From FHFA OIG report in 2011:
What FHFA-OIG Found
Between 2006 and early 2011, FHFA and its predecessor agency
repeatedly found that Fannie Mae had not established an acceptable and
effective operational risk management program despite outstanding
requirements to do so. Nonetheless, FHFA has not taken decisive
action to compel Fannie Mae to create and administer an operational risk
management program. As Fannie Mae’s regulator and conservator,
FHFA’s authority over the Enterprises is broad and includes the ability
to discipline or remove Enterprise personnel to ensure compliance with
Agency mandates. But to date, FHFA has not exercised this or other
authorities. Instead, FHFA has pursued the matter principally through
less forceful supervisory means, such as conducting ongoing operational
risk examinations and issuing Matters Requiring Attention, which
were ineffective during the period.
Fannie Mae’s lack of an acceptable and effective operational risk
management program may have resulted in missed opportunities
to strengthen the oversight of law firms it contracts with to process
foreclosures. For example, in a May 2006 internal report, Fannie Mae
learned that attorneys acting on its behalf in Florida and elsewhere had
filed false documents in foreclosure proceedings. The report further
stated that Fannie Mae did not oversee the quality of these attorneys’
representation or the legal positions taken in their pleadings.
Nonetheless, in a 2011 preliminary report FHFA concluded that Fannie
Mae still had not acted on the recommendations to improve its attorney
oversight contained in the 2006 report.
According to FHFA, Fannie Mae has recently made improvements in
its operational risk program, and the Agency expects that the
Enterprise will have an acceptable program in place no later than the
first quarter of 2012. Given Fannie Mae’s history of non-compliance,
FHFA-OIG believes that the Agency must exercise maximum
diligence and take forceful action to ensure that Fannie Mae meets the
Agency’s expectations in this regard. Otherwise, FHFA’s safety and
soundness examination program, as well as its delegated approach to
conservatorship management, may be adversely affected.
Robert Stowe England, an author and financial journalist, did an one-on-one interview with the inspector general for the Federal Housing Finance Agency in February 2012:
Q: Let’s discuss more about the foreclosure abuses. Your office [OIG] has found that if Fannie Mae had done a better job of overseeing law firms involved in foreclosures, it could have prevented a number of abuses that occurred. FHFA disagreed with that conclusion. Can you explain how Fannie Mae might have improved its operations to prevent or mitigate law firm foreclosure abuses–or was this whole approach a lost cause?
A: FHFA’s predecessor agency [the Office of Federal Housing Enterprise Oversight (OFHEO)] issued a consent order in 2006 requiring Fannie Mae to implement an operational risk program.
Q: What is operational risk?
A: Operational risk means the risk of loss to an organization from people, systems, inadequate controls and external events, which would include law firm foreclosure abuses. And implementation of a successful program would cause Fannie Mae to self-identify, report and correct operational risk.
For a five-year period, from 2006 to 2011, OFHEO and then FHFA repeatedly cited Fannie Mae for not implementing an effective operational risk program. And despite these findings, Fannie Mae has not yet implemented an effective program and FHFA has not required it to do so.
We found in a report we did on this topic that Fannie’s failure to implement an effective operational risk program may have been a missed opportunity to correct weaknesses in Fannie Mae’s oversight of servicing and foreclosure abuses, including weak oversight of its retained attorney network.
So, for example, in 2006, Fannie Mae hired a law firm to investigate foreclosure abuses. The law firm prepared a report that found that certain law firms that represented Fannie Mae in foreclosures [had] filed false documents in foreclosure proceedings in Florida.
And the report recommended that Fannie Mae stop this activity. It also observed Fannie Mae didn’t take steps to adequately oversee their attorneys. And FHFA in 2010 did a special review and also concluded that [Fannie Mae] didn’t take adequate steps, even though they were aware through this 2006 report of these foreclosure abuses.
So, we believe that strengthened law firm oversight by Fannie Mae could have detected, if not prevented, abuses like robo-signing. That’s why we recommended that FHFA require Fannie Mae to implement an effective operational risk program.
Q: In October 2011, FHFA directed Fannie and Freddie “to transition away from current foreclosure attorney network programs and move to a system where mortgage servicers select qualified law firms that meet certain minimum, uniform criteria.” Doesn’t this directive suggest that FHFA had concluded that GSE oversight of attorney networks involved in foreclosures is so flawed that they needed to ditch entirely their retained attorney networks?
A: Presumably, FHFA recognized that the retained attorney network wasn’t working in announcing its elimination. But the core message of our report on the retained attorney network–actually we did a report on default-related services–still applies. And whether default-related legal service providers are selected from a retained attorney network or another way, strong controls are critical to ensure oversight.
Our report on default-related legal services found that various indicators could have led FHFA to identify and address heightened risk posed by foreclosure abuses prior to late 2010. It also found that FHFA examination guidance for the audit period was inadequate. And we found that FHFA guidance to the GSEs was inadequate.
Specifically, there wasn’t a formal process for the enterprises to share information on bad actors. So, you’d have one enterprise firing a bad lawyer and not telling the other enterprise. And there was no guidance to the GSEs on how to handle problem servicers.
And here is the consent order in 2006 to Fannie Mae by the Office of Federal Housing Enterprise Oversight (OFHEO). Click here. And let’s not forget in the FHFA Inspector General Report that Fannie Mae Knew of ‘Robo-signing’ in 2003. From the report:
2006 Report to Fannie Mae of Foreclosure Abuses in Florida
In December of 2003, a Fannie Mae shareholder began alerting Fannie Mae to foreclosure abuse allegations, and in 2005 Fannie Mae hired an outside law firm to investigate a variety of allegations regarding purported foreclosure processing abuses. In May 2006, the law firm issued a report of investigation in which it found that:
[F]oreclosure attorneys in Florida are routinely filing false pleadings and affidavits….
The practice could be occurring elsewhere. It is axiomatic that the practice is improper and should be stopped. Fannie Mae has not authorized this unlawful conduct.
Further, the report observed that Fannie Mae did not take steps to ensure the quality of its foreclosure attorneys’ conduct, the legal positions taken in the attorneys’ pleadings, or the manner in which the attorneys processed foreclosures on the Enterprise’s behalf.
FHFA-OIG could not establish whether Fannie Mae complied with its obligation to notify OFHEO of the 2006 report of foreclosure abuses. Fannie Mae officials claim that they informed an OFHEO senior official of the report during a telephone conversation in 2006, but they have no record of the communication. The OFHEO official, who now works for FHFA, has no records or recollection of the conversation.