Fannie Mae and Freddie Mac have continued to spend billions of dollars on questionable mortgage loans despite previous alerts to potential issues with their appraisals, the Federal Housing Finance Agency’s Office of Inspector General said Thursday.
According to a new report, the mortgage giants ignored warnings from the FHFA’s data portal about underwriting violations, such as unknown property values or unverified appraiser’s licenses, on over $107 billion in mortgage loans that they purchased between June 2012 and September 2013, years after the mortgage crisis first began. The OIG, the FHFA’s watchdog, issued its criticisms as part of its analysis of how Freddie and Fannie are utilizing appraisal data.
Fannie & Freddie Ignored Red Flags From Appraisal Data
Rather than heeding these warnings, Fannie and Freddie had set up automatic overrides so they could ignore the portal’s red flags and move on with purchases of the mortgage loans, the report said. The GSEs claimed they planned to further fine-tune the warning messages, and did not want to burden the sellers of these loans with having to respond to them. However, the OIG said those warnings are a necessary risk mitigation tool. Before 2012, there wasn’t a uniform system for analyzing these appraisal reports, the report said.
From June 2013 to September 2013, Freddie bought over 29,000 loans worth $6.7 billion despite the lack of property value information. Appraisals for approximately $1.1 billion of those loans had indications that their valuations were inflated, according to the report. In 2012 alone, Freddie and Fannie purchased approximately 6 million single-family residential mortgages totaling $1.3 trillion, the report noted.
The FHFA responded to the OIG report, and said it will look into whether some of the warning messages should be altered to immediately nix the purchase of the subject loan, as well as other remedies. The FHFA estimates it will implement any necessary changes to the system by January 31, 2015.
In light of these findings, it is incredibly ironic to us that Freddie and Fannie have continued to press claims against mortgage loan sellers for allegedly faulty appraisals on legacy loans, which in some case were sold to the GSEs more than 10 years ago. Given what we view as the GSEs’ penchant for blaming others for their own failures, we would not be at all surprised if this later vintage of loans becomes yet another wave of buy back demands.