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GSEs knew of foreclosure attorney abuses in 2003: FHFA-OIG

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A Fannie Mae shareholder sounded the alarm on foreclosure abuses at law firms handling foreclosures for the government-sponsored enterprises back in 2003, but it took regulators seven years to aggressively tackle the problem, the Federal Housing Finance Agency Office of Inspector General said in a report. The report highlights concerns industry insiders had for years about the practices of default servicing firms in a network of firms handling Fannie Mae and Freddie Mac foreclosures. After the 2003 warning, Fannie Mae hired an outside firm in 2005 to look into allegations of abuses at network firms.  A year later, Fannie Mae issued a report stating "foreclosure attorneys in Florida are routinely filing false pleadings and affidavits." The drafters of the 2006 report warned abuses could be occurring elsewhere and should be stopped. The report also said, "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 enterprises' behalf." According to the OIG report, Fannie Mae officials claim they informed a senior official with the Office of Federal Housing Enterprise Oversight, Fannie's former regulator, during a 2006 telephone conversation about the abuses uncovered. However, the former OFHEO official, who now works for the FHFA, has no recollection of that conversation, according to the inspector general's report. The report also highlighted FHFA's delay in addressing issues among some of the network's law firms. The FHFA became conservator of the government-sponsored enterprises in 2008, but despite numerous media reports and other warnings, the agency did not launch a "comprehensive examination" of foreclosure issues at law firms in the GSE network until several major news stories broke in August 2010, highlighting some of those abuses. One of the major cases breaking last year involved the Law Offices of David J. Stern,  a Florida firm that ended up under investigation for its foreclosure practices. The inspector general's report said, "There were indicators prior to August 2010 that could have led FHFA to identify the heightened risk posed by foreclosure processing within Fannie Mae’s attorney network. These indicators included significant increases in foreclosures, which accompanied the deterioration of the housing market; consumer complaints alleging improper foreclosures; contemporaneous media reports about foreclosure abuses by Fannie Mae’s law firms; and public court filings in Florida and elsewhere highlighting such abuses." The report went on to say that although FHFA hasn't yet published the results of its review of Fannie's attorney network, "the examiners’ preliminary findings confirm that at least one of these indicators — deteriorating industry conditions — should have provided adequate warning of the increased risk associated with default-related legal services." The Office of Inspector General added that FHFA has yet to develop formal policies to deal with the poor performances of law firms in the GSEs' network of firms. The study even goes on to claim there are instances where Freddie Mac fired poor performing law firms but Fannie Mae continued to use the same firms. "FHFA needs to develop procedures to identify and assess new or heightened risks, as it simultaneously addresses historic risks with which it is familiar. FHFA had neither an ongoing risk-based supervisory plan detailing examination and continuous supervision of default-related legal services, nor finalized examination guidance and procedures for use in performing targeted examinations and supervision of such services," the report concludes. Write to Kerri Panchuk.

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