WASHINGTON, March 7 (Reuters) - The regulator for Fannie Mae and Freddie Mac needs to improve supervision of companies that service their government backed mortgages if the two firms are to reduce losses, a federal watchdog said on Wednesday.
Mortgage servicing is "critically important to the financial health" of Fannie Mae and Freddie Mac and the Federal Housing Finance Agency has failed to implement tighter regulations overseeing the process, the agency's inspector general said in a report.
The FHFA needs increased access to the records and contracts of companies that provide mortgage servicing on the two money-losing firms' nearly $4.5 trillion servicing portfolio, the report said.
Government-run Fannie and Freddie own or guarantee about half of all U.S. home loans and rely on third-party firms to service mortgages and handle foreclosures. Problems have arisen when servicers used faulty foreclosure practices.
"FHFA and Freddie Mac have taken positive steps to improve oversight of mortgage servicing, however deficiencies continue to exist and they need to be addressed to mitigate losses and protect homeowners," Steve Linick, the inspector general of the finance agency, said in a statement.
The five biggest mortgage servicers reached a $25 billion settlement with the U.S. government after investigations revealed the banks used faulty paperwork to improperly seize homes in the foreclosure process.
FHFA learned about the practices of Freddie Mac's mortgage servicers as early as 2008, but it wasn't closely monitoring them until August 2010, the report concluded.
Freddie Mac and Fannie Mae have been propped up by over $150 billion in federal aid since they were rescued by the government in 2008.
The FHFA mostly agreed with the recommendations of the report and said it is taking steps to improve its monitoring of servicing at Freddie Mac and Fannie Mae, Jon Greenlee, FHFA's deputy director of enterprise regulation, said in a written response to the report.
The FHFA relies on Fannie Mae and Freddie Mac to monitor the potential risks that can arise from the relationship they have with their mortgage servicers.
The watchdog's report cited banking regulators that have set-up more "sufficient regulations" that provide a framework for servicer oversight.
The report mainly focused on Freddie Mac's mortgage servicers and oversight, and not the relationship Fannie Mae has with various financial institutions servicing its loans.