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Better Oversight Needed on Distressed Property Policies

by devteam January 16th, 2014 | Share

The Office of Inspector General (OIG) of the FederalrnHousing Finance Agency (FHFA) released two reports today recommending better FHFArnoversight of two aspects of Fannie Mae’s management of distressedrnproperties.  In the first report OIGrnlooked at a Fannie Mae plan to refund borrower contributions involved in thernshort sale of distressed properties.  Thernother evaluated Fannie Mae’s method of reimbursing servicers for pre-foreclosurernproperty inspection fees.</p

Throughrntheir Seller/Servicer Guides, Fannie Mae and Freddie Mac (the GSEs) providernguidance on delinquency management and default prevention to their servicersrnwho are contractually required to comply with the guidance. Fannie Mae expectsrnservicers to identify borrowers who are having difficulty making mortgagernpayments due to a financial hardship and offer appropriate workout options,rnsuch as a short sale in which proceeds from the sale of the property do notrncover the balance of the mortgage. Fannie Mae also depends on its servicers tornevaluate borrowers for contributions toward the remaining balance and relies onrnits servicers to collect borrower contributions along with the net proceedsrnfrom the short sale closing.</p

In an earlier audit of Fannie Mae’s closed shortrnsale transactions OIG found that Fannie Mae servicers were collecting fromrnborrowers with the financial ability to do so contributions toward thernremaining balance of their mortgages after short sale proceeds werernapplied.  OIG found that where propertiesrnwere located in the state of California those contributions might be contraryrnto state law and that borrower contributions for short sales under the HomernAffordable Foreclosure Alternative (HAFA) program, could violate the programrnrequirements.  </p

The audit made Fannie Mae aware of the California law thatrnexpressly prohibited the holder of a note from requiring the borrower to payrnany additional compensation in exchange for the written consent to a sale otherrnthan the sale’s proceeds. This would include the collection of borrowerrncontributions as a condition of a short sale.  Further investigation found that Fannie Mae’srnservicers collected borrower contributions for 124 short sales completed duringrn2012. </p

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

OIG earlier recommended that FHFA review FanniernMae’s remediation plan and issue appropriate guidance and oversee the executionrnof Fannie Mae’s plan to ensure that a good faith effort is made to promptlyrnrefund inappropriately collected borrower contributions to borrowers. rnSimilarly, FHFA should also examine Freddie Mac’s controls over short salernborrower contributions in California and issue appropriate guidance.  </p

Although FHFA stated it agreed with OIG’s threernrecommendations, OIG says the Agency’s actions are not fully responsive and thernrecommendations are unresolved. In particular, FHFA actions provide limitedrnconfidence that borrowers will be treated consistently in decisions concerningrnrefunds of their contributions to short sales.  OIG requests that FHFArnreconsider its position on these three recommendations and provide additionalrncomments within 30 days of the issuance of this report.</p

The second report looked at whether Fannie Maernoverpaid servicers for property inspections conducted prior to foreclosures.  The Fannie Mae servicing guide requires servicers to performrna monthly inspection on all properties where borrowers have become delinquentrnon their mortgage loan to help protect the GSE’s interest inrnthe property and secure the property from physical conditions that may result inrnadditional credit losses.  rnHowever, Fannie Mae limits the total amount per loan that servicers arernreimbursed for pre-foreclosure property inspections.</p

OIGrnconcluded following a study that the GSE’s process for paying servicers forrnproperty inspection claims has significant control deficiencies which caused itrnto overpay servicers by approximately $5 million in 2011 and 2012.  </p

OIGrnrecommends that FHFA direct Fannie Mae to: </p

1    Obtain a refundrnfrom servicers for overpayments of property inspection claims; </p

2    Implement systemrncontrols to reject property inspection claims over established tolerancernlimits; and </p

3.   Issue guidance tornall servicers concerning requirements to adhere to reimbursement limits forrnproperty inspection claims.  </p

OIGrnalso recommends that FHFA assess the need for additional examination coveragernof Fannie Mae’s pre-foreclosure property inspection reimbursementrnprocess. 

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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