Ocwen Criticized Over VA Foreclosures

The 59-page report, Actions Needed to Strengthen VA’s Foreclosed Property Management Contractor Oversight, was issued last month by the Government Accountability Office to the U.S. House of Representatives’ Committee on Veterans’ Affairs.

Ocwen, based in West Palm Beach, Fla., was contracted by VA in August 2003 under the A-76 process to manage VA foreclosures for a fee of around 1.3 percent of the sales price. In addition, Ocwen is reimbursed for the costs of maintenance, repairs, and other expenses. The contract runs out in 2008.

About 36,000 properties have been sold by Ocwen since entering the contract, though the average selling time has risen from 311 days in 2005 to 342 days during the first half of this year.

“VA also has not been satisfied with Ocwen’s performance in selling properties in the shortest time possible and at price levels established in the contract,” GAO said. “In response, Ocwen officials have raised concerns about the fairness of certain VA contractual requirements and oversight procedures.”

Properties on the West Coast had the lowest average selling times while New England properties had the highest.

About 23 percent of foreclosed loans as of January had been in Ocwen’s inventory for at least one year, the report said. In 2000, by contrast, when VA managed the foreclosure process itself, the average selling time was 237 days.

In addition, Fannie Mae and Freddie Mac have taken less than 230 days to sell their own foreclosed properties in each of the past several years — although the report cautioned about making comparisons between organizations because of a number of factors that can account for the time it takes to sell.

Ocwen officials explained, however, that VA properties are concentrated in rural areas or regions with declining urban centers, the report said.

Ocwen submitted a plan to reduce the percentage of properties that have been in its inventory for more than a year, including more visits by company staff to cities with high inventories such as Detroit and Houston. It also said it would increase its staff to focus on these homes and pay Realtors bonuses on the properties.

Ocwen’s plan has already resulted in a reduction of this inventory, with properties in its inventory for a least a year declining to 21.5 percent in September from 23.0 percent in March.

“We believe we have maintained a generally positive working relationship with the VA during the execution of this contract,” Ocwen Chief Risk Officer William E. Rinehart said in a statement to MortgageDaily.com. “As any issues have come up, we have worked closely with the VA to resolve them to our mutual satisfaction.”

Among other concerns outlined in the report, Ocwen has failed to secure doors and windows, remove trash and debris, maintain lawns and make necessary repairs. Several property photos included in the report showed significant debris remaining on inspected properties.

“During the initial years of the contract, Ocwen officials said the company generally tried to sell the VA properties as quickly as possible without spending significant funds on repairs or maintenance,” GAO said. “Ocwen officials stated that this strategy, which is a common industry practice, was subsequently revised to make improvements in VA properties before listing them for sale.”

While the contract allows up to 5 percent of loans serviced by Ocwen to be deficient in performance, quarterly onsite inspections between October 2005 and March 2007 on 2,391 properties in 25 states indicated that between 32 percent and 46 percent of the loans had deficient servicing.

“While VA has sent written notice of Ocwen’s failure to meet the overall inspection standards on a quarterly basis, short of terminating the contract, the department does not have effective recourse under the contract to hold the company accountable for its performance,” the report stated.

The contract calls for properties to be appraised at the time the property is assigned. The value is then discounted by 14 percent to an amount the property is required to be sold at. But Ocwen has been assessed three penalties for a total of $1.3 million by VA for falling short on contracted targets for return on sales — though the company has challenged the fines, which remain unpaid, because appraisals are done before eviction and don’t reflect an inspection.

Ocwen contended that a single deficiency, sometimes quite trivial, caused a property to fail inspection.

Factors hindering VA in overseeing Ocwen’s performance include inadequate information systems and VA’s inability to sufficiently penalize Ocwen. The report repeatedly compared VA’s ability to monitor its inventory of foreclosed properties with Fannie and Freddie’s ability — which is much stronger.

GAO also noted that it is difficult or impossible for VA to verify the authenticity of expenses submitted for reimbursement on sold properties.

One example was cited from a Michigan property where photos from 2004 indicated work was required for water damage and Ocwen was paid $9,900 for the repairs. But a 2007 photo showed work had not been done on one wall and the damage had worsened. VA has set up a bill of collection against Ocwen in the amount of $2,400 for the unfinished repairs.

However, it is rare that before and after photos are available for VA to determine whether such work has been done.

“Without significant enhancements in VA’s contract and oversight processes, which VA officials said they are considering, there is a substantial risk the department will continue to face challenges in ensuring contractor performance after a new foreclosed property management contract is awarded in 2008,” GAO concluded. “We recommend that VA include in the contract (1) the requirement that the contractor provide real-time property management data deemed necessary by the department and (2) the authority to impose defined penalties for key property management activities, including penalties for unsatisfactory performance in maintaining properties and selling them within established time frames.”

Ocwen’s Rinehart noted, “While we were surprised by this report’s conclusions, we take them seriously, continue to review them in depth and intend to work closely with the VA and the GAO to satisfactorily address all of the points,”

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: mtgsam@aol.com