Freddie Mac, after being criticized by the Inspector General’s office of its regulator, has improved its mortgage buyback reviews and could recoup an additional $3.4 billion in damages, according to a new report.

The cash will come to the GSE from its seller/servicers — mortgage lenders that sold (now problematic) mortgages during the years 2005-2007 into the secondary market.

Freddie informed its seller/servicers in June that it would be increasing the number of nonperforming loans in its scope of review, which prompted many banks to increase their loan loss reserves.

In total, Freddie will be reviewing an additional 350,000 loans for buyback claims. Some of the audits will not be finished until 2014. The IG estimates that recoveries will total between $2.2 billion and $3.4 billion – money that will go right to Freddie’s bottom line.

The report, penned by the IG’s office, notes that, “The actual amount recovered will depend on such factors as the number of loans reviewed, the percent of defects that warrant put-backs, and the recovery per loan.”

In its early audits of Freddie, investigators for the IG found what they call a “significant flaw” in the GSE’s underwriting reviews: it failed to examine defaulted loans that were older than two years. (A year ago the agency released a report on Freddie’s buyback claims with Bank of America.)

An examiner for the IG “believed that the increase in default rates in later years was due to the expiration of low-interest, teaser-rate loan features that lead to substantially higher interest rates, coupled with falling home values that prevented the refinancing of loans.”

As of September 2010, Freddie had made repurchase requests on 59,514 (24%) of the 250,833 foreclosed loans in its portfolio. And as of the same date, it had collected on 35,569 (14%).

In its early review, the examiners claimed the GSE had not reviewed at least 300,000 loans with a principal balance of $50 billion for possible repurchase claims.

The audit discovered that 100,000 nonperforming loans originated in 2006 were never reviewed for possible repurchase reviews.

Fannie Mae is adopting a similar review approach, the IG says in its report.

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