Department of Veterans Affairs: Actions Needed to Strengthen VA's
Foreclosed Property Management Contractor Oversight (15-NOV-07,  
GAO-08-60).							 
                                                                 
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.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-60						        
    ACCNO:   A78168						        
  TITLE:     Department of Veterans Affairs: Actions Needed to	      
Strengthen VA's Foreclosed Property Management Contractor	 
Oversight							 
     DATE:   11/15/2007 
  SUBJECT:   Contract administration				 
	     Contract oversight 				 
	     Contract performance				 
	     Federal procurement				 
	     Federal property management			 
	     Foreclosures					 
	     Housing programs					 
	     Information management				 
	     Information systems				 
	     Internal controls					 
	     Maintenance (upkeep)				 
	     Property disposal					 
	     Reporting requirements				 
	     Government agency oversight			 
	     Waste, fraud, and abuse				 
	     VA Home Loan Guaranty Program			 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-08-60

   

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to [email protected].

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 

GAO: 

Report to the Ranking Member, Subcommittee on Economic Opportunity, 
Committee on Veteransï¿½ Affairs, House of Representatives: 

November 2007: 

Department Of Veterans Affairs: 

Actions Needed to Strengthen VAï¿½s 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 firmï¿½Ocwen Financial Corporation (Ocwen)ï¿½after determining 
that doing so would increase the programï¿½s efficiency. VA oversees the 
Ocwen contract, which terminates in 2008, through onsite property 
inspections and other means.

GAO was asked to (1) describe VAï¿½s inspection and other oversight 
findings and (2) evaluate VAï¿½s 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 VAï¿½s 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 Ocwenï¿½s 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 contractï¿½s 
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 GSEsï¿½ information systems, for example, VAï¿½s 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. VAï¿½s 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, [email protected]. 

Contents: 

Letter: 

Results in Brief: 

Background: 

VA Has Identified Significant Performance Deficiencies in Key Areas of 
Ocwenï¿½s Management and Sale of Foreclosed Properties: 

VA Has Limited Capacity to Oversee Its Contractorï¿½s 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 VAï¿½s PMOU Staff: 

Table 2: Most Frequent Deficiencies Identified (Security, Maintenance, 
and Safety) by VA Realty Specialists (October 2005 through March 2007): 

Table 3: Ocwenï¿½s Performance in Meeting Specified ROS Requirements: 

Figures: 

Figure 1: Overview of the Foreclosure, Property Management, and Sales 
Processes: 

Figure 2: Ocwenï¿½s 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 
[email protected]. 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 Maeï¿½Government 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. ï¿½ 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. ï¿½ 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. ï¿½ 3729(c). 

[12] 38 U.S.C. ï¿½ 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] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "Subscribe to Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office: 
441 G Street NW, Room LM: 
Washington, D.C. 20548: 

To order by Phone: 
Voice: (202) 512-6000: 
TDD: (202) 512-2537: 
Fax: (202) 512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: [email protected]: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Gloria Jarmon, Managing Director, [email protected]: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, [email protected]: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: 

*** End of document. ***