Magazine article American Banker

Fannie, Freddie Need Third-Party Tests of Compliance: Watchdog

Magazine article American Banker

Fannie, Freddie Need Third-Party Tests of Compliance: Watchdog

Article excerpt

Byline: Kate Berry

The regulator of Fannie Mae and Freddie Mac should require that banks and mortgage lenders obtain independent, third-party tests to ensure compliance with guidelines, according to a government watchdog report.

Neither Fannie nor Freddie "have routine, independent verification of counterparty compliance," the Federal Housing Finance Agency Office of Inspector General said in a report to be released Friday.

As a result, the government-sponsored enterprises are exposed to greater risk of fraud and the misrepresentation of facts about properties, borrowers or loans, the report said.

The report is the second in the past two weeks that has been highly critical of the FHFA, which oversees Fannie and Freddie while they are in conservatorship. The watchdog recently lambasted the FHFA for failing to analyze the costs to taxpayers of a new plan to reduce buybacks for banks and mortgage lenders.

This latest report continues that criticism of the FHFA's "representation and warranty framework," announced in May, alleging the plan could further shift risks from lenders and servicers to the GSEs themselves.

Since the plan gives lenders relief from buying back nonperforming loans after just three years, the GSEs are increasingly relying on lenders' underwriting processes for assurances of loan quality, the report said.

Other federal agencies involved in the mortgage market do require some type of independent testing of counterparty compliance, the report said. Ginnie Mae, the Securities and Exchange Commission, the Department of Housing and Urban Development and private investors in mortgage-backed securities commonly require third-party attestation of compliance, the report said.

Yet, neither Fannie nor Freddie "has established requirements for those sellers to have their loan production processes independently tested by a third-party as part of either annual financial statement audits or separate engagements," the report said. …

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