A recent audit conducted by the Office of Inspector General (OIG) for the Department of Housing and Urban Development (HUD) revealed that the agency’s shortcomings in ensuring mortgage servicer compliance resulted in more than $2 billion in unnecessary costs paid by the Federal Housing Administration’s Mutual Mortgage Insurance fund.
Concerned that HUD overpaid servicers’ claims for FHA insurance benefits, the OIG conducted the audit to determine whether HUD paid such claims for properties that did not foreclose or convey on time. What it founds was that HUD paid claims for an estimated 239,000 properties that fit this description.
“This condition occurred because HUD did not have adequate controls to ensure that servicers complied with Federal regulations,” the OIG wrote in its audit report.
As a result, HUD paid an estimated $141.9 million for servicers’ claims for “unreasonable and unnecessary” debenture interest that was incurred after the missed foreclosure or conveyance deadline, and an estimated $2.09 billion for servicers’ claims for unreasonable and unnecessary holding costs that were incurred after the deadline to convey.
The OIG reviewed a statistical sample of 90 claims HUD paid from nearly 250,000 with indicators that they had missed their deadlines in the past five years.
“We reviewed each loan in our sample using applicable regulations, HUD handbooks, and mortgagee letters to determine whether servicers foreclosed or conveyed on time,” the OIG wrote.
Of the 90 loans that were reviewed, 89 missed a foreclosure deadline, a conveyance deadline, or both. Projecting the sample results to the OIG’s “universe” of nearly 250,000 claims, the auditor determined that HUD paid claims for 238,978 properties that missed their foreclosure or conveyance deadlines.
“The foreclosure and conveyance process is sequential, so when a servicer misses the foreclosure deadline, it is more likely to miss the conveyance deadline as well,” the OIG wrote.
Servicers were found to have missed their deadlines to initiate foreclosure for 56 of 90 loans in the OIG’s sample. HUD regulations state that servicers must start foreclosure within 6 months from the date of default, however for these 56 loans, servicers were late initiating foreclosure by an average of 419 days, or approximately 14 months. Additionally, the longest delay was on a loan that missed this deadline by 1,862 days.
Under existing regulations, servicers are required to exercise “reasonable diligence” in prosecuting the foreclosure proceedings to completion and acquiring title to and securing the property. HUD defines “reasonable diligence” for each state through the issuance of mortgagee letters, however, this can vary from 3-30 months, depending on the state and the period covered by the various mortgagee letters, noted the OIG.
Taking this criteria into account, the OIG found that for 68 of 90 loans servicers missed their deadlines to finalize foreclosure and secure the properties in question. On average, for these 68 loans servicers were late foreclosing upon and securing the properties by 523 days, or roughly 17 months. The longest delay was on a loan that missed this deadline by 1,779 days.
As for conveyance delays, the audit found that servicers missed their deadlines to convey properties to HUD for 87 of 90 loans in the OIG sample size. Servicers are required to obtain “good and marketable title” and transfer the property to HUD within 30 days of securing the property.
But for these 87 loans, servicers were late conveying the properties to HUD by an average of 495 days, or approximately 17 months—the longest delay occurring on a loan that missed this deadline by 1,896 days.
The OIG audit underscores the need for HUD to provide greater oversight in efforts to ensure compliance among servicers. In this regard, the OIG recommends that HUD issue a change to 24 CFR (Code of Federal Regulations) Part 203, which corrects deficiencies that it believes allowed an estimated $2.23 billion in “unreasonable and unnecessary” costs to the FHA insurance fund.
“We recommend that HUD develop a strategic information technology plan to make significant operational changes to HUD’s monitoring of single-family conveyance claims to ensure that servicers comply with foreclosure and conveyance timeframes,” OIG writes. “We also recommend that HUD develop and implement controls to identify non-compliance with current regulations at 24 CFR 203.402.”
The results of the audit are concerning, particularly the more than $2 billion cost burden placed on the FHA’s MMI Fund revealed just one month before the agency’s annual actuarial report is expected to be released.
In Fiscal Year 2015, the financial condition of the MMI fund gained $19 billion, an increase that was driven by a $7.9 billion growth in the Home Equity Conversion Mortgage portfolio.
The conveyance claims reviewed in OIG’s audit of HUD concerned only claims on forward loans and not FHA reverse mortgages.
Editor’s note: This article has been updated to clarify that all claims reviewed under the audit are related to conveyance claims on forward FHA mortgages only.
Read the full audit report here.
Written by Jason Oliva