FEDERAL HOUSING 

ADMINISTRATION

Improving Disposition 

and Oversight 

Practices May 

Increase Returns on 

Foreclosed Property 

Sales

Report to Congressional Requesters

June 2013

GAO-13-542

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-542, a report to 

congressional requesters

June 2013

FEDERAL HOUSING ADMINISTRATION

Improving Disposition and Oversight Practices May 

Increase Returns on Foreclosed Property Sales

What GAO Found

The Federal Housing Administration’s (FHA) performance in selling its foreclosed 

properties—known as real estate-owned (REO) properties—lagged the 

performance of both of the government-sponsored enterprises (enterprises), 

Fannie Mae and Freddie Mac. FHA disposed of more than 400,000 properties 

from January 2007 through June 2012. Its combined 2007-2012 returns, 

measured by the net execution rate (net sales proceeds divided by 

independently assessed property values) were about 4 to 6 percentage points

below the enterprises’ returns (see figure). After controlling for certain differences 

in their properties’ characteristics (e.g., value, location, and local market 

conditions), differences in combined returns between FHA and the enterprises 

persisted at an estimated 2 to 5 percentage points.

FHA’s Aggregate Net Execution Rate Based on Independently Assessed Property Value 

Relative to the Enterprises’ Rates for REO Dispositions (Results Not Controlled for Property 

Characteristics), January 2007 through June 2012

Further, while the enterprises took an average of around 200 days after

foreclosure to dispose of REO properties, FHA took about 340 days—more than 

60 percent longer (see figure). A similar pattern persisted even after controlling 

for certain property differences. FHA also took longer than the Department of 

Veterans Affairs (VA). For FHA, unlike the others, a significant part of the time 

between the foreclosure sale and REO sale is taken by loan servicers who must 

complete certain activities before conveying title to FHA. In the first half of 2012, 

FHA’s disposition returns and timelines generally improved relative to the 

enterprises’. All three entities use similar strategies to dispose of their REO 

properties, but FHA does not use some practices that the enterprises and private 

mortgage servicers use that may have the potential to improve its sales 

performance. For example, FHA does not repair its properties to increase their 

marketability, something both enterprises do. And unlike the enterprises, FHA 

does not incorporate information from multiple sources in setting list prices or 

consistently take into account market conditions when reducing prices. Instead, it 

View GAO-13-542. For more information, 

contact Mathew J. Scirè at (202) 512-8678 or 

sciremj@gao.gov.

Why GAO Did This Study

With mortgage foreclosures at historic 

levels in recent years, FHA is faced 

with disposing of a high volume of 

REO properties. The enterprises, other 

federal agencies, and private sector 

mortgage servicers also dispose of 

REO properties from their foreclosures. 

To assess the relative effectiveness of 

FHA’s REO dispositions, GAO 

examined (1) FHA’s disposition goals, 

strategies, practices, and effectiveness 

in disposing of properties compared 

with those of the enterprises and 

private servicers; and (2) FHA’s

oversight of the contractors that 

maintained and marketed its REO 

properties. GAO analyzed REO 

disposition data from FHA and the 

enterprises, including modeling to 

control for property differences across 

the entities. GAO also collected 

information from program 

requirements, policies, and interviews 

on each entity’s oversight of its REO 

dispositions.

What GAO Recommends

GAO makes 10 recommendations 

intended to increase FHA’s returns on 

the disposition of REO properties, 

including considering repairs that 

increase net proceeds, requiring the 

use of additional information for setting 

initial and subsequent listing prices;

and improving its oversight of its 

contractors, including updating and 

maintaining comprehensive guidance, 

implementing a performance 

scorecard, increasing in-person 

inspections, and ensuring that listing 

brokers are appropriately located. FHA

reviewed a draft of this report and 

agreed with GAO’s recommendations.
Highlights of GAO-13-542 (Continued)

United States Government Accountability Office

relies on one appraisal in setting initial prices and often reduces them by set 

amounts. GAO found that if FHA’s execution rate and disposition time frame had 

equaled those of the enterprises in 2011, it could have increased its proceeds by 

as much as $400 million and decreased its holding costs—which can include 

items such as taxes, homeowners’ association fees, and maintenance costs—by 

up to $600 million for the year.

Average Disposition Timelines by Entity for REO Dispositions (Results Not Controlled for 

Property Characteristics), January 2008 through June 2012 (All Years Combined)

In addition, FHA’s oversight of the contractors that it uses to maintain and 

dispose of REO properties has weaknesses, and it does not use some of the 

oversight tools other entities use that might prove effective. First, government 

internal control standards require complete, updated policies and procedures to 

guide program oversight. But FHA has not updated its REO disposition handbook 

since 1994, even though the agency implemented a different program and 

contractor structure in 2010. In the absence of a central source of updated 

guidance, GAO and FHA internal auditors found inconsistencies in both 

contractor activities and staff oversight across FHA’s four regional 

homeownership centers. Second, FHA has not implemented a uniform system 

for evaluating contractor performance. For instance, FHA has yet to implement a 

proposed version of the type of scorecard that the enterprises use to assess 

differences in contractor performance. Also, its planned incentive structure for 

contractors has been found not to comply with federal contracting rules. These 

two shortcomings have prevented FHA from assigning work according to 

contractors’ performance—a key quality control in its new REO program 

structure. Further, FHA aims to inspect 2 to 6 percent of its REO properties 

annually, although other entities with REO properties report inspecting between 

25 and 35 percent monthly, or between 7 and 40 percent annually. Finally, FHA 

has not taken steps to ensure that the listing brokers marketing its REO 

properties are located close enough to the properties to have adequate 

knowledge of local markets. Without implementing more effective activities to 

evaluate contractor performance and ensure compliance with program 

requirements, FHA’s REO properties may continue to remain on the market 

longer and sell for lower prices than properties held by the enterprises.
Page i GAO-13-542 FHA Property Disposition

Letter 1

Background 3

Changes to Its Disposition Practices Could Help FHA Improve 

Results 13

FHA Could Further Improve Its Monitoring and Evaluation of REO 

Contractors 41

Conclusions 62

Recommendations for Executive Action 64

Agency Comments and Our Evaluation 65

Appendix I Objectives, Scope, and Methodology 67

Appendix II Comments from the Department of Housing and Urban 

Development 75

Appendix III GAO Contact and Staff Acknowledgments 79

Table

Table 1: Number of REO Dispositions for FHA and Other Entities 

from January 1, 2007 through June 30, 2012 68

Figures

Figure 1: Typical Foreclosure Processes 6

Figure 2: FHA Homeownership Center Operating Regions 10

Figure 3: REO Property Dispositions by Various Housing Program 

Entities, First Quarter 2007 through Second Quarter 2012 12

Figure 4: FHA’s Aggregate Net Execution Rate Based on 

Independently Assessed Property Value Relative to the 

Enterprises’ Rates for REO Dispositions, January 2007 

through June 2012 18

Figure 5: FHA’s Aggregate Net Execution Rate Based on Initial List 

Price Relative to the Enterprises’ Rates for REO 

Dispositions, January 2007 through June 2012 19

Contents
Page ii GAO-13-542 FHA Property Disposition

Figure 6: Average Disposition Timelines by Entity for REO 

Dispositions, January 2008 through June 2012 (All Years 

Combined) 22

Figure 7: Average Disposition Timelines by Entity for REO 

Dispositions, January 2008 through June 2012 (by Year) 25

Figure 8: Sales of REO Properties by Type of Sales Method, 

January 2007 through June 2012 28

Figure 9: Aggregate Share of REO Dispositions by Type of Buyer 

for All Sales, January 2007 through June 2012 30

Figure 10: Differences in FHA Homeownership Centers’ and the 

Enterprises’ Aggregate Net Execution Rates Based on 

Independently Assessed Value for All REO Dispositions, 

January 2007 through June 2012 46

Figure 11: Difference between FHA Homeownership Centers’ 

Average Disposition Times and the Enterprises’ Times for 

All REO Dispositions, January 2008 through June 2012 48

Abbreviations

AVM Automated Valuation Model

BPO Broker’s Price Opinion

FAR Federal Acquisition Regulation

FHA Federal Housing Administration

HUD Department of Housing and Urban Development

M&M Management and Marketing

OGC Office of General Counsel

OIG Office of Inspector General

REO Real estate-owned

RHS Rural Housing Service

VA Department of Veterans Affairs

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Page 1 GAO-13-542 FHA Property Disposition

441 G St. N.W.

Washington, DC 20548

June 20, 2013

The Honorable Randy Neugebauer

Chairman

Subcommittee on Housing and Insurance

Committee on Financial Services

House of Representatives

The Honorable Spencer Bachus

House of Representatives

The Federal Housing Administration (FHA) within the Department of 

Housing and Urban Development (HUD) strives to assist low- and 

moderate-income borrowers obtain home loans by providing guarantees 

to private lenders. In 2012, FHA insured about 1.2 million single-family 

mortgages, providing about $227 billion in mortgage insurance. With the 

high rate of mortgage loan defaults since 2006, FHA has had to take 

possession of a large number of foreclosed properties.1 FHA’s inventory 

of these real estate-owned (REO) properties grew from over 25,000 in 

2007 to a peak of more than 65,000 by the end of 2011, an increase of 

about 160 percent. Other government agencies that operate housing 

finance programs, including the Department of Veterans Affairs (VA) Loan 

Guaranty Service and the Department of Agriculture’s Rural Housing 

Service (RHS), as well as the two government-sponsored enterprises (the 

enterprises), Fannie Mae and Freddie Mac, also have experienced 

increasing numbers of REO properties. All of these entities seek to sell or 

otherwise dispose of their REO properties in order to recover some 

portion of the loss on the original failed loans.2

REO properties must be maintained, repaired if necessary, evaluated to 

determine an appropriate selling price, and marketed for sale. Conducting 

these activities effectively can ensure that FHA maximizes returns and 

minimizes maintenance and other holding costs. You requested that we 

 1

FHA also acquires REO properties from lenders that obtained them through a process 

known as deed-in-lieu of foreclosure whereby a delinquent borrower avoids foreclosure 

but is required to transfer title to the property to the lender.

2

Unlike its direct loan program, RHS does not take possession of REO properties for the 

loans that it guarantees but rather oversees their disposition by lenders with the goal of 

minimizing losses. 
Page 2 GAO-13-542 FHA Property Disposition

examine various aspects of FHA’s REO activities. This report examines 

(1) how FHA’s disposition goals, strategies, and practices and 

effectiveness in disposing of properties compares with those of other 

entities; and (2) how FHA oversees the contractors that maintain and 

market its REO properties.

To identify the goals and strategies for REO programs at FHA and other 

entities, we reviewed program regulations, requirements, and policies. To 

assess the effectiveness of FHA’s REO property dispositions, we 

analyzed disposition data from FHA and the other federally related 

entities, including all REO properties disposed of from January 2007 

through June 2012.3 We did not include RHS in our analysis of REO 

property disposition performance because it only obtains and manages 

REO properties through its direct loan program and it had a comparatively 

small number of such dispositions. During the period of our analysis 

RHS’s direct loan property dispositions were less than 1 percent of FHA’s 

dispositions. RHS also did not have property-level data available for many 

of the data elements that we included in our analyses. Similarly, we were 

not able to obtain some information on VA’s REO dispositions because it 

was in the process of transitioning to a new REO property management 

contractor. We created regression models to assess the extent of 

differences between FHA’s performance and that of the two enterprises 

after accounting for some differences in the characteristics of the 

properties they acquired. We also used these models to identify factors 

that could explain differences in performance. We determined that the 

REO disposition data were sufficiently reliable for the purposes of our 

analysis. To determine how FHA and the other entities oversaw the 

contractors that managed and disposed of their REO properties, we 

reviewed program regulations, requirements, and policies and interviewed 

staff from these entities as well as from some private sector mortgage 

servicers that also acquired and disposed of REO properties.4 We 

conducted this performance audit from February 2012 to June 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

 3

While we collected and analyzed data on all dispositions during the period, some 

dispositions were missing certain data elements and could not be included in all of our 

calculations. For more detailed information on the share of dispositions by entity that were 

included in our calculations, please see the notes for figures 4-11.

4

We did not attempt to verify the extent to which these other entities complied with their 

policies and practices.
Page 3 GAO-13-542 FHA Property Disposition

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. For more information on the 

methodologies used in this report, see appendix I.

Established by the National Housing Act of 1934, FHA’s single-family 

mortgage insurance program helps home buyers obtain home mortgages 

by providing insurance on single-family mortgage loans. The mortgage 

insurance allows FHA-approved private lenders to provide qualified 

borrowers with mortgages on properties with one to four housing units 

and generally compensates lenders for nearly all of the losses incurred on 

such loans. FHA insures mortgages on properties that meet its criteria, 

providing guarantees for initial purchases, construction and rehabilitation, 

and refinancing. To support the program, FHA imposes up-front and 

annual mortgage insurance premiums on home buyers.5 The agency has 

played a particularly large role among minority, low-income, and first-time 

home buyers. In 2012, about 78 percent of FHA-insured home purchase 

loans went to first-time home buyers, about 32 percent of whom were 

minorities.

A number of other federal and private sector entities participate in the 

mortgage market. Along with FHA, the VA Loan Guaranty Service and 

RHS administer federal government programs that insure or guarantee 

single-family mortgages made by private lenders. In addition to these 

government agencies, private companies insure lenders against losses 

on home mortgages, and private lenders make loans without mortgage 

insurance. The enterprises also participate in the U.S. housing market by 

purchasing mortgages from lenders.

VA’s Loan Guaranty program is an entitlement program that provides 

eligible veterans, active duty military personnel, and certain other 

individuals with housing benefits. The VA guaranty program allows 

mortgage lenders to extend loans to eligible borrowers on favorable 

terms—for example, with no down payment—and provides lenders with 

 5

The Mutual Mortgage Insurance Fund, which supports this program, is required by law to 

contain sufficient reserves and funding to cover the estimated future payment of claims on 

foreclosed mortgages and other costs.

Background

Other Mortgage Market 

Participants
Page 4 GAO-13-542 FHA Property Disposition

financial protections against the losses associated with such mortgages. 

To help support the program, borrowers are required to pay a funding fee 

that equals a certain percentage of the loan amount, although serviceconnected disabled veterans are exempt from paying this fee. The 

program may also receive congressional appropriations if needed.

RHS operates guaranteed and direct loan programs to help rural 

Americans with very low incomes, low incomes, and in some cases 

moderate incomes purchase single-family homes. The purpose is to 

provide financing with no or low down payments at favorable rates and 

terms. The loans are generally for the purchase, construction, 

rehabilitation, or relocation of a dwelling and related structures. RHSguaranteed loans are made through approved local lenders, with RHS 

providing the lenders substantial financial protections against associated 

losses. The loans are available to qualifying borrowers who meet 

applicable household income limits and seek to buy properties in eligible 

rural areas. Under its direct loan program, RHS extends loans to qualified 

borrowers—who must have low incomes and be without adequate 

housing—for the purchase of properties that are modest in size, design, 

and cost.

Congress established the enterprises as for-profit, shareholder-owned 

corporations. They share a primary mission to stabilize and assist the 

U.S. secondary mortgage market and facilitate the flow of mortgage 

credit. To accomplish this goal, the enterprises purchase conventional 

mortgages that meet their underwriting standards, obtaining their funds 

through borrowing or by issuing mortgage-backed securities, which are 

securities backed by pools of mortgages.6 The enterprises hold some of 

the purchased mortgages in their portfolios, but they package most of 

them for sale to investors in the secondary mortgage market. In exchange 

for a fee, the enterprises guarantee these investors the timely payment of 

principal and interest. Both enterprises are also required to purchase 

mortgages that serve low- and moderate-income families. On September 

6, 2008, the Federal Housing Finance Agency placed the enterprises into 

conservatorship out of concern that the enterprises’ deteriorating financial 

condition threatened the stability of financial markets.

 6

Conventional mortgages do not carry government insurance or guarantees.
Page 5 GAO-13-542 FHA Property Disposition

Institutions that originate home mortgages generally do not hold such 

loans as assets on their balance sheets but instead sell them to other 

financial institutions for the purpose of securitizing the mortgage. These 

securities pay interest and principal to their investors, which include 

financial institutions and pension funds, among others. In the past, 

institutions originating mortgage loans took care of all the activities 

associated with servicing them—including accepting payments, initiating 

collection actions for delinquent payments, and foreclosing if necessary. 

With the advent of securitization, entities known as mortgage servicers—

which can be large mortgage finance companies or commercial banks—

typically undertake such activities on behalf of the current owners of the 

loans.

If a borrower defaults on a mortgage loan secured by the property, the 

mortgage note holder is generally entitled to pursue foreclosure to obtain 

title to the property. The foreclosure process is governed by state laws 

and differs across states, but foreclosed properties are typically sold at 

auction, as shown in figure 1. Once the borrower is in default, the 

mortgage servicer—often in conjunction with the borrower and entities 

with an interest, such as mortgage guarantors and insurers—must decide 

whether to pursue a home retention workout or other foreclosure 

alternative or to initiate foreclosure.7 The mortgage owner or servicer 

generally initiates foreclosure once the loan becomes 90 days or more 

delinquent unless the borrower can resolve the loan’s delinquency by 

paying the outstanding amount or some other resolution occurs, such as 

a borrower repayment plan or loan modification. If the foreclosure process 

is completed and no third party purchases the home at the foreclosure 

sale, the home usually becomes the property of the loan holder or 

servicer as part of an REO inventory.

 7

FHA requires servicers to consider, and when qualified implement, home retention and 

disposition options in a specific order with specified time frames.

Foreclosure Process
Page 6 GAO-13-542 FHA Property Disposition

Figure 1: Typical Foreclosure Processes

However, certain states provide the previous owners of foreclosed 

properties with a right of redemption that allows them to pay amounts 
Page 7 GAO-13-542 FHA Property Disposition

owed to the lender and reclaim ownership. During redemption periods, 

the previous borrower or current occupant is allowed to remain in the 

residence and the REO property owner or servicer generally is not 

permitted to pursue activities such as evicting property residents or 

securing properties. Some states may have a confirmation process to 

complete the foreclosure process and transfer title that may also delay 

possession and marketing of an REO property. Typically, the redemption 

or confirmation period begins after the foreclosure sale and lasts from 

around 1 to 6 months or more. However, if properties become vacant, 

some state laws may permit the shortening of redemption periods and 

allow the REO property owners or servicers to take control of foreclosed 

properties.

The acquisition of REO properties differed across the entities that we 

reviewed. When a servicer forecloses on an FHA-insured property that is 

not sold to a third party, the foreclosure is held in the lender’s or servicer’s 

name, and the lender or servicer is responsible for the property until it is 

conveyed to FHA. FHA requires servicers to oversee properties during 

redemption periods, to evict residents if properties not in redemption 

periods are occupied, and to perform critical maintenance on properties. 

The servicer files a claim with FHA, and FHA conducts its inspections 

before accepting the title. The length of time between the foreclosure sale 

and entry of a property into FHA’s REO inventory depends in part on 

state foreclosure laws as well as the actions of the loan’s servicer. 

According to FHA rules, a servicer needs marketable title before it can 

convey a property to FHA, and the title is generally considered to be 

marketable only after the borrower has left the home or been evicted, any 

redemption period has expired, and other required actions have taken 

place. After conveyance to FHA, the property is assigned to FHA’s 

contractors, which begin the process of preparing the REO property for 

sale.

Other federally related entities that acquire REO properties take custody 

of and are responsible for them closer to the time of the foreclosure sale. 

For example, the enterprises require servicers to convey properties to 

them within 24 hours of foreclosure sales, while VA requires servicers to 

provide notice of their intent to convey properties within 15 days of 

foreclosure sales, although servicers have 60 days (or longer in certain 

jurisdictions) to provide evidence of acceptable title to conveyed 

properties. RHS’s REO process varies, depending on whether the 

property has had a guaranteed or direct loan. With direct loans, RHS 

takes possession of the property after the foreclosure sale and manages 

the entire REO process. With guaranteed loans, the lender receives title 
Page 8 GAO-13-542 FHA Property Disposition

to the property and maintains, markets, and disposes of the property, and 

RHS oversees the process. Because RHS acquires and disposes only of 

REO properties related to its direct loans, we generally considered only 

these types of properties when discussing RHS’s REO disposition.

Disposing of REO properties can involve various activities, although the 

disposition process is generally similar across entities. While a property is 

held as part of an entity’s REO inventory, the entity is responsible for 

maintenance, including cleaning, lawn care, snow removal, and security. 

If a property has a tenant or is otherwise occupied, eviction proceedings 

may need to occur before it is offered for sale.8 After any redemption 

periods expire and evictions take place, properties are usually assessed 

to determine their market value. The market value is used to determine 

the selling, or listing, price. A listing real estate broker is usually chosen to 

market the property publicly, generally through a multiple listing service 

system—a database set up by a group of real estate brokers to provide 

information about properties for sale. If a property does not attract interest 

at its initial listing price, the price can be reduced. Once a purchase offer 

is accepted, the sale closing process occurs, and ownership is transferred 

to the new owner.

Since 1999, FHA has been outsourcing to private sector contractors the 

maintenance and disposition of its REO properties. Entities that dispose 

of REO properties typically use various types of contractors, including 

those that manage the marketing or maintenance activities for a large 

number of properties. These larger contractors often use subcontractors 

to provide specific services related to the marketing or maintenance of 

properties, such as listing the property for sale or cutting the lawn. In June 

2010, FHA launched the third generation of its Management and 

Marketing (M&M) contractor program, known as M&M III. Under prior 

arrangements, FHA’s M&M contractors were responsible for both the 

maintenance and marketing of FHA’s REO properties. However, under 

M&M III these functions are performed by separate contractors, including 

maintenance contractors that are responsible for preserving properties 

 8

The Protecting Tenants at Foreclosure Act of 2009 protects certain tenants from 

immediate eviction by new owners who acquire residential property through foreclosure. 

The provisions are scheduled to expire on December 31, 2014. 12 U.S.C. §§ 5201 note, 

5220 note.

REO Disposition Process

REO Program Structures 

and Use of Contractors
Page 9 GAO-13-542 FHA Property Disposition

and marketing contractors that are responsible for selling the homes.9

Under the M&M III structure, FHA also uses contractors called Mortgagee 

Compliance Managers that protect FHA’s interests in foreclosed 

properties that lenders have not yet conveyed to FHA.10 The M&M III 

structure was also meant to include an additional contractor to serve as 

an oversight monitor to assist FHA in overseeing its REO program’s 

performance, including the other M&M III contractors.

FHA conducts its mortgage loan insurance programs and its REO 

disposition program through four regional operating locations called 

homeownership centers, or HOCs. The homeownership centers are 

located in

• Atlanta, Georgia;

• Denver, Colorado;

• Philadelphia, Pennsylvania; and

• Santa Ana, California.

Each of these homeownership centers oversees FHA operations in the 

states within their region (see fig. 2). Under M&M III, FHA contracts with 

entities to provide the necessary maintenance or marketing services in 

multiple areas that cover several states. Within each of these contract 

areas, multiple entities generally will receive either maintenance or 

marketing contracts as a way of fostering competition among the 

contractors to improve their responsiveness, reduce risk, and increase 

net returns to FHA. FHA staff—known as government technical 

representatives—in each of these locations oversee the maintenance and 

marketing contractors, including monitoring and evaluating their 

performance and providing technical guidance and assistance.

 9

FHA refers to its maintenance contractors as Field Service Managers and its marketing 

contractors as Asset Managers.

10The activities performed by the mortgagee compliance manager include reviewing 

property inspections to ensure the property is in conveyance condition, resolving 

conveyance exceptions, and providing guidance to mortgagees related to pre- and 

postconveyance responsibilities.
Page 10 GAO-13-542 FHA Property Disposition

Figure 2: FHA Homeownership Center Operating Regions

Other entities also use contractors to manage and dispose of REO 

properties, but to varying degrees. For example, officials from one of the 

enterprises said that it used three nationwide contractors for property 

maintenance, with each operating in different states. According to these 
Page 11 GAO-13-542 FHA Property Disposition

officials, contractors inspect the properties, but field-based quality control 

employees also do property inspections. For disposition, this enterprise 

has its own internal management group that markets and sells REO 

properties using its own network of listing brokers. The enterprise’s 

officials said that to help adjust capacity based on REO inventories, the 

enterprise had also contracted with external asset management 

companies that did not use its broker network. The officials noted that the 

enterprise recently ended its use of these contractors, as its REO 

inventories had declined.

The other enterprise has used contractors to manage and dispose of its 

REO properties since 2008. According to officials, this enterprise initially 

used one sales management contractor but added two more in March 

2011. These officials explained that each of the three contractors 

operated in every geographic area, allowing the enterprise to more easily 

change the contractor managing a property if necessary. The enterprise’s 

officials also said that it managed the network of service providers—such 

as listing brokers, property maintenance companies, and repair 

contractors—that its sales management contractors used to ensure a 

consistent process and minimize potentially adverse relationships among 

contractors. Officials said that the enterprise primarily maintained 

relationships with local service providers rather than nationwide providers 

because markets differed at the local level. The enterprise’s oversight 

structure includes several different groups, including oversight monitors 

that review specific areas of contractor performance, individual business 

teams that also review performance across all contractors, and vendor 

oversight teams that serve as liaisons between the business units and 

contractors.

VA and RHS use different approaches. VA staff told us that the agency 

used a single contractor to manage the maintenance and disposition of its 

entire REO inventory. This contractor uses numerous subcontractors to 

maintain and market properties and manage the subcontractors. 

According to its staff, VA wanted one company to manage everything so 

that it could have a single point of interaction and accountability. RHS 

uses both contractors and its own staff to dispose of REO properties, 

according to agency officials. For its direct loans, RHS staff manage the 

disposition of any foreclosed properties for which it takes possession in 

about half of the states, while a central RHS office oversees contractors 

that manage and dispose of properties in the remaining states. Officials 

said that for several years RHS had been transitioning from using its own 

staff to using contractors to dispose of properties. For its guaranteed 

loans, RHS does not use contractors but relies on lenders that take 
Page 12 GAO-13-542 FHA Property Disposition

possession of the REO properties with some RHS oversight. If a lender 

completes foreclosure or a deed-in-lieu of foreclosure on a loan that RHS 

guarantees, the lender receives title to the property and maintains, 

markets, and disposes of the property.

As a result of the large number of loan defaults arising during the housing 

crisis, FHA and the other entities have generally experienced significant 

growth in their REO property disposition activities. As shown in the figure 

below, each of the entities disposed of an increasing number of REO 

properties during that time. RHS was not included in the figure because it 

had no more than 218 direct loan REO property dispositions in any 

quarter during the time period.

Figure 3: REO Property Dispositions by Various Housing Program Entities, First Quarter 2007 through Second Quarter 2012

Note: We do not identify the identity of the enterprises for certain analyses. We use “enterprise A” and 

“enterprise B” when referring to the entities’ disposition volumes.

The Housing Crisis 

Increased the Volume of 

REO Properties
Page 13 GAO-13-542 FHA Property Disposition

Our review of FHA and other federally related housing entities found that 

they pursued similar goals and strategies for disposing of REO properties, 

including seeking to sell most properties to owner-occupants—individuals 

planning to occupy the homes as primary residences. But data for REO 

dispositions from January 2007 through June 2012 showed that FHA’s 

returns from selling its REO properties generally trailed the returns 

earned by the enterprises. This difference declined when differences in 

property characteristics, such as location and value, were considered. In 

addition, we found that FHA, on average, took significantly longer to sell 

its properties than the enterprises and VA—more than 130 and 70 

additional days, respectively. We also evaluated how the method used to 

sell properties and the type of purchaser affected FHA’s performance. 

The large majority of FHA’s dispositions were retail sales to owneroccupants or investors, and our analysis of FHA’s performance indicated 

that the agency achieved higher returns on sales to owner-occupants 

than on sales to investors and other buyers. However, FHA had a smaller 

share of owner-occupant sales than the enterprises. We also found that, 

in making these sales, FHA did not follow several practices that other 

entities used in disposing of REO properties that could potentially 

increase the agency’s returns, including repairing properties to increase 

their market value, using multiple inputs to set list prices, and using 

market-based information to make subsequent list price reductions.

FHA’s goals for disposing of its REO properties were similar to those of 

the other entities we reviewed. According to staff from FHA, VA, and the 

enterprises, each entity aims to maximize the financial return of REO 

dispositions while minimizing each property’s time in inventory. 

Specifically, FHA’s regulatory goals for its REO program are to dispose of 

properties in a manner that expands home ownership opportunities, 

strengthens neighborhoods and communities, and ensures a maximum 

return to the mortgage insurance fund.11 Currently, the performance of 

FHA’s REO program is assessed against three formal goals:

• reducing the average number of days from acquisition to listing REO 

properties for sale by 2 percent from the prior fiscal year’s average,

• reducing the average number of days in inventory by 2 percent from 

the prior fiscal year’s average, and

 1124 C.F.R. § 291.1(a)(2).

Changes to Its 

Disposition Practices 

Could Help FHA 

Improve Results

FHA and Other Federally 

Related Entities Have 

Similar Goals and 

Strategies for Disposing of 

REO Properties
Page 14 GAO-13-542 FHA Property Disposition

• conducting at least 12 REO workshops/meetings to promote 

acquisition and reuse of foreclosed properties in Neighborhood 

Stabilization Program areas.12

While not having a formal goal addressing the expected return on its REO 

sales, FHA staff told us that they attempted to improve the solvency of 

FHA’s insurance fund by targeting a gross execution rate—that is, a 

property’s sale price as a share of its assessed value, or list price—of 100 

percent although they said they use a specific target of at least 80 percent 

when evaluating homeownership center performance. VA staff said that it 

advises the contractors that market its REO properties that their 

execution rate target is 80 percent—based on a property’s net sales 

proceeds rather than gross sales price—but offers additional 

compensation incentives for a rate of 88 percent or better. One of the 

enterprises has a procedural manual for REO sales that notes that its 

goal is to sell properties for “as close to 100 percent of the list price as 

possible.”

FHA and the other entities we reviewed pursued similar strategies to 

achieve their goals. Staff from these entities explained that they 

attempted to sell their REO properties primarily via retail sales to either 

owner-occupants or to investors, who would likely renovate them for 

resale or rentals. Retail REO sales usually are conducted by private real 

estate brokers that market the properties the same way they market other 

properties—for example, listing them in a multiple listing service. Officials 

from these entities explained that they pursued retail sales because such 

sales produced higher net returns than other methods of selling the 

properties, such as selling multiple properties at once—bulk sales—or 

selling individual or multiple properties at auctions. Officials of some of 

these entities said that they generally pursued these alternative 

disposition strategies only after retail sales had proven unsuccessful and 

that often such sales involved low-value properties or properties with 

problems that made sales through retail methods difficult.

 12The HUD Secretary’s Office of Strategic Management and Planning defines strategic 

goals for FHA’s REO property disposition in its Management Action Plan. The 

Neighborhood Stabilization Program was established to try to reduce inventories of 

foreclosed homes by providing funding to state and local governments to, among other 

things, acquire and rehabilitate or demolish foreclosed and abandoned homes.
Page 15 GAO-13-542 FHA Property Disposition

Officials from FHA and other federally related housing entities said that 

they preferred retail sales not only because of their higher returns, but 

also because such sales generated more purchases by owner-occupants. 

Further, some of the officials and representatives of some nonprofit 

organizations said that owner-occupant sales were better for stabilizing 

communities and protecting home values. Owner-occupants are assumed 

to have more incentive to maintain their properties than investor owners 

that may be absent or focused primarily on maximizing rental income. 

They also said that owner-occupant sales generally yielded a higher 

financial return than sales to investors. FHA staff noted that selling to 

owner-occupants helped to achieve one of HUD’s overall agency goals—

to expand home ownership opportunities—and said that FHA required 

sales records for REO properties to reflect the type of buyer. To further 

promote sales to owner-occupants, FHA and some of the other entities 

often use methods such as exclusive access periods. For example, FHA 

accepts offers on properties that qualify for FHA insurance only from 

owner-occupants for the first 30 days of the listing.13

In some cases, FHA also disposes of REO properties at a discount 

through certain programs intended to further its agency’s mission goal of 

creating strong, sustainable, inclusive communities and quality affordable 

homes. These discount sale programs represented only a small fraction 

of FHA’s total REO dispositions from January 2007 through June 2012. 

They include the Asset Control Area program, discount sales to nonprofit 

organizations and government entities, the Good Neighbor Next Door 

program, and the $1 Home Sale program.

• Asset Control Area. Properties located in areas that HUD has 

designated for revitalization based on the area’s household incomes, 

home ownership rates, and level of FHA-insured mortgage 

foreclosure activity can be offered to sale to municipal government 

entities or approved nonprofits through this program.14 These 

properties are offered at discounts of at least 50 percent of the 

appraised value of the property for properties valued at over $25,000. 

 13If the property is deemed uninsurable, the exclusive owner-occupant purchase period is 

reduced to 5 days from the initial listing date. 

14Revitalization areas are HUD-designated geographic areas authorized by Congress 

under provisions of the National Housing Act and are intended to promote revitalization 

through expanded home ownership opportunities.
Page 16 GAO-13-542 FHA Property Disposition

Properties valued at less than that amount may be sold for as little as 

$100.

• Discount sales to nonprofit organizations and government entities. 

Qualified nonprofit organizations and government entities may also 

purchase FHA properties at a discount. Discounts range from 10 to 30 

percent, depending on the property’s FHA insurability status, location, 

and other factors. For example, one initiative provides grantees 

participating in the Neighborhood Stabilization Program exclusive 

access to newly conveyed REO properties that are located in their 

designated areas for 2 days after the grantee is notified that an 

appraisal has been obtained.

• Good Neighbor Next Door. Under this program, properties in 

revitalization areas can also be offered to police officers, teachers, fire 

fighters, and emergency medical technicians at 50 percent off of the 

list price.

• $1 Home Sale. Sales of “aged inventory” (properties listed for sale for 

more than 6 months) can also be made for $1 plus closing costs to 

local governments to support local housing and community 

development initiatives.

FHA’s returns from selling its REO properties generally have trailed the 

returns of the two enterprises but its performance has improved recently. 

FHA also took longer to dispose of properties than the enterprises but 

showed recent improvement in this area. Each of these entities achieved 

better results when conducting retail sales of individual properties than 

when using other disposition methods and when selling properties to 

owner-occupants rather than to investors and other buyers. All of the 

entities, including private REO servicers, that we interviewed assessed 

their performance in disposing of REO properties using a variety of 

metrics. For example, execution rates gauge success in maximizing a 

property’s sale prices. They can be calculated by comparing either a 

property’s gross sales price or net sales proceeds with some measure of 

the property’s value, such as an assessed value from an independent 

FHA’s Returns on REO 

Sales Slightly Lagged 

Those of the Enterprises 

and Dispositions Took 

Substantially Longer to 

Complete
Page 17 GAO-13-542 FHA Property Disposition

appraiser or the price at which the property was listed for sale.15

Properties that sell for larger percentages of the assessed value or listed 

price generate higher returns for the seller. We analyzed data from REO 

properties disposed of from January 2007 through June 2012 to 

determine FHA’s and the enterprises’ net execution rates based on 

independently assessed value, which represents the entities’ net sales 

proceeds as a percentage of those values.16 Our analysis showed that 

the aggregate net execution rate for FHA was 4 and 6 percentage points 

lower depending on the enterprise (see fig. 4).17

 15Net sales proceeds represent the cash received by the seller at settlement, or the 

contract sales price less deductions for items such as seller concessions and broker 

commissions. Independently assessed value represents the estimated value from an 

independent appraisal for FHA, one of the enterprises, and VA. For the other enterprise it 

represents an independent broker’s price opinion, because according to its officials the 

enterprise does not obtain appraisal values for all of its properties. We do not identify the

identity of the enterprises for certain analyses; rather, we use “enterprise 1” and 

“enterprise 2” to refer to each of the entities.

16FHA and the enterprises each obtain a value assessment from independent parties. 

Although the enterprises also use additional inputs when determining a property’s value, 

we used only the independent appraisals and broker’s price opinions for this calculation, 

since they provided a more consistent basis for comparison. However, because the 

independently assessed value for FHA and one enterprise came from an appraisal, 

whereas the independently assessed value for the other enterprise came from an 

independent broker’s price opinion, any systematic differences between the appraisals 

and broker’s price opinions may be reflected in the independently assessed value 

execution rate results.

17We calculated the aggregate net execution rate by totaling the net proceeds received 

from each disposition and dividing them by the total independently assessed values for 

the properties disposed of during the period. For execution rates using independently 

assessed value, we added any actual repair costs to the assessed value in the ratio’s 

denominator to approximate the value of the property as repaired. 
Page 18 GAO-13-542 FHA Property Disposition

Figure 4: FHA’s Aggregate Net Execution Rate Based on Independently Assessed 

Property Value Relative to the Enterprises’ Rates for REO Dispositions, January 

2007 through June 2012

Note: The year 2012 represents data from January 1, 2012, through June 30, 2012. The figures that 

we report for execution rates are aggregate calculations for individual years and the entire period 

rather than averages of the execution rates for individual property dispositions. For example, we 

calculated the aggregate net execution rate based on independent value by dividing the sum of the 

net sales proceeds for properties disposed during a given period by the sum of the independently 

assessed values for those properties. This calculation included data from 416,929 (99.91 percent of 

total) dispositions for FHA, 352,490 (99.90 percent) for one enterprise, and 648,966 (87.51 percent) 

for the other enterprise. It did not include all dispositions for each entity because of missing values for 

certain data elements. VA did not have the property-level data available that are necessary to 

calculate net execution rates.

To account for the possibility that the performance differences were 

attributable to differences in the property characteristics of each of these 

entities’ REO inventories, we developed a regression model to control for 

the effects on the net execution rates of certain property characteristics—

such as location, value, and local real estate market conditions—that 
Page 19 GAO-13-542 FHA Property Disposition

were beyond the entities’ control. Based on this analysis, we estimate that 

FHA’s aggregate independently assessed value net execution rate still 

trailed that of the enterprises by 2 and 5 percentage points.18

Similarly, FHA’s aggregate net execution rate based on initial list prices 

for the entire period was worse than enterprise 2’s and enterprise 1’s by 3 

and 6 percentage points, respectively, as shown in figure 5. After 

controlling for the effects of certain property characteristics—as we did for 

the independently assessed value net execution rate—we estimate that 

FHA’s net execution rate based on initial list prices was less than that of 

enterprise 2 and enterprise 1 by 2 and 4 percentage points, respectively.

Figure 5: FHA’s Aggregate Net Execution Rate Based on Initial List Price Relative to 

the Enterprises’ Rates for REO Dispositions, January 2007 through June 2012

 18See appendix I for more information on how we controlled for differences in the 

characteristics of each entity’s REO properties.
Page 20 GAO-13-542 FHA Property Disposition

Note: The year 2012 represents data from January 1, 2012, through June 30, 2012. The figures that 

we report for execution rates are aggregate calculations for individual years and the entire period 

rather than averages of the execution rates for individual property dispositions. The calculation of 

initial list price net execution rates included data from 416,690 (99.85 percent of total) dispositions for 

FHA, 352,461 (99.89 percent) for one enterprise, and 649,040 (87.52 percent) for the other 

enterprise. It did not include all dispositions for each entity because of missing values for certain data 

elements. VA did not have the property-level data available that are necessary to calculate net 

execution rates.

When comparing aggregate execution rate performance based on gross 

sales prices rather than net sales proceeds, the difference between FHA 

and the enterprises widened slightly for both independently assessed 

values and initial list prices.19 Both FHA’s net and gross execution rates 

improved relative to the enterprises during the first half of 2012 and for 

the list price ratio, FHA’s performance was equal to that of the 

enterprises.

Although the difference in aggregate net sales returns between FHA and 

the enterprises over the entire period was 6 percent or less, a small 

improvement in performance can yield substantial amounts of additional 

revenue because FHA disposes of tens of thousands of properties each 

year. For example, if FHA had achieved a similar net execution rate 

based on independently assessed value as enterprise 2, it would have 

received over $400 million in additional revenue for 2011 alone.20 And if 

FHA’s aggregate net execution rate for 2011 had been 1 percentage point 

higher, FHA would have received over $90 million in additional revenue.

 19The gross sales price is the contract price before deductions for items such as seller 

concessions and broker commissions.

20The estimated additional revenue is based on a 5-percentage-point difference in net 

execution rate after controlling for certain property characteristics and a total of 114,300 

dispositions in 2011 at an average appraised value of $80,000. We used enterprise 2’s 

independently assessed value net execution rate in this calculation because this 

enterprise and FHA both used appraisals to value their properties, which provided the 

most consistent basis for comparison. 
Page 21 GAO-13-542 FHA Property Disposition

FHA took significantly longer to sell its properties than the enterprises and 

VA, but the differences decreased in the first half of 2012.21 For each 

entity, we analyzed the time in days that elapsed between the date of the 

foreclosure sale of the property to the closing date of the REO sale.22

Based on this analysis, FHA took on average about 340 days from the 

foreclosure sale to sell its REO properties based on dispositions from 

January 2008 through June 2012, compared with just over 200 days for 

the enterprises and about 270 for VA (fig. 6).23 This difference between 

FHA and the enterprises in average REO timelines persisted after 

controlling for the average effects of certain property characteristics such 

as location, value, and local real estate market conditions.24

 21Although the REO data necessary to calculate sales return performance were not 

available from VA and RHS, VA data on the overall REO disposition time frame were

available and reliable for our purposes.

22As noted previously, FHA acquires its REO properties later than other entities. The 

average time from the foreclosure sale to FHA’s acquisition date was 161 days on 

average for properties that it disposed of from January 2008 through June 2012. 

23About 13 percent of the REO property dispositions for which we received data from FHA 

were missing a foreclosure sale date. Because the majority of these records were for 

dispositions in 2007, we used January 2008 as the starting point for our analysis of REO 

disposition time frames. 

24See appendix I for more information on how we controlled for differences in the 

characteristics of each entity’s REO properties.

FHA Took Longer to Sell Its 

REO Properties Than the 

Enterprises
Page 22 GAO-13-542 FHA Property Disposition

Figure 6: Average Disposition Timelines by Entity for REO Dispositions, January 2008 through June 2012 (All Years 

Combined)

Note: The enterprises generally acquire REO properties within 24 hours of foreclosure sales, and VA 

generally acquires properties within 15 days. The REO sale date represents the closing date of the 

REO sale. Each of the timelines included data from 337,755 (100.00 percent of total) dispositions for 

one enterprise and 703,853 (100.00 percent) for the other enterprise. For FHA and VA, the 

calculation of the foreclosure sale to REO sale timelines included data from 344,396 (92.94 percent) 

and 58,558 (100.00 percent) dispositions, respectively. For FHA, the foreclosure sale to REO 

acquisition timeline included data for 344,396 (92.94 percent) dispositions and the foreclosure sale to 

initial valuation timeline included data from 344,395 (92.94 percent) dispositions. The calculations did 

not include all dispositions for each entity because of missing values for certain data elements.
Page 23 GAO-13-542 FHA Property Disposition

a

VA did not have data available for its REO properties’ initial valuation dates.

Longer disposition times can create additional costs for items such as 

taxes, insurance, home owners’ association fees, maintenance costs, and 

other expenses (holding costs) and leave properties exposed to an 

increased risk of vandalism and other property damage. We found that if 

FHA’s average number of days from foreclosure sale to REO disposition 

had equaled those of the enterprises, it could have avoided around $600 

million in extra holding costs for 2011 alone.25 Furthermore, the negative 

impact of vacant properties on neighborhoods and property values has 

been identified in prior GAO reports and other sources, underscoring the 

importance of minimizing the amount of time required to dispose of 

properties after the foreclosure sale.26

The differences in the length of time FHA took to dispose of REO 

properties relative to the other entities was largely attributable to 

differences in one specific period—the time from the foreclosure sale until 

the date of the initial REO valuation. FHA and the other organizations 

obtain the initial value assessment once a property is ready to be listed 

for sale and marketed to potential buyers. The assessment is typically 

made after the expiration of any redemption period after the foreclosure 

sale and any necessary eviction action, as well as cleaning, maintenance, 

and repair of the property. FHA’s average for this period was 184 days, 

while the enterprises’ averages were 69 (enterprise 1) and 66 days 

(enterprise 2).27 As discussed previously, FHA acquires its REO 

properties from mortgage servicers at a later date after the foreclosure 

sale than the enterprises and other entities. Having multiple entities 

complete its postforeclosure sale activities, such as eviction, could be one 

 25This amount may vary as it is based on an estimate of FHA’s average daily holding 

costs of $38. FHA said that this amount generally represented the period beginning when 

it accepts conveyance of an REO property, but we assumed that holding costs for the 

preconveyance period were similar to that for the postconveyance period. The estimated 

extra holding costs associated with extended REO disposition timelines was based on 

2011 dispositions of 114,300 properties and average days from foreclosure to REO sale of 

340 for FHA, 201 for enterprise 1, and 208 for enterprise 2.

26For example, see GAO, Vacant Properties: Growing Number Increases Communities’ 

Costs and Challenges, GAO-12-34 (Washington, D.C.: Nov. 4, 2011); and Mortgage 

Foreclosures: Additional Mortgage Servicer Actions Could Help Reduce the Frequency 

and Impact of Abandoned Foreclosures, GAO-11-93 (Washington, D.C.: Nov. 15, 2010). 

27VA did not have data available for the dates of its REO properties’ initial value 

assessments.
Page 24 GAO-13-542 FHA Property Disposition

reason that FHA’s average time from foreclosure to initial valuation was 

longer than the times for the other entities.28 As we stated in our 2002 

report on FHA’s process for selling REO properties, the enterprises, VA, 

and RHS have one entity that is responsible for the custody, 

maintenance, and sale of foreclosed properties, but FHA divides these 

responsibilities among its mortgage servicers and REO contractors, all of 

which operate largely independently of one another.29 This divided 

approach to property custody could delay the initiation of critical steps 

necessary to sell REO properties quickly. As a result, in 2002 we 

recommended that HUD establish unified property custody as a priority 

for FHA and that it determine and implement the optimal method for 

establishing unified property custody. In their response at the time of the 

report, HUD said that it agreed that a unified custody approach may 

streamline processes and oversight, reduce holding time, and increase 

net return. HUD also said that the agency intended to continue research 

to determine the feasibility of unified custody within the framework of 

existing statutory requirements and explore statutory changes that would 

increase efficiencies in the property disposition program. However, HUD 

subsequently determined that it would not be advisable for the agency to 

establish unified property custody as an objective for the agency and it 

did not implement our recommendation. The analysis in this report once 

again highlights the need for FHA to consider whether the potential 

benefits from unified property custody, such as shorter REO disposition 

timelines and lower holding costs, outweigh any costs and challenges 

associated with acquiring REO properties from servicers closer to the 

foreclosure sale date.

Once the initial value assessment was completed, it took FHA an average 

of 168 days to sell a property, which was more comparable to the 

enterprises’ average timelines of 142 and 132 days. And in the first half of 

2012, FHA had a shorter average time from initial valuation to completed 

REO sale than the enterprises, as shown in figure 7.

 28FHA officials noted that its timeline could also have been affected by the fact that one of 

its largest servicers delayed the conveyance of a significant number of foreclosed 

properties in recent years because of uncertainty about a review of foreclosure processing 

by federal banking regulators. These officials explained that FHA had no requirements on

the amount of time servicers were allowed to file claims and convey foreclosed properties 

to FHA.

29See GAO, Single-Family Housing: Opportunities to Improve Federal Foreclosure and 

Property Sale Processes, GAO-02-305 (Washington, D.C.: Apr. 17, 2002).
Page 25 GAO-13-542 FHA Property Disposition

Figure 7: Average Disposition Timelines by Entity for REO Dispositions, January 2008 through June 2012 (by Year)

Note: The REO sale date represents the closing date of the REO sale. Each of the timelines included 

data from 337,755 (100.00 percent of total) dispositions for one enterprise and 703,853 (100.00 
Page 26 GAO-13-542 FHA Property Disposition

percent) for the other enterprise. For FHA and VA, the calculation of the foreclosure sale to REO sale 

timelines included data from 344,396 (92.94 percent) and 58,558 (100.00 percent) dispositions, 

respectively. For FHA, the foreclosure sale to initial valuation timeline included data from 344,395 

(92.94 percent) dispositions and the initial valuation to REO sale timeline included data from 369,576 

(99.73 percent) dispositions. The calculations did not include all dispositions for each entity because 

of missing values for certain data elements.

a

VA did not have data available for its REO properties’ initial valuation dates.

Some of this difference may be due to the time taken to list a property for 

sale. From January 2008 through June 2012, FHA took an average of 32 

days to list a property for sale after receiving the value assessment, 

compared to 13 days for enterprise 1 and 24 days for enterprise 2. In the 

first half of 2012, however, FHA’s average had fallen to 18 days. 

Similarly, FHA took slightly longer to sell its properties once they were 

listed—an average of 136 days compared to 119 for enterprise 1 and 118 

for enterprise 2. But in the first half of 2012, FHA’s average time from 

listing to sale was shorter than the enterprises’. FHA officials indicated 

that its lagging performance prior to 2012 may have been due, at least in 

part, to limitations in their ability to adjust the level of homeownership 

center staff resources in response to increases in inventory that occurred 

in the years prior to 2012.30 FHA’s recent performance relative to the 

enterprises may also reflect continued progress in implementing its new 

M&M III contractor program structure that began in the middle of 2010.

We tested certain factors that were to some degree under FHA’s and the 

enterprises’ control to explore whether these factors helped to explain the 

differences in REO disposition performances. We included these factors 

(time from foreclosure sale to REO disposition, ratio of initial list price to 

initial valuation amount, disposition method, and buyer type) in additional 

regression models to determine whether their inclusion significantly 

changed the results. These models indicated that the length of time from 

the foreclosure sale to the REO sale was associated with FHA’s lower net 

execution rate relative to the enterprises. Specifically, when our 

regression models included the time from the foreclosure sale to the REO 

sale, FHA’s relative performance deficit in terms of the independently 

assessed value net execution rate was eliminated completely. Such a 

result indicates that the longer time FHA requires to acquire and sell 

 30In 2011, we reported that while FHA’s REO property inventory increased by 85 percent 

from the end of 2006 to the end of 2010, its homeownership center staff increased by 13 

percent from 2006 to 2010. See GAO, Federal Housing Administration: Improvements 

Needed in Risk Assessment and Human Capital Management, GAO-12-15 (Washington, 

D.C.: Nov. 7, 2011). 
Page 27 GAO-13-542 FHA Property Disposition

properties could be an important factor in explaining differences in 

execution rate performance. However, an actual causal relationship is 

difficult to isolate and prove, as additional factors—such as deteriorated 

property conditions or variations in market conditions within ZIP code 

areas—that were not incorporated into our regressions could also explain 

both the performance difference and the difference in the average total 

disposition time between FHA and the enterprises.

Aligning with their stated preferences for retail sales, the predominant 

share of FHA’s and the enterprises’ REO property dispositions were 

through retail sales of individual properties to owner-occupants or 

investors (fig. 8). From January 2007 through June 2012, retail sales 

were about 97 percent of FHA’s dispositions, about 99 percent of 

enterprise 1’s, and 91 percent of enterprise 2’s. Enterprise 2 had the 

highest share of bulk and auction sales over the time period, representing 

almost 7 and 2 percent of its total dispositions, respectively. Less than 4 

percent of FHA’s dispositions from January 2007 through June 2012, on 

average, were for programs related to its housing mission goals (e.g.,

discounts and donations). Dispositions through the enterprises’ programs 

that market properties to nonprofits and public entities (e.g., discounts 

and donations) accounted for less than 0.5 percent of total dispositions 

from January 2007 through June 2012.

FHA and the Enterprises 

Disposed of Most REO 

Properties through Retail Sales,

Which Produced Higher 

Returns Than Other Methods
Page 28 GAO-13-542 FHA Property Disposition

Figure 8: Sales of REO Properties by Type of Sales Method, January 2007 through 

June 2012

Note: FHA held several auction sales in 2011 and 2012 through which it disposed of a total of 326 

properties representing 0.08 percent of its dispositions for the overall period. The calculation of sales 

method types included data from 417,301 (100.00 percent of total) dispositions for FHA, 352,798 

(99.99 percent) for one enterprise, and 741,623 (100.00 percent) for the other enterprise. VA did not 

have property-level data available on the type of sales methods it used.

Retail sales also generated higher returns than other disposition methods. 

For example, FHA’s independently assessed value and initial list price 

execution rates (net sales proceeds as a share of property values or list 

prices) were both 30 percent higher for its retail sales than for its mission 

program dispositions for sales from January 2007 through June 2012. 

The enterprises, particularly enterprise 2, also generally had higher 

execution rates for retail sales than other disposition methods over the 

same period. Specifically, enterprise 2’s independently assessed value 

execution rate for retail sales was 52 percent higher than for its auction 

sales, 95 percent higher than for its bulk sales, and 62 percent higher 

than for its nonprofit and public entity sales. For enterprise 1, retail sales 

were 36 percent, 40 percent, and 1 percent higher, respectively, than 

sales using these methods.
Page 29 GAO-13-542 FHA Property Disposition

We also examined FHA’s performance in selling REO properties to

different types of buyers. Our analysis of data for all dispositions from 

January 2007 through June 2012 showed that FHA achieved higher 

returns on sales to owner-occupants than on sales to investors and other 

buyers, although it had a smaller share of these types of dispositions than 

the enterprises. FHA’s independently assessed value and initial list price 

net execution rates both were 25 percent higher for sales to owneroccupants than for sales to nonowner-occupant investors. The 

enterprises experienced smaller return premiums—ranging from 10 to 19 

percent—from owner-occupant sales as measured by these sales return 

measures.

FHA’s and the enterprises’ overall returns on owner-occupant sales were 

generally comparable. Specifically, FHA’s net execution rate based on 

independently assessed value was the same as enterprise 1’s and four 

percentage points less than enterprise 2’s. Based on initial list price, 

FHA’s net execution rate was 2 percentage points less than enterprise 1’s 

and the same as enterprise 2’s. Yet FHA sold a smaller share of its 

properties to owner-occupant buyers than the enterprises. Specifically, 

about 58 percent of FHA’s sales from January 2007 through June 2012 

were to owner-occupant buyers, compared to 63 and 68 percent for the 

enterprises. FHA’s share of owner-occupant sales increased to about 64 

percent in the first half of 2012. Figure 9 shows FHA’s and the 

enterprises’ percentage of REO property sales to owner-occupants, 

based on our analysis of data from sales of REO properties from January 

2007 through June 2012.

FHA Sales to Owner-Occupants 

Net Higher Returns Than Those 

to Investors, but FHA Had a 

Smaller Share of These 

Dispositions Than the 

Enterprises
Page 30 GAO-13-542 FHA Property Disposition

Figure 9: Aggregate Share of REO Dispositions by Type of Buyer for All Sales, 

January 2007 through June 2012

Note: The calculation of buyer types included data from 417,280 (99.99 percent of total) dispositions 

for FHA, 352,807 (99.99 percent) for one enterprise, and 732,659 (98.79 percent) for the other 

enterprise. VA did not have property-level data available on the type of buyer.

Properties that FHA sold to owner-occupants also had higher average 

sales prices and were sold more quickly than properties that were sold to 

other buyers. For example, the average price of FHA’s sales to owneroccupants from January 2007 through June 2012 was more than 

$77,000, compared to less than $50,000 for sales to nonowneroccupants. Likewise, it took FHA an average of 42 fewer days to dispose 

of properties sold to owner-occupants during the same time period than 

were needed to complete sales to investors and other buyers, as 

measured from the foreclosure sale date. The average sale prices of the 

enterprises’ owner-occupant sales were around twice the average 

amount of their sales to investors and other buyers, but the timelines 

were similar for both types of sales.

Results from our regression models also indicated that the type of buyer 

was associated with FHA’s lower independently assessed value net 

execution rate—which gauges success in maximizing a property’s sale 

price. When we controlled for differences in the share of sales to owneroccupants in our regression models, FHA’s performance deficit relative to 

the enterprises for independently assessed value net execution rate was 

reduced. However, this association does not necessarily mean that this 

factor caused the performance difference. For example, additional 

factors—such as deteriorated property conditions or the existence of 

certain amenities that might attract owner-occupants—that were not 
Page 31 GAO-13-542 FHA Property Disposition

controlled for in our regressions could also explain the differences in 

performance and share of owner-occupant sales between FHA and the 

enterprises.

Based on our analysis of all dispositions from January 2007 through June 

2012, the enterprises repaired more properties than FHA and 

experienced higher returns than on properties that they did not repair.31

Our review of data for all REO dispositions during this period showed that 

the enterprises spent at least $1,000 on repairs for 29 percent (enterprise 

1) and 23 percent (enterprise 2) of the properties they sold. FHA, 

however, spent at least that amount on only about 5 percent of its 

properties. Based on our analysis, we found that properties repaired by 

the enterprises netted higher independently assessed value net execution 

rates, after accounting for repair costs, and also achieved higher list price 

net execution rates.32 Specifically, the enterprises’ net execution rates 

based on independently assessed value—including the cost of repairs—

were 3 to 4 percentage points higher over the entire period for properties 

with at least $1,000 in repair costs than for properties with repair costs 

less than that amount.33 The difference for the net execution rate based 

on list price over the entire period was 3 percentage points for each of the 

enterprises. However, the enterprises’ properties with at least $1,000 in 

repair costs sold an average of 33 to 47 days more slowly than properties 

with lower repair costs, as measured from the initial valuation date. These 

differences may reflect the time required to complete repairs or a greater 

willingness to market the property for a longer period.

Our analysis also showed that FHA netted higher returns on sales of REO 

properties that were in better condition—that is, that met minimum 

property standards to qualify for FHA insurance. To be eligible for an 

 31For our purposes, we defined repaired properties as those that had at least $1,000 in 

total repair costs.

32FHA’s net execution rates were lower for repaired properties than for unrepaired 

properties, but FHA only conducts repairs when they are deemed necessary for health 

and safety reasons rather than to increase property values as do the enterprises, 

according to agency officials.

33Because the decision to repair a property is based on various property characteristics, it 

is possible that those property characteristics that led the enterprises to do repairs are 

responsible for the higher execution rates. Still, as discussed later, the enterprises and 

private market servicers we interviewed told us that repairing certain properties led to 

higher returns.

REO Properties That Had Been 

Repaired or Were in Good 

Condition Netted Higher 

Returns, but FHA Repaired 

Few Properties before Selling 

Them
Page 32 GAO-13-542 FHA Property Disposition

FHA-insured loan, a property must be in a condition and location free of 

known hazards and adverse conditions that could affect occupants’ health 

and safety or the structural soundness of any improvements or that could 

impair the use and enjoyment of the property. For example, FHA requires 

properties to have adequate heating, hot water, and electricity. Based on 

our analysis of data for all REO dispositions from January 2007 through 

June 2012, FHA received higher sales returns for properties that were 

eligible for FHA insurance (eligible) than it did for properties that were 

deemed ineligible because their condition did not meet these standards 

(ineligible). FHA’s independently assessed value net execution rate was 

12 percentage points higher for eligible properties than for ineligible 

properties for all dispositions during this period. Furthermore, eligible 

properties sold faster than ineligible properties, which took an average of 

88 additional days—26 percent longer—from the foreclosure sale date to 

sell.

FHA staff told us that while they generally did not repair REO properties 

to increase the sale value, some properties are repaired to address health 

and safety concerns and to preserve the property’s condition. FHA 

officials also noted that while the agency might conduct these types of 

repairs when necessary, FHA does not repair properties specifically to 

meet its minimum property standards.34 FHA officials explained that FHA 

had a long-standing policy of not repairing properties. They said that the 

agency does not conduct repairs because of concerns about having to 

oversee contractors that perform the work and HUD’s inability to obtain 

volume discounts on replacement appliances or other home fixtures 

because of the agency’s preference for using small contractors. They also 

said that having to comply with HUD procurement guidelines and the 

Davis-Bacon Act made it more difficult for FHA to engage in construction 

projects to repair properties and increase sale returns.35 However, 

 34Under the 203(k) rehabilitation mortgage insurance program, however, FHA sells 

properties to borrowers with a repair escrow account for repairs, including those that might 

be necessary to qualify for FHA insurance. This program enables borrowers to finance 

both the purchase of a property and the cost of its rehabilitation through a single mortgage 

or to finance the rehabilitation of their existing property.

35The Davis-Bacon Act requires that all laborers and mechanics employed by contractors 

and subcontractors performing on certain federal contracts must be paid at least the 

prevailing wage rate, including fringe benefits, in the local area in which they are 

employed, as determined by the Secretary of Labor. In addition, contractors are required 

to pay these workers weekly and submit weekly certified payroll records to the contracting 

or administering agency. 40 U.S.C. §§ 3141-3144, 3146-3148.
Page 33 GAO-13-542 FHA Property Disposition

officials noted that in 2011 FHA had begun a small pilot program in its 

Atlanta homeownership center to assess the impact of repairs on 

properties’ marketability. This program selected favorable properties—

that is, relatively high-quality properties in a few counties in the Atlanta 

metropolitan area—to repair and officials indicated that results had 

generally been positive. The pilot involved about 50 completed sales and 

around 80 additional properties as of September 2012, according to FHA 

officials. However, the officials also said that FHA had not analyzed the 

sale prices of the repaired properties to determine whether it was 

achieving higher returns than it could achieve without conducting repairs. 

Additionally, one FHA official expressed concern that the existing policy 

not to repair properties prevented FHA from capturing the additional 

returns that can come from selling repaired properties for higher prices. 

Instead, the official said that selling properties without making repairs 

intended to increase the sale value allowed investors to purchase them, 

make the repairs, and capture the additional returns.

Similarly, VA and RHS staff said that their agencies generally did very few 

repairs to REO properties and that most generally were sold without 

repairs intended to increase the sale value, largely because repairs did 

not generally result in higher returns. In some cases, VA has conducted 

minor (cosmetic) repairs in order to improve returns, according to VA 

staff. However, staff noted that in general the costs associated with 

making these repairs have not been fully recovered by the eventual sale 

proceeds. They further noted that some cosmetic repairs—such as fixing 

windows, painting, or installing new carpeting—may increase sale 

returns, but major repairs often reduced returns, at least in part because 

of the additional costs of repairs and holding the property longer. The VA 

officials told us that a few years ago they conducted a small case study of 

repair work done for six properties and found no positive result from doing 

the repairs. RHS officials also said that RHS did not make repairs for the 

majority of its direct loan REO properties unless repairs were needed for 

safety. For properties in its guaranteed loan program, RHS generally has 

not had lenders complete cosmetic repairs but may consider repairs to 

increase returns on a case-by-case basis. RHS officials also said that 

lenders completed repairs on guaranteed properties for safety reasons 

and to preserve and protect the property.

In contrast to FHA, VA, and RHS direct loan properties, the enterprises 

and the three private mortgage servicers we contacted did make case-bycase determinations on conducting cosmetic repairs to improve returns, 

increase the likelihood of an owner-occupant purchase, or meet 

neighborhood standards. Officials from these entities said that they did 
Page 34 GAO-13-542 FHA Property Disposition

repairs on between about 20 to 40 percent of their REO properties, 

although staff from one of the private mortgage servicers indicated that 

they had been repairing up to 80 percent of their properties due to the 

lengthy foreclosure process. One of the enterprise’s officials told us that it 

had been repairing more REO properties as a way to improve the impact 

on neighborhoods as well as to earn the highest possible return. For 

example, the officials said that about 80 percent of repaired properties 

were sold to owner-occupants compared to about 50 percent of 

unrepaired properties. They also explained that repair decisions were 

based on numerous factors, including neighborhood conditions, potential 

buyers, and the costs of the repairs. As the length of time that an unsold 

property remains on the market increases, the enterprise may reassess 

the repair decision to see if performing repairs could add value and 

facilitate a sale. Officials also said that the enterprise repaired properties 

based on expected returns, regardless of value. The other enterprise also 

makes decisions on whether and to what extent to do repairs on a 

property-by-property basis, primarily to increase returns, according to 

staff. This enterprise’s staff said that they viewed repairing properties as a 

way to maximize the properties’ value and increase the chances of selling 

them to owner-occupants. They said that the enterprise also tried to 

ensure that properties conformed to neighborhood standards and were 

competitive with other properties for sale in the area. In some areas

where the potential for vandalism was high, they said that the enterprise 

would be less likely to make repairs early in the REO process but would 

complete them just prior to closing.

Among the goals that FHA staff described for the agency’s REO 

disposition program were maximizing net returns to the mortgage 

insurance fund and increasing home ownership, but FHA may be failing 

to take advantage of the opportunity for increased financial returns by not 

repairing more properties. FHA’s policy to limit repairs only to those 

related to health and safety concerns may in part explain why it sells 

fewer properties to owner-occupants than is the case for the enterprises. 

Repairing properties only to address health and safety concerns would 

not necessarily result in a property that meets standards for FHA 

eligibility, and as a result FHA may be selling fewer properties to owneroccupants, many of whom may be interested in FHA loans. As we have 

shown, FHA’s sales of eligible properties yield higher returns than those 

that are not in an eligible condition. If FHA repaired ineligible REO 

properties to make them eligible, the agency might be able to realize 
Page 35 GAO-13-542 FHA Property Disposition

higher sales returns, avoid the holding costs related to the longer 

disposition time frames for ineligible properties, and further its mission of 

increasing home ownership.36

FHA uses only one input to set list prices—an appraisal, or professional 

appraiser’s estimate of the property’s fair market value based on market 

research and analysis as of a specific date. Other entities use additional, 

generally accepted methods for establishing a listing price for their 

properties, including obtaining an estimate from a real estate broker—

known as a broker’s price opinion (BPO). BPOs are estimates of the 

market value of a particular property prepared by a real estate broker, 

agent, or sales person. In addition, market values for properties can also 

be estimated using automated valuation models (AVMs), computerized 

programs that estimate property values using proprietary and public data, 

such as tax records and information kept by county recorders and 

multiple listing services, and other real estate records.

FHA’s marketing contractors set REO property list prices at the appraisal 

value, although their marketing contractors also have access to BPOs. 

FHA’s regulations require the use of an independent appraiser when 

setting a price for an REO property, and FHA staff told us that properties 

typically are listed at the appraised value.37 Based on our review of 

property dispositions from January 2007 through June 2012, the list 

prices of more than 98 percent of FHA’s properties equaled the appraised 

market value. However, FHA field staff told us that the agency’s 

marketing contractors often also ordered BPOs to evaluate and review list 

prices and were required to obtain BPOs when requested by FHA. These 

additional valuations are not used to change the list price; however, FHA 

staff said that the listing brokers used BPOs to evaluate and support list 

price reductions when properties did not sell. Staff from one of FHA’s four 

homeownership centers noted that its marketing contractors often have 

properties’ listing brokers complete a BPO during the listing process to 

assess the accuracy of the appraisal value used in setting the list price. 

 36Any reduction in holding costs would depend on whether the time needed to complete 

repairs exceeded the additional time typically required for FHA to sell ineligible properties.

37See 24 C.F.R. § 291.100(b), which requires that the list price assigned to an REO 

property be based upon an appraisal conducted by an independent real estate appraiser 

using nationally recognized industry standards for the appraisal of residential property.

FHA Uses a Single 

Assessment of Market 

Value in Setting List Prices, 

but Other Entities Use 

Multiple Sources
Page 36 GAO-13-542 FHA Property Disposition

These staff said that if the BPO value differed greatly from the appraisal 

value, the marketing contractor might discuss the valuation with the 

appraiser and request that the value be reconsidered. Although they said 

that they could only recall one or two instances of appraisers changing 

their valuations after these discussions, the staff at this office considered 

comparing the appraisal value to a BPO value to be an effective practice 

on a case-by-case basis. A review of the plans of selected marketing 

contractors showed that contractors were to obtain BPOs during the 

listing process and also when considering subsequent list price 

reductions. For example, some contractors’ marketing plans called for an 

initial BPO when the property was listed for sale and every 30 days 

thereafter as a way to evaluate the appraised value and appraiser 

performance and to analyze market data. The contracts between FHA 

and its marketing contractors also state that the contractor must obtain an 

independent BPO when directed by FHA staff.

In contrast, the enterprises, VA, RHS, and the three private mortgage 

servicers we interviewed all use at least two methods—either an 

appraisal and BPO or two BPOs—to estimate the market value of their 

REO properties as part of determining a list price. The enterprises also 

use an AVM to provide an additional value estimate and incorporate 

additional information and analysis beyond the supplemental valuation 

information into their list price decisions. For example, the enterprises 

produce list price guidance based on factors such as location, market 

conditions, comparable sales, REO sales trends, and input from listing 

agents. Following this guidance, the enterprises may set a list price above 

or below the estimated market value based on whether the property is 

located in a depreciating or appreciating market. For property dispositions 

from January 2007 through June 2012, one enterprise set the initial list 

price for less than 1 percent of its properties at the independent BPO 

value, and 28 percent were within 5 percent of the BPO value.38 The other 

enterprise set initial list prices at the appraised market values for fewer 

than 10 percent of the REO properties that it disposed of during this 

period, and 28 percent of initial list prices were within 5 percent of the 

appraised value.

 38Because one of the enterprises generally does not obtain an appraisal, we compared 

the initial list prices of its properties to the values from the independent BPO. The 

percentages for both enterprises were similar when calculated only for properties with less 

than $1,000 in repair costs. 
Page 37 GAO-13-542 FHA Property Disposition

Using multiple information sources could improve the accuracy of FHA’s 

market value estimates and list prices. Officials from other federal 

housing agencies and the enterprises said that multiple inputs increased 

accuracy by providing a range of independently valued assessments. 

Providers of appraisals and BPOs use different approaches to valuing 

properties and combining the two methods produces the best results, 

according to officials from some entities. For example, appraisals are to 

be conducted by trained and certified independent professionals with no 

interest in the outcome of the sales, but these appraisals focus on past 

sales and listings and may not reflect current price trends. BPOs, 

although conducted by brokers who may have an interest in the outcome, 

may reflect more knowledge of the properties and local markets. In 

addition, appraisers may have difficulty finding comparable property sales 

in some rural areas, and officials said that appraisals are more costly to 

obtain than BPOs. If estimates from different sources vary, entities 

reconcile them to produce a market value estimate that reflects a broader 

and more diverse base of information and analysis than an estimate from 

a single source. Our analysis of the enterprises’ reconciled value 

estimates—which incorporate all of their market value inputs such as 

appraisals, BPOs, and AVMs—indicated that the reconciled values 

generally were lower than independent value assessments reflecting a 

single source such as an appraisal or BPO and accordingly reflected final 

sale prices somewhat more accurately. For all dispositions from January 

2007 through June 2012, the enterprises’ reconciled value estimates 

were closer to gross sale prices than their independent value 

assessments were by 1 and 7 percentage points overall.

The use of multiple valuation methods could help FHA more accurately 

estimate the market values of its REO properties, increasing the 

likelihood of selling properties more quickly and at prices that best reflect 

current market conditions. FHA officials indicated that BPOs and AVMs 

could reduce costs and increase the accuracy of FHA’s market value 

assessments by better reflecting recent market trends. A senior official 

from FHA’s single family housing program also said that using AVMs 

could improve FHA’s ability to identify the most appropriate marketing and 

disposition strategies for certain properties by providing more accurate 

and timely market value estimates. In early 2013, FHA’s Santa Ana 

homeownership center began a pilot program to evaluate the use of 

AVMs in validating appraised market values, according to agency 

officials. The officials explained that the pilot program uses a model that 

incorporates results from multiple AVMs to assess the independent 

appraisals. They said that the model has helped to identify opportunities 

for FHA to increase list prices based on market analysis. The officials also 
Page 38 GAO-13-542 FHA Property Disposition

said that they were considering other options to establish accurate list 

prices and reduce risks from appraised market values that were 

unnecessarily low relative to market conditions. They stated that FHA was 

working with HUD’s Office of General Counsel (OGC) to determine if the 

regulatory requirement that list prices be based on an appraisal allowed 

them to be based on multiple sources that include an appraisal rather 

than solely on the appraised market value.

FHA generally did not take into account market conditions when reducing 

the list prices for REO properties that do not sell. FHA’s marketing 

contractors determine when and by how much the list prices should be 

reduced. FHA’s marketing contractors create plans for each of the 

geographic contract areas in which they operate that describe how they 

intend to market and sell FHA properties and submit these plans to FHA’s 

homeownership centers for approval. The marketing plans include a 

schedule identifying time frames and percentage thresholds for reducing 

list prices. For example, a schedule might indicate that for properties that 

have been listed for sale for between 30 to 60 days, the list price should 

be set at 90 percent of appraised value. These schedules vary by 

marketing contractor and FHA homeownership center. For example, the 

schedules’ quantitative thresholds for the amount and timing of price 

reductions can differ, although most plans use one of two standard 

amounts. Some schedules describe a reduction of “up to” a certain 

percentage of the appraised value or current list price, while others 

specify that properties will be listed for an amount “no less than” a 

percentage of the appraised value or current list price. Our analysis of 

each of the 23 marketing plans used by FHA’s marketing contractors 

showed that all but one used a schedule for price reductions.

However, FHA lacks a clear and consistent policy for how price 

reductions should be conducted, allowing each of its homeownership 

centers to approve marketing contractors’ plans for reducing list prices. 

FHA headquarters and homeownership center officials whom we 

interviewed differed on the extent to which price reductions required 

review and approval by FHA staff. Officials from FHA’s headquarters said 

that marketing contractors had to provide supporting documentation to 

justify why a price reduction was necessary and receive prior approval 

from homeownership center staff for all proposed reductions, even if they 

were following a schedule. However, officials we spoke with at each of 

the centers said that their marketing contractors typically did not need and 

did not obtain prior review and approval from FHA staff as long as they 

followed the approved price reduction schedules in their marketing plans. 

They added that marketing contractors only needed to provide 

FHA’s Use of NonmarketBased Price Reductions 

Differs from Other 

Entities’ Practices and May 

Contribute to Lower 

Returns
Page 39 GAO-13-542 FHA Property Disposition

documentation to FHA homeownership center staff and receive 

homeownership center approval for price reductions that exceed 

marketing plan thresholds. Further, staff from homeownership centers 

described to us different practices that they followed when considering 

price reductions in excess of marketing plan schedules. For example, the 

Atlanta and Denver offices allowed exceptions to the schedule for 

individual properties, but the Santa Ana office does not allow any price 

reductions in excess of the schedule, according to staff.

Analysis of FHA’s REO property dispositions indicated that marketing 

contractors generally followed the price reduction schedules 

systematically when reducing properties’ list prices. To assess the extent 

to which list price reductions on FHA’s properties followed these 

schedules, we analyzed list price data from FHA’s REO property 

dispositions from June 2011 through June 2012 and compared the price 

changes to the schedules in contractors’ marketing plans. Based on this 

analysis, we found that almost half of the properties that FHA sold over 

the period had at least one price reduction. Of these, about 75 percent of 

the initial reductions were for a scheduled amount.39 Most price reduction 

schedules based this amount on one of two specific percentages.

Only one of FHA’s four homeownership centers—Denver—preferred its 

marketing contractors to base list price reductions on evaluations of 

market conditions rather than on a schedule. Denver center officials said 

that they encouraged marketing contractors to base price reduction 

decisions on evaluations of individual property-level market data. The 

Denver center also requires its marketing contractors to provide 

supporting documentation for all price reductions on REO properties, and 

its staff review the documentation for a small sample of these reductions, 

according to officials. Furthermore, one contractor’s price reduction 

schedule for the Denver center included a threshold range for price 

reductions rather than a specific percentage. One marketing contractor in 

the region did not have a price reduction schedule in its marketing plan 

 39For marketing plans that specified a range for the reduction or did not contain a 

schedule, we considered a price change to be for a scheduled amount only if the price 

was reduced by one of the two reduction percentages specified in most other plans. For 

marketing plans that specified that price changes could be up to a certain amount, we 

considered a price change to be for a scheduled amount only if the price change was for 

the maximum amount.
Page 40 GAO-13-542 FHA Property Disposition

and instead analyzed market conditions, the appraisal, and other 

information to determine a new list price.

None of the marketing contractors in the other centers used a range for 

price reductions or had marketing plans that did not include a price 

reduction schedule. Officials from one homeownership center indicated 

that automated reductions were easier, quicker, and required fewer 

resources. Those from another center noted that following such 

reductions helped to find the right price in a structured fashion. In 

contrast, officials from the Denver center identified several disadvantages 

to using systematic price reductions and said that they attempted to have 

the schedules removed from contractors’ marketing plans at the 

beginning of the M&M III program. However, they explained that officials 

at FHA headquarters at that time strongly resisted the change. Although 

differences in disposition performance cannot be attributed solely to 

pricing practices, the Denver homeownership center performed better 

both in terms of sales returns and speed of sales than either the 

Philadelphia or Atlanta centers even when we controlled for regional 

differences, as we discuss later in the report. And compared to the 

enterprises’ performance in the states where each center operates, the 

Denver center’s performance compared more favorably with the 

enterprises’ performance than did that of the other centers, which lagged 

the enterprises.

While homeownership centers generally reduced REO properties’ list 

prices with similar frequency, some differences existed in the degree to 

which contractors’ price reductions followed marketing plan schedules. 

Based on our analysis of data on all property dispositions from June 2011 

through June 2012, each of the homeownership centers reduced prices 

for close to the overall average of 47 percent. However, the Denver 

center reduced prices by scheduled amounts less frequently than the 

other centers, consistent with its preference that contractors base price 

reduction decisions on evaluations of market conditions. For example, 

almost 90 percent of the Santa Ana center’s initial price reductions were 

for a scheduled amount, compared with 58 percent for the Denver center. 

The Atlanta and Philadelphia centers had figures of 81 percent and 76 

percent, respectively.

Other federally related housing entities with REO inventories generally 

based their decisions to reduce prices on evaluations of property-level 

information and market conditions. According to officials from the 

enterprises and VA documents that we reviewed, these entities used 

individual assessments of market conditions rather than predetermined 
Page 41 GAO-13-542 FHA Property Disposition

schedules when considering the timing and amount of list price revisions. 

These entities also defined thresholds to identify when reductions 

required additional levels of approval. RHS follows a schedule for its 

direct loan program, but agency officials acknowledged limitations with 

this approach including a lack of flexibility. Market participants that we 

interviewed, including real estate brokers, an industry consultant, and a 

nonprofit organization, identified disadvantages with systematic price 

reductions, such as the potential for interested buyers to adjust the timing 

and amount of their bids in anticipation of a discounted price. The limited 

use of price reduction schedules may provide certain advantages by 

establishing clear benchmarks for determining when to evaluate a 

property’s market situation and which reduction amounts should require 

review and approval by FHA staff. However, reducing list prices based 

solely on a schedule may lower prices at times and by amounts that are 

not optimal, potentially lowering FHA’s net return. For example, a property 

whose list price is reduced excessively or hastily may sell at a price that is 

unnecessarily low based on market conditions, leading to lower returns 

for FHA. Also, mispriced properties may take longer to sell thereby 

increasing FHA’s holding costs. In contrast, a strategy of basing price 

reductions more comprehensively on evaluations of property-level 

information and market conditions would likely be more flexible and could 

provide more accurate prices. Further, because many marketing 

contractors already obtain BPOs and other assessments of market 

conditions and are sometimes required to do so, such an approach would 

likely not involve significant costs for FHA.

FHA does not have a current and complete set of policies and procedures 

for its current REO disposition program as required by internal control 

standards.40 Federal internal control standards require agency 

management to conduct monitoring of program quality and performance 

through the establishment and review of performance measures and 

indicators. Under the new contract structure that FHA introduced in 2010, 

the agency intended that its staff conduct specific activities to assess 

whether its contractors were meeting minimum requirements under the 

contracts, but these reviews have not been occurring. Further, while FHA 

is in the process of implementing procedures to better ensure that FHA 

 40See GAO, Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1, 1999).

FHA Could Further 

Improve Its 

Monitoring and 

Evaluation of REO 

Contractors
Page 42 GAO-13-542 FHA Property Disposition

homeownership centers perform consistent oversight activities, it has not 

implemented a critical component of the plan—a scorecard to evaluate 

contractor performance against standard metrics that would allow it to 

compare the quality of its contractors’ activities. Our review also showed 

that FHA was not conducting as many or as frequent in-person property

inspections as other entities that dispose of REO properties and that it 

was not taking steps to determine that listing brokers were located 

sufficiently close enough to the properties they were selling to ensure 

local market knowledge. Finally, although assigning work to contractors in 

part on the basis of their performance was intended to have been a key 

quality assurance mechanism under the new contract structure, FHA has 

encountered various obstacles to implementing this condition.

FHA does not have a current and complete set of policies and procedures 

for its current REO disposition program, as required by internal control 

standards. These standards require formally documented policies and 

procedures that are clear and readily available.41 Such materials can be 

used to

• provide guidance to staff in the performance of their day-to-day 

activities,

• help ensure that activities are performed consistently across an 

agency,

• communicate management’s directives, and

• help ensure that the agency complies with federal laws and 

regulations.

These control standards require that policies and procedures be reviewed 

regularly and updated when necessary. In keeping with these 

requirements, the enterprises have well-documented policies and 

procedures for their REO disposition programs. One of the enterprises 

has consolidated its guidance and expectations for its staff and 

contractors in a single, comprehensive guide that it updates as needed.

 41The plans, methods, and procedures used to meet missions, goals, and objectives are a 

fundamental component of internal control, which itself is an integral component of an 

organization’s management and seeks to ensure the effectiveness and efficiency of 

agency operations. See GAO, Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1. 

FHA’s Lack of Current 

Policies and Procedures 

for REO Disposition May 

Create Inefficiencies
Page 43 GAO-13-542 FHA Property Disposition

The other enterprise does so using multiple documents that are 

accessible from a single location.

However, while FHA has an REO Disposition Handbook that outlines 

policies, procedures, and key controls for REO activities, the agency has 

not updated the handbook since 1994. FHA describes the Disposition 

Handbook’s objectives as providing comprehensive guidance that reflects 

program requirements and that stresses the importance of internal 

controls, incorporates fiscal procedures, and provides clear statements of 

policy for field office staff. However, the handbook does not reflect the 

current structure, processes, or requirements that FHA uses to dispose of 

properties. Nevertheless, FHA’s contracts reference it as a source of 

applicable guidance. FHA headquarters staff told us that the disposition 

handbook was outdated and did not reflect the current REO program 

structure, including the use of the multiple types of contractors and their 

responsibilities. But staff from one FHA homeownership center told us 

that they continued to use the handbook for policy guidance in certain 

areas, such as broker registration, contract extensions, rental 

agreements, and the closing agent monitoring checklist.

Instead of updating its Disposition Handbook, FHA relies on mortgagee 

letters, housing notices, and contracts to document its current policies 

and procedures. FHA headquarters staff told us that they had not taken 

steps to update the program handbook and that they used these letters 

and notices to provide new and revised guidance to their staff and 

contractors. FHA officials also indicated that the terms of its contracts with 

service providers served to document the REO process and performance 

expectations. However, as mentioned earlier, these contracts refer to the 

outdated Disposition Handbook as a source of reliable guidance. Also, 

using multiple contracts rather than a single consolidated document as a 

source of policies and expectations for staff and contractors creates the 

potential for inconsistencies. In addition, FHA has a decentralized REO 

disposition process managed through four homeownership centers, 

underscoring the need for a single source of guidance on policies and 

procedures for headquarters and field staff. FHA’s contractors may have 

multiple contracts overseen by different centers, and in a February 2013 

report, HUD’s Office of the Inspector General (OIG) found that one of 

FHA’s REO contractors faced different procedural requirements across 
Page 44 GAO-13-542 FHA Property Disposition

the various HUD operating regions in which it was active.42 According to 

HUD OIG staff, they had also found a lack of consistent expectations for 

contractors across homeownership centers. For example, some centers 

were requiring maintenance contractors to pay any homeownership 

association fees and other unpaid bills before sale closings, but other 

centers expected marketing contractors to make these payments. In 

some cases, FHA faced delayed sales closings for failing to pay these 

fees on a timely basis.

Lack of consistent and updated guidance on policy and procedures may 

also make oversight of contractors less efficient and may increase the 

REO program’s operating costs. FHA staff in two homeownership centers 

told us that they spent significant amounts of time responding to policy 

inquiries from contractors and seeking answers to questions about policy 

within the agency. Staff from one of these homeownership centers 

indicated that more guidance on policy matters would be beneficial and 

said that they needed additional support for procedures. The lack of a 

single, up-to-date form of guidance for the REO program leaves FHA 

without important internal controls, has resulted in extra costs in time and 

resources for FHA staff, and has created a burden for some contractors 

who face differing requirements across regions.

Further, the lack of consistent guidance may be a factor in the execution 

rate performance of the four homeownership centers. For instance, some 

centers may be using practices that increase contractor performance that 

other centers have not tried. As discussed previously, our analysis of 

FHA’s property dispositions revealed differences in performance levels 

across its homeownership centers. For instance, aggregate sales returns 

based on independently assessed value and list price execution rates for 

all properties disposed from January 2007 through June 2012 were 13 

and 12 percentage points higher for the Santa Ana and Denver centers 

than for the Philadelphia center and 7 percentage points higher than for 

the Atlanta center. Each year within the overall period showed similar 

patterns with the Santa Ana and Denver centers typically having higher 

execution rates than the Atlanta and Philadelphia centers. Even after 

controlling for the average effects of certain property characteristics, such 

 42HUD OIG, Ofori & Associates, PC, Hartford, CT, Single Family REO Contract 

Administration, 2013-BO-1001 (Boston, MA: Feb. 19, 2013).
Page 45 GAO-13-542 FHA Property Disposition

as value and changes in local housing prices, Santa Ana and Denver had 

higher execution rates than Atlanta and Philadelphia.

Because regional housing market differences could affect performance of 

the homeownership centers even after controlling for certain property 

characteristics, we compared the performance of the homeownership 

centers with the performance of the enterprises in the states where each 

center operates. For all dispositions from January 2007 through June 

2012, the Denver center’s aggregate independently assessed value net 

execution rate was comparable to that of the enterprises in the states 

where it was responsible for REO property dispositions. The Santa Ana 

and Atlanta centers lagged the enterprises by 2 to 6 percentage points for 

dispositions in their respective states, while the Philadelphia center 

lagged the enterprises by 8 and 11 percentage points (fig. 10). After 

controlling for the average effects of certain property characteristics, such 

as value, ZIP code, and changes in local housing prices, differences in 

the homeownership centers’ performance relative to the enterprises 

generally persisted. However, Santa Ana’s performance decreased while 

Philadelphia’s increased such that their performance differences relative 

to the enterprises were similar. Denver’s performance declined slightly 

but remained comparable to that of the enterprises and the Atlanta 

center’s performance improved but still lagged that of the enterprises.
Page 46 GAO-13-542 FHA Property Disposition

Figure 10: Differences in FHA Homeownership Centers’ and the Enterprises’

Aggregate Net Execution Rates Based on Independently Assessed Value for All 

REO Dispositions, January 2007 through June 2012

Note: This calculation included data from 416,929 (99.91 percent of total) dispositions for FHA, 

352,490 (99.90 percent) for one enterprise, and 648,966 (87.51 percent) for the other enterprise. It 

did not include all dispositions for each entity because of missing values for certain data elements. VA 

did not have property-level data available that were necessary to calculate net execution rates.

The average number of days to complete an REO disposition from the 

date that FHA acquired properties also varied, from 164 for the Denver 

center to 212 for the Philadelphia center for all dispositions from January 

2008 through June 2012.43 Other time frames—such as from the initial list 

date to the completed sale—also illustrated performance differences 

among the homeownership centers, as did the results for individual years. 

Even after controlling for the average effects of certain property 

characteristics, such as value and changes in local real estate prices, 

 43Because of missing data for many FHA property dispositions in 2007, we used January 

2008 as the starting point for our analysis of REO disposition time frames.
Page 47 GAO-13-542 FHA Property Disposition

these differences persisted. Because regional housing market differences 

also could affect the time required to dispose of properties, we compared 

the homeownership centers’ time frame performance with that of the 

enterprises in the states where the centers operate. For all dispositions 

from January 2008 through June 2012, the Denver center’s average 

number of days from a property’s initial valuation to the completed REO 

sale was generally equivalent to that of the enterprises.44 The Santa Ana, 

Atlanta, and Philadelphia centers, in order, took longer to sell properties 

than did the enterprises in the states in which they operate (fig. 11). After 

we controlled for the average effects of certain property characteristics, 

such as value, ZIP code, and changes in local housing prices, the 

average number of days from initial valuation to completed sale for each 

of the homeownership centers generally exceeded that of the enterprises 

to an even greater extent. The Denver center exceeded the enterprises 

by the least number of days, while Philadelphia exceeded the enterprises 

by the most.

 44We compared the time from initial valuation to REO sale since that period is consistent 

for each of the entities and most closely approximates the period for which FHA’s 

homeownership centers have responsibility for property disposition activities.
Page 48 GAO-13-542 FHA Property Disposition

Figure 11: Difference between FHA Homeownership Centers’ Average Disposition 

Times and the Enterprises’ Times for All REO Dispositions, January 2008 through 

June 2012

Note: The average disposition times reflect the time from initial valuation, since that date was 

available from FHA and the enterprises and most closely reflected when FHA’s homeownership 

centers began managing and overseeing the disposition of REO properties. This calculation included 

data from 369,576 (99.73 percent of total) dispositions for FHA, 337,755 (100.00 percent) for one 

enterprise, and 703,853 (100.00 percent) for the other enterprise. It did not include all dispositions for 

each entity because of missing values for certain data elements. VA did not have the property-level 

data available that were necessary to calculate the time from initial valuation to disposition.

Returns on sales of FHA’s REO properties also varied across marketing 

contractors, as did the time that the contractors required to complete 

dispositions. From 2010—when FHA implemented its new contract 

structure—to 2012, the difference between the contractors with the best 

and worst execution rates based on independently assessed value was 

between 12 percent and 19 percent each year.45 Of the seven marketing 

contractors, one had the best execution rate in each of the last 2 years 

 45Data for 2012 are from January 1st to June 30th.
Page 49 GAO-13-542 FHA Property Disposition

and another had the worst rate for each of those years. Likewise, the 

difference between the contractors with the best and worst time frame for 

the number of days from acquisition to completed sale ranged from 11 

percent to 40 percent each year.46 Again, one contractor—not the same 

one that had the best execution rate—had the best time frame in each of 

the last 2 years and another—the same one that had the worst execution 

rate in each of the last two years—had the worst time frame for each of 

the last 2 years.

These differences raise questions about the guidance that FHA provides 

to its homeownership centers and contractors tasked with managing and 

selling REO properties. For instance, FHA has not identified optimal 

practices and included them in a single consolidated handbook, although 

some centers could be using practices that could benefit others. 

According to an FHA headquarters official, staff in each homeownership 

center analyze their office’s performance against the overall agency goals 

of reducing the time that REO properties are in inventory and the time it 

takes to list properties for sale, steps that should decrease the costs 

associated with dispositions. According to this official, each center 

analyzes this data monthly and takes corrective action as deemed 

necessary, and recently the performance across homeownership centers 

on these timeline measures have been similar. The official also noted that 

homeownership center staff complete standard contractor monitoring 

activities monthly to identify and address potential problems with 

disposition performance. Although having each homeownership center 

evaluate its own performance is an important internal control step, it does 

not replace an independent performance assessment across all of FHA’s 

centers, nor does it address the causes of any differences in performance 

across centers. FHA has yet to conduct any analysis to identify 

differences in execution rate performance across homeownership centers 

and the factors that may account for such differences, although doing so 

could help to improve performance at all centers and reduce costs across 

the REO program.

 46Data for 2012 are from January 1st to June 30th.
Page 50 GAO-13-542 FHA Property Disposition

Under the new contract structure—known as M&M III—created in 2010, 

FHA expected that its staff and an oversight contractor would conduct a 

number of specific activities to monitor its REO maintenance and 

marketing contractors’ performance, including (1) assessing whether its 

contractors are meeting minimum contractual requirements, and (2) using 

standard metrics in a scorecard to evaluate the level of contractors’

performance. Federal internal control standards require agency 

management to monitor program quality and performance through the 

establishment and review of performance measures and indicators. Also, 

HUD contracting standards and guidelines require the periodic evaluation 

of a contractor’s performance to help ensure that services conform to the 

contract’s quality and quantity requirements.47

Under the new M&M III program structure FHA homeownership center 

staff were expected to evaluate maintenance and marketing contractors 

monthly to determine whether they were meeting minimum contract 

standards. Staff were expected to perform this analysis using a tool—the 

performance requirements summary—that assessed the contractors 

against several minimum standards. However, staff at FHA’s four 

homeownership centers have not been performing the systematic reviews 

envisioned in HUD guidelines and the M&M III program structure to 

determine whether contractors are meeting minimum performance 

requirements. FHA staff in the four centers told us that they had not been 

using the planned assessment tool as intended and instead had just been 

reviewing the quality of contractors’ performance more informally and 

subjectively. FHA homeownership center staff explained that they did not 

complete formal performance requirements summary reports to be 

shared with contractors because FHA did not have a standard reporting 

mechanism. Instead, they informally assess contractors by examining 

performance trends, reports on properties exceeding suggested time

frames for disposition, property inspections, and public feedback. FHA 

homeownership center staff indicated that the tool was not available 

because the methodology for producing it was to have been developed by 

the oversight monitor contractor, but the initial firm chosen for this role did 

not produce results that FHA deemed usable and FHA did not renew its 

contract when it expired in 2011. FHA headquarters officials also said that 

 47HUD, Office of the Chief Procurement Officer, Contract Monitoring Desk Guide

(Washington, D.C.: March 2009), and HUD, Office of the Chief Procurement Officer, 

Handbook 2210.3 Procurement Policies and Procedures, Revision 9 (Washington, D.C.: 

April 2009).

FHA Has Yet to Implement 

a Uniform System for 

Evaluating Contractor 

Performance
Page 51 GAO-13-542 FHA Property Disposition

the original contractor oversight plans were not implemented because this 

contract was not renewed. By not completing these assessments, FHA 

has not systematically or uniformly determined whether contractors have 

been performing as intended. Without a comprehensive system to 

evaluate whether contractors are meeting minimum performance 

standards, FHA risks not being able to ensure the most efficient and 

effective disposition of its properties.

Additionally, FHA has failed to implement another critical component of its 

M&M III program structure—a uniform tool known as a performance 

scorecard—that was to have been used to compare the level of 

contractor performance with that of other contractors. FHA intended to 

use contractor performance scorecards to determine which contractors 

would continue to receive new assignments of REO properties, and how 

many they would receive. However, FHA officials said that they never 

implemented use of a contractor performance scorecard because of the 

terminated relationship with its oversight monitor contractor that was 

responsible both for developing the scorecard and for the actual 

monitoring. While the performance requirements summary was a tool to 

identify minimum contractor performance, the scorecard would allow FHA 

to evaluate the level of contractor performance using standard metrics 

and to better compare the relative quality of a contractor’s activities 

against that of other contractors. For example, other entities use a 

scorecard to rank contractors on their overall performance as well as on 

certain component metrics that together comprise their overall score.

Component metrics used by these entities include measures such as the 

average time to complete certain tasks or services or the results of 

oversight inspections.

More recently, FHA has taken some steps to increase the consistency of 

its monitoring activities. A 2012 report by HUD’s OIG found that staff in 

FHA’s four homeownership centers had developed their own contractor 

oversight procedures that had led to inconsistent oversight of REO 

contractors.48 During the course of the OIG audit, FHA headquarters staff 

developed standardized plans—one for monitoring maintenance 

contractors and one for monitoring marketing contractors—that the 

homeownership centers were to begin using in June 2012. Each of these 

 48This work was finalized and issued as HUD OIG, Real Estate-Owned Management & 

Marketing III Program, Washington, D.C., 2012-LA-0003 (Los Angeles, CA: Sept. 18, 

2012).
Page 52 GAO-13-542 FHA Property Disposition

two standardized monitoring plans includes various contract monitoring 

tasks, such as measuring performance in key areas and reviewing 

disposition status reports for properties that exceed certain REO 

processing time frames (e.g., that have been in the REO inventory for 

more than a year).49 As part of these plans, FHA included a contractor 

performance scorecard that its staff had developed. However, FHA 

officials said that the scorecard was not implemented due in part to 

difficulties renewing FHA’s contract with the provider of its REO data 

management system. To assist in its development of a standard method 

of evaluating contractor performance, including scorecards, FHA officials 

said that a new contractor was hired in September 2012. FHA officials 

said that the scorecards would likely require the approval of each of the 

maintenance and marketing contractors, as it was not included in their 

original contracts as a basis for performance evaluation.

In contrast, the enterprises and private sector mortgage servicers that we 

interviewed had been using scorecards to evaluate and compare 

contractor performance and as a basis for assigning work to contractors. 

These scorecards generally tracked a variety of metrics related to quality 

and time frames, such as the number of days that a property was listed 

for sale, different measures of sales returns, and completion of 

maintenance and repair work. For example, one of the enterprises uses 

performance results from monthly scorecards and quarterly report cards 

to ascertain whether its contractors are meeting its standards for 

performance. Its officials and those from two private mortgage servicers 

we spoke with said that they also used scorecard results to make 

decisions about reducing or ending their use of poorly performing 

contractors. Officials from some of these entities said that they also used 

scorecards to compare the performance of individual contractors to the 

performance of all contractors in a similar geographic area. These 

officials also said that the contractors knew how the scorecards were 

 49The contract monitoring tasks are analysis of the adequacy of contract funding levels; 

measurement of contractor performance in key areas; training of homeownership center 

staff on the monitoring of REO contractors; training of REO contractors on FHA’s 

performance expectations; review of REO contractors’ entry of data and documentation 

into FHA’s property management database; visiting REO properties to inspect contractors’ 

work; visiting REO contractors’ work sites to evaluate the appropriateness of office 

technology and personnel; developing and implementing communication between 

homeownership center and headquarters staff; reviewing property status reports from 

FHA’s property management database; and reviewing disposition status reports for 

properties that exceed certain REO processing time frames (such as properties that have 

been in REO inventory for more than a year). 
Page 53 GAO-13-542 FHA Property Disposition

being used to assess their performance and that their business 

relationship with the company and the volume of work they received 

depend on the assessments.

In the absence of a scorecard, FHA homeownership center staff indicated 

that they were taking steps to evaluate contractors individually and to 

provide feedback on their performance. But homeownership centers were 

using different processes that were inconsistent, fragmented, and 

informal. For example, staff at two centers said that they relied on 

individual measures of performance such as case reviews and summary 

reports of properties’ progression through different stages of the 

disposition process. Staff from one of these centers explained that while 

they had a sense of whether a contractor was doing a good job or not, 

they did not have the ability to formally compare performance across 

contractors. Staff from one center told us that some staff members had 

created a scorecard-like tool to evaluate the performance of contractors 

for which they had oversight responsibilities, but had been told by HUD 

contracting officials that they could not share the results with the 

contractors until FHA introduced a standard scorecard nationwide. 

However, staff from a different office said that they had shared certain 

individual contractor performance information with their contractors.

Without a functioning, standardized scorecard, FHA does not have a 

uniform tool for evaluating the overall level of its contractors’ performance 

and cannot effectively make distinctions about relative performance 

differences across contractors or tell contractors how their performance 

compares to their peers. This shortcoming also limits FHA’s ability to 

identify and address underperforming contractors and creates the risk 

that FHA cannot ensure the most efficient and effective disposition of its 

properties.

Our review also showed that FHA was not conducting certain contractor 

oversight activities performed by some other entities that dispose of REO 

properties. Specifically, FHA was not conducting as many or as frequent 

in-person property inspections as other entities and was not taking steps 

to ensure that listing brokers were close enough to the REO properties 

they were chosen to market to know local market conditions and 

efficiently access the properties. One of the ways that FHA’s oversight 

activities varied from other federally related housing entities and private 

mortgage servicers was the extent to which it conducts in-person property 

inspections. HUD’s Contract Monitoring Guide states that inspections are 

the best way to determine the quality of a contractor’s performance. FHA 

FHA’s Contractor 

Oversight Lacked Key 

Activities Used by Other 

Entities
Page 54 GAO-13-542 FHA Property Disposition

and other entities typically have their contractors visit properties regularly 

to inspect the properties’ condition and to perform routine maintenance 

such as lawn cutting. However, they also have their own staff or thirdparty contractors that visit properties for oversight purposes, including 

ensuring that contractors are performing their required duties and 

maintaining properties to expected standards. According to staff from one 

of FHA’s homeownership centers, performing in-person property 

inspections is critical because they allow FHA staff to review contractor 

performance, identify problems needing resolution, and conduct quality 

assurance checks, especially in the absence of a uniform scorecard. 

FHA’s standard monitoring plans include property site visits to help 

ensure that maintenance contractors are conducting their own routine 

inspections and maintaining the condition of assigned properties in 

accordance with their contractual requirements. They also are meant to 

help ensure that marketing contractors are following required standards 

and procedures when conducting sales activities. FHA’s plans call for inperson inspection of 2 percent of properties three times per year.50

However, FHA homeownership center staff had varying interpretations of 

FHA headquarters’ expectations for the amount and timing of property 

inspections. For example, staff in some centers told us that they aimed to 

inspect 2 percent of properties annually, while staff in another center said 

they targeted 6 percent of properties annually. The timing of the 

inspections also varied across the homeownership centers from a certain 

percentage each month to a certain percentage in three of the four 

quarters of the fiscal year.

According to FHA officials, a lack of adequate travel funds and staff 

capacity has created challenges for homeownership centers in 

conducting in-person property inspections. Staff at some centers said that 

a lack of available funds could delay some inspections until the end of the 

fiscal year, when funds might become available. Others noted that in the 

past they had inspected more properties within proximity to the 

homeownership center when travel funds were not available. However, 

waiting to conduct inspections until the end of the fiscal year and 

restricting them to a limited geographic area limits their effectiveness, as 

the inspections may not target properties in certain locations or 

 50Specifically, the plans state that REO properties selected for inspection should include 2 

percent of newly acquired properties from the most recent quarterly period and 2 percent 

of other properties that do not yet have an accepted sale offer. The plans further state that 

the frequency should be three times per year—January through September. 
Page 55 GAO-13-542 FHA Property Disposition

contractors equally. Further, contractors may become aware that they are 

unlikely to have properties inspected early in the year or in certain 

locations.

To supplement the in-person inspections, FHA attempts to use other 

means of monitoring whether its contractors are complying with its 

expectations, but the effectiveness of these efforts is also uncertain. For 

example, FHA homeownership center staff may conduct reviews of the 

evidence, such as photographs of the property, that contractors submit to 

document that they have performed routine inspections and other 

activities. However, in 2012 HUD OIG audits found that contractors could 

upload pictures that do not accurately depict a property’s condition or 

incomplete reports that limited the effectiveness of these reviews.51 To 

supplement its own staffs’ monitoring efforts, FHA’s contractors that are 

responsible for marketing REO properties also complete some 

inspections as part of their quality control plans. Additionally, property 

listing agents employed by the marketing contractors inspect the work of 

maintenance contractors for all properties that are listed and sold. 

However, the effectiveness of these reviews may be limited because FHA 

staff told us that the property listing agents have often been reluctant to 

submit negative reports on maintenance contractors’ performance 

because of fear of damaging working relationships with these other 

contractors.

The number of in-person inspections that FHA completes may not be 

sufficiently effective to ensure that FHA’s contractors are conducting their 

activities in compliance with contractual requirements. In multiple reports 

issued between March 2012 and February 2013, HUD’s OIG found that 

contractors responsible for maintaining and marketing FHA’s REO 

properties were often not performing the required work at all or were not 

 51HUD OIG, Single Family REO Contract Administration: Ofori & Associates, PC, Hartford, 

CT, Did Not Always Comply With Its REO Contract and Marketing Plan Requirements, 

2013-BO-1001 (Boston, MA: Feb. 19, 2013).
Page 56 GAO-13-542 FHA Property Disposition

performing to the expected level of quality.52 For example, a September 

2012 HUD OIG report examined a Las Vegas, Nevada, FHA contractor 

and found that it did not secure or properly maintain 40 percent of the 96 

properties that the OIG examined.53 Another report from September 2012 

reviewed 125 properties nationwide and determined that FHA’s 

contractors did not properly maintain 75 of them, as evidenced by 

unmaintained yards, unclean conditions, lack of security, and water 

leaks.54 The review also found that for 100 of the 125 properties, FHA’s 

maintenance contractors did not conduct routine inspections in a timely 

manner.55 Furthermore, this OIG audit revealed that FHA’s maintenance 

contractors nationwide were paid for inspections for which they had not 

completed the required documentation and may not have conducted. One 

of FHA’s homeownership centers developed a report to identify these 

missing routine inspections and, in coordination with HUD’s procurement 

office, requested reimbursement of fees paid to five of its contractors 

totaling more than $1.3 million for more than 10,000 inspections from 

June 2011 through February 2012.

In contrast to the amount of in-person inspections done by FHA, other 

federally related housing entities and private mortgage servicers we 

spoke with indicated that they conducted in-person inspections of much 

larger percentages of their REO properties and conducted them more 

frequently. For example, staff from one of the enterprises told us that it 

performed in-person oversight inspections of 25 to 30 percent of its REO 

 52See, for example HUD OIG, Innotion Enterprises, Inc., Las Vegas, NV, Single Family 

REO Contract Administration, 2012-LA-1010 (Los Angeles, CA: Sept. 12, 2012); HUD 

OIG, HUD’s Oversight - REO M&M III Contract Administration, LA-12-0019 (Los Angeles, 

CA: Mar. 30, 2012); HUD OIG, Evaluation of HUD’s Management of Real Estate-Owned 

Properties, IED-12-001R (Washington, D.C.: Apr. 19, 2012); HUD OIG, Single Family 

REO Contract Administration: Ofori & Associates, PC, Hartford, CT, Did Not Always 

Comply With Its REO Contract and Marketing Plan Requirements, 2013-BO-1001 

(Boston, MA: Feb. 19, 2013).

53HUD OIG, Innotion Enterprises, Inc., Las Vegas, NV, Single Family REO Contract 

Administration, 2012-LA-1010 (Los Angeles, CA: Sept. 12, 2012). 

54HUD OIG, Real Estate-Owned Management & Marketing III Program, Washington, D.C., 

2012-LA-0003 (Los Angeles, CA: Sept. 18, 2012).

55The HUD OIG report noted that FHA’s maintenance contracts stated that, at a minimum, 

properties must be inspected once every 2 weeks. In some cases, it found that the routine 

inspections were late by 1 to 33 days. 
Page 57 GAO-13-542 FHA Property Disposition

properties monthly using an independent inspection firm.56 The other 

enterprise said that it completed in-person inspections of around 35 

percent of properties monthly, using both an independent inspection firm 

and its own staff. VA officials noted that it conducted in-person 

inspections on at least 10 to 20 percent of its REO properties annually 

and in fiscal year 2012 the agency inspected over 40 percent. In addition, 

staff from one of the private mortgage servicers we interviewed told us 

that its own field agents inspected about 40 percent of its properties, 

while two other private mortgage servicers said that they inspected about 

7 and 10 to 12 percent of their properties on a monthly basis throughout 

the year.

Federal internal control standards require that agency management 

conduct effective monitoring to assess program quality and performance 

over time and work to address any identified deficiencies. Other entities, 

whether federally related or private, found that frequent in-person 

property inspections were an effective way to better ensure that 

contractors were performing required activities and to assess the quality 

of their work. As a result of not conducting in-person inspections of a 

greater share of its REO properties and not inspecting them more 

frequently, FHA may not discover potential maintenance and disposition 

problems, potentially resulting in poorly maintained properties that sell for 

lower prices.

In addition, FHA does not have the procedures that the enterprises have 

to ensure that properties are assigned to listing brokers located close 

enough to the properties to have sufficient knowledge of the local market. 

Using listing brokers that are close to and familiar with properties and the 

surrounding communities improves the chances that the properties will be 

shown as often as possible and will be well maintained. FHA’s contracts 

require its marketing contractors to use local real estate professionals 

whose primary place of business is within reasonable proximity of the 

listed property. However, FHA does not have either a definition of 

“reasonable proximity” or formal guidelines or procedures for determining 

whether properties are assigned to local listing brokers, according to 

officials. FHA headquarters officials said that they had an informal goal of 

 56This enterprise selects the inspection sample from available REO properties, which 

does not include properties in eviction, redemption, litigation, or with disposition activities 

on hold for other reasons. The inspections are documented and reviewed by the 

enterprise’s staff each month.
Page 58 GAO-13-542 FHA Property Disposition

using brokers located within 20 miles of a listed property, but noted that 

consistently defining what constitutes reasonable proximity could be 

difficult. For example, distances that would be considered reasonable in 

an urban area might not be realistic in a rural location. FHA 

homeownership center staff said that headquarters had not yet 

implemented clear criteria or controls for the marketing contractors that 

assigned properties to brokers.

In the absence of clear criteria from FHA headquarters, homeownership 

centers often made their own determinations on using brokers within 

reasonable proximity to properties. For instance, FHA staff at one center 

told us that after discovering as part of unrelated inspections that listing 

brokers for some of its properties were not local, the center and its 

marketing contractors had decided that “local” generally meant within 50 

miles, with exceptions for sparsely populated areas. Centers also varied 

in their reviews of listing brokers’ proximity to their listed properties. One

center noted that such reviews were part of annual inspections of 

marketing contractors. However, officials at another center said that they 

did not believe the proximity of listing brokers was a major concern and 

did not monitor it closely and instead placed more emphasis on overall 

performance. Officials from one listing broker that has sold properties for 

two of FHA’s marketing contractors said that there had been many 

instances of listed properties being more than 50 miles from the listing 

broker’s office. They also noted that many of these more-distant listing 

brokers were not members of the listing service that includes properties 

for those local markets, which resulted in a lack of proper exposure for 

FHA’s properties. Without clear guidance from FHA on the use and 

oversight of listing brokers, homeownership centers may continue to 

make their own determinations on what constitutes “reasonable proximity”

to listed properties and may not be able to ensure that properties are 

being effectively marketed by knowledgeable agents.

In contrast, the enterprises have established guidelines for the selection 

of local listing brokers and conduct monitoring to ensure brokers’

proximity to the listed properties. For example, one of the enterprise’s 

REO sales guidelines states that properties should be no further than 25 

miles from the listing broker, although this threshold is used more often 

for rural areas, according to officials. In urban areas the goal is to assign 

a broker as close as 5 miles to the property. The officials also told us that 

the enterprise used reports to monitor the distances between listing 

brokers and their assigned properties and addressed situations involving 

longer distances on a case-by-case basis. Officials from the other 

enterprise emphasized the importance of using listing brokers located 
Page 59 GAO-13-542 FHA Property Disposition

close to listed properties because of local brokers’ market knowledge. 

This enterprise has a goal for broker proximity of about 15 to 20 miles, 

according to these officials, but the distances can vary in rural areas. The 

officials also told us that the enterprise had an Internet-based REO 

management system that assigned properties to listing brokers by 

geographic area. The enterprise’s staff define the geographic areas within 

which its listing brokers can receive property assignments when it adds 

them as approved service providers and conduct reviews of listing 

brokers’ office locations.

As part of the new M&M III program structure it introduced in 2010, FHA 

intended to implement a key quality control—assigning contractors work 

according to the quality of their performance—but has encountered 

obstacles to implementing this mechanism. The Federal Acquisition 

Regulation (FAR) stipulates a strong preference for using multiple 

contractors for the types of contracts that FHA has used to manage and 

dispose of REO properties.57 With respect to the types of contracts that 

FHA has used to manage and dispose of REO properties, the FAR 

provides that the agency must provide each contractor with a fair 

opportunity to be considered for the work.58 FHA designed its M&M III 

contract structure to include 10 geographic areas with multiple 

maintenance and marketing contractors operating within most areas. 

During the first year of the M&M III contracts, FHA assigned equal 

percentages of REO properties to each contractor in a contract area to 

satisfy the minimum guarantee under the contract.59 After the first year, 

FHA intended to use performance evaluations to help determine the 

shares of its REO properties within a contract area that it would assign to 

each of the multiple contractors operating in that area, with the highperforming contractors receiving the largest allocations of properties.60

 57Federal Acquisition Regulation (FAR) § 16.504(c).

58FHA has used multiple award indefinite-delivery, indefinite-quantity contracts which 

allow FHA to award contracts to multiple contractors for their services, but provide 

flexibility in both quantities and delivery scheduling. FAR § 16.501-2. When FHA 

determines its specific service requirements, it awards a task order to one of the 

contractors for those requirements. FAR § 2.101. See also, FAR § 16.505(b)(1). 

59Placing an order to satisfy a minimum guarantee is an exception to the fair opportunity 

process. FAR § 16.505(b)(2)(i)(D). 

60While contractor performance can be used as a basis for determining future awards of 

work, the FAR requires agencies to also consider cost. FAR § 16.505(b)(ii)(E).

FHA Has Not Assigned 

Work to Contractors Based 

on Evaluations of Their 

Performance
Page 60 GAO-13-542 FHA Property Disposition

FHA planned to divide property assignments within the overall contract on 

a percentage allocation basis, so that all individual contractors in an area 

would receive a minimum share of the work as long as the contractors 

met minimum performance requirements.

However, FHA has been unable to implement this system as intended for 

two reasons. First, until it implements the planned scorecards or other 

uniform evaluation method, FHA has no way to systematically generate

the information needed to assign work based on performance. Second, 

after implementing the new M&M III program structure, FHA encountered 

challenges in ensuring that its performance-based allocation contract 

structure complied with the FAR. In late 2011, HUD’s OGC advised FHA 

that the process of allocating a minimum share of property assignments 

to each of its contractors was not compliant with the FAR rules requiring 

that each contractor have a fair opportunity to compete and win all the 

work for which it is competing.61 FHA officials said that the performancebased competitions that OGC determined would be compliant with federal 

acquisition rules, with contractors winning either all or none of the work 

assignments, would jeopardize the financial viability of some contractors.

These officials explained that contractors have high overhead costs and 

could go out of business if they did not receive at least some property 

assignments for more than a few weeks.

As the result of these obstacles to implementing performance-based 

allocations as planned, FHA has continued to assign properties to 

marketing contractors based on equal allocations in a contract area. It 

also assigns work to maintenance contractors solely on the basis of the 

cost. FHA staff told us that they could not identify an acceptable 

alternative to assigning work among multiple contractors that was also 

compliant with federal acquisition rules. Instead, FHA plans to award new 

contracts that give all property assignments in a contract area to a single 

contractor for at least a year. FHA staff said that if the contractor 

performed poorly or was unable to provide the necessary services, the 

property assignments could be shifted to a contractor in a neighboring 

area by redefining the contract area. However, the practical difficulties 

and challenges involved in redefining contract areas and reassigning all 

properties among contractors could make implementing this option 

 61FAR § 16.505(b)(1). In addition, the FAR provides that an agency may not use an 

allocation or designation method that would not result in fair consideration being given to 

all awardees prior to placing an order. FAR § 16.505(b)(1)(ii)(B). 
Page 61 GAO-13-542 FHA Property Disposition

difficult. Further, it is not clear that FHA has fully explored other options 

that are compliant with federal acquisition rules.

In terms of performance incentives, FHA officials said that its discretion in 

determining whether to renew annual contracts was the most important. 

However, this particular incentive may be less powerful than the frequent 

reallocation of work envisioned under the M&M III contract structure. 

According to officials, FHA has never failed to renew an annual contract 

for the 50-plus maintenance and marketing contracts that have been part 

of the current contract structure since 2010. FHA staff told us that under 

the maintenance and marketing contracts’ terms, they could reassign 

properties to another contractor or suspend property assignments to a 

poorly performing contractor, but these options have rarely been used. 

According to agency officials, since 2010 FHA has suspended a 

contractor’s assignments only once for a period of 1 month and has not 

yet reassigned properties from one contractor to another on the basis of 

poor performance. FHA officials said that they had not defined standard 

criteria for the number of instances of deficient performance that would be 

required before these actions were taken. Rather, FHA staff perform a 

risk assessment, and the contractor is given an opportunity to address 

any deficiencies.

FHA has tried to create other incentives for superior performance. It pays 

marketing contractors a percentage of a property’s sale price at the time 

of sale based on the disposition price and time frame. These payments 

are higher for properties with sale prices above a set percentage of the 

initial listing price and within a certain time frame. Over the second half of 

2012, almost one-third of FHA’s sales met the thresholds for the higher 

fee amount, according to FHA data. However, FHA procurement officials 

told us that the bonus fee structure was not a normal contract incentive 

and that FHA also was considering including more typical performance 

incentives and disincentives in contracts. They explained that the only 

specific disincentive or performance penalty in the current contracts is 

FHA’s ability to assess late fees if contractors delay sale closings. 

Without performance-based work assignments, however, FHA’s ability to 

motivate contractor performance is limited because it has few other 

incentives and disincentives and uses them infrequently. As a result, FHA 

cannot ensure that its maintenance and marketing contractors are 

performing at the highest possible levels.

In contrast, the enterprises and private market servicers we interviewed 

use performance-based work assignments to align contractor incentives 

and promote high performance. None of these entities are required to 
Page 62 GAO-13-542 FHA Property Disposition

follow federal acquisition regulations. Officials from one of the enterprises 

explained that if one of its contractors consistently performed better than 

others based on scorecard assessments, the high-performing contractor 

would receive more work assignments, with the amount dependent on 

capacity considerations. This system applies to its national marketing 

contactors, listing brokers, maintenance contractors, and other service 

providers. The other enterprise also considers performance when 

assigning properties to contractors such as listing brokers, according to 

its officials. Officials from two private mortgage servicers we interviewed 

told us that they assigned additional work to contractors with better 

performance on their scorecard indicators and that poor contractor 

performance could lead to fewer work assignments or termination.

The housing crisis has increased the number of REO properties in FHA’s 

inventory. The agency’s ability to effectively dispose of these properties in 

ways that maximize sales proceeds and minimize holding time could help 

increase the government’s financial returns. We found that FHA’s 

disposition performance and the time required to complete sales of REO 

properties lagged the performance of the government-sponsored 

enterprises. Our analysis of FHA’s REO activities revealed that the 

agency was not employing some of the disposition practices that the 

enterprises and other housing entities used. These practices could be a 

factor in other entities’ ability to dispose of REO properties for higher 

returns and with less holding time and include:

• using multiple means of assessing property values to better assure 

that REO properties are fairly valued and thus more likely to sell faster 

and at the highest price,

• making improvements to properties with characteristics that are more 

likely to result in a higher sales price if repaired, and

• basing price reductions for properties that do not sell at the original list 

price on market conditions rather than on a predetermined schedule.

If FHA could perform as well as the enterprises in disposing of REO 

property, it could potentially generate hundreds of millions of dollars in 

additional sales proceeds and reduce maintenance and other holding 

costs from its future REO activities.

Federal internal control standards call for agencies to have 

comprehensive policies and means to help ensure that program 

objectives are being met and that expected activities are being 

completed. However, FHA has not taken the actions necessary to ensure 

Conclusions
Page 63 GAO-13-542 FHA Property Disposition

that its controls and oversight activities are effective in several areas. 

Specifically,

• FHA lacks comprehensive guidance for its REO program and a 

process for updating this guidance as policies and procedures 

change. Having such guidance could better ensure consistent 

practices across homeownership center staff and uniform oversight of 

the numerous contractors that carry out maintenance and marketing 

activities. Further, having a robust revision process would allow FHA 

to incorporate best practices that it identifies by analyzing differences 

in performance across homeownership centers, something it currently 

does not do.

• FHA has fully implemented neither mechanisms for evaluating 

contractors’ activities against minimum expected standards nor a 

scorecard that would allow staff to compare contractor performance to 

identify high- and low-performing contractors. Addressing this issue is 

critical to better ensuring contractors are performing as expected and 

meeting program goals.

• Given the FHA Inspector General’s findings that REO properties were 

not always being well-maintained as required by the service providers’

contracts, the number of in-person inspections currently being 

undertaken by FHA does not appear to be effective.

• FHA lacks controls to help ensure that the brokers marketing its 

properties meet FHA contractual requirements that brokers be in 

reasonable proximity to their properties. As a result, FHA risks having 

brokers that do not have the expected level of local market knowledge 

and cannot conduct effective marketing activities because they are 

too far away.

• FHA contracts generally lack incentives and disincentives that would 

encourage performing high-quality work consistent with other entities’

practices. Implementing a more frequent performance-based 

assessment and assigning work on the basis of performance could 

improve returns on REO properties and reduce property holding 

times.

Collectively addressing these issues could improve FHA’s oversight of its 

contractors by, for example, ensuring that their properties are inspected 

regularly and that they face consequences for not meeting program 

requirements.
Page 64 GAO-13-542 FHA Property Disposition

To increase the potential for higher financial returns from FHA’s 

disposition of REO properties, the Secretary, HUD, should direct the 

Commissioner, FHA, to identify and implement changes in current 

practices or requirements that could improve REO disposition outcomes, 

including

• requiring the use of multiple estimates of market value when 

determining initial list prices,

• considering whether conducting repairs could increase the amount of 

net proceeds from specific property sales, and

• ensuring that the timing and amount of price reductions for its listed 

properties are made on the basis of an evaluation of market 

conditions rather than on standardized schedules.

To improve its oversight of the REO disposition program, the Secretary, 

HUD, should direct the Commissioner, FHA, to

• update its REO program disposition handbook, or equivalent 

document, to include a current and consolidated set of policies and 

procedures for managing and disposing of FHA’s REO properties;

• establish a process for analyzing differences in disposition 

performance and practices across homeownership centers that can 

be used to periodically update this handbook or equivalent 

documentation to reflect current policy and procedures;

• implement a mechanism for systematically reviewing contractors’

compliance with minimum performance requirements through the use 

of standard metrics;

• ensure the completion and implementation of the scorecard currently 

being developed, including ensuring that performance metrics 

included in the scorecard are consistent with those used to review 

contractors’ compliance with minimum performance requirements;

• determine more effective ways, including increased use of in-person 

inspections, to better ensure that contractors comply with expected 

requirements;

• implement controls to ensure that listing brokers are located within 

close enough proximity to their listed properties to effectively market 

REO properties; and

• take steps to develop a legally acceptable means of assigning work to 

REO contractors that uses more frequent assessments of past 

performance.

Recommendations for 

Executive Action
Page 65 GAO-13-542 FHA Property Disposition

We provided a draft of this report to HUD, FHFA, Fannie Mae, Freddie 

Mac, VA, and RHS for their review and comment. HUD provided written 

comments, which are reprinted in appendix II. Fannie Mae, Freddie Mac,

and VA provided technical comments on the draft report, which we 

incorporated as appropriate. In a letter from the Assistant Secretary for 

Housing – Federal Housing Commissioner, HUD agreed with our 

recommendations. HUD also identified actions that it has taken or 

planned to take in response to our recommendations. For example, HUD 

wrote that FHA plans to update its REO disposition handbook. In addition, 

in response to our recommendation that FHA establish a process for 

analyzing differences in disposition performance and practices across 

homeownership centers that can be used to periodically update the 

handbook, HUD pointed to the monitoring plan that FHA has implemented 

for its contractors that will analyze disposition performance and practices 

across homeownership centers. HUD also wrote that any identified best 

practices will be noted, discussed, and communicated to homeownership 

centers and contractors. It will be important for FHA to also periodically 

update the handbook to reflect these changes in practices, as we 

recommended. HUD acknowledged that budgetary constraints affect 

implementation of contractor performance scorecards—critical elements 

in three of our recommendations—and limit its ability to make increased 

use of in-person property inspections that we suggested could be used to 

better ensure that contractors comply with expected requirements. While 

recognizing that FHA’s scope for action may be limited by available 

budgetary resources, we emphasize the importance of considering not 

just the costs to undertake these steps but also the potential savings and 

improved disposition outcomes that would be realized from enhanced 

contractor oversight. 

In response to our recommendation to develop a legally acceptable 

means of assigning work to REO contractors that uses more frequent 

assessments of past performance, HUD said that FHA has taken steps in 

its new REO contracts to provide incentives to high-performing 

contractors and disincentives to lower-performing contractors by 

transitioning inventory among them based on performance and price. 

When implementing such a contract structure, we encourage FHA to

consider inventory transitions on a frequent basis, such as quarterly, to 

align with the frequency of the scorecard performance assessments. 

In technical comments, the Director of Regulatory Affairs of Fannie Mae 

noted that the REO execution rate performance information that our 

report presents was inconsistent with publicly disclosed loss severity 

rates published by FHA. Although loss severity rates—which measure 

Agency Comments 

and Our Evaluation
Page 66 GAO-13-542 FHA Property Disposition

loss on a defaulted loan as a percentage of the unpaid principal 

balance—can be presented when discussing REO performance, we did 

not include such analysis in our report because this measure reflects 

factors beyond the control of the REO programs of these entities. For 

example, loss severity rates can be affected by the original loan-to-value 

ratio, loan amortization schedule, origination date, changes in market 

values, or the existence of mortgage insurance. We therefore do not use 

loss severity rates to assess REO performance. Fannie Mae also noted

that the performance execution information that uses independent 

valuations may not be comparable across entities because not all REO 

sellers use the same valuation methodology. Our report notes that the 

entities use different methods for obtaining an independent valuation—

including an independent appraisal for FHA and one of the enterprises 

and an independent BPO for the other enterprise—and that any 

systematic differences between the appraisals and BPOs could affect the 

performance results. We also calculated execution rate results using list 

prices and these calculations showed similar results.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to interested congressional 

committees, HUD, FHFA, Fannie Mae, Freddie Mac, VA, and RHS. In 

addition, the report will be available at no charge on the GAO website at 

http://www.gao.gov.

If you or your offices have any questions about this report, please contact 

me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last

page of this report. GAO staff who made key contributions to this report 

are listed in appendix III.

Mathew J. Scirè

Director

Financial Markets and

Community Investment
Appendix I: Objectives, Scope, and 

Methodology

Page 67 GAO-13-542 FHA Property Disposition

Our objectives were to examine (1) real estate-owned (REO) property 

disposition practices used by the Housing and Urban Development 

Department’s (HUD) Federal Housing Administration (FHA) and other 

federally related housing entities and how FHA’s effectiveness compares 

to that of these entities, and (2) how FHA oversees its REO disposition 

program.

To examine the disposition practices, we reviewed REO program 

regulations, requirements, and policies to determine the goals and 

strategies for these activities of FHA and other federally related housing 

entities, including the Department of Veterans Affairs (VA), the 

Department of Agriculture’s Rural Housing Service (RHS), and two 

housing government-sponsored enterprises (the enterprises)—Fannie 

Mae and Freddie Mac. We interviewed HUD and FHA staff in the 

agency’s Washington, D.C., headquarters and staff in the four regional 

homeownership centers that oversee REO activities in their areas. We 

also interviewed staff from other federally related housing entities about 

the goals and strategies of their REO activities. We also discussed REO 

goals and strategies with staff from three large private-sector mortgage 

servicers that also acquire and dispose of REO properties. We selected 

these servicers because they were among the largest servicers of home 

mortgages. To obtain additional information on REO activities, we also 

interviewed staff from the National Association of Realtors, two local 

realtors identified as knowledgeable about REO properties by that 

association, and community groups or government housing entities in 

various cities with large REO concentrations. We also interviewed the 

National Community Stabilization Trust, which administers a database of 

REO properties for purchase by community groups, and an appraisal 

group responsible for promoting appraisal standards.

To assess the effectiveness of FHA’s REO dispositions, we obtained and 

analyzed REO disposition data from FHA and the other federally related 

housing entities, including all REO properties disposed of from January 1, 

2007, through June 30, 2012, as well as properties in inventory at the end 

of the period.1 Specifically, we obtained data from the data management 

systems of FHA, the enterprises, VA, and RHS. We did not include RHS 

in our analysis of REO property disposition performance because it only 

 1

We collected information on all single family REO properties defined as having 1-4 units 

that were disposed of during the period.

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 68 GAO-13-542 FHA Property Disposition

obtains and manages REO properties through its direct loan program and 

these are very small in number compared to the other entities. For 

example, in the period of analysis, RHS’s direct loan property dispositions 

represented less than 1 percent of FHA’s REO dispositions. RHS also did 

not have property-level data available for many of the data elements that 

we included in our analyses. Table 1 shows the number of dispositions for

each entity that occurred during this time period based on the data that 

we received and analyzed. For RHS, we used data on its direct loan 

properties because it only acquires and disposes of REO properties 

related to its direct loans and does not do so for properties from its 

guaranteed loan program. 

Table 1: Number of REO Dispositions for FHA and Other Entities from January 1, 

2007 through June 30, 2012

FHA Enterprise A Enterprise B VA RHS

417,303 741,623 352,847 65,273 3439

Source: GAO analysis of FHA, Freddie Mac, Fannie Mae, VA, and RHS data.

Note: We do not identify the identity of the enterprises for certain analyses. We use “enterprise A” and 

“enterprise B” when referring to the entities’ disposition volumes.

We assessed the reliability of these data by reviewing agency data 

documentation, interviewing officials, and testing for missing values, 

outliers, and obvious errors. VA and RHS did not have property-level data 

available that were necessary for some of the calculations in this report. 

In particular, VA and RHS did not have data available on initial REO 

valuation dates, type of sales method, and type of buyer. Additionally, VA 

did not have data on initial REO appraisal amounts and RHS did not have 

data on net sales proceeds. We excluded VA and RHS from calculations 

that used these data elements and noted these instances as applicable. 

We addressed missing data by excluding those properties with missing 

data elements from analyses that relied on those elements as necessary. 

Finally, in analyses using the net sales proceeds data element, we 

excluded properties with net sales proceeds of $0, as this is an unlikely 

value for that element and could indicate missing data. We excluded 

additional properties from our regression models, as described below. In 

no instance did we exclude more than 13 percent of all properties. After 

making the necessary qualifications, corrections, and related 

assumptions, we believe that the data were reliable for our purposes as 

described in this appendix.

To determine the performance in maximizing the sales price of REO 

dispositions by the entities, FHA homeownership centers, and FHA asset 
Appendix I: Objectives, Scope, and 

Methodology

Page 69 GAO-13-542 FHA Property Disposition

managers, we calculated various execution rates. These rates included 

the ratio of REO dispositions’ gross sales prices (for gross execution 

rates) or net sales proceeds (for net execution rates) to one of several 

estimated property valuations.2 The measures of property values that we 

used included (1) the sum of an independent assessment of a property’s 

value—an independent appraisal or BPO conducted by a third party if the 

entity did not use appraisals—plus any repair costs for that property, and 

(2) the initial list price for the REO property.3 We calculated aggregate 

execution rates for each organization by dividing the sum of their property 

dispositions’ net sales proceeds by the sum of the properties’

independently assessed values or initial list prices. We used aggregate 

execution rates because, by showing the net return on the total estimated 

value of properties in an entity’s portfolio, the aggregate rates better 

reflect the entity’s overall performance than an average of the execution 

rates of individual properties. The aggregate rate calculates execution 

rate performance on a value-weighted basis, with higher value properties 

having a greater impact on the aggregate rate than low-value properties. 

An average of individual properties’ execution rates gives equal weight to 

properties of different values despite their unequal effects on total net 

returns.

To assess the timeliness of the entities’ REO property dispositions, we 

calculated the average number of days from the foreclosure sale to the 

day on which they sold or otherwise disposed of the property, as well as 

the number of days they took to move properties between various points 

within the REO process.

To account for the possibility that differences in performance results 

between FHA and the enterprises might be due to differences in the 

characteristics of the properties that each entity acquired and disposed of 

in their REO programs, we used the data on the REO property 

dispositions from January 1, 2007, through June 30, 2012, to create 

 2

Net sales proceeds represent the cash received by the seller at settlement, or the 

contract sales price less deductions for items such as seller concessions and broker 

commissions.

3

For FHA, one of the enterprises, and VA, we used the estimated value from an 

independent appraisal as the independently assessed value. For the other enterprise, we 

used an independent broker’s price opinion as this enterprise’s officials said that it does 

not obtain appraisal values for all of its properties.
Appendix I: Objectives, Scope, and 

Methodology

Page 70 GAO-13-542 FHA Property Disposition

various regression models. The general regression specification for these 

models was:

y = �αi

i

organizationi +�βjXj

j

+�γg,hzipg ∗ valuationh +

g,h

e

where:

• y is the performance measure being assessed, such as net execution 

as a percent of independently assessed value or time from 

foreclosure to REO sale closing;

• organization is an indicator variable for the entity holding the property;

• X is a series of control variables related to the property and 

represents the relationship between variable j and the outcome 

variable, independent of the other variables in the model;

• zip is an indicator variable for the property’s ZIP code;

• valuation indicates the range of the property’s independently 

assessed value;4

• α, β, and γ are the parameters of interest; and

• e represents an error term.

We interacted the ZIP code and valuation category variables to allow the 

average effect of the valuation category on the performance measure to 

vary between ZIP codes. The parameters of interest were the coefficients 

for each organization.

We used the following additional property characteristics as control 

variables in the regressions:

• year the property was built (as a categorical variable),

• number of bedrooms (as a categorical variable),

• number of units for the property (as a categorical variable),

• the change in the FHFA House Price Index for the property’s ZIP code 

from the month of the initial valuation to the month one quarter after 

the initial valuation, and

 4

We used valuation categories of $0 to less than $25,000; $25,000 to less than $50,000; 

$50,000 to $100,000; $100,000 to less than $150,000; $150,000 to less than $200,000; 

and greater than $200,000. 
Appendix I: Objectives, Scope, and 

Methodology

Page 71 GAO-13-542 FHA Property Disposition

• the change in the FHFA House Price Index for the property’s ZIP code 

from the month of the initial valuation to one month after the initial 

valuation month.

In addition, for regressions with an execution rate as the outcome 

variable, we included the month and year of REO acquisition as a 

categorical control variable. For regressions with the number of days from 

the foreclosure sale to the REO disposition as the outcome variable, we 

included the number of weeks from the scheduled date of the last 

completed payment to the date of the foreclosure sale as a categorical 

control variable.5

For the regression models with an execution rate as the outcome 

variable, we weighted every property by the amount of the property’s 

independently assessed value. This was done so that the percentage 

point differences resulting from the regressions would be similar to overall 

aggregate differences for models where only the entity dummies were 

included. Weighting by property value also reduced the effect of 

heteroskedasticity that was likely present over the range of valuations.6

To reduce the effect of outliers on the regression estimates, we excluded 

certain property records that had irregular values for a few data elements. 

For the regression models with an execution rate based on either the 

independently assessed value or reconciled value as the outcome 

variable, we excluded properties with independently assessed value net 

execution rates greater than 300 percent or less than negative 300 

percent. Such large or small execution rates suggest a highly inaccurate 

valuation or otherwise irregular data such as a very low property value or 

sales price. For models with execution rate based on initial REO list price 

as the outcome variable, we excluded properties with the highest and 

lowest 1 percent of values for the ratio of initial REO list price to 

independently assessed value for all properties. In total, we excluded 

fewer than 12 percent of all properties in our data for each of the net 

execution models.

 5

We included this variable despite 13 percent of FHA’s dispositions missing foreclosure 

sale dates because those properties already were excluded from the regressions with the 

days from the foreclosure sale date to the disposition date as the outcome variable.

6

The variance in the execution ratios was generally higher for lower value properties. 
Appendix I: Objectives, Scope, and 

Methodology

Page 72 GAO-13-542 FHA Property Disposition

Due to these exclusions, the population of properties used in the net 

execution regression models was smaller than the full population that was 

used when calculating the aggregate results. As a result, to estimate the 

percentage point difference in net execution rates between FHA and the 

enterprises for the full population, we multiplied the percentage point 

differences from the aggregate execution rates by the ratio of the 

percentage point differences resulting from the full regression model to 

the percentage point differences resulting from a regression model with 

only entity variables.

For the models where the time from the foreclosure sale to the completed 

REO property disposition was the performance measure, we excluded 

properties that had a negative value for the number of days from the 

foreclosure sale to the completed REO property disposition. In total, we 

excluded less than 13 percent of all properties for the time frame models.

We took various steps to test these regression models for robustness.

• We used various thresholds for the exclusion of property records from 

the net execution models. For example, we tested results when the 

models excluded properties with independently assessed values 

above and below certain amounts rather than properties with 

execution rates above and below certain amounts.

• We used various specifications for certain property and market 

characteristics. For example, we tested models where the categorical 

variable for independently assessed value was not interacted with ZIP 

code, where it was specified as a log, and where it was specified as a 

polynomial. We also tested models where the change in the FHFA 

House Price Index in each ZIP code was specified as the change in 

the index in the year prior to the disposition date and in the month 

prior to that date.

• We included additional property characteristics as a control variable in 

the models or excluded some of the property characteristics. For 

example, we tested models where a property’s occupancy status at 

REO acquisition was included as a control variable. This variable 

ultimately was not included in our final models because a significant 

percentage of FHA’s property dispositions were missing data for this 

variable.

These models showed qualitatively similar results for the reduction in the 

performance difference between FHA and the enterprises relative to 

regressions with only entity variables. However, the final model for net 

execution rates had one of the largest reductions in the performance 
Appendix I: Objectives, Scope, and 

Methodology

Page 73 GAO-13-542 FHA Property Disposition

difference between FHA and the enterprises. This appeared to be due to 

the interaction of properties’ independently assessed values and ZIP 

codes.

To identify factors that could help explain differences in FHA’s REO 

performance relative to that of the enterprises, we also created models 

that included various factors (time from foreclosure sale to REO 

disposition, ratio of initial list price to initial valuation amount, disposition 

method, and buyer type) at least partially under the entities’ control and 

examined how their inclusion affected estimates of the performance 

difference between the entities as measured by net execution rates.

To compare the performance of FHA homeownership centers and 

contractors, we computed execution rates and average time frames for 

the properties they managed. When examining time frames, we focused 

on the time frame from a property’s initial valuation to completion of the 

disposition because initial valuation was the date available from both FHA 

and the enterprises that most closely reflected when FHA’s 

homeownership centers begin managing and overseeing the disposition 

of REO properties. In addition, when comparing homeownership center 

performance, we developed regression models to account for the 

possibility that differences in performance results between the 

homeownership centers might be due to differences in the characteristics 

of the properties that each center disposed of in their REO programs. To 

further control for regional differences that our nationwide regression 

models may not have been able to capture, we compared the 

performance of the homeownership centers to the performance of the 

enterprises in the states where each center operates. For this analysis, 

we also conducted separate regressions for each homeownership center 

region to account for differences in the characteristics of properties 

between homeownership centers and the enterprises in those states. For 

the regression models used to compare the performance of the 

homeownership centers, we controlled for the same property and housing 

market characteristics that we included in our regression models 
Appendix I: Objectives, Scope, and 

Methodology

Page 74 GAO-13-542 FHA Property Disposition

comparing FHA’s overall performance to that of the enterprises.7

However, we did not include ZIP code in the models directly comparing 

homeownership center performance because the homeownership centers 

operate in regions with mutually exclusive ZIP codes.

To examine the price reduction strategies used by FHA, we also obtained 

additional data on all listing prices for properties that FHA disposed of 

from June 30, 2011, through June 30, 2012. To determine if price 

reductions occurred at a scheduled amount, we compared the price 

reductions reflected by these data to the price reduction schedules, if any, 

listed in FHA contractors’ marketing plans. One contractor did not have a 

price reduction schedule in its marketing plan so we considered price 

reductions for properties managed by this contractor to be according to 

schedule if they occurred at one of the two standard reduction 

percentages that appeared in most other contractors’ marketing plans. In 

addition, some marketing plans for one contractor specified a range for 

the price reduction amount. In these cases, we considered a price change 

to be for a scheduled amount if the price was reduced by one of the two 

standard reduction percentages that appeared in most contractors’

marketing plans. Finally, for marketing plans that specified that price 

changes could be up to a certain amount, we considered a price change 

to be for a scheduled amount only if the price change was for the 

maximum amount, since the goal of this analysis was determine how 

often price changes were for particular, predictable, amounts.

To determine how the entities oversee their REO programs, including the 

contractors they use to perform various REO-related activities, we 

interviewed staff from FHA and the housing entities. We also reviewed 

program regulations, requirements, and policies related to oversight. We 

also discussed REO oversight activities with the staff from the three 

private sector mortgage servicers.

 7

FHA’s homeownership centers comprise distinct geographical areas and the effects of 

property characteristics, such as the number of bedrooms, may differ across geographical 

areas. Thus, we also completed regressions comparing homeownership center 

performance without using property characteristics such as the number of bedrooms, 

initial REO valuation, year built, and the number of units as explanatory variables. These 

regression results were qualitatively similar to the results of regressions that included 

those variables.
Appendix II: Comments from the Department 

of Housing and Urban Development

Page 75 GAO-13-542 FHA Property Disposition

Appendix II: Comments from the Department 

of Housing and Urban Development
Appendix II: Comments from the Department 

of Housing and Urban Development

Page 76 GAO-13-542 FHA Property Disposition
Appendix II: Comments from the Department 

of Housing and Urban Development

Page 77 GAO-13-542 FHA Property Disposition
Appendix II: Comments from the Department 

of Housing and Urban Development

Page 78 GAO-13-542 FHA Property Disposition
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 79 GAO-13-542 FHA Property Disposition

Mathew J. Scirè, (202) 512-8678, or sciremj@gao.gov

In addition to the individual named above, Cody Goebel, Assistant 

Director; Kevin Averyt; Stephen Brown; Emily Chalmers; William R. 

Chatlos; Robin Ghertner; DuEwa Kamara; John Karikari; Jon Menaster; 

Alise Nacson; Jessica Sandler; Jena Sinkfield; Jack Wang; William T. 

Woods; and Ethan Wozniak made key contributions to this report.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(250663)
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