OIG Reports on Progress since Review of Bank of America Repurchase Settlement
The Federal Housing Finance Agency’srn(FHFA) Office of Inspector General (OIG) has issued a report on the progress</bFHFA has made in correcting substantial deficiencies OIG identified in arnsettlement agreement with Bank of America (BOA) in 2011. The settlement involved repurchase claims</bmade by Freddie Mac against BOA seeking reimbursement for loans purchased fromrnthe bank which later defaulted. FHFArnoversaw negotiations leading to the settlement.</p
The number of repurchase requests issuedrndivided by the number of loans reviewed is the repurchase rate. As of September 2010 Freddie Mac hadrnrequested repurchase of 59,513 of the 250,833 loans it had reviewed betweenrn2005 and July 31, 2010, a rate of 24 percent. rnHowever, as of that time it had received reimbursement for only 35,569,rn14 percent, of the loans it had reviewed. rnBy the end of 2010 the company’s outstanding repurchase claims againstrnall loan sellers totaled $3.8 billion.</p
On January 3, 2011 FHFA announced thatrnFreddie Mac and Fannie Mae had agreed to settle various claims against BOA andrnthe bank had agreed to pay Freddie Mac $1.35 billion to settle current andrnfuture loan repurchase claims on 787,000 loans. rnThere was considerable public criticism of the settlement agreement atrnthe time it was announced in January 2011 and OIG undertook an evaluation ofrnFHFA’s oversight, issuing a report on September 27, 2011.</p
OIG found that an FHFA examiner hadrnraised concerns about Freddie Mac’s loan review process months before the BOArnsettlement but FHFA did not act on or test the ramifications of these concerns.rn Freddie Mac’s practice was to reviewrnloans that became non-performing within two years of origination or withrnpayment problems within that time frame. This meant Freddie Mac had systematicallyrnexcluded from the review process many loans it had purchased or guaranteed betweenrn2005 and 2007. These were boom years forrnoriginations and produced vintages defaulting at high levels. The method of review could potentially costrnFreddie Mac billions of dollars of losses that could otherwise have beenrnavoided. </p
The FHFA had examiner noted that therntwo-year time frame was flawed because of the substantially higher incidence ofrndefault after that time due to the expiration of low interest teaser-rate loanrnfeatures and falling home prices that prevented refinancing. </p
Freddie Mac senior management was alsornengaged in a process of “overrides” in which they elected not to requestrnrepurchase of meaningful numbers of loans, admittedly because, among otherrnreasons, they wanted to maintain good business relations with loan sellers.</p
Based on the review, OIG made tworngeneral recommendations to FHFA; it should improve Freddie Mac’s loan reviewrnprocess and act to improve FHFA’s management process. </p
Among specific points raised regardingrnthe first recommendation was the FHFA should withhold approval of Freddie Mac’srnrepurchase settlements until it could be confident that concerns about thernreview process have been resolved; senior management should oversee the GSE’s “outrnof sample” loan testing and consider independently validating the testing andrnshould issue internal guidance regarding its handling of future repurchasernsettlements should they arise. The repost also recommended an evaluation ofrnwhether Fannie Mae and Freddie Mac should adopt consistent review practices forrnrepurchase claims.</p
There were two specific recommendation tornimprove FHFA management in this area; direct supervisors must properly andrntimely address and act upon significant concerns brought to their attention andrnsenior managers must address and act onrnsignificant concerns when they become aware that the normal reporting andrnsupervisory process is not working properly.</p
After the initial report Freddie Macrnsenior management devised a new strategy to review a substantial number of “legacyrnloans” in default and thereafter presented the strategy to FHFA and proposed tornemploy it until it was no longer cost effective to do so. Freddie Mac implemented the new strategy inrnMarch 2012 and in June informed sellers and servicers that they would begin tornsee further increases in the number of non-performing loans sampled by FreddiernMac.</p
OIG estimates that an additional $2.2rnbillion to $3.4 billion in repurchase requests will be initiated for the legacyrnloans originated during the housing boom. rnFor loans selected for review in 2012 alone Freddie Mac will savernsomewhere in the range of $0.8 billion to $1.2 billion by making additionalrnrepurchase requests. This analysis is premised on, among other things, thernreview of an additional 350,000 legacy loans.</p
FHFA also adopted the OIG recommendationrnthat Fannie Mae and Freddie Mac adopt consistent review practices. In its directive of January 19, 2012 the twornGSEs were told to align their seller/servicer contracts in this and seven otherrnareas.
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