EXECUTIVE SUMMARY

The Office of Corporate Justice has retained Baker & Hostetler LLP to conduct an independent investigation of concerns expressed by Mr. Nye Lavalle, a Fannie Mae shareholder, about several Fannie Mae business practices in connection with single-family mortgages. 1 Mr. Lavalle accuses Fannie Mae of “aiding, abetting and sanctioning … predatory lending and servicing schemes,” as well as committing accounting and securities fraud, and racketeering violations. He views Fannie Mae as responsible for damage inflicted on single-family borrowers by unscrupulous lenders and servicers because Fannie Mae approves lenders and servicers, maintains servicer profiles and ratings, approves mortgage document terms and servicing requirements, and benefits from the income stream created by wrongdoing. He fears Fannie Mae’s alleged failures could result in both civil and criminal liability that would affect shareholder value.

Through a series of communications to members of the Board of Directors and
others starting in December 2003, Mr. Lavalle called for an independent investigation of his
allegations? The Board of Directors decided to conduct an internal review of these concerns.
On September 12,2005, the Office of Corporate Justice retained Baker & Hostetler LLP.

Mr. Lavalle began investigating the mortgage industry after his parents, Anthony
and Matilde L. Pew, had a dispute with mortgage servicer EMC Mortgage Corporation (“EMC”),
a subsidiary of Bear Stearns Companies (“Bear Stearns,,).3 EMC ultimately foreclosed on the
Pews’ property, even though, according to Mr. Lavalle, his family is wealthy and made repeated
efforts to repay the loan.4 The dispute motivated Mr. Lavalle to investigate and publicize his
allegations that EMC engaged in predatory servicing practices, which has resulted in several
lawsuits between Bear Stearns and Mr. Lavalle. 5 Mr. Lavalle then broadened his focus to
include the single-family mortgage industry as a whole.

Mr. Lavalle considers himself a gadfly of the mortgage industry. He claims to
have been investigating, analyzing and exposing mortgage fraud, predatory lending and
servicing, and securitization schemes since 1993.6 He has a website that details his complaints,
and has posted information on several other sites. 7 He claims to have spent more than 20,000
hours and nearly $500,000 investigating predatory lending and servicing. 8 He reports that he is a
consultant to plaintiff lawyers who sue lenders and servicers and to homeowners.
Mr. Lavalle’s view is that since Fannie Mae is such an important force in the
mortgage industry, it has both the responsibility and means to end abusive lending and servicing
practices. Mr. Lavalle’s view is that Fannie Mae directs the conduct of servicers from afar. In
an e-mail ofFebruary21.2006.Mr. Lavalle expresses his frustration, saying:
I hate to keep using the analogies that you don’t like but it really is
like a Mafia operation. The Godfather [Fannie Mae] says we got a
problem, “take care of it” and the lieutenant [“the servicer”]
orders the hit [foreclosure] and hires the hitman [the USFN or
other lawyer to foreclose].

The hit man and lieutenant don’t want the Godfather implicated so
they create layers of deniability [a typical CIA, white house, legal
and political maneuver] to conceal who the real parties in interest
are and who had knowledge of and ordered the hit.

While Mr. Lavalle is partial to extreme analogies that undermine his credibility, he has become
knowledgeable about the mortgage industry. He has identified significant issues but, in our
view, does not always analyze them correctly. In proposing solutions, he generally undervalues
the benefits to homeowners of efficient mortgage markets operated at low costs and overstates
the needs of borrowers to have information about the status of their loans in the secondary
markets for mortgages. Fannie Mae has already identified and is addressing many of the same
issues. This report details several areas where Fannie Mae faces legal and business issues that
remain to be addressed.

Mr. Lavalle also claims that as a result of this work, he and his family have been
harassed. He expresses considerable anger when he attributes these attacks to Fannie Mae. An
investigation of his personal retaliation claim is in progress; to date Mr. Lavalle has identified no
direct conduct by Fannie Mae that he considers harassing.

We have reviewed more than 1,500 pages of documents provided by Mr. Lavalle
to Fannie Mae or us directly and had 17 conversations with him. We have identified six general
areas of his concerns: (1) foreclosure policies and procedures, (2) transparency, (3) protection of
promissory notes, (4) predatory servicing, (5) fraud detection and reporting, and (6) accounting
and securities issues. Within each area, Mr. Lavalle identifies multiple issues that are detailed in
this report. In investigating these concerns, we have collected documents from Mr. Lavalle,
Fannie Mae and public sources, reviewed extensively eFannie.com, and interviewed at least 30
Fannie Mae employees. The company has fully cooperated in our investigation.
In reviewing Mr. Lavalle’s concerns as a shareholder, we have told Mr. Lavalle
that the proper scope of our investigation is to determine whether he has identified wrongdoing
hy Fannie Mae officials or financial risks of sufficient magnitude to affect materially Fannie
Mae’s financial statements. We cannot resolve every case of an alleged mishandled mortgage.
1. Foreclosure Policies and Procedures

Mr. Lavalle asserts that Fannie Mae’s mortgage servicers and the Mortgage
Electronic Registry System, Inc. (“MERS”) routinely make misrepresentations in foreclosure
proceedings. He has identified two categories of alleged misrepresentations: that MERS or the
servicers are the holders and owners of the defaulted promissory notes, and that promissory notes
are lost, stolen or destroyed.9 He also questions whether foreclosures in the name of MERS or
servicers satisfy state laws on standing to sue. Since Fannie Mae authorizes foreclosures, Mr.
Lavalle argues that Fannie Mae could be liable for these misrepresentations, including for
racketeering violations under federal and state laws, and could risk having foreclosure sales
unwound by the courts. 10

We have found evidence that false statements by foreclosure attorneys are being
routinely made in at least two counties in Florida and appear to be occurring elsewhere.
Apparently due to Mr. Lavalle’s ex parte communications, two Florida judges ordered hearings
to examine MERS’s role in foreclosures. During consolidated hearings that resulted in the
judges dismissing 24 foreclosure actions, three judges (including one who took the time to
observe and comment) criticized MERS for routinely filing “sham” pleadings and “false”
affidavits regarding its interest in promissory notes and supposed lost promissory notes. I I One
judge questioned whether large numbers of foreclosures would have to be reversed due to fraud
on the court.

[…]

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“From my own personal experience and 20 years of research and investigation, nothing — and I mean nothing — that a bank, lender, loan servicer or their lawyer says or puts on paper can be trusted and accepted as true,” Mr. Lavalle said.

NYT-

YEARS before the housing bust — before all those home loans turned sour and millions of Americans faced foreclosure — a wealthy businessman in Florida set out to blow the whistle on the mortgage game.

His name is Nye Lavalle, and he first came to attention not in finance but in sports and advertising. He turned heads in marketing circles by correctly predicting that Nascar and figure skating would draw huge followings in the 1990s.

[FAIR GAME NYT]