Department of Veterans Affairs
Actions Needed to Strengthen VA's Foreclosed Property Management Contractor Oversight Gao ID: GAO-08-60 November 15, 2007In 2003, the Department of Veterans Affairs (VA) significantly revised its in-house approach to managing and selling properties that become subject to foreclosure proceedings due to defaults by veterans on mortgages guaranteed by the department. VA contracted this function out to a private firm--Ocwen Financial Corporation (Ocwen)--after determining that doing so would increase the program's efficiency. VA oversees the Ocwen contract, which terminates in 2008, through onsite property inspections and other means. GAO was asked to (1) describe VA's inspection and other oversight findings and (2) evaluate VA's overall contract oversight program to determine whether any lessons can be learned prior to the implementation of the next contract in 2008. Among other steps, GAO reviewed VA inspection reports, accompanied VA staff on visits to three states, interviewed VA and Ocwen officials, and compared VA's procedures to those of other organizations that manage foreclosed properties.
VA inspections of foreclosed properties managed by Ocwen have identified a substantial number of deficiencies, such as failure to secure doors and windows, remove trash and debris, maintain lawns, and make needed repairs. GAO observed generally similar conditions in visits with VA realty specialists in Oklahoma, Michigan, and North Carolina, which may have reduced the marketability of the affected properties. 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. In response, Ocwen officials have raised concerns about the fairness of certain VA contractual requirements and oversight procedures. While VA has made a committed effort to oversee the contractor's performance, its overall capacity to do so is significantly limited compared to two government-sponsored enterprises (GSE), Fannie Mae and Freddie Mac, which manage large inventories of foreclosed properties. Unlike the GSEs' information systems, for example, VA's system does not include real-time property maintenance and repair information, including expense data. Without this data, VA is not able to fully assess the quality of property maintenance and repairs, the reasonableness of related expenses, and take corrective action on a timely basis to correct deficiencies. VA's contract with Ocwen also does not include sufficient authority for the department to impose penalties for unsatisfactory performance in key areas, such as property maintenance.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-08-60, Department of Veterans Affairs: Actions Needed to Strengthen VA's Foreclosed Property Management Contractor Oversight
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United States Government Accountability Office:
GAO:
Report to the Ranking Member, Subcommittee on Economic Opportunity,
Committee on Veterans‘ Affairs, House of Representatives:
November 2007:
Department Of Veterans Affairs:
Actions Needed to Strengthen VA‘s Foreclosed Property Management
Contractor Oversight:
GAO-08-60:
GAO Highlights:
Highlights of GAO-08-60, a report to Ranking Member, Subcommittee on
Economic Opportunity, Committee on Veterans' Affairs, House of
Representatives.
Why GAO Did This Study:
In 2003, the Department of Veterans Affairs (VA) significantly revised
its in-house approach to managing and selling properties that become
subject to foreclosure proceedings due to defaults by veterans on
mortgages guaranteed by the department. VA contracted this function out
to a private firm”Ocwen Financial Corporation (Ocwen)”after determining
that doing so would increase the program‘s efficiency. VA oversees the
Ocwen contract, which terminates in 2008, through onsite property
inspections and other means.
GAO was asked to (1) describe VA‘s inspection and other oversight
findings and (2) evaluate VA‘s overall contract oversight program to
determine whether any lessons can be learned prior to the
implementation of the next contract in 2008.
Among other steps, GAO reviewed VA inspection reports, accompanied VA
staff on visits to three states, interviewed VA and Ocwen officials,
and compared VA‘s procedures to those of other organizations that
manage foreclosed properties.
What GAO Found:
VA inspections of foreclosed properties managed by Ocwen have
identified a substantial number of deficiencies, such as failure to
secure doors and windows, remove trash and debris, maintain lawns, and
make needed repairs. GAO observed generally similar conditions in
visits with VA realty specialists in North Carolina, Oklahoma, and
Michigan, which may have reduced the marketability of the affected
properties. 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. In response, Ocwen officials have raised
concerns about the fairness of certain VA contractual requirements and
oversight procedures.
While VA has made a committed effort to oversee the contract‘s
performance, its overall capacity to do so is significantly limited
compared to two government-sponsored enterprises (GSE), Fannie Mae and
Freddie Mac, which manage large inventories of foreclosed properties.
Unlike the GSEs‘ information systems, for example, VA‘s system does not
include real-time property maintenance and repair information,
including expense data. Without this data, VA is not able to fully
assess the quality of property maintenance and repairs, the
reasonableness of related expenses, and take corrective action on a
timely basis to correct deficiencies. VA‘s contract with Ocwen also
does not include sufficient authority for the department to impose
penalties for unsatisfactory performance in key areas, such as property
maintenance.
Figure: Condition of a Lawn at a VA Property in Michigan:
[See PDF for image]
This figure is a photograph showing the condition of a lawn at a VA
property in Michigan.
Source: GAO.
[End of figure]
What GAO Recommends:
In designing a new property management contract scheduled for
implementation in 2008, GAO recommends that VA ensure that it can
obtain real-time data and impose penalties for unsatisfactory
performance. In written comments on a draft of this report, VA agreed
with these recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-60]. For more information, contact Yvonne
D. Jones, 202-512-8678, jonesy@gao.gov.
Contents:
Letter:
Results in Brief:
Background:
VA Has Identified Significant Performance Deficiencies in Key Areas of
Ocwen‘s Management and Sale of Foreclosed Properties:
VA Has Limited Capacity to Oversee Its Contractor‘s Performance in
Managing and Selling Foreclosed Properties:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Department of Veterans Affairs:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Monitoring Tools Used by VA‘s PMOU Staff:
Table 2: Most Frequent Deficiencies Identified (Security, Maintenance,
and Safety) by VA Realty Specialists (October 2005 through March 2007):
Table 3: Ocwen‘s Performance in Meeting Specified ROS Requirements:
Figures:
Figure 1: Overview of the Foreclosure, Property Management, and Sales
Processes:
Figure 2: Ocwen‘s Overall VA Property Maintenance Ratings, October 2005
through March 2007:
Figure 3: Percentage of Inspected VA Properties with Deficiencies in
Security, Maintenance, and Safety Subcategories, Second Quarter of
Fiscal Year 2007:
Figure 4: Structural Damage at an Oklahoma Property for Sale:
Figure 5: Trash and Debris Not Cleaned Up at an Oklahoma Property for
Sale:
Figure 6: Trash and Debris Not Cleaned Up at an Oklahoma Property for
Sale:
Figure 7: Trash and Debris Not Cleaned Up at a Second Oklahoma Property
for Sale:
Figure 8: Condition of Lawn at a Michigan Foreclosed Property for Sale:
Figure 9: Condition of Yard at a Michigan Foreclosed Property for Sale:
Figure 10: Improperly Maintained Swimming Pool at a Foreclosed Property
for Sale in Michigan:
Figure 11: Foreclosed Property for Sale in North Carolina:
Figure 12: Unsecured Window at a North Carolina VA Property for Sale:
Figure 13: VA Average Days in Inventory before Sale, by Region (2005
through June 2007):
Figure 14: Questionable VA Repair Reimbursement at a Michigan
Foreclosed Property for Sale:
Figure 15: Demolished VA Foreclosed Property:
Abbreviations:
CPTS: Centralized Property Tracking System:
FHA: Federal Housing Administration:
GSE: government-sponsored enterprise:
HUD: Department of Housing and Urban Development:
Ocwen: Ocwen Financial Corporation:
OMB: Office of Management and Budget:
PMOU: Property Management Oversight Unit:
ROS: return on sales:
VA: Department of Veterans Affairs:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 15, 2007:
The Honorable John Boozman:
Ranking Member:
Subcommittee on Economic Opportunity:
Committee on Veterans' Affairs:
House of Representatives:
Dear Mr. Boozman:
In 2003, the Department of Veterans Affairs (VA) significantly revised
its traditional in-house approach to managing and selling foreclosed
properties from the Home Loan Guaranty program for veterans by
contracting this function out to a private firm, Ocwen Financial
Corporation (Ocwen).[Footnote 1] VA entered into this contract, which
terminates in 2008, after determining that a private sector company
could more efficiently manage the department's foreclosed property
inventory, and thereby reduce costs to the government.[Footnote 2] From
the time VA's Home Loan Guaranty program was created in the 1940s until
2003, VA had managed its foreclosed property inventory using staff in
regional offices nationwide who oversaw a network of property
management brokers and other contractors. VA and its contractors were
responsible for, among other things, securing foreclosed properties,
performing necessary maintenance (e.g., removing debris and cutting
lawns) and repairs, and selling the properties within reasonable time
frames to minimize tax and other expenses. Since 2004, Ocwen has
performed these tasks using its own nationwide network of real estate
brokers and contractors.[Footnote 3]
Under the contract, Ocwen receives a fee for each property sold (about
1.3 percent of the sales price), and VA reimburses the company for the
costs of maintenance, repairs, and other expenses. From 2004 to August
2007, Ocwen sold approximately 36,000 VA properties, including about
7,700 in 2006, and received about $45 million in compensation.[Footnote
4] The contract also establishes a variety of performance requirements
for Ocwen. For example, the contract requires Ocwen to meet targets for
securing and maintaining properties, selling properties within the
shortest time possible, and selling properties, on average, at prices
that meet established return on sales (ROS) targets. VA's Home Loan
Guaranty program staff in Washington, D.C., are responsible for the
overall oversight and management of the Ocwen contract. In addition, a
VA unit of approximately 16 individuals based in Nashville, Tennessee,
is responsible for monitoring Ocwen's compliance with specific
provisions of the contract, such as maintenance and repair obligations.
To carry out its responsibilities, VA staff in Nashville inspect a
sample of properties each year to determine how well they are being
maintained. Ocwen also submits maintenance and repair expense
documentation to the Nashville VA office for review and approval.
Because of your interest in ensuring that VA manages its operations as
efficiently as possible, you asked that we review the department's
foreclosed property management oversight. You expressed particular
interest in learning whether Ocwen had fully met its obligations under
the contract and whether any lessons could be learned that would assist
VA in designing the new property management contract that is expected
to be finalized in 2008.[Footnote 5] Accordingly, this report (1)
describes the findings of VA on Ocwen's performance in key areas
related to foreclosed property management and the contractor's views on
its own performance, and (2) evaluates VA's overall policies,
procedures, information systems, and data for overseeing the foreclosed
property management and sale processes.
To meet our objectives, we obtained and reviewed VA's contract with
Ocwen; quarterly reports that assess Ocwen's performance in key areas
such as property security, maintenance, and safety; 50 randomly
selected VA inspection reports and supporting documentation; data on
the time it takes Ocwen to sell VA properties; correspondence between
VA and Ocwen; and previous GAO reports.[Footnote 6] We also interviewed
VA officials in Washington and Tennessee as well as Ocwen officials.
Further, we accompanied VA realty specialists on site visits to three
states--Michigan, North Carolina, and Oklahoma--to observe the
department's property inspection process and the condition of
foreclosed properties firsthand.[Footnote 7] We selected these states
on the basis of several criteria, including the number of VA properties
for sale in each state, the range in median listing prices of the VA
properties, and geographic and economic diversity. Additionally, we
interviewed officials from two government-sponsored enterprises (GSE),
Fannie Mae and Freddie Mac, which also manage and sell a large
inventory of foreclosed properties, and obtained data from the
companies on the average time it takes them to sell such properties. We
discussed the design of their approaches to managing foreclosed
properties with officials from the GSEs and compared these approaches
with VA's. We assessed the reliability of the data used and found them
to be sufficiently reliable for the purposes of this report.
We conducted our work in Boston, Massachusetts; Nashville, Tennessee;
San Francisco, California; and Washington, D.C.; and in Michigan, North
Carolina, and Oklahoma between January 2007 and September 2007 in
accordance with generally accepted government auditing standards.
Appendix I explains our scope and methodology in greater detail.
Results in Brief:
In its contract oversight role, VA has identified deficiencies in
certain key areas related to Ocwen's performance in managing and
selling the department's foreclosed properties. These include the
following:
* VA realty specialists found a substantial number of deficiencies
related to security, maintenance, and safety issues during their
inspections of 2,391 foreclosed department properties during the 6
quarters from October 2005 through March 2007. Specifically, VA
inspections found that the number of properties that did not meet
overall inspection standards ranged from 32 percent to 46 percent
during those 6 quarters.[Footnote 8] VA realty specialists cited Ocwen
for a variety of problems that included failure to secure doors and
windows, remove trash and debris, perform required lawn maintenance,
and correct interior and exterior structural conditions that can cause
deterioration or make properties unsafe. We generally observed similar
conditions, which may have reduced the marketability of the affected
properties, when we accompanied VA realty specialists on site visits in
Oklahoma, Michigan, and North Carolina. In response, Ocwen officials
expressed concerns that one deficiency can cause a property to fail a
VA inspection and that such inspections at times focused on trivial
items, which is a contention that the department disputes.
* VA has not been satisfied with Ocwen's overall compliance with its
contractual obligation to sell the department's foreclosed properties
in the shortest time possible. According to VA data, the average time
that Ocwen has taken to sell VA properties increased from about 315
days in 2005 to 342 days in the first 6 months of 2007. In comparison,
VA reported taking approximately 237 days to sell foreclosed properties
when it managed the process in 2000, and data we obtained from the GSEs
show they reported selling their foreclosed properties, on average, in
less than 230 days over each of the past several years. Although
caution must be exercised in making such comparisons among
organizations because a variety of factors can affect the time it takes
to sell foreclosed properties, data provided by VA and the GSEs for one
key area, property location, suggest that the department's concerns
about Ocwen's performance may be warranted. According to this data, the
GSEs have sold relatively more foreclosed properties in states with
distressed housing markets in recent years than has been the case for
VA property sales. VA has expressed particular concern about the number
of foreclosed properties in Ocwen's inventory for a year or longer (23
percent of the inventory in January 2007 according to VA), and
requested that Ocwen submit a plan to reduce the number of such
properties in January 2007. While VA reviewed the plan that Ocwen
submitted in February 2007 and accepted it in June 2007, it is too
early to evaluate the plan's effectiveness.
* VA has consistently cited Ocwen for not meeting return on sales (ROS)
targets established in the contract. As a result, VA assessed three
financial penalties totaling $1.3 million against the company for
failure to comply with these requirements. However, Ocwen officials
contend that VA's approach to calculating ROS targets for foreclosed
properties is not consistent with industry standards and lacks
credibility. VA officials have responded that the department's approach
is clearly defined in the contract and that VA has taken steps to
address Ocwen's concerns. Nevertheless, Ocwen has challenged VA's
penalties, and these challenges remain under review by the department.
VA has made a committed effort to ensure that Ocwen complies with its
contractual obligations through onsite inspections and other means, but
the department's overall capacity to help ensure the effective
management of its foreclosed property inventory is significantly
limited. While there are differences between the GSEs' and VA's
approaches to managing and selling foreclosed properties, the
department could potentially benefit from adopting certain elements of
the GSEs' approaches.[Footnote 9] These elements reportedly allow the
GSEs to develop an understanding as to how individual properties are
being managed from the time such properties enter the companies'
inventories until the date they are sold to homebuyers or investors. In
particular, GSE officials said their companies' information systems
contain real-time data on how properties are being maintained and
repaired and permit GSE staff to review the appropriateness of
maintenance and expense data incurred on an ongoing basis. In contrast,
VA's property management system, the Centralized Property Tracking
System (CPTS), generally does not capture real-time property
maintenance and repair data or data on the expenses the contractor
incurs in managing the department's foreclosed property inventory.
Without such data, VA is not well positioned to assess the quality of
the maintenance and repair of its foreclosed properties during onsite
inspections or the reasonableness of related expenses and take
corrective action on a timely basis to correct deficiencies. Moreover,
while VA's contract with Ocwen allows the department to impose a
defined penalty for unsatisfactory ROS performance, it does not allow
similar penalties for unsatisfactory performance in other key areas,
such as property maintenance or the time it takes to sell foreclosed
properties.[Footnote 10] Senior VA officials we contacted recognize
there are limitations in the department's contract and oversight
processes. For example, the VA officials said the lack of real-time
property management data limits the effectiveness of the property
inspection program, and the department did not enforce a provision in
the contract requiring Ocwen to provide real-time property management
information because the company's systems were unable to do so. VA
officials also said they are considering steps to address such
limitations in anticipation of the new foreclosed property management
contract that is scheduled to be in place in 2008, but have not yet
reached any final decisions. Without improvements in VA's current
contract and oversight processes and authorities, the department will
not be well positioned in the future to help ensure that its properties
are managed in an efficient and effective fashion.
To improve VA's capacity to oversee the foreclosed management property
and sales processes, we recommend the department take several steps in
designing, negotiating, and awarding a new contract and relevant
oversight processes for the function. Specifically, we recommend VA
ensure that the contract includes (1) the requirement that the
contractor provide real-time property management data as deemed
necessary by the department and (2) the authority to impose penalties
for unsatisfactory performance in key areas, such as property
maintenance and selling properties within established time frames. We
also recommend that VA use real-time data provided by the contractor to
monitor the management of its foreclosed property inventory (or a
sample thereof) on an ongoing basis and act on a timely basis,
including the use of penalties as appropriate, to address identified
deficiencies.
We provided a draft of this report to VA for its review and comment. In
VA's written comments, the department generally agreed with the
report's conclusions and concurred with its recommendations. We also
obtained technical comments from VA, the GSEs and Ocwen Financial
Corporation, which have been incorporated into this report as
appropriate. VA's letter and comments are reprinted in appendix II.
Background:
According to VA, the department's Home Loan Guaranty program can
provide financial incentives for private lenders to offer eligible
veterans of the U.S. armed forces mortgages with certain favorable
terms, such as not requiring a downpayment. VA guarantees a portion of
the mortgage loan in the event that borrowers default, providing
lenders with substantial financial protections against some of the
losses that may be associated with extending such mortgage loans. To
help support the program, veterans are required to pay a funding fee of
up to 3.3 percent of the loan amount.[Footnote 11] The VA's Home Loan
Guaranty program receives funding through the Veterans Housing Benefit
Program Fund.[Footnote 12]
When veterans fall behind on mortgage payments, VA encourages lenders
or mortgage servicers to work with the veterans to avoid foreclosure,
such as restructuring the terms of the mortgage.[Footnote 13] According
to VA officials, the department monitors lenders' and servicers actions
to help veterans retain their homes. However, if veterans still cannot
meet their mortgage obligations, foreclosure proceedings or termination
proceedings may be initiated. State foreclosure laws establish certain
procedures that mortgage servicers must follow in conducting
foreclosures and establish minimum time periods for various aspects of
the foreclosure process (see fig. 1). For example, servicers are
generally required to provide borrowers with certain notices associated
with the initiation of the foreclosure process. At the foreclosure
sale, loan holders may purchase the properties. Then, the servicers may
transfer or "convey" the properties to VA which, in turn, "assigns" the
properties to Ocwen for management and sale. However, the contractor
may not be able to immediately take control of such properties or evict
the occupants in states with redemption laws if the debtor has a right
to possess the property during the redemption period. In states with
redemption periods (which can generally last 6 months to a year or
longer), unless waived, borrowers are provided the opportunity to match
the winning bids at the foreclosure sale and reclaim their properties.
Figure 1: Overview of the Foreclosure, Property Management, and Sales
Processes:
[See PDF for image]
Overview of the Foreclosure, Property Management, and Sales Processes:
* Borrower defaults on the mortgage;
* Initiation of foreclosure;
* Foreclosure sale;
* Property transfer;
* Property management;
* Sale to investor or home buyer.
Source: GAO analysis of VA foreclosure processes.
[End of figure]
VA contracted out responsibility for foreclosed properties to Ocwen
through the A-76 process. Under the A-76 process, federal departments
and agencies identify activities that are "commercial" in nature and
assess whether it would be more cost-effective for the government to
contract such functions out to the private sector. In 1999, at the
request of the Office of Management and Budget (OMB), VA initiated an A-
76 study to determine whether the department's foreclosed property
management function should be contracted out, and conducted a
competitive process to determine whether the private sector could more
efficiently manage the department's foreclosed property inventory. As
provided in the OMB Circular A-76, Performance of Commercial
Activities, VA's Home Loan Guaranty program staff reviewed the
department's ongoing approach to property management, developed a
proposal for developing a more efficient organization, and submitted a
proposal on improved management of foreclosed properties to VA for
review.[Footnote 14] VA also invited private sector companies to submit
proposals and several companies, including Ocwen, did so. VA convened a
panel of acquisition officials, which included officials with
experience in the Home Loan Guaranty program to review the competing
proposals. The panel determined that Ocwen had demonstrated the
technical capacity to manage and sell the department's foreclosed
property inventory, and concluded that Ocwen's estimated cost in doing
so would save 10 percent over the VA Home Loan Guaranty unit's
proposal.[Footnote 15] Accordingly, VA awarded the foreclosed property
management contract to Ocwen on August 27, 2003.
After the A-76 contract determination was made, VA reassigned or
offered early retirement incentives to many of the staff involved in
managing and selling foreclosed properties and assumed responsibility
for overseeing Ocwen's performance under the contract. VA Home Loan
Guaranty staff in Washington are responsible for overall contract
management and policy issues, and staff in VA's Property Management
Oversight Unit (PMOU) in Nashville are responsible for assessing
Ocwen's compliance with specific contract provisions. As shown in table
1, PMOU conducts onsite inspections of a nationwide sample of
properties each year to assess the maintenance and repair work on such
properties. Typically, properties subject to PMOU inspections are on
the market, with "for sale" signs prominently displayed on the front
lawn or elsewhere. After properties are sold, Ocwen submits maintenance
and repair invoices to PMOU staff for their review and approval. PMOU
staff audit a sample of such invoices to identify potentially
questionable expenditures and, if necessary, go back to Ocwen for
additional information. PMOU staff also conduct other types of desk
audits related to specific contract provisions--for instance, to
determine whether Ocwen or its contractors accepted the best offer on a
particular property, as required.[Footnote 16] VA and PMOU have
developed an information system, the Centralized Property Tracking
System (CPTS) that maintains information on the department's foreclosed
properties, including the results of onsite inspections and other
performance audits.
Table 1: Monitoring Tools Used by VA's PMOU Staff:
Activity: Onsite property inspections;
Purpose: Ensure that properties are secured, maintained, and free from
safety hazards;
Methodology: Visit a sample of about 1,800 properties annually in
states with highest volumes of foreclosed properties. Inspect
properties' interior and exterior conditions.
Activity: Invoice audits;
Purpose: Ensure appropriateness of property maintenance and repair
expenditures;
Methodology: Review a sample of about 10 percent of closed property
files. Verify that there is adequate documentation to support claimed
expenditures and follow up with contractor if documentation is lacking
or expenses are questionable.
Activity: Desk audit measures (sold properties);
Purpose: Ensure compliance with various contract provisions, such as
those involving accepting offers on a property;
Methodology: Review a sample of about 10 percent of closed property
files. Ensure compliance with contract provisions and supporting
documentation.
Activity: Vendee loan audit[A];
Purpose: Ensure compliance with contractual requirements involving
vendee loans;
Methodology: Review a sample about 10 percent of closed property files.
Ensure that loan files indicate compliance and documentation is
adequate.
Source: VA.
[A] VA may finance loans to external parties for the purchase of the
department's foreclosed properties. Such loans are referred to as
"vendee loans."
[End of table]
Fannie Mae and Freddie Mac are the GSEs responsible for managing large
inventories of foreclosed properties. Both are private corporations
chartered by Congress to provide a continuous flow of funds to mortgage
lenders and borrowers. To fulfill their responsibilities of stabilizing
the nation's mortgage markets and expanding homeownership
opportunities, the GSEs purchase mortgages from lenders and either
retain them in their portfolios or package them into mortgage-backed
securities that are sold to investors;[Footnote 17] as a result, the
GSEs may become responsible for properties that are foreclosed. To
effectively manage the foreclosed properties, both GSEs have
established monitoring systems to oversee the efforts of brokers and
other contractors in securing, repairing, maintaining, and marketing
the properties in order to sell them as quickly as possible. In 2006,
the GSEs together sold approximately 43,000 foreclosed properties.
VA Has Identified Significant Performance Deficiencies in Key Areas of
Ocwen's Management and Sale of Foreclosed Properties:
In its oversight capacity, VA has identified significant deficiencies
in Ocwen's compliance with key contractual provisions relating to the
company's management of the department's foreclosed property inventory.
For example, VA has identified deficiencies in Ocwen's performance in
securing and maintaining department properties as well as mitigating
identified safety hazards. The failure to properly maintain foreclosed
properties also may have contributed to other deficiencies VA has
identified in Ocwen's performance. That is, poorly maintained
properties may take longer to sell than would otherwise be the case and
it may be difficult for Ocwen to sell such properties at targeted price
levels. In response, Ocwen officials have raised concerns about the
fairness of certain of VA's contractual requirements and oversight
procedures.
VA's Inspections Identified Substantial Security, Maintenance, and
Safety Deficiencies:
VA's contract with Ocwen established a 95 percent overall performance
standard for Ocwen in maintaining VA's foreclosed properties (or a
maximum failure rate of 5 percent).[Footnote 18] However, as shown in
figure 2, VA's onsite inspections conducted during the 6 quarters from
October 2005 through March 2007 found that Ocwen consistently failed to
meet the overall property maintenance standard.[Footnote 19] For each
quarter, the percentage of properties that did not met VA's inspection
standards ranged from 32 percent to 46 percent. During the period from
October 2005 through March 2007, VA staff conducted a total of 2,391
property inspections in about 25 states, mostly of properties that were
on the market and had for sale signs in the front yard or prominently
located elsewhere on the properties.[Footnote 20] 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. As is discussed later in
this report, VA's contract with Ocwen does not provide the department
with the authority to impose a penalty on Ocwen for the failure to
adequately maintain the department's properties.
Figure 2: Ocwen's Overall VA Property Maintenance Ratings, October 2005
through March 2007:
[See PDF for image]
This figure is a vertical bar graph depicting Ocwen's Overall VA
Property Maintenance Ratings, October 2005 through March 2007. The
vertical axis of the graph represents percentage from 0 to 100, with
95% indicated as the minimum satisfactory rating. The horizontal axis
represents years 2006-2007. The following data is depicted, with
percentages approximated from the graph:
Year: 2006, first quarter;
percentage: 64%.
Year: 2006, second quarter;
percentage: 69%.
Year: 2006, third quarter;
percentage: 67%.
Year: 2006, fourth quarter;
percentage: 55%.
Year: 2007, first quarter;
percentage: 61%.
Year: 2007, second quarter;
percentage: 57%.
Source: GAO.
Note: Data for the second quarter of 2007 is preliminary because VA had
not finalized its March 31, 2007 Quarterly Performance report.
[End of figure]
VA's overall property maintenance rating category consists of three
specific subcategories (1) securing properties, (2) performing required
maintenance and repairs, and (3) eliminating safety and other hazards.
For illustrative purposes, figure 3 shows VA inspection findings in
each of these subcategories for the second quarter of 2007. While Ocwen
is required to meet the 95 percent satisfactory performance threshold
in each of these categories, the figure indicates that the company
failed to comply with this standard. For example, VA realty specialists
found maintenance deficiencies in 27 percent of the foreclosed
properties inspected during the quarter. According to the VA data we
reviewed, Ocwen consistently missed the required performance thresholds
for the three subcategories by varying margins during the 6 quarters
between October 2005 and March 2007. More specifically, for the 18
total rating segments covering the three subcategories during the 6
quarters, Ocwen failed to meet the 95 percent performance threshold in
17. Ocwen did meet the required performance threshold for the security
subcategory in the second quarter of 2006 (with a satisfactory score of
95.5 percent in the properties inspected) while just missing the
threshold for the security category in the third quarter of 2006 with a
satisfactory score of 94.4 percent.
Figure 3: Percentage of Inspected VA Properties with Deficiencies in
Security, Maintenance, and Safety Subcategories, Second Quarter of
Fiscal Year 2007:
[See PDF for image]
This figure is a vertical bar graph depicting the percentage of
inspected VA Properties with deficiencies in Security, Maintenance, and
Safety Subcategories, Second Quarter of Fiscal Year 2007. The vertical
axis of the graph represents percentage from 0 to 100. The horizontal
axis of the graph represents the type of violation cited. The following
data is depicted, with percentages approximated from the graph:
Type of violation cited: Maintenance;
percentage: 27%.
Type of violation cited: Security;
percentage: 21%.
Type of violation cited: Safety;
percentage: 10%.
Source: GAO.
Note: Unlike the overall maintenance score which only counts the number
of properties with one or more violations, VA realty specialists may
identify a violation in one or more of the subcategories for each
property. As a result, the number of violations may exceed the number
of properties inspected. Data for the second quarter of 2007 is
preliminary because VA had not finalized its March 31, 2007 Quarterly
Performance report.
To develop information on the most common property management
deficiencies identified by VA realty specialists, we reviewed VA's
inspection findings as identified in the quarterly reports that covered
the October 2005 through March 2007 period. As shown in table 2, the
most common security deficiency VA realty specialists identified
involved one or more doors being unsecured. In other cases, VA realty
specialists could not gain access to properties scheduled for
inspections, largely because their lock boxes had been changed, which,
according to VA, also constitutes a violation under the contract
because the department is unable to assess properties'
conditions.[Footnote 21] Under the largest category, property
maintenance, the most commonly cited deficiencies included failure to
remove trash and debris, perform adequate property maintenance or
repair (e.g., fixing leaking roofs that may cause structural damage),
and adequately maintain lawns. Under the third category, safety
deficiencies, VA realty specialists identified a variety of exterior
and interior deficiencies such as unsafe front steps, missing
handrails, and large floor holes.
Table 2: Most Frequent Deficiencies Identified (Security, Maintenance,
and Safety) by VA Realty Specialists (October 2005 through March 2007):
Deficiencies: Security;
* One or more doors not secured;
* Door locked (unable to gain access);
* Windows not secured.
Deficiencies: Maintenance;
* Trash/debris not removed;
* Inadequate property maintenance or repair;
* Lawns overgrown or similar deficiencies;
Deficiencies: Safety/hazardous;
* Exterior structural unsafe conditions;
* Interior structural conditions;
* Pool and/or spa not secured.
Source: GAO analysis of VA inspection reports.
Note: Because VA did not break out and summarize the individual types
of deficiencies, we developed the information contained in this table.
The information is based on our analysis of VA's quarterly performance
reports that covered 2,391 properties visited by VA realty specialists.
[End of table]
To assess the documentary support for VA's property inspection
findings, we reviewed 50 randomly selected inspection files at PMOU.
Our random sample was chosen from the property maintenance subcategory
of 698 inspections that VA staff conducted from October 2005 through
March 2007 and covered properties in 20 states and inspections by 13
different realty specialists. For each file, we reviewed the VA realty
specialists' inspection checklist and notes to identify the types of
deficiencies cited, such as poor lawn maintenance. We also reviewed
documentation included in the files, particularly photographs, to
assess the support for the findings. Our analysis of this documentation
was generally consistent with the VA inspection results.
We also visited foreclosed VA properties in Oklahoma, Michigan, and
North Carolina to observe the VA inspection process and the conditions
of the properties firsthand. These three states were selected to
reflect a range in median listing prices of VA properties on the market
as well as geographic and economic diversity. Overall, the VA realty
specialists found that approximately 78 percent of the 130 properties
inspected in each state had one or more security, maintenance or safety
deficiencies, as follows:[Footnote 22]
* The Oklahoma properties represented a mix in terms of their
conditions and corresponding values. Although some properties were in
good condition, many needed a considerable amount of structural and
cosmetic work to improve their condition and appearance. In many cases,
the VA realty specialist concluded that Ocwen and its brokers had not
taken required steps to correct structural problems before properties
were listed for sale (fig. 4). Further, the VA realty specialist found
that, in many cases, Ocwen and its brokers had not removed trash and
debris from many properties as required (figs. 5, 6, and 7).
Figure 4: Structural Damage at an Oklahoma Property for Sale:
[See PDF for image]
This figure is a photograph depicting damage along a roof line.
Source: GAO.
Note: According to the VA Realty Specialist, such a structural
violation could cause interior water damage as well as allow animals to
enter the property.
[End of figure]
Figure 5: Trash and Debris Not Cleaned Up at an Oklahoma Property for
Sale:
[See PDF for image]
This figure is a photograph of trash and debris inside a property.
Source: VA.
[End of figure]
Figure 6: Trash and Debris Not Cleaned Up at an Oklahoma Property for
Sale:
[See PDF for image]
This figure is a photograph of trash and debris inside a property.
Source: VA.
[End of figure]
Figure 7: Trash and Debris Not Cleaned Up at a Second Oklahoma Property
for Sale:
[See PDF for image]
This figure is a photograph of trash and debris within the basement
entranceway of a property.
Source: GAO.
[End of figure]
* The Michigan properties we visited, primarily in the Detroit area,
reflected the distressed housing market conditions in that state, and
many had been on the market for a year or longer.[Footnote 23] Like the
properties we visited in Oklahoma, however, the VA realty specialist
identified deficiencies in the maintenance of the properties that
likely further contributed to the challenges involved in selling them.
For example, the VA realty specialist cited 25 of the 48 properties for
poor lawn maintenance (figs. 8 and 9). In some cases, the lawn height
had reached 2 feet. Furthermore, 13 of the 48 properties were not
secure. In addition, in one case, a swimming pool had not been
adequately maintained and posed a safety risk to neighborhood children,
according to the VA realty specialist (fig. 10).
Figure 8: Condition of Lawn at a Michigan Foreclosed Property for Sale:
[See PDF for image]
This figure is a photograph of an overgrown lawn at a property.
Source: GAO.
[End of figure]
Figure 9: Condition of Yard at a Michigan Foreclosed Property for Sale:
[See PDF for image]
This figure is a photograph of a lawn containing tree branch debris at
a property.
Source: GAO.
[End of figure]
Figure 10: Improperly Maintained Swimming Pool at a Foreclosed Property
for Sale in Michigan:
[See PDF for image]
This figure is a photograph of an improperly maintained swimming pool
at a property.
Source: GAO.
[End of figure]
* The North Carolina properties we visited were generally in better
condition than the properties we visited in Oklahoma and Michigan. Many
of the properties were newer (no more than 5 to 10 years old), in
fairly good structural shape and relatively well maintained (fig. 11).
Despite the relatively good condition of the properties, in 17 of 44
cases the VA realty specialist found deficiencies related to unsecured
doors or windows. In many of the properties we visited, we were able to
walk into the house either through the front or back door or enter
through an open window (fig. 12).
Figure 11: Foreclosed Property for Sale in North Carolina:
[See PDF for image]
This figure is a photograph of the outside of a well-maintained
property.
Source: GAO.
[End of figure]
Figure 12: Unsecured Window at a North Carolina VA Property for Sale:
[See PDF for image]
This figure is a photograph of an unsecured window at a property,
viewed from the inside.
Source: GAO.
[End of figure]
Ocwen officials said the company initially used a different approach to
maintaining and repairing VA properties than is the case today. During
the initial years of the contract, Owen officials said the company
generally tried to sell the VA properties as quickly as possible
without spending significant funds on repairs or maintenance. 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. Ocwen officials also said they
had concerns about VA's overall inspection process, including the fact
that one deficiency can cause a property to fail an inspection. Ocwen
officials have also stated that VA does not always provide the results
of its on-site property inspections on a timely basis which impacts
their ability to respond and show improvement in the following
performance review. While a VA official acknowledged that there will
likely always be maintenance and repair deficiencies in a large
inventory of foreclosed properties, the department's concern regarding
Ocwen is the large number of such deficiencies. Ocwen officials also
said that VA inspections at times focused on relatively trivial items,
such as a property having too many pine needles on the front walkway.
However, VA officials disputed this allegation and said that department
inspections focus on key property security, maintenance, and safety
items specified in the contract.
While Ocwen officials raised concerns about VA's inspection procedures,
they also said that the company hired two independent consulting firms
to inspect VA properties and assess their maintenance.[Footnote 24]
Unlike VA inspections that typically focus on properties on the market,
Ocwen officials said its contractors inspected properties at varying
stages in the foreclosed property management process--for instance,
when the properties were being readied for sale. In some cases, Ocwen
officials said the inspectors identified substantial deficiencies in
their brokers' maintenance and repair of VA foreclosed properties. In
other cases, Ocwen officials said they did not believe the inspectors
provided sufficient evidence, such as photographs, to support their
findings. Nevertheless, Ocwen officials said they follow up on all
deficiencies identified in the inspection reports and use the reports
to better manage the inventory of foreclosed VA properties. For
example, the Ocwen officials said they use the inspection report
findings to determine whether additional training for brokers is
required or whether certain brokers should be terminated for not
performing according to standards.
VA Has Not Been Satisfied with Ocwen's Performance in Selling
Foreclosed Properties in a Timely Manner:
VA has not been satisfied with Ocwen's overall compliance with its
contractual obligation to sell the department's foreclosed properties
in the shortest time possible. According to VA data, the average amount
of time that Ocwen required to sell VA's foreclosed properties
increased from 311 days in 2005 to 315 days in 2006 to 342 days in the
first 6 months of 2007 on a weighted basis.[Footnote 25] In contrast,
our 2002 report noted that when VA managed the process in 2000, the
average sale took 237 days.[Footnote 26] As shown in figure 13, the
increase in selling times of VA properties from 2005 to 2007 was
relatively uniform across the United States. Moreover, approximately 23
percent of VA's foreclosed property inventory had been in the
department's inventory for a year or longer as of January 2007. While
the contract does not specify a threshold percentage of its foreclosed
properties being in the market for a year or longer, VA officials said
they viewed 23 percent as excessive.
Figure 13: VA Average Days in Inventory before Sale, by Region (2005
through June 2007):
This figure is a vertical bar graph depicting the average days in
inventory before sale, by Region (2005 through June 2007). The vertical
axis of the graph represents days from 0 to 500. The horizontal axis of
the graph represents regions. The following data is depicted, with the
number of days approximated from the graph:
Region: New England;
Days, 2005: 360;
Days, 2006: 380;
Days, 2007: 400.
Region: Mid Atlantic;
Days, 2005: 350;
Days, 2006: 360;
Days, 2007: 280.
Region: East North Central;
Days, 2005: 345;
Days, 2006: 348;
Days, 2007: 370.
Region: West North Central;
Days, 2005: 345;
Days, 2006: 360;
Days, 2007: 365.
Region: South Atlantic;
Days, 2005: 340;
Days, 2006: 330;
Days, 2007: 335.
Region: East South Central;
Days, 2005: 340;
Days, 2006: 345;
Days, 2007: 250.
Region: West South Central;
Days, 2005: 340;
Days, 2006: 335;
Days, 2007: 350.
Region: Mountain;
Days, 2005: 335;
Days, 2006: 345;
Days, 2007: 370.
Region: Pacific;
Days, 2005: 320;
Days, 2006: 320;
Days, 2007: 345.
Source: VA.
[End of figure]
Data from the GSEs on the time it takes them to sell foreclosed
properties suggest that Ocwen's time in selling VA properties may be
long by industry standards. The GSEs generally sold foreclosed
properties in under 230 days, on average, on a weighted basis over the
past several years.[Footnote 27] Although caution must be exercised in
making comparisons between organizations due to the variety of factors
that can account for the time it takes to sell foreclosed properties,
VA and GSE data on property location suggest that the department's
concerns about the time incurred to sell its properties may be
warranted. According to VA and GSE data, the GSEs have sold relatively
more properties in states with distressed housing markets as a
percentage of their overall foreclosed property sales over the past
several years than is the case with VA property sales.
Ocwen officials we contacted cited several reasons for the company's
performance in selling foreclosed VA properties and the reasons some VA
properties remained in inventory for considerable periods. For example,
Ocwen officials said state redemption periods can add to the period of
time a property remains in the inventory. Ocwen officials also noted
(1) the slowdown in the national real estate market since 2005, (2) the
fact that VA properties were concentrated in rural areas or regions
with declining urban centers, and (3) the length of time it could take
to complete repairs on VA properties. In response, VA officials said
Ocwen's explanations for its performance were generally without merit.
For example, VA officials said steps can be taken to manage the
foreclosure process in states with redemption laws, such as monitoring
such properties to determine whether they have been vacated and whether
the occupants had waived their redemption rights. VA officials also
said Ocwen's performance in selling properties had deteriorated even at
the height of the real estate market boom in 2005 and early 2006 and
the contractor failed to market them aggressively. VA officials further
stated that any contractor bidding to manage a nationwide inventory of
foreclosed properties should be aware that such properties could be
located in both urban and rural areas.
In early 2007, after nearly 2 years of seeking to improve Ocwen's
performance in reducing the number of properties that had been in the
department's inventory for more than a year, VA requested that Ocwen
provide a plan for reducing the number of such properties.[Footnote 28]
Under the plan that Ocwen submitted to VA in February 2007, the company
pledged to take a number of specific steps to meet this goal. For
example, the Ocwen plan included company staff visits to cities with
high inventories of VA properties that had been on the market for
extended periods, such as Detroit and Houston, which would allow staff
to develop a better understanding of local housing market conditions
and plans to sell properties faster. Ocwen also has created three new
job positions whose only focus is to sell properties that have been on
the market for more than 12 months and has provided bonuses to real
estate agents as an incentive to sell these assets more quickly. VA
accepted Ocwen's plan in June 2007, and department officials said they
planned to monitor the company's compliance with a series of mutually
agreed upon time frames for reduction in the inventory of properties on
the market for more than a year. However, VA officials said Ocwen has
not yet proposed potential time frames as has been requested. Pending
receipt of such proposed time frames, VA officials said the department
is monitoring Ocwen's performance. VA officials said the number of
properties in Ocwen's inventory for a year or more declined slightly
from 23 percent in March 2007 to 21.5 percent in September 2007.
VA and Ocwen Have Disputed the Contractor's Performance in Meeting
Foreclosed Property Return on Sales Targets:
VA has consistently cited Ocwen for not selling foreclosed properties,
on average, at ROS levels established in the contract. Under the
contract, VA appraises each property prior to the foreclosure sale to
establish an estimated listing price and ROS target.[Footnote 29] At
the time the property is assigned, VA applies a discount of
approximately 14 percent to this price. For example, if the appraised
value of a property was estimated at $100,000, the discounted value
would be $86,000.[Footnote 30] According to VA officials, the 14
percent discount is based on the department's experience with the
expenses, such as real estate broker commissions and maintenance costs
that are involved in managing and selling foreclosed properties. The
contract also specifies that the cost of any repairs Ocwen or its
contractors make on foreclosed properties will be added to the
discounted property value. The contract requires Ocwen, on average, to
sell VA foreclosed properties at 100 percent of their discounted value,
including any repair expenses that have been incurred.
As shown in table 3, Ocwen did not meet the 100 percent ROS target
levels specified in the contract from April 2005 through December 2006,
according to VA. As specified in the contract, VA has the authority to
impose financial penalties on Ocwen if the company's compliance with
this requirement drops below 97 percent.[Footnote 31] VA imposed a
total of $1.3 million in such penalties on Ocwen for nonperformance in
meeting ROS targets for the last 3 quarters of 2005. Ocwen has appealed
the penalties to VA and has not paid any funds to the department thus
far. In contesting VA's penalties, Ocwen officials said the
department's method for calculating ROS targets by conducting
preforeclosure sale appraisals was inconsistent with industry
standards. Ocwen officials questioned the validity of preforeclosure
sales appraisals because appraisers may not be granted access to
properties to assess their condition Rather, the Ocwen officials said
it is industry practice to conduct an appraisal and other listing price
estimates after transfer of the property and evictions when it is
possible to gain access and fully evaluate a property's condition.
Ocwen stated that they have asked VA for access to the pre-foreclosure
appraisal but have been denied such appraisals. Ocwen officials also
said that some state laws establish redemption periods of up to a year
so that property owners have time to make good on their debts and
reclaim their properties. Ocwen officials said that foreclosed property
conditions in states with redemption periods can further deteriorate,
raising further questions about the validity of preforeclosure
appraisals.
Table 2: Ocwen's Performance in Meeting Specified ROS Requirements:
Quarter ending: June 30, 2005;
VA's performance requirement (percent): 100;
Ocwen's performance (percent): 94.
Quarter ending: Sept. 30, 2005;
VA's performance requirement (percent): 100;
Ocwen's performance (percent): 93.
Quarter ending: Dec. 31, 2005;
VA's performance requirement (percent): 100;
Ocwen's performance (percent): 95.
Quarter ending: Mar. 31, 2006;
VA's performance requirement (percent): 100;
Ocwen's performance (percent): 97.
Quarter ending: June 30, 2006;
VA's performance requirement (percent): 100;
Ocwen's performance (percent): 96.
Quarter ending: Sept. 30, 2006;
VA's performance requirement (percent): 100;
Ocwen's performance (percent): 97.
Quarter ending: Dec. 31, 2006;
VA's performance requirement (percent): 100;
Ocwen's performance (percent): 97.
Source: VA.
[End of table]
VA officials have responded that the contract clearly specifies the
means of calculating ROS targets and Ocwen was informed of these
requirements prior to agreeing to manage the department's foreclosed
property inventory. VA officials also said that they have agreed not to
include in the ROS calculation an appraisal based on an exterior
inspection. Further, VA officials also said they have taken additional
steps to adjust the ROS calculations in certain conditions to address
Ocwen's concerns, yet the company still has failed to meet the
established targets.[Footnote 32] As of August 2007, Ocwen's appeal of
the VA's penalties for failing to meet ROS targets remained under
review by the department. If VA decides against Ocwen, the company has
recourse to appeal the decision to the United States Civilian Board of
Contract Appeals.
VA Has Limited Capacity to Oversee Its Contractor's Performance in
Managing and Selling Foreclosed Properties:
While VA has made a committed effort to help ensure Ocwen's compliance
with the contract through onsite inspections and other means, the
department's overall capacity to oversee the contract and the
management of its foreclosed property inventory is significantly
limited. The GSEs have established procedures and data systems to
monitor foreclosed properties from the time such properties are
transferred into the companies' inventories until the time they are
sold to external parties. While VA and the GSEs use different
foreclosed property management approaches, the department could
potentially benefit by adopting elements of the GSEs' approaches to
strengthen its contract oversight capacity. Unlike the GSEs, VA
generally does not obtain real-time data on the management of its
foreclosed property inventory, and its key oversight activities
(including onsite inspections and invoice audits) occur relatively late
in the process when the department's capacity to take corrective action
may be limited. Further, VA does not have clear authority under the
contract to impose penalties for unsatisfactory performance in key
areas that are important for effective foreclosed property management
contract oversight.[Footnote 33] VA officials recognize that the
department's contract oversight policies and systems have limitations
and said they are considering steps to address such limitations when
the next contract is awarded in 2008. Without taking corrective
measures, VA may not be able to effectively ensure the efficient and
effective management of its foreclosed property inventory.
GSEs Have Designed Processes and Information Systems to Monitor and
Control Foreclosed Property Management on an Ongoing Basis:
The GSEs use generally similar processes and information systems that
provide for ongoing oversight and control of the foreclosed property
management and sales processes. For example, officials said the GSEs
select and train the real estate brokers who are responsible for
managing and selling their foreclosed property inventories. Officials
said the GSEs use a variety of criteria in selecting their contractors,
including their overall sales volume and experience.
GSE officials also said that their real estate brokers and other
contractors are required to perform a variety of steps as soon as
foreclosed properties are conveyed and report their actions on an
ongoing basis. For example, brokers are required to inspect conveyed
properties and identify any hazards as well as their plans to mitigate
these hazards and report this information to GSE officials responsible
for monitoring each property. GSE officials also said that brokers are
required to develop strategies for maintaining and marketing each
property and reporting this information. In addition, the GSEs require
their brokers to develop and report estimated listing prices for each
property. According to GSE officials, they have developed information
systems that allow their staff to monitor the information that brokers
are required to submit on an ongoing basis. An official from one GSE
said that, given the importance of selling foreclosed properties as
expeditiously as possible to minimize related costs, the GSE's
information system tracks each property's status throughout the
management and sales processes. The GSE official said that having a
real-time information system allows staff to better monitor contractor
performance and ensure that properties move from one stage of the
process to the next (e.g., from the maintenance stage to the listing
stage) on an expedited basis.
Additionally, GSE officials said they have developed processes to
monitor the condition of their foreclosed property inventories as well
as maintenance and repair quality and costs. Officials from each GSE
said they have hired outside firms or use in-house staff to
periodically inspect a sample of their foreclosed properties to help
ensure they are being maintained according to established standards.
Further, GSE officials said their staff are responsible for reviewing
and approving repairs that exceed established thresholds. GSE staff may
review and approve bids to conduct such repair work and may require
that before and after photographs be taken to document the need for
proposed repairs as well as the quality of the repair work. According
to officials from one GSE, their inspectors have full information about
proposed repair work so they can assess its quality during onsite
property inspections. Officials from both GSEs said they will not
reimburse contractors for repairs unless their brokers certify that the
repairs have been completed.
VA's Oversight Capacity Is Limited by a Lack of Real-Time Property
Management Data:
There are important differences between the GSEs' approaches to
foreclosed property management and VA's approach, which complicate
comparisons among the organizations. The main difference between the
GSEs and VA is that the GSEs directly oversee the management and sale
of their foreclosed property while VA's contractor, Ocwen, is directly
responsible for this function with the department acting in a contract
oversight role. Therefore, VA is not directly involved in the
management and sale of its foreclosed inventory as are the GSEs and
cannot be expected to do so. Nevertheless, VA must oversee its
contractor's performance, through inspections and invoice audits among
other measures, and there are elements of the GSEs' approaches that, if
adopted by the department, could potentially enhance the efficiency and
effectiveness of these oversight efforts. The GSEs use these elements,
among others, to manage the sale of far more properties together than
VA (43,000 in 2006 as compared to about 7,700) and have sold such
properties in considerably shorter periods over the past several years
as discussed earlier.
The key aspect of the GSEs' approaches that VA could potentially
benefit from adopting is that, unlike the department, the GSEs
reportedly collect and analyze data and information that allows them to
monitor the management and sale of foreclosed properties on an ongoing
basis. For example, similar to GSE procedures, VA's contract with Ocwen
requires the contractor to conduct initial inspections of foreclosed
properties and develop marketing strategies for them. However, Ocwen is
not required to submit any of these inspection reports or marketing
strategies at the time they are completed to VA for its review. Rather,
a VA official said the department may request documentation of such
inspections and marketing strategies as part of desk audits that take
place after a property has been sold, which may be a year or more after
a property has been assigned to Ocwen. The VA official said this
documentation may be requested to help assess Ocwen's claims for
reimbursement for property repair expenditures and to help assess the
reasonableness of the marketing strategy on a particular
property.[Footnote 33] Since this process takes place after properties
have been sold, however, it does not provide VA with any information on
properties' conditions at the time of assignment to Ocwen or how the
contractor plans to repair and market such properties. Nor does the
process provide VA with any opportunity to take reasonable steps to
help ensure that any deficiencies noted in the repair and marketing
strategies are addressed before actions are taken that could impede the
contractors' ability to sell the properties within a reasonable
timeframe and within ROS targets. For example, without such
documentation and information on a sample of properties recently
assigned to the contractor, VA officials are not in a position to hold
meetings with contractor officials and potentially agree to changes in
repair and marketing strategies.
Similarly, VA's property management information system, CPTS, lacks
critical real-time information necessary for the department to develop
an ongoing assessment of the maintenance and repair work on its
foreclosed property inventory and the related expenses that Ocwen and
its contractors incur. For example, CPTS generally does not include any
information regarding the type of repair work that is ongoing on
foreclosed properties or the status of such repairs.[Footnote 34] As a
result, VA staff, unlike GSE inspectors, are generally not effectively
positioned to identify and assess the quality of repair work on
foreclosed properties when conducting inspections. Additionally, CPTS
does not capture real-time property maintenance and repair expense data
so that VA staff can review and assess the reasonableness of such
expenses on an ongoing basis. Instead, under the terms of the contract,
Ocwen may submit property expense documentation, such as invoices, to
VA staff for review after the sale of such a property. VA staff in
Nashville review such documentation and may question expenses that do
not appear to be reasonable or adequately supported. According to a VA
realty specialist, staff can identify potentially questionable or
erroneous expense claims based on their experience in performing such
work and because of weaknesses in supporting documentation. For
example, one VA realty specialist said that sometimes duplicate or
similar receipts will be submitted for maintenance work on a particular
property, such as nearly identical receipts for lawn care on the same
property on the same date. However, in the absence of such obvious
weaknesses in supporting documentation, VA staff may lack a basis for
questioning repair expense claims on properties that have been sold.
Without the ability to monitor data on ongoing repair work, even on a
sample of properties, VA's capacity to assess the reasonableness of its
expenditures on such repair work is limited.
The importance for VA to develop an enhanced and ongoing process to
oversee contractor performance in managing the department's foreclosed
property is demonstrated by evidence suggesting that the current
oversight process has not been effective. As discussed earlier, despite
VA's ongoing property inspection program and quarterly communications
with Ocwen, overall property maintenance has not improved and remains
far below standards established in the contract. For example, VA realty
specialists identified overall maintenance deficiencies in nearly 80
percent of the properties we visited in Oklahoma, Michigan, and North
Carolina. Although VA officials said there was a slight decline in the
percentage of properties in inventory for a year or longer between
March and September 2007, data provided by the department indicate that
the overall average time incurred in selling properties increased from
315 days in 2006 to 340 days in the first 6 months of 2007 on a
weighted basis. Further, as shown in figures 14 and 15, there appears
to be the potential for questionable reimbursements in the management
of the department's foreclosed property inventory. Without improvements
in VA's contract oversight processes, its capacity to identify and
address potentially questionable practices is undermined.
Site Visits Demonstrate Potential for Questionable Reimbursements:
During our May 2007 visit to Michigan to observe the VA property
inspection process, the VA realty specialist identified potentially
questionable repairs at a foreclosed property that had been on the
market for 3 years, as shown in figure 14.
Figure 14: Questionable VA Repair Reimbursements at a Michigan
Foreclosed Property for Sale:
[See PDF for image]
This figure contains comparison photographs from 2004 and 2007 of
questionable VA repairs at a Michigan property.
Sources: VA (2004) and GAO (2007).
[End of figure]
According to VA's property records, the department had reimbursed Ocwen
$9,900 for property repairs that had taken place in 2004. The expenses
included $6,000 for a new roof and $3,900 for new gutters and
downspouts, and repairing and refinishing the interior walls. While VA
generally does not reimburse Ocwen for repair expenses until after a
property has been sold, a department official said that the department
had reimbursed the contractor in this particular case due to actions
the department took in response to Hurricane Katrina.[Footnote 35]
Because the repair reimbursement data were listed in CPTS, the VA
realty specialist was in a position to review the quality of the work
at the time of the onsite inspection. Because the same realty
specialist had visited the property in 2004, he was able to provide us
with photos taken in 2004 while we took similar pictures during our
2007 visit. As shown in the two photographs above, the interior wall
area that VA paid to have repaired in 2004 had gotten significantly
worse by 2007. As a result, the VA realty specialist determined that
the repairs were never completed by 2007. Therefore, VA has set up a
bill of collection against Ocwen in the amount of $2,400 for interior
wall repairs that were not done.
While VA was able to identify this instance of potentially questionable
repair work, it was only able to do so because Ocwen had already been
reimbursed for the work due to the actions the department took in
response to Hurricane Katrina. Other than cases associated with
Hurricane Katrina and cases where VA has reimbursed Ocwen for repairs
exceeding $10,000, VA realty specialists generally would not have
information about property maintenance and repairs in conducting onsite
inspections. In most cases involving repair work costing less than
$10,000, VA realty specialists would have a limited basis for raising
questions regarding the quality of such repairs or the appropriateness
of VA reimbursements to the contractors for such repairs.
During the same Michigan trip in May 2007, the VA realty specialist
learned that a property he was to inspect had already been demolished,
as shown in figure 15.
Figure 15: Demolished VA Foreclosed Property:
[See PDF for image]
This figure is a photograph of a lot where a VA foreclosed property has
been demolished.
Source: GAO.
[End of figure]
According to both VA's and Ocwen's records, the home was listed for
sale at $12,750 and had two bedrooms, one bath, and a total of 696
square feet of living space. The VA realty specialist had no knowledge
that the house had been destroyed and contacted Ocwen to determine who
authorized its demolition. Ocwen informed the VA realty specialist that
the house had been demolished by the city of Detroit in March 2007,
even though it was still on Ocwen's Web site for sale in May 2007 prior
to our visit. According to Ocwen, the property was demolished without
its knowledge because the listing agent failed to: (1) provide accurate
reporting with regard to the house, (2) follow up with the city, (3)
perform authorized repairs, and (4) inform Ocwen when the house was
demolished. As a result, Ocwen is requiring the listing agent to
reimburse VA $15,664 through Ocwen for the value of the house and
repairs that were made. The agent has already started the repayment
process. As a result, Ocwen has already paid the VA $10,442.68 toward
the settlement. In addition, the VA will recover additional funds when
the vacant lot is sold and it determines the amount of its loss on the
property. Ocwen currently has the vacant land for sale at $1,200.
VA's Contract Does Not Include the Authority to Impose Penalties for
Unsatisfactory Performance in Key Areas:
In addition to not obtaining and analyzing real-time property
management data as would be consistent with the GSEs' approaches to
foreclosed property management, VA also lacks clear authority to hold
its contractor accountable for unsatisfactory performance in key areas.
As discussed earlier, although VA's contract with Ocwen allowed the
department to impose defined penalties on the contractor for its
failure to meet contractually established ROS targets, the contract did
not provide such authority for other key areas, including property
maintenance and selling properties within the shortest time
possible.[Footnote 36] In a previous report on the Department of
Housing and Urban Development's (HUD) oversight of contractors that
manage its foreclosed properties, we found that HUD's contracts did not
include sufficient penalties to ensure compliance with contract
provisions because the department believed it had sufficient authority
to carry out its responsibilities.[Footnote 37] For example, our report
found that HUD's contracts did not include penalties for failure to
reduce the number of properties that had been on the market for 6
months or longer and recommended that it develop such penalties.
Because VA's contract does not allow for penalties for property
maintenance deficiencies, the department has not been able to impose
penalties on Ocwen for not meeting maintenance requirements in the
contract and better ensure compliance. Similarly, while VA required
Ocwen to submit a plan to reduce the inventory of foreclosed properties
that have been on the market for a year or longer, the department has
not been able to impose monetary or other penalties on the contractor
for its performance in this key area. Without clearly defined
penalties, VA's capacity to hold the contractor accountable for
nonperformance is limited.
VA Officials Recognize Contract and Oversight Limitations and Are
Considering Approaches to Address Such Limitations:
Senior VA officials we contacted recognize there are limitations in the
department's capacity to oversee contractor performance in managing and
selling the department's foreclosed property inventory. PMOU officials
said that much of VA's oversight activities occurs "after the fact"
when foreclosed properties have already been sold, which limits
contractor oversight. For example, PMOU officials said the lack of
property repair information in CPTS limits the ability of VA realty
specialists to assess the reasonableness of property repairs. As a
result, VA staff said they are not able to assess the quality of the
repair work on which the department is expending taxpayer funds. In
addition, VA officials said the process of reviewing property expense
documentation after properties are sold is labor intensive and does not
necessarily enhance the department's capacity to assess the
reasonableness of such expenses.
VA officials also said the department had not enforced a provision in
the contract that required Ocwen to provide real-time property
management information because the contractor's computer systems lacked
the necessary capacity. Under the terms of the original contract, Ocwen
was required to develop an information system that could submit, on a
daily basis, key property management information and data, such as
property marketing reports, repair information, and expenses incurred
to manage the properties. However, VA officials also said that, once
the contract was in place in 2003, they determined through discussions
with Ocwen officials that the company's systems lacked the capacity to
provide such information.[Footnote 38] VA officials also said that
requiring Ocwen to upgrade its systems to provide the required data
would have been prohibitively expensive. VA officials also said they
required Ocwen to make other upgrades to its systems that took a higher
priority than the property management information, such as changes
necessary to track the department's efforts to provide housing for
victims of Hurricane Katrina.[Footnote 39] While PMOU officials said
Ocwen offered VA staff access to the contractor's system to monitor
foreclosed property management, department staff were often unable to
gain access and generally did not use it. Ocwen officials said they
have worked with VA on providing repair data and have reprogrammed
their systems to provide such data, but also stated that additional
changes were not necessarily cost-effective because the contract
expires in 2008.
VA officials said the contract with Ocwen does not include a penalty
for unsatisfactory performance in property maintenance because the VA
team that developed the contract solicitation proposal (during the A-76
process in 2003) believed a penalty for unsatisfactory ROS performance
would provide sufficient incentive for the contractor to meet
performance targets in other areas. That is, VA officials believed a
sufficiently large ROS penalty would provide the contractor with
incentive to perform in areas like property maintenance, since failure
to do so could negatively affect property sales prices. However, VA
officials also said that, after the contract award, Ocwen and VA agreed
to changes in the ROS penalty outlined in the contract solicitation,
which lowered the size of the ROS penalty and likely diminished its
potential to incentivize the contractor's performance. As discussed
earlier, VA officials also said the contract language regarding
penalties for the failure to reduce the number of properties that were
in Ocwen's inventory for considerable periods was vague and has
complicated the department's capacity to impose penalties in this area.
In anticipation of VA's new foreclosed property management contract
that is scheduled to be in place in 2008, department officials said
they are considering approaches to address existing limitations, but
they have not yet reached any final decisions. For example, VA
officials said the department is considering a variety of means to
address weaknesses in its ability to monitor the contractor's
performance on an ongoing basis. One VA official said the options under
consideration include requiring the contractor to provide real time
property information or for the contractor to provide department staff
with access to its system. Further, VA officials said they were
exploring the idea of developing a performance-based contract that
would focus more on results than the current contract, such as selling
properties within reasonable time frames at targeted prices. VA
officials also said they would seek to eliminate certain reporting and
other compliance-related requirements in the current contract that are
labor intensive for the department and the contractor but may not add
value to the overall property management and sale process. To
accomplish these objectives, VA staff said they have consulted with the
department's property management staff as well as outside organizations
that manage foreclosed properties to obtain their views. VA officials
further stated that they expected to issue a request for proposals to
companies seeking to bid on the new contract in late 2007 or early 2008
with the final contract expected to be awarded in the spring of
2008.[Footnote 40]
Conclusions:
VA has faced challenges in ensuring contractor performance and the
effective management of its foreclosed property inventory. VA
inspections have found that many properties are not adequately
maintained and repaired as required under the contract, which may have
contributed to the increasing period of time it has taken to sell the
department's foreclosed properties as well as the failure to meet ROS
targets. Moreover, Ocwen has disputed VA's findings in key areas, such
as property maintenance and ROS compliance, and has contested the
department's ROS-related compliance penalties. The disputes between VA
and Ocwen can be counterproductive and time consuming and detract from
the overall objective of managing and selling the department's
foreclosed properties in an efficient and effective manner and
identifying potentially questionable repair work and claims for
reimbursement.
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. While VA has made a committed
effort to oversee the contractor's performance, the department's
activities, such as property inspections and reviews of expense
documentation, are labor intensive and occur comparatively late in the
foreclosed property management and sale processes, rendering the
department's capacity to take corrective actions less effective.
Lacking real-time property management data, such as initial inspection
and marketing strategy reports as well as data on repairs and their
related costs, VA cannot assess how Ocwen manages the department's
foreclosed properties on an ongoing basis or take steps to encourage
improved contractor performance. With real-time data, VA staff could
potentially assess the management of its foreclosed property, or a
sample thereof, on an ongoing basis and intervene on a timelier basis
to better ensure contractor performance in terms of managing properties
and incurring reasonable expenses in so doing.
Finally, while we acknowledge that the authority to impose penalties
for failing to comply with contract provisions can result in ongoing
disputes like the one currently taking place between VA and Ocwen over
the company's ROS compliance, the fact that the contract did not
include sufficient authority for the department to impose adequate
penalties for unsatisfactory performance in other key activities was
significant. Without the clear and enforceable ability to impose
defined penalties in such areas as property maintenance and selling
properties within reasonable time frames, VA lacks an important tool to
hold its contractor accountable for not meeting expectations in
carrying out its responsibilities.
Recommendations for Executive Action:
To improve VA's capacity to oversee the foreclosed management property
and sales processes, we recommend that the department take several
steps in designing, negotiating, and awarding a new contract for the
function. Specifically, 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.
Prior to awarding the contract, we also recommend that VA thoroughly
review and verify the capacity of the contractor's information systems
and the ability to provide required property management data. Finally,
we recommend that VA use real-time data provided by the contractor to
monitor the management of its foreclosed property inventory (or a
sample thereof) on an ongoing basis and act on a timely basis,
including the use of penalties as appropriate, to address identified
deficiencies.
Agency Comments and Our Evaluation:
VA provided written comments on a draft of this report, which are
reprinted in appendix II. In its comments, VA generally agreed with the
report's conclusions and agreed to implement its recommendations. VA
stated that it is preparing a solicitation for a new foreclosed
property management services contract (that is anticipated to be
awarded in June 2008), which will include the requirement that the
contractor provide real-time property management data. VA also said it
is requesting that all bidders on the contract, among other things,
include proposed incentives for good performance in their bids as well
as disincentives for poor performance. We encourage VA to use this
information, along with its own independent analysis, to develop
appropriate contract penalties for poor performance in key property
management areas, such as maintenance and the time that it takes to
sell properties. Further, VA stated that it plans to use real-time data
provided by the contractor on an ongoing basis and address identified
deficiencies on a timely basis. VA also provided technical comments,
which are reprinted in appendix II, as did the GSEs and Ocwen. We
reviewed all of these technical comments and made revisions to the
draft as appropriate.
We note that, among VA's technical comments, the department stated that
the draft report did not define the differences between the VA and GSE
approaches to foreclosed property management. VA stated that, unlike
the GSEs which directly manage their foreclosed property inventory,
Ocwen is responsible for performing this function on the department's
behalf and is awarded or penalized by VA based on the company's ROS
performance. Further, VA stated that that (1) the department cannot be
expected to track the actions on each foreclosed property as they
happen for the purpose of telling the contractor what needs to be done
in real time, and (2) the GSEs' approach is fairly unique within the
foreclosed property industry whereas VA's approach is more commonly
used.
We believe that both the draft and final reports include an accurate
description of the differences between the VA and GSE approaches to
foreclosed property management, and recognize that department staff
cannot be expected to be directly involved in the property management
and sale processes as are GSE staff. However, we believe that there are
elements of the GSEs' approaches, particularly the use of real-time
data, that could benefit VA's contract oversight function if adopted by
the department. As noted in the report, the GSEs use real-time property
management data to oversee networks of real estate brokers and other
contractors that manage foreclosed property inventories far larger than
VA's and sell such properties in considerably shorter periods, on
average. We are encouraged that VA recognizes the importance of
obtaining real-time property data and will require such data under the
new foreclosed property contract. With such real-time data, VA staff
could potentially assess the contractor's performance on a sample of
foreclosed properties, rather than each property, and take steps as
necessary on an earlier basis than is currently possible to help ensure
better foreclosed property management and sale outcomes.
In both VA's written and technical comments, the department also said
that, contrary to a statement in the draft report, VA did maintain data
on the time it took to sell foreclosed properties prior to the award of
the Ocwen contract. We have removed that reference from the final
report and included holding time data provided by VA, as appropriate.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of the report
to interested committees; to the Secretary of the Department of
Veterans Affairs; and to the heads or designees of Fannie Mae, Freddie
Mac, and Ocwen Financial Corporation. We will make copies available to
others upon request. In addition, the report will be available at no
charge on our Web site at [hyperlink, http://www.gao.gov]. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. If you or your staff have
any questions about this report, please contact me at (202) 512-8678 or
jonesy@gao.gov. Key contributors are acknowledged in appendix III.
Sincerely yours,
Signed by:
Yvonne D. Jones:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
This report's objectives were to (1) describe the Department of
Veterans Affairs (VA) findings on Ocwen Financial Corporation's (Ocwen)
performance in key areas related to foreclosed property management and
the contractor's views on its own performance, and (2) evaluate VA's
overall policies, procedures, information systems, and data for
overseeing the foreclosed property management and sale processes.
To address our objectives, we reviewed VA's foreclosed property
management contract with Ocwen and identified the requirements and
performance targets for three key areas: property maintenance, selling
properties within the shortest possible time frames, and selling
properties at established price goals, which are referred to as return
on sales (ROS) targets. We reviewed a variety of VA documents related
to each of these areas, particularly VA's quarterly performance reports
developed as a result of its onsite property inspections and other
oversight measures, such as invoice audits and desk audits. These VA
reports, which generally covered the 6 quarters starting on October 1,
2005, and ending on March 31, 2007, addressed how well Ocwen secured,
maintained, and kept the properties free from hazards as required under
the contract as well as other requirements.[Footnote 41] We also
reviewed VA property inspection reports, oversight procedure
documentation, data on the time it takes to sell VA foreclosed
properties, Ocwen's February 2007 plan to reduce the number of VA
properties in the department's inventory for a year or more, and
correspondence between VA and Ocwen, including VA penalty letters to
Ocwen regarding the contractor's performance in meeting ROS targets and
Ocwen's responses to these letters. Further, we reviewed VA's quarterly
inspection reports for October 2005 through March 2007 to identify the
most frequently cited violations in each of the three maintenance
subcategories.[Footnote 42] We also interviewed VA Home Loan Guaranty
officials in Washington, D.C., and the Property Management Oversight
Unit (PMOU) in Nashville, Tennessee, to develop an understanding of
VA's oversight procedures and Ocwen's performance under the contract.
We also took two steps to review the results of VA's property
inspection findings regarding Ocwen's performance and, in the process,
better understand the department's general oversight procedures. First,
we reviewed and analyzed a random sample of 50 property maintenance
inspection reports and supporting documentation. Our sample was based
on 698 properties where the VA realty specialists identified
maintenance violations during their visits from October 1, 2005,
through March 31, 2007. We selected 50 of these reports at random to
avoid any potential for bias in our review. This sample was not
designed to be generalizeable to the population of 698 properties. We
reviewed the inspection checklist, inspection notes, and supporting
photographs. In addition to helping to assess the support for VA's
inspection findings, this analysis provided us with a basis for
understanding VA's overall property oversight program, which was
primarily addressed under objective (2).
Second, we accompanied the VA realty specialists on their visits to
three states - Oklahoma, Michigan, and North Carolina. The states
represented geographic diversity as well as locations that face
different economic conditions and housing issues. In our state
selection process, we also considered the number of VA properties for
sale in each state, the median listing prices of VA properties as
identified on Ocwen's Web site in April 2007, and VA's property
inspection schedule. During the visits, which included about 100
properties, we took pictures and observed the process that VA realty
specialists follow to asses how well Ocwen and its network of brokers
were maintaining and preparing the properties for sale. We also
discussed the inspection findings with VA staff.
To gain a perspective on the time it has taken Ocwen to sell VA
properties, we compared available VA data to data provided by Fannie
Mae and Freddie Mac, two government sponsored-enterprises (GSE) that
manage and sell large volumes of foreclosed properties. Specifically,
we compared Ocwen's performance in selling VA properties on a weighted
basis (weighting is based on property sales by state) to the GSEs'
aggregated performance on a weighted basis for calendar years 2005 and
2006 and the first 6 months of calendar year 2007. For example, the
weight for a given state is based on that state's number of sales
relative to all sales across all states, for each entity.
We defined the measurement period, generally, as the date of the
foreclosure sale until the date a property is sold to an external
party, such as a homebuyer or investor. Our analysis may understate the
time it takes to sell VA properties because lenders or mortgage
servicers have up to 15 days from the date of the foreclosure sale to
transfer a property to VA. VA measures the "assignment date" or the
date a property is assigned to Ocwen for management and sale rather
than the foreclosure sales date. To determine the appropriateness of
our comparisons, we analyzed the geographical distribution of VA,
Fannie Mae and Freddie Mac foreclosed property data. We determined that
overall, VA's foreclosure inventory as compared to that of Fannie Mae
and Freddie Mac was not disproportionately concentrated in states that
were identified by VA and the GSEs as having particularly distressed
housing markets. We also assessed the reliability of these data by
interviewing officials at these organizations knowledgeable about the
data and found them to be sufficiently reliable for the purpose of this
report.
To obtain Ocwen's views on its performance, we reviewed the
contractor's written responses to VA inquiries regarding its
performance with respect to property maintenance, selling properties
within the shortest period possible, and meeting ROS targets. We also
obtained and reviewed the results of inspection reports prepared by two
companies that Ocwen hired to assess the maintenance of VA foreclosed
properties. We also interviewed Ocwen officials to obtain their views
on the company's performance under the contract as well as VA's
contract oversight procedures.
To specifically address objective (2), we held discussions with GSE
foreclosed property management officials to develop an understanding of
their policies, procedures, and information systems for managing the
function. We also prepared written summaries of the GSEs' approaches,
which we provided to the companies for their review and verification.
We then compared and contrasted the GSEs' overall approaches to
foreclosed property management to those of VA. In addition, we reviewed
provisions in VA's contract with Ocwen to assess the authority it
included for penalizing the contractor for unsatisfactory performance
in key foreclosed property management areas. We also reviewed a
previously issued GAO report that identified certain penalty provisions
as important for the effective oversight of the foreclosed property
management and sales processes.[Footnote 43]
We conducted our work in Boston, Massachusetts; Nashville, Tennessee;
San Francisco, California; and Washington, D.C.; and in Michigan, North
Carolina, and Oklahoma between January 2007 and September 2007 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Veterans Affairs:
The Secretary Of Veterans Affairs:
Washington:
October 30, 2007:
Ms. Yvonne D. Jones:
Director:
Financial Markets and Community Investment Issues:
U. S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Jones:
The Department of Veterans Affairs (VA) has reviewed the Government
Accountability Office's (GAO) draft report, Department Of Veterans'
(Sic) Affairs: Actions Needed to Strengthen VA's Foreclosed Property
Management Contractor Oversight (GAO-08-60) and generally agrees with
GAO's conclusions and concurs with GAO's recommendations.
VA is developing the next solicitation for a new property management
services contract. Using a performance-based acquisition strategy, the
new solicitation will include the requirement for real-time property
management data as well as incentives for good performance and
disincentives for poor performance. VA anticipates awarding the new
property management services contract in June 2008.
Enclosure (1) specifically addresses each of GAO's recommendations and
provides technical comments to the draft report. GAO states VA does not
maintain data for properties it held in inventory when VA managed its
own foreclosed properties. Enclosure (2) is a report of holding time
data for the periods when VA managed its own foreclosed properties. VA
appreciates the opportunity to comment on your draft report.
Sincerely yours,
Signed by:
Gordon H. Mansfield:
Acting:
Enclosures:
[End of letter]
Enclosure:
Department of Veterans Affairs (VA) Comments to Government
Accountability Office (GAO) Draft Report Department Of Veterans'
Affairs: Actions Needed to Strengthen VA's Foreclosed Property
Management Contractor Oversight (GAO-08-60):
To improve VA's capacity to oversee the foreclosed management property
and sales processes, GAO recommends that the Department take several
steps in designing, negotiating, and awarding a new contract for the
function. Specifically, we recommend that VA:
* Include in the new contract the requirement that the contractor
provide real-time property management data deemed necessary by the
Department.
Concur - VA is preparing the next solicitation for a new property
management services contract and will include the requirement for real-
time property management data. VA anticipates awarding a new contract
by June 2008.
* Include in the new contract 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.
Concur - VA is preparing the next solicitation for a new property
management services contract. VA is using a performance-based
acquisition strategy. This strategy requires all companies bidding on
the contract to propose appropriate business strategies that will
ensure effective management of our properties with a high return on
sale. In addition, VA will ask that interested bidders include in the
bid proposals incentives for good performance as well as disincentives
for poor performance.
* Prior to awarding the contract, GAO also recommends that VA
thoroughly review and verify the capacity of the contractor's
information systems to provide required property management data.
Concur - VA will ask that interested bidders include in their bid
proposal their capacity for providing VA with real-time data, and VA
will review and verify that capacity before awarding the contract.
* GAO recommends that VA use real-time data, provided by the
contractor, to monitor the management of its foreclosed property
inventory (or a sample thereof) on an ongoing basis and act on a timely
basis, including the use of penalties as appropriate, to address
identified deficiencies.
Concur - VA will use real-time data provided by the contractor to
monitor the management of VA foreclosed property inventory on an
ongoing basis and to act on a timely basis to address identified
deficiencies.
Technical Comments:
Page 5, first bullet, the report states: "While the contract does not
establish specific time frames for selling VA properties, the
Department has not been satisfied with Ocwen's overall compliance."
While it is true that VA has not been satisfied with Ocwen's overall
compliance, Section 3.2.2 and corresponding J-8.5 of the Property
Management Services Contract describe a disincentive penalty for
properties remaining in the service provider's custody for 12 months or
more. VA considers this a stated timeframe for selling properties.
Page 6: In the comparison of VA's Property Management operation with
Freddie Mac and Fannie Mae”Government Sponsored Enterprise (GSE)
approaches: the report states, "...there are differences between the
GSE's and VA's approach to managing and selling foreclosed
properties..." Unfortunately, the report does not define the
"difference," and this omission is significant.
The GSEs directly manage their foreclosed properties. This means that
the GSEs make the daily decisions regarding management and marketing.
The approach that the selected GSEs employ is fairly unique in the
industry and strongly resembles the approach employed by VA prior to
awarding the contract for management of VA foreclosed properties to a
private sector contractor.
The VA contract requires Ocwen to make those daily decisions. Under the
current contract, Ocwen manages the properties through to sale and is
rewarded or penalized based on the results of their Return on Sale
(ROS). In this type of contractual arrangement, the client company (VA)
is not expected to track the actions on each property as they happen
for the purpose of telling the real estate owned (REO) management
company (Ocwen) what needs to be done in real time. VA's current
approach is a standard industry approach that many mortgage companies
employ, where client mortgage companies contract with REO management
companies to manage and market their inventory. It is the approach the
Department of Housing and Urban Development uses, and is very typical
of the REO industry in general. VA's oversight operation is in place to
evaluate the effectiveness of Ocwen's decisions.
Page 7, last paragraph, the report states that VA's program: "is an
entitlement that provides eligible veterans with certain favorable
terms." To be accurate, VA provides a guaranty, which serves as an
inducement to private lenders to make home loans on favorable terms to
veterans.
The report also states that: "the loans are offered to veterans of the
U.S. armed forces by private mortgage lenders and include benefits such
as no downpayment loans." To avoid confusion with what constitutes the
VA benefit entitlement versus favorable lender terms, we suggest
substituting language such as "include such favorable terms as no
requirement for downpayment" for the last clause of that sentence.
Page 8, first full paragraph, line 1: substitute "encourages" for
"allows", as it is one of VA's top priorities to help veterans retain
their homes. Also insert after the first sentence the following: "VA
monitors lenders and mortgage servicers' efforts in this regard, and
also actively engages in its own efforts to help veterans retain their
homes."
Page 8, first full paragraph, line 9, the report states: "At the
foreclosure sale, the servicers may purchase the property by bidding on
the property whose value may be the outstanding debt or the fair market
value." We recommend the following instead: "At the foreclosure sale,
loan holders may purchase the property by bidding the amount calculated
pursuant to the formula in 38 U.S.C. § 3732."
Page 8, first full paragraph, line 11, insert "may" before "transfer or
"convey" the properties...."
Page 8, footnote 11: strike "with" after "Veterans" and insert
"receiving compensation (or who, but for the receipt of retirement pay,
would be entitled to receive compensation) for their".
Page 8, footnote 12, insert "housing operational" before "costs for
VA's direct and guaranteed housing loans."
Page 26, late October 18, GAO added this statement in the last
paragraph: "Ocwen was also concerned with VA's overall inspection
process including the fact that one deficiency can cause a property to
fail an inspection and the lack of timeliness in notifying Ocwen of the
results of the quarterly performance reports. Ocwen officials have also
stated that VA does not always provide the results of its on-site
property inspections on a timely basis."
The Performance Requirements Summary (Figure J.5.2, Reference 3.7.4)
has clearly stated since the contract began that when VA was reviewing
property maintenance, three questions would be asked. Is the property
secure? Is the property adequately maintained? And is the property free
of hazards? If the answer to any of these three questions is no, VA
reports in its audit that the property failed to meet the contractual
requirements. VA uses these criteria to emphasize the importance of
proper maintenance in protecting the value of the asset from
deterioration or damage and the public from injury.
When VA employees inspect properties and observe that a property is not
secure, or that an immediate health or safety hazard exists, the
employee conducting the site visit calls the Nashville Property
Management Oversight Unit and reports the condition. The Nashville
staff e-mail Ocwen to-alert them of the problem with the property for
corrective action. VA also follows up with Ocwen a week later requiring
that Ocwen report back corrective action it has taken. VA provides
Ocwen the complete report on all property inspections as part of the
quarterly performance review. It is important to remember that the
purpose of the field inspections of the properties is to enable VA to
assess the performance of Ocwen as far as property maintenance. Ocwen
should have its own internal control procedures to measure the
performance of their subcontractors.
Page 28, Note #27, the report states: "VA does not maintain comparable
data (for average days in inventory) for earlier periods when it
directly managed the foreclosed property inventory." VA does have
holding time data for the periods when it managed its own foreclosed
properties (see Enclosure (2)). In addition, historical property
management data for the years 1997 through 2000 are included in J-4 of
the contract.
Page 31, late October 18, GAO added this sentence to the last
paragraph: "Ocwen stated that they have asked VA for access to the pre-
foreclosure appraisals but have been denied such appraisals."
While technically this is true, VA did agree to exclude from the Return
on Sale (ROS) calculation any property where the VA liquidation
appraisal was based on an exterior inspection.
Page 33, paragraph 1, line 12 the report states: "...VA does not have
the authority under the contract to impose penalties for unsatisfactory
performance in key areas that are important for effective foreclosed
property management contract oversight." The contract provided for two
penalties: the ROS bonus/penalty and the aged properties (holding time)
penalty. Management found the language for the holding-time penalty
vague and difficult to enforce.
Under Section J-5.3 of the contract, the VA Contracting Officer does
have other enforcement mechanisms for poor contractor performance
including "performing the work through other means and deducting the
cost from the Service Provider's invoice." However, the Contracting
Officer did not elect to do so because there was no alternative
contractor readily available to which VA could reassign its VA
properties. Thus, VA chose to continue to work with Ocwen to improve
its performance.
Page 38, Figure 16: VA update to the report's statement: "VA is still
awaiting a response from Ocwen" for repairs that were billed to VA but
apparently not completed. After Ocwen's response, VA determined that
some of the repairs were made but set up a Bill of Collection against
Ocwen in the amount of $2,400 for interior wall repairs that were not
done.
Page 38, late October 18, GAO added this note after Figure 16: "In
October 2005, VA requested that Ocwen remove all foreclosed properties
from the market in anticipation that such properties might serve as
shelter for Katrina victims. VA then reimbursed Ocwen for any repairs
that had previously been done on such properties prior to their removal
from the market. Subsequently, Ocwen placed the property back on the
market and the reimbursement to Ocwen for $9,900 was listed in CPTS."
Ocwen's comment is extraneous and does not address the fact that the
interior walls were not repaired.
Page 39, Figure 17: VA update to the report's statement: "...that a
determination will be made as to whether or not Ocwen will be held
liable for damages when information is received," for a property that
Ocwen demolished without VA authority. VA received $10,442.68 from
Ocwen toward settlement. Additional funds will be recovered when the
vacant lot is finally sold, and VA determines the amount of its loss on
the property.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Yvonne D. Jones (202) 512-8678:
Staff Acknowledgments:
In addition to the individual named above, Wesley M. Phillips,
Assistant Director; Emily Chalmers; Janet Fong; Marc Molino; Richard
LaMore; Linda Rego; Shana Wallace; Tom Taydus; Richard Vagnoni; and
William Woods made key contributions to this report.
[End of section]
Footnotes:
[1] The VA Home Loan Guaranty program generally allows qualified
veterans to obtain VA-insured mortgages with certain favorable terms
and provides mortgage lenders with substantial financial protection
against losses that may be associated with extending such mortgages. By
selling foreclosed properties, VA seeks to recover some of the expenses
that it incurs in providing such financial protections to lenders.
[2] VA made this determination through the Circular A-76 cost
comparison process. The Office of Management and Budget (OMB) is
responsible for publishing and updating OMB Circular A-76 "Performance
of Commercial Activities," which establishes federal policy regarding
the performance of commercial activities. The circular establishes
procedures for determining whether commercial activities should be
performed under contract with commercial sources or in-house using
government personnel. This process is known as competitive sourcing and
is identified as one of the primary initiatives in the President's
Management Agenda. The scope of our work did not include an analysis of
VA's determination to contract out the management of its foreclosed
property inventory through the A-76 process.
[3] While VA and Ocwen signed the contract in August 2003, the
effective contract starting date was January 2004. VA continued
managing its inventory of foreclosed properties until December 2003
when it began to transition responsibility for managing and selling
such properties to Ocwen.
[4] Ocwen compensation data are as of September 7, 2007.
[5] According to VA officials, the department does not plan to resume
managing foreclosed properties itself because many of the staff who
previously performed this function have left VA.
[6] GAO, Single Family Housing Opportunities to Improve Federal
Foreclosure and Property Sale Process, GAO-02-305 (Washington, D.C.:
Apr. 17, 2002); GAO, HUD Single Family and Multifamily Property
Program: Inadequate Controls Resulted in Questionable Payments and
Potential Fraud, GAO-04-390 (Washington, D.D.: Mar. 3, 2004); GAO,
Single Family Housing: Stronger Measures Needed to Encourage Better
Performance by Management and Marketing Contractors, GAO/RCED-00-117
(Washington, D.C.: May 12, 2000).
[7] VA realty specialists typically conduct onsite property inspections
and audits of financial information submitted by Ocwen regarding
property maintenance and repairs, among other tasks, as part of their
responsibilities.
[8] VA's contract with Ocwen established a minimum standard of 95
percent compliance in these areas. The original contract established a
standard of 97 percent, but was modified by a contract amendment in
June 2005. The data for the second quarter of 2007 are preliminary as
VA has not finalized the quarterly performance report for the period.
[9] The GSEs directly manage their network of real estate brokers
whereas VA relies on its contractor to perform this function.
[10] We have previously identified such penalties as important for
effective management of the foreclosed property management function.
See GAO/RCED-00-117. In this report, we identified deficiencies in the
Department of Housing and Urban Development's (HUD) oversight of
contractors that manage HUD's foreclosed property inventory. The report
concluded that HUD's contracts lacked penalties for key areas, such as
selling properties within reasonable time frames. The report
recommended that HUD revise such contracts to include appropriate
penalties.
[11] 38 U.S.C. § 3729. Veterans receiving compensation (or who, but for
the receipt of retirement pay would be entitled to receive
compensation) for their service-connected disabilities and surviving
spouses of veterans who died in service or from service connected
disabilities are exempt from the funding fee. 38 U.S.C. § 3729(c).
[12] 38 U.S.C. § 3722. Appropriations from this program account provide
for all housing operational costs for the VA's direct and guaranteed
housing loans. Additionally, appropriations are provided for the
administrative expenses necessary to carry out these programs, which
may be transferred to and merged with the general operating expenses
account. See for example, the Military Quality of Life and Veterans
Affairs Appropriations Act, 2006, Pub. L. No. 109-114, 119 Stat. 2372,
2383 (Nov. 30, 2005).
[13] Mortgage servicers, such as large mortgage finance companies or
commercial banks, typically service mortgages insured or guaranteed by
VA. Mortgage servicers do not necessarily finance the mortgages they
service, but rather service mortgages for a fee on behalf of those
entities that own the mortgages, such as the lenders that originated
the mortgages.
[14] In its proposal to retain responsibility for managing the
department's foreclosed property inventory, VA proposed reducing the
277 staff involved in the process by about half, operating the process
out of 4 regional offices rather than 46, and hiring a national
contractor with responsibility for property repair work.
[15] Ocwen had previously managed foreclosed properties for lenders and
other clients.
[16] In the case of multiple offers, the determination is based on
which offer is closest to the established minimum acceptable net return
or produces the highest net return among all the offers and meets the
terms of the listing.
[17] The GSEs retain responsibility for the credit risks on any of the
mortgage-backed securities they guarantee. That is, the GSEs, in
exchange for a fee, guarantee the timely payment of principal and
interest to investors on the mortgages that serve as the collateral for
the securities.
[18] VA refers to its overall performance category as property
maintenance. As described in this section, the overall category
consists of three subcategories: (1) securing properties, (2)
performing maintenance and repairs, and (3) eliminating safety and
other hazards. In inspecting a sample of properties, VA staff may
identify a violation in one or more of the subcategories for each
property. For example, a particular property may not be properly
secured (e.g., a window is left open) and poorly maintained (e.g.,
leaking roof not repaired). However, in calculating Ocwen's overall
performance in managing the properties sampled, VA only counts the
total number of properties with at least one violation in any one of
the three subcategories to avoid double-counting. VA reports the
results of its inspection findings to Ocwen on a quarterly basis.
[19] We chose this time frame for our analysis for two reasons. First,
when VA transferred responsibility for managing its foreclosed property
inventory to Ocwen in January 2004, there were many foreclosed
properties that had been managed by the department. By October 2005, it
is likely that many such properties had already been sold; therefore,
VA's inspection related directly to Ocwen's performance in managing the
department's property inventory. Second, by October 2005, Ocwen had
nearly 2 years to develop experience in managing VA's foreclosed
properties, which provides a more reasonable basis for assessing its
performance compared to earlier periods (e.g, 2004 and early 2005).
[20] The VA realty specialists determined that the lock boxes either
did not contain a key or had an incorrect access code.
[21] The VA realty specialists determined that the lock boxes either
did not contain a key or had an incorrect access code.
[22] GAO staff visited 96 of the 130 properties with the VA realty
specialists.
[23] Housing markets in Michigan and other parts of the upper Midwest
have been negatively affected by the downturn caused by the declines in
the automobile and related industries.
[24] One contractor conducted 4,653 property inspections from November
2004 through November 2006. The other contractor conducted 455 property
inspections from June 26, 2007, through July 9, 2007. Consistent with
the contract, Ocwen officials said they did not request that VA
reimburse the company for the cost of these inspections.
[25] VA measures time in inventory from the date the property is
assigned to Ocwen (typically within 15 days of the foreclosure sale)
until the time the property is sold to either a home buyer or an
investor. This period of time includes state redemption periods.
Weighting is based on property sales by state. For example, VA's weight
for a given state is based on that state's number of sales relative to
all VA sales across all states.
[26] GAO-02-305. The 237-day figure from 2000 is based on a nonweighted
average. Data are not available to calculate a weighted average by
state. VA also provided holding time data for its various district
offices when the department directly managed the sale of its foreclosed
property inventory during fiscal years 2001 through 2003. The VA data
shows that, on average and not weighted by state, properties remained
in the department's inventory for about 8 months during the period.
[27] As measured from the foreclosure sales date to the date of sale to
an external party, including state redemption periods. The comparison
may understate the differences between the GSEs and VA because VA
measures time in inventory from the assignment date, which may be up to
2 weeks later than the foreclosure sale.
[28] Beginning in the spring of 2005, VA correspondence with Ocwen
indicates the department sought to impose penalties of approximately $7
million on Ocwen for its failure to reduce the number of properties
that had been in the department's inventory for a year or longer.
However, as discussed later in this report, VA later concluded that the
contract lacked sufficient authority for the department to impose such
penalties. Consequently, VA requested that Ocwen submit a plan to
reduce the number of properties in inventory for more than a year.
[29] These requirements are established in attachment J of VA's
contract with Ocwen.
[30] Based on deducting the 14 percent (which is equal to $14,000) from
the $100,000 appraised value.
[31] While VA seeks to achieve an ROS compliance rate of 100 percent,
the contract provides the department with the discretion to impose
penalties on Ocwen if its ROS compliance falls below 97 percent. For
example, if all VA properties sold in a particular quarter had an
average discounted listing price of $86,000, VA would have the
discretion to impose penalties on Ocwen if the average sales price for
such properties was less than $83,420, which is 97 percent of $86,000.
[32] VA has periodically recalculated the ROS, such as in cases where
properties are damaged due to fire or where no appraised value had been
determined at the time of assignment to Ocwen.
[33] The VA official said that Ocwen does not always provide complete
documentation of, for example, the marketing plans as it is required to
maintain under the contract. However, the VA official said that the
department's reviews generally do not seek to ensure complete
compliance with documentation requirements, but rather, the overall
reasonableness of the marketing plan and Ocwen's compliance with it.
[34] CPTS may have some repair information in those cases when large
expenses are involved (generally repair expenses of $10,000 or more).
[35] In October 2005, VA requested that Ocwen remove all foreclosed
properties from the market in anticipation that such properties might
serve as shelter for Katrina victims. VA then reimbursed Ocwen for any
repairs that had previously been done on such properties prior to their
removal from the market. Subsequently, Ocwen placed the property back
on the market, and the reimbursement to Ocwen for $9,900 was listed in
CPTS.
[36] The contract did include a provision for assessing a penalty for
properties held for 12 months or more in which the contractor failed to
take action. However, according to VA officials, this provision may not
be enforceable because it does not specify how the penalty would be
calculated.
[37] GAO/RCED-00-117. HUD, through the Federal Housing Administration
(FHA), provides insurance on certain types of mortgages extended by
lenders. If borrowers default on such mortgages, FHA may become
responsible for the management and sale of properties secured by the
mortgages to external parties.
[38] It was beyond the scope of this review to assess why VA did not
ensure that Ocwen could provide the required data prior to entering
into the contract. VA officials also said that many of the staff
involved in the A-76 process and assessing Ocwen's capacities are no
longer with the department.
[39] According to VA officials, some VA foreclosed properties were used
temporarily to house victims of the Hurricane Katrina crisis.
[40] A request for proposal is a solicitation issued by the government
to prospective offerors describing what the government requires and how
the offers will be evaluated. Negotiations may be conducted with
offerors and the award is typically based on a combination of price and
technical merit.
[41] In some cases, we reviewed information outside of this time frame.
For example, the report presents data on Ocwen's ROS performance for
the quarters ending June 30, 2005, and September 30, 2005, because the
department is seeking to impose penalties on the contractor for not
meeting established ROS targets during those quarters.
[42] Data for the second quarter of 2007 is preliminary because VA had
not finalized its March 31, 2007 Quarterly Performance report.
[43] GAO/RCED-00-117.
[End of section]
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