Banking and Finance Law Daily Wrap Up, GOVERNMENT SPONSORED ENTERPRISES—Audit provides step to improve oversight of REO sales, (Sep 30, 2013)

By John M. Pachkowski, J.D.

The Inspector General (IG) for the Federal Housing Finance Agency has released the results of a performance audit regarding the agency’s Real Estate Owned (REO) Pilot Program.

Pilot program. The FHFA established the Pilot Program in early 2012 in conjunction with the Treasury Department, Department of Housing and Urban Development, Federal Deposit Insurance Corporation, Federal Reserve Board, Fannie Mae, and Freddie Mac using input from meetings with stakeholders and review of more than 4,000 responses to a Request for Information seeking input on options for selling single-family Real-Estate Owned properties held by Fannie Mae, Freddie Mac, and the Federal Housing Administration. Under the program, qualified investors to purchased pools of foreclosed properties, consisting of 2,500 single-family Fannie Mae REO properties, with the requirement to rent the purchased properties for a specified number of years. In late 2012, the FHFA noted that Pacifica Companies, LLC had purchased 699 Fannie Mae properties in Florida, The Cogsville Group, LLC had purchased 94 properties in Chicago, and Colony Capital, LLC had purchased 970 properties in California, Arizona and Nevada.

IG findings. The IG found that the FHFA established a sound process for reviewing, scoring, and recommending investors to qualify as bidders under the REO Pilot Program. However, Fannie Mae’s bidder qualification contractor did not fully comply with important provisions of the established process. The IG pointed out that the contractor did not properly score the risk attributes for 12 of 47 potential investors, six of whom were determined to be eligible to bid even though they did not meet prescribed bidder qualification scoring criteria. The IG also found that Fannie Mae did not always follow its contractor’s scores and recommendations; and that the FHFA did not independently verify the work performed by Fannie Mae’s bidder qualification contractor, thereby not discovering the instances of noncompliance.

The FHFA was also criticized for being unclear as to how the pilot program’s goals and objectives were to be achieved; how the agency intended to monitor and assess the performance of the pilot or any other future initiatives under the overall REO disposition program; and not creating a program plan to guide its REO disposition-related initiatives. The IG noted that these steps were important to provide the oversight needed to ensure proper disposition of Fannie Mae’s extensive REO inventory.

Recommendations. To improve oversight of the REO Pilot Program, the IG recommended that the FHFA should: (1) establish verification controls to ensure enterprise contractors are performing in accordance with agreed criteria and that any proposed waivers to the criteria are documented and submitted for FHFA review and approval; (2) clarify guidance regarding bidder submission of financial statements and explanation of adverse financial events as part of the bidder qualification process; and (3) issue formal guidance for the REO disposition program, including the REO Pilot Program, requiring a program plan with clearly defined goals and objectives, a program monitoring and oversight mechanism, criteria to measure and evaluate program success, and the means to assess alternative REO disposition strategies.

Companies: Fannie Mae; Freddie Mac

RegulatoryActivity: GovernmentSponsoredEnterprises Loans Mortgages