Fannie Mae and Freddie Mac could be leaving money at the table when capable borrowers opt to strategically default. But recommendations in a new government report could put an end to that.
Last year, the government-controlled companies pursued $2.1 billion in deficiency balances. But less than $5 million was collected.
By doing a better job, according to the report, some of the $187 billion in taxpayer assistance doled out so far to keep the pair afloat could be offset.
The report, FHFA’s Oversight of the Enterprises’ Efforts to Recover Losses from Foreclosure Sales, was released Wednesday by the Federal Housing Finance Agency Office of Inspector General.
In addition to pursuing strategic defaulters who currently have the ability to repay, Fannie and Freddie can also go after those who will be able to repay at some point in the future. Included in this group are borrowers on investment property loans and those who walked away from second homes.
While FHFA has the ability to provide Fannie and Freddie with guidance about pursuing deficiency balances from borrowers who can afford to repay such amounts, it currently doesn’t oversee deficiency management.
The regulator doesn’t collect information about the secondary lenders’ deficiency management practices or obtain data about the scope or effectiveness of their deficiency recoveries. Without this information, FHFA is unable to determine whether stronger oversight will provide any benefit.
Because of disparate deficiency management approaches at the two government-sponsored enterprises, Fannie and Freddie’s activities vary.
For instance, Fannie requires its vendors to pursue deficiency balances in more than twice as many states as Freddie.
And while Fannie maintains oversight of its vendors’ methodologies, Freddie leaves it up to vendors whether or not to pursue deficiencies.
Another disparity is Freddie’s practice of not pursuing deficiencies when third parties buy foreclosures, while Fannie does.
In addition, an initiative at Fannie focuses on strategic defaulters.
“FHFA may be able to help the enterprises recoup future losses through strengthened oversight and guidance,” the report states.
The OIG recommends that FHFA arm itself with enough information to analyze how Fannie and Freddie manage deficiency balances then issue guidance on the subject and incorporate deficiency management into its oversight.
Comments received from FHFA indicate that it agrees with the OIG’s recommendations.
A future audit by the OIG will assess differences in the GSEs’ practices and their relative effectiveness in recovering deficiencies.
