Why FHFA-OIG Did This Audit

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) support the secondary mortgage market by buying residential mortgages and securitizing most of them. Typically, when borrowers default on these mortgages and efforts to cure the defaults fail or do not materialize, the properties are foreclosed upon and eventually sold. The purchase price, though, may not be enough to pay off the entire outstanding mortgage balance on the property and the resulting shortfall is known as a deficiency. The Enterprise that owned or guaranteed the particular mortgage then absorbs the loss.

In 2008, the Enterprises entered conservatorships overseen by the Federal Housing Finance Agency (FHFA or Agency) as a result of their deteriorating financial  conditions. Simultaneously, the U.S. Department of the Treasury (Treasury) began investing taxpayer funds—more than $187 billion to date—in the Enterprises to cover their losses.

If the Enterprises can recover mortgage deficiencies, then they can mitigate some of their losses. For example, with respect to borrowers who may currently or in the future possess the ability to repay—such as, but not limited to, owners of investment properties or vacation homes who have defaulted for strategic reasons—pursuing deficiency collections and judgments may provide an added source of revenue for the Enterprises. In addition, pursuit against such borrowers may deter others who are considering default despite being financially able to make their mortgage payments. However, during 2011, the Enterprises recovered only a small fraction of the deficiencies they pursued—approximately $4.7 million collected out of $2.1 billion pursued.

FHFA’s Office of Inspector General (FHFA-OIG) undertook this audit to assess FHFA’s oversight of the Enterprises’ deficiency management. In a future audit, FHFA-OIG plans to assess the Enterprises’ different practices and their relative effectiveness in recovering deficiencies.

[ipaper docId=110317789 access_key=key-4mbcketv4fejab76hf7 height=600 width=600 /]

Comments

comments