Due to the high-risk nature of managing real-estate owned assets at Fannie Mae and Freddie Mac, the Office of Inspector General for the Federal Housing Finance Agency (FHFA-OIG) has implemented an aggressive evaluation process to assess FHFA’s REO oversight and conservatorship efforts, according to a new report. 

The report evaluates initiatives by the U.S. Department of Housing and Urban Development and the GSEs to shrink their respective REO inventories, while addressing steps taken by the HUD Inspector General and FHFA-OIG to assess their respective REO-related activities. 

When the national REO inventory is significant, it can create challenges to creditors attempting to manage REO inventories successfully. HUD, FHFA and the GSEs are particularly sensitive to such risks, the report says, given the size of their respective REO inventories. 

The evaluation strategy, conducted by FHFA-OIG, was established to determine whether FHFA and the GSEs maximize financial recoveries and minimize the negative effects of foreclosures on affected communities during their management of REOs. Therefore, FHFA-OIG will research the potential effectiveness of these REO management activities and determine if proper risk management controls have been put in place to avoid fraud and abuse.

FHFA has continued to deem the GSEs’ large REO inventories as a contributor to “critical concern” ratings in its quarterly risk assessment. In spite of this, however, FHFA failed to conduct targeted examinations of REOs until 2011. The evaluation process conducted by FHFA-OIG will include an audit of FHFA’s oversight of the enterprises’ REO management programs. 

It was discovered that FHFA’s targeted examinations, completed in 2012, were positive supervisory steps that the GSE can change in the future by simply assessing other REO risk areas that need supervision. FHFA-OIG said FHFA will improve if it uses a more comprehensive REO risk assessment to enhance its planning of supervisory activities. 

As another aspect of its evaluation strategy, FHFA-OIG plans to cover the key steps in the REO management process, which includes matters such as securing the property, maintenance and repair, valuation and marketing and finally the sale. 

Under consideration are several evaluations of FHFA’s oversight of the GSES’ planning, monitoring and management of REO. The evaluations will focus on the ability of the GSEs’ to handle future workloads and mitigate adverse effects on homeowners and communities. 

If FHFA decides to implement the sale-rental commitment model on a wider scale, FHFA-OIG also plans to study FHFA’s and Fannie Mae’s REO Pilot Program. 

FHFA-OIG would likely cover whether the program is meeting expectations, the quality level of the controls that are created to ensure that investors have sufficient expertise and financial resources to meet their rental commitment as well as the quality of the processes by which Fannie Mae watches investor compliance with their rental commitments and FHFA’s general overview of Fannie’s efforts to implement the program.

Finally, FHFA-OIG plans to gauge FHFA’s oversight of single-family property inspections at the GSEs, which see property inspections as crucial to the successful management of their REO inventories. At various points throughout the mortgage servicing process, property inspections are required. These inspections should establish the comprehensive condition of the property, such as security, occupancy status, maintenance requirements, neighborhood conformity and more. 

With this audit and evaluation strategy, FHFA-OIG hopes it will be able to determine whether FHFA is ensuring that the GSEs are mitigating REO risks and costs and the negative impacts of foreclosures on communities effectively.

Further, FHFA-OIG looks to be in a position to make suggestions, as necessary, to strengthen FHFA’s REO-related oversight and conservatorship efforts.