Inspector Faults Some Aspects of FHFA Supervision of GSEs
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.
-
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. -
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. -
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. -
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
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