FHFA Watchdog Sends Milestone Report to Congress

By: Jann Swanson •

The fifth Semiannual Report from the Office of Inspector General (OIG) of the Federal Housing Finance Agency (FHFA) was released to Congress today.  The report, prepared under the direction of Steve A. Linick, Inspector General, catalogues the audit and evaluation work done by OIG between October 1, 2012 and March 31, 2013 and the current status of FHFA, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and the Federal Home Loan Banks (FHLBanks).  It also recounts investigative activities in support of federal and state prosecutors pursuing instances of fraud in the housing industry.

In a letter accompanying the report Linick said that his office is mindful that the long term success of FHFA is necessarily affected by the uncertainty surrounding the fate of the GSEs and that of the housing finance industry.  "Until the uncertainty is resolved," Linick said, "we will continue to focus on housing finance matters such as managing risks and repaying taxpayers, that will remain useful to stakeholders - FHFA, Congress, and the public - whatever reform may come.

OIG calls the current reporting period a significant one as it was the first time since 2008 that the GSEs under FHFA conservatorship returned to profitability.  This shows the results of previous FHFA actions such as reforming the GSEs' executive pay practices and significant progress toward continuing financial stability.  Developments during the period also reflect efforts to reduce and manage risk, such as through foreclosure prevention efforts, toward the goal of repaying taxpayer investment in the GSEs.

At the same time OIG says the reporting period marks a crossroads for the GSEs.  FHFA facilitated amendments to the Senior Preferred Stock Purchase Agreements (PSPAs) between the GSEs and Treasury which means the GSEs are no longer drawing on the Treasury in order to pay dividends back to them.  FHFA has also assisted the GSEs to reduce the volume of their owned real estate (REO) through the REO sales initiative. 

Between October and March the OIG conducted a number of audits, evaluations, and investigations.  These included:

  • A Case Study of Freddie Mac's Unsecured Lending to Lehman Brothers prior to the firm's bankruptcy.
  • FHFA's Oversight of the Asset Quality of Multi-Family Housing Loans Financed by the GSEs
  • FHFA's Oversight of the GSE's Efforts to Recover Losses from Foreclosure Sales

These audits and evaluations were covered extensively by MND at the time they were issued.

During the reporting period OIG also:

  • Developed an Audit and Evaluation Plan focusing on areas of FHFA operations posing the greatest risks to the agency and the GSEs;
  • Issued Systematic Implication Reports which identify potential risks and weaknesses in FHFA's management control system discovered by OIG during investigations;
  • Assessed proposed legislation, regulations, and policies related to FHFA,
  • Educated a broad audience on OIG, FHFA, and GSE issues and on wider issues of fraud, waste, and abuse.

Reporting on FHFA and GSE operations during the period the OIG noted the significant improvement in the GSEs' financial results with Fannie Mae reporting a net income of $17.2 billion in 2012 compared with a net loss of $16.9 billion in 2011.  Freddie Mac reported smaller but similar results. In addition, for the first time since the beginning of the conservatorships both GSEs were able to pay dividends to the Treasury without any draw under the PSPAs, something they each did in the second, third, and fourth quarters of 2012.

Factors affecting the GSEs improved financial condition included enhanced oversight, reform, rebuilding, and risk management and reduction.  During this period FHFA issued new appraisal requirements for higher-priced loans, created a new national database, and developed a new infrastructure for the secondary mortgage market.

The OIG also discussed the recovery of losses for Fannie Mae due to loan origination and servicing defects in mortgages it purchased between 2000 and 2008 and at activities related directly to FHFA's involvement in increased prevention of foreclosure and the REO pilot initiative. OIG also details is efforts to track performance and accountability through FHFA's updated strategic Plan.

The final section of the Semiannual report summarizes conservatorship reform and various reform proposals including the work that has been done to stabilize the GSEs since conservatorship and the reforms the GSEs have implemented to improve overall business operations and encourage greater private-sector participation in the secondary mortgage market.  The section also discusses how FHFA is preparing for change and its five year strategic plan which focuses on actions to organize, rehabilitate and wind down the GSEs in order to make way for a new secondary mortgage market.