oversight

FHFA's Conservator Approval Process for Fannie Mae and Freddie Mac Business Decisions

Published by the Federal Housing Finance Agency, Office of Inspector General on 2012-09-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

          FEDERAL HOUSING alsoFINANCE AGENCY
            OFFICE OF INSPECTOR GENERAL


              FHFA’s Conservator Approval Process for
                  Fannie Mae and Freddie Mac
                        Business Decisions




Audit Report: AUD-2012-008                     September 27, 2012
                                                   AT A GLANCE
                         FHFA’s Conservator Approval Process for Fannie Mae and
                                     Freddie Mac Business
                                                  title   Decisions

Why FHFA-OIG Did This Audit                                               but the Agency primarily relies on the Enterprises to decide
The Federal National Mortgage Association (Fannie Mae) and           titlewhen to seek approval for their actions.  As a consequence,
the Federal Home Loan Mortgage Corporation (Freddie Mac)                  Enterprise requests for approval have been inconsistent. For
                                                                     titleexample, FHFA-OIG determined that Fannie Mae executed
lost billions of dollars when the housing market collapsed in
2007 and 2008. In response, Congress enacted the Housing                  seven insurance settlement discounts totaling over
and Economic Recovery Act of 2008 (HERA), which created                   $306 million that should have been approved by FHFA in
the Federal Housing Finance Agency (FHFA or the Agency) to                advance. By contrast, Freddie Mac executed similar
regulate Fannie Mae and Freddie Mac (collectively, the                    settlements after seeking FHFA’s approval. FHFA-OIG also
Enterprises) in order to ensure their safety and soundness and            found that over a three-year period Fannie Mae took over
facilitate a stable and liquid mortgage market.                           4,500 actions to increase the Enterprise’s counterparty risk
                                                                          limits without first obtaining conservator approval. Freddie
On September 6, 2008, the Enterprises entered into                        Mac, by contrast, had a process for requesting and receiving
conservatorships supervised by FHFA. As conservator, FHFA                 approval for risk limit increases from the conservator.
has extensive authority over the Enterprises’ operations.
However, in November 2008, the Agency broadly delegated                   Additionally, the Agency can improve how it processes
most of its conservatorship authority back to the Enterprises. As         requests for conservatorship decisions and follows up on the
part of the delegation, the Agency required the Enterprises to            decisions it makes. FHFA-OIG determined that FHFA has not
obtain Agency approval for selected business decisions, such as           established criteria or policies to ensure rigorous review of
those involving legal settlements over $50 million and risk limit         Enterprise business decisions. FHFA-OIG also found that
increases. FHFA’s Office of Inspector General (FHFA-OIG)                  FHFA does not have a formal process to verify that the
audited FHFA’s process for approving these non-delegated                  Enterprises abide by conservatorship decisions, but instead
Enterprise business decisions.                                            has relied on informal conversations and unrelated reviews
                                                                          (e.g., routine examinations) to assess compliance.
What FHFA-OIG Found                                                       FHFA-OIG believes that strengthening control over the
FHFA-OIG concluded that the Agency can better accomplish                  Agency’s conservator approval process will help FHFA achieve
its oversight mission by proactively exerting greater control             its goals of preserving and conserving Enterprise assets.
over its conservator approval process.
FHFA-OIG found that FHFA did not require conservatorship                  What FHFA-OIG Recommends
approval for various major business decisions such as reviewing           Overall, FHFA has taken some positive steps as conservator by
and approving Fannie Mae’s single family underwriting                     retaining authority over certain Enterprise business decisions.
standards and its High Touch Servicing Program, which involved            However, the Agency can further improve its performance
multiple transfers of mortgage servicing rights for over 700,000          as conservator by establishing controls to accomplish its
loans with an unpaid principal balance in excess of $130 billion.         intended outcomes. Specifically, FHFA-OIG recommends
FHFA should revisit the authorities delegated to the Enterprises          that the Agency: (1) revisit FHFA’s non-delegated authorities
to ensure that the Agency, in its role as conservator, is involved        to ensure that significant Enterprise business decisions are sent
in their major business decisions.                                        to the conservator for approval; (2) guide the Enterprises to
Moreover, even when conservatorship approval of Enterprise                establish processes to ensure that actions requiring conservator
business decisions is required, FHFA cannot be assured that the           approval are properly submitted for consideration;
Enterprises always request such approval. FHFA has informed               (3) properly analyze, document, and support conservator
the Enterprises which actions remain under FHFA’s authority,              decisions; and (4) confirm compliance by the Enterprises with
                                                                          conservator decisions. FHFA agreed with most of FHFA-
                                                                          OIG’s recommendations.

 Audit Report: AUD-2012-008                                                                          Dated: September 27, 2012
TABLE OF CONTENTS
TABLE OF CONTENTS .................................................................................................................1
ABBREVIATIONS .........................................................................................................................3
PREFACE ........................................................................................................................................4
BACKGROUND .............................................................................................................................5
      Enterprise Actions That Require FHFA’s Approval ................................................................6
      How the Enterprises Ask for FHFA’s Approval ......................................................................7
      How FHFA Determines Whether to Approve Enterprise Requests .........................................8
      FHFA’s Oversight of the Request and Approval Processes .....................................................9
FINDINGS .....................................................................................................................................12
      1. FHFA’s Non-Delegated Authorities and Procedures Are Outdated and Allow
         Certain Major Business Decisions to Avoid Conservator Approval ...............................12
                      Single-Family Underwriting Standards ................................................................ 12
                      High Touch Servicing Program ............................................................................ 12
      2. FHFA’s Procedures Governing the Conservatorship Approval Process Are Not
         Sufficiently Detailed and They Do Not Require a Single Point of Contact for
         Approval Requests...........................................................................................................13
                      FHFA Has Neither Issued Sufficient Guidance nor Updated Its November
                      2008 Directives Concerning Conservatorship Approvals..................................... 14
                      Until Recently FHFA Had Not Established Procedures to Centralize the
                      Intake of Conservatorship Approval Requests .................................................... 17
                      FHFA Should Take a Greater Role to Ensure That the Enterprises Have
                      Put in Place Adequate Policies, Procedures, and Governance Structures
                      Concerning Conservatorship Approvals ............................................................... 19
      3. FHFA Has Not Established Criteria or Policies to Ensure Rigorous Review of
         Enterprise Business Decisions and Has Not Maintained a Central Repository for
         Documentation Supporting Conservator Decisions ........................................................20
                      FHFA Sometimes Relies upon Information Provided by the Enterprises
                      Without Independently Verifying It or Performing a Business Case
                      Analysis................................................................................................................. 20


         Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                                       1
                     OCO Does Not Centrally Maintain or Track Documentation Supporting
                     Final Conservatorship Decisions .......................................................................... 22
                     The Enterprises May Not Sufficiently Understand FHFA’s
                     Conservatorship Action Approval Process ........................................................... 23
      4. FHFA Has Not Established a Formal Process to Follow Up on Significant
         Conservator Decisions to Ensure the Enterprises Comply with Them ...........................23
                     FHFA Has Not Ensured that the Enterprises Have a Sound Follow-up
                     Process in Place..................................................................................................... 24
                     An Example of Non-Compliance with an FHFA Conservatorship Decision ....... 25
CONCLUSION ..............................................................................................................................26
RECOMMENDATIONS ...............................................................................................................27
SCOPE AND METHODOLOGY .................................................................................................29
APPENDIX A ................................................................................................................................31
      FHFA’s Comments on Findings and Recommendations .......................................................31
APPENDIX B ................................................................................................................................38
      FHFA-OIG’s Response to FHFA’s Comments ......................................................................38
APPENDIX C ................................................................................................................................41
      Summary of Management’s Comments on the Recommendations ........................................41
ADDITIONAL INFORMATION AND COPIES .........................................................................44




         Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                                     2
ABBREVIATIONS
CGC ................................................................................. Conservatorship Governance Committee
Treasury ................................................................................................ Department of the Treasury
DEPS ..................................................................... Division of Examination Programs and Support
DER............................................................................................. Division of Enterprise Regulation
Enterprises.......................................................................................... Fannie Mae and Freddie Mac
Fannie Mae......................................................................... Federal National Mortgage Association
FHFA ........................................................................................... Federal Housing Finance Agency
FHFA-OIG ...................................... Federal Housing Finance Agency Office of Inspector General
Freddie Mac .................................................................. Federal Home Loan Mortgage Corporation
HERA.......................................................................Housing and Economic Recovery Act of 2008
OCO ...................................................................................... Office of Conservatorship Operations
OGC ........................................................................................................ Office of General Counsel
OPAR ................................................................................. Office of Policy Analysis and Research




         Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                                  3
                                     Federal Housing Finance Agency
                                       Office of Inspector General
                                             Washington, DC



                                              PREFACE
HERA, which amended the Inspector General Act, created FHFA-OIG and authorized it to
conduct audits, evaluations, investigations, and other law enforcement activities pertaining to
FHFA’s programs and operations.1 FHFA-OIG also recommends policies that promote economy
and efficiency, and works to prevent and detect fraud and abuse.

This audit report supports FHFA-OIG’s mission to promote the economy and efficiency of
FHFA’s programs and operations. It also furthers FHFA-OIG’s first strategic goal to help FHFA
support the Enterprises and to understand the conservatorships’ causes and costs.2 Specifically,
the report is intended to add value with respect to FHFA’s role as conservator and its oversight
of the Enterprises’ business decisions. The report also reinforces FHFA-OIG’s commitment to
prioritize projects related to FHFA’s conservatorships and oversight of Fannie Mae and Freddie
Mac.3 Along these same lines, FHFA-OIG has recently released a white paper addressing
FHFA’s role as conservator and the challenges faced by the Agency in managing the
conservatorships.4

FHFA-OIG appreciates the cooperation of everyone who contributed to the audit, including
officials at Fannie Mae, Freddie Mac, and FHFA. This audit was led by Laura Benton, Audit
Director; Kevin Carson, Audit Director; and Scott H. Smith, Auditor-in-Charge.




Russell A. Rau
Deputy Inspector General for Audits



1
    HERA (Public Law No. 110-289); the Inspector General Act (Public Law No. 95-452).
2
    See FHFA-OIG, Strategic Plan: Fiscal Years 2012-2014 (“Strategic Goal 1—Adding Value,” p. 10).
3
 See FHFA-OIG, Audit, Evaluation, and Survey Plan: FY 2012 (“Key Areas of FHFA-OIG Audit, Evaluation, and
Survey Focus,” p. 4).
4
 See FHFA-OIG, FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and Freddie Mac,
WPR-2012-001, March 28, 2012.


          Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                        4
BACKGROUND
HERA was enacted on July 30, 2008, and created FHFA to supervise and regulate the
Enterprises in order to ensure their safety and soundness, and, by doing so, to facilitate a stable
and liquid mortgage market. Six weeks later, the Enterprises were placed into conservatorships
overseen by FHFA. To stave off insolvency, the U.S. Department of the Treasury (Treasury)
simultaneously began to support the Enterprises with significant capital investments of taxpayer
funds (totaling $187.5 billion as of June 30, 2012).5 When the conservatorships were created,
they were regarded as temporary measures. The then-Treasury Secretary described the
conservatorships as a temporary “time-out” to allow policymakers to further consider the future
role of the federal government and the Enterprises in the housing finance system.6 But more
than four years have elapsed since that action was taken—likely far more time than anyone
anticipated—and the conservatorships remain in place.

As conservator, FHFA’s objective is to conserve and preserve Enterprise assets. FHFA is
empowered to operate Fannie Mae and Freddie Mac and conduct their business, but has
broadly delegated authority back to each Enterprise.7 FHFA’s approach to operating the
conservatorships has been for the Enterprises to “continue to be responsible for normal business
activities and day-to-day operations,” and “not to manage every aspect of the Enterprises’
operations.”8 For example, FHFA generally does not make decisions about individual
mortgages, property sales, or foreclosures because “the Enterprises each have a review process to
look into situations that arise involving their mortgages or property transactions.”9 The Agency,
though, retains the right to review and reverse any delegated action.

FHFA retains its authority as conservator over selected Enterprise business decisions. FHFA has
identified eight categories of Enterprise actions that require conservator approval. FHFA also
has established the Office of Conservatorship Operations (OCO) to ensure that the Agency is
involved in, and exercises final approval over, the Enterprises’ major business decisions. OCO
5
 HERA expanded Treasury’s authority to provide financial support to the Enterprises, which it has done by
purchasing the Enterprises’ preferred stock pursuant to Senior Preferred Stock Purchase Agreements.
6
 See FHFA-OIG, FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and Freddie Mac,
WPR-2012-001, March 28, 2012.
7
  For FHFA’s authority as conservator, see P.L. 110-289 § 1145(b)(2) “General Powers;” for FHFA’s delegation of
this authority see Letter from James B. Lockhart III, Director, FHFA, “RE: Instructions for the Board of Directors
for Order No. 2008-0006” (November 24, 2008).
8
 Letter from FHFA’s Acting Director Edward J. DeMarco to Chairman Christopher Dodd and Ranking Minority
Member Richard C. Shelby, U.S. Senate Committee on Banking, Housing, and Urban Affairs; and to Chairman
Barney Frank and Ranking Minority Member Spencer Bachus, U.S. House of Representatives (February 2, 2010).
9
 See “What FHFA’s Role is …” on FHFA’s website (http://www.fhfa.gov/Default.aspx?Page=369,
accessed: September 20, 2012).


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                         5
offers advice if the Enterprises ask, but otherwise the Enterprises generally determine which
actions require conservator approval.

The sections that follow summarize the types of Enterprise actions that require FHFA approval,
how the Enterprises request (and the Agency grants) approval, and what process FHFA has in
place to oversee Enterprise requests and approvals.

Enterprise Actions That Require FHFA’s Approval

By letters dated November 24, 2008, FHFA informed the Enterprises’ respective boards of
directors which actions—out of a “broad delegation of functions”—require Agency approval
(also referred to as the Agency’s “non-delegated authorities” or “letters of instruction to the
Enterprises”).10

Specifically, the Enterprises must seek FHFA’s approval for the following:

     1. Actions involving capital stock, dividends, the Senior Preferred Stock Purchase
        Agreements, increases in risk limits, material changes in accounting policy, and
        reasonably foreseeable material increases in operational risk;11

     2. Creation of any subsidiary or affiliate or any substantial transaction between the
        Enterprise and any of its subsidiaries or affiliates, except for transactions undertaken in
        the ordinary course of business;

     3. Matters that relate to conservatorship, such as the initiation and material actions in
        connection with significant litigation addressing the actions or authority of the
        conservator, repudiation of contracts, qualified financial contracts in dispute due to
        conservatorship status, and counterparties attempting to nullify or amend contracts due to
        conservatorship status;

     4. Actions involving hiring, compensation, and termination benefits of directors and officers
        at the executive vice president level and above;

10
  Letters to the Enterprises from James B. Lockhart III, Director, FHFA, “RE: Instructions for the Board of
Directors for Order No. 2008-0006” (November 24, 2008).
11
  Treasury provides the Enterprises with financial support through the Senior Preferred Stock Purchase Agreements.
These agreements were designed to ensure each Enterprise maintains positive net worth. Currently, the terms of the
agreements require a 10% reduction in the Enterprises’ retained investment portfolios each year. The only material
additions to these portfolios come from delinquent mortgages pulled out of Enterprise mortgage-backed securities
after being four months delinquent. Under these agreements, each Enterprise is required to pay Treasury a quarterly
dividend equal to 10% of the total amount drawn under their respective agreements. However, on August 17, 2012,
the agreements were amended. As of January 1, 2013, the dividend will be replaced by a sweep of each Enterprises’
net worth and the retained portfolios will be reduced by 15% each year.


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                         6
     5. Actions involving the retention and termination of external auditors and law firms serving
        as consultants to the Enterprises’ respective boards of directors;

     6. Settlements in excess of $50 million of litigation, claims, regulatory proceedings, or tax-
        related matters;

     7. Any merger with (or purchase or acquisition of) a business involving over $50 million;
        and

     8. Actions that in the reasonable business judgment of the Enterprises’ respective boards of
        directors are likely to cause significant reputational risk.

FHFA’s authority as conservator is not limited to these eight areas. FHFA retains broad
authority to review any activity or transaction at any time. Further, the Enterprises may contact
OCO for help in determining which actions require approval, but FHFA does not require them to
do so. Instead, FHFA generally allows each Enterprise to decide whether or not particular
actions warrant seeking Agency approval. As a result, the Agency also reviews actions and
renders conservatorship decisions for actions that fall outside the eight non-delegated areas.

How the Enterprises Ask for FHFA’s Approval

In FHFA’s November 2008 letters discussed above, the Agency made the Enterprises’ respective
boards of directors responsible for implementing measures to coordinate with FHFA and for
ensuring “appropriate regulatory approvals” are received.12 In turn, the boards delegated this
responsibility down and spread decision-making authority out to senior managers in their
various business units (e.g., Counterparty Risk Management, and Housing and Community
Development). These managers determine if FHFA’s prior approval should be obtained for a
proposed action. If they decide that a proposed action meets FHFA’s criteria for conservator
approval, a request is submitted to FHFA, a decision is received from the Agency, and the
managers are supposed to ensure their units comply with FHFA’s decision.

Prior to May 2011, neither Enterprise had implemented any formal policies or procedures for
coordinating with FHFA on approval requests. In the third quarter of 2009, FHFA requested
Freddie Mac’s assistance in tracking items requiring FHFA approval and implemented a
framework for reporting and tracking these requests. On May 17, 2011, Freddie Mac established
procedures to compile, track, and update the status of its requests. Pursuant to these procedures,
Freddie Mac, on a weekly basis, updates the list of outstanding requests and their status by
soliciting relevant data from the responsible business units. Unlike Freddie Mac, Fannie Mae

12
  Letter from James B. Lockhart III, Director, FHFA, “RE: Instructions for the Board of Directors for Order No.
2008-0006” (November 24, 2008).


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                        7
has established no written procedures but, since 2009, it has provided FHFA with a weekly
update to a list of outstanding requests for conservatorship approval.

Both Enterprises continue to take a decentralized approach to seeking FHFA’s approval for
actions that fall under the conservator’s authority. When the Enterprises determine that
conservatorship approval is necessary, requests are formulated and forwarded to FHFA. Before
December 2011, the Enterprises’ individual business unit managers generally would submit
requests for conservator approval to OCO, but they also could submit requests to other offices
within FHFA.13 OCO, however, was not always apprised of the requests submitted to other
FHFA offices.

In December 2011, OCO notified the Enterprises of the establishment of a “one-entry”
notification system, thereby eliminating any potential confusion regarding where to submit a
request for conservatorship action. FHFA instructed the Enterprises that beginning immediately
all issues—with the exception of executive compensation items and certain legal questions—
requiring conservatorship approval must be submitted to OCO through a designated electronic
mailbox. Issues involving individual executive compensation must be submitted through another
designated electronic mailbox. The Enterprises were also informed that approval requests
submitted to FHFA through any other means are not considered items requiring FHFA action
until they are properly submitted to FHFA through the appropriate electronic mailbox. Further,
communications (i.e., approvals) from FHFA that are not processed in this manner are not
considered binding or valid decisions of the conservator.

How FHFA Determines Whether to Approve Enterprise Requests
FHFA’s conservatorship review and approval process varies depending on the type of request.
For example, OCO has the authority to approve requests based on guidance received from the
FHFA Acting Director. It can decide a matter itself, assign the matter to another office, or work
directly with a lead FHFA office on the matter in order to take advantage of the lead office’s
expertise. For more significant requests, OCO utilizes a “red folder” process in which OCO
establishes a lead office to review the request while also obtaining input from other FHFA
offices. OCO compiles an approval package that includes a memorandum approving or
disapproving the Enterprise’s request based on the input received from the various FHFA offices.
The decision memorandum is then circulated in a red folder with a sign-off sheet for each of the
involved FHFA offices. After each participating office reviews and signs off on the decision
memorandum, it is submitted to the FHFA Acting Director for review and a final


13
  Requests involving compensation issues were forwarded directly to FHFA’s Office of Policy Analysis and
Research. In addition, requests that involved litigation or legal issues were typically sent directly to the Office of
General Counsel. The Enterprises also occasionally submitted requests directly to other offices within FHFA.


        Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                            8
conservatorship decision. OCO relies on expertise throughout FHFA to evaluate issues and
provide recommendations regarding the conservatorship.

Enterprise requests that are submitted to the Office of Policy Analysis and Research (OPAR)—
compensation-related issues—or Office of General Counsel (OGC)—legal-related questions—
are reviewed independently of OCO. When Enterprise requests are submitted in this manner,
OPAR and OGC may consult FHFA’s Acting Director and others before making a decision, or
they may decide internally with no further discussion. In either case, OPAR and OGC can send
their decisions back to the requesting Enterprise unit without apprising OCO of the request or
decision made.14

FHFA’s Oversight of the Request and Approval Processes

FHFA has not centralized information summarizing all requests for conservator approval from
the Enterprises. For example, OCO’s tracking spreadsheet is not complete because FHFA
offices such as OPAR and OGC do not always apprise OCO of conservatorship approval
requests. In addition, although the tracking spreadsheet includes Enterprise requests and FHFA’s
resulting recommendations and decisions, OCO may not be aware of actions requiring
conservator approval that were not submitted by the Enterprises.15

The requesting Enterprise updates the tracking spreadsheet weekly and submits it to OCO, which
reviews the spreadsheet and modifies it in turn as necessary.16 As of May 17, 2012, OCO had
received and subsequently tracked (using the tracking spreadsheet) a total of 611 conservatorship
action requests from the Enterprises. Requests remain open until a decision is made or the
request is withdrawn by the applicable Enterprise. As of May 17, 2012, a total of 583 requests
had been closed (this total includes Agency decisions and informational requests concerning
actions that did not need conservator approval), see Figure 1 below.17



14
  According to OCO, beginning in 2012, all communication from OPAR is centralized through a dedicated portal
and OPAR copies OCO on all decisions. OGC copies OCO on conservatorship related issues, as it deems
appropriate.
15
  The OCO tracking spreadsheet also includes actions submitted by the Enterprises that do not require
conservatorship approval.
16
  Beginning in 2012, based on the establishment of the “one entry” notification system discussed above, OCO
asserts that it receives all approval requests, and the manual process of updating the spreadsheets on a weekly basis
has been replaced by an automated system.
17
   The number of approval requests, some of which did not require conservator approval, was compiled from OCO’s
tracking spreadsheets and is approximate. The 28 pending conservator approval requests is the difference between
the number received and the number closed and outstanding as of May 17, 2012. Also, policy requests, which OCO
began tracking in January 2012, were not included in these figures because they were tracked on a separate
spreadsheet for policy matters rather than on the conservatorship approval request spreadsheet.


        Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                          9
                    Figure 1: OCO’s Tracked Requests for Conservator Approval

                             Fannie Mae                                         Freddie Mac

                                No.                                                 No.
               Year           Received      Closed                Year            Received       Closed
         2009                       46           26         2009                        68            46
         2010                       94           90         2010                       108           104
         2011                      104          105         2011                        74            84
         2012 (as of 5/17)          64           69         2012 (as of 5/17)           53            59
         Total                     308          290         Total                      303           293


Since Enterprise requests involving compensation and legal issues can bypass OCO and are not
tracked by OPAR and OGC, the tracking spreadsheet does not achieve its purpose of recording,
tracking, and monitoring all “requests made to, and actions taken by the FHFA.”18 But the
tracking spreadsheet’s limitations are somewhat mitigated by a group of Agency executives who
meet regularly to review Enterprise requests and Agency approvals.

Enterprise requests for conservator approval may be reviewed by FHFA’s Conservatorship
Governance Committee (CGC). The CGC commenced operation in mid-2009 and is comprised
of senior FHFA executives.19 The CGC’s purpose is to provide an executive level review of
decisions related to the Agency’s role as conservator. For each committee meeting, OCO
provides the CGC with the tracking spreadsheet and identifies any entries that may significantly
affect the Enterprises or FHFA (e.g., safety and soundness challenges, reputational risk issues,
etc.). The CGC provides broad oversight on issues that cut across individual offices and enables
FHFA to coordinate on issues that span Agency responsibilities “so that multiple viewpoints can
be raised and considered.”20 The CGC’s recommendations go directly to FHFA’s Acting
Director for final decisions. The CGC governance document indicates that the committee will
meet at least weekly, and the agenda will include new business, status reports on issues not yet
closed, and final recommendations for OCO to FHFA’s Acting Director.

In addition to the CGC meetings, OCO staff indicated that there are other meetings held
internally and with the Enterprises that provide the Agency with oversight control of Enterprise
18
  OCO Status Report Protocol, p. 1 (October 2010). Note: Figure 1 was compiled using the information contained
in the OCO tracking spreadsheets.
19
  This includes the Acting FHFA Director as the Chairman; OCO’s Senior Associate Director as the Vice-
Chairman; the Deputy Director of Enterprise Regulation; the Associate Director for the Office of Policy Analysis
and Research; the Senior Associate Director for Congressional Affairs and Communications; the General Counsel;
the Deputy General Counsel responsible for conservatorship issues; the Deputy Director for Housing, Mission, and
Goals; and the Special Advisor to the Director.
20
     “CGC Committee Overview,” OCO Status Report Protocol, Exhibit A, p. A-3 (October 2010).


          Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                       10
requests for conservator approval. These include meetings between Agency senior management;
OCO and FHFA’s Acting Director; the Enterprises’ boards of directors and FHFA officials; and
the Enterprises’ Chief Executive Officers and FHFA’s Acting Director. According to OCO,
these meetings can provide forums for learning about and discussing Enterprise activities that
involve conservator approval.

After FHFA informs an Enterprise about its decision concerning a particular request, the Agency
does not have policies or procedures to follow up to ensure compliance with the decision.
Instead, OCO closes out the particular item in the tracking spreadsheet and informs the Division
of Enterprise Regulation (DER) about the decision. In general, DER evaluates the Enterprises’
finances and their regulatory compliance through yearly onsite examinations and other periodic
visits. However, DER does not have a specific examination program related to the Enterprises’
compliance with conservator decisions. If the decisions happen to relate to an examination topic,
they may be included in DER’s review at its staff’s discretion.

In the findings that follow, FHFA-OIG discusses how FHFA can strengthen the system it set up
to ensure that the Enterprises seek conservator approval, to determine whether to grant Enterprise
requests, and to ascertain whether the Enterprises comply with conservator decisions.




      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   11
FINDINGS
FHFA-OIG finds that:

           1. FHFA’s Non-Delegated Authorities and Procedures Are Outdated
              and Allow Certain Major Business Decisions to Avoid Conservator
              Approval

OCO may not have been involved in a number of major business decisions because they are not
specified within the eight categories of non-delegated authorities. For example, OCO was not
involved in the review and approval of Fannie Mae’s single-family underwriting standards or its
High Touch Servicing Program in which, to date, there have been multiple transfers of mortgage
servicing rights totaling more than $1.5 billion. Given the now long duration (i.e., four years) of
the conservatorships, OCO should consider reassessing the non-delegated authorities to ensure
that FHFA is involved in all of the Enterprises’ major business decisions.

           Single-Family Underwriting Standards
FHFA-OIG recently issued a report that addresses Fannie Mae’s single-family underwriting
standards. The report finds that the Agency’s oversight of underwriting is limited.21 It also
highlights the importance of underwriting standards: “[o]versight of underwriting standards is
significant given that such standards control which loans Fannie Mae buys, and, thus, they
comprise the lynchpin of a principal business activity valued at $605 billion in 2010 and $427
billion in 2011 (as of October 31, 2011).”22 As conservator, FHFA has a responsibility to ensure
that the Enterprises’ underwriting standards appropriately balance credit risk and return. FHFA
can further fulfill its conservator responsibility by ensuring sound oversight of underwriting
standards through more active involvement and detailed guidance governing its review process.

           High Touch Servicing Program
In late 2008, Fannie Mae’s High Touch Servicing Program was initiated to help avoid credit
losses. The program involves transferring mortgage servicing rights to specialty servicers and, to
date, the value of such transfers is approximately $1.5 billion. The overall program has not been
reviewed or approved by FHFA as conservator. Additionally, FHFA did not review or approve
the overwhelming majority of transactions (i.e., transactions involving over 700,000 loans with



21
  See FHFA-OIG, FHFA’s Oversight of Fannie Mae’s Single-Family Underwriting Standards, AUD-2012-003
(March 22, 2012), available at http://www.fhfaoig.gov/Content/Files/AUD-2012-003.pdf.
22
     Id.


           Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                        12
an unpaid balance in excess of $130 billion),23 but FHFA was advised of and had “no objection”
to one transaction.24

Given the magnitude and importance of these business decisions—for which the Enterprises
were not required to request conservator approval—FHFA should consider, as part of its recent
initiative to reassess the list of non-delegated authorities,25 whether additional categories of
business decisions should be included in the list of non-delegated authorities and therefore
expressly require conservatorship approval.

        2. FHFA’s Procedures Governing the Conservatorship Approval
           Process Are Not Sufficiently Detailed and They Do Not Require a
           Single Point of Contact for Approval Requests

Although FHFA has directed the Enterprises to seek FHFA’s approval for certain kinds of
business decisions, it did not establish sufficient internal controls to ensure that the Enterprises
comply with the directive. In addition, although FHFA created OCO as the main office
administering its conservator responsibilities and made it available to answer the Enterprises’
questions, the Agency did not make OCO the central point of contact for all conservatorship
approval requests.

Accordingly, Enterprise requests for approval have been inconsistent. For example, FHFA-OIG
determined that Fannie Mae agreed to seven insurance settlements during 2009 and 2010 that
resulted in settlement discounts totaling $306 million. These settlements were in excess of $50
million each and should have been approved in advance by FHFA—because they constitute non-
delegated authorities. By contrast, Freddie Mac settled similar claims but first sought FHFA’s
approval. FHFA has not taken adequate steps to ensure that approvals are consistently handled
across both Enterprises.

In another example found by FHFA-OIG, the Enterprises were inconsistent with respect to their
requests for conservator approval for counterparty risk limit increases (i.e., the maximum credit
risk exposure that the Enterprises permit for a particular counterparty). The Agency identified

23
  See FHFA-OIG, Evaluation of FHFA’s Oversight of Fannie Mae’s Transfer of Mortgage Servicing Rights from
Bank of America to High Touch Servicers, EVL-2012-008 (September 18, 2012), available at
http://www.fhfaoig.gov/Content/Files/EVL-2012-008.
24
  OCO also reviewed and had “no objection” to a Fannie Mae request to utilize a specialty servicer in October
2009, but this transaction did not involve the transfer of mortgage servicing rights.
25
  In January 2011, OCO assembled a working group to reassess and provide further clarification of FHFA’s
expectations regarding the types of business decisions that require FHFA approval. The latest versions of the
revised delegations and letter of instruction were produced in March, April, and June of 2012; were circulated
among various FHFA offices and the Enterprises for review and comment; and, as of September 2012, have not
been formally issued or adopted.


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                        13
through an examination that Fannie Mae did not request conservator approval for risk limit
increases even though risk limit increases are expressly included among the non-delegated
authorities. Freddie Mac, by contrast, requested and received approval for risk limit increases
from the conservator. Again, FHFA has not taken adequate steps to ensure that approvals in this
area are consistently handled.

As a Federal agency, FHFA is subject to internal control standards that help it meet
responsibilities and minimize risk associated with its programs and operations. The Government
Accountability Office’s Standards for Internal Control in the Federal Government defines
internal control activities as the policies, procedures, techniques, and mechanisms that help
ensure an agency’s objectives are met.26 Further, as specified in the Office of Management and
Budget’s Circular A-123, it is management’s responsibility to develop and maintain effective
internal controls.27 As FHFA develops and re-engineers its programs and operations, it should
design management structures to help ensure accountability for results, such as ensuring that
FHFA and the Enterprises have comprehensive policies and procedures to guide the
conservatorship approval process.

           FHFA Has Neither Issued Sufficient Guidance nor Updated Its November 2008
           Directives Concerning Conservatorship Approvals
Although the Enterprises have been in conservatorship for more than four years, FHFA has not
updated the non-delegated authorities, issued supplemental directives, or clarified its
expectations under the November 2008 letters of instruction.28 Additionally, based on interviews
with the Chief Compliance Officers for each Enterprise, other than the November 2008 letters,
the Enterprises have not received adequate guidance with respect to what actions require
conservatorship approval.

Moreover, one of the Enterprises commented that, in its opinion, FHFA wants the Enterprise to
be broad in its interpretation of what might require conservatorship approval and to err on the
side of asking for approvals that may not be needed. FHFA-OIG further found, through
discussions with FHFA and Enterprise officials, that if a transaction is deemed to be “ordinary
course of business” or qualifies as “loss mitigation,” it is generally understood not to require
conservatorship approval. However, neither FHFA nor the Enterprises have published any
guidance to clarify, explain, or illustrate the meanings of these terms.
26
     Standards for Internal Control in the Federal Government, “Definition and Objectives,” p. 4 (November 1999).
27
     OMB Circular A-123, Management’s Responsibility for Internal Control, “Introduction,” p. 4.
28
   See footnote 25. Also, based on discussions with OCO and other key offices involved with reviewing
conservatorship action approval requests, FHFA generally provides feedback in response to specific conservatorship
action approval requests. Further, in June 2012, OCO issued a Settlement Policy and Settlement Procedural Guide
to provide direction, context, and an established process for the Enterprises to pursue settlements with
counterparties.


          Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                          14
The lack of comprehensive guidance has led to inconsistent interpretations of FHFA’s order and
letters of instruction. For example, unlike Freddie Mac, Fannie Mae has never sought FHFA
approval before increasing counterparty risk limits. In Freddie Mac’s case, the Enterprise
submits to its board of directors for approval changes in counterparty risk limits on an aggregate
basis that cover counterparty risk limits across multiple business units. For instance, in July
2009, Freddie Mac requested an aggregate increase of $8 billion in total counterparty exposure
across eleven counterparties. Following board of director approval, Freddie Mac submitted these
actions for FHFA conservator approval.

Freddie Mac’s approach of submitting requests for risk limit increases that aggregate
counterparty risk limits across the organization appears to satisfy FHFA’s rules for
conservatorship approval. As of March 2012, FHFA has approved nine Freddie Mac requests for
approval of board-level risk limit increases. By contrast, Fannie Mae does not submit
counterparty risk limit changes to its board of directors for approval, does not aggregate requests
across business units, and does not submit risk limit increase requests to FHFA for conservator
approval. FHFA-OIG found that Fannie Mae staff handled 4,543 counterparty risk limit
increases totaling $515 billion between November 25, 2008, and January 27, 2012.29 None of
these increases were presented to FHFA for approval.

Fannie Mae’s risk limit increases were identified through a DER targeted examination, which
found that Fannie Mae did not obtain its board of directors’ or FHFA’s approval for increases in
exposure limits for mortgage insurers during June 2011. Accordingly, in January 2012, DER
issued a deficiency notice to request that the Enterprise seek board and conservator approvals.
Furthermore, OCO informed FHFA-OIG that it was not aware of these risk limit increases until
DER brought them to its attention.




29
  Fannie Mae also reduced its counterparty risk limits 2,947 times between November 24, 2008, and January 30,
2012, for a total of $731 billion. Thus, risk limits in total were not increased during this period. FHFA’s letters of
instruction to the Enterprises do not require them to seek approval of risk limit decreases.


        Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                          15
Notably, many of these risk limit increases are significant: 160 of them were for amounts greater
than or equal to $1 billion. Figure 2, below, lists Fannie Mae’s ten largest risk limit increases.

Figure 2: Fannie Mae’s Ten Largest Risk Limit Increases (in $Billions)

                                                                      Old        New
       Date                        Counterparty                      Limit       Limit     Increase
      7-May-10    Counterparty 1                                     $9.7        $39.3       $29.6
      8-Aug-11    Counterparty 2                                     16.7         31.7         15
      6-May-10    Counterparty 3                                      11           22          11
      5-Nov-09    Counterparty 4                                      3.3          14         10.7
      5-Nov-09    Counterparty 5                                      2.4         10.5         8.1
      5-Nov-09    Counterparty 6                                      2.4          10          7.6
     18-Dec-08    Counterparty 7                                       ‒          7.6          7.6
      5-May-10    Counterparty 2                                      9.3         16.7         7.4
      5-May-10    Counterparty 8                                      7.9          15          7.1
     19-June-09   Counterparty 9                                       9           16           7

Following DER’s issuance of the deficiency notice, OCO took the position that the risk limit
increases were not required to be approved by FHFA because Fannie Mae’s board of directors
had delegated the authority to approve these risk limits to its Chief Executive Officer. OCO’s
explanation, however, appears to be inconsistent with the letters of instruction, which clearly
retain for FHFA’s exclusive approval (i.e., do not delegate to the Enterprises) “actions involving
… increase in risk limits.” Additionally, OCO in its own policies and procedures identifies
increases in risk limits as an example of a non-delegated action that requires conservator
approval. Further, neither the letters of instruction nor OCO’s written procedures state that
FHFA’s (i.e., the conservator’s) consideration of any action is contingent upon approval by
Fannie Mae’s board of directors.

Notwithstanding its assertions, OCO has begun to work with Fannie Mae’s risk management
team to establish and set appropriate board-level counterparty risk limits similar to the
governance structure existing at Freddie Mac. When this work is completed, Fannie Mae should
be able to increase its counterparty risk limits and seek conservator approval without the
significant administrative burden of requesting them on a case-by-case basis.

FHFA has exerted some effort to clarify its original directives. During January 2011, OCO
assembled a working group comprised of six senior FHFA executives to reassess and provide
further clarification of the letters of instruction regarding the types of business decisions that
require FHFA approval. But as of September 2012, the revised letters of instruction have not
been formalized.




      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   16
        Until Recently FHFA Had Not Established Procedures to Centralize the Intake of
        Conservatorship Approval Requests
FHFA did not have procedures to establishing a central point of entry for conservatorship
approval requests. FHFA-OIG found that conservatorship approval requests were not always
routed to OCO, the main office responsible for administering FHFA’s conservator
responsibilities. For example, conservatorship approval requests involving executive
compensation issues were reviewed exclusively by another FHFA office, OPAR, and requests
involving legal issues were reviewed by OGC, a different FHFA office. Other FHFA offices,
including the Credit Risk Division, the Office of the Chief Accountant, and the Office of
Housing and Regulatory Policy, also occasionally received conservatorship action approval
requests.

FHFA-OIG also found that, although approval requests received by OCO were routinely tracked,
OCO was not always aware of and could not track approval requests received by other FHFA
offices. Consequently, OCO was unable to maintain accountability for all conservatorship
approval requests submitted to FHFA.

Notably, FHFA-OIG found that FHFA’s decentralized process contributed to Fannie Mae
engaging in non-delegated actions without requesting or receiving conservatorship approval. For
example, Fannie Mae claims that it believed that the seven insurance settlements (i.e., mortgage
insurance pool policy commutations) referenced above that resulted in $306 million in discounts
did not require conservatorship approval. On the contrary, under FHFA’s delegation of
authority, each Enterprise is obliged to seek conservatorship approval for settlements greater
than $50 million. OCO was not aware of the settlements.30

By way of background, a mortgage insurance pool policy commutation transaction is a
settlement between an insured (e.g., Fannie Mae) and a mortgage insurer in which the mortgage
insurer agrees to make a lump sum payment to the insured to terminate all or a portion of its
mortgage insurance policy on a pool of insured mortgages. Commutations are typically executed
at a discount to the remaining amount of insurance coverage on the mortgage pool, and this
benefits the mortgage insurer. From Fannie Mae’s perspective, the termination of this type of
insurance coverage results in premium savings and the immediate use of funds received from the
mortgage insurer. Additionally, Fannie Mae’s receipt of an up-front payment, rather than
waiting for insurers to make claims payments over time, enables it to mitigate the potential risk
of having the insurers either go out of business or making partial payments due to an insurer’s
declining financial condition. In fact, before the first pool policy commutation reviewed by
FHFA-OIG was executed in July 2009, Fannie Mae sent an email to FHFA’s Credit Risk

30
  Although the Agency’s Credit Risk Division was aware of the settlements, it was not asked for, nor did it provide,
approval for them.


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                        17
Division indicating that if the deal was consummated it would provide some capital relief to the
subject mortgage insurer, which would enable it to continue to write new business.31

From July 2009 through June 2010, Fannie Mae executed without FHFA approval seven
mortgage insurance pool policy commutations with an estimated remaining amount of insurance
in force of $1.239 billion for a fee of $933 million. FHFA, in its role as conservator, was
therefore not in a position to determine whether the $306 million settlement discounts effectively
preserved and conserved Fannie Mae’s assets. For example, because FHFA did not review these
transactions, it did not have an opportunity to assess the adequacy of the model(s) and
assumptions used by Fannie Mae to determine the amount of insurance risk in force; calculate
fair value of the mortgage pool policies and premiums forgone; or analyze and validate the
settlement discounts of $306 million (risk in force minus fee charged). FHFA also lost the
opportunity to assess whether certain mortgage insurers were viable sources of future insurance
coverage for the Enterprise.

In contrast to Fannie Mae’s handling of mortgage insurance pool policy commutations, Freddie
Mac submitted to OCO two approval requests related to commutations: the first, for
commutations generally; and the second, for a specific commutation.32 In response to the first
request, OCO advised Freddie Mac that it should seek conservator guidance for each individual
settlement valued at more than $50 million. FHFA’s Credit Risk Division responded to the
second request, but copied OCO, indicating that the second transaction was within Freddie
Mac’s delegated authority because the settlement amount was less than $50 million.33

In October 2011, Fannie Mae presented FHFA’s Credit Risk Division with a proposal for
another mortgage insurance pool policy commutation settlement. This proposal identified the
seven unapproved settlements discussed above. In November 2011, OCO learned of these
unapproved settlements and, through FHFA’s OGC, FHFA notified the Enterprises that
insurance settlements require Agency consent if they are over $50 million in value. The
directive not only required the Enterprises to inform OCO of proposed settlements, but also
served to close a potential loophole by requiring Agency approval for any group of settlements
with one party that have an aggregate value of $50 million or more. Such FHFA directives are


31
  In some states, if a mortgage insurer does not meet a required minimum policyholders’ position or exceeds a
maximum permitted risk-to-capital ratio (generally 25 to 1), it may be prohibited from writing new business until its
policyholders’ position meets the minimum or its risk-to-capital ratio falls below the limit, as applicable.
32
  Additionally, Freddie Mac’s requests indicated that Fannie Mae was engaging in similar transactions involving
mortgage insurance pool policy commutations, but OCO did not follow up with Fannie Mae to determine the extent
of its settlement transactions in this area.
33
  In July 2011, Freddie Mac notified FHFA that the settlement amount for that matter was estimated to be $15
million, which is below the approval threshold of $50 million. Later in November 2011, OCO worked with OGC to
clarify formally that insurance settlements over $50 million require FHFA’s advance approval.


        Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                         18
examples of good internal controls that help the Agency achieve its intent of reserving
conservator authority over major business decisions.

        FHFA Should Take a Greater Role to Ensure That the Enterprises Have Put in
        Place Adequate Policies, Procedures, and Governance Structures Concerning
        Conservatorship Approvals
As part of its efforts to review and clarify the November 2008 letters of instruction, FHFA needs
to take a more proactive role as conservator to ensure that the Enterprises have put in place
sufficient internal controls, including policies and procedures and governance structures, to
comply with FHFA’s letters of instruction. FHFA’s November 2008 Instructions for the Board
of Directors (Order No. 2008-0006) acknowledges that the non-delegated authorities are broad
and states that the boards should implement appropriate measures to coordinate with FHFA as
the regulator and conservator of the Enterprises.

FHFA-OIG found that OCO had not determined whether the Enterprises had implemented
policies and procedures for complying with the non-delegated authorities. After FHFA-OIG
raised the issue in October 2011, OCO contacted both Enterprises and learned that Freddie Mac
had established written policies and procedures related to conservatorship decisions,34 but Fannie
Mae had not. However, FHFA-OIG notes that, to date, OCO has not reviewed the sufficiency of
Freddie Mac’s policies.

FHFA-OIG believes that FHFA should ensure that Fannie Mae develops a process to confirm
compliance with the Agency’s approval requirements.35 As conservator and regulator, FHFA
has the responsibility to provide for the Enterprises’ safety and soundness and preserve and
conserve their assets by taking a more proactive role in developing policies, procedures, and
governance processes that are adequate and appropriately structured to secure FHFA’s approval
of major business decisions.




34
  On September 13, 2012, OCO provided to FHFA-OIG Fannie Mae’s policies and procedures, effective August 1,
2012, for complying with the non-delegated authorities. OCO, however, has not reviewed the sufficiency of those
policies and procedures.
35
  FHFA’s examiner-in-charge for Fannie Mae concurs in this belief. See Letter from FHFA’s Division of
Examination and Regulation, RE: Delegations of Authority to the board of directors of the Federal National
Mortgage Association (FNM-DER-2012-005, January 1, 2012).


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                       19
        3. FHFA Has Not Established Criteria or Policies to Ensure Rigorous
           Review of Enterprise Business Decisions and Has Not Maintained a
           Central Repository for Documentation Supporting Conservator
           Decisions

FHFA-OIG acknowledges that FHFA has devoted significant resources to meeting its
conservator mission. In particular, FHFA has established OCO as its main administrative arm
for the Enterprises’ conservatorships. In turn, OCO has implemented intake, tracking, and
decision-making processes for Enterprise requests. FHFA-OIG, however, found that FHFA can
improve its oversight by ensuring that it: develops review procedures that include testing and
validation of conditions asserted in support of approval requests; centrally tracks and maintains
documentation of its decision-making; and educates the Enterprises regarding FHFA’s decision-
making processes. Without sound and auditable decision-making processes, the Agency may
have difficulty justifying conservatorship decisions.

        FHFA Sometimes Relies upon Information Provided by the Enterprises Without
        Independently Verifying It or Performing a Business Case Analysis
A number of FHFA-OIG published reports show that FHFA sometimes relies on the Enterprises’
determinations without independently testing and validating them, thereby giving undue
deference to Enterprise decision-making. For example, at the end of 2010, FHFA approved a
$1.35 billion settlement of mortgage repurchase claims that Freddie Mac asserted against Bank
of America.36 In approving the settlement, FHFA relied on Freddie Mac’s analysis of the
settlement without testing the assumptions underlying the Enterprise’s existing loan review
process. An FHFA-OIG report found that FHFA did not act timely or test concerns raised by an
FHFA senior examiner about limitations in Freddie Mac’s existing loan review process for
mortgage repurchase claims.37

Similarly, in 2009 and 2010, the Enterprises awarded their top six officers over $35 million in
compensation.38 FHFA reviewed and approved these compensation awards based primarily on
the Enterprises’ determinations and recommendations. An FHFA-OIG report found that FHFA
did not test or validate the means by which the Enterprises calculated their recommended
36
  The mortgage repurchase settlement, as a settlement of a claim exceeding $50 million, required pre-approval by
the conservator.
37
  See FHFA-OIG, Evaluation of the Federal Housing Finance Agency’s Oversight of Freddie Mac’s Repurchase
Settlement with Bank of America (September 27, 2011), available at http://www.fhfaoig.gov/Content/Files/EVL-
2011-006.pdf. FHFA-OIG also issued a follow-up report on this topic. See FHFA-OIG, Follow-up on Freddie
Mac’s Loan Repurchase Process, EVL-2012-007 (September 13, 2012), available at
http://www.fhfaoig.gov/Content/Files/EVL-2012-007.
38
  These payments, as compensation decisions relating to personnel at or above the executive vice president level,
required pre-approval by the conservator.


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                        20
compensation levels and did not consider factors that might have resulted in reduced executive
compensation costs.39
In another example found by FHFA-OIG during the course of this audit, FHFA unduly relied on
information provided by Fannie Mae when it issued a “no objection” response to the Enterprise’s
request to make an additional investment of between $55 million and $70 million in order to
protect an existing $40 million investment.

On May 26, 2010, Fannie Mae forwarded an email request to OCO for approval to purchase a
senior mezzanine loan made to a large business entity by another lender, in order to protect an
existing $40 million junior loan to the same entity. The request explained, “… we have the
potential to become $150 million underwater on the senior loan and if someone else buys the
senior mezzanine loan, we could have our $40 million junior mezzanine position foreclosed out
from under us, so [there is] a total of about $190 million of taxpayer money riding on this.”
Attached to the email chain was a Bloomberg article, which provided additional details about the
joint venture. The request was also supported by an internal Fannie Mae memorandum, which
recommended that Fannie Mae purchase the $85 million senior mezzanine loan from another
lender for a purchase price of between $55 million and $70 million.

On the same day the request was made, OCO informed Fannie Mae it had “no objection” as
follows:

        We have received your request regarding the purchase of the … senior mezzanine
        position. You have represented that the failure to purchase this portion will
        jeopardize your existing $40 million junior lien … You have indicated that your
        actions are designed to mitigate a potential loss, the proposed actions are in the
        best interest of Fannie Mae, and are being undertaken in a manner consistent with
        existing loss mitigation practices.

        Given the complex nature of this transaction and the short time in which a
        decision must be made, it is not possible for us to assess the reasonableness of this
        proposal. However, based on your representation that the proposed transaction is
        necessary to mitigate loss, we have no objections to your plans as described.

Fannie Mae subsequently advised FHFA that “shareholders/taxpayers made $56 million” on the
transaction.



39
  See FHFA-OIG, Evaluation of the Federal Housing Finance Agency’s Oversight of Fannie Mae’s and Freddie
Mac’s Executive Compensation Programs, (March 31, 2011) available at
http://www.fhfaoig.gov/Content/Files/Exec%20Comp%20DrRpt%2003302011%20final,%20signed.pdf.


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                    21
This example suggests that FHFA may be unduly deferring to Enterprise decision-making in
cases in which the Enterprises make requests to approve complex transactions at the last
minute.40 Although there may be circumstances when such approval is warranted, FHFA may be
in a position to satisfy better its conservatorship responsibilities by imposing deadlines for
submission of approval requests so that it has enough time to evaluate complex transactions.

The foregoing suggests that FHFA needs to increase the rigor of its approval process by taking a
more active role investigating the underlying facts rather than passively accepting the account
thereof supplied by the Enterprises.

        OCO Does Not Centrally Maintain or Track Documentation Supporting Final
        Conservatorship Decisions
OCO does not maintain complete records of FHFA’s final conservatorship decisions. FHFA-
OIG also found that OCO does not centrally maintain detailed documentation to support
conservatorship decisions when the documentation supporting a decision has been prepared by
an FHFA office other than OCO.

According to OCO, it maintains some of the final decisions for calendar year 2009, the majority
of the final decisions for 2010, and all of the final decisions for 2011. These files in many
instances, however, do not include the initial Enterprise request or documentation supporting the
FHFA analysis that took place in connection with evaluating the request. OCO explained that its
revised protocols as of August 2011 do not require OCO to maintain any documentation
supporting its analysis of the request. Rather, FHFA’s minimum documentation requirements
provide merely that the applicable office must compile and maintain the initial request, routing
communications, and the final communication and review package. It was further explained that
the lead FHFA office (such as OCO, OPAR, or OGC) owns the documentation pertinent to the
conservatorship approval requests it reviews. Consequently, FHFA-OIG found inconsistencies
with the documentation in OCO’s files and that some of OCO’s files include only the final
decision.

The absence of a central repository for conservatorship approval documents heightens the risk
that such documents—the record of the request and FHFA’s deliberations surrounding the
request—are or may become lost. This issue is compounded by the fact that under FHFA’s
previous decentralized structure (i.e., prior to December 2011) OCO was not the central
clearinghouse for all conservatorship approval requests. The Enterprises would at times send
issues directly to other FHFA offices without OCO’s knowledge and without entering the data
onto OCO’s Status Report Tracking Spreadsheet. In addition, OCO did not require these other

40
  In response to the draft audit report, FHFA noted that Fannie Mae was not required to seek conservatorship
approval of the purchase of the senior mezzanine loan.


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                        22
FHFA offices to maintain separate tracking systems or to report information on conservatorship
actions on a routine basis.

FHFA-OIG also confirmed through discussions with OPAR and OGC that these FHFA offices
did not maintain separate tracking spreadsheets. As a result, OCO could not readily provide
FHFA-OIG with summary data on all approval requests and related dispositions during the 2009-
2011 timeframe. Further, FHFA-OIG learned that entries made on the approval request tracking
spreadsheets—the primary mechanism used by FHFA to track approval requests—were
sometimes made after the fact when OCO learned of a request from another FHFA office or from
the Enterprises.

In December 2011, OCO narrowed the number of channels through which conservatorship
requests may be submitted and revised its protocols to place responsibility on the lead office for
maintaining detailed documentation to support conservatorship decisions. Despite this
improvement, FHFA-OIG believes that OCO should be responsible for establishing and
maintaining a central repository for all documentation supporting conservatorship decisions.
FHFA should also reconsider its decision not to require OCO to compile and maintain
documentation supporting FHFA’s decisions. This will help FHFA increase the transparency
and defensibility of its conservatorship decisions. It will also help ensure that documentation is
readily available for external review.

       The Enterprises May Not Sufficiently Understand FHFA’s Conservatorship
       Action Approval Process
FHFA-OIG also found during the course of this audit that the Enterprises may not sufficiently
understand FHFA’s decision-making process for their approval requests. For example, Freddie
Mac’s Chief Compliance Officer believes that there is no definitive structure or method for the
conservatorship decision-making process, and she does not have a clear understanding of why
certain requests get approved while others are denied. Freddie Mac’s Chief Compliance Officer
advised that Freddie Mac would like more clarity on what FHFA’s decision-making process is
and who makes the decisions. The Chief Compliance Officer of Fannie Mae stated that there
were times when FHFA and the Enterprise had differences of opinion or different philosophical
viewpoints regarding what issues require conservatorship approvals.

       4. FHFA Has Not Established a Formal Process to Follow Up on
          Significant Conservator Decisions to Ensure the Enterprises Comply
          with Them

FHFA-OIG found that once a conservatorship decision is made and communicated to the
Enterprises, OCO does not have a formalized process to follow up to ensure that the decision is
adhered to. This is true regardless of the dollar value or potential implications of the decision.
Instead, OCO forwards conservator decisions to DER to consider—in its discretion—in its
      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   23
annual examination cycle. OCO does not believe the responsibility for follow-up on
conservatorship decisions rests with its office.

FHFA-OIG tested the effectiveness of this procedure by obtaining a judgmental sample of ten
conservatorship approval decisions. Based on the responses from DER, OGC, and the Office of
Housing and Regulatory Policy, only two of the ten sampled decisions appear to have been
followed up, and even in those two instances the follow-up was not sufficiently documented.

FHFA-OIG also confirmed through interviews with DER and Division of Examination Programs
and Support (DEPS) management that there is not a specific examination program in place to
review the Enterprises’ compliance with conservatorship decisions. DER and DEPS learn of
conservatorship approvals and decisions through weekly senior management meetings with OCO
and review of the conservatorship approval tracking spreadsheets. According to DEPS
management, targeted examinations may include the review of conservatorship directives
depending on the topic. If the subject matter of a targeted examination intersects with the topic
of a directive, then the examiner will determine if the directive was followed.

FHFA-OIG requested information from DEPS pertaining to specific conservatorship decisions
made during 2010 and 2011 that FHFA followed up on pursuant to its examination programs.
Although the information provided by DEPS shows that FHFA has performed some
conservatorship-related examination work, this work appears to have been performed primarily
for specific examinations, rather than ensuring that the Enterprises adhered to conservatorship
decisions related to specific approval requests. Further, DEPS acknowledged the need to take a
more systematic approach in 2012 to review, prioritize, and follow up on conservatorship
directives through examinations. Therefore, OCO, in conjunction with DEPS and DER, should
develop a formalized risk-based follow-up plan specifically to review conservatorship decisions.

       FHFA Has Not Ensured that the Enterprises Have a Sound Follow-up Process in
       Place
Like FHFA, the Enterprises also do not routinely follow up on conservator decisions to ensure
that their component parts that are responsible for implementing the decisions have done so.
FHFA-OIG found that the internal audit functions within the Enterprises have not conducted any
audits or reviews pertaining to the conservatorship action process or specific conservatorship
requests.

For example, Fannie Mae’s internal auditors stated that the conservatorship action approval
process is FHFA’s responsibility and not within the scope of the internal audit function. Fannie
Mae’s internal audit reviews are primarily focused on the company’s risk profile to support
Fannie Mae’s lines of business. Similarly, Freddie Mac’s internal auditors informed FHFA-OIG
that they had no knowledge of the conservatorship approval tracking spreadsheets and related
processes; therefore, the conservatorship process or any specific transactions that required
      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   24
conservatorship approval were not included in their audit universe unless they were reviewed
incidentally pursuant to a Corporate New Business Initiatives audit.

Additionally, FHFA has not required the Enterprises to develop formal policies and procedures
to ensure adherence to FHFA’s delegations of authority, including the conservatorship approval
process and actions taken with regard to FHFA conservatorship decisions. The Enterprises have
taken the non-delegated authorities outlined in the letters of instruction and disseminated them
across their respective business units. Each business unit has the responsibility to comply with
them but, based on the perception that the conservatorship process does not have an impact on
the Enterprises’ risk profiles, Fannie Mae and Freddie Mac have not reviewed compliance by
their business units.

       An Example of Non-Compliance with an FHFA Conservatorship Decision
During the course of this audit, FHFA-OIG identified an example of a situation in which an
Enterprise did not comply with a conservatorship decision. In August 2010, the Enterprise
requested FHFA’s approval to pay a termination benefit to one of its employees at the vice
president level. Although this action did not require conservator approval, FHFA management
reviewed the request, which detailed the amount of the termination benefit (i.e., six months
salary) the employee would receive and the benefits the employee would forfeit upon
termination (i.e., a $40,000 retention bonus). FHFA advised the Enterprise that it had “no
objection.” Months later, FHFA-OIG found that the Enterprise had in fact paid the former vice
president twelve months of salary and the $40,000 retention bonus. The Enterprise did not
apprise FHFA of its payments of an additional six months’ salary and the retention bonus.

As this example demonstrates, FHFA should consider issuing a directive to the Enterprises
prohibiting deviations from its conservatorship decisions and requiring them to monitor actively
compliance with those decisions, even in cases like this where prior approval is not necessary
and the amount of money at issue is relatively small. FHFA also should independently follow up
on such compliance. FHFA will be in a stronger position to express confidence in its
conservator achievements by confirming that the Enterprises are complying with its decisions.
Verification policies and procedures and regular examinations will also help FHFA monitor the
effectiveness of its decision-making and adjust its business case analyses accordingly.




      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   25
CONCLUSION
FHFA’s role as conservator of Fannie Mae and Freddie Mac is critical to mitigating instability in
the nation’s housing finance markets and ensuring that the Enterprises operate safely and
soundly. FHFA-OIG’s work demonstrates that strengthening control over the Agency’s
conservatorship approval process will help FHFA achieve its goals and also protect taxpayers
from having to provide further financial support.

Towards that end, FHFA-OIG recommends that FHFA: revisit its non-delegated authorities to
ensure that significant Enterprise business decisions are sent to the conservator for approval;
establish a system capable of ensuring that the Enterprises request approval when it is required;
improve how it processes these requests, including intake, tracking, and decision-making; and
install a mechanism for confirming that the Enterprises have complied with its decisions.




      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   26
RECOMMENDATIONS
FHFA-OIG recommends that FHFA:

1. Reassess the non-delegated authorities to ensure sufficient FHFA involvement with major
   business decisions.

2. Evaluate the internal controls established by the Enterprises, including policies and
   procedures, to ensure they communicate all major business decisions requiring approval to
   the Agency.

3. Evaluate Fannie Mae’s mortgage pool policy commutations to determine whether these
   transactions were appropriate and in the best interest of the Enterprise and taxpayers. This
   evaluation should include:

   a.     An assessment of Fannie Mae’s methodology used to determine the economic value of
          the seven mortgage pool policy commutations. This assessment should include a
          documented review of Fannie Mae’s analysis, the adequacy of the model(s) and
          assumptions used by Fannie Mae to determine the amount of insurance in force, fair
          value of the mortgage pool policies, premiums forgone, any other factors incorporated
          into Fannie Mae’s analysis, and the accuracy of the information supplied to FHFA; and

   b.     A full accounting and validation of all of the cost components that comprise each
          settlement discount (risk in force minus fee charged), such as insurance premiums and
          time value of money applicable to each listed cost component.

4. Develop a methodology and process for conservator review of proposed mortgage pool
   policy commutations to ensure that there is a documented, sound basis for any pool policy
   commutations executed in the future.

5. Complete actions to establish a governance structure at Fannie Mae for obtaining conservator
   approval of counterparty risk limit increases.

6. Establish a clear timetable and deadlines for Enterprise submission of transactions to FHFA
   for conservatorship approval.

7. Develop criteria for conducting business case analyses and substantiating conservator
   decisions.

8. Issue a directive to the Enterprises requiring them to notify FHFA of any deviation to any
   previously reviewed action so that FHFA may consider these changes and revisit its
   conservatorship decision.

        Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                     27
9. Implement a risk-based examination plan to review the Enterprises’ execution of and
   adherence to conservatorship decisions.




      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   28
SCOPE AND METHODOLOGY
This performance audit’s objective was to assess FHFA’s process for approving non-delegated
actions of the Enterprises under conservatorship. Specifically, FHFA-OIG assessed FHFA’s
procedures for approving activities proposed by the Enterprises and the Agency’s actions to
ensure that the Enterprises have implemented appropriate measures to comply with its
conservator approval requirements.

FHFA-OIG performed its fieldwork for this audit from November 2011 through March 2012.
The audit was conducted at FHFA’s offices located in Washington, DC. Computer processed
information was not used during this audit.

To achieve its objective, FHFA-OIG:

      Reviewed FHFA’s and the Enterprises’ policies and procedures related to the conservator
       approval process;

      Assessed FHFA’s and the Enterprises’ controls to ensure that actions requiring Agency
       consent received conservator consideration and that the Enterprises complied with
       conservator decisions;

      Interviewed FHFA and Enterprise officials regarding their views of the approval process
       and their controls over it, and the transactions FHFA-OIG selected;

      Selected five judgmental samples to test the conservator approval process; selection was
       based on diversity of subject matters, review processes, FHFA divisions, and potentially
       significant dollar amounts; and

      Selected ten judgmental samples to test FHFA’s follow-up to ensure compliance with
       conservator decisions; selection was based on those in the original sample that had
       decisions (three) and those that were readily available on OCO’s status report (seven).

FHFA-OIG assessed the internal controls related to its audit objectives. Internal controls are an
integral component of an organization’s management that provide reasonable assurance that the
following objectives are achieved:

      Effectiveness and efficiency of operations;

      Reliability of financial reporting; and

      Compliance with applicable laws and regulations.


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                    29
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives, and include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance. Based on the work completed on this
performance audit, FHFA-OIG considers its findings on FHFA’s approval process for
conservatorship actions to be significant deficiencies within the context of the audit objectives.

FHFA-OIG conducted this performance audit in accordance with Generally Accepted
Government Auditing Standards. Those standards require that audits be planned and performed
to obtain sufficient, appropriate evidence to provide a reasonable basis for FHFA-OIG’s findings
and conclusions based on the audit objective. FHFA-OIG believes that the evidence obtained
provides a reasonable basis for the findings and conclusions included herein, based on the audit
objective.




      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   30
APPENDIX A
FHFA’s Comments on Findings and Recommendations




    Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                 31
Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                             32
Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                             33
Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                             34
Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                             35
Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                             36
Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                             37
APPENDIX B
FHFA-OIG’s Response to FHFA’s Comments

On September 12, 2012, FHFA provided comments to a draft of this report. FHFA agreed with
Recommendations 1, 2, 4, 7, and 9, and partially agreed with Recommendations 3, 5, 6, and 8.
FHFA-OIG has attached FHFA’s full response as Appendix A, and considered it where
appropriate in finalizing this report. Appendix C provides a summary of the Agency’s response
to FHFA-OIG’s recommendations and the status of agreed-to corrective actions.

FHFA-OIG considers FHFA’s responses to Recommendations 1, 2, 4, 5, and 9 to be sufficient to
resolve these recommendations, which will remain open until FHFA-OIG determines that
agreed-to corrective actions are completed and responsive to the recommendations. Concerning
Recommendation 5, although FHFA partially agrees with this recommendation, it disputes
FHFA-OIG’s assertion that a governance process for risk management did not exist and that
FHFA and the board of directors were not informed of risk exposure increases. FHFA-OIG
maintains its position that Fannie Mae’s governance structure was not adequate in that it allowed
risk limit increases to be executed without conservator approval. In fact, if an examination by
DER had not identified the issue of a lack of board of directors and conservator approval for
certain counterparty risk limit increases, this flaw in Fannie Mae’s corporate governance
structure may not have been noted, potentially allowing the Enterprise to continue to execute
unapproved risk limit increases. Nonetheless, FHFA-OIG considers OCO’s recent actions to
establish and implement board level counterparty risk limits at Fannie Mae to be responsive to
the recommendation.

Below, FHFA-OIG summarizes its evaluation of FHFA’s comments to the four
recommendations (i.e., Recommendations 3, 6, 7, and 8) for which FHFA-OIG concludes that
the Agency’s comments are not responsive and the recommendations unresolved. FHFA-OIG
requests that FHFA reconsider its position on these four recommendations and provide additional
comments within 30 days of this report.

       Recommendation 3

Although FHFA partially agreed with this recommendation, it disagreed with FHFA-OIG that
additional work was needed to validate Fannie Mae’s mortgage insurance pool policy
commutations. FHFA states that it has reviewed the Enterprise’s models and its analysis
supporting these transactions and does not disagree with Fannie Mae’s analysis or facts
presented. Despite FHFA’s position, it has been unable to produce documentation to show that it
has performed any level of analysis on these transactions beyond merely relying on data
provided by Fannie Mae. Accordingly, FHFA-OIG maintains its position that FHFA should

      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   38
independently assess the methodology underlying the analysis and validate the results of this
analysis for the historical transactions. Such analysis will also help FHFA identify any needed
improvements in the evaluation of future mortgage insurance pool policy commutations.

Consequently, FHFA-OIG considers FHFA’s comments to Recommendation 3 to be
nonresponsive and the recommendation unresolved.

       Recommendation 6

Although FHFA partially agreed with this recommendation, it does not believe that setting
specific timelines and deadlines is necessary or enhances the process of sound decision-making.
FHFA also indicates that the myriad of requests for decisions it receives may in some cases
require a quick decision or an analysis process that can take months. Although FHFA-OIG
appreciates the variety and breadth of requests that OCO receives from the Enterprises, FHFA-
OIG believes that establishing overall timetables and deadlines will enable FHFA to evaluate
appropriately Enterprise requests without being pressured to rely on Enterprise decision-making
to approve requests at the last minute.

Consequently, FHFA-OIG considers FHFA’s comments to Recommendation 6 to be
nonresponsive and the recommendation unresolved.

       Recommendation 7

Although FHFA agreed with this recommendation, its proposed actions to address the
recommendation focus on the issue of maintaining copies of decision records and recordkeeping
issues rather than developing criteria for conducting business case analyses. FHFA-OIG
continues to believe that FHFA needs to develop criteria for conducting business case analyses
and substantiating conservator decisions. Such criteria will help ensure that a common set of
principles is applied to all conservatorship decisions and that adequate support exists to
demonstrate that conservatorship decisions are sound.

Consequently, FHFA-OIG considers FHFA’s comments to Recommendation 7 to be
nonresponsive and the recommendation unresolved.

       Recommendation 8

FHFA partially agreed with this recommendation and will require the Enterprises to bring
material deviations to previously reviewed actions or new information arising post-decision that
may affect the decision-making process to FHFA’s attention through its draft Conservatorship
Decision Protocols. Although inclusion of such language in the draft Conservatorship Decision
Protocols is a positive step, FHFA-OIG maintains that the protocols are internal procedures
governing FHFA’s process for approving requests related to non-delegated actions. In FHFA-

      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   39
OIG’s view, procedures governing the Enterprises’ reporting deviations from conservator
decisions should be separately documented to emphasize the importance of the reporting
requirement.

Consequently, FHFA-OIG considers FHFA’s comments to Recommendation 8 to be
nonresponsive and the recommendation unresolved.




      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   40
APPENDIX C
Summary of Management’s Comments on the Recommendations

This table presents FHFA’s management response to FHFA-OIG’s report and the
recommendations’ status when the report was issued.

                                                   Expected
Rec.                                              Completion     Monetary      Resolveda       Open or
No.    Corrective Action: Taken or Planned           Date        Benefits      Yes or No       Closedb
1.   FHFA agrees with the recommendation           12/31/12        $0            Yes            Open
     and has completed the reassessment of
     non-delegated authorities. The revised
     letters of instruction will be issued by
     December 31, 2012.
2.    FHFA agrees with the recommendation          5/30/2013         $0           Yes            Open
      and has identified the assessment of the
      Enterprises’ compliance with directives
      as one of its key areas of supervisory
      focus in the 2012 supervisory plan for
      both Enterprises. FHFA will consider
      this recommendation closed with the
      completion of the FY 2012 examination
      cycle.
3.    FHFA partially agrees with this                 N/A            $0            No            Open
      recommendation but does not agree that
      additional work should be completed to
      assess and validate Fannie Mae’s
      analysis and underlying methodologies
      used to determine the settlement
      discounts for the seven mortgage
      insurance pool policy commutation
      transactions.
4.    FHFA agrees with this                         6/27/12          $0           Yes            Open
      recommendation and issued a
      Settlement Policy and accompanying
      Settlement Procedural Guide on
      June 27, 2012. FHFA-OIG will
      evaluate this guide.
5.    FHFA partially agrees with this             12/31/2012         $0           Yes            Open
      recommendation. OCO is working
      with Fannie Mae to ensure the board
      has established risk limits with FHFA
      approval where required.

       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                    41
                                                   Expected
Rec.                                              Completion     Monetary      Resolveda       Open or
No.    Corrective Action: Taken or Planned           Date        Benefits      Yes or No       Closedb
6.   FHFA partially agrees with this                 N/A           $0             No            Open
     recommendation and is going to
     finalize the Conservatorship Decision
     Protocols by December 31, 2012.
     However, FHFA does not believe that
     setting specific timelines and deadlines
     for Enterprise submission of approval
     requests is necessary or enhances the
     process of sound decision-making.
7.    Although FHFA agrees with this                  N/A            $0            No            Open
      recommendation, its response does not
      address FHFA-OIG’s recommendation
      to develop criteria for conducting
      business case analyses. Instead,
      FHFA’s response addresses the issue of
      maintaining copies of decision records
      and recordkeeping issues.
8.    FHFA partially agrees with this                 N/A            $0            No            Open
      recommendation and will incorporate
      within its Conservatorship Decision
      Protocols the requirement that material
      deviations to a previously reviewed
      action, or new information arising post-
      decision that would have materially
      affected the decision-making process,
      should be brought to FHFA’s attention
      by the Enterprises. FHFA has also
      developed a risk-based process to
      follow up on conservatorship decisions
      in 2012 and believes that this will be
      more beneficial at finding and
      correcting issues than issuing a
      directive reliant on the Enterprises to
      convey non-compliance.
9.    FHFA agrees with this recommendation         5/30/2013         $0           Yes            Open
      and confirmed that DER’s supervisory
      evaluation of Enterprise risk
      management will continue to review
      and perform examination work relating
      to the Enterprises’ processes for
      tracking and executing directives issued
      by FHFA as conservator.


       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                    42
(a) Resolved means: (1) Management concurs with the recommendation and the planned, ongoing, or completed
corrective action is consistent with the recommendation; (2) Management does not concur with the recommendation,
but alternative action meets the intent of the recommendation; or (3) Management agrees to the FHFA-OIG
monetary benefits, a different amount, or no ($0) amount. Monetary benefits are considered resolved as long as
management provides an amount.
(b) Once FHFA-OIG determines that the agreed-upon corrective actions have been completed and are responsive to
the recommendations, the recommendations can be closed.




       Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                      43
ADDITIONAL INFORMATION AND COPIES
For additional copies of this report:

          Call the Office of Inspector General at: (202) 730-0880

          Fax your request to: (202) 318-0239

          Visit the FHFA-OIG website at: www.fhfaoig.gov



To report alleged fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

          Call our Hotline at: (800) 793-7724

          Fax your written complaint directly to: (202) 318-0358

          Email us at: oighotline@fhfaoig.gov

          Write us at:    FHFA Office of Inspector General
                           Attn: Office of Investigation – Hotline
                           400 7th Street, SW
                           Washington, DC 20024




      Federal Housing Finance Agency Office of Inspector General • AUD-2012-008 • September 27, 2012

                                                   44