The Federal Housing Administration might have lost as much as $1 billion in 2011 alone because of its poorly performing REO program, according to a new report from the Government Accountability Office.
The watchdog agency found that had the FHA's program to dispose of foreclosed properties been on par with those of Fannie Mae and Freddie Mac, it could have increased its proceeds by as much as $400 million in 2011 and decreased its holding costs by as much as $600 million.
The FHA's performance in selling its real estate owned properties lags that of both GSEs, according to the study. Its combined returns for the 2007-2012 period, a time when it disposed of some 400,000 properties, were about four to six percentage points below the enterprises' returns.
Even after controlling for such property characteristics as value, location and market condition, the difference between the FHA and the GSEs was in the two- to five-point range.
Whereas Fannie Mae and Freddie Mac took an average of 200 days to dispose of a repossessed property, the FHA took 340, more than 60% longer, the GAO found. Even the Department of Veterans Affairs had a better track record.
The FHA and the GSEs all use similar strategies to dispose of
For example, the FHA does not repair its properties to boost their marketability. And the housing agency does not use multiple sources to set asking prices. Nor does it consistently take into account market conditions when reducing prices.
The watchdog agency, an arm of Congress, also said the FHA could improve its oversight of contractors and the manner in which it evaluates their performance. Whereas the government control standards call for complete, updated policies and procedures to guide program oversight, the FHA hasn't updated its REO manual in 20 years.
The report also called into question the FHA's inspection policies, noting that while other entities examine between 25 and 35 properties monthly, the FHA's goal is to personally visit 2% to 6% of its REO properties annually.
The GAO offered 10 recommendations to boost the FHA's disposition returns, including updating and implementing its planned performance scorecard. "Without implementing more effective activities to evaluate contractor performance and ensure compliance with program requirements," the report said, "FHA's REO properties may continue to remain on the market longer and sell for lower prices than properties held by the enterprise."
