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. 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 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 service- connected 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. RHS- guaranteed 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. 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. 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. 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. However, certain states provide the previous owners of foreclosed properties with a right of redemption that allows them to pay amounts 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 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. 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.