FEDERAL

Figure 27. Freddie Mac Loans Originated in 2001
and 2006 Entering Foreclosure
Foreclosure Starts
60,000
50,000
40,000
30,000
20,000
10,000
0
1 2 3 4 5
Foreclosure Year
Originated in 2001 Originated in 2006
As our work has shown, it is incumbent upon FHFA
to ensure that adequate supervisory resources are in
place, and housing finance oversight agencies must
actively verify the mortgage market decision making
under their purview.
Verify: Independently Testing and
Validating Decision Making
Figure 27. Freddie Mac Loans Originated in 2001 and 2006 Entering Foreclosure
We have repeatedly identified significant instances
in which FHFA has displayed undue deference
to enterprise decision making in its capacity as
conservator. Without adequately testing or validating,
the agency has deferred to the enterprises on key
issues. The agency’s actions in each case reflect its
approach as conservator to delegate most business
decisions to the enterprises.
However, our reports have shown that some matters
are sufficiently important to warrant greater agency
involvement, such as issues that touch on the causes
of the housing crisis, the conservatorships, and the
taxpayers’ investment in the enterprises.
For example, our work demonstrated how FHFA relies
on the enterprises to oversee and establish underwriting
standards and to grant variances from them. 162
Another report showed a similar pattern of
accepting the enterprises’ decision making without
testing or validating their logic and conclusions.
In general, we determined that FHFA did not
require conservatorship approval for various major
business decisions, such as a servicing program,
which involved multiple transfers of MSR for over
Originated in 2006
700,000 loans with an Originated unpaid in 2001 principal balance over
$130 billion. 163 The same report also showed that
FHFA unduly relied on information provided by
Fannie Mae when it issued a “no objection” response
to the enterprise’s request to make an investment of
between $55 million and $70 million in order to
protect an existing $40 million investment. On the
same day as the request for approval was submitted,
FHFA stated that given the complex nature of the
transaction and the short decision time frame, the
agency could not assess the reasonableness of the
proposal. Yet, FHFA still made “no objection” to the
transaction. 164
Another report documented how FHFA approved
a $1.35 billion settlement of mortgage repurchase
claims that Freddie Mac asserted against Bank of
America without testing the enterprise’s underlying
assumptions. Essentially, the settlement assumed
that loans originated during the housing boom
and purchased by Freddie Mac would behave no
differently than loans bought before the boom. 165
However, an FHFA senior examiner—and Freddie
Mac’s internal auditors—observed a different
foreclosure pattern associated with the housing boom
era loans (i.e., loans originated around 2006). As
shown in Figure 27 (see above), for these loans—
many of which are higher risk—foreclosures peaked
three to five years after origination, instead of two to
three years for pre-boom loans originated in 2001. 166
This difference was important because Freddie
Mac did not review defaulted loans for repurchase
claims if the defaults occurred more than three years
after origination. That meant Freddie Mac had
not reviewed for repurchase claims over 300,000
foreclosed loans originated between 2004 and
2007. These loans had an unpaid principal balance
exceeding $50 billion. 167
62 Federal Housing Finance Agency Office of Inspector General