Recommendations and Actions
The Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), is insuring more than $375 billion of real estate loans.(1) HUD is often required to pay an insurance claim to the lender and either take over the insured loan (i.e., take an assignment of the loan) or take ownership of the real estate that was collateral for the loan. As a result, HUD has an overwhelming, and worsening, task in managing problem loans assigned to it and in disposing of the real estate it owns. In recent years, the workload--especially for loan management and real estate disposition--has been increasing while HUD staff is shrinking. Increased staff is unlikely; nor is it the best way to deal with an essentially business--not government--function like management and disposition of problem assets (loans and real estate).
Legally, HUD is required to defer foreclosure and take assignment of home mortgages when it appears that the default was due to circumstances beyond the mortgagor's control and it may be possible to return a homeowner's loan to a performing status within a three- year period. During that time HUD may temporarily reduce or forgo mortgage payments.
About one of five single-family defaulted loans goes to HUD assignment rather than to immediate foreclosure. This creates an out- of-control workload and forces difficult personalized judgments on lower-level HUD staff. HUD has more than 90,000 such loans, valued at about $3.3 billion. About one-half are in default. Last year, about 17,000 new loans were taken in by HUD by assignment, and only about 1,700 were resolved through foreclosure.(2) The portfolio is thus building at a great rate. The loans are serviced in-house, which further strains HUD systems and staff capabilities. Loan servicing is a commonly available contract service performed by the private sector for competitively set prices. Private companies operating in a competitive market can normally provide a business service (like loan servicing) more efficiently than a government staff, which is protected from the rigors of competition.
Single-family homeowner loans held by HUD require two very different kinds of attention. The first, decisions as to forbearance, requires determining whether a homeowner is having only a temporary financial difficulty--not of his or her own making--and is thus deserving of federal assistance. The homeowner may be assisted by deferring payment of money due. These are individualized, somewhat subjective decisions of a social service character. Social service-oriented nonprofit (or, perhaps, for-profit) private organizations can usually handle such issues with more flexibility and sensitivity than can government staff. That is especially so when the government staff is stretched too thin.
The second kind of attention needed, the task of working assets, is very different. Working assets is the effort to maximize financial return from the $3.3 billion of loans and loan-derived real estate, to protect the FHA Fund and indirectly the taxpayer. It requires quick, tough business decisionmaking. For defaulted loans, legal process should be put in place quickly and loan workouts, compromises, or foreclosures and sale accomplished quickly with a focused money-making orientation. This is a suitable task for a business organization with its own money at risk and a clear profit motive tied to maximizing the net return from the assets. This is not as suitable a task for salaried government staff working from government rules and handbooks.
It is not likely, in any event, that HUD will be able to staff appropriately for this task--either in numbers or in appropriate skills. A totally new approach is required. A public-private partnership, organized to maximize the value of the assets entrusted to it, would work well for part of the job: working the assets. A directly relevant model partnership has been used by the Resolution Trust Corporation (RTC), an organization established to dispose of assets from failed savings and loans. The RTC partnership model was used for about $4 billion of loan and real estate assets in two recently closed transactions (with First Nationwide Bank for the problem assets of Columbia Savings and with Brazos Asset Management for the problem assets of New West/American Savings). These Asset Management and Disposition (AMD) Partnerships were structured essentially as 80/20 limited partnerships in which the private partner holds a 20 percent interest in net proceeds and has full management control of all business decisionmaking as General Partner. The government is a Limited Partner with an 80 percent interest. The government has sufficient oversight authority to protect its interest, but cannot interfere in day-to-day business decisionmaking. The AMD partnership agreement is carefully constructed to ensure that the private General Partner has its financial interests aligned with the government Limited Partner and will maximize its financial return only by maximizing the return to the government.
An AMD partnership would not be a good vehicle for helping homeowners work through temporary financial difficulties to meet their mortgage obligations. That kind of task can be contracted out to nonprofit organizations (or other contractors) using temporary financial assistance to help with mortgage payments (at no more cost than the comparable deferral of mortgage payments now taking place). The State of Pennsylvania has successfully done so with nonprofit organizations such as ACTION Housing in Pittsburgh.
The HUD assignment and forbearance program has as its primary purpose the provision of assistance to homeowner borrowers. It is reasonably expected that the program will have some cost. In some circumstances, especially when a loan has just become delinquent, it may actually be a money saver, rather than a cost, for the loan insurer to provide some temporary mortgage assistance rather than to pay a mortgage claim and then collect on the delinquent loan. Some private mortgage insurers use such early intervention with homeowners developing financial problems in a conscious business effort of loss mitigation. HUD has no such program.
The single-family loans in question are primarily insured under the FHA Mutual Insurance Fund, which is structured to be actuarially sound--that is, self-funded without requiring appropriations. Even though appropriations are not required, managers of the fund in HUD are not freely permitted to make any and all businesslike expenditures, even when they determine such expenditures to be cost- effective. For example, HUD would require authority to make temporary mortgage payments for FHA-insured borrowers.
1. HUD should be authorized to use the Mutual Insurance Fund for any cost-effective expenditure needed to maximize the value of the fund, including all expenditures recommended through the actions below.
2. HUD should undertake programs designed to mitigate losses.
In order to mitigate losses and prevent unnecessary foreclosure, HUD should continue to implement programs such as their Nationwide Pre- foreclosure Sales Program. In addition, HUD should continue to take action that will both encourage flexibility in the execution of forbearance agreements and encourage deeds in lieu.
3. HUD should contract out loan servicing for the single-family loans for which it accepts assignment.
Loan servicing is a common business function that is not an appropriate task to be performed in-house by a government agency.
4. HUD should dispose of assigned single-family mortgages.
HUD should continue to sell assigned mortgages along the line of the recently concluded sale of over 15,000 assigned mortgages in five pools, and the sale of ten land development mortgage loans. The Department should also bid out 20 percent General Partnership interests in four to six AMD limited partnerships for managing and disposing of pools of assigned loans. HUD should undertake the necessary rule making and obtain the services of a financial advisor so that a program of periodic loan sales can be undertaken.
5. HUD should contract with qualified nonprofit or other organizations to administer a financial assistance program for temporary help with mortgage payments for HUD-held mortgages and for such mortgages that have been transferred to the above-described AMD partnerships.
Contractors will work with borrowers to help them keep their homes to the extent feasible and within the funding limits provided. Contractors will have access to the standardized AMD partnership databases and receive appropriate notices from the AMD partnerships so that resources can be efficiently applied. Assistance payment limits and criteria should be for a more limited period than three years and be statutorily authorized (explicitly replacing the consent decrees now limiting HUD).
By dividing the two very different tasks (helping financially strapped homeowners and maximizing financial return on problem assets) between two different types of public-private structures, HUD can:
--- maximize financial return from assets, thus protecting taxpayers and making resources available for housing;
--- provide efficient, structured assistance to temporarily strapped homeowners with appropriate Congressional authorization and fund control;
--- take care of a massive workload problem without increasing HUD staff; and
--- streamline HUD operations in a difficult, staff-intensive area, which should facilitate consolidation of functions and offices and thus produce long-term administrative savings.
An efficient Loss Mitigation Program developed experimentally using statistically valid samples of HUD's massive portfolio will reduce costs overall and greatly reduce the number of loans requiring FHA payoff under its insurance obligations.
The FHA funds in which these expenditures and savings or losses take place at present are self-funded and do not show explicitly in the federal budget. Savings to the FHA funds which should occur from the above management reforms will be substantial compared with the present situation, which is inherently wasteful.
1. Interview with John Ambrogne, Director, Office of Budget and Fiscal Resources, Federal Housing Administration, U.S. Department of Housing and Urban Development, Washington, D.C., May 21, 1993.
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