -25.8 -10.6 -33.7

7.9 0. 4 9.0 -2.8 14.8 Manchester 17.4 -13.9 5. 3 2.4 8. 9

-7.7 24.9 -15.3 -21.3 -23.1 Phoenix 42.5 -34.4 26.3 -29.6 -16.8

-25.8 40.9 -36.9 22.6 -19.1 Phoenix 42.5 -34.4 26.3 -29.6 -16.8

-25.8 40.9 -36.9 22.6 -19.1 Roanoke 0.7 -5.4 4. 2 21.8 20.8

7.5 15.1 -20.9 -22.3 -23.8 St. Paul -16.7 -13.2 -13.0 17.7 -26.0

23.7 16.2 -11.5 -17.5 4. 9 St. Petersburg -17.3 -46.0 35.1 19.7 -27.7

27.3 86.8 -35.7 -25.2 14.4 Change in total number of employees -2.4 -18.8 1.
3 1.6 -18.5 Change in average number of defaults per employee 7.4 26.7 -17.1
-10.8 0. 5

Source: GAO analysis of VA data.

Appendix V: Data on VA?s Supplemental Servicing

Page 47 GAO- 01- 610 Supplemental Loan

Table 7: Foreclosure Avoidance Through Servicing (FATS) Ratio at Each
Regional Loan Center

VA Regional Loan Center 1996 1997 1998 1999 2000 Average

(1996- 2000)

Atlanta 30.8% 28.3% 25.1% 25.4% 22.3% 26.2% Cleveland 38.3 40.3 35.0 42.3
35.9 38.4 Denver 47.7 38.8 37.5 39.6 37.3 39.3 Houston 38.9 40.7 42.4 39.4
35.3 39.5 Manchester 39.3 36.7 31.9 31.2 20.3 31.6 Phoenix 38.3 33.5 34.7
32.9 27.5 33.9 Roanoke 27.9 26.2 19.6 26.8 27.5 25.4 St. Paul 41.9 39.0 26.0
30.4 30.2 33.6 St. Petersburg 42.3 39.4 33.2 34.5 30.3 36.0 Average 37.5
35.0 32.1 33.4 30.0 33.5

Source: GAO analysis of VA data.

Appendix VI: Comments From the Department of Veterans Affairs

Page 48 GAO- 01- 610 Supplemental Loan

Appendix VI: Comments From the Department of Veterans Affairs

Note: GAO comments supplementing those in the report text appear at the end
of this appendix.

Appendix VI: Comments From the Department of Veterans Affairs

Page 49 GAO- 01- 610 Supplemental Loan

Appendix VI: Comments From the Department of Veterans Affairs

Page 50 GAO- 01- 610 Supplemental Loan

Appendix VI: Comments From the Department of Veterans Affairs

Page 51 GAO- 01- 610 Supplemental Loan

The VA Secretary said VA conducted a study in 1999 and 2000 (VA?s 1999
study) that concluded that the national FATS ratio was the best measure of
VA?s supplemental servicing activities and that such a measure accounted for
local economic conditions and legal requirements. In reaching our
conclusions and making our recommendation, we reviewed and considered
information VA supplied on its 1999 study. According to the information
provided, in September 1999 the Loan Guaranty Service convened a group of
headquarters and regional VA personnel to review FATS and various
alternatives. In all, six alternatives were considered based on eight
criteria. The unweighted FATS ratio met all criteria. In contrast, a measure
similar to FATS, but adjusted in some manner to account for local economic
factors beyond VA control, did not meet three criteria:

 proposal must be supportable, reliable and easily validated,

 proposal must have a clear and simple approach, and

 the group must reach a consensus on the recommendations. Based on the
information provided, it did not appear that the group then considered the
future potential of the LS& C computer system to provide improved
performance measures for benefits to veterans or cost savings to the
government. With full implementation of the LS& C computer system, we
reached the conclusion that VA should develop new performance measures for
benefits to veterans and cost savings to the government that can be compared
across the nine regional loan centers. GAO Comment

Appendix VII: GAO Contacts and Staff Acknowledgments

Page 52 GAO- 01- 610 Supplemental Loan

Davi M. D?Agostino, (202) 512- 8678 William B. Shear, (202) 512- 4325

In addition to those named above, Kyong Lee and Kristi Peterson made key
contributions to this report. Appendix VII: GAO Contacts and Staff

Acknowledgments GAO Contacts Acknowledgments

(233662)

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