The Office of Inspector General
(OIG) of the Federal Housing Finance Agency (FHFA) released a performance audit
report that recommends FHFA tighten its oversight of government
sponsored enterprise (GSE) Fannie Mae's controls over approval of short
sales. Fannie Mae, which has operated
under FHFA conservatorship since 2008, uses short sales, wherein the lender
accepts less than the full mortgage balance to release its lien, as one of its mitigation
strategies to help minimize the severity of losses it incurs from loan
OIG says that during 2012
Fannie Mae and its servicer approved over 73,000 short sales. Lenders typically approve short sales when
borrowers are experiencing financial hardship that prevents them from making
their mortgage payments and when they can be expected to have difficulty
selling the property because the current market value is less than the mortgage
balance. Fannie Mae must approve short
sales on loans it owns or guarantees because it will absorb any resulting loss
but it relies on its servicers to collect financial information from borrowers
and to determine whether those borrowers are eligible for a short sale.
Servicers are expected to obtain
the Uniform Borrower Assistance Form (UBAF) from borrowers. This form identifies the borrower's reasons
for claiming financial hardship and outlines the documentation required to
support claimed income, expenses, and assets.
Fannie Mae relies on its servicers to obtain and review this information
and, depending on the level of authority delegated by the GSE to the servicer
either make the borrower eligibility determination for the GSE or forward the UBAF
and documentation to it for consideration.
OIG reviewed a sample of 41
short sale transactions across multiple servicers and found that five servicers
were not always collecting all of the required documentation before making
eligibility determinations or forwarding the information to Fannie Mae. These servicers were responsible for 34
percent of the GSE's short sales in 2012.
OIG also found that servicers did not always conduct adequate reviews of
the documents supplied by borrowers, did not pursue documentation that they had
identified as missing, or left discrepancies between the UBAF and supporting
documentation unresolved. In each of
these cases the short sale was nonetheless approved.
OIG also questioned the application of Fannie Mae's Low FICO Program in
which servicers were allowed to approve short sales without collecting or
reviewing any information or documentation if the borrower had a FICO score below
620 and was at least 90 days delinquent on the mortgage loan. OIG concluded that FHFA should review this
program to determine whether it should apply to borrowers with mortgages
secured by non-owner occupied properties.
These borrowers, OIG said, might not experience the requisite financial
hardships that would justify a short sale.
On the basis of what it found in the audit, OIG recommended that FHFA should
direct Fannie Mae to:
requirement that all borrowers not eligible for the Low FICO Program (now
called the Streamlined Documentation Program) provide a borrower-certified UBAF
and all supporting documentation.
to identify and resolve inconsistencies between the UBAF and its supporting
Assess its servicer
compensation structure to determine if it should reflect the quality of borrower
eligibility determinations for short sales and success in limiting losses.
over collection and use of electronic information on the financial condition of
borrowers to ensure data is reliable and used effectively in both borrower eligibility
and servicer evaluation processes.
In addition to recommending a review of the appropriateness of the Low FICO
program for owners of non-owner occupied properties OIG recommended the FHFA should provide
examination coverage of the GSEs short sale activities with emphasis on
identifying systemic deficiencies related to borrower submissions, GSE
eligibility determinations, servicer compensation structure, and reliability of
electronic information used in managing short sales.
FHFA agreed with OIG's recommendations.