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58 | Th e M Rep o RT O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t a report filed by the Office of Inspector General (OIG) of the Federal Housing Finance Agency (FHFA) states that Freddie Mac and Ginnie Mae ignored "red flags" that pointed to a mortgage fraud scheme perpetrated by lenders Taylor, Bean & Whitaker and Colonial Bank, which resulted in billions of dollars in losses for the two federally supported housing companies. In addition to the losses ab- sorbed by Freddie Mac (almost $2 billion) and Ginnie Mae (almost $1 billion), private banks that con- ducted business with Taylor Bean & Whitaker lost billions. The wholesale mortgage lender filed for bankruptcy in 2009, two years before its CEO, Lee Bentley Farkas, was imprisoned for his alleged role in the fraud. Fannie Mae avoided losses by voiding a contract to buy loans from Taylor Bean & Whitaker following an investigation in 2000—about two years before the fraud began and about eight years before the housing crisis. The report from FHFA's OIG states that Fannie Mae failed to notify Freddie Mac or Ginnie Mae that the contract had been terminated, however. Michael P. Stephens, FHFA's acting inspector general, conclud- ed in the report that the losses could have been avoided had there been better communication between the government agencies and if more thorough audits had been conducted. The OIG report says Ginnie Mae ignored warning signs and financial discrepancies that would have made it aware of Taylor Bean and Colonial's scam. "Various red flags should have alerted counterparties, inves- tors, and regulators to the fraud scheme, but they were not adequately addressed," Stephens said in the report. "The failure to adequately address the red flags cost various parties losses of bil- lions of dollars." Without the knowledge of the voided contract between Fannie Mae and Taylor Bean & Whitaker, Freddie Mac began buying loans from the lender in 2002 during the housing boom. When the market fell out in 2008 and the fraud was uncovered, Freddie Mac tried to make Taylor Bean & Whitaker buy the faulty loans back, but by then, the Florida-based lender was already on its way to bankruptcy. Ginnie Mae found itself in a similar position after buying loans from Taylor Bean & Whitaker during the housing boom and then attempting to force the lend- er to repurchase the fraudulent loans after the market crashed. The OIG report calls for mea- sures such as increased "monitor- ing of counterparties that exhibit abnormal or unusual character- istics" and requiring the GSEs to "share—between themselves and with FHFA, Ginnie Mae, and other interested entities—negative performance and compliance data, and evidence of illegal activities of counterparties" to prevent similar losses in the future. Oig: Officials ignored red Flags in Fraud scheme Taylor, Bean & Whitaker losses could have been avoided with better communication, inspector says Department SECONDARY MARKET