Better Oversight Needed on Distressed Property Policies

News

The Office of Inspector General (OIG) of the Federal
Housing Finance Agency (FHFA) released two reports today recommending better FHFA
oversight of two aspects of Fannie Mae’s management of distressed
properties
.  In the first report OIG
looked at a Fannie Mae plan to refund borrower contributions involved in the
short sale of distressed properties.  The
other evaluated Fannie Mae’s method of reimbursing servicers for pre-foreclosure
property inspection fees.

Through
their Seller/Servicer Guides, Fannie Mae and Freddie Mac (the GSEs) provide
guidance on delinquency management and default prevention to their servicers
who are contractually required to comply with the guidance. Fannie Mae expects
servicers to identify borrowers who are having difficulty making mortgage
payments due to a financial hardship and offer appropriate workout options,
such as a short sale in which proceeds from the sale of the property do not
cover the balance of the mortgage. Fannie Mae also depends on its servicers to
evaluate borrowers for contributions toward the remaining balance and relies on
its servicers to collect borrower contributions along with the net proceeds
from the short sale closing.

In an earlier audit of Fannie Mae’s closed short
sale transactions OIG found that Fannie Mae servicers were collecting from
borrowers with the financial ability to do so contributions toward the
remaining balance of their mortgages after short sale proceeds were
applied.  OIG found that where properties
were located in the state of California those contributions might be contrary
to state law
and that borrower contributions for short sales under the Home
Affordable Foreclosure Alternative (HAFA) program, could violate the program
requirements. 

The audit made Fannie Mae aware of the California law that
expressly prohibited the holder of a note from requiring the borrower to pay
any additional compensation in exchange for the written consent to a sale other
than the sale’s proceeds. This would include the collection of borrower
contributions as a condition of a short sale.  Further investigation found that Fannie Mae’s
servicers collected borrower contributions for 124 short sales completed during
2012.

In response, Fannie Mae acknowledged the importance of the
issue and developed a Remediation Plan that was finalized during October 2013
to notify its servicers to refund the borrowers the amount of any improper
contributions for the short sale of properties located in California that were
closed on or after January 1, 2011. A remediation plan is also in place for the
HAFA short sales where borrower contributions were collected.  The amounts in question are as much as $3.1
million for the California collections and up to $53,000 for HAFA short sales.

OIG earlier recommended that FHFA review Fannie
Mae’s remediation plan and issue appropriate guidance and oversee the execution
of Fannie Mae’s plan to ensure that a good faith effort is made to promptly
refund inappropriately collected borrower contributions to borrowers. 
Similarly, FHFA should also examine Freddie Mac’s controls over short sale
borrower contributions in California and issue appropriate guidance. 

Although FHFA stated it agreed with OIG’s three
recommendations, OIG says the Agency’s actions are not fully responsive and the
recommendations are unresolved. In particular, FHFA actions provide limited
confidence that borrowers will be treated consistently in decisions concerning
refunds of their contributions to short sales.  OIG requests that FHFA
reconsider its position on these three recommendations and provide additional
comments
within 30 days of the issuance of this report.

The second report looked at whether Fannie Mae
overpaid servicers for property inspections conducted prior to foreclosures.  The Fannie Mae servicing guide requires servicers to perform
a monthly inspection on all properties where borrowers have become delinquent
on their mortgage loan to help protect the GSE’s interest in
the property and secure the property from physical conditions that may result in
additional credit losses.  
However, Fannie Mae limits the total amount per loan that servicers are
reimbursed for pre-foreclosure property inspections.

OIG
concluded following a study that the GSE’s process for paying servicers for
property inspection claims has significant control deficiencies which caused it
to overpay servicers by approximately $5 million in 2011 and 2012. 

OIG
recommends that FHFA direct Fannie Mae to:

1    Obtain a refund
from servicers for overpayments of property inspection claims;

2    Implement system
controls to reject property inspection claims over established tolerance
limits; and

3.   Issue guidance to
all servicers concerning requirements to adhere to reimbursement limits for
property inspection claims. 

OIG
also recommends that FHFA assess the need for additional examination coverage
of Fannie Mae’s pre-foreclosure property inspection reimbursement
process. 

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