POGO Letter to HUD Secretary Shaun Donovan regarding apparent problems with the FHA mortgage insurance program

Secretary Shaun Donovan

U.S. Housing and Urban Development

451 7th Street S.W.,

Washington, DC 20410

"It is HUD's policy to reduce the inventory of acquired properties in a manner that expands homeownership opportunities, strengthens neighborhoods and communities, and ensures a maximum return to the mortgage insurance fund." 24 CFR §203.670

Dear Secretary Donovan:

Congratulations on your recent appointment. The Project On Government Oversight (POGO) is an independent nonprofit that investigates and exposes corruption and other misconduct in order to achieve a more effective, accountable, open, and honest federal government. In that regard, we understand you have an enormous task ahead, and we wanted to bring to your attention an opportunity to improve HUD operations that could strengthen the FHA mortgage insurance program and help reduce the harm caused by the larger foreclosure crisis.

Specifically, we are writing about HUD's apparent decision to disregard section (b) (3) of the Occupied Conveyance regulation, 24 CFR §203.670. According to the section, HUD will accept conveyance of a property that remains occupied by the defaulted mortgagor if doing so would be in the Secretary's interest. The Secretary's interest is defined by one or more of the following criteria:

(a) Occupancy of the property is essential to protect it from vandalism from time of acquisition to the time of preparation for sale.

(b) The average time in inventory for HUD's unsold inventory in the residential area in which the property is located exceeds six months.

(c) With respect to multi-unit properties, the marketability of the property would be improved by retaining occupancy of one or more units.

(d) The high cost of eviction or relocation expenses makes eviction impractical.

The Occupied Conveyance regulation was first brought to POGO's attention by real estate industry insiders in 2006. The insiders expressed frustration that foreclosed properties in their region that were backed by FHA mortgage insurance were routinely left vacant in HUD's inventory for long periods of time. As a result, the properties were often subject to severe damage due to both vandalism and environmental causes. The insiders were certain that despite the damage being inflicted on homes in their region, HUD was not offering foreclosed mortgagors the option of staying and safeguarding their former properties post-foreclosure, through the Occupied Conveyance regulation.

Subsequent to our discussion with the industry insiders, POGO filed a Freedom of Information Act (FOIA) request with HUD for records of HUD's utilization of the regulation. In response, HUD provided data revealing that occupied conveyance of single-family homes had only been accepted 300 times nationwide between FY 2001 and June 30 of FY 2006. Yet the Government Accountability Office (GAO) reported that at the end of calendar year 1999 alone, approximately 19,000 of the 49,000 properties in HUD's inventory were in inventory for six months or longer. [1] In light of the current foreclosure crisis, it is likely that the number of properties in HUD's inventory for six months or longer has increased.

In response to POGO's request for a breakdown by state, HUD stated, "HUD only permits occupancy of single-family, non-rental REO properties in hardship cases. The numbers are too small to merit a breakout by state." This response appears to confirm that section (b) (2) of the Occupied Conveyance regulation is not being utilized, despite the length of time properties are left unattended in HUD's inventory.

HUD's failure to utilize section (b) (2) of the Occupied Conveyance regulation is of concern to POGO for three reasons. First, the likely damage to properties that remain unoccupied in HUD's inventory for a long period of time prevents the maximization of the returns to the mortgage insurance fund, which is funded entirely through sales and premiums paid by home buyers, rather than congressional appropriations, and is thereby dependent on foreclosed properties being sold at the highest possible value. Second, the surrounding neighborhoods suffer because unattended properties often become eye-sores and attract crime. The resulting reduction in value of properties near the unattended property in HUD's inventory further contributes to the cycle of the current foreclosure crisis. Finally, fewer persons will be displaced if given the opportunity to stay and safeguard their properties post-foreclosure. The extra time granted by allowing former owners to stay on to safeguard the property may provide the time necessary for those former owners to arrange for their future housing.

POGO believes that by utilizing a regulation that is already on the books, HUD has an opportunity to strengthen the mortgage insurance program while simultaneously mitigating some of the harms caused by the larger foreclosure crisis. POGO would appreciate the opportunity to discuss our findings with your office in more detail. Please contact me or Jake Wiens at (202) 347-1122 or [email protected].

Sincerely,

Danielle Brian

Executive Director