GSEs Need Better Plan to Recover Losses from Foreclosures: FHFA OIG

When a home is sold through a foreclosure sale, at times the debt on the mortgage is not fully recovered through the sale. The remaining amount is the deficiency, and this amount is passed on to the mortgage owner to absorb or to try and collect from the borrower.

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The ""FHFA's Office of Inspector General"":http://www.fhfaoig.gov/ (OIG) revealed in a report Wednesday that Fannie Mae and Freddie Mac have a recovery rate of only 0.22 percent when pursuing deficiencies, leaving room for much improvement.

According to the report, in 2011, the GSEs' vendors pursued 35,231 deficiency accounts, with a combined value of about $2.1 billion. Of this amount, vendors recouped about $4.7 million, which is 0.22 percent of the total.

In addition, 2012 may see even more losses to recover, considering there are 1.1 million seriously delinquent mortgages on the verge of becoming foreclosures, OIG reported. The figure is triple the number of GSE foreclosures in 2011.

In the report, OIG said ""timely guidance"" from FHFA on how the GSEs can manage deficiencies could help them recoup future losses and protect taxpayer dollars.

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""Recovering losses from strategic defaulters and others who have the ability to repay their financial obligations-e.g., real estate investors and vacation home owners-presents an opportunity for the Enterprises to strengthen their financial positions and to reduce the need for future taxpayer support,"" OIG stated in the report.

As the conservator of the GSEs, OIG further stated that FHFA ""should obtain information necessary to better understand the Enterprises' deficiency activities and to determine where improvements can be made.""

However, recovering the deficiencies has not been a priority for the GSEs. Instead, the FHFA watchdog said they are more focused on foreclosure alternatives to minimize losses.

In addition, the GSEs have different policies on pursuing deficiencies. For example, Freddie Mac does not pursue a borrower for a deficiency if a third party buys the property at foreclosure sale, while Fannie Mae will pursue the deficiency, regardless of whether it or a third party bought the property at a foreclosure sale, OIG explained.

When dealing with strategic defaulters, the GSEs also have different approaches. Fannie Mae has articulated intent to focus on strategic defaulters, according to the OIG, but Freddie Mac has no policy on collecting from strategic defaulters.

OIG offered three recommendations to FHFA on managing deficiencies.

One of the recommendations is to obtain deficiency-related information, such as the GSEs' effectiveness in collecting deficiencies for borrowers who have the ability to repay.

The second is to incorporate deficiency management into FHFA's supervisory review process, and the third is to provide written guidance to the GSEs ""on managing their deficiency collection processes, including at a minimum whether they should be pursuing the same type of defaulted borrowers and pursuing collections in the same states.""