OIG Finds Numerous Shortcomings in FHFA Control of Servicers

The Office of the Inspector Generalrn(OIG) for the Federal Housing Finance Agency (FHFA) has completed an audit tornassess whether FHFA has an effective supervisory control structure andrnsufficient examination coverage and oversight activities to adequately and promptlyrnidentify and mitigate risks involving mortgage servicing contractors.  These contractors are employed to manage thernloan portfolios of the government sponsored enterprises (Enterprises) andrnsupervision was of special concern in light of the increasing workloadrnoccasioned by rising delinquencies and the additional burdens of loan modificationsrnand foreclosure processing.  The auditrnlooked specifically at Freddie Mac.</p

The OIG had the following findings.</p

I.   rn FHFA needs to strengthen its supervision ofrnthe Enterprises by establishing a more robust counterparty oversight and riskrnmanagement framework.</p

The OIG foundrnthat FHFA differed from federal banking regulators in that it generally has notrnissued sufficient regulations or guidance governing the Enterprises’ contracts withrnservicers.  Rather than establishing andrnimplementing effective regulations or guidance over the way the Enterprisesrnreport critical servicer information and establishing baseline requirements forrnservicing, FHFA relies on the Enterprises individually to monitor counterpartyrnrisk.  In turn the Enterprises routinelyrnrely on the servicers themselves to manage the loans in their portfolios.</p

In addition,rnFHFA’s ability to supervise servicer risk may be hampered by a lack of directrnaccess to servicers’ books and records relating to the Enterprises’ $4.5rntrillion servicing portfolio.   While FHFArnlacks the statutory authority to regulate or supervise the servicers, there isrnno prohibition against the Agency securing such access through contracts.  As late as last September the contract termsrnand conditions which FHFA had had the ability to control since it becamernconservator in September 2008 did not provide FHFA with this access or with thernability to ensure that servicers are complying with their contracts.</p

FHFA should alsornhave access to their servicers books and records to fulfill its responsibilityrnof overseeing the prudential operations of the Enterprises, to support itsrnenforcement actions, to fill oversight gaps associated with servicers’rnactivities, and to ensure safety and soundness of the Enterprises.</p

FHFA has alsornnot issued regulations or guidance requiring the Enterprises to report criticalrnservicer information to FHFA but the issue is currently underrnconsideration.  FHFA needs to receiverntimely and relevant information regarding servicer operation because of thernsignificant concentration of risk among a few servicers.</p

FHFA has notrndeveloped comprehensive guidelines because it believes that the Enterprisesrnhave the knowledge and expertise to develop sufficient servicing guides andrnthus relies on them to establish their own minimum mortgage servicingrnrequirements.  In 2011 FHFA directed thernEnterprises to establish requirements for servicing non-performing loans butrnhas not required the Enterprises to establish requirements for other aspects ofrnservicing such as the larger subset of performing loans.  This has led to significant differencesrnbetween the servicing guides of the two Enterprises although FHFA has sought tornalign the servicing of delinquent mortgages.</p

2.  FHFA should address the follow through of improvementsrnstarted by Freddie Mac in 2011 to address servicer performance.</p

     The OIG credits Freddie Mac with developingrna business plan in 2011 to better manage higher-risk loans but redacts criticalrnparts of the explanation of the plan.  Itrndoes say that only the largest servicers have been targeted for full plan implantationrnand that for these servicers Freddie Mac now uses account plans and has a goalrnto put these in place for the next largest tier of servicers.  Where plans are not in place credit lossrnminimization activities are largely unstructured and informal and may notrnachieve optimum results.  Freddie Macrndoes not currently anticipate assigning account plans to the subset of itsrnsmallest servicers.  </p

3.  FHFA’s examination coverage of Freddie Mac’srnoversight and risk management of counterparties needs improvement.</p

     As early as 2008 FHFA had information thatrnmortgage servicing represented a heightened risk to the Enterprises but did notrncommence its examination coverage until 2010. rnEven though it was true that FHFA was confronted with other challengesrnsuch as the Home Affordable Modification Program and examinations of other highrnrisk credit issues it could have done more in response to indicators ofrnheightened risk such as the increasing delinquency rates and reports ofrnpossible problems from servicer reviews conducted by other Federal agencies.</p

     When it did begin to devote more resourcesrnto servicing in 2010 it did not adequately assess the risk that servicers posernto Freddie Mac.  Between January 2010 andrnMay 2011 FHFA conducted five reviews directly related to the operationalrnaspects of servicing however OIG concluded that the reviews did not provide arncomprehensive and meaningful assessment of the potential risks that could arisernfrom the use of servicers and OIG found these reviews wanting on a number ofrncounts.</p

FHFA-OIGrnmakes the following recommendations:</p

1.     rnThatrnFHFA establish and implement more robust regulations or guidance governingrncounterparty oversight and risk management for mortgage servicing whichrninclude   (a) requirements for contractingrnwith servicers including provisions for allowing FHFA access to relevantrnservicer information; (b) promptly reporting on material poor performance andrnnon-compliance by servicers; and (c) minimum, uniform standards for servicingrnmortgages owned or guaranteed by the Enterprises.</p

2.     rnDirectrnFreddie Mac to take the necessary steps to monitor and track the performance ofrnits servicers to reasonably assure achievement of credit loss savings by (a)rnimplementing servicer account plans for the remaining servicers underrnconsideration for plans and (b) taking action to maximize credit loss savingsrnamong the remaining servicers that are not under consideration to receivernplans.</p

3.     rnImprovernexisting procedures and controls governing coordination with other federalrnagencies that have oversight jurisdiction of the Enterprises mortgagernservicers.  

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