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.
