Billions lost to fraud through lack of communication at Fannie, Freddie -- report

by Ryan Smith26 Aug 2014
The government’s mortgage finance giants could have saved taxpayers billions had they more effectively shared information about a massive fraud case, according to a new report.

A new report by the acting inspector general of the Federal Housing Finance Agency, Michael P. Stephens, found that a lack of communication between Fannie Mae, Freddie Mac and Ginnie Mae led to losses in a massive fraud case involving Colonial Bank and Taylor, Bean & Whitaker Mortgage Group. The fraud landed Taylor Bean’s CEO, Lee Farkas, in prison in 2011.

According to prosecutors, Farkas covered up massive losses at TBW through a scam in which the company sold phony loans to Alabama’s Colonial Bank and diverted money from Ocala Funding, a TBW subsidiary. The fraud -- which eventually led to the collapse of Colonial -- was discovered in a 2009 audit.

But the fraud could have been detected earlier had Fannie, Freddie and Ginnie been more alert and in better communication with each other, the inspector general reported. Better communication could have prevented nearly $2 billion in losses at Freddie Mac and nearly $1 billion at Ginnie Mae, as well as billions at private financial institutions taken in by the fraud, the report stated.

According to the IG report, Fannie Mae conducted a lengthy investigation of TBW in 2000, before the fraud that eventually destroyed the company was even underway. However, Fannie’s investigation revealed irregularities that caused it to terminate its contract to buy loans from TBW. But Fannie didn’t inform Freddie of its findings.

Freddie, noting the cessation of business between Fannie and TBW, decided to enter a “special relationship” with the company; specifically, Freddie agreed to purchase mortgages from TBW and then hire TBW to service those mortgages. This decision was made with little or no due diligence, according to Stephens.

“Its due diligence essentially consisted of discussions between a Freddie Mac employee, Farkas, and representatives from Colonial,” he wrote.

Stephens wrote that Fannie, Freddie and Ginnie missed several “red flags” that should have alerted them to the TBW fraud, including the fact that the company was very “very thinly capitalized” and that it lacked the ability to ensure Freddie Mac loan eligibility standards were met.

“The failure to adequately address the red flags cost various parties losses of billions of dollars,” Stephens wrote. “To avoid a recurrence of such losses, the Enterprises need to improve counterparty monitoring, contract enforcement, and communication.”

Stephens wrote that since Fannie and Freddie had not self-initiated any “of these straightforward internal controls,” the FHFA should consider imposing them.

“In retrospect it appears obvious that Fannie Mae, Freddie Mac, Ginnie Mae and FDIC should have shared their experiences with counterparties among themselves and they should have learned from each other’s experiences,” he wrote. “However, these obvious points were not implemented in the TBW-Colonial scenario.”


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