The inspector general for the Federal Housing Finance Agency sounded the alarm on what it calls a failure on the part of Fannie Mae servicers to collect all of the required information when approving borrowers for short sales.
The report, titled “Fannie Mae’s Controls Over Short-Sale Eligibility,” says based on a review of 41 short sales involving multiple Fannie Mae servicers, the OIG discovered that five key servicers fell short in collecting data on homeowners by failing to always collect the required documentation before determining a borrower's short-sale eligibility.
OIG claims that five servicers—which processed 34% of all Fannie short sales in 2012—failed to establish consistent compliance with all requirements.
The same report claims the GSE's servicers in question fell short when conducting borrower eligibility requirements for short sales. Fannie and its servicers approved 73,000 short sales in just 2012, the OIG claimed.
A spokesperson for Fannie declined to comment on the report.
As far as the issues raised, the oversight group is asking the GSE to respond to these challenges. In some cases, borrowers with significant financial resources ended up selling multiple non-owner occupied properties through Fannie’s Low FICO program, FHFA-OIG claimed in its report.
The group also says Fannie and its servicers fell short in ensuring they had every borrower's eligibility requirements stored in the GSE’s system of record.
Additionally, the report claims OIG found discrepancies in financial information reported on certain Uniform Borrower Assistance Forms, which are the documents that establish the need for financial support.
The report advises the Federal Housing Finance Agency, as conservator of the GSEs, to require Fannie to establish new controls over short sales and to ensure quality collection of financial information during the approval process.
Furthermore, the report wants the GSE to study its servicer compensation model and resolve any inconsistencies in borrower loan files when they conflict with short sale requirements.
In reacting to the report, Ed Pinto of the American Enterprise Institute – a long-time critic of how Fannie and Freddie operate within the secondary mortgage market – said the report "fits in with a broader concern" in the way short sales have generally been run in the past. He says there has always been "a lot of opportunity for fraud" in short sales.
Yet, Pinto says the servicing industry actually pushed for tighter policies regarding short sales more than a year ago, and the government pushed back on the grounds it wanted flexibility.
"Government agencies and regulators should have supported the request of some in the industry that there be more teeth in policing short sales," he added.
Along with enhancing controls, the OIG recommends that the FHFA review documentation to determine if a short-sale should be approved for a non-owner occupied property, while also examining the GSE’s overall oversight of short sales to find and fix deficiencies in borrower submissions.