Property Disposition: Information on HUD's Acquisition and Disposition of Single-Family Properties
Released: 1995-08-04T00:00:00

Letter

Losses and Costs Associated With HUD’s Acquisition, Management, and Sale of Single-Family Properties

The Department of Housing and Urban Development’s (HUD) single-family mortgage insurance programs are intended to protect lenders from financial losses resulting from defaults on mortgage loans to home buyers. As part of this insurance protection, HUD acquires foreclosed properties from lenders and manages these properties until they can be sold from its inventory. This section describes the costs and revenues associated with HUD’s acquisition and disposition activities as well as the losses to the Federal Housing Administration’s (FHA) insurance funds incurred through these activities.

Overall Costs and Revenues

During fiscal years 1992 through 1994, HUD sold about 200,000 single-family properties. It spent nearly $14 billion to acquire, manage, and sell these properties, and it sold these properties for about $9.2 billion. Overall, FHA’s insurance funds lost about $4.75 billion from the foreclosure of these loans. (See fig. 1.1.) However, premiums for the principal single-family fund—the Mutual Mortgage Insurance (MMI) Fund—have more than offset the losses incurred for properties financed by loans insured by this fund.

Section 1 Losses and Costs Associated With HUD’s Acquisition, Management, and Sale of Single-Family Properties The data supporting this figure appear in app. III, table III.1.

For the properties sold from HUD’s inventory during fiscal years 1992 through 1994, the median loss per property for foreclosure and disposition activities was about $22,500, or about 39 percent of the costs paid to acquire these properties. The insurance funds incurred losses on about 97 percent of the properties sold from HUD’s inventory during this period.

For a relatively small portion of the properties sold, the losses were much higher than the median and substantially increased the total loss to the funds. About 11,500 properties, or 6 percent of the properties sold, accounted for about 16 percent of the total loss to the funds—about $750 million. The funds lost more than $50,000 through the acquiring and selling of each of these properties. Moreover, 482 of these properties incurred losses of more than $100,000 each, resulting in losses to the funds of more than $57 million.

Of the properties with unusually high losses, a disproportionately large number were multiunit dwellings. For example, although less than 1 percent of the single-family properties that HUD sold during this period had three or four dwelling units, one-third of the properties with losses exceeding $100,000 had three or four dwelling units. These multiunit properties may have had higher mortgage loans and higher unpaid principal balances at the time of default than most of the properties sold by HUD. In addition, the properties with very high losses were concentrated in just a few states. Twenty percent of all properties with losses from $50,000 to $100,000 were in California; about half of all properties that lost this much were located in five states—California, Connecticut, Illinois, New York, and Texas. Forty-four percent of the properties with losses exceeding $100,000 were located in five states—California, Colorado, Connecticut, Massachusetts, and New York. According to HUD officials, losses of this magnitude may be due to a number of reasons, such as the collapse of a local real estate market due to the closing of a locally based industry. Figure 1.2 illustrates the range of losses per property.

Section 1 Losses and Costs Associated With HUD’s Acquisition, Management, and Sale of Single-Family Properties The data supporting this figure appear in app. III, table III.2.

proceeds are deposited in the appropriate insurance fund; however, interest is foregone for the length of time between property acquisition and sale.

Breakdown of Costs

For the single-family properties sold during fiscal years 1992 through 1994, HUD incurred by far the largest proportion of its total costs—about 89 percent, or more than $12.4 billion—to acquire the properties. In addition, it incurred about 5 percent of its total costs, or about $691 million, to manage the properties and about 6 percent of its total costs, or about $867 million, to sell the properties. (See fig. 1.3.)

Property Acquisition Costs

HUD protects lenders from loss by insuring mortgages against the risk of default. As part of this insurance program, HUD acquires properties that have gone through foreclosure.

The acquisition costs incurred by HUD represent all of the expenses paid by or on behalf of the lender in connection with the foreclosure, acquisition, operation, protection and preservation, and conveyance of the property to HUD. In accordance with the law, HUD reimburses the lender for the unpaid principal balance of the loan—even if the property is worth less than the mortgage balance, covers a portion of the costs associated with foreclosure, and makes interest payments to compensate the lender for the interest lost when the borrower defaults on the loan.

The details on the components of acquisition costs are contained in HUD’s single-family insurance claims system rather than the SAMS system. HUD provided us with a nationwide breakdown of the acquisition costs for acquired properties from the claims data system. As figure 1.4 shows, the largest portion of the acquisition costs nationwide is the unpaid principal balance, which represents about 86 percent of the total. Other acquisition costs include the interest paid to compensate lenders for the interest lost through defaults on loans and the reimbursement made to lenders for various costs, including the property taxes paid by the lender, the legal fees associated with the foreclosure, expenses to protect and preserve the property, and other miscellaneous costs. Appendix II presents a more detailed breakdown of HUD’s property acquisition costs.

Section 1 Losses and Costs Associated With HUD’s Acquisition, Management, and Sale of Single-Family Properties The data supporting this figure appear in app. III, table III.4.

An example of a property acquisition cost is an FHA insurance claim for about $126,300 that HUD paid to a lender in 1994. This payment included nearly $105,000 for the unpaid principal balance, about $16,000 as compensation for lost interest, and about $6,700 for other acquisition costs, including legal fees and costs to protect and preserve the property, less about $1,400 for an escrow account held by the lender.

Property Management (Holding) Costs

The property management, or holding, costs—for maintenance and operation, repairs, and property taxes—were much smaller than the acquisition costs for the properties sold from fiscal year 1992 through fiscal year 1994. Nevertheless, these costs totaled more than $691 million. Over the 3-year period, maintenance and operating expenses accounted for about 58 percent of the total holding costs; repairs, about 25 percent; and property taxes, the remaining 17 percent, as shown in figure 1.5. The median total holding cost was just under $2,700 per property.

The following example illustrates property holding costs: HUD acquired a property in January 1994 and sold it about 5 months later. During this time, the holding costs amounted to $2,279, including $1,014 in fees to a private company for managing the property, $868 in real estate taxes, $221 in utility charges, and $176 in miscellaneous costs.

For a small number of properties sold, the holding costs were substantially higher than the median holding cost and accounted for a significant percentage of the total holding costs. For example, although the median amount spent by HUD on repairs for the 3-year period was $290 per property sold, the amount spent on repairs for about 6,000 properties exceeded $5,000 each, totaling more than $45 million. Thus, 3 percent of the properties sold accounted for 26 percent of the $173 million spent by HUD on repairs during this period. Likewise, although the median amount spent on maintenance and operation for the 3-year period was $1,542 per property sold, the amount spent on these costs for about 12,150 properties exceeded $5,000 per property. In this case, total maintenance and operating expenses for 6 percent of the properties sold were more than $87 million, or about 22 percent of the approximately $400 million spent by HUD in this expense category.

Overall, a shift occurred from fiscal year 1992 to fiscal year 1994 in the proportion of the total holding costs spent on maintenance and operation, repairs, and property taxes for properties sold in the 3-year period. While the median amount spent per year on maintenance and operation increased from $1,302 in fiscal year 1992 to $1,672 in fiscal year 1994, the median amount spent per year on repairs decreased from $431 in fiscal year 1992 to $165 in 1994. The median amount spent per year on property taxes, the smallest of the three expense categories, decreased slightly from $429 in fiscal year 1992 to $383 in fiscal year 1994. (See fig. 1.6.)

HUD officials believe that this shift occurred as a result of a number of factors. For example, during the early 1990s, one HUD field office with a very large inventory had a policy of sprucing up many properties by making minor repairs designed to improve their marketability. According to HUD, since this office’s inventory has declined, the total number of properties being repaired nationwide has declined as well. HUD also told us that some minor items that were classified as repairs before fiscal year 1994 have been reclassified as part of the maintenance activities required of contractors that manage properties for HUD. Another reason that HUD officials indicated for the shift in the magnitude of the cost categories has been an effort by HUD to discourage time-consuming repairs so that properties can be marketed and sold out of inventory quickly.

views them as part of the “cost of doing business,” not as an addition to the cost of property disposition for an individual property. These expenses are, however, charged to the appropriate insurance fund.

Property Sales Costs

For the single-family properties sold from fiscal year 1992 through fiscal year 1994, HUD incurred about $867 million in sales costs. These costs include commissions paid to real estate agents, advertising expenses, and special discounts offered to encourage potential buyers to purchase HUD’s properties.

The following example illustrates property sales costs: HUD acquired a property in May 1994 and sold it about 4-1/2 months later for $46,000, incurring $3,327 in sales costs. Specifically, HUD paid $2,500 to a selling broker, $240 to a closing agent, $552 for advertising expenses, and $35 for miscellaneous expenses.

Number of Single-Family Properties Acquired and Sold

During the 3 fiscal years 1992 through 1994, HUD acquired an average of over 63,000 properties annually. During the same period, HUD sold an average of nearly 66,000 properties each year. Because acquiring and selling are ongoing activities, HUD at any one time owns and manages thousands of properties. Overall, the number of properties held by HUD at a specific time—the end of the fiscal year—declined during these 3 years because sales outpaced acquisitions. At the end of fiscal year 1994, HUD had 28,587 properties in inventory. (See fig. 2.1.)

Single-Family Properties Acquired by HUD

year 1993, to just under 60,000 in fiscal year 1994. (See fig. 2.2.) In addition, about 42,000 borrowers who had defaulted were able to avoid foreclosure during this period by being accepted into HUD’s mortgage assignment program. HUD estimates that more than half of these loans will eventually go into foreclosure and the properties will be acquired by HUD.

The properties acquired by HUD during fiscal years 1992 through 1994 were concentrated in relatively few states. Over half were located in seven states—Arizona, California, Florida, Georgia, Tennessee, Texas, and Virginia. About 30,000, or more than 15 percent of all the properties acquired by HUD during this 3-year period, were located in Texas. (See fig. 2.3.)

Single-Family Properties Sold by HUD

From fiscal year 1992 through fiscal year 1994, HUD sold an average of about 66,000 properties annually. The number of properties sold per year declined steadily, from about 70,000 in fiscal year 1992, to about 65,000 in fiscal year 1993, to about 62,500 in fiscal year 1994. (See fig. 2.4.)

The properties sold by HUD during fiscal years 1992 through 1994 were concentrated in nearly the same states as the properties acquired by HUD. Over half were located in seven states—Arizona, California, Colorado, Florida, Georgia, Texas, and Virginia. The largest number of sales took place in Texas. Specifically, from fiscal year 1992 through fiscal year 1994, 32,561 sales, or 16.5 percent of all the sales during that period, occurred in Texas. (See fig. 2.5.)

HUD’s Inventory of Single-Family Properties to Manage and Sell

At any particular time, HUD has title to and responsibility for managing many thousands of single-family properties; the exact number of properties in inventory changes as new properties are acquired and acquired properties are sold. The number of properties held by HUD at the end of each fiscal year declined during the period of our review. HUD’s inventory was reduced from 33,136 properties at the end of fiscal year 1992 to 28,587 properties at the end of fiscal year 1994. (See fig. 2.6.)

Length of Time That Single-Family Properties Remained in HUD’s Inventory

The median time required for HUD to sell an acquired single-family property was about 5 months for the properties sold during fiscal years 1992 through 1994. The properties that remained unsold as of September 30, 1994, had been in inventory a median length of 3 months. As discussed in section 1, the costs of acquiring, managing, and selling a single-family property typically exceed the revenues. These costs were higher for properties that remained in inventory for longer periods of time, while sales revenues generally were lower. Holding costs, in particular, are likely to increase with the length of time that a property remains in HUD’s inventory. Declining sales revenues, however, may not be caused by the length of time that a property remains in inventory. HUD officials told us, for example, that properties take longer to sell in regions that are experiencing declining property values. Hence, the properties that remain in inventory for longer periods of time usually incur higher losses (sales revenue less costs) than the properties that remain in inventory for shorter periods of time.

Length of Time That Single-Family Properties Sold by HUD Remained in Inventory

The properties sold in fiscal years 1992 through 1994 were in inventory a median of 4.7 months. However, the time required to sell any one property varied over a wide range, as shown in figure 3.1. About half of the approximately 198,000 properties sold during fiscal years 1992 through 1994 remained in inventory from 2 to 5 months. Only 8,350, or about 4 percent, of the properties sold during these years were sold in less than 2 months. About 75,000 properties, or 38 percent, were in inventory more than 5 months but no more than 12 months before being sold. The remaining 8 percent were in inventory more than 1 year before being sold. Among these properties, 2,166, or about 1 percent of all the properties sold, were in inventory more than 3 years before being sold.

Section 3 Length of Time That Single-Family Properties Remained in HUD’s Inventory The data supporting this figure appear in app. III, table III.9.

Length of Time That Unsold Single-Family Properties Had Been in Inventory

As of September 30, 1994, HUD had 28,587 properties in inventory. Although HUD had owned these properties for a median of 3 months, the properties—like the properties that HUD sold—had been in inventory for widely varying periods of time, as shown in figure 3.2. Almost 60 percent of the properties that HUD held on September 30, 1994, had been acquired no more than 4 months earlier. In addition, about 29 percent had been acquired earlier in fiscal year 1994. The remaining 12 percent had been in inventory more than 1 year. Of these, 1,231, or 4.3 percent of all the unsold properties, had been in inventory more than 3 years.

Section 3 Length of Time That Single-Family Properties Remained in HUD’s Inventory The data supporting this figure appear in app. III, table III.10.

Of the 28,587 properties in inventory as of September 30, 1994, 3,104, or about 11 percent, were being held off the market. HUD may hold properties off the market while carrying out certain administrative processes and assisting programs for the homeless and for other reasons. These properties made up an increasing portion of the properties in inventory for longer periods of time. In fact, over half of all the properties in inventory for longer than 18 months were being held off the market as of September 30, 1994.

Relationship Between Losses and Time in Inventory

Properties that are in inventory for longer periods of time have proportionally higher losses than properties that are in inventory for shorter periods of time. In general, for every dollar spent to acquire a property, HUD incurred a higher loss for a property that was in inventory longer, as shown in figure 3.3. For example, losses represented 32 percent of the acquisition costs for properties that were sold within 1 month of being acquired. That is, for every dollar spent to acquire such properties, HUD ultimately lost 32 cents after the holding and selling expenses and the revenues received from the sale of the properties are taken into account.

For properties that were in inventory for about 12 months, HUD lost about 52 cents for every dollar spent to acquire the properties.

sold during the 12th month after being acquired were about twice as high (more than $4,100) as the median holding costs for properties that were sold during the 2nd month after being acquired (about $2,000). The median acquisition cost for properties sold during the 12th month was also somewhat higher (about $60,700) than the median acquisition cost for properties sold during the 2nd month (about $57,900). Similarly, the median selling expense was somewhat higher for properties sold during the 12th month (about $4,100) than for properties sold during the 2nd month (about $3,500). Conversely, the median sales revenue for properties sold during the 12th month (about $37,900) was lower than the median sales revenue for properties sold during the 2nd month (about $44,100). According to HUD officials, the price at which individual properties can be sold declines with time, while holding costs mount, and properties may take longer to sell in regions experiencing economic difficulty. (See fig. 3.4.)

Section 3 Length of Time That Single-Family Properties Remained in HUD’s Inventory The data supporting this figure appear in app. III, table III.12.

Inflator is based on the fiscal year that the property was sold, not the date(s) that the cost(s) was incurred.

Holding costs are costs associated with taxes, maintenance and operations, and repairs.

Sales revenue is calculated as the sum of profit (loss), acquisition costs, holding costs, and selling expenses.