Hand over your real estate fraud suspects
February 24, 2005
New rule would force Fannie, Freddie to report possible fraud to regulator
OFHEO Director Armando Falcon Jr.
The Office of Federal Housing Enterprise Oversight (OFHEO) is proposing a regulation to require Fannie Mae and Freddie Mac to report mortgage fraud or possible mortgage fraud to OFHEO in a timely fashion.
The regulation also would require the mortgage finance companies to establish internal controls, procedures and training programs to detect and report mortgage fraud.
"This rule will ensure that Fannie Mae and Freddie Mac do their part to help combat mortgage fraud," said Armando Falcon Jr., OFHEO director. "The enterprises will now have a clear obligation to report fraud and help prevent a repeat of cases like the First Beneficial matter," Falcon said.
Mortgage fraud is rampant in the United States and can cost lenders and consumers millions of dollars. Perpetrators often use sophisticated rings of professionals to bilk lenders out of money. The crimes can take years to investigate.
The rule, which is open for public comment, states that Fannie and Freddie must notify OFHEO if either company is requiring the repurchase of a mortgage backed security or other instrument, or if it is declining to purchase an instrument because of suspected fraud. The proposed rule cites recent examples of fraud or alleged fraud involving First Beneficial Mortgage Corp., Olympia Mortgage Corp., and United Homes LLC.
According to the proposal, failure to comply with the requirements of the regulation may subject Fannie and Freddie or the companies' board members or employees to supervisory actions by OFHEO, including the issuance of cease-and-desist proceedings and civil money penalties.
The public comment period on the proposed regulation is set at 30 days after publication in the Federal Register.
Separately, OFHEO also issued an advisory requiring Fannie and Freddie to notify OFHEO of investigations, legal proceedings, or civil or criminal actions by any governmental authority or private party.
OFHEO's announcement comes in the wake of accounting scandals at both Fannie Mae and Freddie Mac. In December 2004, Fannie Mae replaced Franklin Raines, its chairman and CEO, who announced he was taking early retirement, and Fannie Mae's chief financial officer, Timothy Howard, resigned Dec. 21.
The two left in the wake of an SEC directive to make accounting corrections that could knock out some $9 billion of Fannie Mae's past profit. Fannie Mae's financial accounting troubles have drawn shareholder lawsuits and investigations by the Justice Department and the Securities and Exchange Commission.
House Financial Services Committee Chairman Michael G. Oxley (R-Ohio) has pledged to work toward a legislative reform package for Fannie Mae this Congress. Oxley has said that it is necessary to build a regulator for the GSE with the power, independence and funding to confront and handle such matters.