Housing Finance: Budget Savings From the Sale of HUD Loans (Letter
Report, 07/19/1999, GAO/RCED-99-203).

Defaults on mortgages insured by the Department of Housing and Urban
Development's (HUD) Federal Housing Administration (FHA) increased
during the 1980s, primarily because of weak real estate markets. By the
early 1990s, HUD owned nearly 110,000 single-family and 2,400
multifamily loans that it had insured. In a series of six sales held
between 1994 and 1997, HUD sold 98,640 single-family loans and 1,093
multifamily loans. The sales generated more than $2.2 billion in
budgetary savings. This report discusses the reasonableness of (1) HUD's
estimates of budgetary savings from the sale of its single-family loans
and (2) the model HUD used to estimate savings from the sale of
multifamily loans. GAO concludes that HUD's estimates of budgetary
savings from the sale of the single-family loans it reviewed were
reasonable.

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

 REPORTNUM:  RCED-99-203
     TITLE:  Housing Finance: Budget Savings From the Sale of HUD Loans
      DATE:  07/19/1999
   SUBJECT:  Mortgage loans
	     Loan defaults
	     Cost control
	     Foreclosures
	     Sales contracts
IDENTIFIER:  HUD Single Family Mortgage Assignment Program

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    United States General Accounting Office GAO                Report
    to the Subcommittee on Housing and Transportation, Committee on
    Banking, Housing and Urban Affairs, U.S. Senate July 1999
    HOUSING FINANCE Budget Savings From the Sale of HUD Loans
    GAO/RCED-99-203 United States General Accounting Office
    Resources, Community, and Washington, D.C. 20548
    Economic Development Division B-281139
    Letter July 19, 1999 The Honorable Wayne Allard Chairman The
    Honorable John F. Kerry Ranking Minority Member Subcommittee on
    Housing and Transportation Committee on Banking, Housing and Urban
    Affairs United States Senate During the 1980s, defaults on
    mortgages insured by the Department of Housing and Urban
    Development's (HUD) Federal Housing Administration (FHA)
    increased, primarily because  real estate markets were weak.  As a
    result, by the early 1990s, HUD owned nearly 110,000 single-family
    and 2,400 multifamily loans that it had insured.  To make better
    use of its resources, HUD decided to sell these loans.  Between
    June 1994 and September 1997, HUD held six sales of single-family
    loans and seven sales of multifamily loans.  Through these 13
    sales, HUD sold 98,640 single-family loans and 1,093 multifamily
    loans.  According to HUD, these sales produced over $2.2 billion
    in budgetary savings--$830 million for single-family loans and
    $1.3 billion for multifamily loans.  The Federal Credit Reform Act
    of 1990 defines these budgetary savings as the difference between
    the net proceeds from selling the loans and the value of the loans
    to the federal government (the net present value of the future
    cash flows to HUD) if it had not sold the loans. As agreed, this
    report discusses the reasonableness of (1) HUD's estimates of
    budgetary savings from the sale of its single-family loans and (2)
    the model HUD used to estimate savings from the sale of
    multifamily loans.1 To assess the reasonableness of HUD's
    estimates of savings from the sale of 1HUD employed computerized
    models of future cash flows to estimate the value to the
    Department of not selling both single-family and multifamily
    loans. Page 1                          GAO/RCED-99-203 Estimates
    of Savings From HUD's Loan Sales B-281139 single-family loans, we
    reviewed HUD's single-family model and assumptions and developed
    our own estimates of savings from three of the six single-family
    loan sales.  These three sales were held between October 1995 and
    September 1996.2  To assess the reasonableness of HUD's
    multifamily model, we reviewed available documentation for the
    model and the findings of an independent contractor hired by HUD
    to evaluate the accuracy of the multifamily model.  We did not
    prepare our own estimates of savings to HUD from the sale of
    multifamily loans. Results in Brief    According to HUD, it
    achieved $830 million in budgetary savings by selling 98,640
    single-family loans.  Nearly all of these savings, $774 million,
    were attributable to the sale of 71,946 single-family loans that
    HUD acquired through its mortgage assignment program and sold
    through five sales held between October 1995 and September 1997.
    On the basis of our independent estimates, we conclude that HUD's
    estimates of budgetary savings from the sale of the single-family
    loans we reviewed are reasonable.  Specifically, we independently
    estimated that HUD achieved budgetary savings of $345 million,
    compared with HUD's estimate of $259 million, from its sale of
    38,547 loans sold in three single-family sales held between
    October 1995 and September 1996.  The $86 million difference
    between our estimate of savings and HUD's is not large when one
    considers that the loans sold through these three sales
    represented an unpaid principal balance of $1.7 billion.3
    According to Booz-Allen & Hamilton, Inc., a large management and
    technology consulting firm, the model HUD used to estimate savings
    from the sale of multifamily loans produced reasonable estimates
    of savings. However, Booz-Allen & Hamilton questioned the logic
    and support for several key assumptions and found that the model
    was not thoroughly 2Between 1994 and 1997, HUD sold 98,640 single-
    family loans.  Of these, 71,946 were Mutual Mortgage Insurance
    Fund loans that HUD acquired through its mortgage assignment
    program.  Using a model we developed in 1995, we were able to
    estimate the value to HUD of 38,547 of these single-family loans
    sold through three single-family sales held in Oct. 1995, Mar.
    1996, and Sept. 1996.  Because of data limitations, however, we
    could not use the 1995 model to independently estimate the savings
    from the remaining 33,399 single-family loans that were sold in
    two subsequent sales, held in Jan. and Sept. 1997. Nearly all of
    the remaining 26,694 single-family loans were HUD-held performing
    221 (g)(4) loans insured by HUD before Nov. 30, 1983 (which
    lenders assign to HUD in the 21st  year) and General Insurance
    Fund loans acquired through other means.  Because of data
    limitations, we also excluded from our analysis these loans-most
    of which were sold in the first single-family loan sale, held in
    June 1994. 3All savings estimates are presented in 1994 dollars.
    Page 2                           GAO/RCED-99-203 Estimates of
    Savings From HUD's Loan Sales B-281139 documented.4  In response,
    HUD developed a new model that addressed these weaknesses.
    Without documentation for the original model and the historical
    data used to support key assumptions, we cannot conclude whether
    the original model would produce reasonable estimates of savings.
    Background    Since 1934, FHA, an agency within HUD, has insured
    lenders against losses on single- and multifamily mortgages that
    otherwise might not have qualified for conventional financing.
    During the 1980s, weak real estate markets prompted a surge of
    defaults on both the single-family and multifamily mortgages
    insured by FHA.  By 1994, when the wave of defaults subsided, HUD
    owned almost 110,000 single-family mortgages and 2,400 multifamily
    mortgages. This large inventory of troubled loans consumed a
    disproportionate amount of FHA staff time and prevented the agency
    from properly servicing its portfolio of insured loans and
    preventing further defaults.5  To remedy the situation, in March
    1994, HUD initiated an aggressive program to sell FHA's inventory
    of HUD-held loans.  From June 1994 through September 1997, HUD
    held six sales of single-family loans and seven sales of
    multifamily loans.6  Through these sales, HUD sold 98,640 single-
    family loans and 1,093 multifamily loans.  As of September 30,
    1998, HUD owned about 12,000 single-family and 1,100 multifamily
    loans. About 72,000 of the single-family loans sold by HUD were
    acquired through the Department's now defunct mortgage assignment
    program.  This program allowed lenders, under certain conditions,
    to assign an FHA-insured mortgage to HUD after the borrower
    defaulted, making HUD the owner of the loan.  For borrowers
    accepted into the program, HUD paid the mortgage debt, took
    assignment of the loan from the lender, and developed a new
    repayment plan (forbearance agreement) for the borrower, under
    which mortgage payments could be reduced or suspended 4See Model
    Documentation and Users Guide for the "Value-to-HUD" Model for
    Multifamily Notes, Booz-Allen & Hamilton, Inc. (Apr. 24, 1998).
    5Servicing and managing the loans assigned to FHA requires a
    considerable amount of staff resources. This staff-intensive
    effort takes resources away from monitoring HUD-insured mortgages,
    thereby increasing the risk of default for these mortgages. 6HUD
    also negotiated the transfer of 26 subsidized multifamily loans to
    the Missouri Housing Development Commission and reassigned 85
    unsubsidized multifamily loans to Fannie Mae (the Federal National
    Mortgage Association). Page 3                          GAO/RCED-
    99-203 Estimates of Savings From HUD's Loan Sales B-281139 for up
    to 36 months.  HUD, acting as the lender, collected monthly
    mortgage payments from the borrower while allowing the borrower to
    keep the home.  By taking assignment of loans rather than having
    lenders foreclose on them, HUD can, at times, avoid foreclosure
    losses, help borrowers retain their homes, and provide borrowers
    with opportunities to avoid foreclosure.  However, as we reported
    in October 1995, even with the forbearance provided by HUD to
    these financially strapped borrowers, over half would eventually
    lose their homes through foreclosure.7 Moreover, the mortgage
    assignment program did not reduce HUD's foreclosure losses;
    rather, the program's losses exceeded those that would have
    occurred if the loans had gone immediately to foreclosure.
    Usually, HUD acquires ownership of a multifamily mortgage when the
    borrower defaults on an FHA-insured mortgage.  After such a
    default, the private lender may submit a claim for the insured
    amount to FHA and assign the mortgage to FHA.8 The Federal Credit
    Reform Act of 1990 was enacted to (1) require that the federal
    budget more accurately measure the government's subsidy costs for
    federal direct loans and loan guarantees and (2) permit better
    cost comparisons between credit and noncredit programs.  The
    credit subsidy cost is the estimated net cost, in present value
    terms, to the government of direct or guaranteed loans over the
    entire period that the loans are outstanding.  Under the act, loan
    asset sales are treated as modifications that change the cost of
    the loan or guarantee to the federal government. For federal
    budgetary purposes, the subsidy cost of a sold loan is the
    difference between the value to the federal government of the loan
    if the loan were not sold (the estimated net present value of the
    future cash flows from the loan) and the net proceeds from the
    loan sale.  If the estimated value of keeping the loan is greater
    than the estimated proceeds from a sale, a positive credit subsidy
    estimate would result, and the sale cannot go forward unless
    budget authority has been provided to cover the additional subsidy
    cost to the government.  However, if the estimated value to the
    government of retaining ownership of the loan is less than the
    estimated proceeds from a sale, the government would be achieving
    a savings from the sale and no additional budget authority is
    necessary. 7See Homeownership:  Mixed Results and High Costs Raise
    Concerns About HUD's Mortgage Assignment Program (GAO/RCED-96-2,
    Oct. 18, 1995). 8HUD may also acquire a mortgage through a
    "nondefault" assignment of 221(g)(4) loans after 20 years. Page 4
    GAO/RCED-99-203 Estimates of Savings From HUD's Loan Sales B-
    281139 HUD used separate multifamily and single-family models to
    estimate the net present values of future cash flows to HUD--the
    value of the loans to HUD if they had remained in its portfolio.
    According to HUD, the seven multifamily and six single-family loan
    sales that the Department held from June 1994 through September
    1997 resulted in $2.2 billion in budgetary savings.9 HUD's
    Estimates of              Over the past 5 years, HUD sold 98,640
    single-family loans with an unpaid Savings From the
    principal balance of $4.4 billion.  According to HUD, it saved
    $830 million by selling these loans.  Nearly all of these savings,
    $774 million, were Single-Family Loan              attributable to
    the sale of 71,946 single-family loans that HUD acquired Sales We
    Reviewed Are  through its mortgage assignment program and sold
    through five sales held Reasonable                      from
    October 1995 through September 1997.  Where we were able to
    independently estimate savings, we believe that HUD's estimate of
    budgetary savings from the sale of assigned single-family loans is
    reasonable.10 HUD based its estimate of savings on the results of
    a model that estimated the future revenues and costs to HUD of
    holding these loans rather than selling them.  In 1995, using a
    model we had developed, we reported the cost to HUD of holding
    assigned loans in its portfolio.  To determine the reasonableness
    of HUD's estimate of budgetary savings from the sale of its
    single-family loans, we used this earlier model to estimate the
    value to HUD of the 38,547 assigned single-family loans that HUD
    sold through sales held in October 1995, March 1996, and September
    1996.  (See app. I for a more complete discussion of our model.)
    The 38,547 loans we analyzed represent all but 141 of the mortgage
    assignment program loans sold through theses three sales.
    However, because of data limitations, we could not provide savings
    estimates for the 33,258 assigned loans that HUD sold in two sales
    held in January and September 1997. 9Budgetary savings result
    because the loan purchaser places a higher value on these loans
    than their value to HUD.  According to the information contained
    in the Budget of the United States Government, Fiscal Year 1997,
    the private sector may place a higher value on these loans than
    would HUD because the net cash flows to the private sector may be
    larger.  For example, it is generally felt that the private sector
    is more efficient than HUD at servicing loans and collecting loan
    payments. 10The reasonableness of HUD's and our estimates depends
    on the data provided to the models.  While we did not
    independently verify the accuracy of HUD's data, we did perform
    extensive testing of the data elements used in producing our
    savings estimates (see page 10 for a more detailed discussion of
    the data reliability tests we performed). Page 5
    GAO/RCED-99-203 Estimates of Savings From HUD's Loan Sales B-
    281139 For the three sales for which we had data, our estimate of
    the combined savings to HUD is $345 million, a figure that is $86
    million higher than HUD's estimate of $259 million.  The $86
    million difference between our estimates of savings and HUD's is
    not large when one considers that HUD, through these three sales,
    sold 38,688 single-family loans with an unpaid principal balance
    of $1.7 billion.  These estimates of savings represent the
    difference between the estimated value to HUD of the loans if HUD
    had not sold them and the proceeds from the sale.  Since loan sale
    proceeds remain constant, it is the difference in HUD's and our
    estimates of the value of these loans to HUD if HUD had not sold
    them that causes the $86 million difference in our estimates.  As
    table 1 shows, HUD's estimate of the total value of these loans
    and our estimate are within 7 percent of each other-a difference
    of $86 million.  Given the degree of uncertainty surrounding any
    estimates of cash flows that may occur 20 or more years into the
    future, this 7-percent difference is not substantial. Table 1:
    Estimated Value to HUD and Savings From Sales of 38,547 Single-
    Family Loans 1994 dollars in millions Differencea (HUD's minus
    HUD's estimatea           GAO's estimatea
    GAO's) Value to HUD Oct. 1995 sale
    $329                      $317                        $12 Mar.
    1996 sale                                 397
    389                         8 Sept. 1996 sale
    460                        394                        66 Total
    value to HUD                           $1,186
    $1,100                        $86 Total sale proceeds
    1,445                      1,445                         0 Total
    savings                                  $259
    $345                        $86 Note:  HUD's and GAO's estimates
    exclude the sale of General Insurance Fund and 221(g)(4) loans, of
    which there were 2,309 in the Oct. 1995 sale, 1,891 in the Mar.
    1996 sale, and 3,260 in the Sept. 1996 sale.  Together, these
    loans represented less than 7 percent of the savings to HUD from
    loans sold through these three sales.  The total estimated savings
    equals the total proceeds from the sales minus the total estimated
    value to HUD. aAll of the figures in this column are estimates
    except the one for total sale proceeds. According to HUD, for the
    single-family loan sales held in January and September 1997, it
    used the same model and assumptions to estimate savings as it used
    for the sale immediately preceding these sales.  As noted above,
    data limitations precluded our providing independent estimates of
    savings to HUD from these two sales.  Over 90 percent of the
    single-family Page 6                          GAO/RCED-99-203
    Estimates of Savings From HUD's Loan Sales B-281139 loans sold
    during these last two sales were also mortgage assignment program
    loans.  During our review, we did not identify any issues that
    would raise questions about the reasonableness of HUD's estimates
    of savings from these two sales. The similarities between our
    estimates and HUD's are not surprising, given that both models,
    while differing in some respects, base their estimates of savings
    on the same key variables and assumptions.  For example, both
    models estimate the value to HUD of not selling loans by
    projecting the future cash HUD would receive from recoveries on
    foreclosed homes, principal and interest payments, and homeowners'
    prepayments of loan obligations.  All of these cash flows must be
    forecasted 10 or more years into the future.  In addition, the
    assumptions driving both models are based on historical data.
    There are some differences, however, between HUD's model and ours.
    For example, while our model estimates future principal and
    interest payments together as one payment, HUD's model treats them
    as separate cash flows. In addition, our model estimates
    recoveries on foreclosures by applying an assumed recovery rate to
    HUD's acquisition cost on foreclosed loans, while HUD's model
    applies an assumed recovery rate on foreclosures to the unpaid
    principal balance on foreclosed loans. The Multifamily Model  In
    December 1996, HUD hired an independent contractor to review the
    HUD Used to Estimate  conceptual basis and mechanics of the model
    the Department used for estimating savings from the sale of
    multifamily loans and to determine Savings Had
    whether the model's estimates of savings were reasonable.  In
    April 1998, Weaknesses That HUD  the contractor reported that the
    model produced reasonable results. Has Now Addressed
    However, according to the contractor, the model had certain
    weaknesses that could be corrected through a thorough, rigorous,
    and documented analysis of historical data on the performance of
    HUD-held multifamily loans.11  In response, HUD developed an
    improved model that addressed the weaknesses the contractor
    identified in the original model. The contractor also questioned
    the logic and support for several of the model's key assumptions.
    Specifically, the contractor could not identify the source of
    information supporting the assumptions about loan prepayment,
    11See Model Documentation and User's Guide for the "Value-to-HUD"
    Model for Multifamily Notes, Booz-Allen & Hamilton, Inc. (Apr. 24,
    1998). Page 7                          GAO/RCED-99-203 Estimates
    of Savings From HUD's Loan Sales B-281139 third-party and
    property-sale proceeds, and holding costs.  The contractor also
    questioned the model's (1) use of one collection rate for all
    types of loans that did not vary over time and was based on data
    for only 12 months of collections, (2) failure to address
    arrearages or the application of collections to arrearages and
    current billings, and (3) failure to reduce the scheduled
    principal and unpaid principal balances to zero over time.  The
    contractor also found that the model was not thoroughly documented
    and that people who were knowledgeable about the model's
    assumptions and data sources were no longer available. According
    to one HUD official, the model was not well documented, and over
    time, HUD employees who were involved in the sale of multifamily
    loans and could describe the model moved on to other jobs.  In
    addition, the company hired to develop the multifamily model was
    no longer in existence.  As a result, HUD officials were unable to
    provide us with detailed information on the model's structure or
    on the basis for all of the assumptions used.  Given the limited
    amount of information available, we were unable to provide an
    independent analysis of the strengths and weaknesses of HUD's
    multifamily model.  Furthermore, given the weaknesses identified
    by the contractor, we cannot conclude whether the model produced
    reasonable estimates of savings. In its final report, the
    contractor concluded that none of the identified weaknesses were
    serious enough to compromise the reasonableness of the results
    produced by the multifamily model and that HUD's estimates of
    savings were reliable in all material aspects.  According to the
    contractor, this conclusion was based on professional judgment
    after a thorough examination of the model's documentation and
    structure and available data on HUD-held multifamily loans.12  As
    part of its April 1998 report, the contractor also provided
    documentation for a new multifamily model it developed.  According
    to the contractor, the new model addresses all of its concerns
    about the original model. Agency Comments    We provided copies of
    a draft of this report to HUD for review and comment.  Officials
    of the Department, including the FHA Comptroller, generally agreed
    with the report's findings. 12One way to assess the reasonableness
    of the estimates produced by HUD's original multifamily model
    would be to use the new model to reestimate the savings from past
    loan sales. According to HUD, resource limitations have precluded
    their using the new model for this purpose. Page 8
    GAO/RCED-99-203 Estimates of Savings From HUD's Loan Sales B-
    281139 Scope and      In conducting this review, we focused on the
    two models that HUD used to Methodology    estimate budgetary
    savings from the sale between March 1995 and September 1997 of
    71,946 single-family loans and 887 multifamily loans.13 To
    determine the reasonableness of HUD's estimates of budgetary
    savings from the sale of its single-family loans, we interviewed
    HUD officials responsible for overseeing the single-family loan
    sales program.  In addition, we developed our own estimates of
    savings from HUD's sale of 38,547 assigned single-family loans
    through three sales held between October 1995 and September 1996.
    To develop our estimates, we used a model that we developed in
    1995 to estimate HUD's costs of holding the single-family
    mortgages it had acquired through its mortgage assignment program.
    This program allowed lenders, under certain conditions, to assign
    FHA-insured mortgages to HUD in cases of default, making HUD the
    owner of the loans. Our analysis was based on data we received
    from HUD during our initial review of the mortgage assignment
    program in 1995.  We worked closely with HUD officials and
    discussed the interpretation of HUD's data.  While we did not
    independently verify the accuracy of the data, we did perform
    internal checks of the data elements used to determine (1) the
    extent to which the data fields were coded and (2) the
    reasonableness of the values contained in the data fields.  We
    checked the mean, median, mode, skewness, and high and low values
    for each of the variables used.  We also compared several
    variables from each data set to see if they were recorded the same
    way within each data set.  We developed an appropriate methodology
    for using the data to estimate losses, costs, and revenues to FHA
    for the time period covered. To assess the strengths and
    weaknesses of the model HUD used to estimate savings from the sale
    of multifamily loans, we reviewed available information on the
    model and HUD's assumptions and interviewed HUD officials
    responsible for overseeing the multifamily loan sales program.  In
    addition, we interviewed the independent contractor hired by HUD
    to assess the model and reviewed the contractor's final report.
    This report 13Since June 1994, HUD has also sold 16,029 single-
    family and 206 multifamily 221(g)(4) loans that were assigned to
    HUD in their 21st year by lenders, as previously allowed under the
    terms of FHA's mortgage insurance.  These 221 (g)(4) loans were
    excluded from our review.  Also excluded from the scope of this
    review were 26 multifamily loans transferred to the Missouri
    Housing Development Commission, 85 multifamily loans reassigned to
    Fannie Mae, 10,085 single-family loans that were originally
    insured through FHA's General Insurance Fund, and 580 other
    single-family loans. Page 9                          GAO/RCED-99-
    203 Estimates of Savings From HUD's Loan Sales B-281139 also
    provides documentation for HUD's improved multifamily model.  We
    did not prepare our own estimates of savings to HUD from the sale
    of multifamily loans or assess HUD's new multifamily model.  We
    performed our work from September 1998 through May 1999 in
    accordance with generally accepted government auditing standards.
    As agreed with your offices, unless you publicly announce its
    contents earlier, we plan no further distribution of this report
    until 15 days after the date of this letter.  At that time, we
    will provide copies to Senator Connie Mack, Chairman, Subcommittee
    on Economic Policy, Senate Committee on Banking, Housing, and
    Urban Affairs; Andrew M. Cuomo, Secretary of Housing and Urban
    Development; and other interested parties.  Copies will also be
    made available to others on request. If you or your staff have any
    questions about this report, please contact me at (202) 512-6520.
    Key contributors to this assignment were Chuck Bausell, DuEwa
    Kamara, Matt Scir, and Pat Valentine. Stanley J. Czerwinski
    Associate Director, Housing and Community Development Issues Page
    10                  GAO/RCED-99-203 Estimates of Savings From
    HUD's Loan Sales Appendix I GAO's Model Used to Estimate Single-
    Family Loan Sales Savings
    Appendix I Using a cash flow model,1 we estimated the net present
    value of future revenues and costs for 38,547 loans that the
    Department of Housing and Urban Development (HUD) sold in three
    separate sales held between October 1995 and September 1996.  This
    net present value is an estimate of the value of these loans to
    HUD if it had not sold them.  We then compared this estimate of
    net present value with the actual proceeds of the loan sales to
    determine the savings, if any, from these sales.2  The results of
    these calculations, presented in table I.1, indicate an overall
    savings of $345 million, compared with HUD's lower estimate of
    $259 million. How We Estimated the  We started by estimating the
    value of all 71,458 loans assigned to HUD Value of the
    between 1977 and 1994 as if they had never been sold and had
    performed at a rate determined by historical data.3  We then
    removed from this portfolio Single-Family Loans             the
    loans sold in October 1995 and reestimated the remaining value of
    the Sold                            loans.  The resulting
    reduction in the estimated value of the loans in HUD's portfolio
    equaled our estimate of the value of the loans sold in this sale.
    We used the same methodology to estimate the values of the loans
    sold in the next two sales. Table I.1 includes the number and
    unpaid principal balance of the loans sold in five sales HUD held
    between October 1995 and September 1997.  Sale values and savings
    estimates are also provided.  As noted below, we used our model to
    estimate savings from three of the loan sales, but not from the
    two sales that took place in January and September 1997.4
    Information on the number of loans modeled/sold and the unpaid
    principal balance are also reported in table I.1, along with the
    difference in HUD's and our estimates of savings. 1In 1995, we
    used this model to analyze the cost to HUD of holding single-
    family loans acquired through its mortgage assignment program.
    See Homeownership:  Mixed Results and High Costs Raise Concerns
    About HUD's Mortgage Assignment Program (GAO/RCED-96-2, Oct. 18,
    1995). 2These cash flow estimates are in 1994 present values,
    calculated by using discount rates specified by HUD for each loan
    sale. 3We first matched these loans with loans included in our
    1995 model and then grouped them according to the date they were
    assigned to the program. 4Table I.1 does not include information
    on the loans sold in HUD's first (June 1994) single-family loan
    sale because these loans were not mortgage assignment program
    loans.  We therefore could not use our model to analyze them. Page
    11                         GAO/RCED-99-203 Estimates of Savings
    From HUD's Loan Sales Appendix I GAO's Model Used to Estimate
    Single-Family Loan Sales Savings Table I.1:  Information on HUD's
    Savings Estimates for Single-Family Mutual Mortgage Insurance Fund
    Loans Sold From October 1995 Through September 1997 1994 dollars
    in millions Oct.      Mar.     Sept.     Jan.      Sept. Data item
    1995     1996      1996      1997      1997 Unpaid principal
    balance                      $447.1 $616.8 $653.7 $859.0 $853.2
    Number of loans HUD sold                      10,672 14,309 13,707
    17,182 16,076 Number of loans GAO modeled                  10,831a
    14,159 13,557               0        0 HUD's estimated value to
    HUD                  $328.5 $397.3 $460.1 $600.8 $567.6 GAO's
    estimated value to HUD                  $317.0 $389.0 $393.7
    bb Sale proceeds                                 $335.6 $515.5
    $593.6 $790.0 $767.9 HUD's estimated savingsc $7.1 $118.2 $133.6
    $189.2 $196.3 GAO's estimated savingsc                       $18.6
    $126.5 $200.0                bb Difference between HUD's and GAO's
    estimates                                      $11.5      $8.3
    $66.3          bb Note: HUD also sold 15,212 single-family 221(g)
    (4) loans in June 1994. aFor the Oct. 1995 sale, we identified 159
    more loans than HUD reported as single-family mortgage assignment
    program loans sold. bWe did not estimate the value to HUD for the
    Jan. 1997 and Sept. 1997 loan sales. cFor each sale, the estimated
    savings equals the sale proceeds minus the estimated value to HUD.
    Variables and                   Major cash flow variables, whose
    future values are estimated, include Assumptions We Used  revenues
    from sales of foreclosed properties, early payoffs of loans,
    payments made by mortgagors (borrowers), and advances paid on in
    Our Model                    properties by HUD. We assumed that
    the value of the loans sold was a function of the foreclosure and
    payoff rates.  Other factors that affected costs included (1) the
    ratio of the unpaid principal balance to the original loan amount,
    (2) receivables due on the original loan amount, and (3) the ratio
    of advances to the original loan amount, as well as the policy
    year of the loans.  In addition, we assumed that the Federal
    Housing Administration (FHA) would continue to receive partial and
    delayed payments for some assigned mortgages and that both
    foreclosure and prepayment behavior would Page 12
    GAO/RCED-99-203 Estimates of Savings From HUD's Loan Sales
    Appendix I GAO's Model Used to Estimate Single-Family Loan Sales
    Savings remain the same in the future as in the past, after each
    successive loan sale. Our analysis does not take into account the
    possibility that the loans assigned from fiscal year 1989 through
    fiscal year 1994 may differ from earlier loans in ways that could
    affect their prepayment and foreclosure probabilities beyond 6
    years from the date of assignment.  In addition, neither our
    analysis nor HUD's takes into account the difference in the
    distribution of loan performance for loan pools remaining after
    each sale. Given these assumptions, we projected future cash flows
    from foreclosures, prepayments, and surviving loans.  Because of
    inadequate historical data, it was not possible to estimate
    foreclosure and prepayment probabilities incorporating economic
    indicators such as unemployment rates, payment-to-income ratios,
    current interest rates, and house price appreciation rates.5
    Additional detail on forecasting each of the major revenue
    variables follows. Foreclosure and Prepayment  On the basis of our
    analysis of foreclosure and prepayment data, we Rates
    estimated an ultimate foreclosure probability of 52 percent.  We
    also estimated conditional probabilities using data for the 6-year
    period ending September 30, 1994.  These probabilities were for
    loans entering HUD's mortgage assignment program during a 17-year
    period (fiscal years 197794) and represented loan years 1 through
    17.  We assumed that the conditional foreclosure and prepayment
    rates for loan years 18 through 30 would be the same as for loan
    year 17. Foreclosure Revenues              To estimate foreclosure
    revenues, we obtained an average recovery rate for loans
    foreclosed and sold from data on Mutual Mortgage Insurance Fund
    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.
    Specifically, the average acquisition cost for each year times the
    recovery rate for each foreclosed loan results in the expected
    total foreclosure revenue. 5FHA's database records historical
    foreclosure and prepayment activity from fiscal year 1989 onward.
    Data on previous years' terminations were purged from the
    database. Page 13                        GAO/RCED-99-203 Estimates
    of Savings From HUD's Loan Sales Appendix I GAO's Model Used to
    Estimate Single-Family Loan Sales Savings Prepayment Revenues
    Prepayment revenues are based on data for all assigned loans, the
    number of loans paid off and forecasted to be paid off, and the
    unpaid principal balance at the time of payoff.  In estimating the
    unpaid principal balance, we used the ratio of the unpaid balance
    to the original loan amount for each year.  Using the average loan
    amount, year in the program, and number of expected prepayments,
    we estimated prepayment revenues for each year. For years 19
    through 30, we assumed that the ratio of the unpaid balance to the
    original loan amount would continue to decrease at an accelerated
    rate. To determine the unpaid balance for years 19 through 30, a
    simple regression was applied to the ratio of the unpaid balance
    to the original loan amount for years 1 through 18, in which each
    year's ratio is dependent on the previous year's ratio.  The
    resulting parameters were used to estimate the ratio of the unpaid
    balance to the loan amount for years 19 through 30. Payment
    Revenues       Loan payment revenue estimates are 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.  For each year's
    book of business, we analyzed the ratio of the unpaid balance to
    the loan amounts and the actual payments made for each loan
    category.  We also accounted for advances owed and original loan
    amounts. 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.6  It was
    assumed that the assigned loans would have the same distribution
    over the loan categories that they did in fiscal year 1994 but
    that their length of time in the program would vary.  The ratio of
    actual to scheduled payments was also assumed to vary by the
    length of time in the program.  As loans age, payment ratios rise,
    indicating that a higher percentage of scheduled payments are
    being made for older loans. 6The 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. Page 14
    GAO/RCED-99-203 Estimates of Savings From HUD's Loan Sales
    Appendix I GAO's Model Used to Estimate Single-Family Loan Sales
    Savings Databases We Used in  We used three of HUD's computerized
    databases: Our Analysis                  * the F-60 database of
    current and historical information on all mortgage loans that HUD
    services under the mortgage assignment program; * the A-43
    database of  historical information on mortgages insured under the
    Mutual Mortgage Insurance Fund before assignment; and, * the
    Single-Family Accounting and Management System database of
    properties held and eventually sold by HUD following foreclosure.
    These databases provided information on initial characteristics of
    each loan, such as the year the loan was assigned, the initial
    unpaid principal balance, any delinquent amounts, and the interest
    rate and term of the loan. We categorized the loans as foreclosed,
    prepaid, or active as of the end of fiscal year 1994. (385754)
    Page 15                    GAO/RCED-99-203 Estimates of Savings
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