Steve Linick is wrapping up his first year on the job as the first-ever inspector general of the Federal Housing Finance Agency with a bang.
Linick's office today released a report sharply criticizing FHFA managers for approving a $1.35 billion settlement in December 2010 with Bank of America for selling shoddy mortgages to Freddie Mac, saying the deal might have shortchanged taxpayers billions of dollars.
That report comes on the heels of two released last week, one that faulted oversight of Fannie Mae’s operational risk management program, the other finding shortfalls in the FHFA’s examination program.The FHFA became the conservator of Fannie and Freddie in 2008 when the two government-sponsored enterprises faced insolvency. The agency recently sued 18 of the world’s largest financial institutions for selling Fannie and Freddie faulty mortgage-backed securities, litigation which is unrelated to these claims.
Linick, a career Justice Department prosecutor who previously served as a deputy chief in the Fraud Section and as executive director of the National Procurement Fraud Task Force, was confirmed as IG of the new agency by the U.S. Senate last September.
He first made waves in April when he criticized Fannie and Freddie for paying their top six executives more than $35 million even as the U.S. Treasury has shelled out $162 billion to prop up the entities.
In the most recent report on the Bank of America settlement, the IG’s office said agency managers ignored warnings from a senior examiner about Freddie Mac’s loan review process. At issue were 787,000 mortgages sold to Freddie by Countrywide Financial, which was purchased by BoA in 2008.
The mortgages came with a guarantee. If Freddie later discovered a loan had a defect, such as the borrower did not have the income stated in the application, then Freddie could require that the seller repurchase the loan at full face value. The senior examiner complained that Freddie didn’t review more than 300,000 older loans that originated between 2004 and 2007 for possible repurchase claims – loans with an unpaid principal balance of more than $50 billion – before approving a $1.35 billion settlement that covered Freddie’s past, present and future claims for faulty mortgages from Countrywide.
By contrast, Fannie Mae – which also settled similar charges with BoA for $1.52 billion – did not include future claims in its deal, and was spared skewering in the report.
The report suggests that the FHFA let BoA off the hook cheaply because “a more aggressive approach to repurchase claims would adversely affect Freddie Mac’s business relationships with Bank of America.”
The FHFA management in comments pushed back. Jeffrey Spohn, senior associate director, conservatorship operations, defended Freddie Mac’s practice of not reviewing loans that default after two years because “most later defaults are likely to be unrelated to manufacturing defects (they more typically reflect life events of the borrower such as unemployment, divorce or health issues).”
He also wrote that FHFA “agrees in principle” with the IG’s recommendations about the loan review process but “not with each of the specific action steps,” and that it “believes action in support of this recommendation is already well underway.”
That apparently didn’t sit well with Linick’s office. In additional comments, the IG pointed out that “FHFA has not proposed a specific action plan of its own. Under the circumstances, FHFA-OIG will continue to monitor the issues discussed in this report and the actions that FHFA is taking.”