The Inspector General for the Federal Housing Finance Agency released a report examining loans presented to the Fannie Mae and Freddie Mac and found multiple instances of appraisal-related issues, some of which would equal fatal errors if ignored, with the mortgages bought for securitization. In fairness, these loans represented a tiny portion of approved mortgages.
What's more, the GSE may have ignored questions, or even warnings, about the bad quality of some of the appraisals. The inspector general is recommending more diligence in the entire process.
In 2010, the FHFA directed the government-sponsored enterprises to develop a uniform collateral data portal. Since then, FHFA is able to review loans presented to the portal and approved.
It is no simple undertaking. In 2012 alone, the Enterprises collectively purchased and guaranteed approximately 6 million single-family residential mortgages, valued at $1.3 trillion.
"This joint Enterprise effort to create a portal for submitting and analyzing appraisal data represents a significant change in how they and the mortgage industry have processed appraisal information," the most recent inspection report states.
FHFA reviewed the portal data and found most issues to be minor compared to the total volume of loans processed. The issues represented less than 1% of loans delivered in a three-month period, in some instances.
In most cases, simple errors occurred that will likely be resolved in the future. The report cites 30 joint messages as fatal, which would require the lender to take action to resolve the issue identified by the message. "For example, the lender may have to fill in missing information, reformat data, or convert the file and will then resubmit the appraisal before receiving a successful status, thus allowing delivery of the loan," the report states.
However, when it came to appraisals, some of the findings are more remarkable:
During a five-month period of time, from the end of January 2013 through June 2013, over 56,000 appraisals uploaded into the portal generated at least one of the 25 warning messages about potential violations of Fannie Mae’s underwriting requirements. Over 4,500 of these appraisals generated more than one warning message (up to 9 messages per appraisal). Despite these alerts, Fannie Mae purchased all of the loans for over $13 billion.
The FHFA inspector general report seems optimistic about the prospect of improvement at the GSEs.
"Fannie Mae has yet to fulfill an important aspect of its plans to implement the program: specifically, use of loan data pre-purchase to better the loan quality and reduce representation and warranty risk. Fannie Mae officials believed, however, that they have made progress in the loan quality initiative and informed OIG that they have worked with lenders throughout 2013 relating to loans receiving proprietary messages.