FHFA Watchdog Sends Milestone Report to Congress

The fifth Semiannual Report from thernOffice of Inspector General (OIG) of the Federal Housing Finance Agency (FHFA)rnwas released to Congress today.  Thernreport, prepared under the direction of Steve A. Linick, Inspector General,rncatalogues the audit and evaluation work done by OIG between October 1, 2012rnand March 31, 2013 and the current status of FHFA, the government sponsoredrnenterprises (GSEs) Fannie Mae and Freddie Mac, and the Federal Home Loan Banksrn(FHLBanks).  It also recounts investigativernactivities in support of federal and state prosecutors pursuing instances ofrnfraud in the housing industry. </p

In a letter accompanying the reportrnLinick said that his office is mindful that the long term success of FHFA isrnnecessarily affected by the uncertainty surrounding the fate of the GSEs andrnthat of the housing finance industry. rn”Until the uncertainty is resolved,” Linick said, “we will continue tornfocus on housing finance matters such as managing risks and repaying taxpayers,rnthat will remain useful to stakeholders – FHFA, Congress, and the public -rnwhatever reform may come.</p

OIG calls the current reporting period arnsignificant one as it was the first time since 2008 that the GSEs under FHFArnconservatorship returned to profitability.  This shows the results of previous FHFArnactions such as reforming the GSEs’ executive pay practices and significantrnprogress toward continuing financial stability. rnDevelopments during the period also reflect efforts to reduce and managernrisk, such as through foreclosure prevention efforts, toward the goal ofrnrepaying taxpayer investment in the GSEs.</p

At the same time OIG says the reportingrnperiod marks a crossroads for the GSEs. rnFHFA facilitated amendments to the Senior Preferred Stock PurchasernAgreements (PSPAs) between the GSEs and Treasury which means the GSEs are nornlonger drawing on the Treasury in order to pay dividends back to them.  FHFA has also assisted the GSEs to reduce thernvolume of their owned real estate (REO) through the REO sales initiative.  </p

Between October and March the OIGrnconducted a number of audits, evaluations, and investigations.  These included:</p<ul class="unIndentedList"<liArnCase Study of Freddie Mac's Unsecured Lending to Lehman Brothers prior to thernfirm's bankruptcy.</li<liFHFA'srnOversight of the Asset Quality of Multi-Family Housing Loans Financed by thernGSEs</li<liFHFA'srnOversight of the GSE's Efforts to Recover Losses from Foreclosure Sales</li</ul

Thesernaudits and evaluations were covered extensively by MND at the time they werernissued.</p

Duringrnthe reporting period OIG also:</p<ul class="unIndentedList"<liDevelopedrnan Audit and Evaluation Plan focusing on areas of FHFA operations posing therngreatest risks to the agency and the GSEs; </li<liIssuedrnSystematic Implication Reports which identify potential risks and weaknesses inrnFHFA's management control system discovered by OIG during investigations;</li<liAssessedrnproposed legislation, regulations, and policies related to FHFA, </li<liEducatedrna broad audience on OIG, FHFA, and GSE issues and on wider issues of fraud,rnwaste, and abuse.</li</ul

Reporting onrnFHFA and GSE operations during the period the OIG noted the significantrnimprovement in the GSEs’ financial results with Fannie Mae reporting a netrnincome of $17.2 billion in 2012 compared with a net loss of $16.9 billion inrn2011.  Freddie Mac reported smaller butrnsimilar results. In addition, for the first time since the beginning of thernconservatorships both GSEs were able to pay dividends to the Treasury withoutrnany draw under the PSPAs, something they each did in the second, third, and fourthrnquarters of 2012.</p

Factorsrnaffecting the GSEs improved financial condition included enhanced oversight,rnreform, rebuilding, and risk management and reduction.  During this period FHFA issued new appraisalrnrequirements for higher-priced loans, created a new national database, andrndeveloped a new infrastructure for the secondary mortgage market.</p

The OIG alsorndiscussed the recovery of losses for Fannie Mae due to loan origination andrnservicing defects in mortgages it purchased between 2000 and 2008 and atrnactivities related directly to FHFA’s involvement in increased prevention ofrnforeclosure and the REO pilot initiative. OIG also details is efforts to track performancernand accountability through FHFA’s updated strategic Plan.</p

The finalrnsection of the Semiannual report summarizes conservatorship reform and variousrnreform proposals including the work that has been done to stabilize the GSEsrnsince conservatorship and the reforms the GSEs have implemented to improvernoverall business operations and encourage greater private-sector participationrnin the secondary mortgage market.  Thernsection also discusses how FHFA is preparing for change and its five yearrnstrategic plan which focuses on actions to organize, rehabilitate and wind downrnthe GSEs in order to make way for a new secondary mortgage market.

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