Report: Fannie, Freddie foreclosure inspectors did terrible job

Inspectors turned in manipulated and fraudulent reports

A newly released report says that pre-foreclosure inspections for Fannie Mae and Freddie Mac have serious quality control issues, and may contain fraudulent or manipulated data.

A report from the Office of Inspector General for the Federal Housing Finance Agency says that Fannie Mae and Freddie Mac “do not have quality controls in place to obtain reasonable assurance that pre-foreclosure property inspection information is accurate, consistent, and complete.”

The report also states that, “While the Enterprises (Fannie Mae and Freddie Mac) paid in excess of $91.2 million for pre-foreclosure property inspections during 2011 and 2012, there is limited assurance that either Enterprise had effective controls in place to ensure the quality of inspections conducted or that inspectors submit reports consistent with the existing requirements.”

The report found that in some cases:

  • Property inspection reports contain inaccurate information which conflicts with corresponding photographs
  • Property inspection reports include missing, manipulated, and blurry photographs
  • Property inspectors conduct inspections outside of gated communities instead of waiting to obtain access to restricted properties
  • Servicers neither consistently conduct oversight procedures to evaluate vendors’ property inspection performance, nor validate inspection reports to ensure the information is accurate, complete, and consistent
  • Property inspection reports do not include the names or signatures of those who conducted the inspections
  • Servicers inconsistently adopted requirements for inspectors to complete and pass criminal background checks

In one case, an inspector submitted a series of inspection reports that appeared to have information about the property that was copied from previous reports. “OIG also identified a series of inspection reports for a single property that claimed the property’s grass height was exactly 8 inches for 7 months,” the report says. “In this example, further illustrated in Figure 3, it appears the inspector copied old inspection report information onto each subsequent month’s inspection form.”

In another case, an inspector submitted photographs that were dated April 2007 for a report submitted in December 2012. In several cases, dates on photographs were changed to reflect the date of the inspection.

The FHFA itself was not immune to the report’s negative findings. “There has been little attention provided to pre-foreclosure property inspections by both FHFA and the Enterprises,” the report said. “Specifically, FHFA has not issued guidance to the Enterprises related to the quality of pre-foreclosure property inspections and the Agency has not conducted any targeted examinations of the Enterprises’ pre-foreclosure property inspection processes.”

The report states that the substandard quality control over the inspections and inspectors reduces the effectiveness of the inspections. “The lack of quality controls diminishes the inspection report’s integrity and cast doubt on whether these inspections are working and necessary,” the report states.

In order to address these issues, the OIG advises the FHFA to direct Fannie and Freddie to “jointly assess the effectiveness of their pre-foreclosure property inspection processes.” OIG identified several specific areas for the two agencies to review as part of the assessment, including: identifying pre-foreclosure property inspection risk and objectives, identifying cost-effective control alternatives for achieving the objectives, and recommending inspection standards and quality controls with regard to the content and frequency of inspections.

The report also states that the FHFA should direct Fannie and Freddie to “establish uniform pre-foreclosure inspection quality standards and quality control processes for inspectors.”

In response to the charges levied in the OIG’s report, the FHFA “will issue supervisory direction to each Enterprise to perform and document an assessment of risks and standards related to pre-foreclosure property inspections.”

The expected completion date for this is January 31, 2015.

The FHFA disagreed with the second recommendation, that the two agencies establish uniform pre-foreclosure inspection quality standards and quality control processes for inspectors, saying, “based on the sampling and analysis presented, FHFA does not believe that the report findings and the examples of deficiencies provide compelling support for the imposition of uniform standards and processes for all pre-foreclosure inspections of properties that collateralize delinquent loans held or guaranteed by the Enterprises.”

The OIG responded to the FHFA’s comments, saying “given that FHFA has agreed to direct the Enterprises to make a determination whether standards for pre-foreclosure property inspections should be incorporated into the Enterprise’s program for management of third-party relationships, OIG considers FHFA’s response to recommendation 2 to be potentially responsive to resolve the recommendation, which will remain open until the Enterprises have completed their assessments.”

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