The ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) has signed off on several headline-grabbing arrangements between major lenders and the GSEs to reconcile loan repurchase claims.
[IMAGE] The results of an investigation released this week, however, indicate approval was made in haste. In response, FHFA has put the brakes on any future repurchase settlements pending further examination of the process in place to assess the true cost of such deals for taxpayer-funded ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com.
The FHFA Office of Inspector General (FHFA-OIG) conducted a review of the settlement reached in December 2010 in which ""Bank of America"":http://www.bankofamerica.com paid Freddie Mac $1.35 billion to clear up buyback claims for 787,000 loans with a total unpaid principal balance of $127 billion.
FHFA-OIG said it was prompted to commence the investigation after members of Congress and others questioned the adequacy of the settlement, and on the grounds that the deal ""could serve as a precedent for future repurchase settlements.""
According to the findings published in the ""inspector general's report"":http://www.fhfaoig.gov/Content/Files/EVL-2011-006.pdf this week, a lack of independent action and oversight by FHFA senior management may have led, and could lead, to ""significant losses"" for Freddie Mac and taxpayers.[COLUMN_BREAK]
FHFA-OIG found that as early as mid-2010, prior to the Bank of America settlement, an FHFA senior examiner Ã¢â‚¬Å“raised serious concernsÃ¢â‚¬Â about limitations in Freddie MacÃ¢â‚¬â„¢s existing loan review process for mortgage repurchase claims, particularly the fact that no adjustments had been made to account for the high levels of defaults and foreclosures on loans from pre-bust vintages.
This same examiner sounded the alarm that such shortfalls could potentially cost Freddie Mac Ã¢â‚¬Å“billions of dollarsÃ¢â‚¬Â from the BofA agreement alone.
The inspector generalÃ¢â‚¬â„¢s report notes that Freddie MacÃ¢â‚¬â„¢s own internal auditors also independently identified concerns about the process at the end of 2010.
The inspector general found that Freddie Mac does not review most loans that go into foreclosure more than two years after origination. Freddie Mac data show that for all enterprise-owned foreclosed loans originated between 2004 and 2007, the GSE has not reviewed over 300,000 loans for possible repurchase claims.
Ã¢â‚¬Å“These concerns merited prompt attention by FHFA because they potentially involve significant recoveries for Freddie Mac and, ultimately, the taxpayers,Ã¢â‚¬Â FHFA-OIG said in its report.
The inspector general says FHFA Ã¢â‚¬Å“did not timely act on or test the ramifications of these concernsÃ¢â‚¬Â prior to the Bank of America settlement. By relying on Freddie MacÃ¢â‚¬â„¢s analysis of the settlement without verifying the assumptions underlying the loan review process, FHFA senior managers Ã¢â‚¬Å“may have inaccurately estimated the risk of loss to Freddie Mac,Ã¢â‚¬Â according to FHFA-OIG.
Following the initiation of FHFA-OIGÃ¢â‚¬â„¢s evaluation, the inspector general said, Ã¢â‚¬Å“FHFA, to its credit, suspended future enterprise mortgage repurchase settlements premised on the Freddie Mac loan review process and set in motion activities to test the assumptions underlying the loan review process.Ã¢â‚¬Â