Fannie Report Warned of Foreclosure Problems in 2006


Fannie Mae was warned in a 2006 internal report of abuses in the way lenders and their law firms handled foreclosures, long before regulators launched investigations into the mortgage industry’s practices.

The report said foreclosure attorneys in Florida had “routinely made” false statements in court in an effort to more quickly process foreclosures and raised questions about whether some mortgage servicers or another entity had the legal standing to foreclose.

The report found no evidence that borrowers were improperly placed in foreclosure.

“Fannie Mae took the necessary steps to address the specific issues identified by the 2006 report and regularly evaluates and enhances oversight of its retained attorney network,” said a Fannie Mae spokeswoman.

Fannie Mae hired a law firm to investigate potential mortgage-servicing abuses after a Fannie shareholder raised concerns to Fannie five years ago about the industry’s practices. Above, Fannie Mae’s headquarters stands in Washington, D.C.

The government-controlled agency is the largest U.S. mortgage investor by amount of mortgages guaranteed. Fannie and Freddie Mac buy loans from banks and sell them to investors, providing guarantees to cover losses when loans default. They largely are reliant on banks and other firms to service those loans or to handle day-to-day management, including foreclosure. The firms were taken over by the government in 2008 as loan losses soared and have cost taxpayers $134 billion.

In recent months, federal and state officials have initiated probes into whether banks and foreclosure law firms improperly seized homes by using fraudulent or incomplete paperwork. Some U.S. banks temporarily froze foreclosures to review their processes and now face the prospect of a multibillion-dollar settlement with federal and state officials. Fannie Mae severed ties with two Florida law firms in the past six months due to concerns about how the firms pursued foreclosures in Florida courts.

State and federal officials are seeking to establish new rules for the industry. The report could add ammunition to those calling for stronger regulation of mortgage servicers.

Elizabeth Warren, the White House adviser in charge of establishing the new Bureau of Consumer Financial Protection, said in congressional testimony last week that with proper oversight, “the problems in mortgage servicing would have been exposed early and fixed while they were still small.” Ms. Warren didn’t name Fannie Mae and referred to the industry in general.

Fannie Mae hired law firm Baker & Hostetler LLP to investigate potential mortgage-servicing abuses after a Fannie shareholder raised concerns to Fannie five years ago about the industry’s practices. A person familiar with the report provided an account of its findings. A spokeswoman for Baker & Hostetler declined to comment.

Florida has emerged as a hot spot for foreclosure problems. The state’s top prosecutor is investigating several law firms for improper foreclosure work.

Fannie Mae officials “believe foreclosure counsel are sacrificing accuracy for speed,” said the report. The report didn’t name any firms.

Among other efforts, Fannie revamped its attorney network in October 2008 to facilitate more effective management of “fees, costs, quality, and reporting to Fannie Mae,” said the spokeswoman. While Fannie requires its loan servicers to monitor the conduct of foreclosure proceedings, Fannie said its employees make periodic visits to firms and conduct training. Last year, Fannie retained an auditor and third-party law firms to assist monitoring its network.

At the time of the report, foreclosures nationally stood at relatively low levels. The report didn’t identify the practice of “robo-signing” that initially sparked the foreclosure-document inquiries last fall. Robo-signing occurs when affidavits are signed without someone fully reviewing underlying documentation.

But the report raised other red flags that have roiled the industry, including improper legal filings by foreclosure attorneys and questionable practices surrounding the Mortgage Electronic Registration Systems, an electronic-lien registry set up by the mortgage industry to reduce paperwork and lower costs.

Fannie’s legal department suspected that in order to reduce time-consuming efforts to track down documents, “foreclosure attorneys may be taking short cuts by misrepresenting that [original loan documents] are lost,” the report said. Fannie hadn’t authorized such conduct. The Fannie spokeswoman said the company began requiring Florida law firms to notify Fannie about every filing of a “lost-note” affidavit in 2006.

Fannie officials also told investigators that the company had opted against performing regular reviews of its foreclosure attorneys because the company’s lawyers felt the firm would be better insulated from responsibility for misconduct. The report said the approach was under review at the time.

Last fall, Fannie Mae severed ties with the Law Offices of David J. Stern PA, one of the largest foreclosure attorneys in Florida, after internal reviews raised questions about document-handling practices. This month, the firm said it would cease “the practice of law with respect to all pending foreclosure matters.” A lawyer for Mr. Stern declined to comment.

In February, Fannie stopped using law firm Ben-Ezra & Katz PA because of similar document-handling concerns. A spokesman for Ben-Ezra & Katz said that when the firm “spotted technical deficiencies through our own internal self-audit, we addressed them proactively and forthrightly with our clients, with the court and with Fannie Mae, and we began to remediate the issues case by case and at our own expense.”