Fannie Mae And Freddie Mac Systematically Ignore Red Flags: OIG

Fannie Mae And Freddie Mac Systematically Ignore Red Flags: OIG

Fannie Mae

Photo by NCinDC

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have had stronger recoveries than anyone expected under the conservatorship of the Federal Housing Finance Agency (FHFA), but now it seems that the two government sponsored agencies are ignoring the oversight procedures that the FHFA has put in place to prevent another bailout.

Fannie Mae, Freddie Mac set warnings as automatic overrides

In 2010 the FHFA directed the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to create a uniform collateral data portal that would streamline the process of reviewing loan collateral, increasing loan quality and making risk management more effective. If anything is wrong the portal is supposed to flag the loan as problematic and wait for the lender to resolve the issue before Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) or Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) buys the mortgage.

DG Value Adds 36.4% YTD As Distressed Stocks Surge

Dov Gertzulin's DG Capital is having a strong year. According to a copy of the hedge fund's letter to investors of its DG Value Partners Class C strategy, the fund is up 36.4% of the year to the end of June, after a performance of 12.8% in the second quarter. The Class C strategy is Read More

But an Office of Inspector General (OIG) audit found that the system was being systematically ignored. Between January and June 2013 Fannie Mae spent $13 billion buying 56,000 loans that the portal had red flagged as potentially violating the GSE’s underwriting requirements, and between June and September 2013 Freddie Mac spent $6.7 billion on 29,000 loans that had similarly raised red flags.

“In both cases the GSEs coded the warning messages as automatic overrides,” says a recent OIG audit of the system. The system was literally coded not to bother anyone with potential quality control problems, and at least some of those loans really were problematic. “Based on OIG’s work and the Enterprises’ responsive actions, 23 loans valued at $3.4 million may be repurchased based on the ‘suspended’ status of the appraiser, which is a violation of requirements.”

GSEs don’t want to ‘burden’ lenders by enforcing underwriting requirements

According to the OIG report, the GSEs gave two reasons for coding warnings as automatic overrides. First, they said they wanted more time to fine tune the process to reduce the number of false positives, but extensive testing had already been done.

“Prior to deploying its messages to all lenders in 2013, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) performed over 23,500 tests to determine if rules were acting as intended. In addition to this testing, in June 2012, Fannie Mae conducted a pilot for six months before deployment, where the Enterprise internally analyzed messages that would have been sent to three lenders. Finally, in January 2013, these messages reached a certain level of readiness and were released to all lenders. Therefore, since June 2012, Fannie Mae has had over 18 months to test the warning messages that indicate appraisals may not meet its underwriting requirements,” says the OIG report. Freddie Mac had done comparable amounts of testing.

The other concern was that, “both Enterprises also expressed concern that they did not want to burden lenders with having to respond to messages.”

In other words, Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) are more concerned about not bothering the lenders whose mortgages they purchase than enforcing their own loan quality standards. The GSEs conservatorship has been controversial for many reasons, but if the oversight isn’t even effective it gives more ammunition to those who want to see the arrangement changed.

No posts to display