American Mortgage Field Services billed Fannie Mae for as many as 100,000 foreclosure inspections a month at the height of the housing bust. The frenzy came to a halt after its owner's arrest last year, however, amid a scandal that ultimately led to his imprisonment for running a fraudulent home inspection business.

It turns out that the Spring Hill, Fla.-based company had faked most of the work it claimed to have done on behalf of Fannie. The cost of its $13 million fraud is a rounding error compared to the more than $4.7 billion the government sponsored enterprise spent keeping up foreclosed homes last year.

It may be a sign of a broader problem, however. Concerns about the integrity of foreclosed property management costs are prompting Fannie and its government overseer, the Federal Housing Finance Agency, to take a hard look at the GSE's controls.

At root, the problem is that exponential growth in the number of foreclosed properties in Fannie's portfolio has strained its expense tracking system, sources familiar with the operation say. That, in turn, has raised the prospect that banks and property management vendors are taking advantage of the system and billing for expenses to which they're not entitled.

Servicers "find out through trial and error the course of least resistance, how to avoid filing expenses in a way that the system will kick back," says another person familiar with Fannie's expense system. "That game is played all the time."

Fannie executives are undertaking the stepped-up scrutiny with no preconceived ideas about whether they will uncover problems with the reimbursement process or incorrect payments, says spokesman Andrew Wilson.

The GSE already integrated its expense tracking unit into its servicing operation last year and is looking at other possible improvements. The proximity means that those overseeing the way servicing work is completed are now much closer to the expense approval process.

"The system was built with checks and balances, and we need to make sure those are appropriate," Wilson says.

Some of the concern about costs echoes the GSE's recent struggles to get mortgage servicers to turn over data on the costs of force-placed insurance, a type of property coverage that Fannie concluded was rife with servicer self-dealing.

With foreclosure billing, banks should brace for added scrutiny on expense claims, GSE watchers say.

The GSE's work is geared toward ensuring that its bills are "accurate and auditable," says Tim Rood, a former Fannie executive who is now a partner The Collingwood Group, a Washington, D.C. consulting firm.

"There's scrutiny in [Fannie], and it's therefore likely to trickle down to the servicer," he says.

Fannie created its expense reimbursement infrastructure, known as the 571 system, at a time when foreclosure management was a small part of its operation. For many years loan modification fees were so trivial that they were categorized as "other" expenses. By 2011, they'd grown into Fannie's single largest reimbursement expense at $925 million.

By then Fannie executives were being overwhelmed by foreclosure-related work, say three people familiar with the billing system. Each foreclosed home produces a steady stream of charges that servicers and vendors are supposed to file under 2,000 different — and sometimes overlapping — sub-categories. To address variations in properties, there were multiple billing codes for lawn mowing services and far more categorized as "yard work."

The GSE began outsourcing expense claims processing to Accenture in 2010, but still struggled to keep up. Certain categories of expenses were paid automatically, others required pre-approval and a third category vetting to determine whether they were reasonable.

"Fannie will do things like say 'Here are your [price] caps for inspections, and here are the rules for inspections,'" says a person familiar with the system. "The system's really built on tolerances. What's a reasonable expense for an item. But it's very difficult to tell the legitimacy of those fees, to know if the services occurred."

Another source says the GSE sometimes failed to keep pace with the volume of charges that were flagged by its system as potentially excessive or unwarranted. Fannie staff or contractors were supposed to review the validity of such expenses and annotate with a rationale claim in the system. In at least some instances the space reserved for notes simply states "Overridden by processor through Mass Approval," this person says.

Fannie declined to comment on that assertion in the absence of supporting documents.

Even critics of the existing expense system say the GSE is working to fix it.

"They [Fannie executives] realize there are problems, and they're trying to get the situation better managed," says one such person.

Others pointed to recent staffing changes in Fannie's expense oversight team as evidence that the reimbursement process is receiving more attention.

"We're in a resource constrained environment," says Wilson, the Fannie spokesman. "But we've staffed up in this."

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