Inspector Faults Some Aspects of FHFA Supervision of GSEs

by devteam November 29th, 2011 | Share

The Office of the InspectorrnGeneral for the Federal Housing Finance Agency (FHFA-OIG) will report tornCongress today on its oversight of FHFA. rnThis division of the Department of Housing and Urban Development acts asrnconservator for Fannie Mae and Freddie Mac the two government sponsoredrnenterprises (GSE.)  This semi-annualrnreport which covers the period of April 1 to September 30, 2011 follows 10rnother audit and evaluation reports issued by the FHFA-OIG since FHFA wasrnfounded in early 2009.</p

FHFA-OIG found many positives aboutrnthe work done by FHFA over the relevant period in its dual role as regulatorrnand conservator.  Among the positivernfindings:</p<ol

  • Eliminating the “golden parachute” compensationrnawards to terminated GSE executives;
  • Taking steps to mitigate a shortage of qualifiedrnexaminers;
  • Moving toward improving GSE repurchase claimsrnrecoveries and reducing GSE losses;
  • Responding to FHFA-OIG’s recommendations tornimprove the agency’s effectiveness and efficiency and reduce its vulnerabilityrnto fraud, waste, or abuse.
  • FHFA-OIG found no evidence that the agency’srnindependence has been compromised in connection with the Making Home Affordable (MHA) programs;</li</ol

    On the downside, FHFA-OIG foundrndeficiencies in the agency’s operations and relates them to two underlyingrnthemes.  First, FHFA gave undue deferencernto GSE decision-making without adequately testing and validating thoserndeterminations.  Second, its allocationrnof resources may have affected its ability to supervise the GSEs and enforcernits directives.  These themes, the reportrnsays, have emerged in multiple previous reports from the FHFA-OIG.</p

    In four previous reports FHFA-OIGrnidentified significant occasions in which the agency deferred to GSE decisionrnmaking without adequately validating the underlying data.  </p<ol<li

    Freddie Mac’s assessment of mortgage repurchasernclaim issues with Bank of America.</p

    At the end of 2010 the agency approved a $1.35 millionrnsettlement to resolve repurchase claims Freddie Mac had placed against thernbank.  FHFA-OIG found that FHFA did notrntest concerns raised by its own senior examiner about limitations in FreddiernMac’s existing loan review process which failed to account adequately forrnchanges in foreclosure patterns among loans originated during the housingrnboom.  This could potentially cost thernGSEs considerable amounts of money.</p</li<li

    FHFA provided only limited oversight of the GSEsrnadministration of the Home Affordable Modification Program (HAMP).</p

    FHFA-OIG found that FHFA largely removed itself fromrnoverseeing the negotiations of the five-year agreements between the GSEs andrnthe Department of the Treasury to run HAMP, a key component of MHA, believingrnthat its appropriate role was to ensure that the GSEs were legally authorizedrnto administer HAMP.  Thus FHFA did notrnengage in any formal substantive review to evaluate the agreement’srnfeasibility, risks, or the suitability of the GSEs to run the program.   This disengagement may have led to thernagreement’s failure to address significant details concerning payments to thernGSEs, the scope of their responsibilities, and methods to resolve disputes;rnareas where significant problems occurred almost from the beginning.  </p</li<li

    FHFA did not fully analyze factors related tornexecutive compensation at the GSEs.  </p

    During 2009 andrn2010 FHFA approved payment of over $35 million in compensation to the six toprnexecutives at the GSEs based on the GSE’s recommendations.  The FHFA-OIG found that FHFA did not test orrnevaluate such factors as the lower levels of compensation paid to seniorrnofficials in similar roles at other federal agencies or whether compensationrnshould be discounted to reflect the significant federal financial support tornthe GSEs.</p</li<li

    FHFA does not perform sufficient transactionrntesting of Enterprise Activities.</p

    Transaction testing is the method employed by examiners to derive independent impressionsrnabout the financial and operational conditions at a financial institution andrnits compliance with applicable laws and regulations.  FHFA-OIG found that examiners too often accept assertions made by GSE managers without appropriate transaction testing.</p</li</ol

    Other problems found the FHFA-OIGrnillustrated the role a lack of appropriate resource allocation may have playedrnin the oversight of the GSEs.</p<ol

  • FHFA may have too few examiners to meet itsrnregulatory and conservatorship responsibilities.

    Internal reviewsrnindicate that FHFA has too few examiners to ensure efficient and effectivernexaminations and only 34 percent of these examiners are accredited federalrnfinancial examiners.  FHFA has takenrnsteps to mitigate this shortage but it needs to move quickly and aggressivelyrnin this area.</p</li

  • Sufficient resources were not allocated tornhandle consumer complaints.

    FHFA-OIG foundrnthat FHFA had assigned only two employees on a part-time basis to handlernconsumer complaints.  Given thernsubstantial increase in consumer complaints arising from the deterioratingrnhousing situation, this staff shortage may have caused FHFA to overlookrnconsumer complains about foreclosure processing abuses and fraud.</p</li

  • FHFA did not identify and address new and emergingrnrisks potentially impacting the GSEs.

    FHFA did notrnbegin to schedule comprehensive examination of foreclosure issues until newsrnstories about alleged abuses surfaced in mid-2010 and had not previously consideredrnrisks associated with foreclosure processing to be significant despite FHFA-OIGrnfindings of multiple indications of problems prior to that time.</p</li

  • FHFA has not enforced directives regardingrnFannie Mae’s Operational Risk Program.

    Between 2006rnand 2001 FHFA and its predecessor OFHEO repeatedly found that Fannie Mae hadrnfailed to establish an acceptable operational risk management program.  FHFA did not take decisive action to compelrnthe GSE’s compliance.</p</li</ol<pThe complete report to Congress can be read at

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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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