Freddie Mac Faulted With FHFA on Loan Servicers Oversight

Freddie Mac and its regulator, the Federal Housing Finance Agency, need to do a better job supervising financial institutions servicing the company’s loans, according to the FHFA Office of Inspector General.

FHFA hasn’t implemented regulations governing servicer oversight or paid enough attention to abuses uncovered by other federal regulators, Deputy Inspector General Russell A. Rau wrote today in a report. Five servicers, including Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM), last month settled a lawsuit with state and federal authorities after investigations revealed the banks didn’t have the proper documents to seize homes.

FHFA, which learned about the practices of Freddie Mac’s mortgage servicers in 2008, didn’t begin paying attention to them until August 2010, according to the report.

“Documentation provided by Freddie Mac strongly suggests that weak servicer oversight and risk management played a significant role in the unsatisfactory performance,” Rau wrote in the report. “In light of these control deficiencies, FHFA is not assured that the risk associated with Freddie Mac’s servicing operations is being sufficiently managed.”

Freddie Mac spokesman Brad German noted that the audit praised the company for working with its servicers to accomplish a substantial increase in loan modifications. “This has been an enormous undertaking, more work needs to be done, and we look forward to working with the Federal Housing Finance Agency and our servicers in the months ahead,” German said in an e-mailed statement.

‘Top Priority’

FHFA is taking steps to improve its monitoring of servicing at Freddie Mac and Fannie Mae, Jon Greenlee, FHFA’s deputy director of enterprise regulation, said in a written response to the the report.

“FHFA agrees that mortgage servicing is a critical area and we have made mortgage servicing a top priority of the agency,” Greenlee wrote.

Freddie Mac’s four largest mortgage servicers, Wells Fargo, JPMorgan, Bank of America Corp. and Citigroup Inc. (C) handle 60 percent of its loans. While the company rates the performance of all of its servicers monthly, those with the largest portfolios are held to more specific goals for preventing foreclosures and keeping loans current, also known as loss mitigation, according to the report.

The inspector general recommended that Freddie Mac set loss mitigation goals for all of its 1,457 servicers.

The number of seriously delinquent loans owned by Freddie Mac increased 376 percent to 453,000 from the first quarter of 2008 through the fourth quarter of 2010, according to the report.

To contact the reporter on this story: Clea Benson in Washington at cbenson20@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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