U.S. Department of Agriculture

The Farmers Home Administration (FmHA) makes housing and farm loans to rural Americans who cannot otherwise obtain the loans on reasonable terms. Centralized servicing of loans is widely and successfully used by the private sector, including mortgage firms that typically consolidate and centralize loan-servicing functions, such as loan collections, escrow accounting for taxes and insurance, and delinquency management. This briefing report notes that FmHA's single-family housing loan portfolio is far larger than the agency's farm loan portfolio, FmHA's efforts during the past five years to centralize servicing operations for direct housing loans have not been fruitful, the advantages of centralization outweigh the disadvantages, and options for moving forward with centralization would be consistent with the Agriculture Department's efforts to reinvent itself.

GAO found that: (1) as of 1993, approximately 1,700 FmHA offices held single-family direct housing loans totalling $18.8 billion; (2) funding for homeowners loans has remained constant at $1.2 billion annually; (3) in 1987, about 95,000 FmHA single-family housing loans were sold to a private company for servicing; (4) although FmHA has allocated about $1.6 million and significant staff resources to improve program management and streamline field office operations, it has not formally adopted a centralized approach to servicing single-family housing loans; (5) the benefits of centralized loan servicing include annual operational cost savings totalling $106 million, consolidation and closure of many duplicative county offices, a lower loan delinquency rate, and reduced loan losses; (6) the private loan-servicing company credits its increased efficiency to centralized servicing, computer systems that identify delinquent borrowers and track missed payments, an escrow accounting system that assists borrowers' financial management, and a highly specialized staff who service loans; (7) the potential disadvantages of centralized servicing include the loss of personalized contact between the borrower and loan servicer and the costs of redeveloping existing automated systems; (8) options for implementing centralized servicing operations include establishing an in-house loan servicing center, contracting with the private sector or allowing public and private sectors to compete for loan servicing; and (9) although all options support efforts to reduce hierarchies and improve efficiency, increased loan-servicing competition would improve morale, increase efficiency, and focus on customers' needs.