The federal agency overseeing Fannie Mae and Freddie Mac failed to stop abuses by the mortgage giants' network of foreclosure attorneys for years before problems surfaced in news accounts, according to a report released Tuesday.
The inspector general for the Federal Housing Finance Agency looked into the agency's oversight of foreclosure attorneys for the mortgage financiers after Rep. Elijah E. Cummings in February sought an investigation of alleged abuses. The mortgage companies, which buy loans and mortgage securities, are regulated by the FHFA.
Problems with the network of attorneys had surfaced in August 2010 in news reports that said firms hired to handle foreclosure cases for Freddie and Fannie engaged in practices such as filing false documents and "robo-signing," or processing cases with false signatures. In February, Cummings, a Baltimore Democrat, had begun to look into allegedly illegal activities of mortgage servicers, including wrongful foreclosures, deficient record-keeping, inflated fees and fraud in lending.
The inspector general found that FHFA failed to look into allegations of abuse by specific law firms until after the news reports surfaced, despite indicators of increased risk, including rising default and foreclosure rates amid the housing crisis. The findings document cases as early as December 2003 in which Fannie Mae, FHFA and its predecessor, the Office of Federal Housing Enterprise Oversight, failed to fix problems reported to them.
"FHFA might have been able to take earlier action to strengthen controls over Fannie Mae's law firms involved in the foreclosure process," the report said. "The agency should have paid closer attention to the highly dynamic housing foreclosure environment between 2008 and 2010."
The inspector general's office recommended that FHFA improve its supervision of default-related legal services, improve its capacity to identify abuses in the future and put in place procedures to address poor performance. The agency has agreed to the recommendations, the report said.
The report's finding that some firms violated state laws governing the foreclosure process means, "an untold number of borrowers with loans owned or guaranteed by Fannie Mae may have suffered abuses that violated their legal rights," Cummings wrote in a letter sent Tuesday to FHFA acting director Edward DeMarco. Cummings called for the agency to discontinue Fannie Mae's attorney network .
In April, Freddie Mac had instructed its mortgage servicers to stop referring foreclosure cases to a Virginia law firm, Shapiro & Burson, which was accused of improperly handling more than 1,000 deeds for Maryland homes in foreclosure. A paralegal formerly employed at the firm had filed a complaint alleging that deeds and foreclosure paperwork contained fraudulent signatures.
But Fannie Mae had continued to include the firm on its retained attorney list, while also continuing to use a Bethesda law firm that last year acknowledged filing foreclosure cases with false signatures, according to news reports.
"Among the most troubling findings in the Inspector General's report is the conclusion that FHFA and Fannie Mae continued to utilize the services of law firms they knew were engaging in abusive and illegal actions against homeowners," Cummings said in the letter. "As a Member of Congress and an attorney, I find the systemic failures by FHFA and Fannie Mae to adequately oversee these foreclosure law firms to be a breach of the public trust and an assault on the integrity of our justice system."
Spokesmen for Fannie Mae and Freddie Mac could not be reached for comment Monday.
"My understanding, from the perspective of the homeowners we help, it seems that Fannie and Freddie delegate much responsibility for the servicer and the attorneys, probably too much responsibility," said Phillip Robinson, executive director of Civil Justice, a nonprofit legal assistance group. He said the improper handing of cases has resulted in clouds on untold numbers of land deed titles in foreclosure cases.
"As a result of delegating with a blind eye, the kinds of practices … my clients experience in unfair and wrongful foreclosure actions have become apparent," he said. "We know … there are hundreds and thousands of deeds in Maryland land records that weren't signed by the person they were purportedly signed by. A prospective buyer of property in foreclosure should be asking questions … and make sure the deed is a valid deed."