Established by the National Housing Act of 1934, the FHA single-family mortgage insurance program helps low- and moderate-income families, minorities, and first-time home buyers become homeowners by providing insurance on single-family mortgage loans. The mortgage insurance allows private lenders to provide qualified borrowers with favorable mortgage terms, such as a 3-percent down payment, and generally compensates lenders for nearly all of the losses incurred on such loans. To support the program, FHA imposes up-front and annual mortgage insurance premiums on home buyers. FHA’s single-family mortgage program currently does not require a federal credit subsidy to operate. The Mutual Mortgage Insurance Fund (MMI), 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. FHA’s current mortgage limits vary across the country from $261,609 in high-cost areas to $144,336 in low-cost areas. FHA uses management and marketing contractors to perform certain maintenance on foreclosed properties and to sell the properties to home buyers or investors. VA’s mortgage loan program is an entitlement program that provides eligible veterans with housing benefits. The VA guaranty program allows mortgage lenders to extend loans to eligible veterans on favorable terms, such as a no-down-payment loan, and provides lenders with substantial financial protections against the losses associated with extending such mortgages. To help support the program, veterans are required to pay a funding fee of 1.25 to 3.0 percent of the loan amount. In addition, the program is financed by credit subsidy appropriations to the Veterans Housing Benefit Program Account. RHS operates a guaranteed loan program to help rural Americans with low and moderate incomes purchase single-family homes. The RHS guaranteed loan program does not require borrowers to make down payments or pay monthly mortgage insurance fees. To help offset losses to the government associated with providing financial protections to lenders who make RHS mortgages, RHS currently requires lenders to pay a guarantee fee of 2 percent of the mortgage principal loan amount, which they may pass on to borrowers. Fannie Mae and Freddie Mac are private corporations chartered by Congress to provide a continuous flow of funds to mortgage lenders and borrowers. To fulfill their responsibilities of stabilizing the nation’s mortgage markets and expanding homeownership opportunities, Fannie Mae and Freddie Mac purchase mortgages from lenders across the country and package them into mortgage-backed securities. Most mortgages that Fannie Mae and Freddie Mac purchase are conventional mortgages (i.e., mortgages with no government mortgage insurance or guarantees). They purchase single-family mortgages up to the “conforming loan limit,” which is now set at $300,700. Fannie Mae and Freddie Mac typically require mortgage insurance from private companies on any mortgage purchases with loan-to-value ratios that exceed 80 percent. Fannie Mae and Freddie Mac finance their mortgage purchases through borrowing or issuing mortgage-backed securities that are sold to investors. Mortgage servicers, such as large mortgage finance companies or commercial banks, typically service mortgages insured or guaranteed by FHA, VA, or RHS or purchased by Fannie Mae or Freddie Mac. Mortgage servicers do not necessarily finance the mortgages they service, but rather service mortgages for a fee on behalf of those entities that own mortgages, such as lenders, Fannie Mae, or Freddie Mac. Large servicers typically service FHA, VA, Fannie Mae, and Freddie Mac mortgages, and some service RHS mortgages. Mortgage servicing involves administrative activities such as collecting monthly mortgage payments, maintaining escrow accounts for property taxes and hazard insurance, and forwarding proper payments to purchasers of the loans. Mortgage servicers also are generally responsible for “loss mitigation” (see fig. 1) and for conducting foreclosure proceedings. Table 1 shows the number of FHA, VA, RHS, Fannie Mae, and Freddie Mac foreclosures that were ongoing in 2000. Title insurance companies issue title insurance policies to protect purchasers and lenders against unknown defects of title or against a loss due to any lien or encumbrance that has not been disclosed when a property is purchased or acquired. Title policies typically cover such matters as defective or lost documentation, mistakes, maladministration, or forgery. In addition, title policies typically list exclusions from title coverage for certain defects of title. State foreclosure laws establish the general framework and processes that the organizations and mortgage servicers must follow when foreclosing on defaulted mortgages. These state laws and the federal bankruptcy code establish protections for residents and minimum time frames for conducting foreclosures. Within the framework of applicable state and federal laws, the organizations have developed specific procedures for conducting foreclosures. State foreclosure laws establish certain procedures that servicers must follow in conducting foreclosures and establish minimum time periods for various aspects of the foreclosure process (see fig. 2). Under state laws, servicers are required to provide to borrowers and the public notices associated with the initiation of the foreclosure process. For example, servicers may be directed to mail a notice to the borrower, post a notice of the foreclosure on the affected property, and publish notice of the foreclosure in local newspapers. State laws also generally require servicers or public officials to conduct foreclosure sales. At the foreclosure sale, the servicer purchases the property by bidding the amount of the outstanding debt or the property fair market value. Then servicers, as described in this report, transfer or convey the properties to the organizations for sale or sell the properties themselves. Several states have enacted “redemption” laws that give borrowers the opportunity to match the winning bids from the foreclosure sale and reclaim their properties. During redemption periods, the organizations or servicers are generally not permitted to pursue additional foreclosure proceedings, such as evicting property residents or securing the properties. According to a Freddie Mac official, state redemption periods range from 10 days to 9 months. If properties are vacant, some state laws may permit the shortening of redemption periods and allow the organizations or servicers to take control of foreclosed properties. After foreclosure sales and applicable redemption periods, the organizations or servicers typically proceed with eviction proceedings if foreclosed properties are not already vacant. State laws generally govern eviction proceedings and provide certain protections to the residents of foreclosed properties. For example, state laws require servicers or the organizations to notify property residents before the initiation of an eviction lawsuit. For example, some states have notification periods that range from 3 to 7 days. Homeowners may also file for bankruptcy proceedings under federal law, a procedure that can extend foreclosure proceedings. Filing a bankruptcy petition automatically stays any pending or planned foreclosure proceedings. Generally, a foreclosure conducted in violation of the stay is void, and the lender can be liable for damages. Under certain conditions, courts may lift stays and allow foreclosure proceedings to resume. Within the framework of state and federal laws, the organizations have established procedures for initiating foreclosure proceedings, conducting foreclosures, and selling foreclosed properties to home buyers or investors. Some procedures differ, such as the organizations’ criteria for initiating foreclosures, while others are similar. This section summarizes the organizations’ foreclosure procedures, while two key differences— FHA’s approach to foreclosed property custody and FHA and VA title evidence requirements—are discussed more fully later in the report. Table 2 shows the criteria that the organizations have established for initiating foreclosure proceedings. Fannie Mae and Freddie Mac direct their servicers to initiate foreclosure proceedings at earlier stages than FHA, VA, and RHS. According to Fannie Mae officials, while the organization directs servicers to proceed with foreclosure at an earlier stage than the government organizations, servicers are also required to continue pursuing loss mitigation efforts. Fannie Mae officials said that the organization directs foreclosures at an earlier stage to help minimize losses and because borrowers are more likely to be receptive to loss mitigation efforts when foreclosure is pending. Fannie Mae officials said that the simultaneous approach of loss mitigation and foreclosure proceedings is advantageous because it enables more borrowers to retain their homes and reduce losses in the event loss mitigation is not successful. Freddie Mac officials also stressed that loss mitigation efforts continue even after the initiation of foreclosure proceedings. A Freddie Mac official told us that in some cases the organization, servicers, and borrowers have worked out loss mitigation agreements on the date of foreclosure sales. FHA, VA, and RHS officials said that they have public missions and obligations to their customers, such as low-income Americans, veterans, and rural residents, and take additional time to initiate foreclosure proceedings. Like Fannie Mae and Freddie Mac, each of these organizations also encourage their servicers to continue pursuing loss mitigation efforts after the initiation of foreclosure proceedings. Table 3 summarizes the procedures that the organizations have established to conduct foreclosures. As shown in the first row of table 3, all of the organizations expect servicers to follow established foreclosure time frames, which can vary by state. Organization officials said that they have analyzed the foreclosure laws and bankruptcy laws in each state and collected data on past foreclosure proceedings to determine how long it should take servicers to complete the foreclosure process in each state. The organizations may reward servicers financially for meeting or beating these deadlines and may impose financial penalties where servicers fail to meet the guidelines. For example, FHA generally does not compensate servicers for their interest expenses if they exceed the established deadlines. As shown in the second row of table 3, the organizations have developed differing approaches regarding the law firms that mortgage servicers use to conduct foreclosures. In certain states, Fannie Mae and Freddie Mac have identified law firms that are available to servicers in conducting foreclosures. Referred to as “retained” or “designated” attorneys, these law firms conduct all of the legal procedures related to foreclosures. Fannie Mae and Freddie Mac officials said that the designated attorneys have significant experience in foreclosure work and can ensure that the process is completed in the most efficient manner possible.