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U.S. mortgage settlement with Bank of America costly to taxpayers, report says

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Government regulators may have cost taxpayers billions of dollars by settling mortgage-related claims with Bank of America before addressing questions about the methods used to evaluate the loans involved, according to a government report due out Tuesday.

Senior managers at the Federal Housing Finance Agency, the independent agency that oversees government-sponsored mortgage giants Fannie Mae and Freddie Mac, failed to act in a timely way to “significant concerns” about the process Freddie Mac employed to determine which faulty loans it wanted Bank of America to buy back, the agency’s inspector general found.

By not expanding its inquiry to include loans that ran into problems three to five years after they were originated, “Freddie Mac did not review over 300,000 loans for possible repurchase claims,” the report states. That led a senior FHFA examiner to conclude that the company could be passing up “billions of dollars” that would have benefited taxpayers.

In January, the FHFA announced separate settlements with Bank of America in which the bank agreed to repurchase mortgages from Fannie and Freddie that did not meet the underwriting standards that had been represented to investors. The mortgages involved had been sold to Fannie and Freddie by the troubled mortgage company Countrywide Financial, which Bank of America bought in 2008. The settlements totaled $2.87 billion, including a $1.35 billion settlement for Freddie Mac.

The following month, several members of Congress began to question the adequacy of the deal and sought more information, and the FHFA began looking into the settlements in greater detail.

Although the inspector general did not independently examine Freddie Mac’s loan review process, the report states that had managers taken time to review the firm’s practices, FHFA “may have been in a better position to evaluate” the merits of the Bank of America settlement.

In response to the inspector general’s findings, FHFA officials said in a letter dated Sept. 19 that the agency “has not changed its view that the settlement reached in December was appropriate and reasonable.” Still, the agency has suspended approval of future repurchase agreements pending further review, and officials said the FHFA is working to improve ways “to raise and resolve” concerns brought forth by examiners.

“After reading the IG’s report, I am concerned that FHFA is not exercising independent judgment,” Rep. Randy Neugebauer (R-Tex.), chairman of the House Financial Services oversight subcommittee, said in a statement Monday. “Deferring to [Fannie and Freddie] in this case may well have cost U.S. taxpayers billions of dollars. The American taxpayers deserve better than business as usual, especially when they have already spent $160 billion to keep Freddie and Fannie afloat.”

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