In December 1994, the Secretary of Housing and Urban Development announced a plan to reinvent the Department to transition it from a “lumbering bureaucracy to a streamlined partner with state and local governments.” With the streamlining, the Secretary expects HUD to reduce its staffing from about 11,900 to 7,500 by the year 2000. In March 1995, the Secretary laid out the envisioned changes for HUD in a plan entitled, HUD Reinvention: From Blueprint To Action. The plan was subsequently updated in January 1996. The HUD reinvention plan acknowledges that FHA is behind the times technologically and increasingly ill-equipped to manage its business. The plan notes that FHA needs to streamline operations and acquire state-of-the-art technology and information systems to transform itself into a results-oriented, financially accountable operation. One of the mandates of the plan is to reduce FHA staffing from about 6,000 to 2,500. As part of the downsizing, FHA’s Office of Single Family Housing is planning to reduce its staff from a 1994 level of 2,700 to 1,150 by the year 2000. The mission of FHA’s Office of Single Family Housing is to expand and maintain affordable home ownership opportunities for those who are unserved or underserved by the private market. Single family housing carries out its mission by insuring private lenders against losses on single family home loans. FHA’s insurance operations target borrowers such as first-time home buyers, low-income and moderate-income buyers with little cash for down payments, residents of inner cities and rural areas with inadequate access to credit, minority and immigrant borrowers, and middle-income families in high cost areas. At the end of fiscal year 1995, FHA had insurance outstanding valued at about $350 billion on mortgages for 6.5 million single family homes. FHA processed an average of about 1 million applications for mortgage insurance and disposed of properties acquired from borrower defaults on over 50,000 loans annually during fiscal years 1994 and 1995. Single family housing operations consist primarily of four functions: loan processing, quality assurance, loss mitigation and loan servicing, and real property maintenance and disposition. The following summarizes these basic functions. Loan processing: FHA records data on loans originated by FHA-approved lenders, issues insurance certificates, and conducts underwriting reviews of loan documentation. FHA-approved lenders perform the underwritingtasks necessary to determine whether loans meet FHA’s insurance guidelines. Quality assurance: FHA reviews selected loans to ensure that approved lenders are originating loans in accordance with FHA’s guidelines. Loss mitigation and loan servicing: FHA attempts to resolve delinquencies to minimize losses that can result if borrowers default on loans. FHA’s loss mitigation efforts have generally involved (1) placing delinquent loans in the mortgage assignment program, which offered reduced or suspended payments for up to 3 years to allow borrowers to recover from temporary hardships, (2) offering alternative default resolution actions such as refinancing, or (3) using preforeclosure sales of homes. FHA services loans that are in the mortgage assignment program, which includes collecting monthly payments, paying property taxes, and maintaining accounting records. Property maintenance and disposition: FHA acquires properties from voluntary conveyances by borrowers or foreclosures. FHA inspects and secures the properties, performs necessary repairs, and sells the properties. The functions performed by FHA generally parallel those performed by other organizations in the single family mortgage industry, such as Fannie Mae, Freddie Mac, and large private mortgage insurance corporations. However, the functions FHA performs differ from those of the other organizations because of differing business objectives. Fannie Mae and Freddie Mac are government-sponsored, privately owned enterprises that purchase mortgages from lenders and (1) hold them as investments in their portfolios or (2) sell securities that are backed by mortgage pools. Therefore, in addition to the functions FHA performs, Fannie Mae and Freddie Mac also establish purchase prices for mortgages, negotiate purchase contracts, and market mortgage-backed securities. Private mortgage insurers perform the same functions as FHA and perform loan underwriting for a significant portion of the loans they insure. Similar to FHA, private mortgage insurers also accept loans underwritten by lenders to whom they have delegated the authority to initiate insurance. FHA performs some functions that are unique in the mortgage industry. For example, FHA sells houses from its real property inventory to interested nonprofit organizations, states, and local governments, and FHA works with local community development officials in their efforts to increase home ownership opportunities. Because of its mission, FHA accepts higher levels of risk on many of the mortgages it insures. FHA covers 100 percent of losses on the mortgages it insures, whereas Fannie Mae and Freddie Mac share losses with mortgage insurers and private insurers share losses with mortgage lenders. FHA also insures higher risk mortgages because it accepts higher loan-to-value and borrower debt-to-income ratios than the private mortgage insurers. In addition, FHA has a higher proportional volume of defaults that it must manage and a higher volume of real property maintenance and disposition activities. Historically, FHA’s single family housing operations have had significant management control problems in originating insured loans, resolving delinquencies, managing assigned mortgages, and managing property maintenance and disposition activities. Information system weaknesses have been cited as a contributing factor for many of FHA’s management control weaknesses. For example, independent audit reports have cited FHA systems that collect delinquency data and track default resolution actions as inadequate to support oversight responsibilities and as factors contributing to inadequate loss mitigation efforts. Similarly, FHA’s information systems have not adequately supported the tracking and monitoring of collection and foreclosure actions on loans in the mortgage assignment program. In addition, the lack of information system support for controlling and accounting for properties assigned to real estate brokers for property disposition was cited as a major cause of the highly publicized HUD scandals in the 1980s. According to HUD’s Federal Managers’ Financial Integrity Act (FMFIA) compliance reports and independent auditors’ reports for fiscal years 1994 and 1995, FHA has corrected system weaknesses in the mortgage assignment and property disposition areas but is still developing systems to support delinquency monitoring and resolution. FHA plans to use its existing information technology capabilities to facilitate some streamlining and staff reduction initiatives, while other initiatives will require new information technology applications. FHA plans to achieve the majority of the single family housing staff reductions by reducing its field staff performing loan processing from about 600 to 310, loss mitigation and loan servicing from 600 to 90, and real property maintenance and disposition from 750 to 75. FHA also plans to reduce its single family housing headquarters staff from about 200 to 85. Some of these reductions will be offset by increases in field staff performing quality assurance, marketing and outreach, legal, and administrative support functions. While the staff levels for each function are not final, single family housing officials expect to reach the projected 1,150 staffing target. The planned reduction of loan processing staff is to be facilitated by expanding the use of existing electronic data transfer capabilities to enable the reduction of data entry by FHA staff and the consolidation of operations into fewer locations. New information system support will be needed for FHA’s planned changes to loss mitigation and disposition operations. To reduce its loan processing staff, FHA is (1) expanding the use of its electronic data transfer capabilities so that fewer staff are needed to enter data into systems from paper documents and (2) using its information systems to support the consolidation of operations from 81 offices to 5 offices. FHA established its electronic data transfer capabilities for loan processing and made them available to lenders in 1991. In fiscal year 1995, lenders submitted about 35 percent of loan data electronically. To take further advantage of this capability, FHA plans to ask lenders to increase the use of electronic transfers to deliver loan data. In 1994, FHA began consolidating loan processing operations into fewer offices to increase efficiency. According to officials responsible for single family loan processing operations, variations in workloads have resulted in idle time for loan processing staff at some field offices, while staff at other field offices have been overloaded and processing has been backlogged. Consolidating the work to fewer locations helps eliminate the variations in workload and increase efficiency of operations, thus reducing the number of staff needed to perform the work. FHA is consolidating into its Denver office the loan processing workload that had been performed in 17 field offices. The Denver office is using 42 staff for the loan processing work that was performed by an estimated 96 staff before the consolidation. FHA officials in charge of the pilot attributed the increased efficiency to consolidating the work at one site and increasing the use of electronic data transfer to submit loan data to FHA. According to Denver project officials and documentation, FHA persuaded lenders to increase their use of electronic data transfer from less than 40 percent of all submissions before the consolidation to about 90 percent after consolidation. They also said that loans submitted electronically can be processed in about one-third the time it takes to process loans submitted in paper form. When lenders electronically transfer the loan data, the loan processing staff only need to check that data against the paper forms submitted by the lender. If the data are not submitted electronically, the staff have to enter the loan data from the paper forms into FHA’s information systems. With the initial consolidation and processing changes, the Denver office loan processing times were reduced from 5 to 8 days to an average of 2 days, according to FHA. At the time of our review, the Denver consolidation was substantially complete. In April 1996, FHA announced that it would start consolidating loan processing operations in 32 field offices in eastern states into 2 offices—Philadelphia and Atlanta. FHA plans to complete these consolidations in 1997 and start consolidating the remaining offices in 1998.