oversight

Fannie Mae's Controls Over Short Sale Eligibility Determinations Should be Strengthened

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-11-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

          Federal Housing Finance Agency
              Office of Inspector General




Fannie Mae’s Controls Over Short
 Sale Eligibility Determinations
    Should be Strengthened




Audit Report  AUD-2014-003  November 20, 2013
               Fannie Mae’s Controls Over Short Sale Eligibility
               Determinations Should be Strengthened
               Why OIG Did This Report
               The Federal Housing Finance Agency (FHFA or Agency) currently serves as both
               regulator and conservator of the Federal National Mortgage Association (Fannie Mae
               or Enterprise) and the Federal Home Loan Mortgage Corporation (Freddie Mac). As
Synopsis       conservator, FHFA’s responsibilities are to preserve and conserve Fannie Mae’s
               assets. Short sales are part of Fannie Mae’s loss mitigation strategy to pursue
  ———          foreclosure alternatives in order to help minimize the severity of losses it incurs as
               a result of loan defaults. Fannie Mae depends upon its servicers to collect financial
November 20,   information from borrowers and utilize that information to consider whether
   2013        borrowers are eligible for a short sale. During 2012, Fannie Mae and its servicers
               approved over 73,000 short sales.
               The objective of this performance audit was to assess FHFA’s oversight of Fannie
               Mae’s controls over borrower eligibility requirements applicable to its short sale
               program.

               What OIG Found
               A short sale of real estate occurs when the proceeds from a property sale fall short of
               the amount owed on mortgages secured by the property. As part of the selling process,
               lenders typically release borrowers from the full amount of liens on the property. For
               loans owned or guaranteed by Fannie Mae, the Enterprise requires approval of the
               short sale since it incurs any resulting loss.
               Borrowers may be eligible for a short sale if they are experiencing a financial hardship
               that prevents them from making their mortgage payments and can be expected to have
               difficulty in selling their homes because the current value is less than the amount
               owed on the mortgage. Fannie Mae relies on its servicers – those entities contractually
               required to perform servicing functions such as collection of payments and responding
               to loan delinquencies on behalf of Fannie Mae – to obtain the information needed to
               determine whether a borrower is eligible for a short sale. The servicers request that
               potentially distressed borrowers complete the Uniform Borrower Assistance Form
               (UBAF) identifying their financial hardship and provide supporting documentation for
               all income, expenses, and assets. Furthermore, Fannie Mae relies on its servicers to
               review this documentation. Depending on the level of authority delegated by Fannie
               Mae, servicers will either make the borrower eligibility determination for Fannie Mae
               or collect and review the required information and forward this information to the
               Enterprise for further consideration.
               Based on a review of 41 short sale transactions involving multiple Fannie Mae
               servicers, OIG found that five servicers, which accounted for 34% of Fannie Mae’s
               short sales during 2012, were not always collecting all of the required documentation
               before making borrower eligibility determinations or forwarding the information to
               Fannie Mae when seeking required approvals. Also, servicers did not always conduct
               adequate reviews supporting borrower eligibility determinations. For example,
               servicers identified but did not pursue missing documentation and therefore, could not
               perform a complete borrower eligibility review. In other cases, discrepancies between
               financial information reported on the borrower’s UBAF and supporting
               documentation identified in the course of servicer reviews were left unresolved.
               Regardless of these circumstances, the short sales were approved. Further, Fannie
               Mae and its servicers did not ensure that borrower eligibility information stored within
               Fannie Mae’s system of record, the Distressed Assets Reporting and Tracking System
Synopsis       (DARTS), was accurate. This system is intended to provide Fannie Mae key
               information to make borrower eligibility decisions or evaluate decisions made by its
  ———          servicers.
November 20,   OIG also found that borrowers with potentially significant financial resources sold
   2013        multiple non-owner occupied properties through Fannie Mae’s Low FICO Program
               (now called the Streamlined Documentation Program). This program allows servicers
               to approve short sales without collecting or reviewing any further eligibility
               information about the borrower, including a UBAF and supporting documentation, if
               the borrower has a FICO score of less than 620 and is at least 90 days delinquent on
               the subject loan. OIG concluded that this policy should be reviewed by FHFA to
               determine whether it should apply to borrowers with mortgage loans secured by non-
               owner occupied properties, who may not experience the requisite financial hardship
               that would justify a short sale.

               What OIG Recommends
               FHFA should direct Fannie Mae to take the following actions to strengthen controls
               over short sales: (1) enforce the requirement that all borrowers not eligible for the
               Streamlined Documentation Program provide a borrower-certified UBAF and
               supporting documentation in order to make eligibility determinations and assess
               borrower contributions; (2) establish controls to identify and resolve inconsistencies
               between the UBAF and supporting information used in making short sale eligibility
               determinations; (3) assess its servicer compensation structure to determine if it should
               consider the quality of borrower eligibility determinations for short sales and success
               in limiting losses, including through contributions by borrowers with the ability to
               pay; and (4) enhance controls over collection and use of electronic information from
               servicers on the financial condition of borrowers to ensure data is reliable and
               effectively used in both borrower eligibility and servicer performance evaluation
               processes.
               Additionally, FHFA should (1) review the Streamlined Documentation Program to
               determine whether the program should be available to borrowers seeking approval to
               short sell non-owner occupied properties; and (2) provide examination coverage of
               Fannie Mae’s short sale activities with particular emphasis on identifying systemic
               deficiencies related to borrower submissions, Enterprise eligibility determinations,
               servicer compensation structure, and reliability of electronic information used in
               managing short sales.
               FHFA provided comments agreeing with these recommendations.
TABLE OF CONTENTS ................................................................

ABBREVIATIONS .........................................................................................................................6

PREFACE ........................................................................................................................................7

CONTEXT .......................................................................................................................................8
      Introduction to Short Sales .......................................................................................................8
      Information Fannie Mae Requires its Servicers to Collect from Borrowers to
      Determine Eligibility ................................................................................................................9
      Changes to Fannie Mae’s Short Sale Program that Resulted from the Implementation
      of FHFA’s Directive ...............................................................................................................11
      Short Sales of Non-Owner Occupied Properties Is an Area of Heightened Risk for
      Fannie Mae .............................................................................................................................12

FINDINGS .....................................................................................................................................13
      1. FHFA and Fannie Mae Controls Over Borrowers Seeking Approval for Short
         Sales Should be Strengthened ............................................................................................13
             Servicers’ Files Were Missing Required Supporting Documentation for
             Borrower Eligibility Determinations ..............................................................................14
              Potential Understatement of Borrowers’ Financial Assets .............................................15
             Inconsistency Between Information Supplied by the Borrower and Received by
             Fannie Mae......................................................................................................................16
             Examples of Borrowers Approved for Short Sales of Non-Owner Occupied
             Properties ........................................................................................................................16
              Lack of Incentives for Servicers to Exercise Due Diligence ..........................................17
              Lack of FHFA Oversight ................................................................................................18
      2. The Low FICO Program May Not be Appropriate for Borrowers Seeking
         Approval for Short Sales of Non-Owner Occupied Properties ..........................................18
             Fannie Mae’s Low FICO Program and Streamlined Documentation
             Requirements ..................................................................................................................19
             Examples of Borrowers Approved for Short Sales of Non-Owner Occupied
             Properties Under Fannie Mae’s Low FICO Program .....................................................20

CONCLUSION ..............................................................................................................................22


                                         OIG  AUD-2014-003  November 20, 2013                                                                 4
RECOMMENDATIONS ...............................................................................................................23

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................24

APPENDIX A ................................................................................................................................26
      FHFA’s Comments on OIG’s Findings and Recommendation ..............................................26

APPENDIX B ................................................................................................................................29
      FHFA-OIG’s Response to FHFA’s Comments ......................................................................29

APPENDIX C ................................................................................................................................31
      Summary of FHFA’s Comments on the Recommendations ..................................................31

ADDITIONAL INFORMATION AND COPIES .........................................................................33




                                        OIG  AUD-2014-003  November 20, 2013                                                              5
ABBREVIATIONS .......................................................................

DARTS                 Distressed Assets Reporting and Tracking System

Fannie Mae or
Enterprise            Federal National Mortgage Association

FICO                  Fair Isaac Corporation

FHFA or Agency        Federal Housing Finance Agency

Freddie Mac           Federal Home Loan Mortgage Corporation

HSSN                  Home Saver Solutions Network

LMQC                  Loss Mitigation Quality Control Review

MANP                  Minimum Acceptable Net Proceeds

OIG                   Federal Housing Finance Agency Office of Inspector General

REO                   Real Estate Owned

SQR                   Servicer Quality and Risk Review

UBAF                  Uniform Borrower Assistance Form (Form 710)




                        OIG  AUD-2014-003  November 20, 2013                      6
PREFACE ...................................................................................

The Housing and Economic Recovery Act of 2008 established the FHFA Office of Inspector
General (OIG). OIG is authorized to conduct audits, evaluations, investigations, and other law
enforcement activities pertaining to FHFA’s programs and operations. As a result of OIG’s
work, it may recommend policies that promote economy and efficiency in administering
FHFA’s programs and operations, or that prevent and detect fraud and abuse in them.

Short sales are Fannie Mae’s primary foreclosure alternative to mitigate losses, and this audit
report is a part of OIG’s proactive audit and evaluation strategy to assess the Agency’s related
oversight and conservatorship efforts. This audit focused on whether short sale eligibility
determinations made by Fannie Mae and its servicers were sufficient to deter potential
abuse by borrowers with the ability to continue making mortgage payments or make cash
contributions to reduce losses on the sale.

From a limited sample of closed short sales reviewed, OIG found that Fannie Mae’s controls
over short sale eligibility determinations should be strengthened. OIG also found that
borrowers with potentially significant financial resources sold multiple non-owner occupied
properties through Fannie Mae’s Low FICO Program (now called the Streamlined
Documentation Program) without having to disclose their financial situation. This report’s
recommendations (along with those in prior reports) can increase FHFA’s assurance that the
Enterprises are operating safely and soundly, and that their assets are being preserved and
conserved.

OIG appreciates the cooperation of everyone who contributed to this audit, including officials
at Fannie Mae and FHFA. This audit was led by Laura Benton, Audit Director, and Scott
Smith, Audit Manager, who were assisted by Cairo Carr, Auditor-in-Charge, Chris Sim,
Senior Auditor, Monica Graves, Senior Auditor, and Mendy Breitkopf, Auditor.

This audit report has been distributed to Congress, the Office of Management and Budget, and
others, and will be posted on OIG’s website, www.fhfaoig.gov.




Russell A. Rau
Deputy Inspector General for Audits




                            OIG  AUD-2014-003  November 20, 2013                                 7
CONTEXT ..................................................................................

Introduction to Short Sales

Short sales, also known as pre-foreclosure sales, are a part of Fannie Mae’s strategy to pursue
foreclosure alternatives in order to help minimize the severity of the losses it incurs as a result
of loan defaults. Fannie Mae relies on its mortgage servicers to identify problem loans and
offer appropriate workout options to distressed borrowers. Servicers first look at available
home retention solutions, such as loan modifications and forbearance plans, and then
foreclosure alternatives, such as short sales and deed-in-lieu of foreclosure transactions,
before proceeding with foreclosure. Fannie Mae’s primary foreclosure alternative is a short
sale, accounting for 73,528 (83 percent) of the total completed foreclosure alternative
transactions of 88,732 in 2012.1

In short sales, Fannie Mae’s servicers work with borrowers to sell their homes prior to
foreclosure. Even though the proceeds received from the sale fall short of the amount of debt
secured by liens against the property, a short sale may be mutually beneficial to the borrower
and Fannie Mae. For example, while a short sale most often results in a loss to Fannie Mae,
the Enterprise has estimated the amount of loss in a short sale to generally be less than the
losses associated with the foreclosure process.2 Additionally, borrowers can benefit because
while short sales are likely to adversely affect their credit ratings, the duration of credit
impairment can be shorter.3

Regarding short sales, Fannie Mae has two categories of servicers – non-delegated and
delegated. Non-delegated servicers have no authority to make short sale decisions on behalf
of Fannie Mae. Their role is limited to collecting the information needed to determine whether
the borrower is eligible for the program and forwarding it to Fannie Mae for consideration.
Delegated servicers also collect needed information from the borrower but have been
delegated authority by the Enterprise to make borrower eligibility determinations on behalf of
Fannie Mae and complete short sales if the proceeds from the transaction meet Fannie Mae’s

1
  See Table 47: Statistics of Single-Family Loan Workouts on pg. 135 of Fannie Mae’s 2012 10-K
http://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2012/10k_2012.pdf. Further, this
table indicates that the unpaid principal balance on Fannie Mae’s completed short sales in 2012 was $15.9
billion.
2
  According to Fannie Mae, the average loss severity it experienced from short sales during 2012 was 38.7% of
unpaid principal balance and 45% for real estate owned, which suggests a savings of 6.3% for properties
liquidated through a short sale.
3
  Fannie Mae’s Selling Guide provides that borrowers are not eligible for a Fannie Mae loan for at least two
years after a short sale; by contrast, borrowers are required to meet a seven-year waiting period after a prior
foreclosure to be eligible for a new mortgage loan eligible for sale to Fannie Mae.




                                  OIG  AUD-2014-003  November 20, 2013                                          8
Minimum Acceptable Net Proceeds (MANP).4 However, delegated servicers must obtain
Fannie Mae’s approval for any short sale that does not meet the MANP requirement. See
Figure 1 which depicts the process for a typical Fannie Mae short sale.

                             FIGURE 1. FANNIE MAE’S SHORT SALE APPROVAL PROCESS


        The Borrower experiences a             The Borrower selects a listing       The offer is submitted to the
       hardship and requests a short           agent who in turn secures an        servicer along with a complete
         sale to avoid foreclosure             offer for the subject property       Borrower Response Package




          The servicer reviews the
                                                 If the servicer deems the           Fannie Mae receives the
       documents and determines a
                                               borrower eligible for a short       valuation and determines the
      borrower's eligibility for a short
                                                 sale, the servicer orders a         minimum acceptable net
       sale based on criteria outlined
                                              valuation for the property from         proceeds for the subject
        in the Fannie Mae Servicing
                                                    Fannie Mae's vendor                      property
                   Guide




                                               If the servicer does not have a        Once the short sale is
       If the servicer has a delegated
                                              delegated authority to approve       approved, the servicer sends
          authority to approve short
                                              short sales or the offer is below      an approval letter to the
      sales and the offer exceeds the
                                              the MANP, the servicer cannot         borrower and monitors the
        MANP, the servicer approves
                                              approve and the offer is sent to      execution of the short sale
                the short sale
                                                   Fannie Mae for approval                 transaction


Source: Figure 1 was derived from a Fannie Mae document that described its short sale process.

Fannie Mae’s servicers are bound by the requirements detailed within Fannie Mae’s Servicing
Guide for processing short sale transactions. This guide also details the information that
servicers are required to collect from borrowers to determine whether they are eligible for the
short sale program.

Information Fannie Mae Requires its Servicers to Collect from Borrowers to Determine
Eligibility

Part VII, Section 604 of Fannie Mae’s 2012 Servicing Guide states that the servicer must
identify those borrowers who are experiencing a financial hardship that prevents them from
making their mortgage payments and who can be expected to have difficulty in selling their

4
 The servicer must obtain a Broker Price Opinion or appraisal through Fannie Mae’s vendor list in order to
obtain the Minimum Acceptable Net Proceeds (MANP) from Fannie Mae. MANP is the baseline value to be
used by the servicer to establish a list price that is reflective of current market conditions. See Fannie Mae’s
Servicing Guide https://www.fanniemae.com/content/guide/svc031412.pdf, pg.706-118.




                                       OIG  AUD-2014-003  November 20, 2013                                       9
homes because the current value is probably less than the amount owed on the mortgage.
Servicers are required to exhaust all other available means before discussing a pre-foreclosure
sale with borrowers. After a potential candidate is identified, servicers must obtain and review
a complete Borrower Response Package to determine if the borrower’s financial hardship is
the result of an involuntary reduction in income or an unavoidable increase in expenses.5

A Borrower Response Package includes a UBAF, also known as Form 710, and
documentation that supports disclosures made within the UBAF. The UBAF requires that
borrowers identify their hardship and provide information for all of their income, expenses,
and assets. Required supporting documents include borrowers’ most recent pay stubs, bank
statements, and investment account statements. Also, depending upon borrowers’ identified
sources of income, a copy of a complete, signed individual federal income tax return may be
required. Furthermore, the UBAF requires borrowers to make important certifications,
representations, and agreements, including certifying that all of the information in the
submission is truthful. However, borrowers do not need to meet these requirements if they
qualify for the Low FICO Program (now called the Streamlined Documentation Program).6

To help ensure that its servicers comply with its Servicing Guide and evaluate workout
decisions, annual reviews are performed under Fannie Mae’s Servicer Quality and Risk
Program (SQR) that were previously included in the Loss Mitigation Quality Control
(LMQC) review programs. SQR is designed to evaluate servicers’ compliance with the Fannie
Mae Servicing Guide and loss mitigation program directives through a combination of loan
level testing and a review of documented procedures. Prior to SQR, LMQC was established to
evaluate the quality and control of workout decisions made by Fannie Mae servicers, and all
workout solution compliance testing has since been incorporated into the SQR program. SQR
and LMQC reviews of short sales typically include a review of all servicer and borrower
documentation that is compared to information retrieved from Fannie Mae’s systems.7 The
results of these reviews are used to identify process gaps that require further evaluation by the




5
 According to Fannie Mae’s Servicing Guide, hardships can include death or long-term disability of a
borrower, unemployment, divorce or separation, natural or man-made disaster, and other reductions in income
or increases in expenses.
6
 The Fannie Mae Low FICO Program, which is targeted at borrowers with Low FICO scores, exempts
qualified borrowers from having to provide financial information, including a UBAF and supporting
documentation. See Finding 2 on page 18 for a discussion of the Low FICO Program within the context of
short sales.
7
 Fannie Mae’s servicers enter this information into Fannie Mae’s Home Saver Solutions Network System
(HSSN), a data entry portal that populates another Fannie Mae system, the Distressed Assets Reporting and
Tracking System (DARTS).




                                OIG  AUD-2014-003  November 20, 2013                                        10
servicer and apply appropriate corrective action for adherence to the stated guidance. Fannie
Mae’s top servicers were included within the scope of the SQR reviews.8

Changes to Fannie Mae’s Short Sale Program that Resulted from the Implementation
of FHFA’s Directive
FHFA issued a directive dated April 17, 2012, that required the Enterprises to work together
to align policies and practices in the area of liquidation alternatives, including short sales.
This directive is broad and identifies the areas of alignment as eligibility, solicitation,
documentation simplification, improved listing guidance, evaluation, response time frames,
payments to subordinate lien holders, mortgage insurance delegations, and fraud prevention.

Fannie Mae’s implementation of this directive included a number of changes to the short sale
program. In particular, Fannie Mae’s guidance directed servicers to release the borrower from
liability for any deficiency associated with the Fannie Mae mortgage upon successful
completion of the short sale. However, servicers were required to evaluate certain borrowers
for a cash contribution as part of approving the short sale.9 Fannie Mae’s guidance also
excluded certain borrowers from consideration for cash contributions to short sale transactions
where: (1) applicable law prohibits borrower contributions; (2) the borrower qualifies for
streamlined documentation; or (3) the borrower is an active duty military service member and
meets certain requirements.

Additionally, Fannie Mae’s guidance provided that all servicers, not just those with delegated
authority to make eligibility determinations, were permitted to process short sales for
borrowers considered to be in imminent default (defined as less than 31 days delinquent) with
the following hardships: (1) death of a borrower or co-borrower; (2) long-term or permanent
illness or disability of a borrower or co-borrower or dependent family member; (3) divorce or
legal separation of a borrower or co-borrower; and (4) distant employment transfer/relocation.
If one of these hardships occurred, no additional approval was needed from Fannie Mae, even
if the borrowers were current on their mortgage payments. The mortgaged property had to be
the borrower’s principal residence, thus non-owner occupied properties were excluded from
the imminent default procedures.


8
 During 2013, Fannie Mae selected its top 46 servicers. At a minimum, the top 15 servicers as defined by loan
volume will have an SQR review performed annually.
9
  Fannie Mae required its servicers to evaluate whether borrowers requesting approval for a short sale were
able to provide a cash contribution when their cash reserves were in excess of the greater of $10,000 or six
times their monthly mortgage payment (including principal, interest, and tax and insurance). If servicers
determined that borrowers had the capacity to make a cash contribution, they were required to initially request
a contribution of 20% of borrowers’ cash reserves. If borrowers had cash reserves of more than $50,000,
servicers were required to forward the short sale request to Fannie Mae to determine the contribution amount
and receive written approval of the amount determined by Fannie Mae.




                                 OIG  AUD-2014-003  November 20, 2013                                           11
Short Sales of Non-Owner Occupied Properties Is an Area of Heightened Risk for
Fannie Mae

Fannie Mae has recognized the risk associated with borrowers who request approval to short
sell non-owner occupied properties. In January 2011, Fannie Mae issued supplemental
guidance to its servicers stating that, “Fannie Mae’s approval is required to close a short sale
without a contribution on an investment property or second home.”10 Nonetheless, until
Fannie Mae implemented changes to its short sale program in November 2012, there were no
controls in place to require servicers to determine an appropriate contribution amount based
on a borrower’s cash reserves or prevent a servicer from collecting a nominal cash
contribution from a borrower to avoid securing approval from Fannie Mae on an investment
property or second home.




10
     Short sales under the Low FICO Program were excluded from the contribution approval requirement.




                                  OIG  AUD-2014-003  November 20, 2013                                12
FINDINGS .................................................................................

1. FHFA and Fannie Mae Controls Over Borrowers Seeking Approval for Short Sales
   Should be Strengthened

FHFA and Fannie Mae have taken action to shorten the timelines for processing short sales
and create a standard short sale process to expedite assistance to borrowers. However, based
on its assessment of controls and detailed reviews of a limited number of short sale
transactions, OIG found that Fannie Mae’s servicers were not:

        Collecting all of the required borrower eligibility documentation;
        Conducting adequate reviews supporting borrower eligibility determinations; or
        Ensuring the accuracy of borrower eligibility information stored in Fannie Mae’s
         system of record, DARTS, which is the Distressed Assets Reporting and Tracking
         System.

During 2012, Fannie Mae closed over 73,000 short sales. OIG examined 41 short sales closed
in 2012 by 10 borrowers who sold multiple non-owner occupied properties. 11 Eight Fannie
Mae servicers, including three of its five largest, processed these short sales.

To conduct the review, OIG obtained copies of the servicers’ files and reviewed the
borrowers’ financial information pertinent to making a borrower eligibility determination.
After reviewing the servicers’ files, OIG interviewed seven of the eight servicers with Fannie
Mae’s participation to obtain an understanding of their controls over determining borrower
eligibility.12 Furthermore, OIG accessed borrower eligibility data stored in Fannie Mae’s
DARTS system and compared that information to the borrower eligibility information in the
servicers’ files.
11
  This group of 10 borrowers does not represent a statistically significant sample, and therefore, the results
were not projected across the universe of short sales closed by the Enterprise in 2012. However, the results of
OIG’s testing of the 41 short sales (40 are of non-owner occupied properties) has resonance beyond these
sampled transactions because the overall controls for borrower eligibility applicable to all short sales, including
those in the OIG sample, were identical.
12
   Two of these servicers were subject to SQR reviews during 2012 and two additional servicers were subject
to LMQC reviews during November 2011. The sample size for each of these reviews was 30 for three servicers
and 15 for the remaining servicer. Pursuant to these reviews, Fannie Mae identified issues that were consistent
with OIG’s findings such as missing documentation including, but not limited to, the borrower’s UBAF,
income documentation, and tax return. Furthermore, Fannie Mae found that required information was either
not uploaded to its system of record (DARTS) or that such information was not consistent with data in the
servicer’s system. Holistically, OIG notes that Fannie Mae identified issues related to making borrower
eligibility determinations in 24 out of 29 servicer reviews, which suggests that the control deficiencies
identified by OIG are not limited to the servicers responsible for the short sale transactions reviewed by OIG.




                                  OIG  AUD-2014-003  November 20, 2013                                              13
Figure 2 summarizes OIG’s findings. For the 41 short sale loans reviewed:

        8 were missing required supporting documentation from Borrower Response Packages
         in servicer files;
        19 showed evidence of potential understatement of financial assets; and
        21 had inconsistencies between borrower eligibility information communicated to
         Fannie Mae that is stored in DARTS and information supplied by the borrower.

  FIGURE 2. RESULTS OF OIG’S REVIEW OF SHORT SALES FOR 10 BORROWERS WITH MULTIPLE SHORT
                                     SALES DURING 2012
                                                                     Inconsistency Between
                                  Missing        Potential        Information Supplied by the
         Borrower      No. of    Required    Understatement        Borrower and Received by
            No.        Loans    Documents   of Financial Assets           Fannie Mae
        Borrower 1      10                          6                           6
        Borrower 2       7          2               2                           2
        Borrower 3       4                                                      2
        Borrower 4       3          3               3                           3
        Borrower 5       3                          3                           3
        Borrower 6       2                          2                           2
        Borrower 7       4
        Borrower 8       2
        Borrower 9       3
        Borrower 10      3          3               3                         3
        Totals          41          8               19                        21
Source: OIG Analysis

The examples that follow were derived from OIG’s review of 41 short sales identified in
Figure 2 above.

    Servicers’ Files Were Missing Required Supporting Documentation for Borrower
    Eligibility Determinations
The key control utilized by Fannie Mae and its servicers to gather the information needed
to make informed borrower eligibility determinations for short sales was the UBAF and
supporting documentation. While Fannie Mae’s Servicing Guide requires its servicers to
obtain complete Borrower Response Packages to enable an assessment of borrowers’ financial
hardships and eligibility for short sales, servicers were not exercising due diligence in
carrying out their responsibility to gather sufficient information to make sound eligibility
determinations for certain short sales of non-owner occupied properties. In particular, for
three borrowers with a total of eight short sales, servicers did not obtain all required financial
information, including monthly income and expenses, financial and other assets, liabilities,


                                OIG  AUD-2014-003  November 20, 2013                               14
and supporting documentation such as tax returns and bank statements. When financial
information is missing or incomplete, it cannot be factored into the eligibility determination
process or considered for the purpose of requesting a borrower contribution. When supporting
documentation is missing, servicers are unable to assess whether borrowers have disclosed
current, accurate, and complete information regarding their financial condition. In addition to
incomplete financial information, OIG found that one borrower did not provide a UBAF or an
acceptable equivalent that included required financial information and borrower certification
that all of the information provided was accurate and complete.

Fannie Mae stated that as part of the information gathering process it expects servicers will
follow up on missing documentation and any inconsistencies with information provided by
the borrowers, but this is not always being done. Fannie Mae focuses primarily on the price
negotiations in short sale transactions and does not thoroughly review its servicers’ eligibility
determinations prior to approval in cases where a delegated servicer makes the initial
eligibility determination.

   Potential Understatement of Borrowers’ Financial Assets
Fannie Mae’s servicers did not exercise prudent judgment and conduct necessary follow-up
with borrowers when assessing whether the information in the Borrower Response Package
fairly presented the borrower’s financial condition. Specifically, for 6 borrowers approved for
a total of 19 short sales, the UBAF and required supporting documentation contained
information indicating that the borrower had considerable assets that were not pursued by
Fannie Mae’s servicers in the course of determining whether the borrower was eligible. For
example, the borrowers claimed they had minimal assets or income, yet their tax returns
reflected significant taxable interest income, dividends, and capital gains. Also, multiple
transfers between bank accounts that in total significantly exceeded the borrower’s stated
income and assets did not receive the attention of some of Fannie Mae’s servicers during the
borrower eligibility determination process. This activity is problematic from a risk perspective
because it suggests borrowers understated their income or financial assets. Additionally,
although not required, these cases provide examples where it may be prudent for Fannie
Mae’s servicers to perform independent research to confirm the accuracy and completeness of
the financial information provided by borrowers since it is what servicers rely upon to
determine borrower eligibility.

Servicer interviews provided insight into why additional effort was not expended to follow up
on indications of incomplete or inaccurate financial disclosures. One Fannie Mae servicer
stated that it viewed every customer as being eligible for a short sale regardless of the
eligibility determination process. Another servicer stated that borrowers were determined to
be eligible based on the value of the property and offers submitted. Therefore, even high net
worth individuals are eligible and the borrower financial information is only required to



                            OIG  AUD-2014-003  November 20, 2013                                  15
determine whether a borrower can make a contribution. Yet another servicer stated that
if a borrower is seriously delinquent, only liquid assets are considered for the purpose of
determining the need for a contribution and its amount.

   Inconsistency Between Information Supplied by the Borrower and Received by Fannie
   Mae
Fannie Mae required its servicers to supply it with borrower eligibility information by
entering data into HSSN, a data entry portal that populates DARTS with the information
entered by servicers. Fannie Mae has not put in place adequate controls over these systems
used to gather short sale data and support borrower eligibility decisions. Specifically, for 7
borrowers approved for a total of 21 short sales, borrower eligibility information provided by
servicers to Fannie Mae to enable an assessment of the accuracy of the servicers’ eligibility
determinations (in delegated cases) or to make the eligibility determinations (in non-delegated
cases) was not always accurate, complete, or reconcilable. The only borrower eligibility
information that Fannie Mae typically received from its servicers was data entered into HSSN
such as borrowers’ hardships and information about their finances identified on the UBAF
(e.g., income, expenses, assets, and liabilities). Supporting documents that borrowers supply
to servicers, such as tax returns and bank statements that may be used to verify income and
assets, are not provided to Fannie Mae unless it requests this documentation.

In certain instances, the information entered by the servicers into HSSN to populate the
various data fields within DARTS was inconsistent with the supporting documentation in the
servicers’ files because different approaches were used to populate the various data fields
(e.g., assets, income). For example, one servicer used an online tool to project borrowers’
income and used discretion in deciding what information to enter into HSSN. Another
servicer indicated that it gets borrower eligibility information verbally, which is then entered
directly into Fannie Mae’s system. In order to routinely validate borrower eligibility
determinations and recommendations made by its servicers, Fannie Mae needs to establish
additional controls to ensure data accuracy and completeness, including the identification and
resolution of inconsistencies with supporting documentation.

   Examples of Borrowers Approved for Short Sales of Non-Owner Occupied Properties
The following examples demonstrate the effect of a lack of due diligence on the part of
Fannie Mae’s servicers to obtain complete financial information in order to qualify borrowers.

Borrower 4 and a co-borrower were approved for three short sales within one year although
the borrower failed to provide the required UBAF and report all financial information
including bank accounts and investments. Also, the co-borrower provided tax returns that did
not include pertinent pages and supporting schedules. Moreover, the borrower’s reported
financial hardship was based only on declines in property values, not an inability to repay the


                            OIG  AUD-2014-003  November 20, 2013                                 16
loans. The servicer did not follow up to obtain all missing documentation or establish the
borrower’s eligibility based on his stated financial hardship. Based on an analysis of tax
returns for 2008, 2009, and 2010, the borrowers appeared to have substantial assets and
income. Losses on the three short sales totaled approximately $258,000.

Borrower 10, self-employed and owner of three real estate investing and property
management companies, was approved for three short sales at the same time. The financial
information included in the borrower’s UBAF and profit and loss statement, which reflected
negative cash flow and monthly losses, could not be reconciled to the borrower’s substantial
adjusted gross income reported in his individual federal tax return. Also, the borrower did not
provide the servicer with required bank and securities account statements. Nonetheless, based
on the servicer’s comments in DARTS, Fannie Mae advised the servicer to submit the three
short sales for preforeclosure approval because of time constraints and not wanting to lose an
all cash buyer for all three properties. In turn, Fannie Mae approved all three short sales.
Fannie Mae explained that since the information submitted by the servicer showed the
borrower had a monthly deficit and the loan was over 60 days delinquent at the time of
submission, it agreed to move forward with the short sale without requesting a contribution
from the borrower. Subsequent OIG analysis of publicly available information showed the
borrower appeared to have significant unreported assets and had engaged in a number of
recent real estate transactions including the sale and transfer of properties in Hawaii valued at
over $3 million. Losses on the three short sales totaled approximately $874,000.

   Lack of Incentives for Servicers to Exercise Due Diligence

Fannie Mae structures fees paid to servicers in a manner that encourages short sales.
However, FHFA and Fannie Mae can enhance the servicer incentive structure to encourage
servicers to exercise greater due diligence in carrying out their responsibilities to review and
approve short sale requests. The servicers interviewed stated that the compensation received
for closing short sales was about the same, regardless of whether a borrower contribution was
collected. In fact, one Fannie Mae servicer indicated that it considered every borrower who
requested a short sale to be eligible for the program and would not spend time trying to
determine if a borrower had additional assets.

According to Fannie Mae’s Servicing Guide, the incentive fee is paid to non-delegated
servicers based on the net proceeds from the short sale, which considers both contributions
and promissory notes, but does not incentivize servicers to pursue more than 92 percent of
those proceeds to the value of the property. At the 92 percent level, the maximum incentive
fee of $1,500 is reached. For short sales with net proceeds to value less than 90 percent, a flat
incentive fee of $1,000 is paid. The $500 spread between the incentive for top and bottom tier
performance may not provide sufficient reward compared to the cost of analyzing borrower
eligibility and pursuing contributions or promissory notes in short sales. For delegated


                            OIG  AUD-2014-003  November 20, 2013                                  17
servicers, there was a flat fee of $1,700 through June 2012 when a tiered structure was put in
place based on the delinquency period. Shorter periods receive higher fees as an incentive to
reduce losses by timely action on delinquent loans. Neither FHFA nor Fannie Mae has
completed an assessment of these incentive structures, or the need for financial penalties, to
determine whether these incentives are operating as intended, including deterring potential
abuse of the short sale program. FHFA has commenced a Scorecard project reviewing
incentives for both retention and liquidation solutions that will inform consideration of
changes in 2014. Nonetheless, Fannie Mae may benefit from assessing its short sale
compensation structure for servicers, including the need to focus on conducting thorough
reviews as part of the eligibility determination and contribution assessment processes.

     Lack of FHFA Oversight

FHFA has not performed any supervisory activities over Fannie Mae’s short sale program.
The Agency plans to look at collateral valuations used in single-family REO, foreclosure
bidding, and short sale transactions along with associated fraud prevention processes. FHFA
also plans to review the modeling methodology and procedures used in the valuation of
distressed properties, including short sales, to ensure that they are reasonable. Nonetheless,
there are no current plans to review Fannie Mae’s borrower eligibility determination process
for its short sale program.

2. The Low FICO Program May Not be Appropriate for Borrowers Seeking Approval
   for Short Sales of Non-Owner Occupied Properties

Fannie Mae’s Low FICO Program was designed to exempt borrowers with poor credit from
having to provide additional information on their financial condition and hardships in order to
determine eligibility for short sales.13 In the case of non-owner occupied properties, however,
there may be greater potential that borrowers in fact have the ability to repay or make a
contribution where allowed by applicable law to reduce the loss amount on the short sale. In
such cases, the program may not be achieving its intended purpose.

Specifically, 6 of the 10 judgmentally selected borrowers had 20 short sales approved under
the Low FICO Program. As discussed below, some of these borrowers appeared to have
significant financial resources. There is sound justification as to why many distressed
delinquent borrowers with low credit scores should be spared the burden of submitting
extensive financial information for a short sale eligibility determination. Conversely, there is
also justification for looking at those borrowers with greater potential for making

13
   Credit scores were determined by FICO and are numerical values that rank individuals according to their
credit risk at a given point in time, as derived from a statistical evaluation of information in individuals’ credit
files.




                                   OIG  AUD-2014-003  November 20, 2013                                              18
contributions, such as those with loans secured by non-owner occupied properties, to deter
strategic default and other abuses of the Low FICO Program and ensure borrower
contributions are obtained where borrowers have the capacity to do so and it is not otherwise
prohibited.

   Fannie Mae’s Low FICO Program and Streamlined Documentation Requirements

Fannie Mae initiated the Low FICO Program during January 2011. Under this program,
servicers were authorized to approve short sale transactions where it may be difficult or time
consuming to obtain all of the required financial documentation when the short sale otherwise
met all other Fannie Mae requirements. For borrowers with FICO scores less than or equal to
620, the servicer was permitted to approve short sales of all properties, including non-owner
occupied, without any further collection of financial documentation and without efforts to
obtain a cash contribution or promissory note from the borrower as long as the borrower had a
delinquency on the mortgage loan on the subject property and a delinquency on at least one
other trade line. This program was initially available to Fannie Mae’s delegated servicers and
was documented through a supplement to their Delegations of Authority applicable to pre-
foreclosure sale requirements, rather than within Fannie Mae’s Servicing Guide.

As a control, Fannie Mae required servicers to check a monthly list of loans that are not
eligible for the Low FICO Program before proceeding to qualify borrowers. One reason why
loans would be on the list is that borrower credit utilization practices may indicate strategic
default. Mortgage loans on the list that are not eligible for the Low FICO Program must go
through the normal borrower financial and contribution reviews. However, none of the loans
OIG reviewed were excluded from the Low FICO Program as a result of this control.

As a result of a directive from FHFA dated April 17, 2012, Fannie Mae expanded its Low
FICO Program and relabeled it as the Streamlined Documentation Program. On August 22,
2012, Fannie Mae issued Servicing Guide Announcement SVC-2012-19, effective November
1, 2012, stating that all servicers, not just delegated servicers as previously authorized, may
approve a borrower for a short sale without verifying the borrower’s hardship or obtaining a
complete Borrower Response Package if the borrower is 90 or more days delinquent as of the
date of the servicer evaluation and the borrower’s FICO credit score is less than 620. There
is no exception to qualification for the Streamlined Documentation Program for borrowers
who are requesting approval of short sales of non-owner occupied properties. As
demonstrated by the examples below, servicers were not required to collect financial
information from borrowers of non-owner occupied properties who may have had the means
to continue making payments or provide borrower contributions. Additionally, in one case,
the servicer had financial information indicating the borrower may have had financial
resources, but did not inquire further since the borrower qualified for the Streamlined
Documentation Program.


                            OIG  AUD-2014-003  November 20, 2013                                19
     Examples of Borrowers Approved for Short Sales of Non-Owner Occupied Properties
     Under Fannie Mae’s Low FICO Program

Borrower 2 [see Figure 2], a non-resident alien, was approved for seven short sales within one
year based only on his income, expenses, and assets within the United States. The information
provided by the borrower, through his attorney in fact, to support his financial hardship
clearly stated “The owner does not derive any income in the United States, other than the
rental revenue on his rental properties. This is a revenue statement for the subject property
only.” Five of these seven short sales qualified for the Low FICO Program and no
documentation was required. For the remaining two short sales, the servicer did not inquire
further to determine the individual’s other sources of income and assets outside of the United
States and reported to Fannie Mae in the DARTS system that the individual had no income
and assets. OIG’s research found that the subject borrower potentially could have
considerable income and assets from financial interests outside the United States, yet approval
was given for all seven short sales with losses totaling approximately $1.1 million.

Borrower 8 was approved for two short sales under Fannie Mae’s Low FICO Program during
2012. Accordingly, this borrower was not required to provide any financial information to the
servicer or Fannie Mae to secure approval for his short sales. However, OIG independently
identified information that suggests this borrower had financial resources. Borrower 8
reported in his 2012 federal individual tax return proceeds of approximately $1.2 million from
the purchase and sale of securities between June and October 2012. Losses to Fannie Mae on
the two short sales totaled approximately $1,000,000.

Borrower 9 was approved for three short sales within one year, all under Fannie Mae’s Low
FICO Program. However, the borrower had provided the servicer with financial information
that showed the borrower potentially had financial resources. Most notably, the borrower’s
reported annual income on his personal financial statement and bank deposits during a single
month significantly exceeded the borrower’s annual income reported on his UBAF. Although
the servicer had this financial information, under the Low FICO Program the servicer was not
required to follow up on the inconsistency. In fact, the servicer informed the OIG that it had
identified the discrepancy, but due to withdrawals shown on the bank statements and the fact
that it was under the Low FICO Program, they did not pursue the discrepancy any further.
Losses on the three short sales totaled approximately $978,000.14


14
  Fannie Mae has expressed concern over its ability to mitigate losses on properties located in California
where the subject properties of Borrower 9 and Borrower 2 are located. Under California law, the collection
of borrower contributions on short sales is prohibited. Fannie Mae could decline the short sales and pursue
deficiency judgments under California state law by requiring the servicer to pursue judicial foreclosures.
However, according to Fannie Mae, this would add significant delays by adding 270 days to the non-judicial
foreclosure process and create a one year right of redemption for the homeowner. Through pursuing this course



                                OIG  AUD-2014-003  November 20, 2013                                          20
Based on the above, FHFA should reassess its policy to determine whether the Streamlined
Documentation Program should be available to borrowers seeking approval to short sell non-
owner occupied properties.




of action, Fannie Mae is not guaranteed a successful recovery as the judgment may not be collectible if the
homeowner does not have any assets or declares bankruptcy. Nonetheless, 8 of these borrowers’ 10 short sales
qualified for the Low FICO Program and borrower contributions for such short sales are not collected,
regardless of the state where the property is located.




                                OIG  AUD-2014-003  November 20, 2013                                         21
CONCLUSION ............................................................................

As demonstrated by the lack of controls and examples in this report, borrowers are completing
short sales even though they may have the ability to continue making mortgage payments or
make cash contributions to reduce losses on the sale. These borrowers should not have been
deemed eligible for the program without further analysis by Fannie Mae’s servicers and
Fannie Mae. Deficiencies in controls regarding the Borrower Response Package (including a
borrower-certified UBAF and supporting documentation), servicer incentive compensation,
and data reliability collectively contributed to weaknesses in the overall borrower eligibility
process. As a result, in 19 instances (46% of the 41 loans sampled), incomplete and inaccurate
information was relied upon in qualifying the borrowers for short sales. Additionally, in 20
instances (49% of the loans sampled), Fannie Mae and its servicers did not require the
borrower to supply any financial information and approved the short sales given that these
loans qualified for the Low FICO Program, now referred to as the Streamlined
Documentation Program. Fannie Mae estimated that the losses for the subject 39 loans total
approximately $5.3 million.15

Furthermore, Fannie Mae estimated that it incurred losses from short sales of the 10,310 non-
owner occupied properties for 2012 totaling approximately $953.5 million and losses of
approximately $6.392 billion for all 73,000 short sales closed during 2012. In particular, this
suggests an even greater savings potential by strengthening borrower eligibility controls over
short sales. Also, Fannie Mae can provide a stronger deterrent to borrowers looking to abuse
the short sale program by focusing additional attention on borrowers seeking approval for
short sales of non-owner occupied properties through the Streamlined Documentation
Program. While short sales of non-owner occupied properties present heightened risk and
were a focus of this audit, most borrower eligibility controls are common across all short
sales. Thus, the deficiencies in controls identified can also relate to the remainder of Fannie
Mae’s short sale population. In this regard, additional FHFA oversight through its
examination program is warranted.

OIG is planning targeted work related to other facets of the Enterprises’ short sale process.
The results of this work will help the Agency supervise this important area of loss mitigation.




15
  This estimate does not factor in potential losses that Fannie Mae could incur if the subject properties had
gone into foreclosure.




                                 OIG  AUD-2014-003  November 20, 2013                                         22
RECOMMENDATIONS ...............................................................

OIG recommends that FHFA direct Fannie Mae to take the following actions to strengthen
controls over short sales:

   1. Enforce the requirement that all borrowers not eligible for the Streamlined
      Documentation Program provide a borrower-certified UBAF and supporting
      documentation in order to make eligibility determinations and assess borrower
      contributions.

   2. Establish controls to identify and resolve inconsistencies between the UBAF and
      supporting information used in making short sale eligibility determinations.

   3. Assess its servicer compensation structure to determine if it should consider the
      quality of borrower eligibility determinations for short sales and success in limiting
      losses including through contributions by borrowers with the ability to pay.

   4. Enhance controls over collection and use of electronic information from servicers on
      the financial condition of borrowers to ensure data is reliable and effectively used in
      both borrower eligibility and servicer performance evaluation processes.

Finally, OIG recommends that FHFA:

   5. Review the Streamlined Documentation Program to determine whether the program
      should be available to borrowers seeking approval to short sell non-owner occupied
      properties.

   6. Provide examination coverage of Fannie Mae’s short sale activities with particular
      emphasis on identifying systemic deficiencies related to borrower submissions,
      Enterprise eligibility determinations, servicer compensation structure, and reliability
      of electronic information used in managing short sales.




                           OIG  AUD-2014-003  November 20, 2013                               23
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

The objective of this performance audit was to assess FHFA’s oversight of Fannie Mae’s
controls over borrower eligibility requirements applicable to its short sale program. The scope
of this audit was FHFA’s oversight of Fannie Mae’s controls over making borrower eligibility
determinations for short sales closed during 2012 and testing those controls against a limited,
judgmentally selected sample of short sale transactions closed during 2012. OIG performed
fieldwork for this audit from January 2013 through August 2013 in Washington, D.C., at
FHFA’s and Fannie Mae’s headquarters, and in Dallas, TX at Fannie Mae’s National
Servicing Organization.

In order to achieve its audit objective, OIG:

      Reviewed FHFA’s guidance to the Enterprises related to the short sale program;
      Reviewed Fannie Mae’s policies and procedures related to the short sale process;
      Interviewed FHFA and Fannie Mae officials to further OIG’s understanding of the
       short sale process, how borrower eligibility is determined, and the controls over the
       process;
      Selected a judgmental sample of 10 borrowers who had 41 short sales closed
       during 2012 that resulted in significant losses to Fannie Mae to test the process
       of determining borrower eligibility; selection was based on borrowers who closed
       multiple short sales of non-owner occupied properties and a diversity of property
       locations and servicers; and
      Interviewed seven Fannie Mae servicers to gain an understanding of their overall
       controls over borrower eligibility determinations as well as the process followed by
       each servicer in determining borrower eligibility for the judgmentally sampled short
       sales.

OIG also assessed the internal controls related to the audit objective. Internal controls are an
integral component of an organization’s management that provides reasonable assurance that
the following objectives are achieved:

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives, and include the processes and procedures for planning,


                            OIG  AUD-2014-003  November 20, 2013                                 24
organizing, directing, and controlling program operations as well as the systems for
measuring, reporting, and monitoring program performance. Based on the work completed
on this performance audit, OIG considers deficiencies in FHFA’s oversight of Fannie Mae’s
policies, procedures, and practices with respect to determining borrower eligibility for short
sales to be significant in the context of the audit’s objective.

OIG conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that OIG plan audits and obtain sufficient,
appropriate evidence to provide a reasonable basis for audit findings and conclusions based
on the audit objective. OIG believes that the evidence obtained provides a reasonable basis for
the findings and conclusions included herein, based on OIG’s audit objective.




                            OIG  AUD-2014-003  November 20, 2013                                25
APPENDIX A .............................................................................

FHFA’s Comments on FHFA-OIG’s Findings and Recommendation




                         OIG  AUD-2014-003  November 20, 2013                        26
OIG  AUD-2014-003  November 20, 2013   27
OIG  AUD-2014-003  November 20, 2013   28
APPENDIX B..............................................................................

FHFA-OIG’s Response to FHFA’s Comments

On November 1, 2013, FHFA provided comments to a draft of this report, agreeing
with OIG’s recommendations and identifying actions it would take to address the
recommendations.

FHFA provided a single response to recommendations 1, 2, 4, and 6 that it will consider an
examination of Fannie Mae’s SQR review process as it formulates the 2014 Supervisory
Strategy and examination plan. FHFA views the SQR process as Fannie Mae’s primary tool
for determining servicer compliance with all requirements for the short sale program. Through
conducting an examination of the SQR process or taking other appropriate measures if an
examination is not planned, this action is responsive to recommendations 1 and 6, which
call for enforcing the requirement that all borrowers not eligible for the Streamlined
Documentation Program provide a borrower-certified UBAF and for providing examination
coverage of Fannie Mae’s short sale activities, respectively.

FHFA’s response to recommendations 2 and 4 is potentially responsive. The SQR process is
applied to servicers identified by Fannie Mae. Short sale transactions are selected after the
fact and reviewed for compliance with the requirements of the short sale program. The SQR
process in its current form does not focus on enhancing controls over the short sale process
called for in recommendations 2 and 4. Recommendations 2 and 4 focus on establishing
stronger controls during the eligibility determination process to identify and resolve
inconsistent borrower information and ensure the reliability and effective use of electronic
information on borrowers’ financial condition. Therefore, FHFA’s corrective actions should
ensure controls over Fannie Mae’s short sale eligibility determinations process are thoroughly
reviewed to be fully responsive to recommendations 2 and 4. For example, feedback from
SQR reviews could be used to design and implement needed borrower eligibility controls.

FHFA’s response to recommendation 3 is responsive. FHFA will utilize analysis from
its Scorecard project review currently underway to inform consideration of changes to
liquidation incentives in 2014 and will provide OIG a list of any changes made as a result
of its review.

In response to recommendation 5, FHFA and the Enterprises are working to announce, by
year end, the termination of eligibility of investment property for the Streamline Short Sale
option. FHFA anticipates this change to become effective during the first quarter of 2014.
This action is responsive to recommendation 5 as it called for the Agency to review the




                            OIG  AUD-2014-003  November 20, 2013                               29
Streamlined Documentation Program to determine whether the program should be available to
borrowers seeking approval to sell non-owner occupied properties.

OIG considers the planned actions sufficient to resolve the recommendations, which will
remain open until OIG determines that the agreed-upon corrective actions are completed and
responsive to the recommendations. OIG considered the agency’s full response (attached as
Appendix A) along with technical comments in finalizing this report. Appendix C provides a
summary of management’s comments on the recommendations and the status of agreed-upon
corrective actions.




                          OIG  AUD-2014-003  November 20, 2013                             30
APPENDIX C ..............................................................................

Summary of FHFA’s Comments on the Recommendations

This table presents management’s response to the recommendations in OIG’s report and the
status of the recommendations as of when the report was issued.


                                                    Expected
Rec.                Corrective Action:             Completion   Monetary   Resolveda   Open or
No.                 Taken or Planned                  Date      Benefits   Yes or No   Closedb
       DER is in the process of formulating
       its 2014 Supervisory Strategy and
       examination plans, which includes
       considering examination of the SQR          01/01/2014    $0         Yes        Open
 1
       process. DER will provide OIG with its
       plans for reviewing the SQR process as
       part of its 2014 Supervisory Strategy and
       examination plans by January 1, 2014.
       See corrective action for                   01/01/2014    $0         Yes        Open
 2
       Recommendation 1.
       FHFA has underway a Scorecard project
       reviewing incentives for both retention
       and liquidation solutions. The current
       analysis will inform consideration of       09/30/2014    $0         Yes        Open
 3
       changes to liquidation incentives in
       2014. FHFA will provide a list of
       incentive changes to be made as a result
       of that review if there are any.
       See corrective action for                   01/01/2014    $0         Yes        Open
 4
       Recommendation 1.
       FHFA is working with the Enterprises to
       announce, by the end of this year, the
       termination of eligibility of investment
 5     property for the Streamline Short Sale      03/31/2014    $0         Yes        Open
       option and anticipates this change will
       become effective during the first
       quarter of 2014.
       See corrective action for                   01/01/2014    $0         Yes        Open
 6
       Recommendation 1.




                              OIG  AUD-2014-003  November 20, 2013                             31
a
  Resolved means: (1) Management concurs with the recommendation, and the planned, ongoing, or
completed corrective action is consistent with the recommendation; (2) Management does not concur with the
recommendation, but alternative action meets the intent of the recommendation; or (3) Management agrees to
the OIG monetary benefits, a different amount, or no amount ($0). Monetary benefits are considered resolved
as long as management provides an amount.
b
  Once OIG determines that the agreed-upon corrective actions have been completed and are responsive, the
recommendations can be closed.




                                OIG  AUD-2014-003  November 20, 2013                                        32
ADDITIONAL INFORMATION AND COPIES .................................


For additional copies of this report:

      Call: 202–730–0880
      Fax: 202–318–0239
      Visit: www.fhfaoig.gov



To report potential fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

      Call: 1–800–793–7724
      Fax: 202–318–0358
      Visit: www.fhfaoig.gov/ReportFraud
      Write:
                FHFA Office of Inspector General
                Attn: Office of Investigation – Hotline
                400 Seventh Street, S.W.
                Washington, DC 20024




                             OIG  AUD-2014-003  November 20, 2013                        33