The Federal Housing Finance Agency (FHFA) has often functioned with a single-minded purpose: it wants to limit taxpayer losses on risky housing loans purchased by Fannie Mae and Freddie Mac from banks and other mortgage lenders. That’s it.
Sometimes that works to the benefit of taxpayers and homeowners, as when they pressure banks to repurchase mortgage-backed securities from Fannie/Freddie where the banks made bad representations and warranties. This reveals the essential fraud in the system and could go a long way to reforming it. But when FHFA refuses to promote principal modifications or refinancing on underwater homes, it acts against the interests of the homeowner (and the taxpayers, since principal modifications would help heal the housing market). It’s short-term thinking.
FHFA’s single-minded focus can also go awry even when FHFA appears to be playing a good role. For instance, earlier this year, Freddie Mac inked a $1.35 billion settlement with Bank of America over mortgage backed securities. But the FHFA’s inspector general found in a report that Freddie Mac used a faulty analysis in accepting a deal that lowballed potential losses the agency could incur if the loans it purchased from banks turned out to perform worse than expected.
The faulty methodology significantly increased the probable losses in Freddie Mac’s portfolio of loans, according to the report, prepared by the inspector general of the Federal Housing Finance Agency, which oversees the company. Freddie Mac and Fannie Mae were taken over by the government in 2008 so additional losses would be shouldered by taxpayers.
The report also noted that the settlement with Bank of America in December was completed over the objections of a senior examiner at the agency. Freddie Mac officials did not want to jeopardize the company’s relationship with Bank of America, from which it continues to buy loans, the report concluded.
The agency official who questioned the loan review methodology contended that Freddie Mac’s analysis greatly underestimated the number of dubious loans bought from the Countrywide unit of Bank of America from 2005 to 2007. The deal between Freddie Mac and the bank resolved claims associated with 787,000 loans, some of which were repurchased by the bank, and cannot be rescinded.
“An effective mortgage repurchase process is critical in limiting the enterprises’, and ultimately, the taxpayers’ exposure to credit losses resulting from the financial crisis,” said Steve A. Linick, the inspector general who oversaw the report. “F.H.F.A. and Freddie Mac must do more to ensure that high-dollar settlements of repurchase claims are accurately estimated and in the best interests of taxpayers.”
This really does not bode well for the FHFA’s lawsuit against BofA and 16 other banks over similar claims. While there have been estimates, we haven’t really seen a definitive figure on how much FHFA seeks in those suits. The FHFA report gives me no confidence that they will adjudicate that fairly, or that FHFA would even want to. We’re talking about billions in losses on this settlement, and that was just Freddie Mac and BofA. Who knows how some of the other repurchase deals are going. It seems that FHFA wants a sweet spot in between limiting taxpayer losses and playing nice with the banks, with whom they still partner on mortgage trading.
Once again, we see how a lack of investigation works in the favor of the banks. Freddie Mac just didn’t analyze over 300,000 foreclosed loans they owned and that could have been part of this claim. Much like the state AG investigation, they did a token review and went right to settlement.
The feds have proven time and again they just can’t be trusted to oversee this in a way that protects taxpayers and helps homeowners. A deeper analysis and investigation would have taken a bit longer, but it also would have paid off. It could be that Freddie Mac is learning from this:
Last June, Freddie Mac’s internal auditors advised the company that its controls regarding the loan review process were “unsatisfactory” and said that “opportunities for increasing the repurchase benefit justify an expansion of our sampling approach” after the second year of the loan, the report said. A company official told the Freddie Mac directors that a more in-depth loan review could generate as much as $1 billion in additional revenue.
Two months ago, Freddie Mac began a more rigorous review of foreclosed, interest-only loans. In late August, it told the housing finance agency staff that the study showed 15 percent of the sampled loans — a higher figure than that in the Bank of America settlement — contained defects that might result in buybacks among originators.
But how much more can you expect from an organization that still partners with the banks on which they are trying to force repurchases? This is the real scandal here.
NOTE: Just to be clear, the FHFA is Freddie Mac’s overseer. While Freddie Mac shouldn’t have miscalculated the BofA settlement, FHFA should have provided strong oversight. The IG report is titled “Evaluation of the Federal Housing Finance Agency’s Oversight of Freddie Mac’s Repurchase Settlement with Bank of America,” and it doesn’t evaluate the agency well.
UPDATE: Rep. Brad Miller (D-NC) reacted strongly to the IG report: “The officials at Freddie Mac who decided to settle these claims for billions less than taxpayers had coming should obviously lose their jobs immediately.” I also liked this:
The most infuriating finding is that Freddie Mac knowingly settled too cheaply to remain on good terms with Bank of America and others in the financial industry. That is exactly the kind of secretive, sweetheart deal that undermines the faith of the American people in their own government.