The Office of the Inspector General (OIG) of the Federal Housing Finance Agency (FHFA) has issued a pair of reports critical of the GSEs’ efforts to collect billions of dollars in deficiencies from underwater homeowners who walked away from their mortgages.
“If either the foreclosure sale’s proceeds or the value at which [the GSE] records a property in its real estate owned portfolio is less than the borrower’s mortgage loan balance, the shortfall (or deficiency) represents a loss to [the GSE],” one of the reports explained. “Such losses can be reduced if the enterprise recovers deficiencies from borrowers who possess the ability to repay. Enhanced deficiency management practices can also serve as a deterrent to those who would choose to strategically default on their mortgage obligations.”
The reports found that Freddie Mac did not refer nearly 58,000 foreclosures with estimated total deficiencies of approximately $4.6 billion to its deficiency collection vendors. Between January 2010 and June 2012 Fannie
Mae failed to pursue 26,000 foreclosures that had an average deficiency of $79,000.
In most cases the collection of deficiencies was abandoned because of state laws limiting the amount of time that can pass between a foreclosure sale and a collection action. Delays in collecting and processing paperwork often allowed this statute of limitations to pass.
“Of the 44,652 foreclosure sales, Fannie Mae’s vendors reviewed 14,960 foreclosures and confirmed the existence of deficiency balances, before ceasing action to pursue these deficiencies,” the report on Fannie Mae said. “It is likely that only a portion of these deficiencies may be recoverable, as many borrowers likely do not possess the ability to repay. Further, the deficiency vendors did not pursue or estimate the total deficiencies on the remaining 29,692 accounts because the statutes of limitation expired before the vendor could gather the necessary information to review the accounts and calculate the deficiency balances.”
Both reports found that one of the primary reasons vendors were unable to pursue collections was a delay in the receipt of required information from servicers and foreclosure attorneys. As a result, both reports recommended that Fannie Mae and Freddie Mac install firm guidelines for timely delivery of documents and information from servicers and attorneys. They recommended that the enterprises apply financial penalties for parties that fail to meet deadlines.
The management of the GSEs agreed with all of the recommendations in the reports and are currently in talks with the FHFA to implement new standards for deficiency collection by January 31, 2014.