Since the financial crisis of 2007 – 2008, both Fannie Mae and Freddie Mac have operated under a conservatorship by the federal government. The federal agency responsible for overseeing both mortgage credit companies is the Federal Housing Finance Agency (FHFA).
Most residential mortgage in the United States are backed by either Fannie Mae or Freddie Mac. To assure that both companies remain solvent, the FHFA has required increased underwriting standards. Near the top of the list are better appraisal and valuation standards. Assessing the value of collateral securing mortgage loans is one of the pillars in making sound underwriting decisions.
Since March of 20132, the FHFA has required both agencies to analyze all appraisals for single-family loans before they back the loan. This is a significant undertaking since, in 2012 alone, Fannie Mae and Freddie Mac collectively purchased and guaranteed approximately 6 million single-family residential mortgages, valued at $1.3 trillion. Recently the FHFA’s Office of Inspector General audited the appraisal review process.
The results aren’t pretty.
In a report released on February 6th, auditors found that in just the first 6 months of 2013, Fannie Mae spent $13 billion buying 56,000 loans that potentially violated underwriting or appraisal standards. Freddie Mac spent $6.7 billion buying 29,000 loans with questionable appraisals. According to the report, many of the loans bought by Freddie had no property values listed.
The Inspector General is critical of the two agencies for allowing bad or questionable loans to be purchased. We blame the source of the problem; bad lenders and sloppy underwriters. Unfortunately, in a commission based business, some lenders turn a blind eye to underwriting standards. By doing so, in the short term they get their commission. In the long term, taxpayers are often left footing the bill when a loan defaults.
One would think that after all the scrutiny and huge false claims act (whistleblower) settlements against lenders in recent years, the mortgage industry would learn its lesson. Obviously some have and many mortgage brokers and lenders continue to enjoy low default rates. A quick look at HUD’s Neighborhood Watch information system reveals that a few lenders continue to write bad loans, however.
Under the Civil War era federal False Claims Act, whistleblowers can file a lawsuit under seal against a lender that violates HUD guidelines. Certifying a suspect loan as eligible and meeting the guidelines of HUD, Fannie Mae or Freddie Mac is a violation of the False Claims Act.
Why should whistleblowers come forward? Obviously, it is the right thing to do. Bad lenders hurt everyone including homeowners who are left with houses they can’t afford and taxpayers who are left footing the bill. Frequently, these same bad lenders don’t properly pay their branch managers and staff as well.
Need more reasons? Under the False Claims Act, whistleblowers are entitled to a percentage of whatever the government collects from the wrongdoer. With triple damages and average awards of around 20%, whistleblower awards can easily reach the millions of dollars.
The Financial Institutions Reform Recovery and Enforcement Act – FIRREA for short – also pays cash awards of up to $1.6 million to whistleblowers.
To qualify under either program, whistleblowers must have original source information. The False Claims Act says the fraudulent conduct or false certifications must also relate to a federally backed program. FHA, VA, Fannie Mae and Freddie Mac programs qualify. FIRREA is more broad in its application, there simply must be harm to a federally backed or insured lender.
The first step in bringing a whistleblower case is finding a great whistleblower lawyer. There are many law firms that advertise they take whistleblower work but few concentrate in cases involving lenders, banks and financial institutions. The whistleblower attorneys at Mahany & Ertl have the largest whistleblower case in the United States, HUD’s $2.4 billion car against Allied Home Mortgage. Obviously, not every case is that large but we have plenty of experience in all size cases.
Mahany & Ertl – America’s Whistleblower Lawyers. Case investigated throughout the United States.