FHFA IG Urges Scrutiny of Freddie Mac Loan Review Process

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

The Federal Housing Finance Agency should continue to withhold approval of Freddie Mac mortgage repurchase settlements until it is confident that concerns regarding Freddie’s loan review process have been resolved, according to the agency’s Inspector General.

The IG report, issued Sept. 27, 2011, is in response to concerns from members of Congress and others about the adequacy of Freddie Mac’s $1.35 billion repurchase settlement with Bank of America (BoA).

The major findings of the report note that prior to the BoA settlement, a FHFA senior examiner raised “serious concerns” about Freddie’s mortgage review process, which could potentially cost “a considerable amount of money.” Concerns were also raised independently by Freddie’s internal auditors.

The IG accuses the FHFA of not responding in a timely fashion to these concerns prior to the BoA settlement, noting that the concerns “merited prompt attention by FHFA because they potentially involve significant recoveries for Freddie Mac and, ultimately, the taxpayers.”

Due to the FHFA’s failure to test the underlying assumptions of the Freddie loan review process, FHFA senior managers “may have inaccurately estimated the risk of loss to Freddie Mac,” the IG report says.

The IG is recommending that the FHFA act on the “specific and significant concerns” raised about Freddie’s loan review process. The report also urges the FHFA to initiate more general reforms to ensure a swifter response by senior management to significant concerns that arise.