A Fannie Mae internal review has verified that regional officials suspected that a North Carolina lender was engaged in fraudulent loan sales to Ginnie Mae but did nothing to stop it, the company has admitted in a letter to Congress."A review of the totality of the facts in hindsight suggests that Fannie Mae may have been able to take further steps to investigate and determine whether First Beneficial was engaging in conduct that amounted to fraud," Fannie chief executive Daniel Mudd says in a letter to Rep. Richard Baker, R-La. In 1998, Fannie directed First Beneficial Mortgage Co., Charlotte, N.C., to repurchase home loans that were secured by vacant lots and properties under construction. A Fannie official also learned from a First Beneficial employee that the company was probably trying to buy back the loans from Fannie with funds it received from Ginnie. Fannie officials never notified Ginnie Mae. Under a consent order, Fannie recently agreed to reimburse Ginnie for $7.5 million. "Fannie Mae did not wish to retain funds or benefit from First Beneficial's illegal activities," Mr. Mudd says in the Jan. 14 letter. He also noted that the internal review of the First Beneficial case is continuing. "The lax internal oversight described by Fannie Mae in the First Beneficial fraud makes clear the need for robust external oversight and for regulatory reform to be passed by Congress this year," Rep. Baker said.

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