Good Morning Chairman Allard, ranking member Kerry and members of the Subcommittee. My name is William Apgar, and I am the Assistant Secretary for Housing/Federal Housing Commissioner at the United States Department of Housing and Urban Development (HUD). On behalf of HUD Secretary Andrew Cuomo, I want to thank you for the opportunity to testify on the Federal Housing Administration (FHA), and specifically FHA's single family property disposition program, the focus of today's hearing.
FHA is one of the federal government's real success stories. Since 1934, FHA has helped nearly 30 million American families to become homeowners. We do this by insuring home mortgages, providing valuable credit enhancement that encourages private lenders to make home loans they otherwise would deem too risky. Last year alone, FHA insured 1.3 million loans with an all time record value of $125 billion. Perhaps most importantly, FHA provides this valuable service to the American homebuying public at no cost to the taxpayer. The insurance premiums we collect plus recoveries on properties sold from the real estate owned (REO) inventory exceed the cost of all claims and operations. Indeed, over the next five years, FHA is projected to contribute nearly 20 billion dollars to the national budget surplus.
FHA IS THE STRONGEST IT HAS EVER BEEN
Under the leadership of Secretary Andrew Cuomo, HUD has been working hard to reform the Department and the FHA. Nowhere is the turnaround more evident that in the FHA's mortgage insurance programs. Despite a six-decade history of providing access to mortgage capital - in all regions of the country - in good times and bad - by the early 1990s the FHA was broke. Years of mismanagement left the FHA with projected losses from claims on mortgage insurance far in excess of projected revenue. Absent radical restructuring, a costly federal bailout seemed inevitable.
Yet today, the FHA and its Mutual Mortgage Insurance (MMI) Fund are the healthiest they have been in decades. The most recent actuarial study -- prepared by Deloitte & Touche - provides detailed information on the financial status of the MMI Fund for the fiscal year ending September 30, 1999, and presents projections of the Fund's performance over the next five years. The Deloitte & Touche review focuses on two key measures of the health of the fund: First, the economic value of the MMI fund - defined as the sum of existing capital plus the value of current books of business - and second, the FHA's capital adequacy ratio - defined as the economic value of the fund divided by the total unamortized insurance in force. In specific, the report shows:
· At the end of FY99, the economic value of the fund was an all time record high of $16.637 billion, an increase of $5.277 billion from the economic value as reported for FY98; and,
· Also for FY99, the capital adequacy ratio stood at 3.66 percent, a dramatic increase over the FY98 capital ration of 2.71 percent, and well in excess of the Congressional mandate to exceed a benchmark ratio of 2.00 percent by the year 2000.
As these data indicate, this is a remarkable turnaround from just ten years ago, when the FHA MMI fund had an economic value of negative $2.7 billion. The Deloitte & Touche study also confirms that this improvement is due to fundamental changes in the FHA, and not simply the recent economic prosperity. Moreover, the report projects that the FHA is sufficiently well capitalized to withstand future economic downturns. Deloitte & Touche estimate that:
· Under the most likely economic scenario which is a continued stable and strong performance, the FHA capital ratio continues to rise steadily to 5.29 percent in 2006; and,
· Even under pessimistic assumptions, the capital ratio continues to rise - if some what slower - to 3.90 percent in 2006.
FHA Serves Its Social Mission Better than Ever
While the Actuarial report is good news in and of itself, I am equally pleased to report that the FHA has been able to dramatically improve its financial bottom line, while simultaneously improving it's record of service to first-time homebuyers, minorities, and others not well served by convention market:
· In FY 99, 80.8 percent of FHA purchase money loans went to first time buyers, compared with 64.4 percent in FY92.
· Minority borrowers also increased as a share of FHA homebuyers to 37.7 percent in FY99 compared with 21.7 percent in FY92.
I am particularly proud of FHA's record of serving African-American and Hispanic- American families:
· In FY99, FHA provided financing for an all time record 170,193 African-American families, a more than three fold increase over the number served in FY92
· For Hispanics, the numbers are even more impressive - the record 222,822 loans made to Hispanic borrowers in FY99 represents a four fold increase over FY92 levels.
FHA Reforms Are Working
The health of the fund and the solid record expanding access to homeownership are dramatic evidence that HUD works. Secretary Cuomo's Management Reform plan has brought to HUD new ways of doing business, new technology, and new capacity to address the housing and community development needs of the nation's low and moderate income families and communities.
FHA's new privatized process for selling REO properties is no exception. Since assuming responsibility for all property management and marketing activities approximately one year ago, FHA's M&M contractors have performed extremely well by any measure commonly used in the real estate industry to evaluate performance. Like other organizations in the real estate industry, HUD uses a variety of factors and measures to evaluate REO property management and sales performance, including: overall volume of sales, financial return on sales (measured both by gross property sales price and recovery as a percentage of the mortgage insurance claim), time properties are held in inventory prior to sale.
A comparison of performance measures for the year ending in March 30 1999, the first full year of the operation of the M&M Contractors, with similar measure for the year that ended March 30 1998, demonstrates the effectiveness of the new approach:
· Selling HUD Homes much faster than HUD staff did under the old system. HUD's M&M contractors have reduced the average time properties are held in inventory to 148 days, compared with approximately 178 days one year ago.
· Increasing the financial return to HUD and the federal government. Under the M&M contractors the average sales price on HUD homes has increase by more than 13 percent, and the overall recovery as a percentage of the mortgage insurance claim has increased by nearly 10 percent, representing average savings of nearly $4,000 per property sold. Based on total sales to date (69,000 through April, 2000), the aggregate savings under the program is $275 million;
· Selling many more homes than HUD did under the old system. In the first six months of this current government fiscal year, from October, 1999 through March, 2000, HUD's M&M contractors sold 42,811, compared to sales of just 33,815 homes -- a 27 percent increase in the number of homes sold. These trends continued throughout April, 2000 when over 7,500 homes were sold;
HUD's M&M contractors also have improved the level of property maintenance compared to the old system. Although HUD field staff have identified some specific isolated geographic areas where maintenance has not met HUD's standards, the M&M contractors (with the exception of InTown Management Group (ITMG)) have demonstrated the ability to quickly implement corrective actions and address these deficiencies in response to HUD's assessments. Moreover, the best indication of the M&M contractors improved property maintenance is the market's positive response to HUD homes over the last year. Market indicators, such as a faster pace of sales and higher returns on HUD Homes, clearly indicate that the market has determined that HUD Homes are a better product today than they were one year ago, prior to implementation of the M&M initiative.
FHA Has Successfully Implemented a Comprehensive Contract Monitoring System
Under the new Management and Marketing approach, FHA Staff are able to focus on monitoring contractor activities. This new system, designed in collaboration with the management consulting firm Booz, Allen & Hamilton, calls for HUD field staff and contract monitors to:
· inspect the physical condition of 10 percent of all properties in inventory on a monthly basis;
· audit 10 percent of all M&M contractor case files on a monthly basis;
· complete on-site process observations at the M&M contractor's offices, on a monthly basis;
· conduct daily analysis of property listing and sales reports;
· prepare comprehensive contractor performance assessment reports for each contract area; and,
· hold monthly performance reviews with the contractors to assess critical performance measures, identify deficiencies and direct corrective actions, on a monthly basis.
Each HOC is following these procedures and is producing an unprecedented amount of information on contractors' performance. In just twelve months time HUD field staff have aggressively adopted and implemented this unparalleled, comprehensive contract monitoring system.
With substantial detailed information at their fingertips, HUD staff have been able to pinpoint performance problems when they inevitably arise and implement specific corrective actions to enhance performance. In implementing this new initiative, HUD has deliberately held the contractors to very high standards. The Department has raised the bar on its expectations for contractor performance over the last twelve months, and this attitude has paid tremendous dividends, as the overwhelmingly positive performance numbers above indicate. HUD attributes a great deal of the success to date with the M&M initiative to its aggressive contractor monitoring program.
The Department is rightfully proud of this aggressive monitoring approach, and will continue to insist on contractor improvement in all aspects of contract requirements, from complete file documentation to oversight of sales closings. At the same time, it is important to understand two critical aspects of HUD's monitoring program:
· First, while the Department expects compliance with every requirement in the contract, each assessment category poses a separate and distinct degree of risk to the Department. For example, a contractor who fails to maintain required documentation is absolutely in non-compliance with HUD requirements. However, if the same contractor fails to comply with HUD requirements for acceptable bid thresholds, the risk to HUD of monetary loss due to this type of non-compliance is much higher than documentation shortcomings, and accordingly warrants much more severe action.
· Second, there is every indication, as again noted in the sales performance cited above and in the Department's more detailed performance measures, that the contract control structure employed by HUD has resulted in corrective actions and improved performance by contractors other than ITMG. In tracking a number of different daily and monthly performance reports HUD can point to deficiencies noted in one month's report, coupled with improvements in performance for the following reporting periods. The successful collection and analysis of the information outlined above has had a direct and immediate impact in enhancing contractor performance.
HUD Is Taking Measures to Enhance M&M Contract Monitoring
Still, despite the fact that all four HOC's are accurately collecting all information required of HUD's ambitious contract monitoring plan, the Department acknowledges some inconsistency in areas such as the format for monthly assessments, and the distinction which must be made between the inherent risk in managing and selling foreclosed properties and the risk of contractor non-performance. HUD has scheduled additional training in July, 2000 for contract monitors, to help ensure compliance with the existing reporting format. Further, the Department will provide guidelines to all of its monitors regarding measurement of risks inherent in meeting its social mission (e.g., vacant properties in poor neighborhoods are susceptible to damage due to vandalism) versus operational risk (e.g., contractors' obligations to periodically inspect properties, and correct acts of vandalism such as broken windows). The lack of detailed risk assessment guidelines has sometimes resulted in overstatements of relative risk or failure to make a risk determination. The Department considers this a "lesson learned" in implementing a more comprehensive management control structure, and is committed to improvement in this area.
HUD Has a Full Set of Contract Enforcement Options
In a recent report, GAO observed that HUD has limited and insufficient enforcement tools to improve contractor performance. We believe that this conclusion lacks merit, and is indeed in direct contrast with several other findings contained in the report. As the report notes, M&M contracts are performance-based, with the contractor fee set as a percentage of the sales price, and all payments tied to achievement of performance milestones. Contractors are only paid when they successfully list and sell properties. In this manner, M&M contractors have strong financial incentives to properly maintain and promptly sell all properties for the full market value. Any failure to maintain properties will only delay sales, create additional costs to the contractor and ultimately diminish the property sales price and the corresponding contractor fee. Therefore, the contract structure, which was developed with substantial input from the HUD Office of Inspector General (OIG), provides the best enforcement mechanism available - substantial financial incentives to fully comply with contract requirements. Moreover, failure to perform also can result in HUD not exercising any of the four one-year options contained in these contracts.
In addition to a smart, incentive-based contract structure, HUD has a full array of other enforcement tools at its disposal to address performance deficiencies. To date, HUD has demonstrated a clear willingness to use this complete set of enforcement options to enhance contractor performance. In just over one year of administering the new M&M initiative, HUD can point to several different examples where formal contracting enforcement actions, including Letters of Concern and Deficiency Notices, have resulted in improved performance. The contractor responsible for the six state New England region demonstrated a dramatic improvement in property listings and sales following a Deficiency Notice for shortcomings in these areas. Other contractors have demonstrated improved property maintenance and sales performance following similar notifications.
Finally, perhaps the most striking example of FHA's effective contract monitoring and enforcement system is the termination of Intown Property Management's (ITMG) contracts. After less than six months of poor performance FHA had gathered sufficient detailed performance information to sustain termination of all six contracts and debarment of all three ITMG principles from government work for a ten year period. This is the type of aggressive contract oversight which HUD has in the past been accused of failing to undertake. The Department is committed to ensuring the integrity of its programs, and will take action against anyone, be it a contractor or a HUD employee, who threatens that integrity.
Moreover, the ITMG terminations and subsequent careful implementation of a combination of new "takeover" contractors and special teams of HUD staff to directly manage a small portion of the HUD inventory, have generated substantial improvements in overall performance. As the chart below demonstrates, this tough enforcement action has boosted FHA property sales activity by more than 800 percent over the last six months.
|HOC||Area||States||4/99 to 9/99||10/99 to 3/00|
|Atlanta||Area 1||IL, IN, KY, TN||548||4,708|
|Area 2||NC, SC, GA, AL, MS||545||3,220|
|Philadelphia||Area 2||MI, OH, WV||121||1,817|
|Area 3||NY, PA, NJ, DE, VA, DC||495||7,379|
|Santa Ana||Area 3||WA, OR, ID||184||871|
After selling just approximately 2,200 properties in the first six months of the new initiative under ITMG, under the "takeover" contractors FHA has sold nearly 20,000 homes in the six months since HUD took enforcement action and implemented the takeover plan.
HUD's National Inventory of Homes has Been Declining for Nine Straight Months
After experiencing an increase in the number of HUD Homes nationwide during the initial transition to the M&M system, HUD's national inventory has been declining steadily for the last eight months. At the start of the M&M initiative, HUD directed M&M contractors to re-inspect, re-secure, re-appraise, and re-list every property assigned to them, in order to correct past deficiencies in these areas. This activity, combined with performance failures by Intown Management Group, resulted in a temporary growth in the on-hand portfolio over the first four months of the new initiative. However, since the national inventory peaked in July, 1999, the total number of HUD Homes nationwide has been decreasing steadily. In fact, for each of the last nine months through April, 2000, HUD has sold more homes than it has taken in through claim conveyances. Moreover, since August, 1999 the national inventory has decreased by more than 11,000, a 21 percent decline.
Looking forward, FHA is poised to continue this rapid decline in inventory. As of the end of April, 2000 more than 48 percent of the total inventory, or over 20,600 properties, were under a sales contract or had an acceptable offer from a new home owner. With the typical sales contract required to close within 60 days, FHA is positioned to experience an even more dramatic decline in total inventory over the next two months. Sales data demonstrating these same trends over the last several months were provided to the GAO review team. However, for reasons that are not clear to HUD, GAO has not acknowledged the data.
HUD's Aged inventory is Declining
HUD's internal monthly reports, which were provided to GAO, show that approximately two-thirds of the aged inventory had formerly been maintained by ITMG. Therefore, it is clear that ITMG's dramatic failure to sell HUD Homes during the approximately six months it was under contract with the Department is the primary cause of the growth in aged inventory. Not surprisingly, the takeover contractors and HUD special units managing contract areas formerly under ITMG's control now are starting to show progress in disposing of these difficult to sell properties. After reaching a high of 21,059 properties in December, 1999, just three months after ITMG was terminated, the number of HUD Homes in inventory more than six months had declined to approximately 16,368 by April, 2000, a decrease of more than 22 percent. Further, contractors also are positioned to dramatically reduce the inventory of properties in inventory over twelve months. A recent HUD analysis shows that 53 percent of all properties in this category currently are under a sales contract and will be sold to new homeowners in less than 60 days. HUD expects these positive trends to continue over the next several months.
Moreover, on May 1, 2000 HUD launched the good Neighbor Program -- an innovative program designed to sell aged inventory that has been listed for sale on the open market for more than six months but is not under a sales contract. This program would offer these properties to local governments for $1. Through this program, HUD is partnering with local governments to put these difficult-to-sell properties to good use in promoting community revitalization. In exchange for the discounted sales price, local governments must commit to put the properties to some public use - possibly including rehabilitation and resale to first-time home buyers, low- or moderate-income families, or other targeted beneficiaries.
FHA will continue to work with this Committee, the GAO and other interested parties to further enhance the overall performance of our single family mortgage insurance operations, including our programs for selling REO inventory. FHA plays a vital role in advancing homeownership in America, and today FHA is poised to do even more. Responding to the most recent actuarial report on the financial strength of the FHA, President Clinton has requested recommendation of how best to build on this strength. In particular, with FHA now receiving billions of dollars of revenues in excess of it's cost of operations, President Clinton issued a directive to Secretary Cuomo, OMB Director Jack Lew, and Domestic Policy Advisor Bruce Reed requesting recommendations on how newly available funds can be used to further strengthen federal housing programs and to develop a plan to enhance comprehensive affordable housing opportunities. The intention is nothing less than to build on the current strength of the FHA to expand housing opportunities to the next generation of American families.
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