oversight

FHFA's Oversight of the Servicing Alignment Initiative

Published by the Federal Housing Finance Agency, Office of Inspector General on 2014-02-12.

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

            Federal Housing Finance Agency
                Office of Inspector General




 FHFA’s Oversight of the Servicing
      Alignment Initiative




Evaluation Report  EVL–2014–003  February 12, 2014
               FHFA’s Oversight of the Servicing Alignment Initiative
               Why OIG Did This Report
               During the financial crisis which started in 2007, delinquencies on mortgage loans
               owned or guaranteed by Fannie Mae and Freddie Mac (the Enterprises) increased
               rapidly. Many mortgage servicers – private companies contracted by the Enterprises
               to service their mortgages – did not respond effectively to the surge in delinquencies.

Synopsis       For example, servicers often failed to assist financially distressed borrowers to secure
               Enterprise-sponsored loan modifications that would create more affordable mortgage
  ———          payments. Consequently, many such borrowers ultimately lost their homes through
               foreclosure. Moreover, the Enterprises themselves likely incurred additional losses
February 12,   due to their servicers’ failure to execute consistently their contractual responsibilities
   2014        with respect to delinquent borrowers.
               As the Enterprises’ conservator, the Federal Housing Finance Agency (FHFA or
               Agency) established the Servicing Alignment Initiative (SAI) in April 2011 to
               improve the servicers’ performance and thereby limit the Enterprises’ financial losses.
               SAI consists of a series of FHFA directives that set forth contractual requirements
               that the Enterprises must incorporate into their servicing guidelines. Servicers must
               comply with these guidelines when managing the accounts of financially distressed
               borrowers. For example, servicers are required to respond to borrowers’ requests
               for assistance within specified timeframes, and conduct loan modifications and
               foreclosures pursuant to procedures and deadlines prescribed by FHFA.
               We commenced this evaluation to assess FHFA’s oversight of SAI since the
               establishment of the program in 2011. Specifically, we assessed FHFA’s monitoring
               of the Enterprises’ servicers’ compliance with SAI guidelines.

               What OIG Found
               FHFA’s Monitoring of Enterprise Servicers’ Compliance with SAI is Limited
               FHFA’s Division of Housing Mission and Goals (DHMG), which established SAI,
               has primary responsibility within the Agency for overseeing SAI and servicer
               compliance with its requirements. Therefore, DHMG staff reviewed the Enterprises’
               servicing guidelines prior to their publication in 2011 to ensure that they incorporated
               FHFA’s SAI-related directives. DHMG also periodically communicates with other
               FHFA divisions and units with respect to the implementation of the SAI program.
               However, DHMG’s SAI oversight has significant limitations. Specifically, since
               establishing the program in 2011, DHMG has neither reviewed nor evaluated the
               servicers’ overall compliance with SAI’s numerous requirements. Moreover, DHMG
               does not require the Enterprises to submit for its routine review and assessment their
               critical reports on servicer compliance with SAI’s requirements. Consequently,
               DHMG has not determined whether the servicers are complying with SAI or if the
               initiative is achieving its intended purpose.
               We analyzed the reports by which the Enterprises monitor their servicers’ compliance
               with SAI. The reports identified servicer compliance deficiencies in key SAI
               areas such as responding to borrower requests for assistance and executing
               loan modifications. DHMG has not received these reports on a regular basis.
               Consequently, DHMG has missed opportunities to learn about servicer compliance
               deficiencies that could undermine SAI’s effectiveness. It has also compromised
               FHFA’s ability to oversee the Enterprises’ efforts to correct their servicers’ SAI
               compliance deficiencies.
Synopsis
               What OIG Recommends
  ———
               We recommend that DHMG’s Deputy Director:
February 12,       1. Establish an ongoing process to evaluate servicers’ SAI compliance and the
   2014               effectiveness of the Enterprises’ remediation efforts;
                   2. Direct the Enterprises to provide routinely their internal reports and reviews
                      for DHMG’s assessment; and
                   3. Regularly review SAI-related guidelines for enhancements or revisions, as
                      necessary, based on servicers’ actual versus expected performance.
TABLE OF CONTENTS ................................................................

ABBREVIATIONS .........................................................................................................................5

PREFACE ........................................................................................................................................6

CONTEXT .......................................................................................................................................8
      Servicers Are Required to Manage Enterprise Mortgages in Compliance with the
      Enterprises’ Servicing Guidelines ............................................................................................8
      Many of the Enterprises’ Servicers Failed to Properly Manage Delinquent Borrower
      Accounts During the Financial Crisis .......................................................................................9
      FHFA Established SAI to Address Enterprise Servicer Deficiencies in the
      Management of Delinquent Mortgages ..................................................................................10
              FHFA’s Initial SAI Directive .........................................................................................11
              FHFA’s Subsequent SAI Directives ...............................................................................12
              FHFA’s Servicer Performance Goals .............................................................................12
              FHFA’s Examination of the Enterprises’ Implementation of SAI .................................13

FINDINGS .....................................................................................................................................14
      1.     DHMG’s SAI and Servicer Oversight Program is Limited ............................................14
      2. Enterprise Reports Indicate Considerable Servicer Non-Compliance with SAI’s
      Requirements ..........................................................................................................................15

CONCLUSION ..............................................................................................................................17

RECOMMENDATIONS ...............................................................................................................17

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................18

APPENDIX A ................................................................................................................................19
      FHFA’s Comments on OIG’s Findings and Recommendations ............................................19

APPENDIX B ................................................................................................................................23
      OIG’s Response to FHFA’s Comments .................................................................................23

ADDITIONAL INFORMATION AND COPIES .........................................................................25




                                          OIG  EVL–2014–003  February 12, 2014                                                               4
ABBREVIATIONS .......................................................................

BRP                   Borrower Response Package

DER                   FHFA Division of Enterprise Regulation

DHMG                  FHFA Division of Housing Mission and Goals

Enterprises           Fannie Mae and Freddie Mac

Fannie Mae            Federal National Mortgage Association

FHFA or Agency        Federal Housing Finance Agency

Freddie Mac           Federal Home Loan Mortgage Corporation

GPRMA                 Government Performance and Results Modernization Act of 2010

OIG                   Federal Housing Finance Agency Office of Inspector General

QRPC                  Quality Right Party Contact

SAI                   Servicing Alignment Initiative




                        OIG  EVL–2014–003  February 12, 2014                       5
PREFACE ...................................................................................

The Enterprises support the secondary market by purchasing mortgages that meet their
underwriting standards from originators such as banks or thrifts. Traditionally, the
Enterprises hold these mortgages in their retained portfolios or package them into mortgage-
backed securities that they sell to investors.

The Enterprises’ servicers perform a variety of contractual functions on behalf of the
Enterprises, including the management of accounts of borrowers who become delinquent on
their mortgage obligations. In this regard, servicers are expected to assist such borrowers in
obtaining foreclosure alternatives,1 such as loan modifications2 or short sales.3 If a borrower
cannot repay the mortgage and a foreclosure alternative cannot be completed, then the
servicer is required to liquidate the mortgage through foreclosure.

Beginning in 2007, the U.S. financial crisis caused mortgage delinquencies to increase
significantly in a relatively short period of time. However, many servicers did not respond in
a timely way to financially distressed borrowers who requested assistance. In some cases,
they failed to process loan modifications and foreclosures effectively. They also engaged in
abusive practices that harmed borrowers; and the servicers’ poor performance likely caused
the Enterprises to incur financial losses.

In 2011, FHFA established SAI to improve mortgage servicing and limit Enterprise financial
losses. It consisted of a series of contractual provisions that the Enterprises were required to
incorporate into their servicing guidelines. For their part, servicers must comply with these
guidelines in managing the accounts of financially distressed borrowers. For example,
servicers are required to respond to borrowers’ requests for assistance within specified
timeframes, and conduct loan modifications and foreclosures pursuant to procedures and
deadlines prescribed by FHFA. SAI also established a system of financial rewards and
penalties to encourage servicer compliance with its terms.

Given SAI’s importance to the matter of servicer performance, we initiated this evaluation to
assess FHFA’s oversight of it. Specifically, we assessed FHFA’s monitoring of the
Enterprises’ servicers’ compliance with SAI’s requirements.


1
  Foreclosure alternatives include a payment plan, forbearance plan, loan modification, short sale, or deed-in-
lieu of foreclosure.
2
  In a loan modification, the terms of a mortgage are modified to create a more affordable monthly payment for
the borrower. Upon completion of the modification, the mortgage is brought to a current status.
3
  In a short sale, the borrower is permitted to avoid a completed foreclosure by selling the property for less than
the payoff balance of the mortgage.



                                   OIG  EVL–2014–003  February 12, 2014                                             6
This evaluation was led by Christine Eldarrat, Senior Policy Advisor, with assistance from
Brian Harris, Investigative Counsel; Desiree I-Ping Yang, Financial Analyst; and Irene Porter,
Supervisory Auditor. We appreciate the cooperation of everyone who contributed to this
evaluation. It has been distributed to Congress, the Office of Management and Budget, and
others and will be posted on OIG’s website, www.fhfaoig.gov.




Richard Parker
Deputy Inspector General for Evaluations




                            OIG  EVL–2014–003  February 12, 2014                               7
CONTEXT ..................................................................................

Servicers Are Required to Manage Enterprise Mortgages in Compliance with the
Enterprises’ Servicing Guidelines

The Enterprises contract with servicers to manage the mortgages they own or guarantee.
Upon origination a mortgage is transferred to a servicer. The servicer is often an affiliate of
the lender that originated the mortgage.4 Figure 1 contains a list of the largest mortgage
servicers.

Each Enterprise’s servicing guidelines contains a list of
duties that its servicers must carry out in order to fulfill their                   FIGURE 1. TOP TEN ENTERPRISE
                                                                                         MORTGAGE SERVICERS
contractual obligations to the Enterprise. Figure 2, below,
depicts the servicers’ contractual relationship with the                             Top Ten Enterprise Servicers as
Enterprises.6                                                                               of October 2013
                                                                                          (alphabetical order)5
                                                                                     1. Bank of America
When a mortgage is performing, i.e., the borrower is making
timely payments, then the servicing guidelines specify that the                      2. CitiMortgage
job of the servicer is to collect principal and interest payments                    3. Green Tree
from the borrower and remit them to the Enterprise. As                               4. JP Morgan Chase
compensation, the servicer retains a small percentage of the                         5. Nationstar
payment received from the borrower as a servicing fee.                               6. Ocwen
                                                                                     7. PHH Mortgage
The Enterprises’ servicing guidelines also contain extensive       8. PNC Bank
instructions on the management of non-performing mortgages,        9. US Bank
i.e., those that are delinquent. These instructions cover          10. Wells Fargo
activities such as contacting the borrower, managing bankruptcy
cases, implementing foreclosure alternatives, and pursuing foreclosures.




4
  However, not all servicers are affiliated with a lender. Some servicers purchase the mortgage servicing rights
from lenders or other servicers and then service the underlying loans on behalf of the Enterprises.
5
    Source: Internal Enterprise reports based on the number of mortgages serviced.
6
 Fannie Mae’s servicing guidelines (Fannie Mae Servicing Guide) can be found at
https://www.fanniemae.com/singlefamily/servicing; Freddie Mac’s servicing guidelines (Freddie Mac Single-
Family Seller/Servicer Guide) can be found at http://www.freddiemac.com/singlefamily/service/.



                                    OIG  EVL–2014–003  February 12, 2014                                         8
                                          FIGURE 2. MORTGAGE SERVICING

                                               Performing (Current) Loan
                                                                            Servicer retains a portion of the
       Homeowner submits mortgage payment                                   mortgage payment as compensation
        to Servicer                                                         Servicer forwards the principal and
                                                                             interest payment to the Enterprise
        Borrower                                      Servicer                                    Enterprise

        servicer                                      servicer                                    servicer




       Servicer communicates with delinquent
        borrowers as specified in the Enterprise’s                          Enterprise issues servicing guidelines,
        servicing guidelines                                                 including a section that instructs
       This includes offering foreclosure                                   Servicer on how to service delinquent
        alternatives and, if necessary, beginning                            loans
        the foreclosure process
                                            Non-Performing (Delinquent) Loan




Many of the Enterprises’ Servicers Failed to Properly Manage Delinquent Borrower
Accounts During the Financial Crisis

During the financial crisis, which started in 2007, there was a surge in the number of
borrowers who became delinquent on mortgages owned or guaranteed by the Enterprises. In
particular, the Enterprises’ serious delinquency rates increased from a low of 0.92% (277,000
mortgages) in January 2008, to a peak of 4.93% (1,501,000 mortgages) in March 2010.7

In many cases, servicers failed to properly manage the surge in delinquencies. Specifically,
servicers:
           Often did not timely respond to financially distressed borrowers’ requests for
            assistance;




7
 Source: FHFA’s Foreclosure Prevention Reports. The serious delinquency rate measures the percent of
mortgages in the Enterprises’ portfolios that are three or more payments late, including those mortgages that
are in foreclosure and subject to disposition pursuant to bankruptcy proceedings.



                                     OIG  EVL–2014–003  February 12, 2014                                            9
        Failed to properly administer loan modifications such as Treasury’s Home Affordable
         Modification Program (HAMP);8
        Engaged in “dual-tracking,” which is the simultaneous pursuit of both a foreclosure
         alternative, such as a loan modification, and foreclosure for the same borrower;
        Lost critical borrower documents such as applications for foreclosure alternatives; and
        Did not meet the various legal requirements within the foreclosure process, which
         gave rise to abusive practices such as “robo-signing.”9

This poor servicer performance had an adverse financial impact on the Enterprises.
According to FHFA and the Enterprises, foreclosing upon a mortgage generally results in a
greater credit loss than does sustaining a mortgage through a foreclosure alternative. 10 Thus,
the servicers’ failure to properly manage delinquent mortgages likely resulted in foreclosures
in cases in which foreclosure alternatives would have served better the interest of the
Enterprises and, by extension, the taxpayer. Conversely, in situations in which borrowers are
unable to meet their obligations despite consideration of foreclosure alternatives, it is
generally in the Enterprises’ best financial interests for servicers to pursue foreclosure actions
on a timely basis. Thus, the servicers’ failure to pursue foreclosures pursuant to established
timelines likely increased the Enterprises’ related losses.11

FHFA Established SAI to Address Enterprise Servicer Deficiencies in the Management
of Delinquent Mortgages

In April 2011, FHFA established SAI to improve the servicers’ management of delinquent
mortgages and limit the Enterprises’ associated losses. SAI contains uniform servicing
requirements, compliance with which may be encouraged by monetary incentives and



8
 HAMP is Treasury’s modification program under the Making Home Affordable Initiative that was announced
by President Obama in February 2009. Both Enterprises offer HAMP and non-HAMP modifications. In all
delinquency cases, the Enterprises must evaluate the borrower for a HAMP modification first.
9
  “Robo-signing” refers to a variety of practices, including: signing documents without verifying the
information in them; forging an authorized signature on a document, e.g., the signature of a bank executive;
misrepresenting the title of an authorized signer; and failing to comply with notary procedures as required by
the relevant jurisdiction.
10
  When foreclosure occurs, the Enterprise seizes control of the property securing the mortgage and resells it to
recover some of its credit and other related losses. While in the Enterprise’s inventory, the foreclosed property
may further increase the Enterprise’s credit losses by, for example, further declining in value, and incurring
maintenance, tax, and other expenses.
11
  When foreclosure becomes unavoidable, it is generally in the Enterprise’s financial interest for it to be
conducted as quickly as permitted by state laws and regulations. For example, a property that is not
maintained properly during a lengthy foreclosure process may suffer a decline in value and bring a lower resale
price.



                                  OIG  EVL–2014–003  February 12, 2014                                            10
penalties.12 DHMG13 is primarily responsible for the oversight of SAI and the Enterprises’
efforts to ensure that their servicers comply with its provisions.

     FHFA’s Initial SAI Directive

In 2011 FHFA directed the Enterprises to update their servicing guidelines by adding new
standards and timelines by which servicers were to manage delinquent mortgages. The
changes affected the following key areas, known as SAI work streams:
        Borrower Contact and Delinquency Management – Changes in this area aligned
         servicer requirements for: (1) contacting borrowers – including rules regarding
         collection calls, written communications, and quality right party contacts (QRPC);14
         (2) responding to borrower response packages (BRP);15 (3) referring mortgages to
         foreclosure; and (4) reviewing and responding to borrower inquiries and complaints.
         In addition, they established incentives and penalties related to the receipt of
         completed BRPs.
        Property Inspections – Changes in this area aligned servicer requirements for
         ordering property inspections. Servicers are required to identify and pay particular
         attention to vacant, tenant-occupied, and abandoned properties.
        Foreclosure Timelines – Changes in this area aligned state-level timelines for the
         processing of foreclosures from the date of referral to the attorney/trustee through the
         date of the foreclosure sale. They also established compensatory fees for servicer non-
         compliance.
        Standard Loan Modifications – Changes in this area aligned requirements for a
         standard loan modification (a non-HAMP modification), including eligibility and
         documentation criteria, along with approval terms and conditions. The changes
         established incentives for servicers to complete standard modifications.


12
  Additional remedies are available to the Enterprises when a servicer fails to meet its contractual obligations,
including requiring the servicer to indemnify the Enterprise for losses or imposing a suspension. Whether and
when the Enterprises impose penalties or pursue remedies is outside the scope of this evaluation.
13
  DHMG is responsible for policy development and analysis, oversight of housing and regulatory policy,
oversight of the mission and goals of the Enterprises, and the housing finance and community and economic
development mission of the Federal Home Loan Banks.
14
  A QRPC occurs when a servicer identifies and discusses with a borrower, co-borrower, or trusted party, such
as a housing counselor, the most appropriate options for resolving the delinquency. During a QRPC the
servicer: establishes rapport with the borrower; determines the reason for delinquency, the occupancy status
of, or intent to vacate, the mortgaged property; educates the borrower on alternatives to foreclosure; and
obtains the borrower’s commitment on the next steps.
15
  When a borrower seeks to avoid foreclosure and requests assistance, the servicer will require the borrower to
submit a BRP. Generally, a BRP includes a completed and signed Uniform Borrower Assistance Form (Fannie
Mae/Freddie Mac Form 710) and documentation of the hardship, employment, and income.



                                   OIG  EVL–2014–003  February 12, 2014                                           11
The Enterprises revised their servicing guidelines to reflect these changes.

     FHFA’s Subsequent SAI Directives

Beginning in January 2012, FHFA released four additional SAI directives over a period of 14
months. Each directive was focused on a specific SAI work stream, and the Enterprises
modified their servicing guidelines accordingly.
        Unemployment Forbearance – This program allows a borrower to pay less than the
         payment required by the mortgage note for a defined period of time not to exceed six
         months. Upon completion of the plan, the borrower is required to bring the account
         current.
        Short Sales – This program allows a borrower to sell the property for less than the
         payoff balance of the mortgage to avoid a completed foreclosure.16
        Deed-in-Lieu – This program allows a borrower to convey the property to the
         mortgage holder to satisfy the mortgage and avoid foreclosure.
        Streamlined Modification – This program modifies the terms of the mortgage to
         create a more affordable payment for the borrower.

     FHFA’s Servicer Performance Goals

FHFA’s directives also established specific servicer performance goals to ensure
improvements within the various SAI work streams.17 For example, FHFA’s initial directive
contained at least 35 mandatory servicer activities and established a variety of performance
goals by which the Enterprises could measure servicers’ progress in achieving them. Figure 3
provides examples of some of those activities and goals.




16
  The payoff balance is the sum of the following: unpaid principal, accrued but unpaid interest, balance of tax
and insurance escrows, and default-related expenses, e.g., attorney fees and costs, title costs, and property
inspection fees.
17
  FHFA’s establishment of such performance goals appears consistent with the Government Performance and
Results Modernization Act of 2010 (GPRMA). GPRMA establishes the importance of setting performance
goals that are objective, quantifiable, and measurable for significant federal agency activities. Furthermore, it
establishes the importance of setting performance indicators to measure progress toward those goals and to
assess actual results against expected performance. Finally, GPRMA identifies program evaluation as a means
for assessing, through objective measurement and systematic analysis, the manner and extent to which federal
programs achieve their intended objectives.



                                  OIG  EVL–2014–003  February 12, 2014                                            12
                         FIGURE 3. EXAMPLES OF SERVICER PERFORMANCE GOALS

           Activity                                        Servicer Performance Goals
                                  Servicer should ensure that no more than 5% of incoming borrower
                                   calls are abandoned.18
 Call Center Benchmarks
                                  Servicer should answer borrower calls within 60 seconds.
                                  Servicer should answer borrower emails within 48 hours.
                                  Servicer should establish a QRPC on at least 60% of the loans in the 120-
 QRPC
                                   day delinquent portfolio.

                                  Within 30 days of receipt of a BRP, servicer should send the Evaluation
 BRP
                                   Notice of foreclosure alternative options to the borrower.
                                  No later than 120 days from the due date of the last paid installment,
 Foreclosure Referral
                                   servicer should refer the delinquent account to an attorney to initiate
 Timeframe
                                   foreclosure proceedings.



     FHFA’s Examination of the Enterprises’ Implementation of SAI

In mid-2013, FHFA’s Division of Enterprise Regulation (DER) completed targeted
examinations of the Enterprises’ implementation of SAI.19 DER examiners reviewed the
various controls that the Enterprises established to ensure that their servicers comply with
SAI’s requirements. DER found that, as a general matter, the Enterprises’ controls were
adequate.

Although DER examined the Enterprises’ controls over their servicers, its examiners did
not assess the servicers’ compliance with SAI’s various requirements. As discussed in the
Findings below, assessing the servicers’ compliance with SAI is DHMG’s responsibility.




18
  An abandoned call is one that is made to a call center but ends before a conversation occurs, i.e., the caller
hangs up before contact is made. When an inbound call is abandoned, it is often because the caller is frustrated
with the amount of time spent on hold or his/her inability to speak with a human being.
19
   DER is responsible for ensuring the safety and soundness of Enterprise operations and compliance with laws
and regulations. It conducts examinations and other activities based on its annual assessments of the highest
risks facing the Enterprises as well as their management of such risks.



                                  OIG  EVL–2014–003  February 12, 2014                                           13
FINDINGS .........................................................................................................................

1. DHMG’s SAI and Servicer Oversight Program is Limited

According to DHMG’s Deputy Director, the division is primarily responsible for overseeing
SAI and servicer’s compliance with the program’s requirements and performance goals.
Therefore, in 2011 DHMG reviewed the SAI-related changes to their servicing guidelines
made by the Enterprises. DHMG has also communicated with other FHFA divisions
regarding SAI’s implementation.

However, DHMG’s SAI and servicer compliance oversight program has significant
limitations. In particular, DHMG has neither reviewed nor evaluated the servicers’ overall
compliance with numerous SAI-related guidelines and performance goals even though they
have been in place since 2011.20 As a result, DHMG is not in a position to determine whether
SAI is achieving the intended objectives: improving the servicers’ management of delinquent
accounts and limiting the Enterprises’ losses. Neither is DHMG in a position to assess the
overall effectiveness of the Enterprises’ initiatives to ensure that servicers correct identified
SAI compliance deficiencies.

Moreover, DHMG does not require the Enterprises to submit critical internal reports and
reviews on servicers’ SAI compliance that would be of benefit to the division’s oversight
program.21 Although DHMG periodically reviews some Enterprise reports on servicer
performance, these reports are of limited utility. For example, some provide aggregated
Enterprise financial information, but do not provide a sufficient understanding of servicers’
SAI compliance and progress in achieving their numerous performance goals.




20
  In August 2012, the Enterprises briefed DHMG on SAI’s first year of operations. Based upon this
presentation, DHMG concluded that SAI was a success because “all major delinquency categories were
reduced with the implementation of SAI.” However, DHMG’s conclusion was not well-founded.
We reviewed the PowerPoint presentation provided to DHMG by the Enterprises in August 2012. It does not
contain evidence establishing a causal relationship between SAI and the decrease in defaults. We also
reviewed the Enterprise reports set forth in note 23, infra. They do not provide a basis from which to conclude
that SAI caused the decline in defaults, nor do they indicate that there has been consistent servicer compliance
with SAI.
21
  We believe that FHFA’s failure to review and assess the information in these reports is inconsistent with its
responsibility under GPRMA to evaluate whether, and how well, SAI is meeting its intended objectives. See
footnote 17, supra.



                                      OIG  EVL–2014–003  February 12, 2014                                                    14
2. Enterprise Reports Indicate Considerable Servicer Non-Compliance with SAI’s
   Requirements

We reviewed reports that the Enterprises use to monitor22 servicer compliance with SAI-
related guidelines,23 most of which are not provided routinely to DHMG. We identified the
following potentially significant SAI compliance deficiencies:24,25

          In October 2013, an Enterprise reported on the servicer quality reviews conducted that
           month for 18 of its servicers. Based upon these reviews, the Enterprise made 63 SAI
           non-compliance findings in multiple areas, including: untimely referrals to
           foreclosure and completed foreclosures; failure to solicit borrowers to consider
           foreclosure alternatives, and failure to respond timely to requests for foreclosure
           alternatives; and failure to complete loan modifications timely and document
           modifications sufficiently.
          In August 2012, an Enterprise’s servicer performance scorecard26 rated 34 of the top
           35 servicers on components measured by the SAI servicer quality review. Twenty-
           five servicers received a rating of “satisfactory,” while nine servicers received a rating
           of “needs significant improvement.” In October 2013, 19 of the top 30 servicers were
           rated. Ten servicers received a rating of “satisfactory,” four servicers received a rating
           of “needs improvement,” and five servicers received a rating of “needs significant
           improvement” on their overall servicer quality review rating.

22
   The Enterprises conduct SAI-related servicer quality reviews of individual servicers. They include sampling
loan-level data and documents from servicers. The results of a review allow the Enterprises to make a finding
when there is evidence that the servicer failed to comply with one of the SAI guidelines. However, as detailed
in our Findings, the Agency does not actively monitor the Enterprises’ oversight of their servicers’ compliance
with SAI.
23
     We obtained the following reports from the Enterprises for our review:
Fannie Mae: Borrower Response Package Report; Compensatory Fee Reports; Lender Assessment of Risk and
Controls Report; NSO Monthly Fact Book; NSO Performance Scorecard; Property Inspection Exception
Report; SAI Call Center Metrics Report; Servicer Quality and Risk Review Report; SQR Remediation Reports;
SQR Servicing Alignment Initiative Findings; and the STAR Program Performance Scorecard Report.
Freddie Mac: Borrower Response Package Monthly Progress Report; Operational Review; Program
Compliance Review; Prudent Servicing Review; Servicer Performance Grid – Larger and Specialty Servicers
Report; Servicing Account Plan Report; Servicing Quality Assurance Monthly Management Report; Single
Family Servicing and REO – Monthly Performance Report and Financial Drivers Analysis; SPP Executive
Summary Report; and the SPP Servicer Success Program Scorecard.
24
   We note, as discussed earlier, that the DER exams indicated the Enterprises were producing reports that
allowed them to monitor servicers’ performance and SAI compliance.
25
  Our observations of continued deficiencies in mortgage servicing are consistent with the Consumer Financial
Protection Board’s observations as identified in its September 2013 Supervisory Highlights report.
26
  The servicer performance scorecard is a high-level report that graphically represents servicers’ progress
toward achieving Enterprise targets or goals over time. A scorecard allows for performance monitoring and
identification of less than acceptable performance.


                                    OIG  EVL–2014–003  February 12, 2014                                        15
DHMG’s Deputy Director, who was appointed in March 2013, acknowledged in discussions
with us that the division’s past SAI oversight efforts have been limited. She emphasized that
servicers’ compliance with SAI and other Agency directives is of critical importance, and that
she receives the Enterprises’ monthly servicer scorecards. Further, she is seeking to
strengthen DHMG’s communications with other Agency divisions, such as DER, to ensure
the successful implementation of FHFA’s directives, including SAI.

Our review indicates that the monthly servicer scorecards are high-level summaries that, by
themselves, do not present a complete picture of servicer performance. For example, a given
servicer’s scorecard would not reveal its poor implementation of foreclosure alternatives, such
as short sales and loan modifications, or other such conduct; but such information is contained
in the reports that the Enterprises compile to monitor their servicers’ compliance with SAI’s
various requirements. DHMG, however, does not routinely receive these reports. Thus, vital
information about the servicers’ failure to comply with SAI’s various requirements may have
escaped the Agency’s attention.

In any event, DHMG has not determined whether the servicers are complying with SAI or if
the initiative is achieving its intended purposes: to improve servicer performance and limit
the Enterprises’ financial losses. Finally, there is no indication that DHMG sought or
obtained information regarding any efforts by the Enterprises to address these issues.

We believe that, in order to ensure the success of its program, the Agency must actively
monitor the Enterprises’ oversight and enforcement of the provisions of SAI at the servicer
level.




                            OIG  EVL–2014–003  February 12, 2014                                16
CONCLUSION ............................................................................

FHFA’s establishment of SAI in 2011 was a proactive effort to address widespread
deficiencies in servicer management of delinquent mortgages. However, DHMG did not
develop and implement a process to determine whether servicers were complying with the
numerous requirements contained in the SAI-related servicing guidelines and meeting related
performance goals. Moreover, DHMG does not require the Enterprises to provide certain
internal reports and reviews that would likely benefit the division’s SAI oversight program.

We believe it is critical that FHFA address this deficiency in its oversight process. Doing so
would enable the Agency to identify and understand SAI compliance deficiencies and trends,
ensure that corrective action is undertaken, assess the effectiveness of SAI, and make
adjustments to the program as needed.




RECOMMENDATIONS ...............................................................

We recommend that DHMG’s Deputy Director:

   1. Establish an ongoing process to evaluate servicers’ SAI compliance and the
      effectiveness of the Enterprises’ remediation efforts;

   2. Direct the Enterprises to provide routinely their internal reports and reviews for
      DHMG’s assessment; and

   3. Regularly review SAI-related guidelines for enhancements or revisions, as necessary,
      based on servicers’ actual versus expected performance.




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

Objective

The objective of this report was to assess FHFA’s oversight of SAI.

To achieve this objective we reviewed all publicly available FHFA documents. In addition,
we requested SAI-related documents from FHFA and the Enterprises. We interviewed or met
with multiple individuals from FHFA, Fannie Mae, and Freddie Mac. Finally, we specifically
requested all records maintained pursuant to the SAI charter.

Scope

This survey covers FHFA’s implementation and oversight of SAI during the period of
January 1, 2011, through October 31, 2013.

General Methodology

We evaluated FHFA’s oversight of SAI using the principles detailed in the Government
Performance and Results Modernization Act of 2010 (GPRMA) and the SAI charter.

In conducting this evaluation, we also considered:
       FHFA’s Strategic Plans, Performance Goals, and Performance Measures
       FHFA’s Conservatorship Strategic Plans and Scorecards
       Fannie Mae’s SAI-Related Servicer Performance Reports
       Freddie Mac’s SAI-Related Servicer Performance Reports

This evaluation was conducted under the authority of the Inspector General Act of 1978, as
amended, and in accordance with the Quality Standards for Inspection and Evaluation, which
were promulgated by the Council of the Inspectors General on Integrity and Efficiency.
These standards require OIG to plan and perform an evaluation that obtains evidence
sufficient to provide a reasonable basis to support the findings and recommendations made
in it. We believe that the finding and recommendations discussed in this report meet these
standards.




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APPENDIX A .............................................................................

FHFA’s Comments on OIG’s Findings and Recommendations




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APPENDIX B..............................................................................

OIG’s Response to FHFA’s Comments

Although FHFA states that it “partially agrees” with our three recommendations, we believe
the response indicates that the Agency does not plan to alter substantively its limited oversight
of SAI. FHFA claims that it lacks authority to assess servicer compliance with SAI – a
program that it established in order to improve servicer performance and thereby limit the
Enterprises’ financial losses. We find FHFA’s arguments for maintaining its current approach
to be unpersuasive as described below.

   OIG’s Response to FHFA Comments on its Lack of Regulatory Authority Over Servicers

FHFA’s position is that it does not directly regulate the Enterprises’ servicers, and that it has
delegated to the Enterprises the responsibility to ensure that their servicers comply with SAI.

We understand that FHFA does not directly regulate servicers, but that fact is irrelevant to the
oversight deficiencies we identify in this report. FHFA established SAI and prescribed the
standards that servicers must meet in fulfilling their contracts with the Enterprises. FHFA’s
delegation of day-to-day SAI implementation responsibilities to the Enterprises does not
absolve FHFA of its responsibility to determine whether SAI is having the desired impact
on servicer performance.

   OIG’s Response to FHFA’s Comments on DHMG’s and DER’s Roles in SAI Oversight

FHFA has narrowly defined the roles of DHMG and DER with respect to SAI. According to
FHFA, DHMG’s role was to develop SAI, the implementation of which was left to the
Enterprises, while DER’s role is limited to reviewing the Enterprises’ controls over SAI.
Thus, no unit within FHFA is monitoring the servicers’ compliance with SAI and determining
whether it is having the desired impact on servicer performance.

   OIG’s Response to FHFA’s Planned Actions on the Draft Report’s Recommendations

Recommendation 1: FHFA’s response indicates that it plans to continue its current oversight
approach with regard to SAI.

OIG Response: As described in the report, we believe FHFA’s ongoing activities are
insufficient. For example, the Agency has not compared servicer performance against the
SAI work stream goals, even though SAI has been in effect for nearly three years. Moreover,
FHFA has offered no plan for assessing the effectiveness and success of SAI.




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Recommendation 2: The Agency states that it receives certain Enterprise reports relevant
to servicing activity and will continue to review them; it appears unwilling to review the
additional reports we have identified.

OIG Response: As we stated, the reports to which FHFA confines its oversight are
insufficient to the task. The additional reports we identified are important; for example, they
highlight significant servicer compliance deficiencies, such as failing to respond timely to
requests for foreclosure alternatives. We believe FHFA should obtain these reports so that it
may effectively evaluate servicers’ SAI compliance and, by extension, the impact of SAI.

Recommendation 3: FHFA stated that the fact a servicer does not comply with a guideline
does not mean the guideline itself is problematic.

OIG Response: We agree that a servicer’s failure to comply with a guideline does not
necessarily mean that the guideline is problematic. However, we believe that by reviewing
the guidelines and servicer compliance FHFA may be better able to determine whether any
enhancements to the guidelines are necessary.




                             OIG  EVL–2014–003  February 12, 2014                               24
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




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