Original Post: http://blogs.wsj.com/developments/2011/10/03/report-fannie-mae-regulator-missed-foreclosure-abuses/
By Alan Zibel and Nick Timiraos
Mortgage titan Fannie Mae and its federal regulator failed to pay enough
attention to mounting evidence of abuses at foreclosure-processing law firms
until the issue gained broad public attention last year, a federal watchdog
says.
The inspector general of the Federal Housing Finance Agency, in a report
being released Tuesday, questioned Fannie Mae’s oversight of law firms that
conduct foreclosures on its behalf.
Fannie uses a network of law firms to handle foreclosures for the banks and
other mortgage servicing companies that collect payments on loans backed by
Fannie. The network arrangement allows Fannie to negotiate discounted rates with
approved firms, which in turn can lock in business from the nation’s largest
mortgage investor.
The inspector general’s report indicated that the FHFA had a growing
awareness of potential foreclosure-processing problems in June 2010, when it
conducted a two-day field visit to Florida. The FHFA, according to the inspector
general, found that “documentation problems were evident and law firms…were not
devoting the time necessary to their cases due to Fannie Mae’s flat fee
structure and volume-based processing model.”
After that Florida trip, FHFA staff told Fannie officials that its attorneys
were “increasingly unprepared when they enter the courtroom,” leading to a
larger backlog of foreclosures.
But the warnings weren’t enough to head off widespread document problems that
surfaced months later. In September 2010, banks suspended foreclosures after it
emerged that they were using so-called robo-signers to process hundreds of documents
without verifying their contents. Fannie and its smaller sibling, Freddie Mac,
terminated one of their main Florida law firms last November after uncovering
widespread abuses.
In a review completed by the FHFA this past January, the regulator concluded
that Fannie Mae could have reacted to foreclosure deficiencies sooner. It also
found that Fannie had “inadequate” controls and monitoring of its legal
network.
Homeowners “shouldn’t have to worry whether they will be victims of
foreclosure abuse,” said Steve Linick, the inspector general. The failures by
FHFA and Fannie to provide proper oversight of foreclosure attorneys represent a
“breach of the public trust and an assault on the integrity of our justice
system,” said Rep. Elijah Cummings (D., Md.), who made the initial request for
the inspector general to conduct the report.
An FHFA spokeswoman said that the FHFA is “concluding our supervisory work in
this area and we will direct the enterprises to take whatever action is
warranted once we are done.” Fannie Mae declined to comment on the report.
Fannie last year hired an outside law firm to do compliance for its legal
network and to conduct a review of its largest Florida law firms. But the
inspector general faulted those reviews for being too narrow in scope and said
they “missed the opportunity to confirm and provide a better understanding of
the allegations of foreclosure abuses.”
The report also said that the FHFA should have a formal process to share
information about “problem law firms.” For example, the report said Freddie Mac
last year terminated a law firm that processed over 43% of Fannie Mae’s
foreclosures in Florida and voluntarily told Fannie it had terminated the firm,
in part due to foreclosure processing abuses. Fannie decided to retain the firm,
the report said, in part because it concluded that the cost of transferring its
files to a new firm “would be substantial.”
The report also noted that Fannie had been aware of potential problems with
legal filings in foreclosures since late 2003, when a Fannie Mae shareholder
notified the company of potential abuses. An outside law firm, Baker &
Hostetler LLP, conducted an independent review for Fannie in 2006 in response to
the shareholder’s allegations. The report’s findings were first reported by The Wall Street Journal in March.
The 2006 review found no evidence that homeowners had been improperly placed
in foreclosure, but it said that foreclosure attorneys working on Fannie’s
behalf in Florida had “routinely made” false statements in court in an effort to
more quickly process foreclosures, among other warnings.
Fannie officials also told investigators in 2006 that the company had opted
against performing regular reviews of its foreclosure attorneys because the
company’s lawyers felt the firm would be better insulated from responsibility
for misconduct. The report said the approach was under review at the time, and
Fannie in 2008 revamped its attorney network.
A Fannie spokeswoman said the company took a series of steps to address
specific issues identified by the 2006
report.
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