A new report found that Fannie Mae and its regulator could have done more early on to prevent foreclosure-process abuses by the secondary lender’s network of law firms. The report found that Fannie continued to use problem firms even as Freddie Mac was issuing terminations.
The findings were outlined in FHFA’s Oversight of Fannie Mae’s Default-Related Legal Service from the Federal Housing Finance Agency Office of Inspector General.
The inspector general was prompted to perform an audit at the request of U.S. Rep. Elijah E. Cummings (D-Md.).
The report looked at alleged abuses by the government-controlled enterprise’s retained attorney network. Fannie established the network in 1997 to acquire default-related legal services associated with foreclosure, bankruptcy, loss mitigation, eviction and real-estate-owned closings.
The Washington, D.C.-based firm expanded its network to 140 law firms in August 2009 and has since widened it to 191 firms in 45 states.
FHFA recognized the importance of overseeing Fannie’s and Freddie’s default-related legal services and gradually accumulated data on the attorney networks. But it did not schedule comprehensive examination coverage of foreclosure issues such as allegations of abuse by network law firms until after news stories surfaced in August 2010 suggesting that network attorneys had engaged in inappropriate foreclosure practices such as robo-signing and regularly filing fraudulent documents in court proceedings.
There were signs of heightened risk in the network prior to August 2010 as foreclosures jumped. Those signs included consumer complaints, media reports and public court filings in Florida and elsewhere.
The report indicated that deteriorating industry conditions alone were enough to prompt a closer look by the regulator.
“FHFA had not previously considered risks associated with foreclosure processing to be significant,” the report stated. “Instead, FHFA focused its examination resources on assessing high risk areas such as the enterprises’ management of credit risk.”
While Freddie was found to have terminated poorly performing law firms, Fannie continued to use the companies.
Back in December 2003, a shareholder of Fannie alerted the company to foreclosure abuse allegations. A law firm was hired to investigate the allegations and found that Florida foreclosure attorneys routinely filed false pleadings and affidavits. The law firm indicated that the faulty practices could also be occurring outside Florida.
Fannie claims that it verbally advised an official of its regulator at the time, the Office of Federal Housing Enterprise Oversight, about the findings. But that official, who now works at FHFA, has no recollection of the conversation.
An FHFA report this past June indicated that foreclosure mill law firms were not putting in the time needed to process foreclosures because of Fannie’s flat-fee structure. While an action plan was developed by FHFA to deal with the issue, the inspector general found little evidence that the plan was implemented.
The inspector general recommends that the FHFA examine how it missed identifying the abuses by the attorney network earlier and enhance its ability to identify new and emerging risks. Comprehensive examination guidance and procedures, as well as supervisory plans for default-related services, need to be developed and implemented.
In addition, FHFA needs to develop and implement policies and procedures that address poor performance by the agencies’ default-related legal services vendors.
FHFA reportedly agreed with the inspector general’s recommendations.
