A watchdog report recommends that Fannie Mae and Freddie Mac take steps to ensure pre-foreclosure property inspection reports are legitimate.
Between 2011 and 2012, Fannie Mae and Freddie Mac reimbursed mortgage servicers more than $91.2 million for property inspections on delinquent loans.
Inspections are intended to minimize credit losses. They protect Fannie’s and Freddie’s interests in pre-foreclosure properties by identifying whether the physical condition might pose safety hazards or impair property values.
A report from the Federal Housing Finance Agency Office of Inspector General, FHFA Oversight of Enterprise Controls Over Pre-Foreclosure Property Inspections, said that properly performed inspections can sometimes accelerate the foreclosure process and reduce the redemption period by determining occupancy.
Another use for pre-foreclosure inspections is to prevent situations where property preservation vendors secure the wrong property or inappropriately remove homeowners’ personal property.
“In addition, effective inspections would also ensure that annual reimbursements paid by the enterprises for pre-foreclosure property inspection claims are used in the most cost efficient and effective manner,” the report stated. “We anticipate that the enterprises will incur additional expenses to pay for property inspections, thus warranting oversight.”
Recent changes to servicing policies at Fannie and Freddie removed limits on claims filed for inspections — a move that will increase their expenses.
But Fannie and Freddie are exposed to the risk that contractors provide inadequate reports.
This was evidenced by a recent conviction of a property preservation contractor whose company created and submitted fraudulent property inspection reports to servicers for reimbursement, according to the OIG.
The report cited the case of American Mortgage Field Services, which submitted $12.7 million in fraudulent claims from 2007 until 2012 to servicers including Bank of America. It had agreed to inspect as many as 100,000 properties a month, and the OIG found that as many as 70 percent of the reports were falsified.
The owner of American Mortgage Field Services, Dean Counce, was sentenced last year to 97 months in prison.
The OIG concluded that the neither Fannie nor Freddie have quality controls in place that would provide reasonable assurance that inspection information is accurate, consistent, and complete.
“The lack of quality controls diminishes the inspection report’s integrity and casts doubt on whether these inspections are working and necessary,” the report stated. “Further, the minimum attention to and oversight of pre-foreclosure property inspections poses a control weakness that vendors may be able to exploit with manipulated or fraudulent inspection reports.”
OIG is recommending that FHFA direct Fannie and Freddie to jointly assess their pre-foreclosure inspection process.
This would include identifying risks and objectives, cost effective control alternatives to achieve objectives and recommended inspection standards and quality controls for inspection report content and frequency.
FHFA should direct the pair of enterprises to establish uniform pre-foreclosure inspection quality standards and quality control processes for inspectors, the OIG said.
The report highlighted how 923,000 Fannie and Freddie mortgages were at least 90 days past due as of Dec. 31, 2012. That same year, credit losses exceeded $25 billion as a result of foreclosures and other mitigation actions.
