FHFA Faulted for Role in Bad Settlements for GSEs

The ""Federal Housing Finance Agency"":http://www.fhfa.gov/Default.aspx (FHFA) cut corners in the analysis it deployed to review and accept a $1.35-billion repurchase settlement from ""Bank of America"":https://www.bankofamerica.com/ over mortgage-backed securities for ""Freddie Mac"":http://www.freddiemac.com/, effectively ensuring that losses for the GSE would continue, according to a report released Tuesday by the agency's inspector general.

The report concerns two buyback agreements between the mortgage giant and GSEs last year, with profit margins totaling $2.87 billion for the deal.

The ""report"":http://www.fhfaoig.gov/Content/Files/EVL-2011-006.pdf divulged that the FHFA failed to conduct reasonable analysis even after senior examiners with the agency warned in 2010 that the methodology could render vulnerable the settlement with Bank of America and cost Freddie ""billions of dollars"" in losses from the 787,000 in loan repurchases.

""FHFA did not timely act on or test the ramifications of the senior examiner's concerns prior to the Bank of America settlement,"" the report concluded.

An FHFA spokesperson declined to comment for the story.

""[B]y relying on Freddie Mac's analysis of the settlement without testing the assumptions underlying the Enterprise's existing loan review process, FHFA senior managers may have inaccurately estimated the risk of loss to Freddie Mac,"" it said.

A spokesperson with Freddie Mac could also not be immediately reached for comment.

The inspector-general found that the GSE made moves to adjust for losses by refusing to alter the loan review process in lieu of circumstances arising from the housing boom.

The report nevertheless offered credit where credit is due by highlighting the FHFA's decision to suspend those future repurchase activities relying on the faulty review process.

It said that internal auditors continue to review the methodology, labeling as ""unsatisfactory"" the GSE's rules for corporate governance.

Recommendations followed the analysis, with Steven Linnick, the inspector general, petitioning the FHFA to ""promptly initiate management reforms to ensure more generally that senior management is apprised of and timely acts on significant concerns brought to its attention.""

Among other prescriptions moving forward, direct supervisors and management principals should review and implement procedures in a ""timely"" manner.

""It├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós important the inspector general is reviewing these things,├â┬ó├óÔÇÜ┬¼├é┬Ø says ""Mark Calabria"":http://www.cato.org/people/mark-calabria, director of financial regulation studies with the ""Cato Institute"":http://www.cato.org/. ""There seems to be an effort to kick the can down the road, and we have no idea how aggressive Fannie Mae and Freddie Mac are being in their relationships"" with lenders like Bank of America.