GAO-19-517, FEDERAL HOUSING ADMINISTRATION: Improved Procedures and Assessment Could Increase Efficiency of Foreclosed Property Conveyances

FEDERAL HOUSING

ADMINISTRATION

Improved Procedures

and Assessment

Could Increase

Efficiency of

Foreclosed Property

Conveyances

Report to Congressional Committees

June 2019

GAO-19-517

United States Government Accountability Office

Highlights of GAO-19-517, a report to

congressional

committees

June 2019

FEDERAL HOUSING ADMINISTRATION

Improved

Procedures and Assessment Could

Increase Efficiency

of Foreclosed Property

Conveyance

What GAO Found

From July 2010 through December 2017, the process for conveying foreclosed

properties to the Federal Housing Administration (FHA) took a median of 70

days. The conveyance process—which GAO measured from a mortgage

servicer’s obtaining title to and possession of the property to FHA’s marketing of

the property—involves servicers making repairs, transferring ownership, and

filing a mortgage insurance claim, and FHA inspecting the property. FHA

attributes the length of time to complete the process partly to foreclosure

processing delays that left properties vulnerable to damage and vandalism,

which can increase the time servicers need to bring properties into conveyance

condition. Property damage also may increase the likelihood that FHA will

reconvey a property (transfer it to the servicer) for not complying with condition

standards, further extending the conveyance process. For about 55 percent of

properties conveyed in July 2010–December 2017, servicers exceeded the

required time to obtain title and possession of a foreclosed property and convey

it to FHA. For 2017 alone, the corresponding figure was 72 percent. As a result,

servicers were not eligible to be reimbursed for all repairs and interest expenses

for those properties when filing insurance claims with FHA.

In recent years, FHA changed aspects of its conveyance process to help

address some of the execution challenges the agency and servicers have faced.

For example, in 2016, FHA enhanced its data system for conveyed properties to

reduce manual administrative processing. FHA also began a pilot program in

2017 to decrease the number of properties FHA reconveys by inspecting

properties before conveyance. However, GAO found shortcomings in FHA

policies, procedures, and assessment efforts that are inconsistent with federal

evaluation criteria and internal control standards, as follows:

• FHA’s policies and procedures lack detail that could help servicers and

contractors determine if a property is in compliance, and the agency has not

examined alternative methods of communicating this information. Fifteen of

the 20 servicers GAO interviewed said existing policies, procedures, and

communications often were not clear or specific enough to address property

conditions or repair decisions they encountered. FHA also relies on brief

written policies to explain standards and makes limited or no use of other

methods, such as photographs or industry-wide calls.

• FHA has not provided written direction on when to use alternatives to

reconveyance—such as agreements under which servicers make repairs or

repay FHA for any repair costs after conveyance—for properties not meeting

condition standards. In the absence of such direction, FHA may not be

addressing these properties in the most consistent or effective manner.

• FHA has not developed a plan to assess the outcome of its inspection pilot.

Without rigorous assessment, FHA risks making decisions about the future of

the pilot based on inaccurate or incomplete information.

Addressing these shortcomings could help improve the efficiency and

effectiveness of FHA’s property conveyance process.

View GAO-19-517. For more information,

contact

Daniel Garcia-Diaz at (202) 512-8678

garciadiazd@gao.gov.

Why GAO Did This Study

FHA insures hundreds of thousands of

single-family home mortgages

annually. When an FHA borrower

defaults, the mortgage servicer in

many cases forecloses, obtains title to

the property, and conveys ownership

to FHA. FHA inspects the property,

acquires it if it complies with condition

standards and title requirements, and

lists the property for sale. FHA may

reconvey noncompliant properties to

servicers. During conveyance, homes

may sit vacant for months and can

deteriorate, contributing to

neighborhood blight.

Senate Report 114-243 included a

provision for GAO to review FHA’s

effectiveness and efficiency in reaching

determinations of conveyable

condition. This report discusses (1)

timelines for FHA property

conveyances in 2010–2017 and

whether servicers and FHA met time

requirements, and (2) changes FHA

has made to the conveyance process

in recent years and any ongoing

process challenges. GAO analyzed

FHA data on properties conveyed in

2010–2017, reviewed FHA’s policies

and procedures, and interviewed 20

randomly selected mortgage servicers

accounting for more than one-third of

active FHA mortgages.

What GAO Recommends

GAO recommends that FHA (1)

enhance the content and

communication of policies and

procedures on conveyance condition,

(2) provide written direction on

alternatives to reconveyance, and (3)

develop a plan to assess a pilot

program. FHA agreed with the second

and third recommendations and did not

agree or disagree with the first.

Page i GAO-19-517 FHA Property Conveyances

Letter 1

Background 4

FHA’s Property Conveyance Process Often Takes a Long Time,

and Servicers and Contractors Performance against Time

Requirements Varied 14

FHA Changed Aspects of the Conveyance Process, but Policies

and a Pilot Program Still Have Limitations 33

Conclusions 45

Recommendations 46

Agency Comments and Our Evaluation 46

Appendix I Objectives, Scope, and Methodology 48

Appendix II Comments from the Department of Housing

and Urban Development 54

Appendix III GAO Contact and Staff Acknowledgments 56

Tables

Table 1: Number of Properties Conveyed and Reconveyed

Annually, 2012–2017 18

Table 2: Percentage of Compliance Contractor Reviews That Met

Federal Housing Administration’s (FHA) Time

Requirements, Properties Conveyed, 2011–2017 31

Table 3: Results of Federal Housing Administration (FHA)

Preconveyance Inspection Pilot, as of November 5, 2018 44

Figures

Figure 1: Examples of Properties Conveyed to the Federal

Housing Administration in 2018 7

Figure 2: Number of Properties Conveyed to the Federal Housing

Administration (FHA), 2010–2017 9

Figure 3: Federal Housing Administration’s Property Conveyance

Process 10

Contents

Page ii GAO-19-517 FHA Property Conveyances

Figure 4: Length of the Federal Housing Administration’s (FHA)

Property Conveyance Process, July 2010–December

2017 15

Figure 5: Damage at Properties in the Atlanta and Baltimore Areas

That the Federal Housing Administration Designated for

Reconveyance 17

Figure 6: Median Length of Conveyance Process for Properties

That Were and Were Not Reconveyed to Servicers by the

Federal Housing Administration (FHA), 2012–2017 19

Figure 7: Use of Federal Housing Administration (FHA) Property

Disposition Methods, Fiscal Years 2010–2017 21

Figure 8: Length of Default and Foreclosure Period for Properties

Conveyed to the Federal Housing Administration (FHA),

July 2010–December 2017 24

Figure 9: Length of the Federal Housing Administration’s (FHA)

Conveyance Process from July 2010 through December

2017, by Default and Foreclosure Period Quartile 26

Figure 10: Number of Days for Servicers to Complete the Federal

Housing Administration (FHA) Preconveyance Period for

Properties Conveyed during July 2010–December 2017 28

Figure 11: Percentage of Properties Conveyed to the Federal

Housing Administration (FHA) with at Least One

Overallowable Request, July 2010–December 2017 35

Figure 12: Examples of Flooring Damage at Properties Conveyed

to the Federal Housing Administration in 2018 40

Page iii GAO-19-517 FHA Property Conveyances

Abbreviations

asset disposition system P260 Asset Disposition and Management

System

CWCOT Claims without Conveyance of Title program

enterprises government-sponsored enterprises

FAQ frequently asked questions

FHA Federal Housing Administration

HOA homeowners association

HOC homeownership center

HUD Department of Housing and Urban

Development

REO real estate-owned

servicers mortgage servicers

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Page 1 GAO-19-517 FHA Property Conveyances

441 G St. N.W.

Washington, DC 20548

June 20, 2019

The Honorable Susan M. Collins

Chairwoman

The Honorable Jack Reed

Ranking Member

Subcommittee on Transportation, Housing

and Urban Development, and Related Agencies

Committee on Appropriations

United States Senate

The Honorable David E. Price

Chairman

The Honorable Mario Diaz-Balart

Ranking Member

Subcommittee on Transportation, and Housing

and Urban Development, and Related Agencies

Committee on Appropriations

House of Representatives

The Federal Housing Administration (FHA) within the Department of

Housing and Urban Development (HUD) facilitates homeownership by

insuring lenders against losses on mortgages that finance purchases of

properties or refinance existing FHA mortgages. In fiscal year 2018, FHA

insured about one million single-family mortgages, providing about $209

billion in mortgage insurance.

Each year, mortgage servicers (servicers) foreclose on a portion of the

FHA-insured mortgages that go into default and file insurance claims with

FHA.

One method of disposing of foreclosed properties involves a

servicer conveying a property’s title (transferring ownership) to FHA,

which then markets and sells the home. Servicers conveyed about 31,700

foreclosed properties to FHA in calendar year 2017, the most recent year

for which data were available when we conducted our analysis. In

general, the properties are vacant for some or all of the period between

Mortgage servicers are bank or nonbank entities that perform activities such as accepting

loan payments, initiating collection actions for delinquent payments, modifying loan terms,

and foreclosing if necessary. Mortgages may be serviced by the originator of the loan or

another entity.

Letter

Page 2 GAO-19-517 FHA Property Conveyances

foreclosure and FHA’s sale of the home.

We and others previously

reported that vacant properties can deteriorate if not maintained and can

contribute to crime, blight, and declining property values in surrounding

neighborhoods.

To convey a foreclosed property to FHA, a servicer must complete

several steps that include, but are not limited to, obtaining good and

marketable title, ensuring the property is vacant and secured, and

removing exterior and interior debris.

Once the servicer conveys the title

to FHA, FHA inspects the property to determine whether it meets

conveyance requirements before selling the property out of its real estate-

owned (REO) inventory.

In this report, we define the conveyance

process as beginning when the servicer obtains good and marketable title

and takes possession of the property and ending when FHA markets the

property.

Timely execution of the conveyance process can help minimize the time

properties sit vacant and get foreclosed properties on the market sooner.

HUD regulations allow occupied properties to be conveyed to FHA in certain cases, such

as when state or local law prohibits the eviction of a tenant who is making regular monthly

payments. According to FHA, this happens in less than 1 percent of conveyances.

For example, see GAO, Vacant Properties: Growing Number Increases Communities’

Costs and Challenges, GAO-12-34 (Washington, D.C.: Nov. 4, 2011); and Mortgage

Foreclosures: Additional Mortgage Servicer Actions Could Help Reduce the Frequency

and Impact of Abandoned Foreclosures, GAO-11-93 (Washington, D.C.: Nov. 15, 2010).

According to HUD regulations, good and marketable title means the title is free from all

liens, including any unpaid ground rents, taxes, or special assessments. See 24 C.F.R. §

203.386.

In two prior reports on FHA’s REO process, we found that FHA’s divided approach to

custody of foreclosed properties (between servicers and FHA) could delay the start of

steps needed to sell properties and may have contributed to FHA taking substantially

longer to market properties than other mortgage entities. As a result, in an April 2002

report, we recommended that HUD determine and implement the optimal method of

establishing unified property custody, seeking additional statutory authority if needed.

Although HUD generally agreed with the recommendation, it said it would need to

research the feasibility of implementation. HUD ultimately determined it would not be

advisable to establish unified property custody and did not implement our

recommendation. In a June 2013 report, we made 10 recommendations to increase the

potential for higher returns on disposed REO properties and improve oversight of the REO

disposition program, all of which HUD implemented. See GAO, Single-Family Housing:

Opportunities to Improve Federal Foreclosure and Property Sale Processes, GAO-02-305

(Washington, D.C.: Apr. 17, 2002); and Federal Housing Administration: Improving

Disposition and Oversight Practices May Increase Returns on Foreclosed Property Sales,

GAO-13-542 (Washington, D.C.: June 20, 2013).

Page 3 GAO-19-517 FHA Property Conveyances

Senate Report 114-243, accompanying the Transportation and Housing

and Urban Development, and Related Agencies Appropriations Bill, 2017,

includes a provision for us to review FHA’s effectiveness and efficiency in

reaching determinations of conveyable condition on foreclosed

properties.

This report examines (1) time lines for FHA foreclosed

property conveyances from July 2010 through December 2017 and the

extent to which servicers and FHA met time requirements, and (2)

changes FHA has made to the conveyance process in recent years and

any ongoing process challenges.

To examine time lines for property conveyances and the extent to which

servicers and FHA met time requirements, we reviewed FHA regulations

and policies about the time frames FHA, its contractors, and mortgage

servicers must meet for conveyed properties. We also analyzed property

foreclosure and conveyance data from two FHA data systems for

properties conveyed to FHA in 2010–2017 (2017 was the most recent

year for which data were available when we conducted our analysis). Our

time line analyses begin in July 2010 because FHA changed how it

managed the conveyance process in June 2010. To assess the reliability

of FHA’s data, we reviewed FHA documentation and conducted electronic

testing, including checks for outliers, missing data fields, and erroneous

values. We determined these data were sufficiently reliable for purposes

of characterizing the length of the conveyance process and servicer and

FHA timeliness.

To determine recent changes FHA made to the conveyance process and

any ongoing process challenges, we reviewed updates to FHA

regulations, policies, and procedures for conveyances since 2010 and

interviewed FHA officials on reasons for the changes. We also

interviewed FHA headquarters and field office officials and FHA

contractors with responsibilities for property inspections and approving

servicer property preservation costs about any challenges they

experience executing the conveyance process. We conducted

semistructured interviews with a nongeneralizable random sample of 20

large- and medium-sized servicers of FHA-insured mortgages about any

challenges they have had with conveyance policies and procedures,

including time lines and property preservation allowances. These

servicers accounted for more than one-third of active FHA-insured

S. Rep. No. 114-243, at 125 (2016).

Unless otherwise noted, all years in this report are calendar years.

Page 4 GAO-19-517 FHA Property Conveyances

mortgages as of December 31, 2017. We also visited eight recently

conveyed or reconveyed properties in the Baltimore, Maryland, and

Atlanta, Georgia, areas to observe property conditions and understand

any challenges in documenting and addressing condition issues.

Appendix I describes our scope and methodology in greater detail.

We conducted this performance audit from September 2017 to June 2019

in accordance with generally accepted government auditing standards.

Those standards require that we plan and perform the audit to obtain

sufficient, appropriate evidence to provide a reasonable basis for our

findings and conclusions based on our audit objectives. We believe that

the evidence obtained provides a reasonable basis for our findings and

conclusions based on our audit objectives.

Established by the National Housing Act, FHA’s single-family mortgage

insurance program helps home buyers obtain financing by providing

insurance on single-family mortgage loans. The mortgage insurance

allows FHA-approved private lenders to provide qualified borrowers with

mortgages on properties with one to four housing units and generally

compensates lenders for nearly all the losses incurred on such loans. To

support the program, FHA imposes up-front and annual mortgage

insurance premiums on FHA borrowers.

The agency has played a

particularly large role among first-time, minority, and low-income home

buyers. For example, in fiscal year 2017, about 82 percent of FHA-

insured home purchase loans went to first-time home buyers and more

than 33 percent went to minority home buyers.

FHA requires servicers to undertake certain home retention and

foreclosure mitigation actions to help delinquent homeowners catch up on

late mortgage payments. Before initiating foreclosure actions, FHA

requires servicers to contact the borrower, collect information on the

borrower’s finances, and attempt informal methods of resolving the

delinquency. If informal steps are not appropriate for a borrower’s

circumstances, the servicer evaluates the borrower for a series of home

retention actions, which include a formal forbearance and repayment plan

and a loan modification. Under certain circumstances, the servicer may

The Mutual Mortgage Insurance Fund, which supports this program, is statutorily required

to maintain at least a 2 percent capital ratio, defined as the fund’s economic net worth

divided by the remaining principal balance on all insured loans in the fund.

Background

Foreclosure Mitigation and

Property Disposition

Methods

Page 5 GAO-19-517 FHA Property Conveyances

consider a foreclosure mitigation option, such as a preforeclosure (short)

sale or a deed-in-lieu of foreclosure.

If the home retention and

foreclosure mitigation actions are unsuccessful, the servicer or mortgage

note holder is generally entitled to pursue foreclosure to obtain title to the

property. The foreclosure process is governed by state laws, but

foreclosed properties are typically auctioned at a foreclosure sale. Most

foreclosed properties are disposed of in one of two ways.

• Claims without Conveyance of Title (CWCOT). Through FHA’s

CWCOT program, the servicer attempts to secure a third-party

purchase of an eligible property for an adjusted fair market value that

is less than the amount of the servicer’s projected claim.

• Conveyance. If the foreclosure process is completed and no third

party purchases the home at the foreclosure sale, the home usually

becomes the property of the servicer. Servicers convey these

properties to FHA, which sells them out of its REO inventory.

During the default and foreclosure process, servicers must meet two FHA

time requirements.

The first requires servicers to initiate a foreclosure

(first legal action) or utilize a loss mitigation option within 6 months of

borrower default. The second requirement, for the “reasonable diligence”

period, requires servicers to obtain good and marketable title and

possession of a property within a specified time frame that varies by

state. The servicer secures the property and obtains possession once the

property is vacant. Servicers are subject to financial penalties for missing

these deadlines. In both cases, servicers must curtail the debenture

In a preforeclosure sale, the servicer agrees to accept the proceeds from the sale of the

property to a third party, although the sale price is less than the sum of the principal,

accrued interest, and other expenses owed. In a deed-in-lieu, a delinquent borrower

avoids foreclosure by agreeing to transfer the property title to the lender.

In 2014, FHA began utilizing its revised CWCOT program, which requires servicers to

offer all eligible properties for sale through CWCOT before using the conveyance process.

According to FHA servicing guidance, a loan goes into default 30 days after the borrower

has missed a full payment.

Page 6 GAO-19-517 FHA Property Conveyances

interest that they otherwise would be entitled to collect from the date of

the missed time frame.

Servicers are responsible for maintaining vacant foreclosed properties in

accordance with FHA requirements, which specify allowable reimbursable

amounts to preserve and protect the property. A servicer needing

additional funds to complete the required maintenance must submit an

“overallowable” request to FHA.

When a servicer forecloses on a property with an FHA-insured mortgage

and the property is not sold to a third party through CWCOT, the property

is held in the servicer’s name until the servicer conveys the title to FHA.

As seen in figure 1, these properties span a range of home types and

ages. FHA requires servicers to preserve and protect the property and

ensure it meets FHA’s conveyance condition standards before conveying

title. FHA’s preservation and protection requirements include a number of

specific steps for securing, maintaining, and repairing properties and

documenting property conditions.

FHA reimburses the servicer for up to

$5,000 per property for required work, and the servicer may request

overallowable funds if needed. FHA’s conveyance condition standards

are broader requirements, including that a property be undamaged by

natural disaster and in “broom swept” condition, have all damage covered

by hazard insurance repaired, and be undamaged by the servicer’s failure

to properly secure or maintain the property.

Servicers typically use borrowed funds to finance the payment of outstanding debt on

mortgages in the process of foreclosure. When servicers bid on properties at foreclosure

sales, they continue to use borrowed funds to finance the recovered properties. Servicers

pay interest on these borrowings, which is referred to as the cost of funds, until they file

claims with FHA when properties are conveyed. FHA compensates servicers for their

interest expenses at what is known as the debenture interest rate. The rate is set by

statute at the monthly average yield on U. S. Treasury securities for the month in which

the default on the mortgage occurred, adjusted to a constant maturity of 10 years. See 12

U.S.C. § 1715o.

Servicers generally hire vendors to complete property preservation and protection work

and any work needed to get the property into conveyance condition.

Servicers generally are not required to fix damage caused by the borrower.

Property Conveyance

Process

Page 7 GAO-19-517 FHA Property Conveyances

Figure 1: Examples of Properties Conveyed to the Federal Housing Administration

in 2018

HUD regulations state that the servicer must obtain good and marketable

title and convey the property to HUD within 30 days of the date on which

the servicer filed the foreclosure deed for record or certain other key

dates, whichever is later.

If a servicer does not believe it will be able to

convey the property by this time, it may request an extension from FHA.

The servicer files an insurance claim with FHA when it conveys the title. If

a servicer does not convey the property within the required time frame

and has not received an approved extension, the servicer must curtail the

For mortgages insured on or after November 19, 1992, servicers must obtain good and

marketable title and transfer the property to FHA within 30 days of the later of the filing of

the foreclosure deed for record; recording date of the deed-in-lieu of foreclosure; acquiring

possession of the property; expiration of the redemption period; or the date of any

extension provided by FHA. See 24 C.F.R. § 203.359(b).

Page 8 GAO-19-517 FHA Property Conveyances

debenture interest and property preservation and protection expenses it

claims as of the date of the missed deadline.

Shortly after conveyance, FHA pays the Part A claim to the servicer,

which includes the unpaid principal balance and debenture interest on the

insured mortgage. At this time, FHA becomes responsible for maintaining

the property until it is sold. FHA pays the part of the claim that covers

eligible property preservation and protection expenses incurred by the

servicer once the servicer submits title evidence and documentation of

expenses (in Part B of the claim form). FHA inspects the property and

reviews title evidence before selling the property out of its REO inventory.

In some cases, FHA reconveys the title to the servicer if it finds the

servicer did not comply with requirements related to property condition or

title. When a property is reconveyed, FHA reassigns the title to the

servicer and requests repayment of the claim amount. The servicer then

must correct any title or property condition issues before it may convey

the property and submit a claim to FHA again.

Throughout this process, FHA and servicers use the P260 Asset

Disposition and Management System (asset disposition system) to

communicate and upload documentation about the properties. FHA

articulates its property preservation and protection requirements and

conveyance condition standards in a mortgagee letter and policy

handbook that we refer to collectively as FHA’s conveyance condition

policies and procedures.

From 2010 through 2017, servicers conveyed about 610,000 properties to

FHA. The number of properties conveyed annually peaked in 2012 at

about 111,000 (see fig. 2). In 2017, servicers conveyed fewer than 32,000

properties to FHA. The decline in recent years is consistent with

improvements in the housing market since the 2007–2011 housing

crisis.

If the servicer missed one of the earlier deadlines—the first legal action or reasonable

diligence time frames—it already should have curtailed debenture interest from that point.

See Department of Housing and Urban Development Mortgagee Letter 2016-02

(Washington, D.C.: Feb. 5, 2016); and Handbook 4000.1, Single Family Housing Policy

Handbook (Washington, D.C.: Dec. 30, 2016). Mortgagee letters are written instructions

that FHA periodically issues to its approved lenders and servicers.

According to the S&P/Case Shiller National Home Price Index, average home prices fell

each year in 2007–2011, for a total decline of almost 27 percent.

Page 9 GAO-19-517 FHA Property Conveyances

Figure 2: Number of Properties Conveyed to the Federal Housing Administration

(FHA), 2010–2017

In this report, we define FHA’s property conveyance process as beginning

when the servicer both obtains good and marketable title and takes

possession of a property and ending when FHA assigns a marketing

contractor to sell the property out of its REO inventory (see fig. 3).

Roles and Responsibilities

in the Conveyance

Process

Page 10 GAO-19-517 FHA Property Conveyances

Figure 3: Federal Housing Administration’s Property Conveyance Process

Page 11 GAO-19-517 FHA Property Conveyances

Several FHA contractors and offices play key roles in the conveyance

process.

• Compliance contractor. A nationwide compliance contractor called

the mortgagee compliance manager is responsible for protecting

FHA’s interests in properties conveyed to FHA and communicates

directly with servicers about the properties. The compliance contractor

reviews property inspections to ensure properties meet conveyance

condition standards, reviews requests from servicers for extensions of

conveyance times or for overallowable expenses, reviews servicer

claims for compliance with requirements, and responds to servicer

inquiries about pre- and postconveyance responsibilities. The

compliance contractor is located in Oklahoma City, Oklahoma, and is

overseen by FHA’s National Servicing Center.

• Maintenance contractor. Maintenance contractors, called field

service managers, are responsible for inspecting properties recently

conveyed to FHA and preserving properties in FHA’s REO inventory.

FHA has multiple maintenance contractors; they are responsible for

properties in different regions. Upon conveyance, the maintenance

contractor conducts a comprehensive property inspection to

determine if the property meets conveyance condition standards and

completes the HUD Property Inspection Report. The maintenance

contractor also conducts other inspections at a property before

conveyance, as warranted, including a preconveyance inspection at

the request of the servicer and an overallowable inspection if

requested by the compliance contractor. While these contractors

conduct general maintenance on the property, they typically do not

make major repairs, because FHA generally sells conveyed properties

in as-is condition.

• Marketing contractor. Marketing contractors, called asset managers,

are responsible for marketing and selling the homes in FHA’s REO

inventory.

• FHA homeownership centers. FHA carries out its mortgage

insurance and REO disposition programs through four regional offices

called homeownership centers (HOC). The centers are located in

Atlanta, Georgia; Denver, Colorado; Philadelphia, Pennsylvania; and

Page 12 GAO-19-517 FHA Property Conveyances

Santa Ana, California.

Officials in each HOC are responsible for

overseeing the maintenance and marketing contractors for their

region and reviewing HUD Property Inspection Reports to determine if

conveyed properties should be reconveyed to the servicer due to

condition issues. This determination is then forwarded to the

compliance contractor for an additional review.

• HUD’s Office of Finance and Budget. Staff from this office are

responsible for reviewing servicer mortgage insurance claims for

compliance with FHA requirements. The office selects a sample of

claims from the past 3 years to review whether the property

preservation and protection expenses were within allowable limits and

whether the servicer curtailed debenture interest and property

preservation and protection expenses accurately, among other things.

A number of other federal and federally sponsored entities participate in

the mortgage market. Along with FHA, the Department of Veterans Affairs

and the Department of Agriculture operate programs that guarantee

single-family mortgages made by private lenders.

Additionally, two

government-sponsored enterprises—Fannie Mae and Freddie Mac

(enterprises)—purchase and securitize single-family mortgages.

The Atlanta HOC serves Alabama, the Caribbean, Florida, Georgia, Illinois, Indiana,

Kentucky, Mississippi, North Carolina, South Carolina, and Tennessee. The Denver HOC

serves Arkansas, Colorado, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, New

Mexico, Nebraska, North Dakota, Oklahoma, South Dakota, Texas, Utah, Wisconsin, and

Wyoming. The Philadelphia HOC serves Connecticut, Delaware, District of Columbia,

Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York,

Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia. The Santa Ana

HOC serves Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, and

Washington.

The Department of Veterans Affairs Loan Guaranty program is an entitlement for

veterans, certain members of the National Guard or Reservists who are currently serving,

and spouses of certain veterans. The Department of Agriculture’s Single Family Housing

Guaranteed Loan Program guarantees mortgages for low- and moderate-income

households in eligible rural areas.

Congress established the enterprises as for-profit, shareholder-owned corporations. The

enterprises purchase conventional mortgages that meet their underwriting standards.

They package the mortgages they purchase into mortgage-backed securities, which are

sold to investors in the secondary mortgage market. In exchange for a fee, the enterprises

guarantee the timely payment of interest and principal on the securities they issue. In

2008, the Federal Housing Finance Agency placed the enterprises into conservatorships

out of concern that their deteriorating financial condition threatened the stability of financial

markets.

Other Participants in the

Mortgage Market

Page 13 GAO-19-517 FHA Property Conveyances

However, the property disposition programs for these entities are not

directly analogous to FHA’s. In contrast to FHA, the Department of

Veterans Affairs and the enterprises take custody of and are responsible

for properties closer to the time of the foreclosure sale.

The enterprises

require servicers to convey properties to them within 24 hours of

foreclosure sale or deed-in-lieu of foreclosure, while the Department of

Veterans Affairs requires servicers to provide notice of their intent to

convey properties within 15 days of foreclosure sale. Also in contrast to

FHA, the Department of Agriculture does not take possession of

foreclosed properties with guaranteed loans, but rather oversees their

disposition by lenders.

In FHA’s case, properties are often held in the lender’s or servicer’s name

for an extended period after the foreclosure sale. Following the

foreclosure sale, FHA requires servicers to oversee properties during

redemption periods, to evict residents if properties not in redemption

periods are occupied, and to continue property preservation and

protection activities.

In addition, before conveyance, servicers must

identify and pay any homeowners association (HOA) fees and utility bills

that are due. As described in figure 3, servicers also must make any

required repairs, meet other conveyance requirements, and pass an FHA

property inspection, or face the prospect of having the property

reconveyed. FHA officials said this approach reduces FHA’s holding time

and costs and that the agency does not have the infrastructure to manage

and fund property repairs itself.

However, all the entities have property preservation requirements that servicers must

follow for vacant properties securing delinquent loans.

Certain states provide the previous owners of foreclosed properties with a right of

redemption that allows them to pay amounts owed to the lender and reclaim ownership.

During redemption periods, the previous owner or current occupant is allowed to remain in

the residence and the REO property owner or servicer generally is not permitted to pursue

activities such as evicting property residents or securing properties.

Page 14 GAO-19-517 FHA Property Conveyances

From July 2010 through December 2017, the property conveyance

process took a median of 70 days, but this figure varied widely by year.

Our analysis of FHA data found that, from 2011 through 2015, the median

number of days to complete the conveyance process increased four-fold

(from 41 to 161 days) and varied more widely around the median each

successive year (see fig. 4).

Conveyance time frames declined

We collected data on FHA property conveyances from January 2010 through December

2017, but excluded properties conveyed before July 2010 from our analysis because FHA

changed the way it managed property conveyances in June 2010. Specifically, at that time

FHA launched the third generation of its Management and Marketing contractor program.

Under prior arrangements, FHA’s contractors were responsible for both the maintenance

and marketing of FHA’s REO properties. Under the current structure, separate contractors

perform these functions. FHA also began a new compliance management contract in June

2010.

From July 2010 through December 2010, the median length of the conveyance process

was 82 days. FHA officials told us the length of the conveyance process that year was

affected by program changes, including the introduction of a new Management and

Marketing contractor program.

FHA’s Property

Conveyance Process

Often Takes a Long

Time, and Servicers

and Contractors

Performance against

Time Requirements

Varied

Conveyance Times

Increased after 2011,

Partly Due to Greater Use

of Other Disposition

Methods and Extended

Default and Foreclosure

Periods

Data on Time Frames for

Conveyance and

Reconveyance

Page 15 GAO-19-517 FHA Property Conveyances

substantially in 2016 and 2017 (to a median of 137 days and 112 days,

respectively) while continuing to vary considerably around the median. In

comparison, FHA officials said the conveyance process generally should

take about 37 days to complete—30 days for servicers to make

necessary repairs and convey title to FHA and 7 days for FHA to inspect

the property, communicate any condition issues identified during the

inspection, and assign a marketing contractor to promote and sell it.

Figure 4: Length of the Federal Housing Administration’s (FHA) Property

Conveyance Process, July 2010–December 2017

Note: We excluded properties conveyed from January through June 2010 from our analysis because

FHA changed how it managed the conveyance process in June 2010.

We also found that the time it took properties to complete the conveyance

process varied by HOC region. For the entire July 2010–December 2017

period, the Philadelphia HOC had the highest median time frame (91

days) and the Atlanta HOC the lowest (56 days). The Santa Ana and

These time frames are consistent with regulatory and contract performance

requirements discussed later in this report.

Page 16 GAO-19-517 FHA Property Conveyances

Denver HOCs had medians of 78 and 67 days, respectively. A number of

factors may have contributed to differences among the HOCs, such as

the number of properties conveyed in each region (which can affect

servicer and HOC capacity) and the age of the housing stock (which can

affect the time needed to make repairs).

The time to complete the conveyance process includes, when applicable,

the time needed for FHA to reconvey a property—that is, transfer

ownership to the servicer due to condition or title issues—and for the

servicer to convey it to FHA a second time.

FHA officials said they try to

avoid reconveyances because they prolong the conveyance process and

result in FHA incurring additional preservation and protection costs.

Figure 5 shows examples of condition issues at properties we visited in

the Baltimore, Maryland, and Atlanta, Georgia, metropolitan areas that

were in the reconveyance process.

Our analysis of available FHA data on reconveyance reasons indicates that about 69

percent of properties were reconveyed from October 31, 2016, through December 2017

because of condition issues and about 28 percent due to title issues, such as liens on the

property. Less than 2 percent of properties were reconveyed because they had both

condition and title issues.

To reconvey a property, FHA first issues the servicer a preliminary notice of intent to

reconvey that lists the reasons for the reconveyance. Servicers may appeal the notices.

Page 17 GAO-19-517 FHA Property Conveyances

Figure 5: Damage at Properties in the Atlanta and Baltimore Areas That the Federal

Housing Administration Designated for Reconveyance

Our analysis of FHA data found that reconveyances were not common

enough to significantly affect median conveyance time frames, but

substantially lengthened the conveyance process when they did occur. As

shown in table 1, servicers conveyed 406,863 properties to FHA from

2012 through 2017—the period within our scope for which FHA had

reliable reconveyance data. In comparison, FHA reconveyed 8,874

properties to servicers during that time frame.

The annual number of

reconveyances rose from 1,019 in 2012 to 1,935 in 2015, before declining

to 1,099 in 2017.

According to FHA officials, data on reconveyances in the asset disposition system were

not reliable before calendar year 2012.

Page 18 GAO-19-517 FHA Property Conveyances

Table 1: Number of Properties Conveyed and Reconveyed Annually, 2012–2017

Year

Number of properties

conveyed to FHA

Number of properties

reconveyed to servicers

2012

108,852

1,019

2013

100,434

1,752

2014

55,287

1,595

2015

65,170

1,935

2016

49,101

1,474

2017

28,019

1,099

Total

406,863

8,874

Legend: FHA = Federal Housing Administration

Source: GAO analysis of FHA data. | GAO-19-517

Note: Reconveyances may have not occurred in the same year as the original conveyance.

We also found that the median time to complete FHA’s conveyance

process in 2012–2017 was more than 614 days longer for reconveyed

properties than the median for properties not reconveyed. However, the

difference between the medians declined over time, dropping from 777

days in 2012 to 267 days in 2017 (see fig. 6).

Page 19 GAO-19-517 FHA Property Conveyances

Figure 6: Median Length of Conveyance Process for Properties That Were and Were

Not Reconveyed to Servicers by the Federal Housing Administration (FHA), 2012–

2017

Servicers and FHA must take several steps to complete the conveyance

process for reconveyed properties, which may account for some of the

length of the time frames. Once the compliance contractor has notified

the servicer that a property has condition issues that must be resolved to

avoid reconveyance, the servicer may appeal. FHA officials said appeals

can add up to 120 days to the conveyance process. If the servicer is

unable to resolve the issues and the appeals are denied, FHA reconveys

the property and the servicer must reimburse FHA for the original claim

amount. The servicer then must complete any required repairs, resolve

any title issues, prepare a new evidence package for FHA showing that

condition and title issues were addressed, and submit a request to FHA’s

compliance contractor to convey the property again. FHA’s compliance

contractor then has 10 business days to review the evidence package

and notify the servicer of its decision. Once conveyance is approved, the

servicer may resubmit a new mortgage insurance claim form and

evidence that the property deed has been filed in FHA’s name.

Page 20 GAO-19-517 FHA Property Conveyances

Two factors that likely contributed to the increase in the time to complete

FHA’s conveyance process are increased use of other disposition

methods and property damage stemming from extended default and

foreclosure periods.

Increased use of third-party sales. FHA data indicate that from 2010

through 2017 servicers increasingly disposed of properties through third-

party sales using the CWCOT program. As previously noted, in 2014 FHA

began requiring servicers to offer all eligible properties for sale through

CWCOT before using the conveyance process. According to our analysis

of FHA property disposition data, in fiscal years 2010–2017, the share of

properties disposed of through CWCOT rose from about 1.4 percent to

almost 44 percent, while the share of conveyance and REO sales

dropped from about 84 percent to 42 percent (see fig. 7).

The remaining

properties were disposed of through notes sales or preforeclosure

sales.

Data on FHA property dispositions are published annually in HUD reports to Congress

on the Mutual Mortgage Insurance Fund. See Department of Housing and Urban

Development, Annual Report to Congress Regarding the Financial Status of the FHA

Mutual Mortgage Insurance Fund, Fiscal Year 2018 (Washington, D.C.: Nov. 15, 2018).

FHA conducts note sales by auctioning pools of defaulted FHA-insured loans through its

Distressed Asset Stabilization Program. The loan pools are generally sold at a price below

the outstanding principal balance.

Factors Likely Contributing to

Increased Length of

Conveyance Process

Page 21 GAO-19-517 FHA Property Conveyances

Figure 7: Use of Federal Housing Administration (FHA) Property Disposition

Methods, Fiscal Years 2010–2017

Data represent the number of properties sold from FHA’s REO inventory, which includes properties

conveyed to FHA in prior years.

Increased use of CWCOT may have extended property conveyance time

frames for two reasons. First, servicers must attempt to sell all eligible

properties through CWCOT while simultaneously preparing them for

conveyance, which may add additional time to the conveyance process

according to FHA officials. Second, properties conveyed to FHA because

they are not eligible for or sold through the CWCOT program are

generally in poorer condition and require more repairs, according to

servicer representatives.

This may contribute to extended conveyance

Properties that are not eligible for the CWCOT program include those for which the FHA-

insured mortgage is subject to indemnification and those for which the servicer’s projected

conveyance claim amount is less than the FHA Commissioner’s adjusted fair market value

for the property. Properties with surchargeable damage are also not eligible.

Surchargeable damage is caused by fire, flood, earthquake, tornado, boiler explosion (for

condominiums only), or mortgagee (servicer) neglect.

Page 22 GAO-19-517 FHA Property Conveyances

time frames. For example, a representative from one mortgage industry

group told us that properties ineligible for CWCOT and conveyed to FHA

generally require more than the $5,000 in preservation and protection

costs that FHA allows. In these cases, servicers may request additional

funds from the compliance contractor, but processing the requests may

prolong the conveyance process, as discussed later in this report.

Representatives from one servicer and two mortgage industry groups

stated they prefer the CWCOT program because it reduces the need to

convey properties. They said the conveyance process is costly and

comes with the risk of reconveyance. FHA data show that REO sales

generally had higher loss severity rates (the financial loss on a defaulted

loan as a percentage of the unpaid principal balance) than properties

disposed of through alternative methods, including the CWCOT program.

For example, for the last quarter of fiscal year 2017, FHA reported that

the loss severity rate for properties sold through REO was 54.8 percent,

while the combined loss severity rate for properties disposed of through

alternative methods was 43.8 percent. However, some of this difference

may be attributable to the poorer condition of conveyed properties, as

discussed previously.

Page 23 GAO-19-517 FHA Property Conveyances

Extended default and foreclosure periods. According to FHA officials,

properties with long default and foreclosure periods may be in poor

condition because they deteriorate if servicers delay property

maintenance and repairs.

FHA officials said this was common for

properties conveyed to FHA after the 2012 National Mortgage Settlement

because some servicers delayed foreclosure proceedings to limit their

exposure to litigation in 2010 and 2011 (see sidebar).

FHA officials said that after the Department of Justice issued the National

Mortgage Settlement in February 2012, servicers who had been delaying

default and foreclosure started conveying large numbers of properties.

According to FHA and servicer representatives, damaged properties can

take longer to convey because they require extensive repairs to meet

FHA’s conveyance condition standards.

The results of our analysis of FHA data are broadly consistent with these

observations. The number of properties conveyed to FHA increased by

31 percent (from 84,363 to 110,567) between 2011 and 2012, the year of

the settlement. Additionally, the default and foreclosure period for

conveyed properties (the time between the borrower defaulting on the

mortgage and the servicer obtaining title to and possession of the

property) increased over most of the July 2010–December 2017 time

frame. As shown in figure 8, the median default and foreclosure period

was 416 days for properties conveyed in July–December 2010, peaked at

664 days (about 60 percent higher) for properties conveyed in 2015, and

fell to 612 days for 2017 conveyances. The overall upward trend was

even more pronounced for properties with default and foreclosure periods

at the 75th percentile. The 75th percentile was 555 days for properties

conveyed from July through December 2010, peaked at 1,152 days

The length of a property's default and foreclosure period is affected by the reasonable

diligence requirements in the state in which the property is located. For example, some

states have a legally required redemption period. Many states also require servicers to

foreclose on the borrower through court proceedings (judicial foreclosure), which may be

lengthy.

In 2015, FHA proposed a change to federal regulations that would have established a

maximum amount of time for a servicer to file a claim with FHA and convey the property

without the insurance contract being terminated. According to the proposed regulation,

this change was meant to address the practice of servicers waiting to file FHA insurance

claims for multiple properties at one time. HUD withdrew the proposed change in

response to comments expressing concerns about the reasonableness of the proposed

limit.

National Mortgage Settlement

In February 2012, the Department of Justice

and 49 states settled with the five largest

mortgage servicers— Ally Financial, Inc.

(formerly GMAC), Bank of America

Corporation, Citigroup Inc., J.P. Morgan

Chase & Co., and Wells Fargo & Company —

to address mortgage servicing, foreclosure,

and bankruptcy abuses. The agreement

settled state and federal investigations finding

that these servicers routinely signed

foreclosure-related documents without

verifying their validity and without the

presence of a notary public—a practice known

as “robosigning.”

Source: GAO and U.S. Department of Justice | GAO-19-517

Page 24 GAO-19-517 FHA Property Conveyances

(about 108 percent higher) for properties conveyed in 2016, and declined

to 1,068 days for 2017 conveyances.

Figure 8: Length of Default and Foreclosure Period for Properties Conveyed to the

Federal Housing Administration (FHA), July 2010–December 2017

Note: The default and foreclosure period is the time between the borrower defaulting on the mortgage

and the servicer obtaining title to and possession of the property. We excluded properties conveyed

from January through June 2010 from our analysis because FHA changed how it managed the

conveyance process in June 2010.

Certain regulatory and policy changes also may have increased the

default and foreclosure periods since 2013. HUD issued a mortgagee

letter in 2013 that increased the reasonable diligence time frames and

allowed servicers additional time to complete foreclosures in certain

states.

For example, the reasonable diligence time frame for properties

in New York increased from 13 to19 months. Also, in 2014 mortgage

servicing rules issued by the Consumer Financial Protection Bureau went

Department of Housing and Urban Development, Mortgagee Letter 2013-38

(Washington D.C.: Oct. 28, 2013).

Page 25 GAO-19-517 FHA Property Conveyances

into effect that restricted servicers’ ability to initiate a foreclosure and

gave borrowers additional time to pursue loss mitigation options.

Specifically, servicers may not initiate foreclosure proceedings if a

borrowers’ application is pending for a loan modification or other

alternatives to foreclosure.

In addition, we found that properties with longer default and foreclosure

periods generally took longer to complete the conveyance process than

properties with shorter default and foreclosure periods (see fig. 9).

Specifically, from July 2010 through December 2017 properties with the

longest default and foreclosure periods—those in the highest quartile—

took 93 days at the median to complete the conveyance process and 238

days at the 75th percentile. In comparison, properties with the shortest

default and foreclosure periods—those in the lowest quartile—took 57

days at the median to complete the conveyance process and 136 days at

the 75th percentile for that same period. As previously stated, FHA

officials told us that properties with long default and foreclosure periods

may have deteriorated if servicers were not maintaining them. These

properties may have required additional repairs to bring them into

conveyance condition.

Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation

X), 78 Fed. Reg. 10696 (Feb. 14, 2013); and Mortgage Servicing Rules Under the Truth in

Lending Act (Regulation Z), 78 Fed. Reg. 10902 (Feb. 14, 2013).

Page 26 GAO-19-517 FHA Property Conveyances

Figure 9: Length of the Federal Housing Administration’s (FHA) Conveyance

Process from July 2010 through December 2017, by Default and Foreclosure Period

Quartile

Note: We excluded properties conveyed from January through June 2010 from our analysis because

FHA changed how it managed the conveyance process in June 2010.

As previously noted, overall conveyance time frames declined in 2016

and 2017 from their peak in 2015. FHA officials attributed this

improvement largely to the decreasing number of conveyances affected

by the National Mortgage Settlement. As discussed earlier, the settlement

contributed to a wave of properties that took a long time to convey,

potentially due to damage sustained during extended default and

foreclosure periods. FHA officials also indicated that the improved

housing market in recent years has resulted in fewer foreclosures and,

therefore, fewer property conveyances to FHA. Consequently, servicers

and contractors may be better able to manage the workload associated

with property conveyances and complete the process more quickly.

Page 27 GAO-19-517 FHA Property Conveyances

From July 2010 through December 2017, servicers generally did not

convey properties to FHA within the regulatory 30-day time frame

(preconveyance period).

During the preconveyance period, servicers

must ensure the property has good and marketable title, conduct routine

inspections and maintenance on the property, and ensure the property

meets conveyance condition standards. If servicers do not believe they

will be able to convey a property within 30 days, they may request an

extension. The median number of days servicers took to complete the

preconveyance period increased from 31 in July–December 2010 to 140

in 2015 (see fig. 10).

This figure declined after 2015, dropping to 101

days in 2017. Variation around the median was considerable, especially

in more recent years. For example, in 2017 the time to complete the

preconveyance period was 43 days at the 25th percentile, compared with

268 days at the 75th percentile.

As previously discussed, servicers must obtain good and marketable title and transfer

the property to HUD within 30 days of the later of the filing of the foreclosure deed for

record; recording date of deed-in-lieu of foreclosure; acquiring possession of the property;

expiration of the redemption period; or date of any extension provided by FHA. While FHA

does not collect some of the individual dates listed in the regulation, FHA officials said

servicers submit a date on their claim forms—the date of possession and acquisition of

marketable title—that represents the later of all of the dates except for the extension date.

We used this date as the start date for measuring the length of the preconveyance period.

As previously noted, we excluded properties conveyed to FHA before July 2010 from our

analysis because they were managed using different systems and contractors than

currently used.

Servicers Often Did Not

Convey Properties within

the Required Time Frame,

but Usually Provided Title

Evidence on Time

Page 28 GAO-19-517 FHA Property Conveyances

Figure 10: Number of Days for Servicers to Complete the Federal Housing

Administration (FHA) Preconveyance Period for Properties Conveyed during July

2010–December 2017

Note: We excluded properties conveyed from January through June 2010 from our analysis because

FHA changed how it managed the conveyance process in June 2010.

The percentage of properties for which servicers did not convey in 30

days plus any approved extension grew from about 31 percent in July–

December 2010 to about 72 percent in 2017. For the entire period from

July 2010 through December 2017, the corresponding percentage was 55

percent. Representatives of 13 of the 20 servicers we interviewed said

that meeting the 30-day timeline was one of their top challenges with the

conveyance process.

Representatives of servicers and mortgage industry groups cited several

reasons for servicers needing additional time to convey. For example,

representatives of 11 servicers cited the heavily damaged condition of the

properties they acquired as one of the primary reasons for not conveying

properties within 30 days. Servicer representatives also noted other

reasons, including four who cited waiting for responses on hazard

insurance claims and five who cited difficulty in obtaining HOA bills to

Page 29 GAO-19-517 FHA Property Conveyances

pay. In addition, representatives of two mortgage industry groups and

three servicers told us that meeting all the conveyance and title

requirements simultaneously is a major challenge. For example,

representatives of one mortgage industry group said a servicer may have

completed required property repairs and paid HOA fees and utility bills,

but if the property were subsequently vandalized, the servicer would have

to delay conveyance to complete repairs. By that point, the servicer might

no longer be current on HOA and utility payments. Servicers have the

option to request an extension to the preconveyance time frame if they

think they will be unable to convey a property in 30 days. Servicers

requested a conveyance extension for about 40 percent of the properties

conveyed from July 2010 through December 2017. FHA approved the

extensions in about 40 percent of these cases.

In addition, representatives from six of the 20 servicers we interviewed

said FHA’s process for reviewing servicers’ overallowable requests

(additional funds needed to complete work) negatively affected their

ability to convey properties in 30 days. Once a servicer makes an

overallowable request, FHA’s compliance contractor has 5 business days

to review it and either reject the request or approve all or some of the

requested amount. (We discuss the compliance contractor’s ability to

meet this and other time requirements in the following section.) Servicers

may appeal any rejections, in which case the compliance contractor has 3

business days to make a final determination. Six servicer representatives

said that the time it takes the compliance contractor to make

overallowable decisions may cause them to exceed the 30-day time

frame, especially when they submit multiple requests for the same

property. For context, our analysis of FHA data found that in 2017, the

median number of servicer overallowable requests per property was 13,

and the median number of appeals per property was six.

In contrast to the preconveyance requirement, servicers usually met the

time requirement for giving title evidence to FHA. Title evidence includes

documentation that FHA is the legal owner of the property, including a

copy of the mortgage documentation, a legal description of the property,

and a copy of the recorded deed in FHA’s name. Servicers may provide

title evidence to FHA at any point during the conveyance process up to 45

FHA officials told us that most conveyance extension requests are submitted so the

servicer can file a hazard insurance claim, but they also receive such requests when the

servicer believes preservation and protection work at a property will take longer than 30

days to complete.

Page 30 GAO-19-517 FHA Property Conveyances

days after filing the deed. If servicers believe they will be unable to

provide title evidence within 45 days, they may submit an extension

request to the compliance contractor. According to FHA data, servicers

were able to provide title evidence within 45 days plus any approved

extension for 84 percent of properties conveyed from July 2010 through

December 2017.

FHA’s compliance and maintenance contractors generally met the

required time frames for key conveyance tasks for properties conveyed

from 2011 through 2017.

However, when the contractors did not meet

their required time frames, the delays may have lengthened the time to

complete the conveyance process for some properties.

Compliance contractor. FHA established a time frame of 5 business

days for the compliance contractor to conduct various reviews in the pre-

and postconveyance periods. In the preconveyance period, the

compliance contractor reviews requests for overallowables, conveyance

extensions, and conveyance of a property with surchargeable damage.

The contractor also reviews title evidence and extension requests for title

evidence, which are generally submitted after conveyance. Table 2 shows

the percentage of properties conveyed from 2011 through 2017 for which

the compliance contractor met the 5 business day requirement, according

to our analysis of FHA data.

According to FHA regulations, if the servicer is unable to provide title evidence, it is

considered out of compliance with conveyance requirements and FHA may reconvey the

property, cancel the servicer’s claim for insurance benefits, and request reimbursement for

any expenses incurred for acquisition, holding, and reconveyance from the date the claim

is filed. If the title documentation the servicer provides is insufficient, the servicer may

provide additional evidence in 10 days. If FHA identifies a title defect, the servicer has 60

days to correct it.

We excluded July–December 2010 from this analysis because, as previously noted,

FHA revised its Management and Marketing contractor program in June 2010. The

revisions involved changing the requirements and scope of the contracts and hiring new

contractors. According to FHA, the transition to the revised Management and Marketing

program may have led to work backlogs that caused conveyance tasks to take longer to

complete than in prior periods. We excluded data from this atypical period to avoid

skewing the results our compliance analysis.

FHA Contractors Involved

in Property Conveyances

Largely Met Time

Requirements

Page 31 GAO-19-517 FHA Property Conveyances

Table 2: Percentage of Compliance Contractor Reviews That Met Federal Housing Administration’s (FHA) Time Requirements,

Properties Conveyed, 2011–2017

Postconveyance Reviews

Overallowable requests

Conveyance

extensions

Surchargeable

damage

Title evidence

extensions

Title

evidence

90.8%

93.3%

94.2%

94.5%

86.7%

Source: GAO analysis of FHA data. | GAO-19-517

Note: FHA has a time frame of 5 business days for the compliance contractor to conduct these

reviews.

Although the contractor mostly met the required time frames, when it did

not, the delay may have lengthened the time to complete the conveyance

process. Our analysis of FHA data indicates that when the compliance

contractor missed the deadlines, it missed them by a median of 4–10

days, depending on the requirement.

The compliance contractor’s

review of overallowable requests, conveyance extension requests, and

surchargeable damage requests generally occurs during the

preconveyance period when servicers have 30 days to convey the

property to FHA. As noted earlier, some servicer representatives we

interviewed said that waiting for the compliance contractor to approve or

deny overallowable requests hindered their ability to convey the property

in 30 days.

The compliance contractor must complete at least 95 percent of the

reviews within the 5-day time frame to meet FHA’s standard for minimum

acceptable performance. FHA uses monthly scorecards when reviewing

the contractor’s performance against this standard.

FHA officials told us

they had not issued any deficiency notices to the current compliance

contractor, but that discussions with the contractor can occur when it

does not meet the 95 percent standard in particular months. FHA officials

also noted that some of the contractor’s reviews may take longer than 5

For perspective, the median length of the conveyance process for properties conveyed

from July 2010–December 2017 was 70 days. Our analysis of FHA data indicates that for

properties conveyed in 2011–2017, when the compliance contractor missed the 5

business day deadline, at the median it missed the deadline to review title evidence by 4

days, overallowable requests by 7 days, conveyance extension requests by 8 days, and

surchargeable damage and title extension requests by 10 days.

Although a detailed assessment of FHA’s contractor oversight was outside the scope of

our review, we requested and reviewed examples of these scorecards to determine how

FHA monitored contractor performance.

Preconveyance Reviews

Page 32 GAO-19-517 FHA Property Conveyances

days if resolving them requires obtaining additional documentation or

substantial back-and-forth communications with the servicer.

Maintenance contractors. After conveyance, FHA’s maintenance

contractors have 2 calendar days from the date they are assigned a

property to conduct the comprehensive property inspection and upload

the results into a HUD Property Inspection Report in FHA’s asset

disposition system.

They then have 5 calendar days to complete a

Property Condition Report, which details the functionality of the property’s

systems, the existence of any transferable warranties, and any legal

actions, such as code violations or pending demolition orders. FHA starts

measuring compliance with these time requirements 24 hours after the

properties are assigned to the compliance contractor (to account for

holidays and late afternoon assignments).

According to our analysis of FHA data, the maintenance contractors

completed property inspections and uploaded the results within 3 days

(the 2-day requirement plus 24 hours) for about 90 percent of properties

conveyed from 2011 through 2017. The contractors met the 5-day

requirement to complete the Property Condition Report about 77 percent

of the time. When the maintenance contractors missed these time frames,

they missed them by a median of 1 and 2 days, respectively. The longer a

property remains uninspected after the servicer has conveyed it, the

greater the chance that it will be damaged or vandalized before

inspection. If a property is damaged during this period, disputes may arise

between FHA and the servicer about which entity is responsible for the

damage. FHA is responsible for maintaining the property once the

servicer complies with all HUD regulatory requirements leading to

conveyance, including filing the deed (in FHA’s name) for record and filing

the conveyance claim. However, FHA may hold the servicer responsible

for the damage if the claim was suspended due to the need for review or

correction resulting from certain types of noncompliance with HUD

requirements or if the servicer could not prove the damage occurred after

FHA became responsible for maintaining the property. Disagreement over

this issue can add time to the conveyance process.

FHA measures each maintenance contractor’s performance monthly

using a formula that considers both the contractor’s timeliness in

According to FHA officials, the asset disposition system automatically assigns a

conveyed property to the maintenance contractor when the servicer files the conveyance

claim.

Page 33 GAO-19-517 FHA Property Conveyances

completing property inspections and uploading the results (2-day

requirement plus 24 hours) and in completing the Property Condition

Report (7-day requirement plus 24 hours) for each property. If the

contractor misses either deadline, it is not considered timely for that

property. FHA considers timeliness for 95 percent of properties each

month as satisfactory. According to FHA officials, FHA has taken actions

when the performance of maintenance contractors was not satisfactory. A

HOC official said that the actions may include issuing a defective

performance letter, which requires the contractor to provide a remedy

plan, and issuing a cure notice in coordination with HUD’s contracting

office.

FHA updated aspects of the conveyance process in recent years to help

address some of the challenges experienced by servicers and the

agency. For example, FHA increased property preservation and

protection allowances in 2016 to help address servicer feedback and to

better align allowances with other mortgage industry participants,

according to FHA officials. In February 2016, FHA issued Mortgagee

Letter 2016-02, which increased allowance amounts that servicers may

claim for specific types of property preservation and protection work. It

also increased the total maximum amount servicers may claim for a

property without submitting an overallowable request from $2,500 to

$5,000. However, the mortgagee letter eliminated all exclusions from the

maximum amount, which previously included one-time major repairs,

such as a roof replacement. FHA officials said the agency increased the

allowance amounts to account for the standard increases in property

FHA Changed

Aspects of the

Conveyance Process,

but Policies and a

Pilot Program Still

Have Limitations

FHA’s Updates to Property

Preservation Allowances

and Data Systems Partly

Addressed Certain

Servicer Challenges

Page 34 GAO-19-517 FHA Property Conveyances

preservation costs over time, and to align allowances with those of the

enterprises and the Department of Veterans Affairs.

Seventeen of the 20 servicers we interviewed said that FHA’s current

property preservation and protection allowances are not sufficient to

complete the work needed to convey properties. While representatives of

eight of the 20 servicers told us the changes FHA made to allowances in

2016 helped them complete work within allowance amounts,

representatives of the remaining 12 servicers said the changes did not

help or helped in some ways but presented more challenges in other

ways. Representatives of an association of mortgage lenders and

servicers said that they preferred the previous system, because some

work was excluded from the maximum allowance. For example,

representatives of one servicer said that due to the 2016 changes, they

now must submit an overallowable request for standard maintenance

items, such as grass cuts, once they have exceeded the maximum

allowance amount.

Our analysis of FHA data found that the percentage of properties with at

least one overallowable request increased steadily from 2011 through

2017—from about 53 percent to about 90 percent—despite the 2016

changes (see fig. 11).

For properties with at least one overallowable

request, the median number of requests before the 2016 changes (from

July 1, 2010, through February 4, 2016) was seven, compared with eight

after the changes (from February 5, 2016, through the end of 2017).

2017 alone, the median number of overallowable requests per conveyed

property was 13. However, it may be too early to tell what effect the 2016

mortgagee letter will have on servicer’s ability to conduct work within the

allowances. FHA officials said that although the change in the allowance

amounts was partly intended to reduce overallowable requests, the poor

condition of many properties with extended default and foreclosure

periods may have increased such requests. The officials stated that some

of these properties were still being conveyed to FHA in 2017.

While property disposition processes at the enterprises and the Department of Veterans

Affairs differ from FHA’s, those entities have preservation allowances for maintenance

servicers must complete on vacant properties that may be compared to FHA’s.

Sixty-six percent of the properties conveyed from July through December 2010 had at

least one overallowable request.

FHA instituted the previous allowance schedule on July 13, 2010, in Mortgagee Letter

2010-18.

Page 35 GAO-19-517 FHA Property Conveyances

Figure 11: Percentage of Properties Conveyed to the Federal Housing

Administration (FHA) with at Least One Overallowable Request, July 2010–

December 2017

Note: We excluded properties conveyed from January through June 2010 from our analysis because

FHA changed how it managed the conveyance process in June 2010.

FHA enhanced the information system servicers and contractors use to

manage conveyed properties, but officials noted the need to update

another system FHA uses to process and pay claims. In March 2018,

FHA incorporated its preconveyance inspection pilot, discussed in more

detail later in this report, into the asset disposition system, the information

system servicers use to convey properties to FHA.

FHA officials and

contractors also use the system to track properties from conveyance

through REO sale. With the update, servicers may request a

preconveyance inspection and see the results of the inspection in the

system, according to FHA officials. Before FHA added the pilot to the

asset disposition system, servicers and FHA used email to communicate

about properties in the pilot.

In the preconveyance inspection pilot, FHA conducts physical inspections of certain

properties prior to conveyance and provides the servicer the opportunity to fix any issues

before conveying the property.

Page 36 GAO-19-517 FHA Property Conveyances

In October 2016, FHA added a feature to the asset disposition system

that enables FHA officials, contractors, and servicers to electronically

monitor the status of reconveyed properties. According to FHA officials,

all communication between FHA and servicers on reconveyed properties

previously was by email, including the servicer’s notification to FHA that it

was ready to convey a property again, and the photographs required to

document property condition. However, according to FHA officials, FHA’s

claims system is not equipped to process more than one claim per

property, so claims for properties FHA reconveys and which the servicer

then conveys to FHA a second time must be processed manually.

Officials from FHA’s Office of Financial Services said that manual

processing delays claim payments to servicers—sometimes by more than

a year. Seven of the 20 servicers we interviewed identified delayed claim

payments for reacquired properties as a challenge. FHA officials said that

they have made an internal business case for funding to modernize the

system, but have not succeeded in securing the funding in prior years.

A updated its written direction to servicers on conveyance condition in

2016, but limitations in the contents and methods of communicating these

policies and procedures have contributed to compliance challenges for

some servicers. In its February 2016 mortgagee letter, FHA re-

emphasized its existing directions to servicers about property

conveyance, provided additional details on how to calculate claim

amounts and document property preservation and protection work, and

clarified descriptions of some preservation and protection requirements.

Additionally, in December 2016, FHA issued an updated single-family

housing policy handbook that consolidated all policies and procedures for

servicers into one document, including those on maintaining and

conveying foreclosed properties. However, servicers and other industry

stakeholders with whom we spoke and our review of FHA’s policies and

procedures on conveyance condition identified several limitations, as

follows.

Lack of clarity or specificity. Representatives from 15 of the 20

servicers we interviewed said they found FHA’s policies and procedures

on conveyance condition to be unclear or subjective, and 13 cited specific

parts of the conveyance condition standards they found to be unclear or

missing. For example, one servicer was unsure about the extent of

repairs required when a property had water seepage in the basement. We

found that FHA’s policies and procedures include information on how to

treat a basement that is flooded or a property with moisture damage, but

does not address basement leaks, cracks, or seepage. Representatives

FHA Updated Its Policies

and Procedures on

Conveyance Condition,

but Limitations Remain

Page 37 GAO-19-517 FHA Property Conveyances

of four servicers said that FHA’s policies and procedures do not

sufficiently address how servicers should handle properties with potential

structural or foundation damage. Consistent with this viewpoint, we found

that FHA’s handbook and mortgagee letter do not explain what a servicer

should do if it believes a property has damage affecting its structural

integrity. In addition, representatives of three servicers said FHA’s

expectations of them are unclear when a roof is damaged but does not

currently have a leak. According to FHA’s policies and procedures,

servicers must ensure all roofs “are free of active leaks or other sources

of water intrusion.” However, FHA does not specify what servicers should

do if there is roof damage but no active leak. Two of the servicers said

they were uncertain whether they should replace the damaged roof that is

not leaking, or convey the property and risk reconveyance if it rains

before FHA inspects the property and the roof leaks.

Perceived inconsistency in interpretation. Representatives from 10 of

the 20 servicers we interviewed said FHA is somewhat or not at all

consistent in determining whether properties meet FHA’s conveyance

requirements. Among the remaining 10, one stated that FHA is

completely consistent and nine said that FHA is mostly consistent. In

addition, two of the 20 servicers said the answers they receive from FHA

to the same question differ depending on whom they ask. HOC officials

also noted cases in which their interpretation of policies and procedures

differed from the compliance contractor’s. For example, officials from

three HOCs told us that the compliance contractor sometimes disagrees

with their determination that a property is not in conveyance condition

when the contractor reviews the HOC’s reconveyance decision.

Limited communication methods. In addition to formal written policies

and procedures on conveyance condition, FHA fields servicer questions,

primarily through its compliance contractor, by phone. The compliance

contractor also issues an annual newsletter on topics such as common

reconveyance triggers and best practices for submitting successful

overallowable and extension requests. However, some servicers we

interviewed suggested other possible ways to communicate policies and

procedures that they said they would find helpful, including the following:

According to FHA’s Director of the National Servicing Center, although the compliance

contractor may point out issues, the HOCs have the final say in determining if a property

gets reconveyed.

Page 38 GAO-19-517 FHA Property Conveyances

• Representatives of five servicers said they would like FHA to publish

an aut

horitative set of frequently asked questions (FAQ) on

conveyance condition. FHA has an FAQ web page that includes

information on conveyance condition, but, as of April 2019, did not

include FAQs about the specific property preservation and protection

ssues discussed above (water seepage, structural integrity, and roof

damage with no active leaks). In addition, a link in the web page

labeled “foreclosure/conveyance” led to a few FAQs on conveyance

ondition and property preservation requirements, but the answers

consisted solely of language from FHA’s existing policies

and

ocedures.

• One servicer’s representatives suggested that FHA could issue

pol

icies and procedures in a format similar to Fannie Mae’s Property

Preservation Matrix and Reference Guide. This guide has features

that FHA’s policies and procedures do not have, as discussed below,

including photographic examples, detailed requirements for

photographic documentation, and “if-then” statements detailing what

servicers should do if they encounter certain challenges at a property.

• Representatives of two servicers suggested that FHA host regular

industry calls. While the compliance contractor told us that it takes ad

hoc calls and holds regular teleconference calls with a number of

individual servicers, an FHA official told us the contractor is only

authorized to respond to servicer questions by providing relevant

parts of FHA’s written policies and procedures and is not supposed to

respond with interpretations (clarifications, or explanations) of existi

policies and procedures. Representatives from one servicer said

industrywide calls with FHA staff would give servicers a way to obtai

uller explanations of FHA’s expectations.

• One servicer suggested that FHA provide training to servicers about

the conveyance process. The servicer noted that while FHA provides

training on other aspects of its program, including loss mitigation, it

does not do so for the conveyance process or submitting claims.

Limited direction on photographic evidence. FHA’s policies and

procedures provide instructions for servicers and contractors on how to

document property conditions, but contain limited direction on

photographic evidence. Servicers must thoroughly document the

condition of the property when they first obtain possession so that FHA

does not hold them responsible for damage caused by the borrower.

Servicers also must take before and after pictures of any work they do on

the property. FHA’s policies and procedures on photographic

documentation say only that the servicer must use digital photography,

Page 39 GAO-19-517 FHA Property Conveyances

ensure a date-stamp is printed within each photograph, and ensure that

each photograph is labeled to describe the contents of the photograph.

FHA has not communicated in writing any requirements for photograph

dimensions, color, distance, framing, or content or suggestions for

documenting conditions that may be difficult to see.

Servicers and FHA officials stated that they face challenges in

documenting property conditions in a way that most accurately informs

the compliance contractor about the property. The compliance contractor

reviews documentation, including photographs, uploaded into the asset

disposition system by servicers to make decisions on overallowable and

extension requests. The compliance contractor also reviews

documentation from maintenance contractors on inspection results and

reconveyance recommendations by HOC officials. An FHA maintenance

contractor told us that the compliance contractor sometimes responds

that the condition described is not apparent from the photographs in the

asset disposition system. According to members of an industry group

representing servicers, in some cases this may result in FHA requiring

servicers to repair damage caused by the borrower, because the

servicers’ photographs did not prove the damage was present when they

first gained possession of the property.

To illustrate how photographs can effectively or ineffectively capture

property condition problems, figure 12 provides two examples of flooring

issues at properties conveyed to FHA. In one photograph, the buckling of

the floor is apparent, but in the other, the waterlogged and warped

condition of floor is harder to discern. An experienced FHA maintenance

contractor told us there are creative ways to document some conditions

that are difficult to photograph. For example, to document a damp floor,

one can photograph a piece of paper (which darkens when wet) before

and after placing it on the floor. This method is not included in FHA’s

handbook or mortgagee letter.

Page 40 GAO-19-517 FHA Property Conveyances

Figure 12: Examples of Flooring Damage at Properties Conveyed to the Federal Housing Administration in 2018

mitations in the content and delivery of FHA’s policies and procedures

on conveyance condition suggest room for improvement and are

inconsistent with the federal internal control standard for communicating

externally. This standard calls for management to externally communicate

the necessary quality information to achieve an entity’s objectives.

Federal agencies can help ensure compliance by communicating with

and obtaining information from external parties and by periodically

evaluating and selecting appropriate methods of communication, taking

into account factors such as the audience, the purpose and type of

information being given, and legal or regulatory requirements.

However, FHA has not identified where the conveyance condition policies

and procedures could be improved because it has not assessed

information from servicers—for example, the frequency or content of their

questions to the compliance contractor. FHA also has not thoroughly

evaluated its methods for communicating its policies and procedures. As

a result, FHA has limited assurance that servicers understand FHA’s

GAO, Standards for Internal Control in the Federal Government, GAO-14-704G

(Washington, D.C.: Sept. 10, 2014).

Page 41 GAO-19-517 FHA Property Conveyances

expectations for conveyed properties and that contractor decisions are

made consistently. Weaknesses in these areas can contribute to

inefficiencies such as delays in executing conveyances and

reconveyance of properties to servicers.

A has not provided written direction to HOC officials on choosing

among alternatives to address conveyed properties that do not meet

FHA’s condition standards.

According to officials from FHA

headquarters and the National Servicing Center, HOC officials can (1)

reconvey the property’s title to the servicer, (2) issue a demand letter

establishing a debt to FHA for the cost of the work needed, or (3) enter

into a reconveyance bypass agreement with the servicer that requires the

servicer to complete repairs within a certain number of days. The latter

two options avoid reconveyance and therefore may expedite resale of the

property. These three options are mentioned in different parts of FHA’s

policies and procedures, but the agency has not outlined the

circumstances that would warrant use of each method.

FHA has not provided direction to the HOCs, partly because HOC officials

have the authority to choose a method based on the expected financial

return on the property. However, HOC officials with whom we spoke

differed in the factors that they considered when deciding how to address

properties that do not meet FHA’s conveyance condition standards.

Officials from three HOCs cited criteria that any property with more than

$5,000 in damage due to servicer neglect should be considered for

reconveyance, while a bypass agreement or demand letter may be issued

if the amount of servicer neglect is less than $5,000. However, FHA

officials were not able to tell us where this criterion is written. An official

from the fourth HOC said the decision to reconvey partly depends on the

strength of the housing market. If the HOC believes it can sell the

property in its current condition—even if the condition does not meet

FHA’s conveyance standards—the HOC will be more likely to issue the

servicer a demand letter than reconvey the property. In contrast, an

official from one of the other HOCs told us the state of the housing market

did not factor into decisions on reconveyance. Furthermore, according to

FHA officials, HOCs may also reconvey a property with only small

amounts of damage if the servicer frequently conveys properties not in

FHA may allow properties to be conveyed damaged in certain prescribed situations with

prior approval.

FHA Has Not Provided

Direction on Alternatives to

Reconveyance for

Properties That Do Not

Meet Conveyance

Condition Standards

Page 42 GAO-19-517 FHA Property Conveyances

conveyance condition, in order to impress on the servicer the importance

of complying with FHA requirements.

The HOC officials generally agreed that bypass agreements offer a way

for small repairs to be fixed quickly. However, an official from one HOC

said the HOC did not issue bypass agreements often because servicers’

property preservation and protection vendors may take longer than the

time specified in the agreement to complete repairs and, since the title is

in FHA’s name, FHA has no recourse with the servicer. An official from

another HOC also said that he did not like issuing bypass agreements

because servicers do not always complete repairs quickly.

FHA does not produce reports on the HOCs’ use of reconveyance,

demand letters, and bypass agreements, so the frequency with which the

HOCs employ these methods is unknown. Some servicer representatives

with whom we spoke noted apparent inconsistency among the HOCs. For

example, representatives of three servicers said that some HOCs do not

issue bypass agreements at all. Similarly, representatives of one servicer

told us they have infrequently, if ever, received a demand letter for small

condition issues at properties; rather, FHA reconveys the properties for

minor condition issues.

FHA’s lack of written direction on alternatives to reconveyance is

inconsistent with federal internal control standards, which call for

designing control activities, including policies, to achieve objectives.

Granting HOC officials discretion in dealing with properties that do not

meet condition standards gives them flexibility to respond to specific

circumstances. However, without written direction on factors to consider

when determining whether they should reconvey a property, issue a

demand letter, or enter into a bypass agreement with the servicer, FHA

lacks reasonable assurance that HOCs make determinations consistently

and in line with the agency’s regulatory goals for the REO program—to

dispose of properties in a manner that expands home ownership,

strengthens neighborhoods and communities, and ensures a maximum

return to the mortgage insurance fund.

Balancing these goals may

require using different methods to address properties that do not meet

conveyance standards. For example, in some cases issuing a demand

letter or a bypass agreement for certain properties may result in FHA

GAO-14-704G.

24 C.F.R. § 291.1(a)(2).

Page 43 GAO-19-517 FHA Property Conveyances

marketing and selling the property more quickly than it would by

reconveying the property. A quicker sale, in turn, may help avoid the

negative effects of a vacant property on the surrounding neighborhood.

However, if FHA accepts a property in poor condition, it may receive less

in proceeds when selling the property, which negatively affects FHA’s

mortgage insurance fund.

FHA began a pilot program in 2017 to inspect properties that meet certain

criteria before conveyance, but has not developed a plan to assess the

results of the pilot program. FHA selected three large servicers to

participate in this preconveyance inspection pilot. These servicers may

request preconveyance inspections for properties with characteristics that

increase their chances of being reconveyed, according to FHA officials.

For example, eligible properties include those that experienced recurring

vandalism, received overallowable repairs of greater than $5,000, or have

potential structural defects, foundation issues, or damp or wet

basements.

Based on the inspection results, the properties are

approved to convey, approved to convey subject to repair with no

additional inspection, or denied conveyance through the pilot (see table

3). After conveyance, FHA inspectors conduct a thorough inspection to

confirm that the property meets conveyance condition standards.

Properties that do not meet the standards may be reconveyed.

Other eligible properties include those with code violations—including occupancy

violations—for which the mortgagee requests approval to convey as-is; insurable claims

with completed repairs in excess of $5,000; unrepaired borrower neglect affecting

mechanical, electrical, or plumbing, or having excessive mold; uninsurable and unfinished

renovations the servicer has requested to convey as-is; and completed roof repairs in

excess of $2,500 that have unrepaired interior ceiling or wall damage. Properties with

borrowers 35 or more months delinquent on the mortgage or that were vacant more than

12 months also are eligible, as are properties in a presidentially declared disaster zone

with completed repairs exceeding $5,000 or in Puerto Rico or Washington State.

Reoccurring vandalism is defined as at least two completed vandalism repairs (paid with

insurance proceeds) on a property the servicer has requested to convey as-is.

FHA Does Not Have a

Plan to Evaluate Its

Preconveyance Inspection

Pilot

Page 44 GAO-19-517 FHA Property Conveyances

Table 3: Results of Federal Housing Administration (FHA) Preconveyance

Inspection Pilot, as of November 5, 2018

Inspection result

Number of

properties

Percentage of

inspected properties

Approved to convey

190

27.3

Approved to convey subject to repairs

260

37.3

Denied conveyance

247

35.4

Total inspections

697

100.0

Source: FHA. | GAO-19-517

As of November 2018, FHA had not developed plans for evaluating the

effectiveness of the pilot in achieving the goals of reducing the number of

properties reconveyed due to property condition and minimizing the time

it takes to convey properties. FHA officials told us that they will develop a

plan to assess pilot outcomes when sufficient data are available.

However, without an evaluation plan, FHA may not collect the right

information during the pilot to rigorously assess results. GAO’s guide for

designing evaluations states that key components of an evaluation design

include the evaluation questions or objectives; information sources and

measures; data collection methods; an analysis plan, including evaluative

criteria or comparisons; and an assessment of study limitations.

Certain characteristics of FHA’s pilot underscore the importance of

incorporating these components into evaluation design. For example,

because the pilot is intended to expedite the conveyance process through

preconveyance inspections, it will be important to isolate the impact of the

inspections, potentially by making comparisons to a control group. A

properly selected control group can rule out competing explanations for

observed outcomes. Additionally, because the pilot may affect

participating servicers in ways that extend beyond the speed of the

conveyance process or the probability of reconveyance, it will be

important for FHA to thoroughly consider the information sources and

measures it uses, including participant feedback. For example,

representatives of the three participating servicers told us they had

concerns about FHA holding properties in the pilot to higher conveyance

condition standards than nonpilot properties and the time it takes to

complete the preconveyance inspection process. According to the

representatives, this process, which includes 7 calendar days for the

GAO, Designing Evaluations: 2012 Revision, GAO-12-208G (Washington, D.C.: Jan. 31,

2012).

Page 45 GAO-19-517 FHA Property Conveyances

inspection and 5 business days for the HOCs to review the inspection

report, has resulted in longer holding times and increased vandalism

risks.

Without a well-designed evaluation, FHA risks making decisions about

preconveyance inspections based on incorrect or incomplete information

on the pilot’s benefits and drawbacks.

hile FHA increased the use of other property disposition methods in

recent years, servicers still convey thousands of foreclosed properties to

FHA annually. If the process of transferring ownership from the servicer to

FHA is not efficient, these properties may sit vacant for prolonged

periods, deteriorate, and contribute to neighborhood decline. As a result,

it is critical for FHA to have effective and efficient policies and procedures

for the conveyance process. While FHA has made recent updates to its

handbook, mortgagee letters, and information systems, additional

improvements would better align its processes and procedures with

federal internal control standards and GAO guidance on designing

evaluations:

• By addressing limitations in the content (including its detail) and

ommunication of its policies and procedures on conveyanc

ondition, FHA could help reduce uncertainty and inconsistency in the

conveyance process that may contribute to inefficiencies, such as

reconveyance of properties to servicers.

• Second, by providing direction to HOC officials on factors to consider

when deciding whether to use alternatives to reconveyance for

properties that do not meet conveyance condition standards, FH

ould increase the likelihood that alternatives will be used consistently

and in line with FHA’s goals for the REO program.

• Third, by developing a plan for how it will evaluate the outcomes of

the pilot to inspect certain properties prior to conveyance, FHA coul

hel

p ensure the pilot generates the performance information needed

to make effective management decisions about future policies.

By addressing these issues, FHA could make the conveyance process

more efficient and therefore help reduce negative impacts on

neighborhoods.

Conclusions

Page 46 GAO-19-517 FHA Property Conveyances

We are making the following three recommendations to FHA:

The Commissioner of FHA should enhance the content and

communication of FHA’s policies and procedures on conveyance

condition, including by considering the program stakeholder views

discussed in this report and other stakeholder input. (Recommendation 1)

The Commissioner of FHA should provide written direction to HOC REO

directors on factors to consider when determining whether to reconvey a

property with condition issues, issue a demand letter, or enter into a

bypass agreement with the servicer. (Recommendation 2)

The Commissioner of FHA should develop a formal plan for evaluating

the outcomes of the preconveyance inspection pilot that includes key

elements of evaluation design—such as evaluation objectives and

measures—and utilizes participant feedback and control groups, as

appropriate. (Recommendation 3)

e provided a draft of this report to FHA, the Department of Veterans

Affairs, and the Federal Housing Finance Agency (the conservator and

regulator of Fannie Mae and Freddie Mac) for their review and comment.

The Department of Veterans Affairs and the Federal Housing Finance

Agency did not provide comments. FHA provided written comments

reproduced in appendix II. FHA neither agreed nor disagreed with our first

recommendation to enhance the content and communication of its

policies and procedures on conveyance condition. FHA cited the 2016

updates to its policy handbook and mortgagee letter and said it

recognized the importance of external communication, training, and in-

person meetings to ensure servicers have the information they need to

operate in compliance with FHA programs. Our report discusses these

updates, but also identifies areas for additional improvements to address

limitations in the clarity and comprehensiveness of FHA’s policies and

procedures and methods for communicating them. FHA agreed with our

second and third recommendations to provide written direction on

considering alternatives to reconveyance and to develop a plan for

evaluating the preconveyance inspection pilot.

Recommendations

Agency Comments

and Our Evaluation

Page 47 GAO-19-517 FHA Property Conveyances

We are sending copies of this report to the appropriate congressional

committees, the Secretary of the Department of Housing and Urban

Development, and other interested parties. In addition, the report is

available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact

me at (202) 512-8678 or [email protected]. Contact points for our

Offices of Congressional Relations and Public Affairs may be found on

the last page of this report. Key contributors to this report are listed in

appendix III.

niel Garcia-Diaz

Director, Financial Markets and

Community Investment

ppendix I: Objectives, Scope, and

Methodology

Page 48 GAO-19-517 FHA Property Conveyances

Our objectives were to examine (1) timelines for Federal Housing

Administration (FHA) foreclosed property conveyances in June 2010–

December 2017 and the extent to which servicers and FHA met time

requirements and (2) changes FHA has made to the conveyance process

in recent years and any ongoing process challenges.

To address the first objective, we obtained data from FHA’s Single Family

Insurance System–Claims Subsystem and from the P260 Asset

Disposition and Management System (asset disposition system) on the

610,802 foreclosed properties mortgage servicers conveyed to FHA from

January 1, 2010, through December 31, 2017. For purposes of our

analysis, we generally excluded properties conveyed to FHA from

January 2010, through June 2010 because they were managed using

different data systems and contractors than FHA currently uses.

After excluding these properties, we analyzed data for 544,421 properties

conveyed to FHA from July 2010 through December 2017. (We use

calendar years in this report unless otherwise noted.) We calculated the

number of days it took each property to complete the conveyance

process. We defined the start of the conveyance process as the date the

servicer obtained possession and acquired marketable title for a property

and the end of the process as the date on which FHA assigned a

marketing contractor to sell the property.

For each annual cohort of

conveyed properties, we calculated the 25th, 50th (median), and 75th

percentile time frames and compared these statistics across years.

To analyze the effect that reconveyances had on the length of the

conveyance process, we compared length of time for conveyance in

2012–2017 for properties that were reconveyed to those that were not.

According to FHA staff, data on reconveyances were unreliable prior to

2012, so we excluded those properties from this comparative analysis.

FHA launched the asset disposition system in April 2010 to manage the property

conveyance process. Additionally, in June 2010, FHA launched the third generation of its

Management and Marketing contractor program. Under prior arrangements, FHA’s

contractors were responsible for both the maintenance and marketing of FHA’s real

estate-owned properties. Under the current structure, separate contractors perform these

functions. FHA also began a new compliance management contract in June 2010.

Servicers submit a date on their claim forms indicating when they obtained possession

and marketable title for the property, according to FHA officials. We used this date as the

start of the conveyance process.

Appendix I: Objectives, Scope, and

Methodology

Time Lines for Property

Conveyances

ppendix I: Objectives, Scope, and

Methodology

Page 49 GAO-19-517 FHA Property Conveyances

We interviewed FHA officials about factors that may have affected

conveyance time frames from 2010 through 2017, including increased

use of other disposition methods and servicers delaying foreclosure

actions and the resulting impact on property conditions, since the asset

disposition system does not disclose the reasons for any delays. To

analyze changes in the use of different property disposition methods and

to examine the loss severity rates for these methods, we reviewed FHA

data for fiscal years 2010–2017. To understand the relationship between

properties with long default and foreclosure periods and conveyance time

frames, we measured the time between the borrower defaulting on the

mortgage and the servicer obtaining title to and possession of the

property (effectively, the end of the foreclosure process) for properties

conveyed to FHA from July 2010 through December 2017. We divided

the range of default and foreclosure periods into four quartiles. For each

quartile, we calculated the length of the conveyance process at the

median and at the 25th and 75th percentiles. We then compared these

statistics across quartiles.

To determine the extent to which mortgage servicers and FHA

contractors met their respective time requirements for the conveyance

process, we identified relevant time requirements in Department of

Housing and Urban Development (HUD) regulations and policies. We

also reviewed the performance work statements for FHA’s mortgagee

compliance manager (compliance contractor) and field service managers

(maintenance contractors) to identify the contractors’ time requirements

for the conveyance process. For servicers and contractors, we selected

key time requirements for which electronic data were available, including

the following:

• Servicers

• Thirty calendar days from acquiring title and possession of a

operty, plus the length of any approved time extension, to

convey property to FHA.

• Forty-five days from conveying a property to FHA, plus the length

f any approved time extension, to provide FHA with title

evidence.

• Compliance contractor

• Five business days to review each overallowable request

submitted by a servicer.

• Five business days to review the sufficiency of title documentation

submitted by the servicer.

ppendix I: Objectives, Scope, and

Methodology

Page 50 GAO-19-517 FHA Property Conveyances

• Five business days to determine whether a servicer can convey a

operty with surchargeable damage.

• Five business days to approve or deny a servicer’s conveyance or

title extension request.

• Maintenance contractor

• Two calendar days, plus an additional 24 hours, to complete and

upload the HUD Property Inspection Report from the date the

property was assigned.

• Five calendar days to complete a Property Condition Report from

the date the Property Inspection Report was completed.

For each property, we calculated the number of days it took servicers and

contractors to complete these required steps in the conveyance process

and compared that number to the maximum number of days FHA allows

for each step. For each annual cohort of properties conveyed in 2010–

2017, we calculated the 25th, 50th (median), and 75th percentile time

frames for completing the steps. We also calculated the percentage of

properties for which servicers or FHA contractors met their time

requirements for each step. We reviewed FHA’s procedures for

monitoring the performance of compliance and maintenance contractors

for conveyed properties. We also reviewed examples of contractor quality

control plans and FHA quality control reports and scorecards used to

assess the contractors’ compliance with minimum time frames and other

requirements. Additionally, we interviewed FHA officials about the

contractors’ compliance with their respective time requirements and what

steps FHA took, if any, to address any noncompliance.

We assessed the reliability of data from the Single Family Insurance

System–Claims Subsystem and the asset disposition system by

reviewing FHA documentation about the data systems and data

elements. We interviewed FHA staff and contractors knowledgeable

about the data to discuss interpretations of data fields and trends we

observed in our analysis. We also conducted electronic testing, including

checks for outliers, missing data fields, and erroneous values. We

excluded from each analysis properties with missing or erroneous

information in the applicable data fields. We also excluded from each

analysis properties for which the applicable data fields were five absolute

deviations from the median (which we consider to be outliers). In addition,

we excluded certain properties conveyed in calendar years 2010–2017

that had conveyance dates that were out of sequence. For example, we

excluded properties for which the date a servicer obtained possession

ppendix I: Objectives, Scope, and

Methodology

Page 51 GAO-19-517 FHA Property Conveyances

and good and marketable title occurred after the date the servicer

conveyed the property to FHA. The number of properties we excluded in

any analysis using these methods represents no more than 3.2 percent of

properties conveyed from July 2010 through December 2017, which we

consider to be insignificant when compared to the remaining properties

included in the analysis. After taking these steps, we believe that the data

were sufficiently reliable for purposes of characterizing the overall length

of FHA property conveyances and compliance with key time

requirements.

o determine what changes FHA made to the conveyance process in

recent years, we reviewed relevant FHA regulations, policies, and

procedures issued in 2010 or later, including FHA’s February 2016

mortgagee letter (a written instruction to FHA-approved lenders) on

conveyances. We compared the requirements and property preservation

and protection allowance amounts in the mortgagee letter to those in the

prior mortgagee letter. We also reviewed FHA documentation on changes

to the asset disposition system, FHA’s data system for conveyed

properties, and on FHA’s preconveyance inspection pilot program that

began in 2017. We interviewed FHA officials on the reasons for the recent

changes and on the extent to which they reviewed any analogous

requirements and property preservation and protection allowances of

other mortgage entities (including Fannie Mae, Freddie Mac, and the

Department of Veterans Affairs) when making the updates. To

supplement our review of FHA’s recent changes to property preservation

and protection allowances, we used the asset disposition system data to

analyze changes in the frequency and number of servicer overallowable

requests since the 2016 mortgagee letter went into effect.

To examine what, if any, challenges exist with the conveyance process,

we randomly selected a nongeneralizable sample of 20 large- and

medium-sized, bank and nonbank servicers of FHA-insured mortgages.

We defined large-sized servicers as those with 100,000 or more active

FHA-insured mortgages as of December 31, 2017, and medium-sized

servicers as those with 10,000–99,999 active FHA-insured mortgages as

of that date. These servicers accounted for more than one-third of active

FHA-insured mortgages as of December 31, 2017. We conducted

semistructured interviews with the servicers about their experience with

FHA property conveyances, including the sufficiency of FHA’s policies

and procedures, time lines, and allowance amounts and any challenges

they experienced with the process. We also discussed the extent to which

the 2016 mortgagee letter assisted or hindered their conveyance efforts.

Changes to Conveyance

Process and Ongoing

Challenges

ppendix I: Objectives, Scope, and

Methodology

Page 52 GAO-19-517 FHA Property Conveyances

In addition, we spoke with two national industry groups representing

mortgage servicers about recent changes and any challenges their

members experienced with the conveyance process.

We reviewed FHA’s requirements for servicers and contractors on

conveyed properties. In cases in which servicers stated that FHA’s

policies and procedures on particular conveyance requirements was

insufficient or unclear, we examined the 2016 mortgagee letter, HUD’s

single-family housing policy handbook, and frequently asked questions on

HUD’s website—to determine whether it addressed the topics and was

sufficiently thorough to be applied to properties with different

circumstances. We assessed whether the policies and procedures were

consistent with federal internal control standards for external

communication. In particular, we examined whether the policies and

procedures communicated necessary quality information to achieve

program objectives and whether FHA had evaluated appropriate methods

to communicate them.

Where applicable, we also compared FHA’s

policies and procedures to features of Fannie Mae’s guide for servicers

on how to preserve and protect vacant properties. We also assessed

FHA’s policies and procedures on reconveyances and alternatives to

reconveyance against federal internal control standards for designing

control activities.

To review the preconveyance inspection pilot that FHA began in 2017

and any challenges with the pilot, we interviewed the three participating

servicers about FHA’s implementation of the pilot and the extent to which

preconveyance inspections reduced the likelihood of reconveyance or

addressed other challenges. We spoke with FHA National Servicing

Center officials about their monitoring of pilot outcomes and their plans for

assessing results. We assessed FHA’s planning and evaluation efforts

against key components of evaluation design from GAO’s guide for

designing evaluations.

Furthermore, we interviewed a number of individuals and entities about

challenges they experienced in implementing their property conveyance

responsibilities, the sufficiency of FHA’s policies and procedures, and

GAO, Standards for Internal Control in the Federal Government, GAO-14-704G

(Washington, D.C.: Sept.10, 2014).

GAO, Designing Evaluations: 2012 Revision, GAO-12-208G (Washington D.C.: Jan. 31,

2012).

ppendix I: Objectives, Scope, and

Methodology

Page 53 GAO-19-517 FHA Property Conveyances

methods for assessing contractor performance. These included FHA

headquarters and National Servicing Center officials with responsibilities

for aspects of the conveyance process; FHA’s compliance contractor; and

Real Estate-Owned Division officials, the largest maintenance contractor,

and staff responsible for overseeing the maintenance contractors at each

of FHA’s four homeownership centers.

Finally, we visited eight recently conveyed or reconveyed properties in the

Baltimore, Maryland, and Atlanta, Georgia, areas to observe property

conditions, learn about the maintenance contractors’ property inspection

processes, and understand challenges in documenting and addressing

condition issues. We chose these locations to provide some geographic

dispersion and coverage of different FHA homeownership centers. The

properties were selected by Philadelphia and Atlanta homeownership

center staff based on our request to visit a mix of recently conveyed and

reconveyed properties in metropolitan areas and time periods that we

chose. As a result, the conditions we observed are illustrative rather than

representative of all conveyed properties.

We conducted this performance audit from September 2017 to June 2019

in accordance with generally accepted government auditing standards.

Those standards require that we plan and perform the audit to obtain

sufficient, appropriate evidence to provide a reasonable basis for our

findings and conclusions based on our audit objectives. We believe that

the evidence obtained provides a reasonable basis for our findings and

conclusions based on our audit objectives.

ppendix II: Comments from the Department

of Housing and Urban Development

Page 54 GAO-19-517 FHA Property Conveyances

Appendix II: Comments from the Department

of Housing and Urban Development

ppendix II: Comments from the Department

of Housing and Urban Development

Page 55 GAO-19-517 FHA Property Conveyances

ppendix III: GAO Contact and Staff

Acknowledgments

Page 56 GAO-19-517 FHA Property Conveyances

Daniel Garcia-Diaz, (202) 512-8678 or [email protected]

n addition to the contact named above, Steve Westley (Assistant

Director); Melissa Kornblau (Analyst in Charge); Rachel Batkins; William

Chatlos; Emily Flores; John McGrail; Samuel Portnow; Barbara

Roesmann; Tovah Rom; and Jena Sinkfield made key contributions to

this report.

Appendix III: GAO Contact and Staff

Acknowledgments

GAO Contact

Staff

Acknowledgments

(102317)

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