The Federal National Mortgage Association – Fannie Mae – is once again exposing taxpayers to undue risk in its lending practices, according to a report by the Federal Housing Finance Agency inspector general.

The mortgage giant hired an unqualified auditor with a conflict of interest to oversee loans.  The IG report stated that there was a “substantial risk” that the mortgage company “will operate in an unsafe and unsound manner, suffer losses and expose U.S. taxpayers to further financial risks[.]"

Washington Times:

The current controversy centers on the Chief Audit Executive (CAE), a critical role at Fannie Mae “tasked with providing independent, objective assurance of the enterprise’s governance, risk management and control processes,” the inspector general reported.

But despite the CAE’s role in determining the financial safety of Fannie Mae’s actions, including what loans to hand out, the company internally hired a manager who didn’t have enough experience to meet the role, falling below the “preferable” level of qualifications for the job.

Though looking for at least 15 years’ experience as an auditor, the manager hired had only seven years’ experience and hadn’t worked as an auditor since 1992, the report said.

Furthermore, before becoming the CAE, the manager had served as the chief credit officer for Fannie Mae’s largest business unit. That presented a major conflict of interest, investigators said, since he was strongly invested in the financial success of the company, which could have clouded his judgment on whether a loan was sound.

The report did not name the manager.

Spokespeople for Fannie Mae did not return reporters’ requests for comment Tuesday.

Peter Morici, an economist and professor at the R.H. Smith School of Business at the University of Maryland, said it was “absolutely ridiculous” for Fannie Mae to be hiring its own managers as auditors “when there’s such a large pool [of] talent out there available for this.”

It is “good old-fashioned Latin American corruption,” said Mr. Morici, who also is a frequent columnist for The Washington Times and other publications. “They’re going to inspect their own work, their friends and supervisors. It’s just not what you do. It’s like having the students write and grade their own exams.”

In their report, investigators described the hiring process as “haphazard” and “far from diligent.”

Fannie Mae and Freddie Mac received $187 billion in taxpayer funds in 2008 – a sum they have since paid back.  But using the taxpayer as a backstop because a federal agency is run crookedly or incompetently is morally repugnant.  That $187 billion covered only bad loans – not the sweetheart deals and other examples of cronyism that exists in these government sponsored mortgage companies.  Where does the taxpayer go to recover that money?

The IG should give us the name of that auditor who hasn't worked at that job since 1992.  Perhaps he's someone's brother in law.  Maybe he promised Fannie Mae managers lucrative private-sector jobs.  When government managers violate their own guidelines for hiring senior staff, something else is at work besides the relative qualifications for the job.

Given that the big banks have also lapsed back into bad habits that led to the bailout, it won't take much of an economic shock to send the whole house of cards tumbling to the ground again.  This, we can't afford.  But as long as the regulators fail to do their jobs, the taxpayer will continue to be at risk.