Government Watchdog Finds Fault (Yet Again) in Fannie Mae and Freddie Mac’s Practices

The Federal Housing Finance Agency’s Office of the Inspector General recently audited Fannie Mae and Freddie Mac’s use of a web portal designed to decrease error in collecting appraisal data.  Not surprisingly, the audit found that both government-sponsored entities are failing to use the portal properly.  For example, in some situations for which the database alerted Fannie Mae and Freddie Mac of incomplete or incorrect appraisals, the audit found that nothing was done by either entity to force lenders to fix the problem.

According to the agency’s website, this independent watchdog was established by the Housing and Economic Recovery Act of 2008 “to provide objective reporting to the FHFA Director, Congress and the American people through its audit and investigative activities.” The report released by the Office of the Inspector General states, “The warning messages shared with lenders were coded as ‘automatic overrides,’ the audit report says.  And Fannie did not require lenders to explain or resolve the potential problems.”  Additionally, the report shows that while over 4,500 appraisals that were submitted over five months in 2013 generated several warnings, Fannie Mae moved forward with purchasing each of the loans, ignoring the alerts.

Similarly, last year, Freddie Mac purchased 25,000 loans for which their current Home Value Explorer model could not properly estimate the value.  This happened over a span of three months, and for 4,000 additional appraisals, warnings that were provided by the model were left unheeded by the government-sponsored secondary mortgage provider.

The Inspector General’s report claims that both Fannie Mae and Freddie Mac have relied too much on the post-purchase reviewing process to find errors rather than using the portal as it was intended to be used—specifically, as a method to catch problems before a loan is purchased.  According to the agency, “Without better oversight, the enterprises may not fully use the portal to minimize the risk of buying loans supported by inactive or unlicensed appraisers.”