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 report said.
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 defaulted.
Loans in which borrowers have made payments for 36 consecutive months would also be largely exempt from repurchase requests.
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.
(Editing by Eric Meijer)