The Federal Housing Finance Agency’s office of inspector general found in its audit of how the government-sponsored enterprises (GSEs) handled aged repurchase demands that FHFA did not sufficiently evaluate whether to implement a repurchase late fee program at Fannie Mae.
Freddie Mac assesses late fees on aged outstanding repurchase demands, while Fannie Mae has no monetary penalties to encourage their resolution.
OIG also found that FHFA did not examine Freddie Mac’s use of its contractual right to assess repurchase late fees, resulting in missed opportunities to minimize losses.
Finally, FHFA is not including any uncollected repurchase late fees in bulk settlement negotiations with seller-servicers.
Seller-servicers can satisfy a repurchase demand by repurchasing the loan if it remains active or delinquent and reimbursing losses realized by the GSE if the loan is in foreclosed or real estate owned status. Seller-servicers may appeal the repurchase demand. Seller-servicers historically appealed most repurchase demands, but unsuccessful appeal did not change the due date for resolution of the repurchase demand.
FHFA directed the GSEs to develop “consistent timelines and collection standards for fees and penalties and additional types of penalties and remedies.”
However, the agency’s published guidance for aged repurchase demands essentially let each GSE establish its own model for penalizing seller-servicers. As a result, Freddie Mac continued to employ its existing contractual right to assess late fees on seller-servicers for not resolving repurchase demands timely, while Fannie Mae continued to have no equivalent penalty.
FHFA allowed Fannie Mae to continue without any ability to assess repurchase late fees because the Enterprise claimed that setting up such a program could cost up to $5.4 million.
However, the GSE’s analysis did not consider the potential benefits of the program, including a continuous stream of penalty fees. As an indication of the program’s potential, Freddie Mac could have assessed as much as $284 million from 2009 through 2012 using its existing right to assess late fees.
And for much of that time period, Fannie Mae had a larger volume of unresolved repurchase demands than Freddie Mac. Specifically, as of July 2013, more than 10,000 of Fannie Mae’s repurchase demands totaling $2.5 billion had been unresolved for at least 120 days.
OIG also concluded that Freddie Mac’s assessment of repurchase late fees could benefit from stronger Agency supervision. By inconsistently waiving, enforcing, and excepting late fees through 2012, the Enterprise missed assessing up to $284 million in late fees that are now unlikely to be collected – losses that taxpayers ultimately bore.
The FHFA OIG recommended that the FHFA should quantify the potential benefit of implementing a repurchase late fee program at Fannie Mae, and then determine whether the potential cost outweighs the potential benefit.
It should also direct Freddie Mac to develop a repurchase late fee report to be routinely provided to FHFA that expands on information already provided by adding summary information by seller on outstanding repurchases, aging of repurchases, late fees assessed and collected, discretionary late fee waivers, and global late fee exclusions.
The OIG also said FHFA should direct Freddie Mac to provide FHFA with information on any assessed but uncollected late fees associated with the repurchase claims that are included in the 2013 bulk settlements so that these fees can be considered in the negotiations and documented in accordance with the Office of Conservatorship Operations’s Settlement Policy.