WASHINGTON — The Federal Housing Finance Agency knew as early as 2009 about potentially abusive foreclosure practices and yet failed to take action to curb them, according to a watchdog report released Tuesday.

In the fourth critical report during the past month, the FHFA Office of Inspector General said the FHFA could have done more to correct multiple problems with the foreclosure process.

"FHFA-OIG believes that there were multiple indicators of foreclosure abuse risk prior to 2010 that could have led FHFA to identify and act earlier on the issue," the IG's report states.

The IG's investigation found there had been several warning signs that, if they had been observed, would have allowed the agency to identify risk well before the heightened media attention that began last year.

It pointed to the deteriorating financial conditions that eventually led Fannie and Freddie Mac to be taken into conservatorship; the rising number and dollar value of mortgage defaults and REO in the enterprises' portfolios; and the nearly three dozen consumer complaints reported to the agency. The IG also cited media reports about foreclosure abuses by law firms retained by Fannie and public court filings in Florida and elsewhere alleging such abuses.

According to the IG's investigation, the first signs of abuse came to light under Fannie's previous regulator, Office of Federal Housing Enterprise Oversight, back in December 2003 when a Fannie shareholder began alerting the company of foreclosure abuse allegations.

It was almost two years later before Fannie hired an outside law firm to investigate a series of allegations in the foreclosure process. By 2006, the law firm had issued a report saying it found foreclosure attorneys in Florida "routinely filing false pleadings and affidavits …" and suggested such practices could be happening elsewhere.

For its part, the IG's office was not able to verify whether Fannie had even notified OFHEO in 2006 of the law firm's findings. Officials at the company claim that they did tell an OFHEO senior official during a telephone conversation that year, however there is no record of that conversation. The official, too, has no record or recollection of that specific communication.

Later, FHFA began receiving as early as August 2009 consumer complaints of "inappropriate" foreclosure practices involving Fannie loans. The IG identified 35 such complaints between that summer and October 2010.

At the same time, Fannie's delinquencies increased to historic levels, according to the IG's report. They rose from 400,000 homes at the end of 2008 to nearly 1 million by the end of 2009, leading to a substantial increase in foreclosures.

Fannie's foreclosures more than doubled from 2007 to 2008, and increased by more than 50% the following year. The unpaid principle balance on the 2010 foreclosures totaled more than $47 billion.

Additionally, the sale of foreclosed properties didn't keep pace with the rapid foreclosure increase, and Fannie's inventory of REO grew.

Still, even with the dramatic increase in mortgage delinquencies and foreclosures, that did not prompt FHFA to take further steps to examine the foreclosure process, according to the IG's report. Even FHFA examiners concluded that such "deteriorating industry conditions over the past several years should have prompted the enterprises to review their policies, processes, and controls over their default-related legal services vendors," but didn't.

Instead, news reports circulated about the existence of "foreclosure mills" as the number of delinquencies continued to rise rampantly. Employees were reportedly "robo-signing" mortgage related documents at record speeds without verifying their accuracy. There were reports of fraudulent affidavits and improper notarization, and knowingly concealing mistakes from courts, attorneys and clients.

FHFA did not look into this issue until such media reports began to widely circulate, according to the IG's office.

"FHFA did not schedule comprehensive examination coverage of foreclosure issues, including allegations of abuse by specific law firms that performed default-related legal services until after news accounts of abuses surfaced in August 2010," the IG's report stated.

Traditionally, the FHFA has not considered the retained attorney network, or RAN, a "high-risk area" and so has not focused its examination efforts. The network was created by Fannie to perform default-related legal services related with foreclosure, bankruptcy, loss mitigation, eviction and REO closings.

The IG's office said that had the FHFA looked into key indicators, like rising default and foreclosure rate trends, they would have recognized its growing risk.

"Had the agency more fully explored and considered these indicators, it could have elevated default-related services as an area of concern worthy of increased supervisory attention," the IG's report stated. "Indeed, FHFA might have been able to take earlier action to strengthen controls over Fannie Mae's law firms involved in the foreclosure process."

The IG's office is calling on the agency to develop better procedures to identify emerging risk - a recommendation the FHFA agreed to do by Sept. 29, 2012. It also agreed to another recommendation to put into place better procedures to share information on troubled law firms between the two companies, but said it would review its current standards of its supervisory plans for default-related legal services and would make any changes, if needed.

The IG stressed the importance of such recommendations to prevent further risk of abuse.

"In absence of such action, FHFA has limited assurance that foreclosure processing abuses will be prevented and detected through its supervisory activities," the IG's report stated.

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