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 defaults.
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:
- Enforce the 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.
- Establish controls to identify and resolve inconsistencies between the UBAF and its supporting documentation.
- 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.
- Enhance controls 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.