Audit of the Credit Enhancement Reserve Fund for Securitization Transaction 1993-03

(Audit Report No. 98-090, November 24, 1998)

The Office of Inspector General (OIG) has completed an audit of the Credit Enhancement Reserve Fund (reserve fund) for securitization transaction 1993-03. In 1991, the Resolution Trust Corporation (RTC) began issuing mortgage-backed securities to investors to provide an efficient liquidation method for a large portfolio of mortgages seized from failed lending institutions. In order to enhance the credit ratings of the securities, the RTC established reserve funds for each of the transactions from the sales proceeds of the transactions. The purpose of the reserve funds is to provide investors with a limited amount of protection against credit risks. The FDIC retains a residual interest in the securities and is entitled to any remaining assets and cash flows from the securitization transactions after all of the regular certificate holders have been paid in full, net of expenses. Further, any remaining balance of the reserve fund is returned to the FDIC once all of the loans in the securitization are retired or liquidated. Therefore, any excessive charges to the reserve fund directly affect the remaining balance and FDIC's residual interest in the reserve fund. The FDIC's Mortgage-Backed Securities Administration (MBS), Division of Resolutions and Receiverships (DRR) is responsible for the administration and oversight of the securitization program.

The objective of the audit was to determine if the realized losses that caused reductions to the reserve fund for securitization transaction 1993-03 were allowable and adequately supported by documentation.

We concluded that each of the realized loss calculations tested in our initial sample contained errors that caused reserve fund withdrawals to be overstated by $230,219. Because of the significance of the error rate, we concluded that more errors would have been identified had we tested further. We also concluded that MBS's controls over the securitization program were hampered because the loan servicers and the trustee did not always provide necessary documentation for MBS to monitor claims adequately and identify errors in the calculations of the realized losses. MBS agreed with our findings and agreed to initiate corrective action to quantify the errors made in the calculation of the realized losses previously claimed by the loan servicer. Because of MBS's readiness to take corrective action during the audit, we did not perform additional testing. Our audit report presents the results of our initial sample tests. It is anticipated, however, that MBS's corrective actions will result in additional recoveries to the reserve funds.

We recommended that the Manager, MBS, DRR, take the following actions:

On November 10, 1998, the Deputy Director, Franchise and Asset Marketing Branch, DRR, provided a written response to the draft report. DRR management agreed to disallow $230,219 in questioned costs and agreed to initiate action on our other recommendations. DRR stated that the $230,219 has been returned to the reserve fund; however, they are reviewing the documentation supporting the reimbursement. DRR may request additional supporting documentation or additional reimbursement if warranted as a result of this review. The Corporation's response provided us with the requisite elements of a management decision for all recommendations.

As a result of our audit, we will report questioned costs of $230,219 (of which $6,707 is unsupported) in our Semiannual Report to the Congress.

The Deputy Director, Franchise and Asset Marketing Branch, DRR, responded to our audit report. Under DRR's organizational chart, the Franchise and Asset Marketing Branch oversees MBS's operations.