FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL

FHFA’s Oversight of Fannie Mae’s Default-Related Legal Services

by Barry Fagan
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Why FHFA-OIG Did This Audit

In 1997, the Federal National Mortgage Association (Fannie Mae or Enterprise) established its Retained Attorney Network (RAN) to acquire default-related legal services associated with foreclosure, bankruptcy, loss mitigation, eviction, and Real Estate Owned (REO) closings. In August 2010, news reports alleged that RAN attorneys had engaged in inappropriate foreclosure practices such as routinely filing false documents in court proceedings and “robo-signing.”

The Housing and Economic Recovery Act of 2008 (HERA) established the Federal Housing Finance Agency (FHFA or Agency) as supervisor and regulator of the Enterprises: Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac). On September 6, 2008, FHFA placed the Enterprises into conservatorships out of concern that their deteriorating financial conditions threatened the stability of the financial markets. As the conservator, FHFA is responsible for preserving and conserving each Enterprise’s assets and restoring them to a sound financial condition in order to support the nation’s housing finance markets. FHFA commenced a special review of Fannie Mae’s RAN in late 2010 to determine whether the program met safety and soundness standards, to evaluate the design and implementation of the RAN, and to identify vulnerabilities in its control structure. To date, FHFA has not released the results of its review.

On February 25, 2011, Representative Elijah E. Cummings requested that the FHFA Office of Inspector General (FHFA-OIG) examine “widespread allegations of abuse by ... law firms hired to process foreclosures as part of” the RAN, and Fannie Mae’s and FHFA’s efforts “to investigate these allegations and implement corrective action.” Pursuant to the request, FHFA-OIG performed an audit to assess FHFA’s oversight of Fannie Mae’s default-related legal services performed by law firms within the RAN.

What FHFA-OIG Recommends

FHFA-OIG recommends that FHFA: (1) review the circumstances surrounding FHFA’s not identifying the RAN foreclosure abuses at an earlier stage and develop potential enhancements to its capacity to identify new and emerging risks; (2) develop and implement comprehensive examination guidance and procedures together with supervisory plans for default-related legal services; and (3) develop and implement policies and procedures to address poor performance by default-related legal services vendors that have contractual relationships with both of the Enterprises.

In response to FHFA-OIG’s recommendations, FHFA provided written comments dated September 29, 2011. The Agency agreed with the recommendations. The complete text of the written comments can be found in Appendix A of this report.

Audit Report: AUD-2011-004

Dated: September 30, 2011

What FHFA-OIG Found

FHFA can strengthen its oversight of default-related legal services. FHFA recognized the importance of its oversight of the Enterprises' default-related legal services and gradually accumulated information on the attorney network programs of Fannie Mae and Freddie Mac. However, FHFA did not schedule comprehensive examination coverage of foreclosure issues, including allegations of abuse by RAN law firms until after news stories about alleged abuses surfaced in August 2010. FHFA had not previously considered risks associated with foreclosure processing to be significant. Instead, FHFA focused its examination resources on assessing high risk areas such as the Enterprises’ management of credit risk.

Also, there were indicators prior to August 2010 that could have led FHFA to identify the heightened risk posed by foreclosure processing within Fannie Mae’s RAN. These indicators included significant increases in foreclosures, which accompanied the deterioration of the housing market; consumer complaints alleging improper foreclosures; contemporaneous media reports about foreclosure abuses by Fannie Mae’s law firms; and public court filings in Florida and elsewhere highlighting such abuses. Although FHFA’s management has yet to publish the results of its special review of Fannie Mae’s RAN, the examiners’ preliminary findings confirm that at least one of these indicators – deteriorating industry conditions – should have provided adequate warning of the increased risk associated with default-related legal services. Importantly, FHFA has a number of corrective actions planned in response to the special review.

FHFA needs to develop procedures to identify and assess new or heightened risks, as it simultaneously addresses historic risks with which it is familiar. FHFA had neither an ongoing risk-based supervisory plan detailing examination and continuous supervision of default-related legal services, nor finalized examination guidance and procedures for use in performing targeted examinations and supervision of such services. Consequently, FHFA has limited assurance that foreclosure processing abuses will be prevented and detected through its supervisory activities.

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Barry Fagan
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