Lenders generated an estimated $428 million in gains from the sale of Ginnie Mae securities related to modified defaulted Federal Housing Administration (FHA) loans in 2013. FHA did not seek a portion of the gains to offset its incentive fees for loan modifications or claims of modified loans that redefaulted, according to a new report by the Office of Inspector General (OIG) and Department of Housing and Urban Development (HUD). 

“Therefore, FHA missed opportunities to strengthen its insurance fund and should explore potential program modifications to reduce future payments,” the OIG says in the report. “Lenders could be required to offset gains they obtained from the sale of securities for incentive fees and claims for modified loans that redefault.”

FHA does not have requirements governing the use of these lender gains and it does not receive information on the amounts of the gains generated, which contributed to its missed opportunities, the OIG says.

“We initiated this audit due to our concern that FHA might have incurred costs while allowing lenders to make large amounts of money by modifying defaulted FHA-insured loans,” the OIG says.

Lenders received these gains from modifying 67,048 defaulted FHA loans during fiscal year 2013 and packaging them into Ginnie Mae securities between September 2012 and April 2014. 

“If FHA required lenders to apply the gains against its claims for FHA insurance on failed loans, the insurance fund would pay out smaller claim amounts on the loans that fail,” the OIG says, adding that another opportunity to strengthen the insurance fund would be to decrease the allowable interest rate for modified loans. 

The OIG recommends that the deputy assistant secretary for single family housing perform a study of the loan modification program and evaluate whether any changes are need, among other measures.

Access the report here.

Written by Cassandra Dowell