Freddie Mac's restrictive repurchase review policy on defaulted loans may prevent the GSE from recouping "billions of dollars" in losses from lenders, according to a new investigative report from the Federal Housing Finance Agency.
The agency’s Office of Inspector General also questions whether Freddie may have underestimated its potential losses on loans it purchased from Countrywide Financial Corp. when it entered into a $1.3 billion repurchase settlement with Bank of America in December. (B of A acquired Countrywide in August 2008.)
Freddie generally makes repurchase requests on loans that go into default or foreclosure during the first two years.
However, FHFA examiners observed that defaults on alt-A and interest-only mortgages generally occur during years 3 through 5. Freddie has $186 billion in such high risk loans in its guaranteed loan portfolio.
The examiners estimated that 100,000 defaulted loans in the 2006 vintage were excluded from repurchase reviews because of Freddie's policy.
However, senior Freddie managers resisted making any changes, claiming a more aggressive approach to repurchase claims could adversely affect the GSE’s business relationships with B o A and other large seller/servicers, according to the report. Freddie Mac officials declined to comment on the agency’s findings.
After the B of A settlement, the GSE regulator placed a temporary halt on future buyback settlements entered into by Freddie.
FHFA insists the suspension is related to "continuing questions involving loan quality reviews by Freddie Mac" and is not related to the Bank of America settlement.
"FHFA has not changed its view that the [B of A] settlement reached in December was appropriate and reasonable," FHFA senior associate director Jeffrey Shohn says in a written response to the OIG report that was released early Tuesday morning.
OIG contends that before entering into the settlement FHFA senior managers could have required the GSE to start testing and reviewing loans that defaulted after two years.
It would have placed FHFA in a "better position to evaluate Freddie Mac's repurchase claim settlement with Bank of America," the OIG report says.
