Freddie Mac faulted by IG in $2 billion mortgage fraud loss

The federal government’s giant housing agencies could have saved taxpayers billions of dollars from mortgage fraud in a celebrated case involving Colonial Bank and Taylor, Bean and Whitaker, if they had shared more information with each other and conducted better audits.

That was the conclusion of the inspector general for the Federal Housing Finance Agency being released Tuesday, which found that a massive fraud perpetrated by Taylor Bean’s chief executive, Lee Bentley Farkas, which landed him in prison in 2011 could have been detected earlier. Had the agencies been more on the alert, they might have prevented nearly $2 billion of losses at Freddie Mac, nearly $1 billion in losses at Ginnie Mae — two of the government’s three mortgage-finance agencies — as well as billions more in losses at private banks that did business with the firm.

The report from FHA acting Inspector General Michael P. Stephens noted that in this case, Fannie Mae did take steps to avoid falling prey to the conspiracy between Colonial and Taylor Bean to defraud investors in mortgages they originated, securitized and sold to the government agencies and private banks.

After a lengthy investigation, Fannie Mae officials in 2000 terminated a contract to buy loans from Taylor Bean — well before the massive fraud scheme that brought them down got underway. But Fannie failed to notify Freddie Mac or its regulator about the termination, the report found.

With the mortgage market booming and the housing crisis still years away, Freddie Mac eagerly forged a “special relationship” with Taylor Bean in 2002 to purchase and securitize its loans. Years later, in 2008 and 2009, after the fraud was discovered, Freddie Mac sought to exercise its contractual right to force Taylor Bean to repurchase the fraudulent loans. But the company went out of business before Freddie could collect on $1.8 billion of its loan-repurchase demands.

Similarly, the IG auditors found, Ginnie Mae failed to detect — and in some cases, waived — serious violations of its own rules in connection with loans it purchased from Taylor Bean, leading to massive losses after the company went under. The Taylor Bean prosecution, in which Farkas got a 30-year prison term for multiple counts of fraud, was one of the most significant cases arising from the housing and mortgage crisis of 2008.

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Aside from failing to investigate or otherwise learn about the problems picked up by Fannie Mae, Freddie Mac and Ginnie Mae also missed a series of warning signs and financial irregularities that could have alerted them and their auditors to the scheme perpetuated by Taylor Bean and its co-conspirator, Colonial Bank.

“There were several unheeded red flags that should have alerted regulators and investors,” which could have limited the damage, said Mr. Stephens in the report.