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Report: Freddie Mac, Ginnie Mae Ignored ‘Red Flags’ in Fraud Case

fraud-twoA report [1] filed last week by the Office of Inspector General of the Federal Housing Finance Agency (FHFA [2]) states that Freddie Mac [3] and Ginnie Mae [4] ignored "red flags" with regards to a mortgage fraud scheme perpetrated by lenders Taylor, Bean, and Whitaker and Colonial Bank, which resulted in billions of dollars in losses for Freddie Mac and Ginnie Mae.

In addition to the losses absorbed by Freddie Mac (almost $2 billion) and Ginnie Mae (almost $1 billion), private banks that conducted business with Taylor Bean lost billions. Taylor Bean filed for bankruptcy in 2009, two years before its CEO, Lee Bentley Farkas, was imprisoned for his alleged role in the fraud.

GSE Fannie Mae [5] avoided losses by voiding a contract to buy loans from Taylor Bean following an investigation in 2000 – about two years before the fraud began and about eight years before the housing crisis. The report from the IG states that Fannie Mae failed to notify Freddie Mac or Ginnie Mae that the contract had been terminated, however.

Acting Inspector General Michael P. Stephens concluded in the report that the losses could have been avoided had there been better communication between the government agencies and if better audits had been conducted. The IG report says that Ginnie Mae ignored warning signs and financial discrepancies that would have made them aware of Taylor Bean and Colonial's scam.

"Various red flags should have alerted counterparties, investors, and regulators to the fraud scheme, but they were not adequately addressed," Stephens said in the report. "The failure to adequately address the red flags cost various parties losses of billions of dollars."

Without the knowledge of the voided contract between Fannie Mae and Taylor Bean, Freddie Mac began buying loans from Taylor Bean in 2002 during the housing boom. When the market fell out in 2008 and the fraud was uncovered, Freddie Mac tried to make Taylor Bean buy the faulty loans back, but by then the Florida-based lender was on its way to bankruptcy.

Ginnie Mae found itself in a similar position after buying loans from Taylor Bean during the housing boom and then attempting to force the lender to re-purchase the fraudulent loans after the market crash.

The IG report calls for measures such as increased "monitoring of counterparties that exhibit abnormal or unusual characteristics" and requiring GSEs and Ginnie Mae to "share – between themselves and with FHFA, Ginnie Mae, and other interested entities – negative performance and compliance data, and evidence of illegal activities of counterparties" to prevent similar losses in the future.

The report states that Taylor Bean, which began operating in 1982 and was purchased by Farkas in 1990, was once the nation's largest privately held mortgage company. After the company filed for bankruptcy, Farkas was sentenced to 30 years in prison.