OCC Guidance on Potential Issues With Foreclosed Residential Properties

 Background
In the current economic environment, national banks and federal savings associations (collectively, banks) are facing challenges resulting from unprecedented numbers of troubled residential mortgage loans. Foreclosures on residential properties also are occurring in unprecedented numbers and are projected to continue this trend in the near term. Among the many consequences of high levels of foreclosures are growing inventories of foreclosed residential and commercial properties. The Office of the Comptroller of the Currency (OCC) is providing guidance to banks on obligations and risks related to foreclosed property. This guidance highlights legal, safety and soundness, and community impact considerations.1 It primarily focuses on residential foreclosed properties, but many of the same principles apply to commercial properties.
A bank’s obligations with respect to foreclosed residential properties may differ depending upon the bank’s role in the foreclosure—as owner of the foreclosed property, as servicer/property manager, or as securitization trustee—and the contractual agreements under which it operates. Understanding the requirements imposed by Fannie Mae and Freddie Mac (the Enterprises) or the U.S. Department of Housing and Urban Development (HUD) on servicers is particularly crucial, given the current role of these entities in the mortgage market.
 
Considerations
As a matter of safe and sound banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties. Acquiring title to properties through foreclosure—either for the bank or as servicer for another mortgagee—results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk. Banks should be sure they have identified all the risks and have policies and procedures for monitoring and controlling these risks. In establishing and implementing the policies and procedures, bank management and the board of directors should consider, at a minimum, the following obligations and risks:
 
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