Summary: Commonly referred to as Freddie Mac, the Federal Home Loan Mortgage Corporation is a federally chartered corporation that buys multifamily (apartment buildings) as well as single-family residential mortgages from primary lenders (seller/servicers) who then usually service the mortgages for Freddie Mac after the sale. Following allegations by a Bronx community group that 35 apartment buildings in the New York borough were overfinanced and allowed to deteriorate, GAO examined whether Freddie Mac (1) accepted overvalued appraisals when it bought the properties, which resulted in overfinancing; (2) had in effect a loan-servicing process in the years after the mortgage purchase that protected it against additional risk; and (3) has new procedures to prevent overfinancing and servicing problems. Because of weak internal controls, Freddie Mac did not detect patterns of inaccurate and incomplete information in the appraisals and reports on the physical and financial condition of the properties that were provided by seller/servicers. Consequently, Freddie Mac overfinanced 27 of the 35 properties by about 20 percent of its total investment in them and increased the chances of fraud and program abuse. As of July 1991, Freddie Mac was foreclosing on seven of the 35 properties, and five others were 90 or more days delinquent in mortgage payments. The internal control weaknesses identified in this report have also been found in other reviews of Freddie Mac's multifamily program nationwide. Freddie Mac has suspended purchases in its major multifamily program and is now developing new program procedures. Purchases will resume when Freddie Mac determines that these procedures are adequate to prevent problems in the future. However, the changes instituted and planned as of July 1991 do not address all of the problems GAO identified. Unless additional controls are in place, Freddie Mac will remain vulnerable to program abuse and avoidable financial losses.
