New reports released by the inspector general of the Federal Housing Finance Agency (FHFA) revealed Fannie Mae and Freddie Mac are largely responsible for last year’s mortgage and foreclosure crisis. One report in particular implied that better risk controls at Fannie Mae could have helped avoid potential foreclosure abuse that forced banks to slow down and revamp their mortgage-handling processes.
Regulators Struggle to Develop Risk Controls
According to the reports, regulators don’t have enough examiners for either mortgage finance giant, making it difficult at times to develop risk controls for the companies.
In the report conducted on Fannie Mae, the inspector general concluded that it missed deadlines set by its regulator, the FHFA, to implement an operational risk-management program. This potentially prevented the company from addressing problems identified in an internal review from 2006 on potential foreclosure abuses by law firms that handle foreclosures.
The problems addressed included the possibility of robo-signing, an illegal process that some lenders participate in that involves bypassing the proper court-approved procedure of processing a foreclosure to speed up the process. The internal review found that foreclosure attorneys working on the mortgage financer’s behalf in Florida had “routinely made” false statements in court in an effort to more quickly process foreclosures years ago.
While Fannie Mae said it took steps to address the issues found in the 2006 report, the inspector general found no evidence that the company made any improvements in its oversight of law firms. In fact, regulators weren’t aware of the 2006 report until earlier this year.
FHFA Not Properly Examining Mortgage Giants
The second report released by the inspector general said that the FHFA staff shortages are not only impacting its ability to develop risk controls, but are also hindering its ability to complete thorough examinations of Fannie and Freddie’s processes for managing foreclosed properties.
According to the report, the FHFA had not completed an examination of the law firms that Fannie and Freddie rely on to process foreclosures until late 2010. Since the 2010 examination, the report revealed that the FHFA has worked to address potential examination shortfalls as a part of a broader reorganization of the agency, which was launched in February.
However, the agency still is falling behind on its plans. Its effort to recruit nearly two dozen examiners by the end of this month remains behind schedule, with only six additional hired through July. In addition, just one-third of its 120 non-executive examiners are federally accredited.
With the possible Fannie Mae, Freddie Mac phase-out, the FHFA says it has had problems recruiting examiners. Seized in 2008 by the Bush administration to stabilize the housing industry, both Fannie and Freddie are still in the midst of reorganizing their companies.
So far, there is no word on whether the FHFA will face repercussions for its lack of oversight.
