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FHFA Oversight of Enterprise Controls Over Pre-Foreclosure Property Inspections

Audit Report, AUD-2014-012, March 25, 2014: “The pre-foreclosure property inspection process needs improvement to ensure that  pre-foreclosure inspection objectives are achieved in the most effective manner. There is limited assurance that the Enterprises have effective controls in place to ensure the quality of inspections conducted and that inspectors issue reports consistent with contractual requirements. Overall, several servicers reviewed during the audit did not have quality controls in place to ensure contractors provided accurate, complete, and consistent information in property inspection reports. Specifically, OIG identified inspection reports with inconsistent and inaccurate information; missing or blurry photographs; manipulated date and time stamps on the photographs; and unnecessary inspections that did not provide useful information about the properties. Also, the servicers reviewed by OIG inconsistently adopted requirements for inspectors to complete and pass criminal background checks. These deficiencies in the pre-foreclosure property inspection process occurred, in part, because of: (1) minimal attention and oversight provided by both FHFA and the Enterprises; (2) limited Enterprise quality standards for inspections conducted by inspectors under contract with servicers; and (3) the Enterprises’ reliance on servicers to monitor the quality of property inspections. Further, neither FHFA nor the Enterprises have assessed the overall effectiveness of their respective pre-foreclosure property inspection processes in achieving their safety and loss mitigation objectives. The lack of effective controls related to quality diminishes an inspection report’s integrity and casts doubt on whether performing pre-foreclosure property inspections adds value. Further, the minimal attention and oversight to the pre-foreclosure property inspection process presents a control weakness that inspectors may be able to exploit with manipulated inspection reports. Pre-foreclosure property inspections can assist both servicers and the Enterprises when correctly performed. These inspections can reduce the risk of safety-related incidents and mitigate losses by triggering needed repairs. Further, if a property is determined to be vacant during an inspection, some states allow for an alternative foreclosure process that can accelerate foreclosure proceedings and minimize losses to the Enterprises.”

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