An audit from Federal Housing Finance Agency's inspector general has charged Fannie Mae and Freddie Mac with overriding a system designed to protect the quality of loans they purchased and buying questionable loans.
Specifically, the audit said that between January and June 2013, Fannie Mae spent $13 billion buying more than 56,000 loans even though a system designed to test appraisals warned the loans were potentially in violation of underwriting requirements.
The audit found similar problems with Freddie Mac loan purchases between June and September 2013 when, the IG report charged, Freddie Mac spent $6.7 billion buying more than 28,000 loans despite similar warnings.
In order to help guarantee the quality of the loans they purchase, Fannie Mae and Freddie Mac, among other measures, began running the loans through a collateral quality data portal.
Before the associated loans are presented for purchase, appraisal and appraiser information is collected through the portal system, the inspector general reported.
If the portal's checks find signs that the appraisals violate the purchaser's guidelines , it alerts them and the lenders to the problem. By using the portal, the organizations are striving to improve data quality, ensure compliance with their loan eligibility guidelines, enhance loan reviews, and lower the number of loans that must be bought back by sellers (i.e., repurchased) for not meeting their standards, the audit said.
But the IG report found that Fannie Mae and Freddie Mac allowed the alerts to be overridden and in many cases purchased loans for which there were alerts.
The inspector general said Fannie and Freddie officials allowed the alerts to be overridden so they could check after the loans were purchased to see if the different loan aspects which triggered the alerts had done so properly and not triggered mistaken alerts. The audit praised Fannie and Freddie for wanting to test the system, but pointed out that they had 18 months to have done so prior to the audit.
Among the 14 recommendations for changing the situation, the auditors urged Fannie and Freddie to take the alerts off of automatic override and instead be required to override an alert manually, should any come up, or decline to purchase the loan until the cause of the alert is resolved.