A government watchdog report indicates that the Federal Home Loan Mortgage Corp. might be able to save millions of dollars by reviewing more servicer reimbursement reports before they are paid.
Freddie Mac doled out $1.4 billion in servicer reimbursements for property taxes, homeowners insurance and maintenance fees on distressed properties during 2013.
In addition, the McLean, Va.-based company denied another roughly $126 million in erroneous claims last year.
The multi-layered review process used by Freddie to validate claims was the subject of the Federal Housing Finance Agency Office of Inspector General’s report, Freddie Mac Could Further Reduce Reimbursement Errors by Reviewing More Servicer Claims.
Freddie’s reimbursement system automatically denies claims that don’t meet established cost ceilings. It then manually reviews higher-risk claims.
In addition, a random but statistically significant sample is reviewed in detail prior to payment. Servicers are required to provide supporting documentation for each expense in the claim.
While Freddie’s system is generally effective in cutting down on erroneous servicer reimbursement expenses, the secondary lender still paid out $70 million in erroneous claims last year, according to the report. These claims weren’t subject to the pre-payment review.
“Accordingly, we believe that Freddie Mac may achieve additional savings by enlarging the sample of claims that is subjected to the prepayment review,” the report stated.
Although Freddie’s expenses associated with expanding its sample size would increase, the estimated $1 million in additional cost would yield nearly $7 million in savings.
The OIG acknowledged that the cost to expand pre-payment review will exceed the potential financial benefits at some point.
The report calls for FHFA to require that Freddie conduct a cost-benefit analysis to determine whether to increase the size of its sample.
If the analysis indicates that an expansion is warranted, then Freddie should go ahead and increase the size of its sample.
The report indicated that FHFA has agreed to direct Freddie this month to complete the cost-benefit analysis.
If the report warrants such, then the sample size should be expanded by Oct. 31.
