Freddie’s compromised underwriting standards

by jeffcarroll on Jan 31, 2011

A personal account of alleged impropriety in the multifamily mortgage market

The recent release of the Financial Crisis Inquiry Commission’s (FCIC) final report has re-sparked the debate over the causes of the financial crisis. In particular, the report’s finding that Fannie Mae and Freddie Mac were not primary engines in the subprime crisis elicited a lengthy dissent from noted conservative thinker and FCIC member, Peter Wallison.

Mr. Wallison asserts that the, “sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans.” In particular, he points to, “policy [that] sought to increase home ownership in the United States through an intensive effort to reduce mortgage underwriting standards”

Much of the focus on the role of the GSEs in the crisis has been on mortgages for single-family homes, the associated underwriting practices, and the government policies surrounding those practices, but Freddie Mac also has a presence in the multifamily mortgage market. It is in this regard that I have come face to face the unethical behavior that leads to questionable underwriting.

The following link takes the reader to a redacted copy of a complaint I recently filed with the Federal Housing Finance Agency (FHFA) alleging that Freddie Mac and/or its affiliated lender pressured me to deliver predetermined conclusions in the valuation of a $5,680,000 affordable multifamily property:

Letter, FHFA, Revised 2011-01-26 (Redacted)

Because FHFA is the agency charged with providing “effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and Federal Home Loan Banks” it seemed appropriate that I refer this matter to them.

While this piece is not intended as a thorough analysis of Freddie’s underwriting standards, it is my belief that these situations occur all too often. Over the past few years, I have had several, similar experiences on HUD and Fannie Mae multifamily transactions and suspect I will be faced with similar requests in the future. As the role of Fannie and Freddie in causing the financial crisis continues to play out in the public forum, I will play my own personal part in keeping the GSEs honest by reporting any impropriety to the FHFA and publishing my complaints here.

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