Freddie Mac will be compensated by banks an additional $3.4 billion following a thorough review of bad loans purchased during the housing boom, according to a report from the inspector general for the Federal Housing Finance Agency, Reuters reported Sept. 13.
The report comes after Freddie Mac agreed in January 2011 to settle with Bank of America for $1.35 billion to resolve current and future loan repurchase requests.
The initial settlement covered loans sold by Countrywide Financial, which Bank of America bought in 2008. However, in September 2011, the inspector general found that Freddie Mac's review process for repurchase requests had been deficient and was in need of thorough review, Reuters reported.
According to the report, Freddie Mac only reviewed loans that had become delinquent or had payment problems within the first two years they were made. This process excluded loans that Freddie purchased or guaranteed during the peak years of the housing boom — 2005 to 2007 — that were defaulting in high numbers.
The inspector general found that nearly 100,000 loans granted in 2006 were not reviewed because they did not meet Freddie’s criterion. The report noted that “this practice limited Freddie Mac's potential recoveries from repurchase requests.”
The FHFA is working on policies to improve how Freddie Mac and Fannie Mae will handle future repurchase requests, Reuters reported. The agency will review loans shortly after purchase, rather than after they have defaulted.
As Freddie Mac and Fannie Mae implement improvements to their loan review processes, banks also have been taking bigger charges in order to cover repurchase losses secured during the peak years of the housing boom, Reuters reported.
Fannie and Freddie have so far drawn $188 billion in taxpayer funds to survive and have paid more than $45 billion in dividends.