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. 15
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)