Fannie Mae and Freddie Mac failed to keep tabs on thousands of contractors hired to manage more than 1 million foreclosed homes, possibly exposing the mortgage giants to double billing or charging for work that was never done, according to an alarming Federal Housing Finance Agency report.
Problems identified in the report, issued by the FHFA's inspector general's office, include "inadequate property inspections" by contractors hired to manage the day-to-day maintenance on foreclosed properties, as well as "insufficient controls to detect fraudulent reimbursement" by Fannie and Freddie.
"It is a huge failing on behalf of the mortgage giants," said Anthony Sanders, a real estate finance professor at George Mason University. But typical behavior, he said, "of a monopolist or someone with too much market share or too much power." (Fannie and Freddie own or guarantee about 60 percent of all mortgages in the United States, and have an even greater share of most new home loans).
The report, released Thursday, was apparently based on information turned over by the FHFA following the inspector general's earlier finding that the regulator didn't inspect Fannie and Freddie's foreclosed-home program for more than three years, even as inventory stacked up at an unprecedented pace.
In short, Fannie and Freddie weren't watching the contractors, and the FHFA wasn't watching Fannie and Freddie, the inspector general says. Fannie Mae and Freddie Mac, the two fallen mortgage giants, have soaked up $187.5 billion in taxpayer aid since they were bailed out in 2008. The FHFA is the "conservator" of the mortgage whales, and has the legal power to dictate policy at the once-public companies.
The report cites "deficiencies in key [foreclosed home] contractor management controls" at both organizations. Problems identified by the agency included the failure by one of the mortgage companies to perform comprehensive background checks on its contractors, the potential "improper reimbursement of contractors," and a lack of controls to protect against double billing for foreclosure work.
Most concerning for struggling communities, one of the mortgage companies (the report doesn't say which one) lacked oversight to protect it against shoddy property maintenance and repairs. Failure to keep up homes can also hurt the resale price, which can delay sales and lower sale prices. The report does not include specific details about the cost of this poor oversight, and the agency declined to comment.
But the potential harm, based on the volume of homes tracked through the system, is significant. In 2011 alone, Fannie and Freddie disposed of 353,851 foreclosed homes. At the end of the year, the mortgage companies held 180,000 homes on their books, more than three times what was typical pre-crisis. Fannie or Freddie paid contractors to mow lawns, repair broken windows or prepare homes for sale. Expenses related to foreclosed homes, including value drops due to depreciation, have cost the mortgage companies $8.5 billion since 2007.
Sanders is more forgiving of the lack of oversight by the FHFA, which he said was handed "a staggering mandate" when the companies nearly collapsed -- though he adds that no one should be surprised at this point when a regulator fails to do its job.
The most recent FHFA quarterly report makes no mention of the foreclosure deficiencies. The agency's inspector general is auditing the regulator's oversight and conservatorship efforts to determine whether the agency and the mortgage companies manage foreclosed homes "to maximize financial recoveries and minimize the negative effects of foreclosures on affected communities," the report says.
Freddie Mac spokesman Brad German said the company would not comment on the report, but that foreclosure expenses were trending down. Most recently, expenses were $171 million in the first quarter of 2012, down from $257 million during the same period last year, he said.
Moreover, the National Fair Housing Alliance, an anti-discrimination advocacy group, recently praised Freddie Mac's foreclosed home practices as "designed to preserve neighborhood home values and stabilize communities," German noted.
Andrew Wilson, a Fannie Mae spokesman, said in an email that the company's "overall strategy is focused on maintaining, repairing and selling properties in a way that helps stabilize neighborhoods and maximizes the return for taxpayers."
"We carefully monitor our repair and maintenance vendors and the real estate professionals that we work with to ensure that we are using our resources appropriately," he said.
The apparent failing of the Federal Housing Finance Agency to properly regulate the housing giants is set against the backdrop of a controversy involving Edward Demarco, the acting director of the agency who has resisted the entreaties of the Obama administration, state attorneys general and housing activist who want him to permit principal reduction, or partial loan forgiveness, as a tool to help some struggling borrowers with Fannie or Freddie loans. Demarco has said doing so would pose a "moral hazard" that could encourage other homeowners to intentionally default, though he hasn't completely ruled the option.
An analysis by his own agency found that principal reduction would keep more borrowers in their homes and paying mortgages, and could save Fannie and Freddie -- and ultimately taxpayers -- $1.7 billion.