Where to Look for More Fraud at Fannie Mae

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*** FOR IMMEDIATE RELEASE ***​

WHERE TO LOOK FOR MORE FRAUD AT FANNIE MAE

VENTURA, Calif. (April 11, 2025) – Fannie Mae reported this week it had fired more than 100 employees for unethical conduct, including facilitation of fraud. Expect more such news as the truth emerges about this organization’s activities over the past half-decade.

At the beginning of the decade, under the protective camouflage of its federal conservatorship and Covid-19, Fannie began eliminating critical checks and balances in a radical experiment with U.S. taxpayers’ money and the U.S. economy. The mortgage giant began scrapping or weakening long-accepted underwriting safeguards like standard FICO scoring, title insurance, mortgage insurance, downpayments and appraisals.

Investigators should mine the following areas for the presence of additional waste, fraud and abuse:

• Schemes to coerce in-house analysts. Starting with Covid, Fannie gutted underwriting standards based on political exigencies and then coerced and incentivized a group of in-house analysts to magnify doubts about a class of loans in order to send repurchase demands to lenders. Fannie’s valuation system shunted a subset of the millions of loans purchased by the mortgage giant into a “high risk” pool. A Fannie Mae whistleblower reports that the in-house analysts were then coerced, at the threat of losing their jobs, into validating the automated system’s findings. If this is correct, Fannie’s vendors were also likely pressured or incentivized to tweak automated valuation models. A Maryland task force looking into automated valuation models at the mortgage giants was stonewalled when it began asking questions about Fannie Mae’s automated valuations. Expect considerable fraud and abuse in this area.

• Fraud within “Special-Purpose Credit Programs.” Such programs provide money to particular borrowers who lack adequate down payments for homes or the ability to cover mortgage closing costs. Many Special Purpose Credit Programs were spawned by the mortgage giants under Biden-era appointees for political purposes. These programs have historically resulted in racial targeting and so-called affinity schemes. Last month, Federal Housing Finance Agency Director Bill Pulte ordered Fannie and Freddie to terminate all Special Purpose Credit Programs. Widescale fraud may have already been found with these programs.

• Mischief with loan-level price adjustments. Fannie Mae and Freddie Mac impose a loan-level pricing adjustment which is a fee charged to mortgage borrowers who opt for a conventional mortgage. The fee is supposed to be based on the borrower’s level of risk. The fee can vary depending on factors such as the borrower’s loan-to-value ratio, credit score, type of occupancy, and the number of units in the property. Typically, borrowers pay this fee in the form of higher mortgage interest rates and or fees. These are assessed based upon certain eligibility or other loan features submitted in Fannie Mae’s system. Because it is not well understood by borrowers, all kinds of mischief is possible with this fee. Expect to see sweetheart deals, kickbacks, padding and special waivers of this fee.

• Mischief in Fannie’s funding of home repairs and closing-cost reimbursements. Fannie Mae offers something called HomeStyle Renovation loans, which allow borrowers to finance renovations and improvements while also covering closing costs. The loan covers the cost of home repairs and renovations, including materials and labor. Additionally, Fannie Mae provides expense reimbursement for servicers related to loan servicing, such as for advances for taxes, insurance, and other out-of-pocket expenses. Expect to see considerable fraud in this area.

• Potential sweetheart deals with pre-approved law firms that may have been greenlighted to provide lucrative attorney-opinion letters to replace standard title insurance on federally sponsored mortgages.

• Potential manipulation of executives at the Fair Isaac Company in the dilution of its publicly traded company’s FICO score and the creation of diluted versions of the gold-standard score.

• Mischief by Fannie’s internal employee affinity groups. In their mission statements, these groups of Fannie Mae employees have pledged to join hands with vendors and outside actors, including borrowers. How do we know this? This was in their respective mission statements in a Web page that has since been removed. The page was here.

• Irregularities with credit-default swaps. Fannie has been dumping risk into capital markets by peddling junk-rated credit default swaps in a dangerous and unregulated insurance scheme. (Think insurer AIG’s spectacular collapse and federal bailout in 2008.) The unregistered instruments are called “CRTs.” The practice is relatively new for Fannie, which has found itself propping up an over-the-counter marketplace for the synthetic derivatives.

• In 2022, Fannie Mae reached a $53 million settlement with a nonprofit aligned with the Biden administration’s U.S. Department of Housing and Urban Development. The payment to the National Fair Housing Alliance may not have been vigorously opposed by the mortgage giant. The lawsuit and settlement may simply have been an elaborate, politically directed payout to a nonprofit that acts as HUD’s private enforcement arm, scout and rainmaker.

• Fraudulent mortgages to “credit-invisible” borrowers. In January 2023, under the pretext of helping the underserved, Fannie announced it had tweaked the knobs and dials on its impenetrable underwriting algorithm to fit so-called “credit invisibles” for mortgages. These included borrowers who had never held so much as a gasoline card, a Kohl’s card and those who have become elderly and infirm. In a press release in 2022, Fannie cited findings that show millions of people in the U.S. are “credit-invisible.” Expect to see considerable fraud and abuse in this loan pool.

• Fannie and Freddie have been making bad loans and then dumping the notes for pennies on the dollar to venture capital firms and crony nonprofits. The buyers are not putting foreclosed homes back on the market. The homes are instead being rented out. The restrictions in fine print placed on the purchasers of Freddie and Fannie’s nonperforming loans offer a big clue as to what the twins are up to in hiding botched mortgages. Since Covid, Fannie alone has auctioned off pools of nonperforming and so-called delinquent “reperforming” loans. The twins have been quietly purging the mortgages from their books or holding the loans under misleading labels, such as “reperforming.”

Both Freddie and Fannie have a history of misrepresenting their activities to the public, investors and Congress, from concealing trillions in toxic Alt-A loans, stated-income loans and negatively amortizing loans leading up to the 2007-2008 financial crisis. They required a combined federal bailout of nearly $200 billion in 2008. In the past, both entities have been caught using accounting methods that underreport expenses and inflate income.

In 2011, the Securities and Exchange Commission filed civil fraud charges against former Fannie Mae CEO Daniel Mudd, former Freddie Mac CEO Richard Syron and four other former executives. In 2015, the case against Freddie Mac execs settled with Syron paying $250,000, former chief business officer Patricia Cook paying $50,000, and former vice president of credit policy Donald Bisenius paying just $10,000. The settlement was unusual as it allowed the three executives to continue to deny wrongdoing. Mudd settled his case a year later for $100,000, a sum paid for by Fannie Mae. It was sofa change compared with the $24 million he earned from Fannie Mae from 2006 to 2008.

We can only hope this week’s firings were not a token gesture but the beginning of a purge of bad actors from of this rogue organization.

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Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.

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