The Office of the Inspector General (OIG) for the Federal Housing Finance Agency (FHFA) has criticized the regulator for not doing an adequate job in supervising how the government-sponsored enterprises (GSEs) recover losses from strategic defaulters.
The OIG report says that recovering losses from strategic defaulters and others who have the ability to repay their financial obligations presents Fannie Mae and Freddie Mac with an opportunity to ‘strengthen their financial positions and to reduce the need for future taxpayer support.’ While acknowledging that the GSEs need to ‘navigate diverse legal regimes to pursue deficiencies,’ the OIG questioned how the FHFA has supervised their efforts in recovering losses.
‘FHFA has not taken a proactive approach to its oversight of the enterprises' deficiency management practices to maximize recoveries when appropriate,’ the report says. ‘For example, the agency has not published guidance for the enterprises on the subject and has not conducted any continuous supervision to monitor and analyze trends and risks associated with deficiencies. The agency also has not conducted targeted examinations of deficiency management that could offer detailed information about specific risks, supervisory concerns, etc.
‘Further,’ the report continues, ‘FHFA does not require the enterprises to provide deficiency data. For instance, the agency does not solicit information about the scope of the enterprises' deficiencies, the number or amount of their collection referrals, or their recovery rate. As a result, the agency cannot track or evaluate their collection practices and recovery rates, and thus FHFA cannot readily conclude whether the enterprises' low recovery rate – 0.22% – is reasonable, or if their deficiency recoveries could be improved.’
The OIG notes that due to the ‘absence of meaningful FHFA oversight,’ Fannie Mae and Freddie Mac independently developed their own deficiency management strategies. But the OIG warns that these efforts may not be successful without the FHFA's input.
‘Given a recovery rate of 0.22%, the enterprises appear to have room for improvement in how they manage their deficiencies,’ the OIG states. ‘Further, with 1.1 million seriously delinquent mortgages looming on the foreclosure horizon – triple the enterprises' foreclosures in 2011 – FHFA's timely guidance on deficiency management processes may help the enterprises recoup future losses and protect taxpayers' investment in their financial health.’
The OIG also pointed out that the FHFA is lagging behind other federal agencies in addressing the issue of deficiencies.
‘For example, the U.S. Department of Agriculture, which administers rural housing development programs, advises that deficiency judgments should only be pursued (in allowable states) when borrowers have sufficient assets for recovery,’ says the OIG report. ‘Similarly, the Department of Housing and Urban Development (HUD) issued guidance about pursuing mortgage deficiencies. HUD emphasized seeking deficiency judgments against strategic defaulters who abandon their mortgage payment obligations despite their apparent continued ability to repay.’
The OIG's full report is available online.