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Report: FHA’s REO Disposition Strategy Weak Compared to GSEs

The ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration (FHA) needs to work on improving its REO disposition strategy so it can bring in higher returns when properties go to sale, according to a recent report from the ""GAO"":http://www.gao.gov/. In fact, when compared to Fannie Mae and Freddie Mac, the congressional watchdog found FHA disposes its REOs at a much slower pace and sees smaller returns.


The report was based on a period spanning from January 2007 to June 2012. According to the GAO, the agency's inventory of REOs grew from over 25,000 in 2007 to a peak of over 65,000 by the end of 2011.

After examining foreclosure timelines, the GAO revealed the FHA takes about 340 days to dispose of its REOs after foreclosure, which is more than 60 percent longer than the GSEs' average of 200 days.

Additionally, FHA's returns on REOs were found to be smaller.

Over the four-and-a-half-year period inspected, the report found FHA disposed of more than REO 400,000 properties. To find the agency's combined returns, the GAO measured the net execution rate, which is the net sales proceed divided by the property value.

Overall, the FHA's returns were about 4 to 6 percentage points below the GSEs' returns. When controlling for certain characteristic differences, such as value, location, and local market conditions, FHA's returns were about 2 to 5 percentage points lower compared to the GSEs.


According to the report, ""if FHA's execution rate and disposition time frame had equaled those of the enterprises in 2011, it could have increased its proceeds by as much as $400 million and decreased its holding costs--which can include items such as taxes, homeowners' association fees, and maintenance costs--by up to $600 million for the year.""

Although the FHA and GSEs employ similar disposition strategies, there are certain beneficial practices used by the GSEs and servicers that the FHA overlooks.

For one, unlike the GSEs, the GAO says the FHA does not repair its properties to increase their marketability. The agency also doesn't consider information from multiple sources when determining list prices or ""consistently"" factor in market conditions when reducing prices. Instead, the agency has a practice of relying on one appraisal when setting prices and then reduces the prices by set amounts.

Furthermore, the GAO found FHA has not updated its REO disposition handbook since 1994 despite the fact that the agency implemented a different program and contractor structure in 2010.

The agency also lacks a uniform system for evaluating contractor performance whereas the GSEs have a scorecard to evaluate contractor performance. FHA's planned incentive structure for contractors was also not in compliance with federal contracting rules.

""These two shortcomings have prevented FHA from assigning work according to contractors' performance-a key quality control in its new REO program structure,"" the report stated.

FHA also conducts REO property inspections on a less frequent basis. According to the GAO, while other entities with REOs inspect between 7 and 40 percent of properties annually, FHA's goal is to inspect 2 to 6 percent each year.

The GAO also recommended that the agency ensure listing brokers are located close enough to the property to have ""adequate"" knowledge of the market.

""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 GAO stated.

About Author: Esther Cho


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