A government watchdog said Fannie Mae and Freddie Mac improperly foreclosed on homeowners and cost the government billions of dollars by not holding major banks to strict underwriting requirements.
The report released Tuesday also said the Federal Housing Finance Agency gave "undue deference" to Fannie and Freddie officials and didn't scrutinize more than $35 million in bonuses and compensation to Fannie and Freddie executives.
The FHFA's inspector general had released each of the findings on an individual basis. But the semiannual report to Congress sketched a portrait of abuse at the two mortgage giants that the government failed to stop.
Fannie, Freddie and the FHFA didn't respond to the report. But they have responded to similar allegations in previous reports.
Fannie and Freddie own or guarantee about half of U.S. mortgages, or nearly 31 million loans. The Bush administration seized control of the mortgage giants in September 2008.
Like banks, the mortgage giants relaxed lending standards during the housing boom and didn't thoroughly check incomes and assets. High-interest loans, some with low "teaser" rates, were doled out to risky borrowers.
The inspector general report found that Fannie and Freddie did not force banks to repurchase mortgages when they failed to meet strict underwriting requirements. That decision cost the government billions of dollars.
When a senior examiner at the FHFA raised "serious concerns" about Freddie' process for reviewing Bank of America's mortgages, senior Freddie managers disagreed, according to the report. The managers also said they feared losing business from Bank of America if the government became more aggressive in getting money back for bad mortgages, the report said.
The report also found:
• Fannie knew about allegations of improper foreclosure practices by law firms as far back as 2003 but did not act to stop them.
• Fannie failed to establish an "acceptable and effective" way to monitor foreclosure proceedings between 2006 and early 2011.
• The FHFA failed to oversee the government's signature foreclosure-prevention program, the Home Affordable Modification Program. As a result, it cost the government extra time and resources to fix it.
Fannie officials said they told a government official about false foreclosure practices in 2006. That unnamed official, who now works for Fannie's regulator, the Federal Housing Finance Agency, said he couldn't recall the conversation, the report said.
And both mortgage giants have defended executive bonuses and compensation as necessary to keep talented officials.