    Single-Family Housing: Stronger Measures Needed to Encourage Better
    Performance by Management and Marketing Contractors (Letter Report,
    05/12/2000, GAO/RCED-00-117).

    Pursuant to a congressional request, GAO provided information on the
    Department of Housing and Urban Development's (HUD) management and
    marketing contracts of single-family housing, focusing on HUD's: (1)
    experience with the contractors who manage and market these properties;
    and (2) progress in reducing its single-family property inventory.

    GAO noted that: (1) the central focus of HUD's management and marketing
    contracts is on getting properties sold; (2) in response, contractors
    have been increasingly aggressive at selling properties by using the
    Internet and other mechanisms to publicize the properties; (3) however,
    HUD has experienced problems with these contractors on a number of
    fronts; (4) since the contracts became effective in April 1999, 6 of the
    7 contractors have had significant problems with carrying out their
    responsibilities particularly in regard to securing and properly
    maintaining the properties assigned to them; (5) for example, Intown
    Management Group, which had 7 of the 16 contracts involving about 40
    percent of the properties, had problems with meeting almost all of HUD's
    performance requirements; (6) after trying unsuccessfully to secure
    better performance from InTown, HUD terminated all seven of the firm's
    contracts; (7) HUD selected three replacement contractors from among the
    remaining firms to absorb most of Intown's workload; (8) however, two of
    the three contractors that HUD selected were already having performance
    problems under their existing contracts; (9) HUD staff have limited
    contractor incentives or tools available--short of terminating
    contracts--to enforce contractors' compliance and improve performance;
    (10) HUD's inventory of acquired single-family properties at the end of
    fiscal year (FY) 1999 was 32 percent higher than it was a year earlier
    and over 100 percent higher than it was at the end of FY 1996; (11)
    HUD's new management and marketing contractors increased the total
    number of properties sold from the inventory during FY 1999, and the
    total number of properties in the inventory has now begun to decline;
    (12) however, the contractors have made relatively little progress
    disposing of older properties--properties in the inventory 6 months or
    longer; (13) in fact, as of February 2000, about 20,000 of HUD's
    properties were in the inventory 6 months or longer--up from 13,000
    properties in April 1999, the first month of the contracts; and (14)
    while HUD encourages contractors to sell properties quickly, it does not
    provide incentives for the contractors to focus on properties that have
    been in the inventory for a long period of time.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  RCED-00-117
         TITLE:  Single-Family Housing: Stronger Measures Needed to
    	     Encourage Better Performance by Management and Marketing
    	     Contractors
          DATE:  05/12/2000
       SUBJECT:  Housing programs
    	     Contract administration
    	     Contract performance
    	     Foreclosures
    	     Marketing
    	     Property disposal
    	     Federal property management
    	     Mortgage programs
    IDENTIFIER:  Internet
    	     HUD Single Family Acquired Asset Management System

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    GAO/RCED-00-117

    Appendix I: Comments From the Department of Housing and Urban Development

    32

    Appendix II: Contractors' Performance Dimensions to Be
    Reviewed by Homeownership Center Staff

    39

    Appendix III: GAO Contacts and Staff Acknowledgments

    43

    Table 1: High Risk Performance Dimensions for Contractors
    in June and November 1999 12

    Table 2: Property Maintenance Problems Noted by HUD in the
    November 1999 Assessment Reports 14

    Figure 1: HUD's Inventory of Single-Family Properties at the
    End of Fiscal Years 1996-99 5

    Figure 2: Contract Areas 8

    Figure 3: Unmaintained Washington, D.C., Property 15

    Figure 4: Vandalized Philadelphia Property 16

    Figure 5: Vandalized Electrical Box on California Property 17

    Figure 6: Number of New Acquisitions Into the Inventory
    Compared With Sales by Month Since the
    Implementation of Management and Marketing Contracts 22

    Figure 7: Percentage of Properties by Length of Time in HUD's
    Inventory in April 1999 Compared With Percentage
    in February 2000 25

    FHA Federal Housing Administration

    GAO General Accounting Office

    HUD Department of Housing and Urban Development

    Resources, Community, and
    Economic Development Division

    B-284059

    May 12, 2000

    The Honorable Rick A. Lazio
    Chairman
    Subcommittee on Housing and
    Community Opportunity
    Committee on Banking and Financial Services
    House of Representatives

    The Honorable Wayne Allard
    Chairman
    Subcommittee on Housing and
    Transportation
    Committee on Banking, Housing and
    Urban Affairs
    United States Senate

    Every year, thousands of borrowers default on their single-family mortgage
    loans insured by the Department of Housing and Urban Development's (HUD)
    Federal Housing Administration (FHA).1 When borrowers default, lenders may
    foreclose on the properties for which the loans were secured, file claims
    against the FHA insurance program, and convey the properties to HUD. In
    fiscal year 1999, HUD acquired over 70,000 properties through these
    foreclosures. If HUD's acquired properties are not properly secured,
    maintained, and resold, they can become eyesores and may contribute to a
    neighborhood's decay--particularly as they age.

    At the end of calendar year 1999, approximately 19,000 of 49,000 properties
    were in HUD's inventory for 6 months or longer--HUD's Inspector General
    estimated that these properties may be worth as much as $1.6 billion. These
    properties may lose market value as they age. In response to widespread
    problems with the maintenance of single-family properties reported by HUD's
    Inspector General and us,2 HUD began contracting out the management and
    marketing of its single-family property inventory in March 1999 and awarded
    a total of 16 such contracts. The contractors are responsible for
    inspecting, appraising, securing, maintaining, and selling the properties.
    For these services HUD pays the contractors a fee that is based on a
    percentage of the property's price. HUD pays the contractors 30 percent of
    their fee when they list the properties for sale and the remainder of the
    fee when they are sold. Concerned about HUD's disposition of these
    properties, you asked us to (1) describe HUD's experience with the
    contractors who manage and market these properties and (2) provide
    information on HUD's progress in reducing its single-family property
    inventory.

    The central focus of HUD's management and marketing contracts is on getting
    properties sold. In response, contractors have been increasingly aggressive
    at selling properties by using the Internet and other mechanisms to
    publicize the properties. However, HUD has experienced problems with these
    contractors on a number of fronts. Since the contracts became effective in
    April 1999, six of the seven contractors have had significant problems with
    carrying out their responsibilities particularly in regard to securing and
    properly maintaining the properties assigned to them. For example, InTown
    Management Group, which had 7 of the 16 contracts involving about 40 percent
    of the properties, had problems with meeting almost all of HUD's performance
    requirements. After trying unsuccessfully to secure better performance from
    InTown, HUD terminated all seven of the firm's contracts. HUD selected three
    replacement contractors from among the remaining firms to absorb most of
    InTown's workload. However, two of the three contractors that HUD selected
    were already having performance problems under their existing contracts. HUD
    staff have limited contractor incentives or tools available-- short of
    terminating contracts--to enforce contractors' compliance and improve
    performance.

    HUD's inventory of acquired single-family properties at the end of fiscal
    year 1999 was 32 percent higher than it was a year earlier and over 100
    percent higher than it was at the end of fiscal year 1996. (See fig. 1.)

    Figure 1: HUD's Inventory of Single-Family Properties at the End of Fiscal
    Years 1996-99

    Source: GAO's analysis of data from HUD.

    HUD's new management and marketing contractors increased the total number of
    properties sold from the inventory during fiscal year 1999, and the total
    number of properties in the inventory has now begun to decline. However, the
    contractors have made relatively little progress disposing of older
    properties--properties in the inventory 6 months or longer. In fact, as of
    February 2000, about 20,000 of HUD's properties were in the inventory 6
    months or longer--up from 13,000 properties in April of 1999, the first
    month of the contracts. While HUD encourages contractors to sell properties
    quickly, it does not provide incentives for the contractors to focus on
    properties that have been in the inventory for a long period of time.

    This report makes recommendations designed to improve the effectiveness of
    HUD's contracts for managing and marketing acquired single-family
    properties. While HUD agreed with some of our findings and disagreed with
    others, it did not comment on our draft report's recommendation. HUD does
    not believe that the draft report adequately recognizes many of the
    improvements that the program has achieved since HUD terminated InTown's
    contracts. We believe that our report presents a proper balance between what
    the program has accomplished and the shortcomings that it is still
    experiencing. For example, our report recognizes the improved sales
    performance by the contractors and the resulting decrease in HUD's property
    inventory. At the same time, our report notes that the percentage of
    properties in HUD's inventory for 6 months or longer has increased and that
    problems with the contractors' maintenance of the properties have persisted.
    Accordingly, we have not revised our report.

    Established by the National Housing Act, HUD's Federal Housing
    Administration provides hundreds of thousands of homebuyers with federally
    backed mortgage insurance. The mortgage insurance helps finance home
    purchases, many of them for low-income and first-time homebuyers, by
    insuring private lenders against losses on mortgages for single-family
    homes. From fiscal year 1997 through fiscal 1999, the number of
    single-family mortgage loans insured by FHA grew each year from
    approximately 800,000 to nearly 1.3 million--a 62-percent increase. For the
    3 years combined, FHA insured over 3 million mortgages with a total value of
    $291 billion.

    Most of these mortgages are insured by FHA's Mutual Mortgage Insurance Fund,
    which receives revenues through insurance premiums paid by borrowers. If a
    borrower defaults on a loan and the loan is subsequently foreclosed, the
    lender may file a claim for most of its losses with FHA. The lender
    transfers the title to the home to HUD after the claim is paid. HUD manages
    and sells the property through its property disposition program. The mission
    of HUD's property disposition program is to sell these properties in a
    manner that expands homeownership opportunities, strengthens neighborhoods
    and communities, and ensures a maximum return to the fund.

    As part of an effort to streamline operations and reduce costs, HUD began a
    pilot program in 1996 to test the feasibility of contracting out the
    management and sales functions of its property disposition program. HUD
    determined that the pilot was successful and proceeded with a solicitation
    for management and marketing contracts nationwide. A panel evaluated the
    proposals on the basis of five selection factors: prior experience, past
    performance, management capability and quality control, subcontract
    management, and small business subcontracting. The evaluation determined
    which proposals offered the best value to the Department by considering the
    combined relative merit of these factors.

    On March 29, 1999, HUD awarded seven companies a total of 16 contracts to
    handle most aspects of its property disposition program across the country.
    Each of the contracts covers a different geographic area under the
    jurisdiction of one of HUD's four homeownership centers.3 (See fig. 2.) Of
    the 16 contracts, 3 are under the Atlanta Homeownership Center's
    jurisdiction, 3 are under the Denver Homeownership Center's jurisdiction, 4
    are under the Philadelphia Homeownership Center's jurisdiction, and 6 are
    under the Santa Ana Homeownership Center's jurisdiction. When the contracts
    became effective, they covered 28,741 properties. This was approximately
    two-thirds of HUD's total inventory at the time--approximately one-third of
    the properties were already in the process of being sold and were not
    transferred to the contractors. HUD estimated that it will spend $927
    million over a 5-year period for these contracts.

    Figure 2: Contract Areas

    HUD's statement of work requires contractors to perform all of the
    management and marketing duties and responsibilities formerly performed by
    HUD. The contractor must inspect the property within 24 hours of assignment
    to determine its condition. As part of this inspection, the contractor
    determines whether it needs to clean out any debris to eliminate hazards and
    to put the property into a presentable condition. The contractor is also
    responsible for securing the property to prevent unauthorized entry and to
    routinely inspect the property to protect it and keep it in a presentable
    condition. As part of the sales process, the contractor is required to
    obtain an appraisal of the property no later than 10 business days after HUD
    obtains title to the property, use the appraisal to determine the list price
    for the property, and list it for sale. The contractor accepts sales offers
    and oversees the sales closings. The contractor's responsibilities also
    include such administrative tasks as establishing a file for each property,
    entering property-related data into the HUD database that tracks the status
    of the Department's single-family property inventory (referred to as the
    Single-Family Acquired Asset Management System), and reviewing the claims
    filed by lenders for reimbursement from HUD. The Department pays the
    contractors for these services in two installments--one comprising 30
    percent of the total fee when the properties are listed for sale and one
    comprising the remaining 70 percent when they are sold.4 According to HUD
    officials, the contracts are performance based because contractors are paid
    their full fee only if they sell the properties.

    The Director of the Real Estate Owned Division in each of the four
    homeownership centers is responsible for monitoring contractors' performance
    in the respective homeownership center's jurisdiction. Staff in these
    homeownership centers are responsible for managing and conducting the
    monitoring process and preparing monthly assessments on contractors'
    performance. The homeownership centers have a number of resources upon which
    they can draw to aid them in making these assessments. For instance, HUD
    hired third-party contractors to inspect 10 percent of the properties
    handled by each of the management and marketing contractors. Another
    national contractor is responsible for reviewing 10 percent of the
    management and marketing contractors' property case files each month by
    following a HUD checklist. In addition, the homeownership center's program
    support staff conduct follow-up property inspections and file reviews on a
    10-percent subset of the properties reviewed by HUD's third-party
    contractors, as well as a monthly on-site review at the contractors'
    offices. The homeownership center staff also use data from HUD's
    Single-Family Acquired Asset Management System and input from external
    sources, such as consumer groups and municipalities, in making their
    assessments.5

    According to HUD's contract-monitoring guidance, the homeownership center
    staff are to use information from the sources discussed above to prepare a
    comprehensive analysis of contractors' performance. As part of the analysis,
    the homeownership center staff assigns a risk rating of low, medium, or high
    to the contractor's performance on each of 11 dimensions.6 According to
    HUD's guidance, a "low risk" rating indicates minor performance problems
    that can be easily corrected, which means that no more than 5 percent of the
    properties surveyed resulted in findings of noncompliance.7 A "medium risk"
    rating indicates a pattern of findings and/or findings that significantly
    affect either the Department or the communities that it serves. A "high
    risk" rating indicates patterns or continual findings that the contractor
    has failed to correct or findings that have a devastating effect on HUD's
    assets or the community's interests.

    Contractors' Performance

    The primary emphasis of HUD's management and marketing contracts is on
    getting properties sold. Thus, contractors have been more aggressive at
    selling properties, using the Internet and broad listing brokers,8 and using
    other services to publicize the properties and enhance sales. For example,
    HUD's Southern California contractor has established customer service
    offices to work with the realtors in its jurisdiction. However, HUD has
    experienced widespread problems with its new management and marketing
    contractors on a variety of fronts. Six of its seven contractors have had
    significant problems with securing and maintaining the properties assigned
    to them, and HUD has noted problems with various aspects of the contractors'
    sales processes. InTown Management Group, for example, which had contracts
    covering about 40 percent of the properties in inventory, had problems both
    with property maintenance and sales. HUD, after trying unsuccessfully to
    secure better performance from this contractor, terminated all of its
    contracts. HUD selected three of the six remaining contractors to absorb
    some of the terminated contractor's workload, even though two of these
    replacement contractors were also having performance problems. Although HUD
    has identified these performance deficiencies, its efforts--such as phone
    calls and deficiency letters--to enforce contractor's compliance, short of
    contract termination, have not effectively corrected the problems. HUD has
    also had difficulties with monitoring its contractors' performance. For
    instance, HUD's oversight assessments of contractors' performance do not
    follow a consistent format and do not always determine the level of risk
    posed by contractors' performance, making it difficult to compare and track
    the performance of contractors over time.

    the Contracts' Implementation

    HUD's management and marketing contractors experienced start-up problems
    after being awarded their contracts. Early assessment reports prepared by
    the homeownership centers to evaluate contractors' performance indicated
    that most of the contractors had problems with carrying out some of their
    responsibilities. For instance, the assessment reports for June 1999--3
    months after the contracts became effective--indicate that of the 10
    contracts reviewed by the centers that month,9 8 had high risk performance
    in at least one of the performance dimensions reviewed.10 Four of the eight
    had high risk performance--the potential for adverse impact on the property
    disposition program or to the communities where the properties are
    located--in two performance dimensions, two had high risk performance in
    three dimensions, and one had high risk performance in five dimensions. A
    review of the monthly assessment reports prepared by the centers as of
    November 1999, the last month for the reports that we reviewed, indicate
    that the contractors' performance problems have persisted. The contractors'
    performance under 11 of the 13 contracts reviewed was high risk in at least
    one of the performance dimensions.11 The performance under five of the
    contracts was high risk in three or more performance dimensions. (See table
    1.)

    Table 1: High Risk Performance Dimensions for Contractors in June and
    November 1999

    Continued

     Homeownership centerContractor's high risk    Contractor's high risk
     and contract area   performance dimension(s)a performance dimensions in
                         in June 1999              November 1999

     Atlanta                                       Unable to determine. HUD did
                         Contract area under       not produce an assessment
     Area 1              InTown                    report for this contractor
                                                   in November
                                                   Contract area is the
     Atlanta                                       responsibility of the
                         Contract area under
                                                   Atlanta Homeownership Center
     Area 2              InTown                    staff until a new contractor
                                                   can be selected.

     Atlanta             Property Maintenance
                                                   Property Maintenance
     Area 3              Property Listing for Sale
                         Procedures
                         Property Maintenance
                                                   Claims Review
     Denver              Appraisal Procedures and
                         Monitoring                Property Maintenance
     Area 1
                         Single-Family Acquired    Appraisal Procedures and
                         Asset Management System   Monitoring
                         Data Entry
                         Property Maintenance
                                                   Claims Review
     Denver              Appraisal Procedures and
                         Monitoring                Property Maintenance
     Area 2
                         Office Processes and      Appraisal Procedures and
                         Procedures                Monitoring
                         Claims Review

                         Property Maintenance      Claims Review

     Denver              Appraisal Procedures and  Property Maintenance
                         Monitoring
     Area 3                                        Appraisal Procedures and
                         Sales Procedures          Monitoring

                         Single-Family Acquired    Sales Closing Procedures
                         Asset Management System
                         Data Entry
     Philadelphia
                         Property Maintenance      Property Maintenance
     Area 1
     Philadelphia
                         b                         None
     Area 2
                                                   Property Maintenance
     Philadelphia
                         b                         Sales Procedures
     Area 3
                                                   Sales Closing Procedures
                                                   Philadelphia Homeownership
     Philadelphia                                  Center staff are responsible
                         Contract area under       for one state in this area
     Area 4              InTown                    and the other three states
                                                   were assigned to two
                                                   replacement contractors.

     Santa Ana           Property Maintenance
                                                   Property Maintenance
     Area 1              Property Listing for Sale
                         Procedures

     Santa Ana           Property Maintenance      Property Maintenance

     Area 2              Appraisal Procedures and  Sales Closing Procedures
                         Monitoring
     Santa Ana
                         b                         Appraisal Procedures and
     Area 3                                        Monitoring
                                                   Claims Review
     Santa Ana
                         None                      Property Maintenance
     Area 4
                                                   Tax Payment and Invoice
                                                   Processing
                         Property Maintenance
     Santa Ana
                         Single-Family Acquired
                                                   Property Maintenance
     Area 5              Asset Management System
                         Data Entry
     Santa Ana
                         None                      None
     Area 6

    aSee appendix II for an explanation of each of the performance dimensions.

    bThe contract that was in effect for this area as of November 1999 became
    effective in September 1999. Thus, the June assessment report was for the
    previous contractor.

    One of the areas in which most of the contractors have had particular
    performance problems is that of property maintenance and security.
    Contractors' failure to properly secure and maintain the properties assigned
    to them may cause a decline in property values and have a negative impact on
    surrounding neighborhoods. In the homeownership center staff's monthly
    assessment reports of contractors' performance for each month from May
    through November 1999, the staff's assessments depict high risk performance
    in terms of property maintenance for over half of the contracts reviewed.12
    Even in the assessment reports for November--8 months after the initial
    contract start-up period--the homeownership center staff noted that over 60
    percent of the properties reviewed in some contract areas were in less than
    satisfactory condition.

    Table 2: Property Maintenance Problems Noted by HUD in the November 1999
    Assessment Reports

     Homeownership center/contract Property maintenance problems reported in
     area                          assessment reports
                                   Leaking roofs, broken windows, interior
     Atlanta                       debris, exterior debris, unsecured
                                   properties, properties not inspected within
     Area 3                        24 hours, and missing initial inspection
                                   reports.
                                   Unsecured properties; lawn maintenance not
                                   done; property not clean inside, outside, or
     Denver                        both; properties not in presentable
                                   condition; vandalism; roof leaks and damage
     Area 1                        caused by roof leaks; structural damage; no
                                   file evidence of corrective action on
                                   hazardous conditions or code violations; and
                                   missing routine inspection reports.
                                   Unsecured properties; broken windows;
                                   incompletely boarded windows; lawn
     Denver                        maintenance not performed; property not
                                   clean inside, outside, or both; properties
     Area 2                        not in presentable condition; vandalism;
                                   roof leaks; no snow removal; and structural
                                   damage.
                                   Unsecured properties; initial lawn
     Denver                        maintenance not done; property not clean
                                   inside, outside, or both; properties not in
     Area 3                        presentable condition; vandalism; roof
                                   leaks; no snow removal; and structural
                                   damage.
                                   Unsecured properties; lawn maintenance not
                                   done; property not clean inside, outside, or
     Philadelphia                  both; properties not in presentable
                                   condition; vandalism; roof leaks and damage
     Area 1                        caused by roof leaks; structural damage;
                                   defective paint; pool not secured; no snow
                                   removal; broken windows; water leak in
                                   basement; and no entry key.

     Philadelphia                  Broken windows; property not cleaned; debris
                                   removal needed; property not inspected by
     Area 3                        contractor; repairs needed; and defective
                                   paint.

     Santa Ana                     Unsecured properties; property not cleaned
                                   inside, outside, or not in presentable
     Area 1                        condition; vandalism; broken windows; and
                                   unsecured pools.

     Santa Ana                     Properties not secured; roof leaks;
                                   vandalism; property not clean inside or
     Area 2                        outside; and property not in a presentable
                                   condition.
                                   Little documentation of ongoing protection
     Santa Ana                     and maintenance; completion of authorized
                                   repair or maintenance work not documented;
     Area 4                        and no evidence of follow-up inspections or
                                   routine exterior maintenance.
     Santa Ana
                                   Personal property left in home, and
     Area 5                        structural problems.

    We corroborated that these problems existed during our visits to 16
    properties. Several of the properties we visited were not properly secured
    or maintained. For example, one of the homes in Washington, D.C., was poorly
    maintained (see fig. 3), had an open front window and rear door; beer
    bottles inside; and, although the grass in the front yard had been trimmed,
    the backyard was overgrown with brush and weeds. A property in Philadelphia
    that was listed for sale by the contractor still had the previous
    maintenance contractor's sign on the front door, unrepaired vandalism along
    the side of the house (see fig. 4), trash in the rear courtyard, and an
    unsecured opening into the house. A number of the properties we visited in
    California had trash left in the yard, had been vandalized (see fig. 5), or
    had unlocked doors or windows. HUD officials told us that because of the
    nature of HUD's properties, some of which are in neighborhoods prone to
    vandalism, they may never be able to keep all properties properly
    maintained.

    Figure 3: Unmaintained Washington, D.C., Property

    Figure 4: Vandalized Philadelphia Property

    Figure 5: Vandalized Electrical Box on California Property

    The homeownership centers have been bringing these issues to the
    contractors' attention and pressing for changes in the contractors'
    performance by identifying problems through the monthly assessment reports
    and by discussions with the contractors. For example, HUD's initial
    performance assessment reports for InTown, which was awarded the largest
    number of contracts (7 out of 16) and was assigned about 40 percent of the
    initial property workload, disclosed problems in almost all performance
    dimensions for all of the contractor's contracts. In May 1999, HUD
    terminated the InTown contract covering the states of Iowa, Minnesota,
    Montana, Nebraska, North Dakota, and Wisconsin and issued deficiency letters
    on the other six InTown contracts in an attempt to spur corrective action.
    However, InTown continued to have performance problems with the remaining
    contracts. On September 22, 1999, HUD terminated all six of InTown's
    remaining contracts,13 primarily due to the lack of sales, because at the
    time its contracts were terminated, InTown had sold only about 9 percent of
    the properties for which it was responsible.

    Contractors' performance problems are also illustrated by the contractor
    that HUD selected to assume responsibility for Iowa and five other states
    after HUD terminated the InTown contract. The replacement contractor already
    had three other contracts at the time that it was awarded the former InTown
    contract area in May 1999. While HUD relied on this contractor to absorb
    much of InTown's workload, HUD's assessments had noted serious performance
    weaknesses with the company's existing contracts. For example, the
    replacement contractor's performance in two of its existing contracts was
    high risk for 2 of the 11 performance dimensions assessed by homeownership
    center staff. Specifically, with regard to property maintenance in one of
    these contracts, 64 percent of the contractor's properties inspected by HUD
    staff and third-party contractors were found to be in less than satisfactory
    condition. With regard to appraisal procedures in that same contract area,
    almost half of the files reviewed did not have appraisals completed within
    the required 10 days. According to HUD's guidance, the failure to obtain
    timely appraisals can cause the Department to incur unwarranted holding
    costs and could possibly result in the receipt of appraisals that are not
    accurate.

    In the 6 months after the contractor assumed responsibility for the InTown
    contract, its performance on two of its existing contracts declined even
    further; the contractor's performance was high risk in two to five of the
    performance dimensions reviewed each month. The contractor's performance
    regarding the Iowa contract was even worse; performance was high risk in
    three to six of the dimensions reviewed each month. For example, the
    homeownership center staff's assessments of the contractor's performance
    under one of its contracts from June through September 1999 indicate that at
    least 60 percent of the properties inspected were maintained in less than
    satisfactory condition for all 4 months. These findings included
    deficiencies such as properties that were not secured; properties that were
    not clean inside, outside, or both; or properties that had damage caused by
    roof leaks. During the same time period, the homeownership center staff also
    continued to note high risk performance in the area of appraisal procedures.
    For example, in July 1999, 72 percent of the files reviewed under one of
    this contractor's contracts contained appraisals that were not received
    within the required time frame. These problems notwithstanding, when HUD
    terminated the balance of InTown's contracts in September 1999, it selected
    this same contractor to handle the contract for Washington, D.C., and five
    eastern states formerly handled by InTown. In the first 2 months that this
    new contract was assessed, this contractor's performance was high risk in 3
    of 10 performance dimensions for both months.

    Limited Tools to Improve Contractors' Performance

    While HUD has been effective in identifying performance problems with
    certain aspects of the contractors' operations, it has not been as effective
    in correcting them. HUD has made progress in correcting problems that
    initially surfaced with its monitoring methods, but inconsistencies in the
    homeownership centers' monitoring practices have made it difficult to
    compare the property management contractors' performance and to track
    contractors' performance over time. While the structure of HUD's contracts
    encourages the sale of properties, experience to date has also revealed
    limits in HUD's tools to address poor contractor performance in other areas.
    Finally, HUD's termination of InTown has shown the limits to contract
    termination as an enforcement option when few contractors are available as
    replacements.

    HUD's oversight methods have certain shortcomings that make it difficult to
    compare and track contractors' performance over time. Some of HUD's initial
    monitoring system problems have been associated with the third-party
    contractors that HUD uses to help oversee the management and marketing
    contractors. For instance, according to officials in HUD's Santa Ana
    Homeownership Center, the contractor hired to check the condition of a
    sample of properties in Southern California was not performing the required
    inspections and appeared to be falsifying some inspection records. HUD noted
    that pictures that the contractor claimed it took of properties during its
    inspections were obviously not of the correct properties. HUD terminated
    this property inspection contractor for inadequate performance. The Santa
    Ana Homeownership Center absorbed the contractor's workload while arranging
    for a replacement. However, because of resource constraints, HUD staff
    performed fewer inspections than it would require its contractors to
    perform.

    Inconsistencies in the homeownership centers' development and reporting of
    contractor assessments reduce the usefulness of these assessments for
    tracking and comparing performance. For instance, according to HUD's
    monitoring guidance, the monthly assessments are supposed to determine
    whether the level of performance described under each performance dimension
    constitutes a low, medium, or high risk. These determinations were reported
    by the Santa Ana Homeownership Center in assessment reports only for May and
    June 1999 and by the Denver Homeownership Center for April, June, and August
    1999 but have not been reported by any of the homeownership centers for the
    later months of 1999. In fact, of the assessment reports that we reviewed
    covering the months of April through November 1999, over 70 percent did not
    assign risk determinations to the various performance dimensions. In
    addition, HUD does not use a consistent reporting format--while some
    assessment reports evaluate the 11 performance dimensions specified in HUD's
    contract-monitoring guidance, others assess 10 or 12 performance
    dimensions,14 and while some assessment reports track monthly statistics
    such as data on contractors' sales and inventories, others do not. The
    usefulness of the information presented in the assessment reports also
    varies. For instance, the October and November 1999 assessment reports for
    one contractor list such performance deficiencies as unsecured properties
    and properties with debris that should have been removed but do not give any
    indication of how many inspected properties had these deficiencies. In
    addition, assessment reports were not prepared for one contract for the
    initial 2 months after a new contractor took over an InTown contract.

    Additionally, through experience HUD is learning that it has limited means
    to address poor performance by the contractors. Although the homeownership
    centers have identified performance problems, have brought them to the
    contractors' attention, and have pressed for improvements, these actions
    have not always yielded the improvement desired. For instance, in September
    1999, the Department issued a "letter of concern" to one of the contractors
    regarding the contractor's inadequate progress in maintaining properties in
    presentable condition. HUD also issued a deficiency letter regarding poor
    property maintenance to another contractor. While a HUD official told us
    that neither of these contractors was terminated and that their performance
    subsequently improved, the assessment reports prepared by homeownership
    center staff regarding these two contractors' performance show that as
    recently as December 1999, over half of the properties reviewed for each of
    these contractors were in less than satisfactory condition. Aside from
    pointing out deficiencies in the monthly assessment reports, issuing letters
    of concern or deficiency letters, or taking steps toward contract
    termination, HUD staff do not have other tools available to address
    performance deficiencies. For instance, the contracts do not provide for
    penalties to enforce compliance with the contract terms. As part of its
    audit of FHA's fiscal year 1999 financial statements, KPMG LLP, in a report
    on FHA's internal controls, recommended that FHA devise a method of
    penalizing management and marketing contractors that routinely do not comply
    with performance requirements.15 The report noted that penalties would
    effectively communicate the importance of strictly adhering to HUD's
    guidelines.

    Lastly, HUD's options for absorbing InTown's workload after terminating its
    contracts were somewhat limited. Although HUD got a large response to its
    initial solicitation, few contractors were found to be acceptable. HUD
    evaluated proposals submitted by 49 contractors. However, after screening
    those 49 contractors for significant weaknesses and/or deficiencies, HUD
    found only 8 acceptable contractors and 1 capable of being acceptable. HUD
    selected its seven initial contractors from this group of nine. Prior to
    InTown's termination, HUD negotiated contingency contracts with three of its
    existing contractors to take some of InTown's workload. However, the
    Department was not able to obtain coverage of all the areas by its existing
    contractors. Therefore, HUD's own staff were designated to handle six of the
    states formerly covered by InTown until the Department could bring new
    contractors on board. In November 1999, HUD issued a request for bids to
    obtain contractors for those six states and, according to a HUD contracting
    specialist, expects to award the contracts by June 2000.

    but the Number of Older Properties in the Inventory Is Increasing

    In addition to managing the acquired properties, a key component of the
    contractors' responsibilities is selling these properties. After an increase
    in the inventory in recent years, the number of properties is now beginning
    to decline. The management and marketing contractors, hired for their real
    estate sales expertise, are beginning to increase their sales of newly
    acquired properties coming into the inventory. (See fig. 6.) As a result,
    the inventory of properties as of February 2000 is down to approximately
    47,000, from a high of 52,000 properties. However, the number of older
    properties--those in the inventory longer than 6 months--has increased.

    Figure 6: Number of New Acquisitions Into the Inventory Compared With Sales
    by Month Since the Implementation of Management and Marketing Contracts

    Source: GAO's analysis of data from HUD.

    Beginning to Decline

    HUD's inventory of foreclosed properties steadily increased during fiscal
    years 1997 through 1999 but has been declining throughout fiscal year 2000.
    During fiscal year 1997, HUD acquired 64,000 properties, sold approximately
    59,000, and had an ending inventory of 30,000. In fiscal year 1998, the
    inventory grew to over 39,000 properties; an additional 74,000 properties
    were acquired and 65,000 sold. In the first 3 months following the
    implementation of the management and marketing contracts (Apr. through June
    1999), the inventory continued to increase as additional properties were
    acquired and sales declined. For example, in April 1999, HUD acquired about
    7,000 properties but sold only about 5,600. (See fig. 6.) By the end of
    fiscal year 1999, HUD's inventory reached approximately 52,000 properties.

    To explain the rise in the inventory, HUD officials told us that property
    acquisitions were high because of foreclosures while sales were down because
    of start-up problems experienced by the contractors--particularly InTown's
    failure to sell properties. According to HUD officials, these start-up
    difficulties included the contractors' difficulties in using HUD's
    Single-Family Acquired Asset Management System. In addition, HUD temporarily
    stopped sales of all its properties in February 1999 in preparation for the
    transfer to the management and marketing contractors. HUD required the
    contractors to inspect and reappraise all properties before they could be
    listed for sale again. HUD officials cited the poor performance of InTown as
    the main reason for the decline in sales of acquired properties.

    By October of 1999, however, the contractors had increased their sales,
    which, by that time, were outpacing acquisitions. For example, HUD acquired
    about 6,000 properties in October 1999, while the contractors sold about
    7,000 properties. As of February 2000, the inventory was down to about
    47,000 properties. The structure of HUD's contracts, which provide full
    payment to the contractors only after a property is sold, provides an
    incentive for good sales performance. In addition, since the contractors
    began selling properties in April 1999, HUD has experienced improvements in
    some of its sales-related statistics. For example, the average sales time
    has been reduced by 38 days--from 182 to 144--and the net recovery from
    sales, the percentage of the home's value that HUD nets after paying all
    costs associated with managing the property, increased from 79.7 to 80.2
    percent.

    That Have Been in the Inventory for 6 Months or Longer

    Although the contractors have increased their sales of HUD properties, the
    inventory of older properties, or those that have remained in the inventory
    for 6 months or longer, has increased. The contractors are selling more of
    the newer properties coming into the inventory. In February 2000, almost
    20,000 properties were in the inventory 6 months or longer, about 8,000 of
    these were in the inventory for a year or longer. This is up from about
    13,000 properties that were 6 months or older in April 1999, and about 4,400
    that were in the inventory a year or longer, when the management and
    marketing contracts became effective. Properties that were in the inventory
    for 6 months or longer accounted for 42 percent of the total inventory at
    the end of February 2000--up from 30 percent in April 1999. The properties
    in the inventory for 1 year or longer increased from 10 to 17 percent of the
    total inventory for this same time period. According to a HUD-contracted
    study,16 in the real estate industry, only about 2 to 3 percent of the
    properties remain in the inventory for over a year. According to the
    responsible HUD Division Director, the longer a property remains unsold, the
    higher the likelihood that it deteriorates or is vandalized. Deteriorating
    properties can have a negative impact on the surrounding community and the
    market value of nearby homes. In 1995, we reported that properties in the
    inventory for longer periods of time are sold for proportionately less.17

    Figure 7: Percentage of Properties by Length of Time in HUD's Inventory in
    April 1999 Compared With Percentage in February 2000

    Source: GAO's analysis of data from HUD.

    HUD is aware of the problems with older properties in the inventory, but its
    efforts to address the issue have not been effective. HUD's headquarters
    encourages the contractors, through frequent telephone calls, to focus on
    the older properties. HUD officials told us that they have not yet begun to
    lower the sales price of the older properties to encourage sales.18
    Although, HUD has an extensive monitoring system to oversee contractors'
    performance, the system does not specifically address contractors'
    performance in selling aging properties. Thus, there are no specific
    incentives for the contractors to give attention to the older, potentially
    more difficult to sell properties, or penalties if they do not. In contrast,
    the fee structure of the contracts provides an incentive for the contractors
    to sell properties quickly, which could lead the contractors to sell the
    newer, more marketable properties first. While selling properties quickly is
    desirable, the older properties should not be allowed to deteriorate.

    After a disappointing start with the forced termination of its largest
    contractor, HUD and the remaining management and marketing contractors have
    begun to increase sales. HUD's contracts provide incentives to sell
    properties quickly. However, HUD has found that other performance
    deficiencies persist on the part of many of the contractors, especially in
    the area of property maintenance. HUD requires the contractors to secure and
    maintain the properties that remain in the inventory so that they are not
    blights to the surrounding neighborhoods and so that they can be sold at
    their maximum values. HUD recognizes the importance of maintaining and
    securing its properties and assesses the performance of the contractors on
    this basis. However, given the continuing problems that HUD, KPMG, and we
    have identified with property maintenance and security, HUD's available
    incentives and enforcement methods, short of contract termination, are not
    strong enough to ensure that the contractors are meeting their
    responsibilities in this area. In its internal control report as part of its
    fiscal year 1999 audit of FHA's financial statements, KPMG recommended that
    HUD needs to devise a method of penalizing management and marketing
    contractors that routinely do not comply with contract performance
    requirements. We agree that a more effective mix of incentives and penalties
    is needed.

    Although HUD's inventory of properties has begun to decline, there has been
    little emphasis on properties that have been in the inventory for a long
    period of time. These properties tend to worsen the longer they remain
    unsold and could possibly sell at a lower price than other properties in the
    inventory. HUD's management and marketing contracts are focused primarily on
    selling properties quickly and do not provide contract incentives or
    penalties that could be used to focus more attention on HUD's older
    properties. By not effectively addressing the aging of its inventory, HUD
    may be allowing deteriorating properties to have a negative impact on the
    value of surrounding properties and on the communities and may not be
    accomplishing its goal of achieving a maximum return for its insurance fund.

    To improve the effectiveness of HUD's property disposition program, we
    recommend that the Secretary of Housing and Urban Development direct the
    Assistant Secretary for Housing-Federal Housing Commissioner to develop more
    effective methods, such as specific incentives or penalties, to encourage
    contractors to reduce the number of properties that are in the inventory
    longer than 6 months.

    We provided HUD with a draft of this report for review and comment. While
    HUD agreed with some of our findings and disagreed with others, it did not
    express a view on our draft report's recommendation.

    In commenting on the performance of the management and marketing contractors
    in general, HUD presented a number of recent sales-related statistics and
    asserted that they prove the success of the management and marketing
    contracts. HUD also stated that property maintenance under the management
    and marketing contracts is better, since sales have increased. Lastly, HUD
    stated that our draft report did not consider most of the common real estate
    performance measures such as the overall volume of sales, the financial
    return on sales, the amount of time that properties are held in inventory,
    and the percentage of properties sold to owner occupants in assessing the
    contractors' performance. Contrary to HUD's comment, our draft report did
    address common real estate performance measures such as the number of homes
    sold, the net recovery from sales, and the average sales time. In addition,
    our draft report recognized the recent increase in sales and the improvement
    in sales-related statistics. We also used HUD's performance measures set out
    in its guidance for assessing the performance of the contractors. As we
    report, HUD's monthly assessment reports, which use these measures, show
    continued contractor performance problems--particularly with property
    maintenance. Lastly, while property sales are important, we believe that the
    contractors should be held accountable for managing the properties as well
    as marketing.

    HUD commented that our draft report's discussion of contractors' performance
    did not reflect two critical aspects of its monitoring approach. First, HUD
    stated that while it expects contractors to comply with every contract
    requirement, it noted that the degree of financial risk to the Department
    from noncompliance is much greater for some requirements than others, which
    results in varying actions from HUD. Second, HUD stated that the
    contractors' sales performance and its contractor assessment reports
    indicate that HUD's corrective actions have resulted in improved performance
    by all the contractors except InTown. Our draft report did not distinguish
    between the different types of noncompliance or prioritize HUD's performance
    measures because HUD's guidance does not draw any distinction or priority
    between the different required performance measures it uses to assess the
    contractors. During our review, HUD officials acknowledged that they had not
    established a priority ranking of the contractor performance measures. In
    addition, our draft report concentrated on property maintenance in
    discussing contractors' performance problems because we believe this is one
    of the key performance measures in that it affects the value of the
    property, the ability of the contractor to market the property, and the
    property values of the surrounding community. Furthermore, as our draft
    report stated, our analyses of the monthly assessment reports show that most
    contractors had performance problems that continued, and in some cases
    worsened, for the period we reviewed.

    HUD agreed with our draft report's finding regarding inconsistencies in the
    homeownership centers' monitoring of the contractors. HUD stated that to
    address this problem, it had scheduled additional training for contract
    monitors in July 2000.

    HUD disagreed with our conclusion that the Department had limited
    enforcement tools to address contractors' performance deficiencies. HUD
    stated that it had an array of enforcement tools at its disposal and had
    demonstrated a willingness to use them. Our draft report recognized HUD's
    use of assessment reports, letters of concern or deficiency letters, and
    contract terminations to address contractors' performance problems. However,
    our draft also pointed out that the contracts do not provide for penalties
    to enforce compliance with the contract terms. As a result, HUD has had
    limited success in improving the poor performance of its management and
    marketing contractors. As our draft report noted, two contractors to whom
    HUD issued letters of concern or deficiency letters in September 1999 showed
    continued and serious deficiencies in their maintenance of properties 3
    months later. Moreover, our draft report showed that as of November 1999,
    the contractors' performance under 11 of the 13 contracts was determined to
    be "high risk" in at least one of the performance dimensions.

    In commenting on our draft report's discussion of its inventory of
    properties, HUD stated that its inventory of homes has been declining for 9
    straight months and that this trend should continue. Although we reviewed a
    different time period in our analysis--April 1999 through February 2000--our
    draft report acknowledged that the inventory was beginning to decline at the
    end of fiscal year 1999 as sales began to outpace acquisitions. We also
    recognized that the slowdown in sales in April of 1999 was due to HUD's
    activities related to the transfer of properties to the contractors, such as
    requiring the contractors to inspect and reappraise all of the properties.
    We also cited InTown's poor performance as one reason for declining sales at
    the beginning of the transition to the management and marketing contractors.

    With regard to our draft report's discussion of HUD's aged inventory of
    properties, HUD noted that the inventory of these properties recently
    declined from a high of 21,059 in December 1999 to 16,368 by April 2000.
    While we view this as a positive sign, we note that the aged inventory as of
    April 2000 is still higher than it was a year ago. Our draft report also
    noted HUD's plan to sell aged properties at reduced prices to local
    communities under its Good Neighbor Program. However, with an implementation
    date of May 1, 2000 for the program, it was too early for us to review the
    program or determine its effect on the aged inventory. Considering the large
    number of aged properties and the effect that they can have on the
    surrounding community, we still believe that HUD needs more effective
    measures to encourage contractors to reduce the number of properties in the
    inventory for over 6 months.

    The full text of HUD's letter is presented in appendix I.

    To determine HUD's experience with the contractors who manage and market its
    inventory of acquired properties, we obtained information on the number of
    single-family properties acquired by HUD, property sales, and inventory
    balances for 1996 through 1999. We also reviewed HUD's statement of work for
    the management and marketing contracts and the guidance provided to the
    homeownership center staff for monitoring the contracts. We interviewed the
    Director of HUD's Single-Family Servicing Division and officials at the
    Philadelphia, Pennsylvania and Santa Ana, California Homeownership Centers,
    which have a large portion of HUD's single-family property inventory. In
    addition, we interviewed officials from three of the contractors operating
    in the jurisdiction of these homeownership centers. We also reviewed prior
    reports on this issue by HUD's Office of Inspector General.

    To supplement our review of HUD's and its contractors' practices and
    processes, we visited and observed 16 homes in the Washington, D.C.,
    Philadelphia, Chicago, and Dallas areas. Ten of these homes were selected
    from a nationwide statistical sample of foreclosed properties developed for
    our 1999 review of HUD's foreclosed property management process. We also
    visited six homes selected from a random sample of homes in Fontana,
    California. We limited our selection to the homes that had not been sold and
    were thus still being managed and marketed by the contractor.

    To determine the current status of HUD's management and marketing contracts,
    we interviewed HUD's chief procurement officer and his staff. We obtained
    and reviewed all of HUD's contractor assessment reports for April through
    November 1999. Our primary focus in this analysis was on the risk
    determinations--assessments of the extent of performance problems--made by
    HUD's staff with regard to the contractors' performance on each of the 11
    performance dimensions. In those cases where HUD provided an explanation of
    the extent of performance problems but did not label them as a low, medium,
    or high risk, we applied HUD's criteria to arrive at the risk level depicted
    by their findings.

    We conducted our review from July 1999 through April 2000 in accordance with
    generally accepted government auditing standards.

    As arranged with your office, unless you publicly release its contents
    earlier, we plan no further distribution of this report until 30 days after
    the date of this letter. At that time, we will send copies to the Honorable
    Barney Frank, Ranking Minority Member, Subcommittee on Housing and Community
    Opportunity, House Committee on Banking and Financial Services; the
    Honorable James A. Leach, Chairman, and the Honorable John J. LaFalce,
    Ranking Minority Member, House Committee on Banking and Financial Services;
    the Honorable John Kerry, Ranking Minority Member, Senate Subcommittee on
    Housing and Transportation; the Honorable Susan M. Collins, Chairman, and
    the Honorable Carl Levin, Ranking Minority Member, Senate Permanent
    Subcommittee on Investigations; the Honorable Phil Gram, Chairman, and the
    Honorable Paul Sarbanes, Ranking Minority Member, Senate Committee on
    Banking, Housing, and Urban Affairs; and the Honorable Fred Thompson,
    Chairman, and the Honorable Joseph Lieberman, Ranking Minority Member,
    Senate Committee on Governmental Affairs. We will also send copies of this
    report to the Honorable Andrew M. Cuomo, Secretary of Housing and Urban
    Development; the Honorable William C. Apgar, HUD Assistant Secretary for
    Housing-Federal Housing Commissioner; and the Honorable Jacob J. Lew,
    Director, Office of Management and Budget. We will make copies available to
    others upon request.

    If you or your staff have any questions about the material in this report,
    please call me at (202) 512-7631. Major contributors to this report are
    listed in appendix III.

    Stanley J. Czerwinski
    Associate Director, Housing and
    Community Development Issues

    Comments From the Department of Housing and Urban Development

    Contractors' Performance Dimensions to Be Reviewed by Homeownership Center
    Staff

    According to the Department of Housing and Urban Development's (HUD)
    monitoring guidance, homeownership center staff are to assess the following
    11 dimensions in order to evaluate the management and marketing contractors'
    performance:

    1. Claims Review: This performance dimension encompasses such objectives as
    ensuring that the contractor inspects properties within 24 hours of
    acquisition and reconciles the inspection reports with the claims filed by
    the mortgagees to confirm that the mortgagees completed all maintenance and
    repair actions for which they requested reimbursement. According to HUD's
    guidance, the primary risk associated with this performance dimension is
    that the contractor will not initially inspect the properties within the
    24-hour time frame, which threatens HUD's ability to enforce the mortgagee's
    responsibilities to preserve and protect the Department's assets until the
    property is transferred. Another of the risks mentioned in HUD's guidance is
    that, should the contractor fail to review the reimbursement claim from the
    mortgagee, the Department could pay for items not completed or completed
    incorrectly by the mortgagee.

    2. Property Maintenance: This performance dimension encompasses such
    objectives as determining if the contractor is meeting its obligation to
    secure and maintain all of the properties for which it is responsible,
    ensuring that the contractor is performing routine inspections of its
    assigned properties and that the properties are secured, and ensuring that
    proper notifications are made to inform local authorities of HUD's ownership
    interest in the property. According to HUD's guidance, the risks associated
    with this dimension are that the contractor's failure to promptly perform
    the property maintenance functions may result in declines in property
    values, adverse impacts on the communities where the properties are located,
    and health and safety hazards to the community.

    3. Appraisal Procedures and Monitoring: This performance dimension
    encompasses such objectives as determining if the contractor is meeting its
    obligations to (1) obtain appraisals within 10 days of a property's
    acquisition and (2) ensure that the appraisal value is appropriate and
    reflects true market value. According to HUD's guidance, the primary risk
    associated with this dimension is that the contractor will influence the
    appraiser to underestimate the market value to facilitate a quick sale of a
    property, which could diminish the sale price and result in a lower return
    on sale to HUD. Another risk mentioned in HUD's guidance is that the
    contractor's failure to obtain timely property appraisals will cause the
    Department to incur unwarranted holding costs and could possibly result in
    the receipt of appraisals that are not accurate.

    4. Property Listing for Sale Procedures: This performance dimension
    encompasses such objectives as determining if the contractor is meeting its
    obligation to list properties for sale, ensuring that the listings are done
    in accordance with contract requirements, and ensuring that the contractor
    is displaying accurate and consistent information on all properties across
    all methods of advertising. According to HUD's guidance, the primary risk
    associated with this dimension is that the contractor will not follow
    contract requirements for listing properties, which could result in listing
    properties below market value, thus causing a financial loss to the
    Department. Another risk mentioned in HUD's guidance is that the
    contractor's failure to perform in accordance with the contract requirements
    when listing the property for sale could cause the Department to incur
    additional costs if the property is not properly inspected and listed for
    sale.

    5. Sales Procedures: This performance dimension encompasses such objectives
    as determining if the contractor is meeting its obligation to appropriately
    accept offers on the properties listed for sale, ensuring that the
    contractor is using electronic bidding, and ensuring that the contractor is
    accepting the highest acceptable offers within the thresholds established in
    its contract. According to HUD's guidance, a primary risk associated with
    this dimension is that the contractor will accept unnecessarily low offers
    on the properties in an attempt to facilitate quick sales. Doing so not only
    presents a risk to HUD's financial returns, but also affects the communities
    where the properties are located because it could give the perception to the
    real estate industry and to the public that HUD is only interested in
    "dumping" its properties quickly without attaining the highest net return
    possible.

    6. Sales Closings: This performance dimension encompasses such objectives as
    determining if the contractor is meeting its obligation to close property
    sales within established time frames (30 to 60 days), ensuring that the
    contractor is forwarding complete and accurate closing documents to HUD's
    closing agents, and ensuring that the sales closings are handled by HUD's
    closing agents and the proceeds are received by HUD as soon as possible
    following sales closings. According to HUD's guidance, numerous risks to the
    Department are associated with this dimension. For example, delayed sales
    closings could cause the Department to incur undue holding costs and
    increase the chance of vandalism or damage to properties, resulting in a
    potential loss of revenue to the Department.

    7. Single-Family Acquired Asset Management System (SAMS) Data Entry: This
    performance dimension encompasses such objectives as determining if the
    contractor is meeting its obligation to perform daily data entry into SAMS
    and ensuring that the data in SAMS correspond to the current status of each
    property. According to HUD's guidance, a primary risk associated with this
    dimension is that the contractor will not maintain the SAMS database or
    intentionally misrepresent the information in the system, which could leave
    the Department unable to determine the value of its assets and the number of
    properties of which it must dispose.

    8. Rental Process: This performance dimension encompasses such objectives as
    determining if the contractor is meeting its obligation to maintain rental
    properties in accordance with the lease requirements, ensuring that the
    contractor is collecting rental income on a monthly basis and depositing it
    as appropriate, and ensuring that the monthly rents charged are based on
    fair market rental values. According to HUD's guidance, the primary risk
    associated with this dimension is the loss of rental income if the
    contractor does not perform this function in accordance with contract
    requirements.

    9. Occupied Conveyance Process: This performance dimension encompasses such
    objectives as determining if the contractor is correctly processing occupied
    conveyance requests (requests for occupants to remain in a property
    following its transfer to HUD), ensuring that the contractor is inspecting
    any properties for habitability when an occupied conveyance request has been
    received from the occupant, and ensuring that the contractor is establishing
    a fair market rent that is based on the rents in the area. According to
    HUD's guidance, a risk associated with this dimension is that the contractor
    will not comply with the contract requirements and prevent potentially
    eligible occupants from remaining in a property for a limited period of
    time.

    10. Defective Paint Issues: This performance dimension encompasses such
    objectives as ensuring that a Certification of Inspection for Defective
    Paint Surfaces is on file for any property constructed prior to 1978 and
    ensuring that any defective paint treatment is performed satisfactorily.
    According to HUD's guidance, a primary risk associated with this dimension
    is that if a property where defective paint has been detected is purchased
    by homeowners with children under the age of 7, the contractor's failure to
    treat the defective paint surfaces could result in harm to the children.
    Another risk mentioned in HUD's guidance is that if the contractor fails to
    perform repairs necessary to correct defective paint, the sale of the
    property may be affected, causing it to remain in inventory for a longer
    period of time.

    11. Process Observation: This performance dimension encompasses such
    objectives as determining if the contractor is meeting the entire
    contractual obligation to perform management and marketing functions,
    ensuring that the contractor's key personnel have not changed without prior
    approval by HUD staff, ensuring that the contractor has developed a written
    procedures manual for its employees to follow, and ensuring that the
    contractor is inspecting the work of its subcontractors. According to HUD's
    guidance, the primary risk associated with this dimension is that the
    contractor will not properly perform the functions of the contract, thus
    resulting in a loss of revenue to the mortgage insurance fund, possible
    vandalism to HUD's properties, and an adverse impact on communities where
    properties are located.

    GAO Contacts and Staff Acknowledgments

    Paul J. Schmidt (312) 220-7681

    In addition to those named above, Jacqueline Garza, John McGrail, Stan
    Ritchick, Stewart Seman, and Leigh Ward made key contributions to this
    report.

    (385810)

    Table 1: High Risk Performance Dimensions for Contractors
    in June and November 1999 12

    Table 2: Property Maintenance Problems Noted by HUD in the
    November 1999 Assessment Reports 14

    Figure 1: HUD's Inventory of Single-Family Properties at the
    End of Fiscal Years 1996-99 5

    Figure 2: Contract Areas 8

    Figure 3: Unmaintained Washington, D.C., Property 15

    Figure 4: Vandalized Philadelphia Property 16

    Figure 5: Vandalized Electrical Box on California Property 17

    Figure 6: Number of New Acquisitions Into the Inventory
    Compared With Sales by Month Since the
    Implementation of Management and Marketing Contracts 22

    Figure 7: Percentage of Properties by Length of Time in HUD's
    Inventory in April 1999 Compared With Percentage
    in February 2000 25

    1. HUD defines a single-family property as a residential dwelling of one to
    four units.

    2. See Single-Family Housing: Improvements Needed in HUD's Oversight of
    Property Mangement Contractors (GAO/RCED-98-65 , Mar. 27, 1998) and
    Single-Family Property Disposition Program (99-AT-123-0001, Sept. 17, 1999).

    3. HUD's four homeownership centers administer the single-family housing
    functions formerly performed by 81 HUD field offices. The homeownership
    centers are located in Atlanta, Georgia; Denver, Colorado; Philadelphia,
    Pennsylvania; and Santa Ana, California.

    4. The contractor's fee is calculated by using a "price factor," or a
    percentage of a property's price, specified in the contract, as agreed upon
    by the contractor and HUD. The first payment installment is calculated by
    multiplying the price factor--a specified percentage--by a property's
    listing price; the contractor receives 30 percent of the resulting product.
    The second payment installment is calculated by multiplying the price factor
    by the property's net sales price and then subtracting the amount of the
    first installment.

    5. We also discussed HUD's process for monitoring the management and
    marketing contractors in our report entitled HUD's Loan Origination and
    Foreclosed Property Management Processes (GAO/AIMD-00-41R , Nov. 19, 1999).

    6. These performance dimensions assess such tasks as claims review, property
    maintenance, appraisal procedures and monitoring, and sales procedures. (See
    app. II for a further discussion of the performance dimensions that
    homeownership center staff are to review.)

    7. The homeownership center staff must justify, in writing, any assessment
    of low risk where more than 5 percent of the properties surveyed resulted in
    findings of noncompliance.

    8. The broad-listing broker places each property on a local multiple-listing
    service and answers inquiries regarding the property.

    9. The 10 contracts reviewed include the replacement contractor for the one
    InTown contract that was terminated in May 1999.

    10. In many of the monthly assessment reports evaluating contractors'
    performance, HUD staff provided a narrative but no clear statement of their
    risk determination for each performance dimension. Where there was no risk
    determination made by HUD staff, we applied HUD's criteria to arrive at the
    risk level depicted by their findings.

    11. Three contracts were not assessed in November 1999. As table 1 shows, an
    assessment report was not produced for one contract, another did not have a
    replacement contractor yet, and the last was split between Philadelphia
    Homeownership Center staff and two replacement contractors.

    12. These data exclude the assessment reports related to the InTown
    Management Group contracts.

    13. HUD has referred the principals of InTown to the Office of Inspector
    General and the Department of Justice for criminal investigation.

    14. Some assessment reports included "tax payment and invoice processing" as
    a performance dimension.

    15. This report was issued on February 24, 2000, and it is thus too early to
    assess HUD's actions taken in response to the report's recommendations.

    16. Industry Benchmarking and Best Practices Report, U.S. Department of
    Housing and Urban Development, Single-Family Property Disposition, Business
    Process Reengineering, Andersen Consulting (Mar. 27, 1997).

    17. See Property Disposition: Information on HUD's Acquisition and
    Disposition of Single- Family Properties (GAO/RCED-95-144FS , July 24,
    1995).

    18. On March 1, 2000, HUD announced a new Good Neighbor Program where it
    will sell properties that have been listed for over 6 months to local
    communities for $1. The program is too new for us to know what effect it may
    have on HUD's inventory of older properties or on the fund.
    *** End of document. ***