Homeownership: Mixed Results and High Costs Raise Concerns About HUD's
Mortgage Assignment Program (Letter Report, 10/18/95, GAO/RCED-96-2).
Pursuant to a congressional request, GAO reviewed whether the Housing
and Urban Development's (HUD) mortgage assignment program: (1) helps
borrowers avoid foreclosure; (2) reduces the Federal Housing
Administration's (FHA) foreclosure losses; and (3) can be improved to
reduce such losses.
GAO found that: (1) HUD mortgage assignment program helps borrowers
avoid immediate foreclosure, but is not successful in helping borrowers
avoid foreclosure or retain their homes on a long-term basis; (2) about
52 percent of the 68,700 borrowers in the mortgage program will lose
their homes through foreclosure, and the remaining borrowers will pay
off their loans after the sale or refinancing of their homes; (3) the
mortgage assignment program has not reduced FHA foreclosure losses,
since FHA incurs additional costs under the program which more than
offset the costs from saving some loans from foreclosure; (4) FHA will
incur losses of more than $1.5 billion for those borrowers accepted into
the mortgage program since fiscal year 1989; (5) although FHA borrowers'
premiums pay for these additional losses, it is more difficult for the
single-family insurance program to remain self-sufficient; (6) options
that would reduce additional program losses include reducing the 3-year
relief period provided to borrowers, setting a time limit on eliminating
delinquencies, and accepting borrowers that can pay half or more of
their mortgage payment; and (7) FHA would have to require borrowers to
begin full mortgage payments within a few months after entering the
program to eliminate additional program losses.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-96-2
TITLE: Homeownership: Mixed Results and High Costs Raise Concerns
About HUD's Mortgage Assignment Program
DATE: 10/18/95
SUBJECT: Mortgage programs
Mortgage loans
Foreclosures
Losses
Mortgage protection insurance
Loan defaults
Financial analysis
Homeowners insurance
Financial management
IDENTIFIER: Mutual Mortgage Insurance Fund
HUD Single-Family Insurance System
HUD Activity Tracking System
HUD Single Family Mortgage Notes System
HUD Single Family Mortgage Assignment Program
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Housing and Community
Opportunity, Committee on Banking and Financial Services, House of
Representatives
October 1995
HOMEOWNERSHIP - MIXED RESULTS AND
HIGH COSTS RAISE CONCERNS ABOUT
HUD'S MORTGAGE ASSIGNMENT PROGRAM
GAO/RCED-96-2
Concerns About HUD's Assigned Mortgage Program
(385399)
Abbreviations
=============================================================== ABBREV
CBO - Congressional Budget Office
VA - Department of Veterans Affairs
Fannie Mae - Federal National Mortgage Association
FHA - Federal Housing Administration
Freddie Mac - Federal Home Loan Mortgage Corporation
FTE - full-time equivalent
GAO - General Accounting Office
HUD - Department of Housing and Urban Development
OMB - Office of Management and Budget
RHCDS - Rural Housing and Community Development Service
SAMS - Single-Family Accounting and Management System
Letter
=============================================================== LETTER
B-261534
October 18, 1995
The Honorable Rick A. Lazio
Chairman, Subcommittee on Housing and
Community Opportunity
Committee on Banking and Financial Services
House of Representatives
Dear Mr. Chairman:
During the 19-year period ending September 30, 1993, the Department
of Housing and Urban Development's (HUD) Federal Housing
Administration (FHA) incurred losses totaling about $12.8 billion in
1994 dollars following foreclosure and the subsequent sale of about
525,000 defaulted single-family housing loans that FHA had insured.
However, these losses were offset by insurance premiums paid to FHA
by borrowers, not by the U.S. Treasury.
As an alternative to allowing lenders to foreclose on FHA borrowers
in default, HUD operates a mortgage assignment program. By taking
assignment of mortgages (purchasing mortgages) rather than having
lenders foreclose on them, HUD can at times avoid foreclosure losses
for FHA, help borrowers retain their homes, and provide borrowers
with an opportunity to avoid foreclosure. For borrowers accepted
into the program, FHA pays the mortgage debt, takes assignment of the
mortgage from the lender, and develops a new repayment plan for the
borrower under which monthly mortgage payments can be reduced or
suspended for up to 36 months. HUD, acting as mortgagee, collects
mortgage payments from the borrowers while allowing them to live in
their homes. The number of FHA borrowers participating in this
program has tripled in the last 6 years, totaling about 71,500 at the
end of fiscal year 1994; their unpaid principal balances total about
$3.7 billion. About 1 in 4 defaulted single-family FHA loans are
assigned rather than immediately foreclosed.
Concerned about the rising number of loans assigned to HUD and their
financial impact, you asked us to determine whether the mortgage
assignment program (1) helps borrowers avoid foreclosure, (2) reduces
FHA's foreclosure losses, and (3) can be improved to reduce such
losses.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
HUD's mortgage assignment program helps borrowers avoid immediate
foreclosure, but it is not fully successful in helping borrowers
avoid foreclosure and retain their homes on a long-term basis. Using
historical data on the disposition of program loans, we forecast that
about 52 percent of the approximately 68,700 borrowers who have
entered the program since fiscal year 1989\1 will eventually lose
their homes through foreclosure. We forecast that the remaining
borrowers (48 percent) will pay off their loans following the sale or
refinancing of their homes, often after remaining in the program for
long periods of time.
The mortgage assignment program has not reduced FHA's foreclosure
losses; rather, the program's losses have exceeded those that would
have been incurred if loans had gone immediately to foreclosure
without assignment. We estimate that for borrowers accepted into the
program since fiscal year 1989, FHA will incur losses of about $1.5
billion\2 more than would have been incurred in the absence of the
program. These additional losses are primarily attributable to the
costs that FHA incurs under the program, which more than offset the
financial gain to FHA from saving some loans from foreclosure. While
FHA borrowers' premiums pay for these losses, these additional costs
make it more difficult for FHA's single-family insurance program to
maintain financial self-sufficiency.
Options are available to the Congress that would reduce but not
eliminate the additional losses incurred by the program. These
options include reducing the 3-year relief period provided to
borrowers, setting a time limit on eliminating delinquencies, and/or
accepting only those borrowers into the program who can afford to pay
half or more of their mortgage payments. A revised assignment
program would have to require borrowers to begin full mortgage
payments within a few months after entering the program to eliminate
nearly all of the additional losses.
--------------------
\1 At the time of our review, complete information was not available
on loans that entered the assignment program before fiscal year 1989.
The 68,700 loans analyzed represent about 71 percent of the loans
that have entered the assignment program since its inception. Also,
the 68,700 loans analyzed differ from the 71,500 loans at the end of
fiscal year 1994 in part because the 71,500 loans represent borrowers
active in the program at that time, including borrowers who entered
the program before fiscal year 1989.
\2 Unless noted, all dollar figures used in this report are presented
in terms of their 1994 present value. Loss projections are estimates
based on the best information available and can change under
different economic scenarios.
BACKGROUND
------------------------------------------------------------ Letter :2
The mortgage assignment program was created in 1959 by section 230 of
the National Housing Act. However, HUD only began operating the
program in 1976 in settlement of a lawsuit. The program, intended to
help mortgagors who have defaulted on HUD-insured loans to avoid
foreclosure and retain their homes, provides mortgagors with
financial relief by reducing or suspending their mortgage payments
for up to 36 months until they can resume making regular payments.\3
To enter the program, a mortgagor must apply and meet certain
criteria, including that the default must have been caused by
circumstances beyond the mortgagor's control, such as the loss of
employment or serious illness. However, after the 36-month period, a
mortgagor's delinquencies are not required to be eliminated or
reduced by a specified time other than over the remaining term of the
loan, which HUD can extend for up to 10 years.\4
Most of the mortgages assigned under the program are insured by FHA
under its Mutual Mortgage Insurance Fund (Fund). For these
mortgages, the cost of the assignment program is financed by the
Fund, which insures private lenders against losses on mortgages that
finance purchases of one to four housing units. To cover losses, FHA
deposits borrowers' insurance premiums in the Fund. Historically,
the Fund has been financially self-sufficient. However, if it were
to become exhausted, the U.S. Treasury would have to directly cover
lenders' claims and administrative costs.
We based our analysis of whether the assignment program helps
borrowers avoid foreclosure and reduces FHA's foreclosure losses
primarily on data from two of HUD's national information systems--the
Single-Family Mortgage Notes Servicing System and the Single Family
Insurance System--as of September 30, 1994. We used these data to
analyze foreclosures and delinquencies and forecast the foreclosure
rates of the 68,695 mortgages assigned since fiscal year 1989. We
also built a cash flow model and prepared analysis to estimate the
financial loss to FHA's Fund from these loans by estimating the
revenue and expense flows for these loans over their life. Our data
reflect nationwide mortgage assignment statistics on single-family
loans that were entered in HUD's two national data systems as the
Fund's mortgage defaults that were assigned to avoid
foreclosure--71,500 mortgage loans as of September 30, 1994. Loans
assigned to HUD for other reasons were not included in our
analyses.\5 To determine how to improve the program and reduce its
losses, we obtained information from four other mortgage assistance
institutions that provide foreclosure relief to borrowers in default
on single-family housing loans--the Department of Veterans Affairs
(VA), Rural Housing and Community Development Service (RHCDS),
Federal National Mortgage Association (Fannie Mae), and Federal Home
Loan Mortgage Corporation (Freddie Mac). (See app. I for additional
details on the scope and methodology of our work.)
To improve the administration of the program, HUD recently has
initiated changes to the program. These include selling its
currently assigned loans; implementing Activity Tracking, an
automated collection computer subsystem; studying the costs and
benefits of alternatives to foreclosure; permitting lenders to
provide relief to borrowers, such as suspending or reducing mortgage
payments, without prior approval from HUD; implementing a "compromise
offer" program under which borrowers' loans are considered to be paid
off for less than the amount owed; and implementing for a limited
period of time a program for reducing interest rates on certain
program loans. HUD has also proposed contracting for loan servicing.
The Office of Management and Budget (OMB) considers FHA's mortgage
assignment program to be a high-risk area because controls do not
protect the financial interests and resources of the government. In
the President's fiscal year 1996 budget, OMB stated that the
servicing of assigned loans was expensive, inefficient, and
labor-intensive. Also, OMB noted that there is little evidence that
the program achieves its goal of giving homeowners a chance to keep
their homes during a temporary interruption of income. According to
OMB, legislative changes should be considered to reduce or eliminate
the assignment of loans in the future by greater reliance on the
private sector as well as legislation to reduce the program's
forbearance period from 3 years to 1 year. To reduce the number of
assigned loans and the required servicing of loans, OMB recommended
that HUD continue to sell its assigned loans.
--------------------
\3 In the absence of this program, HUD must take ownership of and
subsequently manage and sell the properties.
\4 Before assigning mortgages, FHA also encourages mortgage lenders
to make use of special forbearance procedures, such as reduced
monthly mortgage payments, when mortgagors are temporarily unable to
make full mortgage payments. These procedures have been used
infrequently by FHA lenders.
\5 Under certain circumstances, loans that are not in default may be
assigned to FHA. These include loans made by lenders under the
condition that they could be assigned to FHA after a 20-year period.
In addition, the records on other loans were eliminated from our
analyses because they were either duplicate records, had incorrect
information, or concerned loans not from FHA's Fund. The Fund's
71,500 loans represent about 78 percent of the 91,700 loans in the
assignment program as of September 30, 1994.
MIXED RESULTS IN AVOIDING
FORECLOSURES PERMANENTLY
------------------------------------------------------------ Letter :3
We forecast, on the basis of historical data on the disposition of
program loans, that about 35,400 (52 percent) of the 68,695 borrowers
accepted into the program since fiscal year 1989 will eventually lose
their homes through foreclosure.\6 For the remaining loans (48
percent), we forecast that borrowers will pay off the loans and avoid
foreclosure by either selling their homes or refinancing their
mortgages, often after remaining in the program for a lengthy period
of time. Some of these borrowers who eventually pay off their loans
may have, under the compromise program, paid HUD an amount less than
the total amount owed. (A detailed discussion of our methodology for
forecasting the program's foreclosure rates appears in app. II.)
Figure 1 shows our estimates of conditional foreclosure rates\7 based
on loans that remained active until a given year and were assigned
during a 17-year period (fiscal years 1977 through 1994). We
estimate that conditional foreclosure rates will increase sharply
over the first 7 years after a loan is accepted into the program,
peaking at about 13 percent. The program's conditional foreclosure
rates substantially exceed those experienced on FHA's nonassigned
single-family loans during the same 17-year period.\8
Figure 1: Conditional
Foreclosure Rates for FHA's
Assigned and Nonassigned Loans
(See figure in printed
edition.)
HUD's records show that since fiscal year 1977, at least 96,500
borrowers have been accepted into the assignment program.\9 About
71,500 of these borrowers were still assigned to HUD as of September
30, 1994. A large portion of them--39,603, or 55 percent--have been
in the program fewer than 3 years (see fig. 2).
Figure 2: Length of Time
Borrowers Had Been in the
Program as of September 30,
1994
(See figure in printed
edition.)
As shown in figure 3, of the approximately 71,500 borrowers in the
program as of September 30, 1994, 59 percent were current with
forbearance agreements or current with their original mortgage
payments. The remaining 41 percent were delinquent or pending
foreclosure. Only 5 percent of the program's borrowers were making
full mortgage payments.
Figure 3: Status of the
Program's Loans as of September
30, 1994
(See figure in printed
edition.)
When borrowers remained in the program beyond the 3-year relief
period and therefore were required to make full mortgage payments,
the proportion of borrowers current with repayment agreements dropped
and the proportion of borrowers in foreclosure increased. Similarly,
the average amount of delinquencies owed by borrowers increased.
(See app. III for detailed information on borrowers' compliance with
repayment agreements.)
Most of the 25,041 borrowers who left the program for whom records
are available did so following foreclosure, while other borrowers
paid off their loans and at times eliminated delinquencies. Of the
25,041 borrowers, HUD foreclosed on 14,707 borrowers (59 percent),
while 10,334 borrowers (41 percent) paid off their loans.\10 An
example of a borrower who left the program through foreclosure is a
Chicago mortgagor who was accepted into the program in November 1990
and was $9,495 behind in payments at that time. The loan's
outstanding principal balance at that time was $34,862. Although HUD
determined that the mortgagor's income was sufficient for him to make
more than full mortgage payments, the mortgagor made only five
payments over the next 3-1/2 years. By September 1994, when HUD
began foreclosure, the borrower was over $25,000 behind in payments.
Borrowers who paid their loans generally did so following the sale of
their homes at a price that, in most cases, allowed them to repay the
outstanding mortgage and the delinquent amount. For example, a
Seattle, Washington, mortgagor defaulted on an $89,890 loan 15 months
after obtaining it. The mortgagor found a new job after experiencing
a salary cut on his previous job. When the mortgage was assigned in
November 1990, the mortgagor was already $6,333 behind in payments.
Initially, the mortgagor was allowed to make reduced payments of $400
per month, about half the full payment. After 2 years, the mortgagor
was unable to pay off the delinquent amount, which had grown to
$19,229 when he sold the house in April 1993. However, the sale
proceeds enabled the mortgagor to fully satisfy his obligation to
HUD. (See app. IV for cases in which some borrowers paid off
mortgages and others did not.)
--------------------
\6 According to a HUD analyst, the ultimate foreclosure rate may be 6
to 8 percentage points higher than our forecast because FHA had
difficulty foreclosing on borrowers in fiscal years 1991 and 1992
because of policy changes in the program. Our estimates are based,
in part, on those 2 years of relatively low foreclosure rates and
therefore may underestimate the ultimate rate.
\7 The conditional foreclosure rate is the percentage of loans that
survive until a given year that then go into foreclosure during that
year. This is only one of many ways that foreclosure rates can be
calculated.
\8 The percentage of loans on which borrowers made full payments
increased with the length of time in the program. The borrowers for
more than one-third of the loans over 10 years old are paying over
100 percent of their scheduled payments. Some borrowers who make
suspended or zero payments have no forbearance agreement.
\9 The actual number is greater because an unknown number of loan
records were purged after the assigned loans were terminated from the
program.
\10 Because an unknown number of assigned loans were purged after
being terminated from the program, we do not know if this
distribution between foreclosures and payoffs is similar for all
borrowers no longer in the program.
PROGRAM'S OPERATING
PROCEDURES CONTRIBUTE TO
HIGH FORECLOSURE RATES
---------------------------------------------------------- Letter :3.1
Given the lower income of FHA borrowers, which can make them
financially vulnerable, the assignment program's operating procedures
do not provide assurance that delinquent amounts will be repaid and
that borrowers will succeed in avoiding foreclosure. These
procedures include (1) accepting borrowers into the program after
they have accumulated substantial loan delinquencies and therefore
have an uncertain repayment ability and (2) a 36-month relief period
when payments can be reduced or suspended, which permits outstanding
delinquencies to grow even if borrowers are current with repayment
agreements. Most FHA home loans are for moderate-income individuals.
These individuals are likely to be more financially vulnerable than
other mortgagors who are able to obtain home loans without FHA's
assistance.\11
Under the assignment program, a borrower must miss at least three
mortgage payments before submitting an application to enter the
program. During the acceptance process, additional payments may be
missed, and substantial delinquencies may accumulate over a period of
6 months or more.\12 We randomly selected, as case studies, 136 loans
from four loan categories--paid-off, current with payments,
foreclosed on, and delinquent--from files at four HUD field
offices--Boston, Chicago, Ft. Worth, and Spokane--to illustrate,
among other things, the amount of delinquencies that borrowers had
accumulated when they entered the program. Our review of these loans
showed that borrowers were, on average, 8 months behind in mortgage
payments of $4,014 on their loans at the time they were accepted into
the program. These loans had an average outstanding principal
balance of $39,886 at that time. These figures, and others reported
later that are based on these case studies, are not projectable to
the universe of assigned loans.
The program also allows 3 years of reduced or suspended mortgage
payments. For borrowers who qualify for this program feature,
delinquencies for unpaid interest and other expenses continue to
grow. As shown in figure 4, as of the end of fiscal year 1994, all
borrowers in the program for more than 1 year but fewer than 3 years
experienced, on average, an increase in delinquent amounts from about
$7,000 to $15,000. On average, after 9 years in the program,
delinquencies for all borrowers continued to grow, peaking at about
$22,000. Similarly, delinquencies for borrowers current with
forbearance agreements also grew at about the same rate as those of
all borrowers during the first 3 years but began to decline after the
borrowers had been in the program for 3 years.\13
Figure 4: Growth in Average
Delinquencies for All Borrowers
and Borrowers Current With
Forbearance Agreements
(See figure in printed
edition.)
Once the 36-month relief period is completed, borrowers are expected
to resume full mortgage payments and, if possible, increase payments
to reduce accumulated delinquent amounts. If borrowers cannot make
full payments, HUD may initiate foreclosure action. There is no
requirement, however, that borrowers pay off their delinquent amounts
or leave the program in a specified time period, other than over the
remaining term of the loan, which HUD can extend for up to 10 years.
About 31,900 (45 percent) of the borrowers in the program as of
September 30, 1994, had been in the program for more than 3 years.
About 1,000 borrowers had been in the program for over 15 years.
--------------------
\11 See Housing Finance: Characteristics of Borrowers of FHA-Insured
Mortgages (GAO/RCED-94-135BR, Apr. 6, 1994).
\12 HUD officials believe that their new handbook, which requires
lenders to process applications for the assignment program, should
expedite the application process.
\13 Although borrowers accumulate delinquencies under the program,
they are receiving some benefits, such as the benefit of living in a
home for a reduced or no payment rather than paying rent.
ASSIGNMENT PROGRAM INCREASES
FHA'S LOSSES
------------------------------------------------------------ Letter :4
In assessing the cost to FHA of operating the program, we (1)
forecasted the foreclosure and payoff rates for loans assigned since
fiscal year 1989 and (2) estimated the expenditure and revenue flows
for these loans over their expected life. Using historical data on
the performance of individual loans in the assignment program, we
developed estimates of loan-servicing costs, acquisition costs, and
other costs for all surviving loans over their anticipated life. In
addition, we estimated revenues received from loan payoffs, mortgage
payments, and the sale of properties after foreclosure. In order to
estimate the program's net loss to FHA, we compared the resulting
cost per assigned loan to the average loss that FHA would have
experienced on these loans had they gone directly to foreclosure
rather than to the assignment program.
Our analysis showed that losses on the 68,695 loans assigned to HUD
since fiscal year 1989 will be an estimated average of about $49,000
each. We subtracted from the estimated average loss of $49,000 the
estimated $27,000 loss that FHA would have experienced had the loans
not entered the assignment program, leaving an estimated net loss to
FHA of about $22,000 per assigned loan.\14
On the basis of this analysis, we estimate that FHA's Fund will
experience additional losses of about $1.5 billion over what it would
have incurred if the loans entering the assignment program since
fiscal year 1989 had immediately gone to foreclosure instead. Table
1 summarizes our estimates of the expenses and income associated with
the program's 68,695 loans over their life. The additional costs
incurred by FHA are primarily attributable to the partial payments it
received on mortgage loans; delays in receiving funds from the sale
of the assignment program's properties that are eventually
foreclosed; administrative costs; and advances made by HUD for taxes,
insurance, and other expenses.
Table 1
Estimated Expenses and Income Projected
Over the Life of Loans Assigned During
Fiscal Years 1989-94
(Dollars in millions)
---------------------------------------- -------- -------- --------
Costs
Administrative costs
Applications received $150
Applications accepted 5
Servicing costs 166
Defaulted loan costs 131
Total administrative costs\a $451
Acquisition costs 4,905
Advances 100
Total costs $5,456
Revenues
Payment receipts $152
Payoff revenues 955
Sale of properties 1,006
Total revenues $2,113
Net cost (cost less revenues) $3,343
Less cost of foreclosed loans if not $1,868
assigned
Total additional cost of assigned loans $1,478
----------------------------------------------------------------------
\a Figures do not add to total because of rounding.
FHA borrowers' premiums pay for these losses, not the U.S. Treasury.
To cover losses, FHA deposits borrowers' insurance premiums in the
Fund. According to 12 U.S.C. 1711, the Fund must meet or endeavor
to meet statutory capital ratio requirements designed to achieve
actuarial soundness; that is, it must contain sufficient reserves and
funding to cover estimated future losses resulting from the payment
of claims on defaulted mortgages and administrative costs.
To offset substantial losses to the Fund that were incurred in the
1980s, FHA borrowers were required to pay higher insurance premiums
beginning in July 1991. In our recent report and testimony\15 on the
actuarial soundness of the Fund, we reported that the economic
value\16 of FHA's Fund clearly has improved significantly in recent
years but that the Fund as of the end of fiscal year 1993 had not yet
accumulated sufficient capital reserves to cover losses during
periods of adverse economic conditions as defined by the law.\17
--------------------
\14 This net loss is the additional amount above what FHA would have
incurred for all loans assigned since fiscal year 1989 if these loans
had been immediately foreclosed. The net loss of $22,000 is averaged
over all loans that entered the program since fiscal year 1989,
whether or not the loans may have been foreclosed.
\15 Mortgage Financing: Financial Health of FHA's Home Mortgage
Insurance Program Has Improved (GAO/RCED-95-20, Oct. 18, 1994) and
Mortgage Financing: Financial Health of FHA's Home Mortgage
Insurance Program Has Improved (GAO/T-RCED-94-255, June 30, 1994).
\16 The economic volume is defined as the current cash available to
the Fund, plus the net present value of all future cash inflows and
outflows expected to result from outstanding mortgages in the Fund.
\17 In its May 8, 1995, report on the economic net worth of the
Mutual Mortgage Insurance Fund, Price Waterhouse reported that the
financial health of the Fund continued to improve during fiscal year
1994 and was nearly actuarially sound as of September 30, 1994.
OPTIONS AVAILABLE TO REDUCE THE
PROGRAM'S LOSSES
------------------------------------------------------------ Letter :5
Options are available to the Congress to change the assignment
program that would reduce the losses incurred by the program. These
options include directing HUD to shorten the 36-month relief period,
set a time limit on eliminating delinquencies, and accept into the
program only those borrowers who can afford half or more of their
mortgage payments.
Information provided by officials from four\18 mortgage lending or
purchasing institutions indicates that these institutions provide
borowers in default a shorter time period to begin full mortgage
payments under the original loan or a modified loan and to repay
delinquent amounts. They also use techniques different from HUD's
that could improve the effectiveness and reduce the cost of the
program.
VA usually capitalizes the delinquency and reamortizes the new loan
balance (i.e. extends the time period for payment of the loan
principal) as soon as it acquires the loan. In addition, VA will
reduce the interest rate on the reamortized loan to as low as 3
percent below the current market rate if a reduction is necessary to
bring the veteran's payments to an affordable level. VA may also
acquire loans for borrowers who are not able to resume payments
immediately if they show the ability to be able to do so in a
reasonable period of time. VA field stations have significant
discretion in deciding what constitutes a reasonable period; however,
it is usually not extended beyond the point at which the loans reach
a full year's delinquency. During this period, VA may provide relief
by agreeing to accept payments of less than a full installment or by
extending complete forbearance. Fannie Mae and Freddie Mac provide
relief for up to 18 months. They may extend this period longer under
certain circumstances, but during the relief period, the borrower
must eliminate the delinquency. Although RHCDS does not have a
specified relief period, an RHCDS official told us that its county
supervisors provide short-term relief on a case-by-case basis.
Another option for reducing the program's losses would require
borrowers to pay half or more in monthly mortgage payments. We
estimate that if all 68,695 borrowers who have entered the program
since fiscal year 1989 had paid and continue to pay 50 percent of
their original mortgage payments, the program would lose about $433
million more than what would have occurred if the loans had gone
immediately to foreclosure, or substantially less than our estimated
loss of $1.5 billion. The mortgage payments being made by borrowers
as of September 30, 1994, averaged about a third of the original
mortgage payments. These borrowers would have to pay 67 percent of
their original mortgage payments for the program to break even.
In addition to a shorter period of relief, other mortgage assistance
institutions stress resolving the delinquency by the end of the
relief period. In contrast, the mortgage assignment program gives
borrowers many years beyond the relief period to repay a delinquency,
as evidenced by some borrowers who have been in the program for 15
years. If the borrower is unable to pay the delinquency within the
3-year relief period, HUD's regulations require that the borrower
must repay the delinquency on or before the mortgage maturity date,
but the borrower may be given up to 10 years beyond the maturity
date.
Freddie Mac, Fannie Mae, and VA also work closely with borrowers to
provide long-term solutions, such as modifying the structure of a
loan to resolve delinquencies. Officials from these organizations
told us that they believe techniques such as refinancing and reducing
interest rates to reduce monthly mortgage payments are successful
alternatives to costly foreclosure. However, HUD seldom uses its
authority to modify borrowers' mortgage loans. Rather, HUD uses
repayment agreements both before and after the 36-month relief period
to secure repayment of outstanding delinquencies. These are
generally 1-year term agreements based on the borrowers' estimated
income and expenses to repay a debt. HUD field office officials told
us that the preparation and monitoring of these agreements requires
extensive staff resources.
According to HUD's Director, Single-Family Servicing Division, the
primary strategy HUD plans to follow to reduce the program's losses
is to sell its assigned loans and thereby reduce the number of loans
it holds and services. In June 1994, HUD sold at auction about
15,000 performing and nonperforming (loans in compliance with
repayment agreements and those not in compliance) single-family loans
that were not in default when assigned, including 357 loans that were
facing foreclosure. FHA received about $12.6 million from the sale
of the 357 loans, which represents about 70 percent of the unpaid
principal balance on these loans. FHA officials consider these
results encouraging and believe that future sales will provide
significant relief to field offices that have a large number of
assigned loans. FHA plans to sell an additional 15,000 loans in
calendar year 1995 and most of the remaining assigned loans over the
next 2 years. By fiscal year 1997, HUD expects its inventory to
consist only of newly accepted assigned loans that would be held by
HUD for a short time before being sold. The purchasers of these
loans would be required to comply with HUD's assignment program's
servicing standards, including permitting 3 years of reduced or
suspended mortgage payments.
--------------------
\18 Officials were contacted at VA; RHCDS, which was formed from the
rural housing section of Farmers Home Administration and the
Community Facilities Division of the Rural Development
Administration; Fannie Mae; and Freddie Mac.
CONCLUSIONS
------------------------------------------------------------ Letter :6
The assignment program operates at a high cost to FHA's Fund and has
not been very successful helping borrowers avoid foreclosure in the
long run. The program helps about half of the financially troubled
homeowners to avoid foreclosure permanently. However, the costs
incurred by HUD to achieve this result exceed the costs that would
have been incurred if all assigned loans had gone immediately to
foreclosure without assignment. While FHA borrowers' premiums pay
these costs, not the U.S. Treasury, the program's costs lessen the
Fund's ability to build reserves.
Options are available to the Congress to make changes to the program
to reduce its losses. The options, such as requiring borrowers to
pay more in monthly mortgage payments, would reduce but not eliminate
the program's additional losses. The assignment program would have
to require borrowers to begin full mortgage payments within a few
months after entering the program in order to nearly eliminate the
additional losses incurred by the program.
All of these options pose the trade-off of preventing some
individuals and families from entering the program who would
eventually bring their loans current and/or avoid foreclosure.
However, unless changes are made to the present assignment program,
its costs will continue to make it more difficult for the Fund to
maintain financial self-sufficiency.
MATTERS FOR CONGRESSIONAL
CONSIDERATION
------------------------------------------------------------ Letter :7
If the Congress believes that the additional losses incurred by the
assignment program are excessive in relation to the number of
borrowers that avoid foreclosure, it could consider eliminating the
program. However, since some borrowers who default on their FHA
mortgages can avoid foreclosure with some assistance, the Congress
could consider establishing a short-term, temporary relief program of
a few months for such borrowers to replace the mortgage assignment
program.
If, however, the Congress believes that the borrowers served by FHA's
single-family program are at high risk and therefore in need of
additional assistance in the form of forbearance, changes to the
program should be considered that would reduce but not eliminate
additional future losses. The following are options that the
Congress could consider:
Require borrowers to (1) resume full mortgage payments within a
shorter time period than the 36 months currently allowed and/or
(2) eliminate outstanding delinquency amounts within a specified
period. For example, the Congress may wish to require that
borrowers resume full mortgage payments within 1 year of
entering the program and eliminate outstanding delinquencies
within 2 years. If borrowers are unable to bring their loan
payments current and/or eliminate delinquencies within the
specified time, the Congress may wish to consider requiring that
HUD foreclose.
Require that only borrowers who can pay half their original
mortgage amount or more be assigned to the program.
AGENCY COMMENTS
------------------------------------------------------------ Letter :8
We provided a draft of this report to HUD, VA, RHCDS, Fannie Mae, and
Freddie Mac officials to obtain their comments. We met with HUD and
VA officials and obtained their comments.
In a meeting with a HUD Special Assistant to the Assistant Secretary
for Housing-Federal Housing Commissioner, HUD's Director of the
Single-Family Servicing Division, and officials from HUD's Offices of
General Counsel and Policy Development and Research, we obtained
HUD's comments. The comments focused on (1) the effects of past
litigation efforts on HUD's management of its mortgage assignment
program and (2) alternatives available to prevent foreclosure other
than the options we suggest for changing forbearance relief (reducing
or suspending monthly mortgage payments for a certain period of time)
provided through the assignment program.
Specifically, HUD commented that litigation has affected the
evolution and operation of the assignment program. According to HUD
officials, a consent decree, which the Department entered into in
1979, and litigation preceding and subsequent to entering the consent
decree known collectively as the Ferrell v. Pierce litigation have
limited HUD's options to modify the assignment program. The
Department believes the Congress needs to understand these
limitations when it considers changing the program. Under the
consent decree, HUD agreed to, among other things, (1) operate the
assignment program for 5 years in compliance with its January 1979
handbook without any modification that would curtail the rights of
the mortgagors under the program and (2) after the 5-year period,
operate either the present assignment program or an equivalent
substitute to help mortgagors avoid foreclosure during periods of
temporary financial distress. A series of lawsuits concerning HUD's
implementation of the consent decree followed.
We agree that the consent decree and the Ferrell v. Pierce
litigation have limited HUD's options to change the program. It is
because of this limitation that the forbearance relief options we
present were addressed to the Congress and not to the Secretary of
HUD. So that the Congress has a full understanding of the
litigation's effects when considering options to forbearance relief
provided through the mortgage assignment program, HUD's description
of the current operation of the assignment program and the effect of
past litigation on that program is provided in appendix V.
HUD also commented that if the Congress were to consider alternative
relief measures for borrowers, there are methods widely used to
prevent foreclosure by the private sector that are not discussed in
our report. The alternatives to forbearance relief cited by HUD
included (1) "modifying defaulted borrowers' mortgage loans by
reducing interest rates, (2) extending the remaining period of the
loans, and/or (3) paying partial claims to remedy default with a new
obligation from the borrower to repay FHA the amount of the claim."
HUD noted that while our report discusses some relief options used
with other federally related mortgages, the options we present to the
Congress for change do not include such options. HUD also commented
that pursuant to section 918 of the Housing and Community Development
Act of 1992, it is studying the adequacy of existing programs
authorized to help FHA borrowers avoid foreclosure and alternatives
to foreclosure being used with other federally related mortgages.
HUD expects to issue this study shortly.
We agree that there are alternatives to foreclosure other than the
forbearance relief measure provided through HUD's assignment program.
In fact, our report points out that Freddie Mac, Fannie Mae, and VA
provide borrowers long-term solutions, such as modifying the
structure of their loans to resolve delinquencies. Officials from
these organizations told us that they believe techniques such as
refinancing and reducing interest rates to reduce monthly mortgage
payments are successful alternatives to costly foreclosure.
However, this report did not seek to analyze all possible
alternatives to the mortgage assignment program because of the focus
of our work and our desire not to duplicate HUD's efforts in studying
such alternatives. However, it should be noted that HUD has seldom
made use of modified mortgage loans. Consequently, assessing the
merits of modifying financially troubled FHA loans to single-family
borrowers in lieu of the forbearance that HUD currently provides is
difficult. In addition, no matter how successful other alternatives
are in avoiding foreclosure, not all borrowers will be able to resume
mortgage payments immediately, which is required under such options
as refinancing, reducing interest rates, and extending the period of
the loan.
We recognize, however, that to the extent that such alternatives are
effective in helping borrowers retain their homes without entering
HUD's assignment program, they could be a more effective way to avoid
costly foreclosure than the current assignment program. HUD's study
on alternatives to foreclosure should be helpful to the Congress in
assessing these alternatives. Our report should be helpful to the
Congress in assessing changes needed to HUD's mortgage assignment
program to reduce losses on those mortgages that enter the program,
regardless of other alternatives that may be used to prevent
assignment.
While HUD officials agreed that the program's losses have exceeded
those that would have been incurred if loans had gone immediately to
foreclosure without assignment, they did not agree with the magnitude
of our estimate of the additional cost that FHA incurs. We received
no official estimate from HUD of the additional cost, although one
HUD analyst said that he believes the additional cost is about
one-third of our estimate. HUD currently has a contracted study
under way that will produce an estimate of the additional cost to FHA
of the program.
HUD also provided clarifying information and technical and editorial
comments for our consideration in completing our report, which we
incorporated where appropriate.
VA's Assistant Director for Loan Management, Loan Guaranty Service,
generally agreed with the factual information presented in this
report on that agency. We incorporated suggestions by VA to further
clarify our report as appropriate.
In telephone conversations with RHCDS, Fannie Mae, and Freddie Mac
officials, they told us that they agreed with the factual information
presented in this report on their organizations and had no further
comments.
---------------------------------------------------------- Letter :8.1
We conducted our work between October 1993 and October 1995 in
accordance with generally accepted government auditing standards.
Unless you announce its contents earlier, we plan no further
distribution of this report until 10 days from the date of this
letter. At that time, we will send copies to interested
congressional committees; the Secretary of HUD; the Director, Office
of Management and Budget; and other interested parties. We will also
make copies available to others on request.
Please call me at (202) 512-7631 if you or your staff have further
questions. Major contributors to this report are listed in appendix
VI.
Sincerely yours,
Judy A. England-Joseph
Director, Housing and
Community Development Issues
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I
Concerned about the rising number of loans assigned to the Department
of Housing and Urban Development (HUD) and their financial impact,
the Chairman, Subcommittee on Housing and Community Opportunity,
House Committee on Banking and Financial Services, asked us to
determine whether the mortgage assignment program (1) helps borrowers
avoid foreclosure, (2) reduces the Federal Housing Administration's
(FHA) losses, and (3) can be improved to reduce losses.
To determine whether the program helps borrowers avoid foreclosures,
we analyzed information on foreclosures, delinquencies, and
borrowers' compliance with repayment agreements contained in two of
HUD's national information systems--the Single-Family Mortgage Notes
Servicing System and the Single Family Insurance System--as of
September 30, 1994. Our data reflect nationwide mortgage assignment
statistics on single-family loans that entered these systems as
section 203(b) mortgage defaults to avoid foreclosure. Loans
assigned to HUD for other reasons were not included in our analyses.
We did not perform a reliability assessment of controls over the data
in the systems; however, we checked our data results through
discussions with HUD personnel, making comparisons to related
automated accounting and financial reports and reviewing sampled
mortgagors' repayment files. We randomly selected and examined 136
case example assigned loans from four loan categories--paid-off,
current with payments, foreclosed on, and delinquent--from files at
four HUD field offices--Boston, Chicago, Ft. Worth, and Spokane--to
illustrate, among other things, cases in which some borrowers were
able to and chose to pay off their mortgages or become current with
their payments and others did not. We selected these field offices
to obtain geographic diversity to recognize differences in real
estate markets.
To determine whether the program reduces losses, we used the data
systems mentioned above as well as HUD's Single-Family Accounting and
Management System to estimate the foreclosure rates of mortgages
assigned since 1989 and revenue and expense flows for these loans
over their life. We used this historical mortgage data to estimate
loan servicing, acquisition, and other costs of surviving mortgages.
We also assessed revenues received from early loan payoffs, mortgage
payments, and sales of properties following foreclosure. We further
compared the cost per assigned mortgage loan to the average loss
experienced by FHA on mortgages that went directly to foreclosure
rather than being accepted into the program. A detailed discussion
of our methodology for forecasting program foreclosure rates and
estimating program costs appears in appendix II.
To determine how to improve the program and reduce program losses, we
obtained records, reports, and studies from HUD, the Department of
Veterans Affairs (VA), Rural Housing and Community Development
Service (RHCDS), Federal National Mortgage Association (Fannie Mae),
and Federal Home Loan Mortgage Corporation (Freddie Mac) and analyzed
appropriate loan servicing guidelines and foreclosure prevention
options. We also interviewed HUD (including HUD's Office of the
Inspector General), VA, RHCDS, Fannie Mae, and Freddie Mac officials
at their headquarters locations in Washington, D.C., and local HUD
officials in Boston, Chicago, Dallas, and Spokane. We also
interviewed officials of five organizations concerned with defaulted
loans--the Mortgage Bankers' Association in Washington, D.C., Legal
Assistance Foundation, Public Action Housing Policy Center, Community
and Economic Development Corporation of Cook County, Inc., and the
Spanish Coalition for Housing.
GAO'S CASH FLOW MODEL USED TO
FORECAST FINANCIAL LOSS
========================================================== Appendix II
This appendix describes the cash flow model we built and the analysis
we conducted to estimate the financial loss to FHA's Fund for program
loans assigned during fiscal years 1989 through 1994. We estimated
the loss the Fund will incur on the 68,695 loans that entered the
program during this period on the basis of assumptions stated in this
appendix. To do so, we (1) estimated the costs that FHA has incurred
on and revenues it has received from these loans as of September 30,
1994, and (2) forecasted future costs and revenues during the
remaining life of these loans.\19 We converted all cash flow
estimates to 1994 present values using an annual discount rate of 7
percent.
The largest element of cost to the Fund is the cost associated with
settling the lender's claim on the mortgage, a cost that FHA must pay
whether or not the foreclosure occurs immediately or the mortgage
enters the assignment program. FHA incurs additional costs while
loans are in the program, including the administrative costs to
operate the program. Revenues received by FHA, including proceeds
from the sale of properties following foreclosure and borrowers' loan
payments, partially offset program costs.
The following sections of this appendix contain a detailed
description of the data we used and how we estimated the costs and
revenues associated with the program.
--------------------
\19 Although some loans can theoretically remain in the program
through the year 2033, we assume that these loans may remain active
through the year 2023.
DATA WE USED IN OUR ESTIMATES
-------------------------------------------------------- Appendix II:1
In our analysis, we used three of HUD's computerized databases--the
F-60 database that provides current and historical information on all
mortgage loans that HUD services under the assignment program, the
A-43 database that provides historical information on mortgages
insured under the Fund before assignment, and the Single-Family
Accounting and Management System (SAMS) database that tracks
properties held and eventually sold by HUD following foreclosure.
From these databases, we obtained information on the initial
characteristics of each loan, such as the year the loan was assigned,
the initial unpaid principal and delinquency amount, and the loan
interest rate and term. We also obtained information on the current
status of each loan, such as the current unpaid balance, the last
payment date, and the delinquency status. We categorized the loans
as either foreclosed, prepaid, or active as of the end of fiscal year
1994.
HOW WE ESTIMATED THE PROGRAM'S
COSTS AND REVENUES
-------------------------------------------------------- Appendix II:2
We estimated the financial losses for program loans by examining all
loans by the year assigned. Costs and revenues were computed for
each year's group of assigned loans over the life of the loans in the
program.
Cash flows out of the Fund when FHA pays (1) lenders' mortgage
claims, (2) taxes and insurance on properties, and (3) salaries and
other administrative costs. Cash flows into the Fund when FHA
collects revenues from (1) the sale of properties following
foreclosure, (2) the early payoff of loans, and (3) payments made by
mortgagors (borrowers). All cash flows are discounted at 7 percent
to a 1994 base year.
We assumed that the net cost to the Fund was partially a function of
foreclosure and payoff rates. Other factors that affected costs
included the percentages of unpaid principal to original loan amount,
receivables due FHA to original loan amount, advances to original
loan amount, and the policy year of the loans. In addition, we
assumed that FHA would continue to receive partial and delayed
payments for some mortgages assigned and that both foreclosure and
prepayment behavior will remain the same in future years as it has
been in the past. This is a critical assumption because of data
limitations. As a result, our analysis does not take into account
that the loans assigned from fiscal years 1989 through 1994 may
differ from earlier loans in ways that affect their prepayment and
foreclosure probabilities beyond 6 years from the date of assignment.
Given these assumptions, we projected future loan activity for
foreclosures, prepayments, and surviving loans. Because of
inadequate historical data, it was not possible to rigorously
estimate foreclosure and prepayment probabilities incorporating
economic indicators, such as unemployment rates, payment-to-income
ratios, current interest rate, and house price appreciation rates.\20
--------------------
\20 FHA's database records historical foreclosure and prepayment
activity from fiscal year 1989 onward. Data on previous years'
terminations were purged from the database.
DETERMINING COSTS
------------------------------------------------------ Appendix II:2.1
The Fund incurs a number of costs associated with operating the
program, including the costs to acquire loans following default, to
administer the program, and for property expenses. The largest cost
relates to the acquisition of loans before they enter the program.
Acquisition costs were compiled for each year's book of business.
The total acquisition costs for all 68,695 loans is about $4.9
billion, about 89 percent of the total cost of $5.5 billion incurred
by FHA's Fund on these loans.
Administrative costs include staff salaries for those servicing
program loans and other costs related to the program's application
approval process and the processing of defaulted loans for
foreclosure. Administrative costs used in our estimates were those
developed by the Congressional Budget Office (CBO).\21 CBO estimated
the assignment program's administrative costs and staffing
needs--full-time equivalents (FTE)--for each phase of the loan
assignment process: assignment requests, endorsements, servicing,
and defaulting mortgages.
First we used CBO's estimates for the costs of each administrative
function in 1994 to estimate the cost per loan for each function. We
then applied this figure to each year's loan activity to estimate the
costs incurred in that year for each function. Next, we used a real
discount rate of 3.5 percent per year to convert the estimates to
1994 present values. CBO's FTE estimates and GAO's cost per loan and
total cost estimates are shown in table II.1, which illustrates that
the administrative cost for the 68,695 loans assigned between fiscal
year 1989 and the end of fiscal year 1994 totals about $451 million
over the life of these loans, about 8 percent of the costs incurred
by FHA's Fund.
Table II.1
Administrative Costs of Assigned Loans
Total cost (in
millions over the
Loan assignment phase Annual 1994 FTEs life of the loan)
------------------------------ ------------------ ------------------
Assignment requests 414 $150
Endorsements 13 5
Annual servicing 575 166
Defaulted mortgages 78 131
Total FTEs and costs\a 1,080\b $451
----------------------------------------------------------------------
\a Numbers do not add because of rounding.
\b FHA officials stated that the actual staff totals for
administering the program are less than 1,080 FTEs.
Salary costs, which averaged $48,017 per FTE in fiscal year 1994, are
used for all FTEs listed. Assignment request costs were allocated to
all program loans, although the majority of these costs were for
processing loans that were not accepted into the program.
Endorsement costs were computed for all 68,695 loans. Servicing
costs were applied every year for as long as the loan remained in the
program. Default costs were computed for foreclosed loans by year of
default.
When borrowers are not current on their mortgages, additional costs
are often incurred by FHA, including advances for property taxes,
insurance, and other costs. HUD makes these payments to ensure clear
title to the property and to protect its investment in case of fire.
These costs totaled about $100 million, about 2 percent of the costs
incurred by the Fund on these loans, and at times are not recovered
from the borrower.
--------------------
\21 Congressional Justifications for 1995 Estimates, Department of
Housing and Urban Development, March 1994, Part 1, page O-8.
FORECASTING THE PROGRAM'S
REVENUES
------------------------------------------------------ Appendix II:2.2
To estimate the program's revenues, we recorded the characteristics
and status of loans for each year's book of business. These data
were used to estimate ultimate foreclosure and prepayment
probabilities of 52 percent and 48 percent, respectively. The
conditional foreclosure and prepayment probabilities for each year
were based on the actual number of loans that were foreclosed on and
paid off between fiscal year 1989 and the end of fiscal year 1994.\22
We estimated these conditional probabilities using data for the
6-year period ended September 30, 1994. These probabilities were for
loans entering the program during a 17-year period (fiscal years 1977
through 1994) and represented loan years 1 through 17. We assumed
that the conditional foreclosure and prepayment rates for years
beyond 1994 (18-30) were the same as for loan year 17. Figures II.1
and II.2 illustrate the estimated conditional foreclosure and
prepayment probability rates by loan year.
Figure II.1: The Program's
Conditional Foreclosure Rates,
by Year
(See figure in printed
edition.)
Source: FHA's F60 database.
Figure II.2: The Program's
Conditional Prepayment Rates,
by Year
(See figure in printed
edition.)
Source: FHA's F60 database.
Revenue estimates were based on the percentage of loans in five loan
status categories--current, current with forbearance, delinquent with
forbearance, delinquent with no forbearance, and pending
foreclosure--and their expected performance in the future. For each
year's book of business, we analyzed the unpaid balance to loan
amount, the amount of receivables outstanding, the amortized payment
amounts, and the actual payments made for each loan category. We
also included the amount of advances owed and original loan amounts
in the estimates.
--------------------
\22 These probabilities are conditional because they are subject to
the condition that the loan has remained active until a given year.
FORECLOSURE REVENUES
------------------------------------------------------ Appendix II:2.3
To estimate foreclosure revenues, an average recovery rate for loans
foreclosed and sold was obtained from the SAMS data on 203b loans
foreclosed during fiscal years 1983-94. Recovery rates ranged
between 43 and 67 percent of acquisition costs each year, averaging
59 percent. The average recovery rate of 59 percent was applied to
the acquisition costs of all foreclosed loans. Average acquisition
costs were used in estimating foreclosure revenues. Specifically,
the average acquisition costs for each year times the recovery rate
for each foreclosed loan results in the estimated total foreclosure
revenue of about $1 billion, about 48 percent of the $2.1 billion in
revenues to be obtained by FHA's Fund on these mortgages.
PREPAYMENT REVENUES
------------------------------------------------------ Appendix II:2.4
Prepayment revenues are based on data for all loans. Using the
number of loans that paid off and those forecasted to be paid off,
the unpaid principal balance at the time of payoff was estimated and
summed for all loans, totaling about $955 million, about 45 percent
of the revenues to be obtained by FHA. In estimating the unpaid
principal balance, we used the ratio of unpaid balance to original
loan amount for each year. Using the average loan amount, year in
program, and the number of expected prepayments, we estimated
prepayment revenues for each year.
For years 19 through 30, we assumed that the unpaid balance to
original loan amount will continue to decrease at an accelerated
rate. To determine the unpaid balance for years 19 through 30, a
simple regression was applied to the unpaid balance to original loan
amount ratio for years 1-18, in which each year's ratio is dependent
on the previous year's ratio. The resulting parameters were used to
estimate the unpaid balance to loan amount schedule for years 19-30.
PAYMENT REVENUES
------------------------------------------------------ Appendix II:2.5
We forecasted loan payment revenues using the estimated number of
loans remaining in the program and the actual and scheduled payments
made for each loan category. Actual loan payments averaged about 34
percent of scheduled payments.\23 It was assumed that the assigned
loans will have the same distribution over the loan categories that
they did in fiscal year 1994 but that the length of time in the
program varies. Actual to scheduled payment ratios were also assumed
to vary by time in program. As loans age, payment ratios rise,
indicating that older loans are paying a higher percentage of
scheduled payments.
Mortgagors' total payments for each year through the year 2023 for
each year's book of business were summed to obtain the estimated
total payment revenue of about $152 million, about 7 percent of the
revenues obtained by FHA's Fund for loans assigned since the
beginning of fiscal year 1989.
--------------------
\23 The percentage of loans making full payments increases with time
in the program. Some borrowers with less than 3 years in the program
make no mortgage payments as part of their suspended payment mortgage
forbearance agreement.
BORROWERS' COMPLIANCE WITH PROGRAM
REPAYMENT AGREEMENTS
========================================================= Appendix III
Approximately 39,600 (55 percent) of the 71,500 borrowers in the
program as of September 30, 1994, had been in the program 3 years or
fewer. HUD's records show that of the 39,600 borrowers, 26,000 (66
percent) are current with repayment agreements while the remaining 34
percent are not current. Of the 26,000 borrowers who are current
with repayment agreements, 36 percent are current with original
mortgage payments. The remaining borrowers (64 percent) are current
with repayment agreements that call for reduced or suspended
payments.
When borrowers remain in the program beyond the 3-year relief period
and therefore are required to make full mortgage payments, the
proportion of borrowers current with repayment agreements drops and
the proportion of borrowers in foreclosure increases. Similarly, the
average amount of delinquencies owed by borrowers increases (see
figs. III.1 and III.2). Of the approximately 31,900 borrowers who
have been in the program more than 3 years and are required to make
full mortgage payments, 38 percent are current on their repayment
agreements.
Figure III.1: Number of
Borrowers by Loan Category and
Time in the Program as of
September 30, 1994
(See figure in printed
edition.)
Figure III.2: Average
Outstanding Delinquent Amounts
by Loan Category and Time in
the Program as of September 30,
1994
(See figure in printed
edition.)
CASES IN WHICH SOME BORROWERS PAID
OFF MORTGAGES AND OTHERS DID NOT
========================================================== Appendix IV
People buy homes for shelter and investment purposes. Normally, they
do not plan to default on a loan. However, conditions that lead to
defaults occur. Defaults may be triggered by a number of events:
unemployment, divorce, death, etc. These events are not likely to
trigger foreclosure if the home can be sold for more than the
mortgage balance and selling expenses. However, if the property is
worth less than the mortgage, these events may trigger a foreclosure.
Prepayments may be triggered by other events such as declining
interest rates or rising house prices, which in turn may result in
the refinancing or sale of a residence.
To illustrate that some borrowers were able to and chose to pay their
mortgages while others did not, we randomly selected 136 case example
loans from four loan categories--paid-off, current with payments,
foreclosed on, and delinquent--from files at four HUD field
offices--Boston, Chicago, Ft. Worth, and Spokane. Of the 136
borrowers, 78 had paid off their loans, 34 were current with their
mortgages, and 24 had either been foreclosed on, provided HUD with a
deed in lieu of foreclosure, or were delinquent on their loans.
Borrowers who had been foreclosed on, had given FHA a deed in lieu of
foreclosure,\24 or had experienced growing delinquencies were
generally unable to resume full payments, and they experienced
additional problems after assignment that intensified their financial
difficulties. These borrowers generally encountered one or more of
the following situations after assignment: (1) intermittent job loss
with a reduction in income, (2) reduction in income due to divorce,
(3) one or more serious illnesses or injuries, (4) loss of a high
paying job and reduced income from a new job, and/or (5)
unanticipated housing repairs. Only a few borrowers did not make
their mortgage payments because they had high installment debt.
While FHA does not keep track of borrowers after foreclosure, FHA
loan servicers familiar with foreclosures told us that after
foreclosure, borrowers generally either rent an apartment or are able
to stay with relatives. Furthermore, program borrowers who
experience foreclosures have experiences that are similar to those of
FHA borrowers who experience foreclosures immediately without
assignment, according to the servicers. However, officials from two
housing counseling agencies told us that some borrowers could become
homeless after foreclosure.
In contrast, the 34 borrowers who were able to become current with
their loans generally did not experience such a litany of problems.
Although their incomes also declined, they either still had jobs,
found new jobs by the time HUD accepted their loans for assignment,
or were able to obtain second jobs to supplement their incomes. As a
result, 25 (about 73 percent) of the borrowers who became current
were able to resume full or increased mortgage payments immediately
upon entering the program. Of the 34 borrowers who became current on
their loans, 13 cured their delinquencies in less than 2 years.
However, the remaining 21 borrowers took 92 months on average to cure
their delinquencies. Seven borrowers took over 10 years to become
current with their original mortgage payments.
Almost all of the 78 borrowers included in our case studies who had
already paid their mortgages did so by selling their homes or
refinancing their mortgages. Of the 78 borrowers, 71 sold or
refinanced their homes, 4 paid mortgages from insurance settlement
payments, and 3 paid through regular or increased payments.
Borrowers who sold their homes were, on average, 8 months behind in
mortgage payments of $4,169 at the time their loans were assigned,
which increased to $6,088 when they sold or refinanced their homes.
However, the proceeds from the sales were generally sufficient for
these borrowers to pay off their original notes and the
delinquencies. Generally, these borrowers had either held the
properties for more than 10 years or lived in areas where housing had
significantly appreciated in value since the homes were purchased.
For example, according to a HUD field office official, housing in
Spokane has almost doubled in value since 1985. In contrast, the
value of homes in the Fort Worth area did not significantly
appreciate during this period. Thus, mortgagors in areas where
housing had significantly appreciated in value who sold their homes
had equity in their homes when they defaulted on their mortgages.
Almost half of the 78 borrowers who paid off their mortgages did so
within 2 years of assignment, and almost two-thirds did so within 3
years of assignment.
(See figure in printed edition.)Appendix V
--------------------
\24 The property owner deeds the property to HUD to avoid
foreclosure.
HUD'S DESCRIPTION OF THE CURRENT
OPERATIONS AND EFFECTS OF PAST
LITIGATION ON THE MORTGAGE
ASSIGNMENT PROGRAM
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C.
Robert S. Procaccini, Assistant Director
Patrick L. Valentine, Senior Evaluator
DuEwa A. Kamara, Senior Economist
Larry Goldsmith, Senior Evaluator
CHICAGO/DETROIT FIELD OFFICE
Gwendolyn B. Poole, Senior Evaluator
Frank M. Taliaferro, Senior Evaluator
Francis M. Zbylski, Operations Research Analyst
John A. Wanska, Senior Evaluator
DALLAS FIELD OFFICE
Sally S. Leon-Guerrero, Staff Evaluator