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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