* Watchdog criticized mortgage giant's review process
* Freddie Mac now looking at more loans from boom years
By Rick Rothacker
Sept 13 Freddie Mac will recover up to
$3.4 billion more from banks after closely scrutinizing soured
loans it bought during the housing boom, a regulator's watchdog
reported on Thursday.
The report comes after Freddie Mac agreed last year to
settle with Bank of America Corp over bad loans the bank
sold to the housing finance company in the runup to the mortgage
crisis. The watchdog, the inspector general for the Federal
Housing Finance Agency, later raised concerns about how Freddie
Mac reviewed loans for potential buybacks by the bank.
After making changes, government-owned Freddie Mac will now
collect more money back from banks, according to Thursday's
report by the inspector general for the FHFA, which regulates
Freddie Mac and Fannie Mae.
Banks grant mortgages loans to customers and then sell them
on to Fannie Mae and Freddie Mac, which packages them as
securities for investors. If the loans go bad, the institutions
can ask banks to buy them back if there were defects in the
underwriting of the loans, such as missing financial statements
or fudged appraisals.
In January 2011, Bank of America reached a $1.35 billion
settlement with Freddie Mac to resolve current and future loan
repurchase requests. The pact covered loans sold by Countrywide
Financial, which Bank of America bought in 2008. But in
September 2011, the inspector general found Freddie Mac's review
process for repurchase requests was lacking.
Freddie Mac had reviewed loans that had become delinquent or
had payment problems in only the first two years after they were
made. This excluded loans that it had purchased or guaranteed
during the housing boom years of 2005 to 2007, which were
defaulting in high numbers, Thursday's report said.
The inspector general found, for example, that nearly
100,000 loans granted in 2006 were not reviewed because they did
not meet Freddie Mac's criteria. "This practice limited Freddie
Mac's potential recoveries from repurchase requests," the
Since the watchdog's initial findings, Freddie Mac and FHFA
have made significant reforms, the report noted. Overall, the
inspector general expects Freddie Mac to recover an additional
$2.2 billion to $3.4 billion.
In a response included in the report, FHFA said Freddie Mac
had made several improvements to its process for reviewing
loans, including looking at a larger number of loans.
FHFA also said it was working on policies to improve how
Freddie Mac and Fannie Mae handle repurchase requests in the
future. This week the agency said it will begin reviewing loans
shortly after they are bought, rather than after they have
Loans in which borrowers have made payments for 36
consecutive months would also be largely exempt from repurchase
requests. [ID: nL1E8KBENO]
As Freddie Mac and Fannie Mae step up their review of loans,
banks have been taking bigger charges to cover repurchase
losses, particularly for ones made during the peak years of the
housing boom. A dispute over repurchase requests between Bank of
America and Fannie Mae became so intense this year that the bank
is no longer selling most loans to the mortgage entity.
Freddie Mac and larger sibling Fannie Mae were seized by the
government at the height of the financial crisis in 2008 as
mortgage losses threatened their solvency. Since then, they have
drawn a total of $188 billion in taxpayer funds to stay afloat,
while paying more than $45 billion in dividends.