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Testimony of the Honorable William C. Apgar
Assistant Secretary for Housing and
Federal Housing Commissioner
Department of Housing and Urban Development

March 25, 1999

Good afternoon Chairman Allard, Ranking Member Kerry and members of the Committee, my name is William Apgar, and I am the Assistant Secretary for Housing/Federal Housing Administration 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 this afternoon on the Federal Housing Administration (FHA), and specifically, on the financial condition of FHA's Mutual Mortgage Insurance (MMI) Fund, the primary FHA fund that backs our single family insurance loan program.

Mr. Chairman, we live in a time when Members of Congress, the public, and even government officials, measure public agencies' performance by results. Members of both sides of the aisle now are encouraging use of government performance measures to objectively assess government programs. I too believe in judging government performance by results, and am pleased to report to this Subcommittee that by any objective measure the financial state of the FHA Fund is sound.

As a mortgage insurance fund, one way we measure our performance is in terms of dollars. By this measure, the FY 1998 actuarial review of the fund prepared by Price Waterhouse Coopers demonstrates that:

  • FHA's Mutual Mortgage Insurance Fund, the primary fund backing single family loan, exceeded statutory capital requirements in FY 1998 for the fourth year in a row. The capital ratio, a measure of the funds cushion against unexpected insurance losses, was 2.71 percent, exceeding the Congressional target of 2.00 percent before the year 2000. This represents tremendous improvement in the capital ratio, which stood at negative 0.88 percent in 1990.

  • The projected economic value of the MMI Fund stood at $11.36 billion at the end of FY 1998. This represents a more than $14 billion increase in the value of the Fund since 1990, when it was negative $2.7 billion.

And, as a government agency that performs a business-like function, selling mortgage insurance, FHA has a special responsibility to accurately account for every dollar of revenue we generate and expenses we pay out in the course of running our programs. By this measure:

  • FHA continues to operate at no expense to the American taxpayer-in fact, last year the insurance premiums exceeded the net cost of all insurance claims and operations by more than $1.5 billion-and HUD projects revenues will exceed expenses by more than $2 billion in FY1999;

  • FHA also recently received a clean opinion from the accounting firm of KPMG, indicating that these financial indictors fairly and accurately represent the condition of the MMI fund. This unqualified opinion represents tremendous progress from the late 1980s and early 1990s when FHA auditors could not offer an opinion on our financial statement because our books were in such poor condition. I believe this achievement speaks volumes about the progress FHA has made under Secretary Cuomo's leadership. Although earning a clean opinion may sound routine to some, it is my understanding that FHA may be one of the few government credit agencies that will receive an unqualified opinion this year.

Finally, in addition to dollars, we also measure our performance in terms of program outcomes. By this measure, FHA is:

  • Helping more American families than ever become home owners. Last year the FHA insured more than one million loans, the third highest annual total in our history-and we continue to focus our programs on those home buyers who are not well served by the private sector. Nearly 80 percent of our purchase loans last year went to first time home buyers-and FHA continues to serve a disproportionately high number of racial and ethnic minorities, urban dwellers and others who cannot gain access to private mortgage financing;

  • FHA also is helping more of our borrowers avoid foreclosure. Last year we doubled the number of home owners assisted by our loan loss mitigation program from 4,800 in FY 1997 to more than 10,800 in FY 1998-and in the first five months of this year we are helping more than 1,600 home owners a month, indicating that we are track to double the number of cases again this year to more than 20,000 cases; and,

  • FHA continues to get a fair return on its Real Estate Owned (REO) properties. Last year we sold more than 64,500 properties at an average of 95 percent of their appraised value.

So, whether measuring the condition of the FHA Fund in terms of capital reserves, program results or revenues and expenses the result is the same-today the FHA Fund is the strongest it has been in years.

And, Mr. Chairman, I believe the Fund is poised to become even stronger. In preparing FHA's audit for the Office of the HUD Inspector General, the accounting firm KPMG both identified specific management issues still facing FHA, and acknowledged significant progress we've made in implementing new initiatives to reform and improve our operations. A careful review of these new initiatives demonstrates that FHA is making significant progress in addressing all of the issues raised in the audit. The remainder of this testimony highlights our reform efforts including our initiatives to:

  • Expand access to capital for American home buyers, by creating operating efficiencies through reorganization and consolidation of functions, streamlining processes and taking advantage of new technology;

  • Enhance foreclosure avoidance capacity by boosting use of our loan loss mitigation program, putting more emphasis on lender monitoring and enforcement, and developing automated systems to monitor insured loan performance; and ,

  • Reform our REO property disposition program by contracting with private sector real estate professionals to perform all property management and marketing activities, freeing FHA staff to focus exclusively on program monitoring activities.


Mr. Chairman, our efforts to improve FHA operations start by making the loan origination process more accessible, efficient and customer friendly. We are creating operating efficiencies by reorganizing and consolidating functions into specialized processing centers. Instead of operating out of 81 small and inefficient field offices, we now deliver single family programs through four, state-of-the-art Home Ownership Centers (HOCs). And we are taking advantage of new technology to speed underwriting reviews, facilitate communication and data transfer with lenders, and enhance lender monitoring and enforcement activities.

In the past, HUD's rule-bound programs and slow and inefficient service delivery have too often deterred needy American families from taking advantage of FHA financing. Now we are working to change that by reforming and rationalizing dozens of FHA loan origination requirements and procedures to make FHA financing more easily accessible and bring our operations more in line with private market practices. Last year, for example, we worked with Congress to simplify our down payment calculation, making it easier for borrowers to understand our programs; and we raised FHA loan limits, extending the reach of our financing to middle income families, many of whom, particularly racial and ethnic minorities, still have difficulty accessing private mortgage capital.

Over the last year, FHA also has implemented broad market use of Freddie Mac's Loan Prospector automated underwriting system, has piloted a similar system with Fannie Mae and has continued development of its own mortgage credit scorecard, scheduled for release in FY 1999. These automated underwriting systems reduce the time it takes FHA to underwrite a loan from several weeks to an average of two days.

Finally, we also are developing new ways to use FHA Connection, a highly successful Internet-based system that gives approved lenders real-time access to HUD information systems. With direct data entry and query access to HUD systems lenders can bypass FHA customer service representatives, and instead directly transmit virtually all loan level data, saving staff time previously spend key-punching data into the systems.

KPMG recognized the importance of these reforms in their audit, by stating:

"Improvements in automated technology and electronic data interchange have created efficiencies in FHA's business related to its single family programs."


FHA also is working hard to help more of our borrowers avoid foreclosure. We recognize that foreclosure avoidance not only helps keep families in their homes, it also benefits the FHA Fund in avoiding the costly process of selling REO properties. Over the last several months, FHA has taken a number of steps to reduce foreclosures. These strategies include:

  • Facilitating greater use of FHA's loan loss mitigation program designed to provide troubled borrowers effective options to foreclosure, and thereby reduce the number of FHA defaults and claims;

  • Enhancing FHA lender monitoring and enforcement activities; and,

  • Developing automated systems to monitor insured loan performance.

Facilitating Greater Use of FHA's Loan Loss Mitigation Program

FHA's new loan loss mitigation program is taking hold, with current projections indicating that the program should serve as many as 20,000 households in default this year, a remarkable increase over activity in previous years. This program is administered by thirty-seven FHA staff in our new Loss Mitigation Center located in Oklahoma City, which opened the Summer of 1997 and became fully operational in February 1998. Staff in this new functional center focus solely on providing foreclosure avoidance counseling to FHA homeowners in default, performing on-site training and monitoring of high volume servicing lenders, and conducting large group training seminars for smaller loan servicers across the country.

The Center's work already is showing results. FHA is seeing a dramatic increase in the number of homeowners in default who are gaining access to one or more foreclosure avoidance option offered by FHA. After performing only 4,800 cases in FY 1997, the first year of the program, we more than doubled program activity in FY 1998 by helping nearly 11,000 homeowners take advantage of foreclosure avoidance options. The number of assisted families per month increased throughout FY1998; and the program has continued to gain momentum in FY99, with FHA processing over 1,600 cases each month. If this rate of use continues throughout the year, as FHA expects it will, then the program should serve approximately 20,000 borrowers this year, a remarkable increase in activity over previous years.

FHA also is beginning to see a marked increase in use of loan loss mitigation program options that keep borrowers in their homes. Of the more than 1,600 cases each month, now more than 75 percent use options that keep the borrower in their home (options such as mortgage modifications, special forbearance or partial claims).

Moreover, HUD officials worked closely with Congress last Fall to craft legislation creating new authority for FHA to impose financial penalties in an amount up to treble the amount of the outstanding insurance claim on lenders who do not follow FHA's loan loss mitigation requirements. This powerful new enforcement tool, which was included in the FY 1999 HUD/VA Appropriations Act, will greatly enhance FHA's ability to enforce existing program requirements and also should encourage even greater use of the loan loss mitigation program.

Enhancing FHA Lender Monitoring and Enforcement Activities

FHA has taken several steps to enhance its lender monitoring and quality assurance activities to ensure lenders are conducting quality underwriting of insured-loans, and servicers are thoroughly evaluating every candidate for the loan loss mitigation program. Since FY 1997, the Department has increased the number of lender monitors from approximately 23 to 154 monitors, and nearly doubled the number of annual on-site monitoring reviews from 256 to 440. For FY99, FHA has established a goal of performing 900 on-site reviews. This increase in activity, naturally, increases lender awareness of FHA program requirements, and is designed to improve lender performance and mitigate losses due to defaults and claims.

Developing Automated Systems to Monitor Insured Loan Performances

FHA also has developed a new automated system for monitoring loan performance data by lender and geographic area. The Neighborhood Watch system, which was designed to track FHA insured loan performance by several different characteristics, including the originating lender, the FHA loan program, specific loan characteristics, and geographic areas, was implemented nationwide in May, 1998. This new automated system gives FHA staff a powerful automated tool for monitoring defaults and making relative comparisons of lender performance.

Furthermore, FHA also is preparing to launch a new performance-based lender enforcement program. The Quality Assurance Division in HUD Headquarters is on schedule to restart the Credit Watch/Termination initiative in FY 1999. This initiative is designed to improve lender origination performance by regularly reviewing mortgagees' early payment default and claim rates by branch office within regional markets, and alerting mortgagees of deficient performance.

Finally, as part of the new Home Buyer Protection Plan announced by Secretary Cuomo in 1998, FHA is now piloting a new automated appraisal monitoring system. This new system will provide consumers the information needed to help them make a good home buying decision, and enhance FHA's capacity to identify and sanction those lenders or appraisers who would abuse the public trust by submitting inflated, incomplete, or misleading appraisal information to the potential home buyer or the FHA.


In the course of doing business as a mortgage insurer, FHA takes ownership of some properties due to borrower default. When a default occurs, FHA lenders first try to keep the borrower in their home by pursuing loan loss mitigation. If these efforts are not successful, the lender forecloses on the home and conveys the property to FHA in exchange for payment of an insurance claim. Last year FHA took in some 70,000 properties, on our base of nearly 7 million loans, or approximately 1 percent of all loans.

FHA foreclosed (or Real Estate Owned) properties tend to be located in distressed communities, and they tend to be in relatively poor physical condition. The challenge for FHA is to sell these properties in a manner that protects the government's financial interest and has a positive impact on neighborhoods where our properties are located. In the past we have attempted to do this by contracting with private firms to manage our properties, and using HUD staff to perform all marketing and sales activities. Using this approach, we sold more than 64,500 properties last year.

Over the last few years, FHA has explored new and innovative methods to improve its property disposition efforts. In 1997 we commissioned a comprehensive study of our property disposition operation by the management consulting firm, Andersen Consulting. The study noted that even though FHA has a number of competitive disadvantages relative to private sector REO operations, including the location and condition of our properties and cumbersome government regulations, FHA's performance compares favorably to industry norms. For example, Andersen reported that:

  • The industry norm for sales revenue is between 96 percent and 105 percent of appraised value, and FHA sells properties at an average of 95 percent of market value;

  • The industry norm for time in inventory according to Andersen is 120 to 180 days, compared to the current FHA average of 187 days; and,

  1. The industry norm for cost of selling properties ranges between 12 percent and 18 percent of market value, while FHA averages 15 percent.

So, while there clearly is room for improvement, the Andersen study confirms that FHA's operations already meet or closely approximate private industry benchmarks.

The Management and Marketing Contracting Model

Building off the Andersen study, FHA moved to further improve operations. Over the last two years we have conducted a pilot demonstration to test an entirely new property disposition method that relies on private sector real estate professionals to perform all property management, marketing and sales activities. Rather than using private contractors to manage the properties and HUD staff to market properties as we have done in the past, this approach utilizes private contractors to perform all management and marketing activities (or M & M activities), freeing HUD staff to focus exclusively on monitoring contractor activities.

This new approach is predicated on the belief that private sector real estate professionals can more efficiently manage and sell REO properties than HUD staff. The National Performance Review report on HUD completed in 1994, first suggested that FHA consider privatizing its REO operation. In that report, the NPR recommended that HUD:

"Outsource its property disposition function in order to create higher returns. Private companies operating in a competitive market can normally provide a business service more efficiently than a government staff, which is protected from the rigors of competition. The management and disposition of problem assets is an essentially business, not government function´┐ŻThis is a suitable task for a business organization with its own money at risk and a clear profit motive tied to maximizing the net return on assets. This is not a suitable take for salaried government staff working from government rules and handbooks"

Mr. Chairman, we know this new contracting approach works. During more than two years of pilot testing in three locations -Baltimore, Maryland, New Orleans, Louisiana and Sacramento, California - private contractors proved able to sell REO properties more quickly and at a higher rate of return than HUD. Under the pilot the average time in inventory was reduced dramatically in all three locations, and the average property sales price and the net return to FHA increased dramatically in two sites and remained constant in the third site (Sacramento, California), despite a downturn in the regional real estate market. Pilot results included the following:

  • The average time a property was in inventory was reduced from 211 days to 139 days in Baltimore; from 236 days to 132 days in New Orleans; and, form 162 days to 122 days in Sacramento; and,

  • The average sales price per property increased by $17,108 in Baltimore and by $6,011 in New Orleans;

  • The net return to FHA per property increased by $13,695 in Baltimore and by $5,105 in New Orleans.

These results not only represent a dramatic improvement over FHA's current operations, in most dimensions they meet or exceed the results obtained by other private sector REO sales efforts.

Implementing Management and Marketing Contracting Model Nationwide

Now, we are taking this successful model nationwide. Last August we issued a Request for Proposals (RFP) for sixteen contracts covering the entire country, that was met with tremendous enthusiasm from the real estate community and government watchdog agencies, alike. In what HUD's Chief procurement Officer called one of the most highly competitive procurements HUD has every conducted, we received more than 170 proposals from a number of highly-qualified private sector real estate professionals.

The HUD Technical Evaluation Panel, chaired by the Director of our Denver Home Ownership Center (HOC), and staffed with a mix of senior field and headquarters REO staff, selected seven highly qualified contractors in January of this year, and FHA entered into contracts with these firms on February 1, 1999. Over the last several weeks we've been working with the contractors on a daily basis to ensure they will be ready to begin providing services on Monday, March 29, when they are scheduled to take over approximately 25,000 properties that are not currently under a sales contract.

Mr. Chairman, we also are confident that these well-qualified contractors will have strong incentive to perform. The M&M contract is incentive-based with the entire contractor fee set as a percentage of the net return on sale to FHA, creating the incentive to sell the properties at a fair market price. And at the suggestion of the HUD Inspector General, the contract minimizes pass through expenses to HUD by requiring the contractors to bear the bulk of the costs associated with maintaining the properties, creating a strong incentive to sell properties quickly.

To further improve the property disposition process, we also have added contract provisions that require contractors:

  • To use the Multiple Listing Service (MLS) to market properties, a requirement that should greatly enhance our marketing reach, create more demand for our properties and generate a higher return on sale;

  • To use electronic bidding to replace our previous sealed bid method that caused substantial delay in our process and was prone to human error;

  • To inspect every property within 24 hours of conveyance into our inventory;

  • To complete property appraisals within ten days of conveyance, to ensure properties are brought to market quickly.

The Comptroller General of the United States agrees that our transition to the M&M contracting model nationwide is likely to generate positive results. In assessing the contract model during the procurement process the office of the Comptroller General at the General Accounting Office (GAO) said:

"We conclude that the record supports finding that substantial benefits of cost savings and quality improvements will likely result from the consolidation of the previously contracted-out requirements with HUD's new requirements into contracts covering relatively large areas, and that these benefits go beyond reducing administrative and personnel costs alone. The expected improved program efficiency and quality, as well as the substantial potential cost savings, support the finding that the consolidation of the requirements under the M&M RFP approach was necessary and justified."

FHA Has Developed a Comprehensive Contract Management and Control System

With the transition to the M&M model, FHA staff will focus exclusively on monitoring contractor activities. Over the last eight months an interdisciplinary team of staff from FHA Headquarters and field REO divisions, the Office of the FHA Comptroller, the Office of Procurement and Contracts, and the Office of General Counsel have been working with the management consultant Booze-Allen & Hamilton to develop a new comprehensive system of management, financial and systems controls for the M&M contract environment. Our new monitoring and control system calls for FHA to:

  • Inspect the physical condition of 10 percent of all properties in the inventory on a monthly basis, using a combination of third-party contract monitors and FHA staff:

  • Audit 10 percent of all M&M contractor files on a monthly basis, employing a combination of third-party due diligence contractors and FHA staff. These audits will capture information related to the property inspection, appraisal, maintenance, listing marketing, bids, sales contract and closing activities:

  • Complete on-site process observations at the M&M contractors' offices on a monthly basis to ensure contractor staff are properly following specific contract requirements;

  • Conduct on-going analysis of results of all property inspection, file audit, and performance measure reports, including data on time in inventory and net return on sale;

  • Hold monthly performance reviews with the contractors, to assess critical performance measures, identify deficiencies and discuss corrective actions:

  • Prepare comprehensive contractor performance assessment reports for each contract area on a monthly basis.

FHA Headquarters staff also will support the system by conducting quarterly reviews of each HOC's REO operation. The objectives of these reviews are to confirm adherence to prescribed monitoring procedures, provide additional training to HOC REO staff as needed and share lessons learned from "best practices" of other HOC REO operations.

FHA is Creating New Partnerships with Local Governments and Nonprofit Organizations

In reforming our property disposition program, HUD also intends to maintain its long-standing commitment to working with local governments and nonprofit organizations wishing to purchase HUD-owned single family housing as part of a broader local strategy to provide and promote affordable housing in cities across the country. Last fall, HUD worked with Congress to create a new approach to transfer FHA foreclosed homes located in revitalization areas to local government and nonprofit organizations.

This new approach, which was included in the FY99 HUD Appropriations Act, will include deep discounts on properties in revitalization areas to defer some of the cost of rehabilitation, and it will offer local government and nonprofit organizations unprecedented control over the neighborhoods they work in. Rather than simply offering properties for sale on a property by property basis, HUD plans to enter into broad agreements with local governments which will agree to purchase all FHA foreclosed properties within a specifically defined revitalization area, to be selected by both the local government and HUD. This will further focus federal and local resources on those neighborhoods most in need of public investment.

The FY 1999 HUD Appropriations Act also gave HUD critical new statutory authority to pay insurance claims in exchange for a note, a modification to our statutes that will pave the way for FHA to pursue a note sales approach to disposition on a broader scale. This alternative approach to property disposition will yield further savings once fully implemented. While implementing the M&M model nationwide, FHA is actively working with a number of external financial consultants to asses alternative program designs using these new authorities.


Mr. Chairman, I would like to thank you for this opportunity to testify today. I would like to conclude by reiterating that I believe HUD and FHA reform is headed in the right direction. Thank you, and I look forward to answering your questions.

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