Housing Finance

Defaults on mortgages insured by the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) increased during the 1980s, primarily because of weak real estate markets. By the early 1990s, HUD owned nearly 110,000 single-family and 2,400 multifamily loans that it had insured. In a series of six sales held between 1994 and 1997, HUD sold 98,640 single-family loans and 1,093 multifamily loans. The sales generated more than $2.2 billion in budgetary savings. This report discusses the reasonableness of (1) HUD's estimates of budgetary savings from the sale of its single-family loans and (2) the model HUD used to estimate savings from the sale of multifamily loans. GAO concludes that HUD's estimates of budgetary savings from the sale of the single-family loans it reviewed were reasonable.

GAO noted that: (1) according to HUD, it achieved $830 million in budgetary savings by selling 98,640 single-family loans; (2) nearly all of these savings, $774 million, were attributable to the sale of 71,946 single-family loans that HUD acquired through its mortgage assignment program and sold through five sales held between October 1995 and September 1997; (3) on the basis of GAO's independent estimates, GAO concluded that HUD's estimates of budgetary savings from the sale of the single-family loans GAO reviewed are reasonable; (4) specifically, GAO independently estimated that HUD achieved budgetary savings of $345 million, compared with HUD's estimate of $259 million, from its sale of 38,547 loans sold in three single-family sales held between October 1995 and September 1996; (5) the $86 million difference between GAO's estimate of savings and HUD's is not large when one considers that the loans sold through these three sales represented an unpaid principal balance of $1.7 billion; (6) according to Booz-Allen and Hamilton, Incorporated, a large management and technology consulting firm, the model HUD used to estimate savings from the sale of multifamily loans produced reasonable estimates of savings; (7) however, Booz-Allen and Hamilton questioned the logic and support for several key assumptions and found that the model was not thoroughly documented; (8) in response, HUD developed a new model that addressed these weaknesses; and (9) without documentation for the original model and the historical data used to support key assumptions, GAO cannot conclude whether the original model would produce reasonable estimates of savings.