Federal Housing Administration: Improved Procedures and Assessment Could Increase Efficiency of Foreclosed Property Conveyances

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.

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.

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.

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  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.

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 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.

Foreclosure Mitigation and Property Disposition Methods

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  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  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.

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  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.

Roles and Responsibilities in the Conveyance Process

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).

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  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.

Other Participants in the Mortgage Market

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.

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.

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

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  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.

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  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 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.

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).

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.

Factors Likely Contributing to Increased Length of Conveyance Process

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.

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  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.

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.”

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  (about 108 percent higher) for properties conveyed in 2016, and declined  to 1,068 days for 2017 conveyances.

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  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.

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.

Servicers Often Did Not Convey Properties within the Required Time Frame, but Usually Provided Title Evidence on Time

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.

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  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  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 Contractors Involved in Property Conveyances Largely Met Time Requirements

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.

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  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  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 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

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  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). In  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.

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 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.

FHA Updated Its Policies and Procedures on Conveyance Condition, but Limitations Remain

FHA 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  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:

Representatives of five servicers said they would like FHA to publish an authoritative 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 issues 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 condition and property preservation requirements, but the answers consisted solely of language from FHA’s existing policies and procedures.

One servicer’s representatives suggested that FHA could issue policies 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 existing policies and procedures. Representatives from one servicer said industrywide calls with FHA staff would give servicers a way to obtain fuller 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,  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.

Limitations 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  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.

FHA Has Not Provided Direction on Alternatives to Reconveyance for Properties That Do Not Meet Conveyance Condition Standards

FHA 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  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  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 Does Not Have a Plan to Evaluate Its Preconveyance Inspection Pilot

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.

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  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.

While 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 communication of its policies and procedures on conveyance condition, 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, FHA could 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 could help 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.

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)

We 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.

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 garciadiazd@gao.gov. 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.

Appendix I: Objectives, Scope, and Methodology

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.

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:  Thirty calendar days from acquiring title and possession of a property, 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 of any approved time extension, to provide FHA with title evidence.

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.

Five business days to determine whether a servicer can convey a property with surchargeable damage.

Five business days to approve or deny a servicer’s conveyance or title extension request.

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  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.

Changes to Conveyance Process and Ongoing Challenges

To 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.

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  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.

Appendix II: Comments from the Department of Housing and Urban Development

Appendix III: GAO Contact and Staff Acknowledgments

In 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.

An empty house caught up in foreclosure can deteriorate or be vandalized—bringing down neighborhood property values.

When a property with an FHA-insured mortgage is foreclosed, loan servicers fix it up and convey it to FHA for resale. We looked at whether this process effectively and efficiently gets vacant houses back on the market.

FHA has improved its process, but more can be done. For example, FHA could give loan servicers more detailed instructions on how to determine if a property is in "conveyable condition." Our recommendations address this and other shortcomings we found.