oversight

The Pennsylvania Housing Finance Agency, Harrisburg, PA, Properly Implemented HUD's Loss Mitigation Requirements for Servicing Loans Insured by the Federal Housing Administration

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

   Pennsylvania Housing Finance Agency,
              Harrisburg, PA
          HUD’s Loss Mitigation Program for Loans
        Insured by the Federal Housing Administration




Office of Audit, Region 3       Audit Report Number: 2015-PH-1006
Philadelphia, PA                                September 28, 2015
To:            Kathleen A. Zadareky, Deputy Assistant Secretary for Single Family Housing,
               HU
               //signed//
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       The Pennsylvania Housing Finance Agency, Harrisburg, PA, Properly
               Implemented HUD’s Loss Mitigation Requirements for Servicing Loans Insured
               by the Federal Housing Administration




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final report of our review of the Pennsylvania Housing Finance Agency’s
implementation of HUD’s Loss Mitigation program for Federal Housing Administration-insured
loans.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
215-430-6730.
                   Audit Report Number: 2015-PH-1006
                   Date: September 28, 2015

                   The Pennsylvania Housing Finance Agency, Harrisburg, PA, Properly
                   Implemented HUD’s Loss Mitigation Requirements for Servicing Loans
                   Insured by the Federal Housing Administration



Highlights

What We Audited and Why
We audited the Pennsylvania Housing Finance Agency’s implementation of the U.S. Department
of Housing and Urban Development’s (HUD) Loss Mitigation program for loans insured by the
Federal Housing Administration (FHA). We conducted the audit because the Agency had the
largest active portfolio and the largest number of delinquent loans for servicers located in
Pennsylvania as of October 2014. Our objectives were to determine whether the Agency (1)
properly implemented HUD’s Loss Mitigation program, (2) properly initiated foreclosures without
using loss mitigation, (3) complied with HUD reporting requirements, and (4) developed and
implemented its quality control program in accordance with HUD requirements.

What We Found
The Agency properly implemented HUD’s Loss Mitigation program and initiated foreclosures
without using loss mitigation for the FHA-insured loans reviewed. It also complied with HUD
reporting requirements and developed and implemented a quality control plan in accordance with
HUD requirements.

What We Recommend
This report contains no recommendations.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................5
         Finding: The Agency Properly Implemented HUD’s Loss Mitigation Requirements
         for Servicing FHA-Insured Loans ................................................................................... 5

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................10
         A. Auditee Comments .................................................................................................... 10

         B. File Review Details .................................................................................................... 11




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Background and Objectives
The Pennsylvania Housing Finance Agency is an approved Federal Housing Administration (FHA)
loan servicer located in Harrisburg, PA. It services more than 29,000 FHA-insured loans.
The U.S. Department of Housing and Urban Development (HUD) established the Loss Mitigation
program in 1996 to ensure that distressed FHA-insured borrowers would have opportunities to
retain their homes and reduce losses to FHA’s insurance fund. Loss mitigation is considered critical
to FHA because it fulfills the goal of helping borrowers in default retain home ownership while
reducing, or mitigating, the economic impact on the insurance fund.
The Loss Mitigation program gives lenders responsibility for managing loan defaults and provides
financial incentives to recognize them for their efforts. Lenders have a responsibility to compare the
loss mitigation options and take appropriate actions that can generate the smallest financial loss to
HUD. The program consists of reinstatement options to allow borrowers to keep their homes and
disposition options that assist them in the disposing of their homes. The lender must evaluate the
borrower for both informal and formal forbearance plans1 before considering one of FHA’s loss
mitigation home retention options. These forbearance plans are the only options available for
delinquent borrowers without verifiable losses of income or increases in living expenses. Mortgage
forbearance is an agreement made between a mortgage lender and delinquent borrower, in which
the lender agrees to not foreclose on a mortgage and the borrower agrees to a mortgage plan that
will, over a certain period, bring the borrower current on his or her payments. A forbearance
agreement, however, is not a long-term solution for delinquent borrowers. It is designed for
borrowers who have temporary financial problems caused by unforeseen problems, such as
temporary unemployment or health problems.
Once forbearance plans are considered, the loss mitigation home retention options must be
considered in the following order: (1) special forbearances, (2) loan modifications, and (3) FHA’s
Home Affordable Modification Program (HAMP). A special forbearance is a written agreement
between a lender and borrower to reduce or suspend mortgage payments. This option is available
only to borrowers who are unemployed. A loan modification is a permanent change to the terms of
a borrower’s loan. FHA-HAMP typically involves the combination of a loan modification and a
partial claim, which may include an amount needed to cover arrears in loan payments and an
additional amount for principal deferment. However, it may now involve the use of one or both of
the loss mitigation options.
The disposition options are preforeclosure and deed in lieu of foreclosure. The preforeclosure
option allows the defaulted borrower to sell his or her house and use the sales proceeds to satisfy the
mortgage debt, although the proceeds may be less than the amount owed. A deed in lieu of



1
 Informal forbearance plans are oral agreements relating to a period of 3 months or less. Formal forbearance plans
are written agreements relating to a period of greater than 3 months and less than 6 months.


                                                         3
foreclosure allows a borrower to turn his or her home over to HUD in exchange for a release from
all mortgage obligations.
Our objectives were to determine whether the Agency (1) properly implemented HUD’s Loss
Mitigation program, (2) properly initiated foreclosures without using loss mitigation, (3) complied
with HUD reporting requirements, and (4) developed and implemented its quality control program
in accordance with HUD requirements.




                                                 4
Results of Audit

Finding: The Agency Properly Implemented HUD’s Loss
Mitigation Requirements for Servicing FHA-Insured Loans
The Agency properly implemented HUD’s Loss Mitigation program for 8 FHA-insured loans
reviewed and initiated foreclosures without using loss mitigation for 14 FHA-insured loans
reviewed. It also complied with reporting requirements and developed and implemented a
quality control plan in accordance with HUD requirements.

The Agency Properly Implemented the Program
The Agency properly implemented HUD’s Loss Mitigation program for eight FHA-insured loans
reviewed. For each of the eight loans, the Agency requested financial information from the
borrowers to evaluate all loss mitigation options before three full monthly installments were due
and unpaid as required. 2 It properly determined whether the borrowers were either eligible or
ineligible for the program in accordance with applicable requirements. Appendix B provides
details on our file reviews.

The Agency Properly Initiated Foreclosures Without Using Loss Mitigation
The Agency properly initiated foreclosures without using loss mitigation for 14 FHA-insured
loans reviewed. For each of the 14 loans, it made an effort to consider all loss mitigation options
before initiating foreclosures as required. 3 The Agency repeatedly made phone calls or sent
letters to the borrowers to inform them of loss mitigation options before three full monthly
installments were due and unpaid as required. It properly initiated foreclosures without using
loss mitigation because the borrowers (1) abandoned or vacated their property, (2) failed to
respond to the Agency’s repeated efforts to inform them of loss mitigation, or (3) rejected the
Agency’s loss mitigation offer. Appendix B provides details on our file reviews.

The Agency Complied With HUD’s Reporting Requirements
For the 22 loans reviewed, the Agency generally complied with HUD’s reporting requirements.
It promptly and accurately reported an up-to-date account of the status and trends of the FHA-
insured loans reviewed in HUD’s Single Family Default Monitoring system 4 in accordance with
applicable requirements. 5




2
  Mortgagee Letters 2000-05, 2012-22, and 2013-32
3
  Regulations at 24 CFR (Code of Federal Regulations) 203.606(a) and Mortgagee Letter 2000-05
4
  HUD’s Single Family Default Monitoring system tracks data on delinquent loans until a delinquency is cured or a
claim is submitted.
5
  HUD Handbook 4330.1, REV-5, paragraph 7-8(A)


                                                        5
The Agency Developed and Implemented a Quality Control Plan as Required
The Agency developed and implemented a quality control plan in accordance with HUD
requirements. 6 Its quality control plan contained the required elements, such as determining
whether (1) all appropriate loss mitigation tools had been considered and documented and that
borrowers were provided every reasonable opportunity to remedy a delinquency or default before
the decision to foreclose, (2) accurate documentation of collection efforts was maintained, (3)
effective collection activities were pursued in a timely fashion; and (4) borrower information was
reported to credit reporting bureaus. Based on the quality control reports reviewed, the Agency
generally followed its plan when conducting quality control reviews.

Conclusion
The Agency properly implemented HUD’s Loss Mitigation program and initiated foreclosures
without using loss mitigation for the FHA-insured loans reviewed. It also complied with
reporting requirements and implemented a quality control plan in accordance with HUD
requirements.




6
    HUD Handbook 4060.1, REV-2, chapter 7


                                                6
Scope and Methodology
We conducted the audit from January through September 2015 at the Agency’s servicing office
located at 211 North Front Street, Harrisburg, PA, and our office located in Philadelphia, PA.
The audit covered the period January 2008 through January 2015.
To accomplish our objectives, we reviewed
    •    Relevant background information;
    •    Applicable regulations, HUD handbooks, and mortgagee letters;
    •    Applicable policies and procedures related to the Agency’s servicing, collection, and
         quality control programs;
    •    The Agency’s organizational charts;
    •    The Agency’s servicing, collection, and quality control files; and
    •    HUD’s report of its monitoring of the Agency’s procedures for servicing FHA-insured
         loans, performed the week of June 25, 2012.

We interviewed responsible Agency employees and HUD officials located in Washington, DC,
and Philadelphia, PA.

To achieve our audit objectives, we relied in part on computer-processed data in HUD’s
Neighborhood Watch 7 and Single Family Data Warehouse 8 systems, which contain data from
HUD’s Single Family Default Monitoring system. Although we did not perform a detailed
assessment of the reliability of the data, we performed a minimal level of testing and found the
data to be adequate for our purposes.

As of December 2014, the Agency serviced more than 29,000 FHA-insured loans. Of those
loans, 7,844 were listed as delinquent in Neighborhood Watch. We selected and reviewed a
sample of eight loans, with a total unpaid principal balance of more than $2.4 million, based on
loss mitigation actions coded in Neighborhood Watch to determine whether the Agency properly
implemented the program. The eight loans had the following codes in Neighborhood Watch:

    •    Two were coded as “seriously delinquent but not in loss mitigation,”
    •    Two were coded as “borrower’s financial information was under review,”
    •    One was coded as “ineligible for loss mitigation,”
    •    One was coded as “forbearance,”




7
  Neighborhood Watch is a secure Web-based application designed to provide comprehensive data querying,
reporting, and analysis capabilities for tracking the performance of loans originated, underwritten, and serviced by
FHA-approved lending institutions.
8
  HUD’s Single Family Data Warehouse system provides case-level data on single-family properties and associated
loans, claims, defaults.


                                                         7
   •   One was coded as “FHA-HAMP,” and
   •   One was coded as “pre-foreclosure.”

As of February 2015, data in HUD’s Single Family Data Warehouse showed 414 loans that went
into foreclosure with no loss mitigation for the period January 2008 to January 2015. From the
universe of 414 loans, we initially identified a stratified, systematic, statistical sample of 90
loans. The universe was divided into six strata according to claim amount to control for
variance. We used a systematic sample within each stratum to control for differences in the
payment problems associated with each loan. After strata boundaries were determined, the data
were sorted and sampled using a computer program written in SAS, using the survey select
procedure with a random-number seed value of 7. We reviewed 14 of the 90 loans, with total
claims paid of more than $1.5 million, to determine whether the Agency considered all loss
mitigation options before initiating foreclosures.
We compared data reported in HUD’s Single Family Default Monitoring system to supporting
documents for each of the 22 FHA-insured loans selected for review to determine whether the
Agency complied with HUD reporting requirements. We also reviewed reports for the quality
control reviews that the Agency performed on its FHA-insured loans between November 2012
and October 2014 and the Agency’s quality control plan to determine whether it complied with
HUD requirements.
We conducted the audit 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
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                8
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

•   Effectiveness and efficiency of operations,
•   Reliability of financial reporting, and
•   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objectives:

•   Validity and reliability of data – Policies and procedures that management has implemented
    to reasonably ensure that valid and reliable data are obtained, maintained, and fairly
    disclosed in reports.
•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that resource use is consistent with laws and regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
We evaluated internal controls related to the audit objective in accordance with generally
accepted government auditing standards. Our evaluation of internal controls was not designed to
provide assurance regarding the effectiveness of the internal control structure as a whole.
Accordingly, we do not express an opinion on the effectiveness of the Agency’s internal control.




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Appendixes

Appendix A


                                Auditee Comments

       The Agency chose not to provide written comments for this audit report.




                                         10
Appendix B


                                                 File Review Details


The following paragraphs provide details on our review of the eight sample delinquent loans
with a total unpaid principal balance of more than $2.4 million.

       •   For three of the loans (the two that were coded as seriously delinquent and the one that
           was coded as ineligible for loss mitigation), the files contained collection histories 9 to
           show that the Agency made an effort to evaluate and consider all loss mitigation
           techniques within the required timeframe. The Agency requested financial information
           from the borrowers, but the borrowers did not return the financial information to the
           Agency for review.

       •   For the two loans in which the borrower’s financial information was under review, the
           files contained collection histories to show that the Agency requested financial
           information from the borrowers to evaluate all loss mitigation options within the required
           timeframe. The files contained evidence that the Agency reviewed documentation, such
           as pay stubs, monthly expenses, profit and loss statement, bank statements, hardship
           letters, and tax returns, to evaluate the borrower’s financial condition.

       •   For the loan in forbearance, the file contained a collection history to show that the
           Agency requested financial information from the borrower to evaluate all loss mitigation
           options within the required timeframe. According to the collection history, the borrower
           promised to make a payment on the loan to bring it current. The borrower made the
           payment in June 2014.

       •   For the FHA-HAMP loan, the file contained a collection history to show that the Agency
           requested financial information from the borrower to evaluate all loss mitigation options
           within the required timeframe. In addition, the file contained a completed FHA Loss
           Mitigation Retention Priority Order (Waterfall) form and the borrower’s financial
           information to show that the Agency selected the appropriate reinstatement option, loan
           modification under FHA-HAMP, and it followed the requirements for implementing that
           option.

       •   For the preforeclosure loan, the file contained a collection history to show that the
           Agency requested financial information from the borrower to evaluate all loss mitigation
           options within the required timeframe. The collection history also showed that the




9
    The collection history is a record of the Agency’s servicing actions on a loan.


                                                            11
           borrower contacted the Agency before the loan became delinquent to request a deed in
           lieu of foreclosure. In addition, the file contained evidence that the Agency reviewed
           bank statements, the most recent tax return, unemployment benefits, monthly expenses,
           and an appraisal report to show that it properly evaluated the borrower for preforeclosure.
The following paragraphs provide details on our review of the 14 sample loans that went into
foreclosure with no loss mitigation with total claims paid of more than $ 1.5 million.

       •   For seven loans, the collection histories showed that the Agency initiated foreclosures
           because the borrowers did not respond to the Agency’s repeated efforts to inform them of
           loss mitigation.

       •   For six loans, collection histories, review committee reports, 10 or inspection reports
           showed that the Agency initiated foreclosures because the properties were either
           abandoned or vacant for more than 60 days.

       •   For one loan, the collection history showed that the Agency initiated foreclosure because
           the borrower rejected the Agency’s special forbearance offer.




10
     A review committee report contains the Agency’s recommendation to initiate foreclosure on a loan.


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