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FHFA Report Uncovers Its Own Mishandling of $2.87 Billion GSE-BofA Settlement
Sep 28, 2011

The Federal Housing Finance Agency (FHFA), the conservator of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, has released a report stating that it failed to properly oversee settlements between the GSEs and Bank of America regarding a $2.87 billion repurchase settlement. In December 2010, FHFA’s Acting Director Edward J. DeMarco, serving in his capacity as conservator of the GSEs, approved two repurchase settlement agreements between the GSEs and Bank of America totaling $2.87 billion ($1.35 billion for Freddie Mac and $1.52 billion for Fannie Mae). FHFA admitted in the report, "Evaluation of the Federal Housing Finance Agency’s Oversight of Freddie Mac’s Repurchase Settlement With Bank of America," that they did not act on or test the ramifications of the senior examiner’s concerns prior to the Bank of America settlement. The FHFA-Office of Inspector General (OIG) also admits in the report that it did not independently validate Freddie Mac’s existing loan review process and, therefore, did not reach  any final conclusion about it. By relying on Freddie Mac’s analysis of the settlement without testing the assumptions underlying the GSEs' existing loan review process, FHFA senior managers may have inaccurately estimated the risk of loss to Freddie Mac. As a result, the FHFA and its senior management concluded that it must promptly act on the significant concerns raised about the loan review process and ensure that Freddie Mac is maximizing its repurchase claim recoveries: ►FHFA should continue to withhold approval of Freddie Mac repurchase settlements until such time as it is confident that the concerns about the Enterprise’s loan review process have been resolved. ►FHFA senior management should ensure that Freddie Mac management resolves the concerns that prompted their internal auditors to issue an “Unsatisfactory” audit opinion. ►FHFA senior management should oversee Freddie Mac’s “out-of-sample” loan testing and consider independently validating the testing. ►FHFA should evaluate whether Fannie Mae and Freddie Mac should adopt consistent review practices for repurchase claims. ►FHFA senior management should initiate an independent assessment of GSE repurchase practices in order to ensure that they are maximizing their repurchase claim recoveries. The report also concluded that FHFA senior management must immediately initiate reforms to avoid the kind of management process shortcomings identified in this evaluation, in particular: ►Direct supervisors to properly address and act upon significant concerns brought to their attention. ►Senior managers, regardless of their position within FHFA, must address and act on significant concerns, particularly when they receive reports that the normal reporting and supervisory process is not working properly.
Sep 28, 2011
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