OIG: Property Preservation Companies Need Better Controls

Posted by Patrick Barnard on March 26, 2014 No Comments
Categories : Required Reading

15221_reo_tall_grass OIG: Property Preservation Companies Need Better Controls Property preservation companies need better controls in place to ensure that the property inspection reports their sub-contractors submit are accurate, a recent audit conducted by the Office of the Inspector General (OIG) for the Federal Housing Finance Agency (FHFA) finds.

What's more, mortgage servicers need to do a better job of verifying whether the reports provided by their property preservation companies are accurate.

The audit revealed that there are numerous problems plaguing the property preservation business, not the least of which is the submission of false or erroneous property inspection reports on the part of sub-contractors. The audit found that "some servicers did not have quality controls in place to ensure contractors provided accurate, complete and consistent information in property inspection reports," a report from the OIG states.

Specifically, the OIG's audit uncovered ‘inconsistent and inaccurate information, missing or blurry photographs, manipulated date and time stamps on photographs, and unneccessary inspections that did not provide useful information about the properties,’ the report states. ‘Also, the servicers reviewed by the OIG inconsistently adopted requirements for inspectors to complete and pass criminal background checks.’

The lack of proper controls and oversight is putting government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which the FHFA oversees, at greater risk, according to the OIG. Furthermore, the GSEs and FHFA have ‘never assessed the overall effectiveness of their respective pre-foreclosure property inspection processes in achieving their safety and loss mitigation objectives,’ it finds.

Among some of the bogus things property inspectors have been doing is altering digital photographs to make it look as if work was performed, when in fact it was not. The report also cites consumer complaints about property inspectors entering homes that are clearly still occupied and, in some cases, damaging or stealing items.

As a result of its findings, the OIG is recommending that the FHFA direct the GSEs to ‘jointly assess the effectiveness of their pre-foreclosure property inspection processes’ and, based on this assessment, ‘establish uniform pre-foreclosure inspection quality standards and quality control processes for inspectors." This includes "identifying pre-foreclosure property inspection risks and objectives, identifying cost-effective control alternatives for achieving the objective(s), and recommending inspection standards and quality controls with regard to the content and frequency of inspections.’

The OIG, however, acknowledges that property inspections are critical to both servicers and the GSEs in determining the condition and status of homes in various stages of foreclosure.

‘These inspections can reduce the risk of safety-related incidents and mitigate losses by triggering needed repairs,’ the report states. ‘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.’

Interestingly, the report doesn't go so far as to prescribe a solution for what is a very difficult problem to solve: How to ensure that the data and information that is being collected and reported by inspectors in the field is accurate. It would seem that the only way to create a thorough check and balance would be to have some or all properties inspected twice – first by the property management company's sub-contractors, and second by a "follow-up" team of independent inspectors who would verify that the information originally reported was correct by way of a "ghost inspection." This, however, would essentially double the cost of conducting property inspections – and that increased cost would ultimately have to be passed off onto consumers.

The report mentions that one of the servicers audited seemed to have better controls in place. That is because this particular servicer, the report says, was using "ghost" inspections to ensure report quality.

The OIG's report seems to suggest that throwing more money at the problem might be a solution: It implies that most of the property inspectors are grossly underpaid – sometimes receiving less than $5 per inspection. Paying these sub-contractors more money might make them less inclined to cheat the system by submitting bogus reports or photographs, the OIG report suggests. They may also be less inclined to steal items from the properties they inspect.

The report also calls into question whether property management companies are doing their due diligence in terms of performing background checks on the inspectors and maintenance staff they hire. Although the report acknowledges that this is already being done, it claims that some companies are administering background checks on their contractors ‘inconsistently.’

To download a copy of the report, click here.

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