At the end of 2010, the federal government announced a settlement with Bank of America in which the bank bought back $2.87 billion in mortgages that did not meet Fannie Mae and Freddie Mac's standards — that is these were mortgages where, for example, someone inflated their income to guarantee a loan.
In an Inspector General report released today, however, regulators found that Fannie, Freddie and the Federal Housing Finance Agency (FHFA) failed to scrutinize hundreds of thousands of loans to see if they were eligible for repurchase and that could have cost taxpayers billions. What's more, a "senior examiner" raised a red flag before the settlement was reached.
The Washington Post does the best job at boiling down the report into one graph:
By not expanding its inquiry to include loans that ran into problems three to five years after they were originated, "Freddie Mac did not review over 300,000 loans for possible repurchase claims," the report states. That led a senior FHFA examiner to conclude that the company could be passing up "billions of dollars" that would have benefited taxpayers.
Here's how the Inspector General explains it in its report:
First, in mid-2010, prior to the Bank of America settlement, an
FHFA senior examiner raised serious concerns about limitations in
Freddie Mac's existing loan review process for mortgage repurchase
claims, which, according to the senior examiner, could potentially
cost Freddie Mac a considerable amount of money. Freddie Mac's
internal auditors independently identified concerns about the process at the end of 2010. These concerns merited prompt attention by FHFA because they potentially involve significant recoveries for Freddie Mac and, ultimately, the taxpayers. Further, unless examined and addressed, the underlying problems are susceptible to recurrence.
Second, FHFA did not timely act on or test the ramifications of these
concerns prior to the Bank of America settlement. FHFA-OIG did
not independently validate Freddie Mac's existing loan review
process and, therefore, does not reach any final conclusion about it.
Nevertheless, by relying on Freddie Mac's analysis of the settlement
without testing the assumptions underlying Freddie Mac's existing
loan review process, FHFA senior managers may have inaccurately
estimated the risk of loss to Freddie Mac.
Third, following the initiation of FHFA-OIG's evaluation, 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. Additionally, other findings tend to support the
validity of the concerns about the process. For example, on June 6,
2011, Freddie Mac's internal auditors issued an audit opinion that
the Enterprise's internal governance controls over this process were
"Unsatisfactory." Furthermore, at the end of 2010 and then again in
mid-2011, a Freddie Mac senior manager advised the board of
directors that the Enterprise could recover more in the future if it
used a more expansive loan review process.
CNN reports that the FHFA stuck by its guns saying the settlement was "appropriate and reasonable."
The Post also reports that Rep. Randy Neugebauer (R-Tex.), chairman of the House Financial Services oversight subcommittee, said he was "concerned the FHFA is not exercising independent judgement."
"Deferring to [Fannie and Freddie] in this case may well have cost U.S. taxpayers billions of dollars," he said in a statement. "The American taxpayers deserve better than business as usual, especially when they have already spent $160 billion to keep Freddie and Fannie afloat."