oversight

HUD's DASP Note Sales Generally Resulted in Lower Loss Rates Than Conveyance Claims

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-09-06.

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

                        Office of Housing
                        Washington, DC
              Distressed Asset Stabilization Program




Office of Audit, Region 7          Audit Report Number: 2018-KC-0003
Kansas City, MO                                     September 6, 2018
To:            Susan Betts, Acting Deputy Assistant Secretary for Finance and Budget
               Office of Housing, HW

               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
Subject:       HUD’s DASP Note Sales Generally Resulted in Lower Loss Rates Than
               Conveyance Claims


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) results of our latest review of the single-family note sales program.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG website. 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
913-551-5870.
                    Audit Report Number: 2018-KC-0003
                    Date: September 6, 2018

                    HUD’s DASP Note Sales Generally Resulted in Lower Loss Rates Than
                    Conveyance Claims




Highlights

What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD) single-family
note sales program. This is the third in a series of audits on the note sales program. The first
audit, 2017-KC-0006, reported that HUD did not conduct rulemaking or develop formal
procedures for its single-family note sales program. The second audit, 2017-KC-0010, reported
that HUD generally ensured that purchasers followed the requirements outlined in the
conveyance, assumption, and assignment contracts (purchase agreements). However, the
requirements in the purchase agreements needed improvement. We conducted a third audit of
the Distressed Asset Stabilization Program (DASP) because we wanted to determine if it was a
cost effective addition to HUD’s various asset disposition programs.

Our audit objective for this audit was to determine the loss rates for notes sold in HUD’s DASP
and compare them to the loss rates for notes processed through the traditional conveyance claim
process.

What We Found
HUD’s DASP note sales generally had a lower loss rate than that of its comparable conveyance
process. The DASP loss rate was more than 3 percentage points lower than the loss rate of
similar conveyance notes identified during our analysis. This calculation took into account the
loss rate for actual DASP sales during the same period as the similar real-estate-owned
conveyance claims. Ultimately the DASP program generally saved the insurance fund more
money than its comparable conveyance process.

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

Results of Audit ........................................................................................................5
         Results: HUD’s DASP Note Sales Generally Resulted in Lower Loss Rates Than
         Those of Conveyance Claims ........................................................................................... 5

Scope and Methodology ...........................................................................................6

Internal Controls ......................................................................................................7

Appendixes ................................................................................................................8
                 A. Auditee Comments and OIG’s Evaluation .................................................... 8
                 B. Loss Rate Analysis…....................................................................................... 10




                                                               2
Background and Objective
The U.S. Department of Housing and Urban Development’s (HUD) Office of Housing conducts
single-family mortgage note sales under section 204(g) of the National Housing Act. The sales
structure consists of whole loan, competitive auctions, offering for purchase defaulted single-
family mortgages provided by Federal Housing Administration (FHA)-approved loan servicers.
The notes are sold with minimal postsale restrictions or reporting requirements.

Since HUD began selling pooled notes in its Distressed Asset Stabilization Program (DASP), it
has sold 108,616 notes totaling $18 billion. HUD asserts that DASP saves the insurance fund
money compared to similar HUD real-estate-owned sales.
A HUD real-estate-owned home is a one-to-four-unit residential property acquired by HUD as a
result of a foreclosure action on an FHA-insured mortgage. HUD becomes the property owner
and offers the property for sale to recover the loss on the foreclosure claim. The HUD Home
Store is the listing site for HUD real-estate-owned single-family properties where the public,
brokers, State and local governments, and nonprofit organizations can search the inventory of
HUD properties for sale.
The FHA Office of Housing conducts mortgage loan sales under the Single Family Loan Sale
Initiative, and most distressed notes are sold through DASP. The initiative aims to meet the
mission and financial objectives of maximizing recoveries to the insurance fund. The sales
structure consists of whole loan, competitive auctions, offering for purchase defaulted single-
family mortgages provided by FHA-approved loan servicers. The loans sold contain specified
representations and warranties and may be sold with postsale restrictions or reporting
requirements. FHA sells loans in large national pools, as well as loan pools in designated
geographic areas that are aimed at stabilizing neighborhoods affected by foreclosures.

In June 2015, HUD implemented a series of changes to the note sales program. These changes
included preventing foreclosure for a year after the note was sold rather than 6 months. Under
the policy, borrowers had a year to work with the purchaser to resolve the default. At that time,
FHA also required servicers to evaluate borrowers for the Home Affordable Modification
Program (HAMP) or a substantially similar modification, and FHA implemented nonprofit-only
sales. HAMP allows the use of a partial claim up to 30 percent of the unpaid principal balance as
of the date of default, combined with a loan modification, for the purposes of reinstating the
mortgage as current.
Due to the changes, our audit concentrated on the three most recent DASP note sales: 2015-1,
2016-1, and 2016-2. These pools contained 18,008 distressed notes, with an unpaid principal
balance of $2.9 billion.




                                                3
The key difference between REO sales and the DASP program is that REO sells individual
foreclosed upon properties whereas DASP pools multiple defaulted loans then sells them through
an auction process.

Our audit objective was to determine the loss rates for notes sold in DASP and compare them to
the loss rates for notes processed through the traditional foreclosure and conveyance claim
process.




                                               4
Results of Audit

Results: HUD’s DASP Note Sales Generally Resulted in Lower Loss
Rates Than Those of Conveyance Claims
HUD’s DASP note sales generally had a lower loss rate than that of its comparable conveyance
process. The DASP loss rate was more than 3 percentage points better than the loss rate of
similar conveyance notes identified during our analysis. This calculation took into account the
loss rate for actual DASP sales during the same period as the similar real-estate-owned
conveyance claims. Ultimately the DASP program generally saved the insurance fund more
money than its comparable conveyance process.
DASP Note Sales Generally Saved the Mutual Mortgage Insurance Fund More Money
HUD’s DASP note sales generally saved the Mutual Mortgage Insurance fund more money than
its comparable conveyance process. The DASP loss rate was more than 3 percentage points
better than the loss rate for loans, which met the criteria to be included in the DASP note sales
but were instead allowed to proceed through
the foreclosure process, resulting in a
conveyance claim.                                 The DASP loss rate was 3 percent
                                                better than the similar loss rate for
We identified all conveyance claims that
met predefined criteria for DASP and were        notes that went to conveyance.
located in a similar geographic area from
January 2014 to December 2015 and calculated the loss rate for those loans. Then we calculated
the loss rate for actual DASP sales during the same period as the conveyance analysis.
The conveyance loss rate for the more than 81,000 notes in our analysis, which met the DASP
criteria but went to conveyance, was 61percent from January 1, 2014, to December 31, 2015.
The nationwide DASP loss rate for loans during that same period was 58 percent. The DASP
loss rate was more than 3 percentage points better than that of similar conveyance notes
identified during our analysis.
According to HUD FHA’s Annual Report to Congress, dated November 15, 2016, FHA
estimated that since 2013, DASP recoveries had netted $2.4 billion, about $16,000 per unit, over
what would have been collected through the standard real-estate-owned execution.
Our complete methodology and analysis are located in appendix B of this report.
Recommendations
There are no recommendations.




                                                5
Scope and Methodology
Our audit work covered the DASP records from 2010 to 2016. We performed our work from
October to November 2017 at HUD headquarters in Washington, DC.

To accomplish our objective, we
    conducted interviews with HUD officials on the note sales process;
    interviewed various purchasers to determine the viability of individual note sales;
    determined the total number of loans sold through DASP;
    developed a sampling selection to determine audit objectives;
    reviewed conveyance, assignment, and assumption contract sale requirements;
    reviewed conveyance loss and note sales loss rates; and
    compiled data to determine the number of sample loans bought for properties that were
       either vacant or in an active foreclosure.
We developed a sample of loans to determine our audit universe and review sample. The full
sampling plan is located in appendix B of this audit report. The following are highlights from
the sample plan:

      The sample contained loans that could have been selected for DASP from January 1,
       2014, to December 31, 2015.
      The sample resulted in 81,311 distressed notes.
      We found 57,776 DASP notes during the same period.
      This sample was not designed to be projected to the larger universe of all DASP loans.
To achieve our objective, we relied on data obtained from HUD’s Office of Asset Sales
individual note sales bidder data and HUD’s Single Family Housing Enterprise Data Warehouse.
The warehouse maintains the loan data for individuals who have obtained a mortgage insured
under HUD/FHA's single family mortgage insurance programs and individuals who assumed an
insured mortgage. We used data from the Office of Asset Sales to develop an individual sales
breakout and data from the Data Warehouse to develop comparable conveyances. We used both
for contextual information in the report. We also used these data to establish the total number of
notes and the note sales’ unpaid principal balance. We performed sufficient work to determine
that the data in the Data Warehouse were reliable for the purposes of this report.
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 objective.




                                                 6
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 objective:

   Controls to ensure that HUD's pricing of note sales resulted in a savings to FHA’s Mutual
    Mortgage Insurance fund.

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 HUD’s internal control.




                                                  7
Appendixes

Appendix A
                    Auditee Comments and OIG’s Evaluation

Ref to OIG
Evaluation   Auditee Comments




Comment 1     Thank you for the opportunity to respond to the Discussion Draft Report -
              HUD's DASP Note Sales Generally had a Lower Loss Rate than that of its
              Comparable Conveyance Process. The Office of Finance and Budget has
              reviewed this draft report and agrees with the Office of Inspector General that
              HUD's DASP note sales generally had a lower loss rate than that of its
              comparable conveyance process and the DASP program generally saved the
              insurance fund more money than its comparable conveyance process.




                                             8
                         OIG Evaluation of Auditee Comments
Comment 1   The Office of Finance and Budget agreed with the conclusions in the report.




                                             9
Appendix B
                                      Loss Rate Analysis


We identified and analyzed conveyance claims that would have qualified for DASP if the current
servicer had released them into the program. Our analysis calculated the loss rate for
conveyances that could have been selected for DASP and then compared that with the loss rate
for the actual DASP.
   1) Our objective for this data analysis was to identify all conveyance claims that met the
      criteria for DASP and calculate the loss rate for those loans. Our objective was also to
      calculate the loss rate for actual DASP sales during the same period as the conveyance
      analysis.
   2) We calculated the loss rate for conveyance claims that could have been selected for
      DASP (but were not).
          a. We selected January 1, 2014, to December 31, 2015, as the analysis period.
          b. We identified applicable program criteria that we would use to identify
               conveyance claims that would have qualified for DASP from the Single Family
               Loan Sales Program Participating Servicer Desk Guide. Specifically, we used
               pages 8-10:




                                               10
11
c. We also used pages 12-13 for the State-specific criteria for the maximum number
   of missed payments before the loan no longer qualified for DASP. We also used
   the chart on page 13, table 1B.
d. We then accessed HUD’s Single Family Data Warehouse via Sybase ODBC
   software to identify all conveyance claims that met the above criteria between
   January 1, 2014, and December 31, 2015.




                                   12
           e. We used the following structured query language (SQL) script to download these
              loans from the Data Warehouse.
           f. This process resulted in 81,311 records that we downloaded from the Data
              Warehouse to an Excel file.
           g. We calculated the following figures:




                    1. We calculated “Total loss(gain) from conveyance sale” as the sum of all
                       records in column Q. This amount is the total of claim A, claim B, and
                       any selling or holding costs of the conveyed property minus the proceeds
                       of the sale.
                    2. We calculated “total UPB” (unpaid principal balance) as the total of
                       column R. This is the amount of the unpaid principal balance at the time
                       of the claim process date.
                    3. We calculated loss rate by using the formula for calculation of the loss
                       rate. Page 149 of the guide states:




We divided the total loss by the UPB to obtain a conveyance loss rate of 61 percent.
                  4. We also calculated the average days in default by using the
                       (AVERAGE) Excel function on column N. This column shows the
                       number of days between the most recent date of default and the date on
                       which the claim was processed. This process resulted in an average of
                       1,065 days when the mortgage was in default before the claim was paid.
   3) We set out with an objective to calculate the loss rate for DASP loans from January 1,
      2014, to December 31, 2015.
         a. We used the SQL query to download all DASP loans (nationwide) from January
             1, 2014, to December 31, 2015.




                                                13
b. This process provided 57,776 results, and we loaded these data into ACL which is
   an audit analytics program capable of handling large amounts of raw data for
   analysis.




c. Loading the data into ACL resulted in 60,607 records.
d. We used the MERGE command in ACL to join the two tables:




e. The point of this step was to combine the DASP sales auction price to that of
   loans identified as DASP loans in the Data Warehouse (the Data Warehouse does
   not have a field for the auction price).
f. After merging the tables, we exported to an Excel file having 57,776 records.
g. We then calculated the following figures within the Excel file:




         1.   We calculated total sales price as the total sum of column T.
         2.   We calculated the total claim as the total sum of column R.
         3.   We calculated the total UPB as the total sum of column S.
         4.   We calculated the loss rate as follows: the (total claim – the total sales
              price)/the total UPB. This amounted to approximately 58 percent.


                                       14
               5. We calculated the average days of default as the total of column J. This
                  amount is the difference in days between the most recent default date
                  and the date on which the claim was processed. This amount represents
                  how long the mortgage went unpaid before it was sold at auction.
4) In summary, we found the nationwide conveyance loss rate for loans that met the criteria
   of DASP to be 61 percent from January 1, 2014, to December 31, 2015. We found the
   nationwide DASP loss rate for loans to be 58 percent from January 1, 2014, to December
   31, 2015.




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