oversight

FHFA's Oversight of Capital Markets Human Capital

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-08-02.

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

              Federal Housing Finance Agency
                  Office of Inspector General




       FHFA’s Oversight of Capital
        Markets Human Capital




Evaluation Survey Report  ESR-2013-007  August 2, 2013
                                           August 2, 2013


TO:             Jon Greenlee, Deputy Director, Division of Enterprise Regulation




FROM:           George Grob, Deputy Inspector General for Evaluations


SUBJECT:        FHFA’s Oversight of Capital Markets Human Capital (ESR-2013-007)


Summary

This report closes the evaluation by the Federal Housing Finance Agency (FHFA) Office of
Inspector General (OIG) of FHFA’s oversight of human capital resources and planning
associated with the capital markets businesses of the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively,
the Enterprises). In particular, this report addresses human capital risk in the Enterprises’ capital
markets businesses. It concludes that, during the period reviewed, human capital risks associated
with voluntary attrition within the Enterprises’ capital market businesses—that led to the
initiation of this evaluation—had been managed to the point that, although still a concern, no
additional study of this topic is needed. However, because voluntary attrition rates are not static,
OIG will continue to monitor the situation and initiate additional work on this topic if necessary.

Background

Introduction
The Enterprises’ combined capital markets businesses, which include their funding, hedging, and
investment activities, manage portfolios of more than $1.1 trillion of mortgage-related assets.
These portfolios share certain characteristics with a hedge fund and, like a hedge fund, they may
sustain significant financial losses. Accordingly, although the Enterprises’ capital markets
businesses have generally been profitable, certain elements have incurred tens of billions of
dollars in losses since the Enterprises entered into conservatorships overseen by FHFA in




      Federal Housing Finance Agency Office of Inspector General • ESR-2013-007 • August 2, 2013
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September 2008. For this reason, OIG initiated a series of evaluations relating to FHFA’s
supervision of the Enterprises’ capital markets businesses.1

OIG began this evaluation after the Enterprises disclosed in their 2011 annual filings concerns
regarding voluntary attrition among employees with specialized skill sets. Earlier, in a November
2011 congressional hearing, Fannie Mae’s CEO testified that Fannie Mae’s 2011 voluntary
attrition rate was “already double our historical experience.”2 Similarly, Freddie Mac’s CEO
testified that “voluntary attrition rates for high performing employees have risen markedly since
we were placed into conservatorship.”3 FHFA confirmed these concerns in its 2011 annual report
to Congress.4 Further, in its 2011 annual examination reports of the Enterprises, FHFA described
human capital risk as one of the most significant risks facing the Enterprises.

Although the immediate concerns that gave rise to OIG’s evaluation were the Enterprises’
disclosures of human capital risk across the Enterprises generally, OIG focused on the
Enterprises’ capital markets businesses because of their portfolios’ size, complexity, and
susceptibility to sustaining significant losses.

Fannie Mae’s Attrition Rate
Fannie Mae’s Capital Markets Group (CMG) manages Fannie Mae’s investment activity in
mortgage-related assets and other interest-earning non-mortgage investments. Fannie Mae funds
these investments with proceeds from debt issuances. These investments are hedged using
derivatives.

In late 2012, Fannie Mae provided FHFA with voluntary attrition rate and employee headcount
data for CMG. Based on that data, OIG determined CMG’s total cumulative voluntary attrition
rate for January 2010 through September 2012. The total cumulative voluntary attrition rate is

1
  See, e.g., OIG, Case Study: Freddie Mac’s Unsecured Lending to Lehman Brothers Prior to Lehman Brothers’
Bankruptcy, EVL-2013-03 (Mar. 14, 2013) (online at: http://www.fhfaoig.gov/Content/Files/EVL-2013-03_1.pdf);
OIG, The Housing Government-Sponsored Enterprises’ Challenges in Managing Interest Rate Risks, WPR-2013-01
(Mar. 11, 2013) (online at: http://www.fhfaoig.gov/Content/Files/WPR-2013-01_2.pdf); and OIG, FHFA’s
Oversight of Freddie Mac’s Investment in Inverse Floaters, EVL-2012-009 (Sept. 26, 2012) (online at:
http://www.fhfaoig.gov/Content/Files/EVL-2012-009.pdf).
2
 Fannie Mae, Testimony of Michael J. Williams, President and Chief Executive Officer, Before the U.S. House of
Representatives Committee on Oversight and Government Reform, Pay for Performace: Should Fannie and Freddie
Executives Be Receiving Millions In Bonuses? (November 16, 2011) (online at: http://www.oversight.house.gov/wp-
content/uploads/2012/01/11-16-11_Full_Williams_Testimony.pdf).
OIG did not independently obtain and verify the data underlying Fannie Mae’s CEO’s testimony.
3
 Freddie Mac, Testimony of Charles E. Haldeman, Chief Executive Officer, Before the U.S. House of
Representatives Committee on Oversight and Government Reform, Pay for Performace: Should Fannie and Freddie
Executives Be Receiving Millions In Bonuses? (November 16, 2011) (online at: http://www.oversight.house.gov/wp-
content/uploads/2012/01/11-16-11_Full_Haldeman_Testimony.pdf).
OIG did not independently obtain and verify the data underlying Freddie Mac’s CEO’s testimony.
4
  FHFA, Report to Congress 2011, at IV and 7 (June 13, 2012) (online at:
http://www.fhfa.gov/webfiles/24009/FHFA_RepToCongr11_6_14_508.pdf).



      Federal Housing Finance Agency Office of Inspector General • ESR-2013-007 • August 2, 2013
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calculated as a ratio of cumulative monthly voluntary terminations over the total number of
employees at CMG at the end of the prior year. OIG found that CMG’s total cumulative
voluntary attrition rate increased somewhat from January 2010 through September 2012.
However, over the same period, CMG’s headcount grew from 108 to 143, suggesting that,
although still a concern, the human capital risk posed by the increase in attrition rates is
mitigated as CMG was able to grow its ranks.

                 FIGURE 1. Fannie Mae CMG – Cumulative Voluntary Attrition Rate

  12%

  10%               2010
                    2011
   8%
                    2012

   6%

   4%

   2%

   0%
          Jan    Feb     Mar    Apr    May     Jun     Jul    Aug     Sep    Oct    Nov     Dec


Freddie Mac’s Attrition Rate
Freddie Mac’s Investments & Capital Markets Division (ICM) manages Freddie Mac’s
investment activity in mortgage-related assets and other interest-earning non-mortgage
investments. As is the case with Fannie Mae’s CMG, Freddie Mac’s ICM funds these
investments with proceeds from debt issuances. Similarly, these investments are hedged using
derivatives.

In the first half of 2013, OIG obtained voluntary attrition rate and employee headcount data for
ICM. Based on that data, OIG determined ICM’s total cumulative voluntary attrition rate for
January 2010 through September 2012. Although ICM’s 2011 total cumulative voluntary
attrition rate was noticeably higher than its 2010 rate, its 2012 rate was lower than its 2011 rate,
implying a stabilization of staff retention rates over the period reviewed.




     Federal Housing Finance Agency Office of Inspector General • ESR-2013-007 • August 2, 2013
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                    FIGURE 2. Freddie Mac ICM – Cumulative Voluntary Attrition Rate

     18%
     16%                2010
     14%                2011
     12%                2012
     10%
      8%
      6%
      4%
      2%
      0%
              Jan     Feb    Mar     Apr     May     Jun     Jul     Aug     Sep    Oct     Nov     Dec

This result is consistent with statements made in Freddie Mac’s 2012 annual disclosure that,
although the Enterprise may find it difficult to attract and retain skilled employees, voluntary
turnover moderated in 2012 compared to 2011.5

Findings

    1. Since the beginning of conservatorship, voluntary attrition of employees with specialized
       skill sets has risen markedly. The Enterprises’ significant human capital risk is described
       by FHFA in its 2011 annual report to Congress and its examination reports of the
       Enterprises, and by the Enterprises in their public disclosures.

    2. As of late 2012, human capital risk posed by voluntary attrition within the Enterprises’
       capital market businesses, while still a concern, appears to have been mitigated. This
       addressed, in part, OIG concerns regarding human capital risk.

Conclusion

OIG found that human capital risk posed by voluntary attrition rates within the Enterprises’
capital market businesses that led to the initiation of this evaluation, although still a concern, had
been managed to the point that no additional study on this topic is needed. However, voluntary
attrition rates are not static; rather, they fluctuate over time. An improving economy puts
additional pressure on the Enterprises’ attrition rates as attractive opportunities become available
to their employees. Therefore, OIG will continue to monitor FHFA’s oversight of the

5
  Freddie Mac, Form 10-K for the Fiscal Year Ended December 31, 2012, at 9, 55, 177, and 332 (Feb. 28, 2013)
(online at: http://www.freddiemac.com/investors/er/pdf/10k_022813.pdf).




      Federal Housing Finance Agency Office of Inspector General • ESR-2013-007 • August 2, 2013
                                                       4
Enterprises’ human capital resources and planning associated with the human capital risk and
initiate additional work on this topic if necessary.

Scope and Methodology

The purpose of this evaluation was to assess human capital risk associated with voluntary
attrition in the Enterprises’ capital markets activities.

As noted above, OIG obtained attrition and employee headcount data for the capital markets
offices of both Enterprises. Using this data, OIG calculated the total cumulative voluntary
attrition rate for each capital markets office from January 2010 through September 2012. This
rate is defined as the ratio of cumulative monthly voluntary terminations over the total number of
employees at CMG or ICM, as the case may be, at the end of the prior year. OIG did not
independently test the reliability of the Enterprises’ data.

The preparation for this evaluation closeout report was conducted under the authority of the
Inspector General Act, and is in accordance with the Quality Standards for Inspection and
Evaluation (January 2012), which was promulgated by the Council of the Inspectors General on
Integrity and Efficiency. These standards require OIG to plan and perform an evaluation that
obtains evidence sufficient to provide reasonable bases to support the findings made herein. OIG
believes that the findings discussed in this report meet these standards.

This study was conducted by David P. Bloch, Director, Division of Mortgage, Investments, and
Risk Analysis; Ezra Bronstein, Investigative Counsel; and Simon Z. Wu, Ph.D., Chief
Economist. OIG appreciates the cooperation of FHFA and Enterprise staff, as well as the
assistance of all those who contributed to the preparation of this report. It has been distributed to
Congress, the Office of Management and Budget, and others and will be posted on OIG’s
website, www.fhfaoig.gov.

The performance period for this evaluation closeout report was from May 2012 to June 2013.



cc:     Edward DeMarco, Acting Director
        Rick Hornsby, Chief Operating Officer
        John Major, Manager, Internal Controls and Audit Follow-Up




      Federal Housing Finance Agency Office of Inspector General • ESR-2013-007 • August 2, 2013
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Additional Information and Copies

For additional copies of this report:

         Call: (202) 730-0880

         Fax: (202) 318-0239

         Visit: 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: (800) 793-7724

         Fax: (202) 318-0385

         Visit: www.fhfaoig.gov/ReportFraud

         Write:
                   FHFA Office of Inspector General
                   Attn: Office of Investigation – Hotline
                   400 Seventh Street, S.W.
                   Washington, DC 20024




     Federal Housing Finance Agency Office of Inspector General • ESR-2013-007 • August 2, 2013
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