Federal Home Loan Mortgage Corporation: Abuses in Multifamily Program Increase Exposure to Financial Losses

Highlights

Pursuant to a congressional request, GAO examined whether the Federal Home Loan Mortgage Corporation's (Freddie Mac) procedures governing the purchasing and servicing of 35 Bronx, New York, multifamily mortgages adequately protected its investments.

Recommendations

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Other	To ensure that key appraisal and servicing information submitted by seller/servicers on multifamily properties is accurate and complete, the Chief Executive Officer of Freddie Mac should direct program controls to be further strengthened by requiring seller/servicers to submit documentation verifying key appraisal and servicing information. For appraisals, seller/servicers should be required to obtain, to the extent available, and include as part of the loan package, documentation verifying key information on the selling prices and dates of sale of comparable and appraised properties, rents, expenses, the physical condition of the properties, and the professional standing of appraisers. For servicing, the documentation and verification requirement should cover updated reports on maintenance problems, rental income and expenses, property sales and secondary mortgages, and the timeliness of borrower mortgage payments. The information should be verified with data obtained from independent sources such as public records, government agencies, and reputable data services, or with documentation such as audited financial statements, signed contracts, or cancelled checks.	Closed – Implemented Freddie Mac revised its multifamily loan underwriting process to include quality control measures which will enhance the reliability of appraisal information. However, there is no indication that it plans to address the recommendation on improving information on the servicing of multifamily properties.
Other	To ensure that key appraisal and servicing information submitted by seller/servicers on multifamily properties is accurate and complete, the Chief Executive Officer of Freddie Mac should direct program controls to be further strengthened by establishing standards governing appraisers' methods of forecasting net income, determining the appropriateness and completeness of expense items, calculating tax savings, and justifying capitalization rates.	Closed – Not Implemented Freddie Mac pointed to existing controls over seller/services that it feels are adequate to mitigate the problem.
Other	Freddie Mac should review its $11-billion portfolio of multifamily loans to identify other instances in which it received inaccurate appraisal and servicing information that may constitute misrepresentation of fact and refer those matters to the U.S. Attorney for appropriate action. Freddie Mac could focus such a review, for example, on: (1) appraisals associated with loans that became delinquent within a short time after it purchased them or that have frequently been delinquent; and (2) servicing information provided for properties on its watch-list of high-risk loans.	Closed – Not Implemented Freddie Mac believes that its quality control review process and annual high-risk loan reviews are adequate to mitigate the problem.

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Topics

Auditing and Financial Management

AppraisalsFinancial institutionsFinancial managementGovernment sponsored enterprisesInternal controlsMortgage loansProgram abusesReal propertyReporting requirementsMortgages