OIG: FHFA not Consistently Involved in GSE Decisions

By: Jann Swanson •

The most recent evaluation of the FHFA by it's Office of Inspector General (OIG), released on Thursday, found that FHFA had perhaps delegated too much of its authority back to the Fannie Mae and Freddie Mac (the GSEs), the entities for which it serves as conservator.  The report found that the agency did not require the GSEs to seek approval for various major business decisions and even when such approval was required, FHFA cannot be assured that the GSEs always request it.

By letters dated November 24, 2008, a little over two months from the start of the conservatorships, FHFA informed the GSEs that they must seek approval for the following:

  • Actions involving capital stock, dividends, the Senior Preferred Stock Purchase Agreements with the Treasury, increases in risk limits, material changes in accounting policy, and reasonably foreseeable material increases in operational risk.
  • Creation of any subsidiary or affiliate or any substantial or extraordinary transactions with subsidiaries or affiliates.
  • Matters that relate to conservatorship or conservatorship status.
  • Personnel actions involving boards of directors or officers at the level of vice president or above.
  • Actions involving hiring or firing of external auditors and law firms serving as consultants to boards of directors.
  • Settlements of litigation, claims, regulatory proceedings or tax-related matters in excess of $50 million.
  •  Any merger with, purchase, or acquisition of a business involving over $50 million.

The boards of directors were made responsible for requests for approval and this authority was delegated downward and throughout senior management in the various business units who decide if a proposed action requires FHFA approval.  Prior to May 2011 neither GSE had implemented any formal policies or procedures for coordinating with FHFA on approval requests and not until December 2011 did FHFA institute a central point for submission of requests, delegating that authority to the Office of Conservatorship Operations (OCO).

OIG made several findings about FHFA's delegation of authorities to the GSEs.

  • FHFA's non-delegated authorities and proceeds are outdated and allow certain major business decisions to avoid conservatorship approval.  These have included decisions on single family underwriting standards and the High Touch Servicing Program.
  • Agency procedures governing the approval process are not sufficient detailed and do not require a single point of contact for approval requests.  FHFA did not establish controls to ensure that appropriate requests were made and consequently requests have been inconsistent.  For example Fannie Mae agreed to seven insurance settlements in 2009 and 2010 (pool policy commutations) that resulted in settlement discounts totaling $306 million, exceeding the $50 limit but Freddie Mac settled similar claims only after seeking FHFA approval.
  • FHFA has not ensured rigorous review of GSE business decisions nor maintained a central repository for documentation supporting its own decisions.
  • FHFA has not established a formal process to follow up on significant conservator decisions to ensure the GSEs comply with them.

OIG made a number of recommendations to FHFA regarding the authorities they have delegated to the GSEs and the Agency's oversight of them.  OIG said FHFA should:

  • Reassess the non-delegated authorities to ensure sufficient FHFA involvement with major business decisions.
  • Evaluate the GSEs internal controls to make sure they communicate all major business decisions involving FHFA approval to the Agency.
  • Evaluate the seven Fannie Mae's pool policy commutations to determine whether they were appropriate and in the best interests of the GSEs and the taxpayers and develop a methodology and process for review of such transactions in the future.
  • Establish a clear timetable and deadlines for GSE submission of transactions to FHFA for conservatorship approval.
  • Issue a directive to the GSEs requiring them to notify the Agency of any deviation to any previously reviewed actions so that FHFA may consider these changes and revisit its decisions.
  • Implement a risk-based examination plan to review the GSEs execution of and adherence to conservatorship decisions.