Fannie Mae failed to take any action on an internal 2005 investigation that revealed that the law firms it was using for foreclosures were filing false documents and were engaged in other foreclosure abuses, and may have hidden the report from its regulator, according to the Inspector General of the FHFA.  

In 2005, Fannie Mae was tipped off by an shareholder that foreclosure firms were engaged in abusive and illegal practices.  It hired a law firm, Baker & Hosteller LLP, to look into the matter.  When Baker & Hosteller issued its report in May 2006, it confirmed the allegations of abuses and illegal practices at the foreclosure law firms, including the creation of false affidavits containing misrepresentations about how loan documents had been lost.  But despite this, Fannie Mae did little or nothing to stop the abuses until years later. "Fannie Mae did not take steps to ensure the quality of its foreclosure attorneys’ conduct, the legal positions taken in the attorneys’ pleadings, or the manner in which the attorneys processed foreclosures on the Enterprise’s behalf," according to the recent Inspector General report. 

The Baker & Hosteller report also revealed that some officials within Fannie Mae were aware of the foreclosure abuses as early as 2005.  This clearly showed that fraudulent affidavits were used to cut corners in many foreclosures even at a time when few foreclosures were occurring. Despite this, foreclosure law firms would later claim that these kinds of abuses only occurred because of the crushing workload they incurred due to the foreclosure crisis.

Robo-signing at the foreclosure law firms and the paperwork "mills" that they used to process foreclosure documents was not mentioned in Baker & Hosteller report.

The report also revealed that Fannie Mae had a hands-off policy regarding foreclosure abuses at its foreclosure law firms.  Reviews of these law firms were not conducted because Fannie Mae officials believed that ignorance of the firms' conduct would help to insulate Fannie Mae from issues arising from abuses.

According to the Inspector General, there is no evidence that Fannie Mae informed OFHEO-- its regulator at the time-- of the May 2006 report.  Fannie Mae claims that it informed an OFHEO official of the report by phone.  The FHFA-- Fannie Mae's current regulator, which replaced OFHEO in 2008-- did not become aware of the 2006 report until the news media reported on it in March 2011.

Fannie Mae finally fired two notorious Florida foreclosure law firms for abuses:  one firm, the Law Offices of David Stern, was fired in November 2010, and Ben Ezra & Katz, a second "foreclosure mill" was fired in February 2011.  In the case of the Stern firm in particular, Fannie Mae's move came only after several months of numerous media reports of abusive foreclosure  practices by the firm.

The Inspector General report found that Fannie Mae has yet to implement an adequate risk management program to prevent such abuses, faulting the FHA and OFHEO before it for tolerating "five years of delay by Fannie Mae" in establishing measures to prevent abuses.  The FHFA says that Fannie Mae will have its risk management program in place by next year.