The Office of the Inspector General for the Federal Housing Finance Agency (FHFA-OIG) will report to Congress today on its oversight of FHFA. This division of the Department of Housing and Urban Development acts as conservator for Fannie Mae and Freddie Mac the two government sponsored enterprises (GSE.) This semi-annual report which covers the period of April 1 to September 30, 2011 follows 10 other audit and evaluation reports issued by the FHFA-OIG since FHFA was founded in early 2009.
FHFA-OIG found many positives about the work done by FHFA over the relevant period in its dual role as regulator and conservator. Among the positive findings:
- Eliminating the "golden parachute" compensation
awards to terminated GSE executives;
- Taking steps to mitigate a shortage of qualified
examiners;
- Moving toward improving GSE repurchase claims
recoveries and reducing GSE losses;
- Responding to FHFA-OIG's recommendations to
improve the agency's effectiveness and efficiency and reduce its vulnerability
to fraud, waste, or abuse.
- FHFA-OIG found no evidence that the agency's independence has been compromised in connection with the Making Home Affordable (MHA) programs;
On the downside, FHFA-OIG found deficiencies in the agency's operations and relates them to two underlying themes. First, FHFA gave undue deference to GSE decision-making without adequately testing and validating those determinations. Second, its allocation of resources may have affected its ability to supervise the GSEs and enforce its directives. These themes, the report says, have emerged in multiple previous reports from the FHFA-OIG.
In four previous reports FHFA-OIG identified significant occasions in which the agency deferred to GSE decision making without adequately validating the underlying data.
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Freddie Mac's assessment of mortgage repurchase claim issues with Bank of America.
At the end of 2010 the agency approved a $1.35 million settlement to resolve repurchase claims Freddie Mac had placed against the bank. FHFA-OIG found that FHFA did not test concerns raised by its own senior examiner about limitations in Freddie Mac's existing loan review process which failed to account adequately for changes in foreclosure patterns among loans originated during the housing boom. This could potentially cost the GSEs considerable amounts of money.
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FHFA provided only limited oversight of the GSEs administration of the Home Affordable Modification Program (HAMP).
FHFA-OIG found that FHFA largely removed itself from overseeing the negotiations of the five-year agreements between the GSEs and the Department of the Treasury to run HAMP, a key component of MHA, believing that its appropriate role was to ensure that the GSEs were legally authorized to administer HAMP. Thus FHFA did not engage in any formal substantive review to evaluate the agreement's feasibility, risks, or the suitability of the GSEs to run the program. This disengagement may have led to the agreement's failure to address significant details concerning payments to the GSEs, the scope of their responsibilities, and methods to resolve disputes; areas where significant problems occurred almost from the beginning.
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FHFA did not fully analyze factors related to executive compensation at the GSEs.
During 2009 and 2010 FHFA approved payment of over $35 million in compensation to the six top executives at the GSEs based on the GSE's recommendations. The FHFA-OIG found that FHFA did not test or evaluate such factors as the lower levels of compensation paid to senior officials in similar roles at other federal agencies or whether compensation should be discounted to reflect the significant federal financial support to the GSEs.
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FHFA does not perform sufficient transaction testing of Enterprise Activities.
Transaction testing is the method employed by examiners to derive independent impressions about the financial and operational conditions at a financial institution and its compliance with applicable laws and regulations. FHFA-OIG found that examiners too often accept assertions made by GSE managers without appropriate transaction testing.
Other problems found the FHFA-OIG illustrated the role a lack of appropriate resource allocation may have played in the oversight of the GSEs.
- FHFA may have too few examiners to meet its
regulatory and conservatorship responsibilities.
Internal reviews indicate that FHFA has too few examiners to ensure efficient and effective examinations and only 34 percent of these examiners are accredited federal financial examiners. FHFA has taken steps to mitigate this shortage but it needs to move quickly and aggressively in this area.
- Sufficient resources were not allocated to
handle consumer complaints.
FHFA-OIG found that FHFA had assigned only two employees on a part-time basis to handle consumer complaints. Given the substantial increase in consumer complaints arising from the deteriorating housing situation, this staff shortage may have caused FHFA to overlook consumer complains about foreclosure processing abuses and fraud.
- FHFA did not identify and address new and emerging
risks potentially impacting the GSEs.
FHFA did not begin to schedule comprehensive examination of foreclosure issues until news stories about alleged abuses surfaced in mid-2010 and had not previously considered risks associated with foreclosure processing to be significant despite FHFA-OIG findings of multiple indications of problems prior to that time.
- FHFA has not enforced directives regarding
Fannie Mae's Operational Risk Program.
Between 2006 and 2001 FHFA and its predecessor OFHEO repeatedly found that Fannie Mae had failed to establish an acceptable operational risk management program. FHFA did not take decisive action to compel the GSE's compliance.
The complete report to Congress can be read at http://www.fhfaoig.gov/Content/Files/second%20semiannual%20report.pdf
