The White House continued its assault on the acting director of the Federal Housing Finance Agency — who refuses to let Fannie Mae and Freddie Mac be used as entitlement tools for upside-down borrowers. The latest attack is on mortgage servicing oversight.
The FHFA Office of Inspector General issued a report Wednesday that calls into question FHFA’s supervision of Freddie’s controls over mortgage servicing.
The inspector general claims that even though FHFA was alerted as early as 2008 to the heightened risk to Fannie and Freddie from servicing, it ignored the risk until August 2010.
Early signals about the emerging risks reportedly included elevated defaults, a concentration of servicing among just a few large servicers and a surge in bank failures. Other signals included an escalation in enforcement actions against problem banks who were counterparties servicing Freddie’s loans.
The OIG also cited FHFA for failing to adequately address operational risks posed by Freddie’s servicing contractors. The regulator additionally ignored reports of examination and enforcements actions by primary regulators, and it didn’t consider servicing reviews conducted by other federal agencies.
“FHFA has not clearly defined its role regarding oversight of servicers, sufficiently coordinated with other federal bank agencies about risks and supervisory concerns with individual servicers, or timely addressed emerging risks presented by mortgage servicing contractors,” the report states. “Moreover, FHFA has not established comprehensive regulations and guidance that provide for servicer management and oversight, and does not adequately monitor servicing performance.”
The bottom line, according to the inspector general, is that FHFA hasn’t ensured that Freddie is managing risk tied to its servicing operations.
FHFA also needs to require Freddie to widen its use of a “more robust servicer performance management program” that was implemented for some of its servicers to a larger cross section of its servicer network, according to the report.
The inspector general recommends that FHFA establish and implement regulations or guidance about servicing oversight and risk management. It also wants the regulator to expand the group of servicers that are rated on performance metrics. In addition, FHFA needs to improve its procedures for coordinating with other agencies.
“One could successfully argue whether the FHFA should have or shouldn’t have audited first hand the servicers that posed the greatest counterparty risks to the GSEs,” Tim Rood, partner and managing director at The Collingwood Group, said. “However, there is no arguing against the need for synchronization and coordination among supervisors and regulators regarding servicer oversight and standards.”
Although the audit focused on Freddie, the recommendations also apply to Fannie.
The latest inspector general report comes on the heels of another report released last month that criticized legal fees being paid by Fannie and Freddie to defend former executives.
FHFA has been under ongoing scrutiny from the inspector general as the Obama administration pressures FHFA Acting Director Edward J. DeMarco to use Fannie and Freddie as tools to jumpstart the real estate market by offering principal reduction on mortgages. DeMarco has steadfastly defended FHFA’s mandate for the two government-controlled enterprises by not allowing the two companies to be used as a tool for the U.S. economy.
The administration has increased staffing at the Office of Inspector General, sources say, bringing it to around a four-to-one ratio in terms of FHFA employees to inspector general employees — a ratio that is unheard of among other government agencies.
