As
the housing crisis unrolled the Department of Housing and Urban
Development (HUD) and the two government sponsored enterprises (GSEs)
Freddie Mae and Fannie Mae came into possession of more and more
properties thorugh foreclosure. As of
September 30, 2012, HUD held 37,445 foreclosed properties (REO) while
the GSEs held 158,138. In addition, the "shadow
inventory"-residential loans at least 90 days delinquent-totaled 1,708,033 properties, roughly 8.7 times the size of the HUD and GSE
REO inventories combined. Even a fraction of the shadow inventory
falling into foreclosure could considerably swell HUD and GSE
inventories of REO properties.

Because of the
volume of this current and potential REO the Offices of Inspector
General (OIG) for both HUD and the Federal Housing Finance Agency
(FHFA) (conservator of the GSEs) recently produced a report on how
HUD and the GSEs are managing and disposing of it.
HUD and the GSEs
have created infrastructures to manage and sell their REO and, while
these differ among the entities, all involve the use of extensive
networks of contractors to perform management tasks to: secure
properties to avoid theft, vandalism, and unauthorized use;maintain
and repair properties as needed;price
properties appropriately through broker price opinions or appraisals
and satisfactory promotional efforts; and sell
properties to homeowners or investors within a reasonable period.
Long before the
housing crisis, HUD outsourced the disposition of its REO inventory to
private contractors under its Management and Market (M&M)
program. These contractors are responsible for property activity
both pre- and post-conveyance, property management, marketing,
accounting and reconciliation, and oversight monitoring. Disposition
of the REO is administered through Homeownership Centers in Atlanta,
Denver, Philadelphia, and Santa Ana, each of which is responsible for
a given geographic area.
Without getting into
the alphabet soup of HUD management, a manager is assigned to each
property to inspect and clean out the property and order an
appraisal. If the property is cleared for sale it is listed for 180
days and if not sold within this time frame is offered to local
government. If there is an acceptable offer the manager does the
necessary title search and other work and clears it for closing.
The
GSEs also manage their REO in inventories using a series of
contractors:
-
Asset
management firms which direct certain
REO contractors in the performance of day-to-day property management
responsibilities.
-
Real
estate brokers who may, in addition to their marketing
responsibilities, manage portions of the REO inventory.
- Attorneys
who manage evictions, title issues, and the closing process.
-
Appraisers
and broker price opinion firms which help the GSEs determine the
value and listing prices of the properties.
While
the burden of managing these REO inventories is significant enough,
the GSEs and HUD must also pay attention to their "shadow
inventories," that is properties with mortgages more than 90 days
delinquent but which are not yet in foreclosure which, as stated
above, have the potential to exponentially expand those inventories.
HUD
and the GSEs have taken several steps to shrink their REO
inventories. FHA, HUDs housing agency, uses its
Office of Assets Sales which was established in 2001 to coordinate
disposition of single family and multifamily mortgage notes. These
note sales began as a pilot in 2010 and have resulted
in the sale of nearly 2,400 single family loans as of April 2013.
Notes are sold competitively at a market-determined price generally
below the outstanding principal balance to purchasers who agree to
delay foreclosure for at least six months. This allows the borrower
a chance to get help from the loan servicer to avoid foreclosure.
In
September 2012, FHA enhanced the program to include pools of
expanded size and use criteria; the revamped program is referred to
as the Distressed Asset Stabilization Program. The first offerings
from the Distressed Asset Stabilization Program occurred in September
2012 with the latest offering conducted in March 2013. As of April
2013, the program has resulted in the sale of nearly 26,000
mortgages. Another offering is planned for June 2013 with an
anticipated sale of 15,000 to 20,000 loans.
In
February 2012, FHFA directed Fannie Mae to launch a pilot REO
disposition program and bids were solicited from qualified investors
to purchase and then rent for a specified period about 2,500 of its
foreclosed properties in geographically concentrated areas across the
country. Investors were qualified to bid after an extensive review
of their financial strength, asset management experience and local
expertise. FHFA has targeted especially hard hit areas such as
Atlanta, Phoenix, and parts of Florida for the program and several
rounds of successful sales have been conducted.
The
FHFA OIG said that since becoming their conservator FHFA has
consistently listed the large inventories of the GSEs as a critical
concern yet did not conduct targeted examinations or other focused
reviews until 2011. FHFA-OIG subsequently audited FHFA's oversight
of the GSE's REO management and marketing and found they had taken
positive supervisory steps but needed to supplement these in the
future with more comprehensive risk assessment of, for example, the
shadow inventory.
OIG
says it plans future assessments of the REO management process
including matters such as securing the property, maintenance,
valuation, marketing, and sale and is considering several evaluations
of FHFA's oversight of the GSE's REO activities with a focus on their
ability to handle future workloads and mitigate adverse effects on
homeowners and communities.
FHFA
OIG will also assess Fannie Mae's pilot REO program if FHFA decides
to implement the sale-rental model on a wider scale. That assessment
may include whether the program is achieving its expected outcomes
and whether it is more cost effective to proceed with the model
rather than make sales through the traditional retail channel. OIG
may also look at the qualities of the controls to vet potential
investors and the GSEs' compliance with the controls and their
monitoring and enforcement of investor compliance with the programs
rules.
FHFA-OIG
also plans to assess FHFA's oversight of single-family property
inspections at the GSEs, which are required at various points in the
mortgage servicing process, including upon delinquency, in
foreclosure, and while managing and disposing of REO. These
inspections should determine the overall condition of the property,
security of the house, occupancy status, maintenance and capital
repair requirements, neighborhood conformity, and other related
information. Inspectors must be qualified to perform the
inspections.
With
this audit and evaluation strategy, FHFA-OIG believes that it will be
well positioned to determine whether FHFA is monitoring the GSEs'
efforts to mitigate REO risks and costs and the negative impacts of
foreclosures on communities and to evaluate the effectiveness of the
controls associated with the REO pilot program controls.
The
OIGs' report concludes by saying that REO management and disposition
are challenging tasks and are likely to become more so as shadow
inventory becomes REO and substantial attention must continue to be
paid to the manner in which HUD, FHFA, and the GSEs handle such
issues.