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Report Addresses Issues with FHFA’s Role in Regulating Freddie Mac

A ""report"":http://www.fhfaoig.gov/Content/Files/AUD%202012-001.pdf from the ""Federal Housing Finance Agency (FHFA) Office of Inspector General"":http://www.fhfaoig.gov/ stated that the FHFA needs to improve how the agency supervises and oversees ""Freddie Mac"":http://www.freddiemac.com/ and points to issues with regulating servicers contracted by the GSE.

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The report revealed that in 2008, FHFA had information indicating that mortgage servicing represented a heightened risk to the enterprises, but FHFA did not begin to devote added attention to servicing issues until August 2010.

The report further explained that while the agency did begin examining Freddie Mac, the risk posed by the GSE's mortgage servicing contractors was not adequately assessed.

Due to challenges and other priorities the agency faced, FHFA officials explained that it ""focused on the Making Home Affordable programs throughout 2009, and its Division of Enterprise Regulation staff devoted complementary examination resources to other, high-risk credit related issues related to bond guarantees and mortgage insurance.""

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From the first quarter of 2008 through the fourth quarter of 2010, the number of seriously delinquent Freddie Mac loans went up 376 percent, going from 95,000 to 453,000, according to the report.

As of June 30, 2011, four mortgage servicers - Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup â€" service 60 percent of the market share for Freddie Mac. Also, 10 of largest servicers manage 80 percent of Freddie Mac's loan portfolio, the report stated.

""The significant amount of servicing business concentrated among so few servicers poses a safety and soundness concern to the Enterprises,"" the report, which was authored by Deputy Inspector General Russell A. Rau, stated.

Although FHFA acts as a regulator for the GSEs, the report states that the agency's ability to do so ""may be impaired by its lack of direct access to servicer books and records relating to the Enterprises' approximately $4.5 trillion servicing portfolio.""

In the report, it is explained that the GSEs' contract terms and conditions with the FHFA as the conservator ""did not provide FHFA with access to servicer information or with the ability to ensure that servicers are complying with their servicing contracts.""

As part of the recommendations listed, the report states that guidance should include ""contractual provision authorizing FHFA's access to relevant servicer information.""

The report also states that the agency will expand its team of examiners that are on site at the GSEs to better manage risks from counterparties, such as servicers, among other activities.

About Author: Esther Cho

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