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FHA Lags GSEs in REO Disposition

Shortcomings outlined in report

July 22, 2013

By Mortgage Daily staff

A new government report indicates that the Federal Housing Administration is doing a worse job disposing of real-estate-owned properties than Fannie Mae and Freddie Mac.

FHA's net execution rate, which reflects net sales proceeds divided by independently assessed property values, was between 400 and 600 basis points worst than Fannie's and Freddie's.

The rate was determined based on more than 400,000 REOs disposed of from January 2007 until June 2012.

After controlling for varying property characteristics like value, location and local market conditions -- the variance was reduced to between 200 and 500 BPS, according to the report from the Government Accountability Office.

While the government-sponsored enterprises took an average of around 200 days after foreclosure to unload the REOs -- FHA took approximately 340 days.

FHA even took longer than the Department of Veterans Affairs.

The report attributed the longer FHA process to servicers having to complete certain activities before conveying title to FHA.

The GAO said that FHA doesn't use some practices used by the GSEs and private mortgage servicers that could improve sales performance.

"For example, FHA does not repair its properties to increase their marketability, something both enterprises do," the report stated. "And unlike the enterprises, FHA does not incorporate information from multiple sources in setting list prices or consistently take into account market conditions when reducing prices."

FHA instead relies on a single appraisal to set the initial price and frequently reduces the values by set amounts.

If FHA's execution rate and disposition time frames were as good as the GSEs in 2011, then it could have increased proceeds by as much as $400 million and cut holding costs by as much as $600 million. Holding costs include items such as taxes, homeowners' association fees and maintenance cost.

The GAO also cited weaknesses in contractor oversight by FHA. Policies for oversight haven't been updated since 1994.

"In the absence of a central source of updated guidance, GAO and FHA internal auditors found inconsistencies in both contractor activities and staff oversight across FHA's four regional homeownership centers," the report said.

The GAO also noted that FHA has not implemented a uniform system for evaluating contractor performance -- leaving poorly performing contractors continuing to handle work.

FHA only tries to inspect between 2 to 6 percent of REO properties each year even though other entities inspect between a quarter and more than a third.

In addition, FHA doesn't ensure that real estate brokers are located near the properties they sell.

"Without implementing more effective activities to evaluate contractor performance and ensure compliance with program requirements, FHA's REO properties may continue to remain on the market longer and sell for lower prices than properties held by the enterprises," the report said.

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