The mortgage assignment program was created in 1959 by section 230 of the National Housing Act. However, HUD only began operating the program in 1976 in settlement of a lawsuit. The program, intended to help mortgagors who have defaulted on HUD-insured loans to avoid foreclosure and retain their homes, provides mortgagors with financial relief by reducing or suspending their mortgage payments for up to 36 months until they can resume making regular payments. To enter the program, a mortgagor must apply and meet certain criteria, including that the default must have been caused by circumstances beyond the mortgagor’s control, such as the loss of employment or serious illness. However, after the 36-month period, a mortgagor’s delinquencies are not required to be eliminated or reduced by a specified time other than over the remaining term of the loan, which HUD can extend for up to 10 years. Most of the mortgages assigned under the program are insured by FHA under its Mutual Mortgage Insurance Fund (Fund). For these mortgages, the cost of the assignment program is financed by the Fund, which insures private lenders against losses on mortgages that finance purchases of one to four housing units. To cover losses, FHA deposits borrowers’ insurance premiums in the Fund. Historically, the Fund has been financially self-sufficient. However, if it were to become exhausted, the U.S. Treasury would have to directly cover lenders’ claims and administrative costs. We based our analysis of whether the assignment program helps borrowers avoid foreclosure and reduces FHA’s foreclosure losses primarily on data from two of HUD’s national information systems—the Single-Family Mortgage Notes Servicing System and the Single Family Insurance System—as of September 30, 1994. We used these data to analyze foreclosures and delinquencies and forecast the foreclosure rates of the 68,695 mortgages assigned since fiscal year 1989. We also built a cash flow model and prepared analysis to estimate the financial loss to FHA’s Fund from these loans by estimating the revenue and expense flows for these loans over their life. Our data reflect nationwide mortgage assignment statistics on single-family loans that were entered in HUD’s two national data systems as the Fund’s mortgage defaults that were assigned to avoid foreclosure—71,500 mortgage loans as of September 30, 1994. Loans assigned to HUD for other reasons were not included in our analyses. To determine how to improve the program and reduce its losses, we obtained information from four other mortgage assistance institutions that provide foreclosure relief to borrowers in default on single-family housing loans—the Department of Veterans Affairs (VA), Rural Housing and Community Development Service (RHCDS), Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac). (See app. I for additional details on the scope and methodology of our work.) To improve the administration of the program, HUD recently has initiated changes to the program. These include selling its currently assigned loans; implementing Activity Tracking, an automated collection computer subsystem; studying the costs and benefits of alternatives to foreclosure; permitting lenders to provide relief to borrowers, such as suspending or reducing mortgage payments, without prior approval from HUD; implementing a “compromise offer” program under which borrowers’ loans are considered to be paid off for less than the amount owed; and implementing for a limited period of time a program for reducing interest rates on certain program loans. HUD has also proposed contracting for loan servicing. The Office of Management and Budget (OMB) considers FHA’s mortgage assignment program to be a high-risk area because controls do not protect the financial interests and resources of the government. In the President’s fiscal year 1996 budget, OMB stated that the servicing of assigned loans was expensive, inefficient, and labor-intensive. Also, OMB noted that there is little evidence that the program achieves its goal of giving homeowners a chance to keep their homes during a temporary interruption of income. According to OMB, legislative changes should be considered to reduce or eliminate the assignment of loans in the future by greater reliance on the private sector as well as legislation to reduce the program’s forbearance period from 3 years to 1 year. To reduce the number of assigned loans and the required servicing of loans, OMB recommended that HUD continue to sell its assigned loans. We forecast, on the basis of historical data on the disposition of program loans, that about 35,400 (52 percent) of the 68,695 borrowers accepted into the program since fiscal year 1989 will eventually lose their homes through foreclosure. For the remaining loans (48 percent), we forecast that borrowers will pay off the loans and avoid foreclosure by either selling their homes or refinancing their mortgages, often after remaining in the program for a lengthy period of time. Some of these borrowers who eventually pay off their loans may have, under the compromise program, paid HUD an amount less than the total amount owed. (A detailed discussion of our methodology for forecasting the program’s foreclosure rates appears in app. II.) Figure 1 shows our estimates of conditional foreclosure rates based on loans that remained active until a given year and were assigned during a 17-year period (fiscal years 1977 through 1994). We estimate that conditional foreclosure rates will increase sharply over the first 7 years after a loan is accepted into the program, peaking at about 13 percent. The program’s conditional foreclosure rates substantially exceed those experienced on FHA’s nonassigned single-family loans during the same 17-year period. HUD’s records show that since fiscal year 1977, at least 96,500 borrowers have been accepted into the assignment program. About 71,500 of these borrowers were still assigned to HUD as of September 30, 1994. A large portion of them—39,603, or 55 percent—have been in the program fewer than 3 years (see fig. 2). As shown in figure 3, of the approximately 71,500 borrowers in the program as of September 30, 1994, 59 percent were current with forbearance agreements or current with their original mortgage payments. The remaining 41 percent were delinquent or pending foreclosure. Only 5 percent of the program’s borrowers were making full mortgage payments. When borrowers remained in the program beyond the 3-year relief period and therefore were required to make full mortgage payments, the proportion of borrowers current with repayment agreements dropped and the proportion of borrowers in foreclosure increased. Similarly, the average amount of delinquencies owed by borrowers increased. (See app. III for detailed information on borrowers’ compliance with repayment agreements.) Most of the 25,041 borrowers who left the program for whom records are available did so following foreclosure, while other borrowers paid off their loans and at times eliminated delinquencies. Of the 25,041 borrowers, HUD foreclosed on 14,707 borrowers (59 percent), while 10,334 borrowers (41 percent) paid off their loans. An example of a borrower who left the program through foreclosure is a Chicago mortgagor who was accepted into the program in November 1990 and was $9,495 behind in payments at that time. The loan’s outstanding principal balance at that time was $34,862. Although HUD determined that the mortgagor’s income was sufficient for him to make more than full mortgage payments, the mortgagor made only five payments over the next 3-1/2 years. By September 1994, when HUD began foreclosure, the borrower was over $25,000 behind in payments. Borrowers who paid their loans generally did so following the sale of their homes at a price that, in most cases, allowed them to repay the outstanding mortgage and the delinquent amount. For example, a Seattle, Washington, mortgagor defaulted on an $89,890 loan 15 months after obtaining it. The mortgagor found a new job after experiencing a salary cut on his previous job. When the mortgage was assigned in November 1990, the mortgagor was already $6,333 behind in payments. Initially, the mortgagor was allowed to make reduced payments of $400 per month, about half the full payment. After 2 years, the mortgagor was unable to pay off the delinquent amount, which had grown to $19,229 when he sold the house in April 1993. However, the sale proceeds enabled the mortgagor to fully satisfy his obligation to HUD. (See app. IV for cases in which some borrowers paid off mortgages and others did not.) Given the lower income of FHA borrowers, which can make them financially vulnerable, the assignment program’s operating procedures do not provide assurance that delinquent amounts will be repaid and that borrowers will succeed in avoiding foreclosure. These procedures include (1) accepting borrowers into the program after they have accumulated substantial loan delinquencies and therefore have an uncertain repayment ability and (2) a 36-month relief period when payments can be reduced or suspended, which permits outstanding delinquencies to grow even if borrowers are current with repayment agreements. Most FHA home loans are for moderate-income individuals. These individuals are likely to be more financially vulnerable than other mortgagors who are able to obtain home loans without FHA’s assistance. Under the assignment program, a borrower must miss at least three mortgage payments before submitting an application to enter the program. During the acceptance process, additional payments may be missed, and substantial delinquencies may accumulate over a period of 6 months or more. We randomly selected, as case studies, 136 loans from four loan categories—paid-off, current with payments, foreclosed on, and delinquent—from files at four HUD field offices—Boston, Chicago, Ft. Worth, and Spokane—to illustrate, among other things, the amount of delinquencies that borrowers had accumulated when they entered the program.