The Federal Housing Administration often takes up to nearly four months as long as other government-related housing finance entities to acquire and sell foreclosed properties, according to a new report by the Government Accounting Office.

Delays resulting from the FHA's procedures for handling foreclosures not only cost taxpayers money, the GAO found, they also contribute to neighborhood decay because properties are not adequately secured and properly maintained.

Additionally, the agency, which is the investigative arm of Congress, found that the FHA together with the Veterans Administration spend millions unnecessarily on new title insurance to help establish the fact that the government had clear title to the foreclosed properties.

To its credit, the FHA has managed to cut its portfolio of foreclosed properties nearly in half since it began outsourcing the management and marketing of its real estate owned in 1999, according to FHA Commissioner John Weicher's response to the GAO study.

Three years ago, the agency's REO roster stood at a whopping 47,000. As of March, the inventory had been trimmed to 29,000 and it is remaining at that level despite the recession, Weicher pointed out.

And even more significantly, he reported, the loss per claim by lenders against the government's mortgage insurance fund had declined from 38.6 percent to 32.7 percent.

But citing the more cost-effective approaches of disposing of foreclosures taken by similar government-related housing organizations, GAO report says the FHA could and should do an even better job.

GAO found that it takes the FHA about 55 days longer to acquire and sell foreclosures than the Veterans Administration and up 110 days longer than the Rural Housing Service, Fannie Mae and Freddie Mac. RHS is a part of the Department of Agriculture, and Fannie and Freddie are government-charted financial institutions which bring liquidity to the mortgage market.

None of these entities provide mortgage money directly to home buyers. Rather, they facilitate the financing of houses, the FHA, VA and RHS by guaranteeing to pay off lenders if borrowers fail to meet their obligations and Fannie Mae and Freddie Mac by promising to make timely payments of principal and interest to investors who purchase mortgages on the secondary market.

When something goes wrong, these organizations make good on their guarantees, take over the properties, make whatever repairs are necessary to put them into marketable condition and sell them to other buyers, often slightly below prevailing market prices.

In the year 2000, these five organizations took back a total of 117,850 properties. And the FHA was responsible for more than half the foreclosures.

Typically, according to the GAO study, it takes Fannie and Freddie 180 to days to dispose of a property it acquires via foreclosure. It takes the RHS 196 days to get the process done. The average number of days between foreclosure and sale is 237 days at the VA. But it takes the FHA an average of 292 days to perform what is essentially the same task.

The GAO faulted FHA's fractured method of dealing with foreclosures for the delays. While VA, RHS and Fannie and Freddie designate a single entity to be responsible for the custody, maintenance and sale of foreclosed properties, the FHA divides these responsibilities between entities which operate largely independent of one another.

"We found that FHA's divided approach to foreclosure property custody can prevent the initiation of critical maintenance necessary to make properties attractive to potential buyers, such as the timely removal of all exterior and interior debris," the GAO said.

"In addition, FHA's divided approach delays the development of property marketing strategies and generates disputes between servicers and contractors. Because FHA's divided approach delays maintenance and other steps necessary to preserve the value and marketability of foreclosed properties, the properties may be sold at lower prices than would otherwise be the case."

The report does not place a monetary value on the delays. But it does say that the FHA and VA together may needlessly have spent some $31.5 million in 2000 alone to make sure they have clear title to foreclosed properties.

Noting that Fannie, Freddie and RHS don't normally purchase new title insurance, yet report few title-related problems when they sell foreclosures, the GAO says the FHA and VA's annual expenditures on title insurance are not cost-effective.

In his response to the GAO report, FHA Commissioner Weicher pledged to streamline his agency's approach to handling foreclosures but warned that it will require legislative approval to institute some of its recommendations.

Published: May 22, 2002

Use of this article without permission is a violation of federal copyright laws.

When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.