Report: Fannie Mae knew of foreclosure abuses in '03

By MJ LEE | 10/4/11 6:25 AM EDT


Fannie Mae knew as far back as 2003 of improper foreclosure practices by law firms but did little to remedy the problem, according to a government report released Tuesday.

The mortgage titan was warned by a shareholder of the evidence on foreclosure abuses in 2003, the inspector general of the Federal Housing Finance Agency said in the report, according to the Associated Press. Fannie Mae hired a law firm to look into the allegations in 2005, which reported the next year that it found foreclosure attorneys in Florida “routinely filing false pleadings and affidavits.”

Officials at Fannie Mae said they informed a government official about the firm’s findings in 2006, according to the report, but the official said he doesn’t remember the conversation.

By June 2010, the FHFA had grown increasingly aware of potential foreclosure processing problems, prompting it to conduct a two-day field visit to Florida, the Wall Street Journal reports. The Agency found “documents problems were evident and law firms … were not devoting the time necessary to their cases due to Fannie Mae’s flat fee structure and volume-based processing model.”

Fannie Mae officials were informed of FHFA’s findings after the Florida visit, but the warnings didn’t put an end to the use of “robo-signing” for processing documents, resulting in banks to suspend foreclosures in fall of 2010. It also led to the investigation by all 50 state attorneys general.

The reports also shines a harsh light on potential misconduct of law firms – for example, Freddie Mac terminated a law firm that processed a large portion of its foreclosures in Florida due to foreclosure processing malpractice. But Fannie Mae refused to follow in Freddie Mac’s footsteps, saying the cost of transferring documents to a new law firm “would be substantial.”

A spokeswoman for the watchdog agency said the FHFA is “concluding our supervisory work in this area and we will direct the enterprises to take whatever action is warranted once we are done,” the Journal said.