The Office of the Inspector General (OIG) for the Federal Housing Finance Agency (FHFA) has completed an audit to assess whether FHFA has an effective supervisory control structure and sufficient examination coverage and oversight activities to adequately and promptly identify and mitigate risks involving mortgage servicing contractors. These contractors are employed to manage the loan portfolios of the government sponsored enterprises (Enterprises) and supervision was of special concern in light of the increasing workload occasioned by rising delinquencies and the additional burdens of loan modifications and foreclosure processing. The audit looked specifically at Freddie Mac.
The OIG had the following findings.
I. FHFA needs to strengthen its supervision of the Enterprises by establishing a more robust counterparty oversight and risk management framework.
The OIG found that FHFA differed from federal banking regulators in that it generally has not issued sufficient regulations or guidance governing the Enterprises' contracts with servicers. Rather than establishing and implementing effective regulations or guidance over the way the Enterprises report critical servicer information and establishing baseline requirements for servicing, FHFA relies on the Enterprises individually to monitor counterparty risk. In turn the Enterprises routinely rely on the servicers themselves to manage the loans in their portfolios.
In addition, FHFA's ability to supervise servicer risk may be hampered by a lack of direct access to servicers' books and records relating to the Enterprises' $4.5 trillion servicing portfolio. While FHFA lacks the statutory authority to regulate or supervise the servicers, there is no prohibition against the Agency securing such access through contracts. As late as last September the contract terms and conditions which FHFA had had the ability to control since it became conservator in September 2008 did not provide FHFA with this access or with the ability to ensure that servicers are complying with their contracts.
FHFA should also have access to their servicers books and records to fulfill its responsibility of overseeing the prudential operations of the Enterprises, to support its enforcement actions, to fill oversight gaps associated with servicers' activities, and to ensure safety and soundness of the Enterprises.
FHFA has also not issued regulations or guidance requiring the Enterprises to report critical servicer information to FHFA but the issue is currently under consideration. FHFA needs to receive timely and relevant information regarding servicer operation because of the significant concentration of risk among a few servicers.
FHFA has not developed comprehensive guidelines because it believes that the Enterprises have the knowledge and expertise to develop sufficient servicing guides and thus relies on them to establish their own minimum mortgage servicing requirements. In 2011 FHFA directed the Enterprises to establish requirements for servicing non-performing loans but has not required the Enterprises to establish requirements for other aspects of servicing such as the larger subset of performing loans. This has led to significant differences between the servicing guides of the two Enterprises although FHFA has sought to align the servicing of delinquent mortgages.
2. FHFA should address the follow through of improvements started by Freddie Mac in 2011 to address servicer performance.
The OIG credits Freddie Mac with developing a business plan in 2011 to better manage higher-risk loans but redacts critical parts of the explanation of the plan. It does say that only the largest servicers have been targeted for full plan implantation and that for these servicers Freddie Mac now uses account plans and has a goal to put these in place for the next largest tier of servicers. Where plans are not in place credit loss minimization activities are largely unstructured and informal and may not achieve optimum results. Freddie Mac does not currently anticipate assigning account plans to the subset of its smallest servicers.
3. FHFA's examination coverage of Freddie Mac's oversight and risk management of counterparties needs improvement.
As early as 2008 FHFA had information that mortgage servicing represented a heightened risk to the Enterprises but did not commence its examination coverage until 2010. Even though it was true that FHFA was confronted with other challenges such as the Home Affordable Modification Program and examinations of other high risk credit issues it could have done more in response to indicators of heightened risk such as the increasing delinquency rates and reports of possible problems from servicer reviews conducted by other Federal agencies.
When it did begin to devote more resources to servicing in 2010 it did not adequately assess the risk that servicers pose to Freddie Mac. Between January 2010 and May 2011 FHFA conducted five reviews directly related to the operational aspects of servicing however OIG concluded that the reviews did not provide a comprehensive and meaningful assessment of the potential risks that could arise from the use of servicers and OIG found these reviews wanting on a number of counts.
FHFA-OIG makes the following recommendations:
1. That FHFA establish and implement more robust regulations or guidance governing counterparty oversight and risk management for mortgage servicing which include (a) requirements for contracting with servicers including provisions for allowing FHFA access to relevant servicer information; (b) promptly reporting on material poor performance and non-compliance by servicers; and (c) minimum, uniform standards for servicing mortgages owned or guaranteed by the Enterprises.
2. Direct Freddie Mac to take the necessary steps to monitor and track the performance of its servicers to reasonably assure achievement of credit loss savings by (a) implementing servicer account plans for the remaining servicers under consideration for plans and (b) taking action to maximize credit loss savings among the remaining servicers that are not under consideration to receive plans.
3. Improve existing procedures and controls governing coordination with other federal agencies that have oversight jurisdiction of the Enterprises mortgage servicers.
