OIG Recommends Tighter Oversight of Fannie Mae Short Sales

The Office of Inspector Generalrn(OIG) of the Federal Housing Finance Agency (FHFA) released a performance auditrnreport that recommends FHFA tighten its oversight of governmentrnsponsored enterprise (GSE) Fannie Mae’s controls over approval of shortrnsales.  Fannie Mae, which has operatedrnunder FHFA conservatorship since 2008, uses short sales, wherein the lenderrnaccepts less than the full mortgage balance to release its lien, as one of its mitigationrnstrategies to help minimize the severity of losses it incurs from loanrndefaults.  </p

OIG says that during 2012rnFannie Mae and its servicer approved over 73,000 short sales.  Lenders typically approve short sales whenrnborrowers are experiencing financial hardship that prevents them from makingrntheir mortgage payments and when they can be expected to have difficultyrnselling the property because the current market value is less than the mortgagernbalance.   Fannie Mae must approve shortrnsales on loans it owns or guarantees because it will absorb any resulting lossrnbut it relies on its servicers to collect financial information from borrowersrnand to determine whether those borrowers are eligible for a short sale. </p

Servicers are expected to obtainrnthe Uniform Borrower Assistance Form (UBAF) from borrowers.  This form identifies the borrower’s reasonsrnfor claiming financial hardship and outlines the documentation required tornsupport claimed income, expenses, and assets. rnFannie Mae relies on its servicers to obtain and review this informationrnand, depending on the level of authority delegated by the GSE to the servicerrneither make the borrower eligibility determination for the GSE or forward the UBAFrnand documentation to it for consideration.</p

OIG reviewed a sample of 41rnshort sale transactions across multiple servicers and found that five servicersrnwere not always collecting all of the required documentation before makingrneligibility determinations or forwarding the information to Fannie Mae.  These servicers were responsible for 34rnpercent of the GSE’s short sales in 2012.</p

OIG also found that servicers did not always conduct adequate reviews ofrnthe documents supplied by borrowers, did not pursue documentation that they hadrnidentified as missing, or left discrepancies between the UBAF and supportingrndocumentation unresolved.  In each ofrnthese cases the short sale was nonetheless approved.</p

OIG also questioned the application of Fannie Mae’s Low FICO Program inrnwhich servicers were allowed to approve short sales without collecting orrnreviewing any information or documentation if the borrower had a FICO score belowrn620 and was at least 90 days delinquent on the mortgage loan.  OIG concluded that FHFA should review thisrnprogram to determine whether it should apply to borrowers with mortgagesrnsecured by non-owner occupied properties. rnThese borrowers, OIG said, might not experience the requisite financialrnhardships that would justify a short sale.</p

On the basis of what it found in the audit, OIG recommended that FHFA should</bdirect Fannie Mae to:</p<ul class="unIndentedList"<liEnforce thernrequirement that all borrowers not eligible for the Low FICO Program (nowrncalled the Streamlined Documentation Program) provide a borrower-certified UBAFrnand all supporting documentation.</li<liEstablish controlsrnto identify and resolve inconsistencies between the UBAF and its supportingrndocumentation.</li<liAssess its servicerrncompensation structure to determine if it should reflect the quality of borrowerrneligibility determinations for short sales and success in limiting losses.</li<liEnhance controlsrnover collection and use of electronic information on the financial condition ofrnborrowers to ensure data is reliable and used effectively in both borrower eligibilityrnand servicer evaluation processes. </li</ul