oversight

Eighth Semiannual Report to the Congress

Published by the Federal Housing Finance Agency, Office of Inspector General on 2014-09-30.

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

Federal Housing Finance Agency
  Office of Inspector General

  Se m iann ual R ep ort to t he Cong r e ss
           April 1, 2014, through September 30, 2014
Federal Housing Finance Agency
 Office of Inspector General




 Semiannual Report            to the       Congress
       April 1, 2014, through September 30, 2014
ii   Federal Housing Finance Agency Office of Inspector General
Table of Contents	

OIG’s Mission	                                                                                       iv
OIG’s Accomplishments from 2010 to Present	                                                           v
A Message from the Acting Inspector General	                                                          1
Executive Summary	                                                                                    2
	Overview	                                                                                            2
	 Section 1: OIG Description, Accomplishments, and Strategy	                                          2
	 Section 2: FHFA and GSE Operations	                                                                 3
Section 1: OIG Description, Accomplishments, and Strategy	                                            6
	   Description	                                                                                      6
	   Leadership and Organization	                                                                      6
	   Accomplishments and Strategy	                                                                     7
	   Audits and Evaluations	                                                                           7
	   Recommendations	                                                                                 17
	   Civil Fraud Initiative	                                                                          17
	   Audit and Evaluation Plan	                                                                       18
	   Peer Reviews	                                                                                    18
	   Investigations	                                                                                  20
	   Civil Cases	                                                                                     40
	   Systemic Implication Reports	                                                                    41
	   Investigations Strategy	                                                                         42
	   Regulatory Activities	                                                                           42
	   Communications and Outreach	                                                                     45
Section 2: FHFA and GSE Operations	                                                                  48
	   Overview	                                                                                        48
	   FHFA and the Enterprises	                                                                        48
	   Enterprises’ Financial Performance	                                                              49
	   Government Support	                                                                              54
	   FHLBank System	                                                                                  56
	   Selected FHFA and GSE Activities	                                                                60
Appendix A: Glossary and Acronyms	                                     68
Appendix B: OIG Recommendations	                                       80
Appendix C: Information Required by the Inspector General Act and 				
            Subpoenas Issued	                                        104
Appendix D: OIG Reports	                                              107
Appendix E: OIG Organizational Chart	                                 108
Appendix F: Description of OIG Offices and Strategic Plan	            109
Appendix G: Figure Sources	                                           113
Appendix H: Endnotes	                                                 116


                              Semiannual Report to the Congress • April 1, 2014–September 30, 2014   iii
OIG’s Mission
The mission of the Federal Housing Finance Agency Office of Inspector General (OIG) is to: promote the
economy, efficiency, and effectiveness of the programs and operations of the Federal Housing Finance Agency
(FHFA or Agency); prevent and detect fraud, waste, and abuse in FHFA’s programs and operations; review
and, if appropriate, comment on pending legislation and regulations; and seek administrative sanctions, civil
recoveries, and criminal prosecutions of those responsible for fraud, waste, or abuse in connection with the
programs and operations of FHFA.

In carrying out this mission, OIG conducts independent and objective audits, evaluations, investigations,
surveys, and risk assessments of FHFA’s programs and operations; keeps the head of FHFA, Congress, and
the American people fully and currently informed of problems and deficiencies relating to such programs and
operations; and works collaboratively with FHFA staff and program participants to ensure the effectiveness,
efficiency, and integrity of FHFA’s programs and operations.




Federal Housing Finance Agency
Office of Inspector General
400 Seventh Street, SW
Washington, DC 20024
Main (202) 730-0880
Hotline (800) 793-7724
www.fhfaoig.gov




iv   Federal Housing Finance Agency Office of Inspector General
OIG’s Accomplishments from 2010 to Present

                         48                  32                     6                    5                  430                    12
                                                                                                                                       Systemic
                                                                        Evaluation                                                    Implication
                              Audits              Evaluations                                White Papers     Investigations
                                                                         Surveys                                                    Reports (SIRs)*



                                                                   Reports by Subject Area
           Work                                                                                                                                       Results

            103                                                                                                                                   $3.9 billion
           Reports                                                                                                                                    Restitutions

            218                                                                                                                                   $2.8 billion
      Recommendations                  Conservatorship and                  FHLBank System                    FHFA Internal                           Recoveries
                                       Enterprise Oversight                    Oversight                       Operations
            430                                                                                                                                  $32.6 billion
        Investigations                                                                                                                         Financial Settlements
                                            Conservatorship                       Advances                    Conservatorship
                                             10 Evaluations                     2 Evaluations                     1 Audit
            209                           3 Evaluation Surveys                                                                                    $1.3 billion
         Subpoenas                           3 White Papers                      Credit Risk                  Operational Risk                         Other**
                                                                                  2 Audits                        18 Audits
                                                                                3 Evaluations                1 Evaluation Survey
            428                               Credit Risk
                                               12 Audits
                                                                             1 Evaluation Survey                                              **Other is comprised of funds
                                                                                                                                              put to better use, questioned
     Indictments/Charges                                                            1 SIR
                                             4 Evaluations                                                                                    costs, unsupported costs,
                                                 1 SIR                    Housing Mission and Goals                                           and fines.
            252                                                                  1 Evaluation
      Convictions/Pleas                   Interest Rate Risk
                                              1 Evaluation
                                          1 Evaluation Survey
             36                              1 White Paper
     Regulatory Activities
                                            Operational Risk
              6                                4 Audits
      Additional Actions                     3 Evaluations
                                                 1 SIR

                                          Real Estate Owned
                                               2 Audits
                                            1 White Paper
                                                1 SIR
                                       Housing Mission and Goals
                                             2 Evaluations

                                          Mortgage Servicing
                                               9 Audits
                                            6 Evaluations
                                                1 SIR




*12 SIRs have been produced, of which 5have been published
publicly and 7 remainprivileged due to their investigative
content.*12 SIRs have been produced, of which 5 have been published
        publicly and 7 remain privileged due to their investigative
        content.
                                                        Semiannual Report to the Congress • April 1, 2014–September 30, 2014                                                  v
vi   Federal Housing Finance Agency Office of Inspector General
A Message from the Acting Inspector General
I am pleased to present OIG’s eighth Semiannual Report to the Congress,
which covers our activities and operations from April 1, 2014, to
September 30, 2014.
During this semiannual reporting period, OIG continued to reinforce the
effectiveness, integrity, and transparency of FHFA, acknowledging where
FHFA’s efforts have enhanced the operations of Fannie Mae, Freddie
Mac, and the Federal Home Loan Banks (FHLBanks) (collectively, the
government-sponsored enterprises, or the GSEs) and recommending
improvements where warranted.
Since April 1, OIG has issued 15 audit and evaluation reports focusing
on key mission areas affecting the nation’s housing finance system. These
reports address a range of topics, including Fannie Mae and Freddie Mac’s
(collectively, the Enterprises) reliance on counterparties to comply with
selling and servicing guidelines, the financial impact of lender-placed
insurance on the Enterprises, and the progress of the development and           Michael P. Stephens
implementation of the Common Securitization Platform.                           Acting Inspector General of the
                                                                                Federal Housing Finance Agency
OIG also issued a systemic implication report identifying fraud indicators
and extracting lessons learned from a multifaceted scheme carried out by
officers and employees of a former Enterprise-approved mortgage originator and an insured depository
institution. Additionally, OIG continued to investigate crimes perpetrated against FHFA and the GSEs. Our
efforts since April 1 resulted in the indictment of 121 individuals and the conviction of 67 individuals, and
the award of more than $353 million in criminal fines and restitution orders. Of note, as a contributor to the
Residential Mortgage-Backed Securities Working Group, OIG, along with other federal and state agencies,
reached a $16.65 billion settlement with Bank of America and a $7 billion settlement with Citibank. And,
in New York, a former Countrywide official was ordered to pay over $1 million in a civil penalty.
I am always inspired by the diligence and hard work of OIG’s employees. It is with profound
gratitude that I was afforded the opportunity to lead them for the past year, and I thank them for
their achievements summarized in this report. Over this past year, Director Watt has extended to me
a respectful and congenial relationship; I am thankful for that. On September 17, 2014, the Senate
confirmed Ms. Laura S. Wertheimer as Inspector General, and she will soon take the oath of office and
commence her leadership. It has been an honor for me to lead OIG, and now I look forward to the
guidance and leadership of Ms. Wertheimer.


Michael P. Stephens
Acting Inspector General
October 31, 2014




                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014           1
Executive Summary

Overview                                                   assets and the average balances of mortgage loans
                                                           decreased, contributing to an overall decline in
This Semiannual Report discusses OIG operations            interest income.
and FHFA developments from April 1, 2014, to               Exploring these and other issues, this report is
September 30, 2014.1                                       organized as follows: Section 1, OIG Description,
During this semiannual reporting period, OIG issued        Accomplishments, and Strategy, highlights several OIG
15 audit and evaluation reports and investigative          audits, evaluations, and investigations relating to the
efforts resulted in the indictment of 121 individuals      programs and operations of FHFA; and Section 2,
and the conviction of 67 individuals. FHFA issued a        FHFA and GSE Operations, provides a closer look at
number of directives and prepared for the potential        FHFA and GSE developments during this reporting
merger of two FHLBanks.*                                   period.

Economic conditions continued to improve since
                                                           Section 1: OIG Description,
our last Semiannual Report, especially in the housing
sector. Fannie Mae and Freddie Mac remained                Accomplishments, and Strategy
the dominant players in the secondary market for
residential mortgages and reported continued profits       This section provides a brief overview of OIG’s
resulting from, among other factors, an increase           organization and describes its oversight activities,
in home prices, higher guarantee fees, improving           including audits, evaluations, and investigations. It
credit quality, and reduced defaults. In addition,         also discusses OIG’s priorities and goals.
the Enterprises continued to recover settlements as
                                                           For example, in this section we discuss the following
a result of litigation alleging private-label securities
                                                           OIG reports:
violations against 18 financial institutions.
                                                           •	 FHFA’s Oversight of the Enterprises’ Lender-Placed
Meanwhile, some FHLBank members’ borrowing
                                                              Insurance Costs (EVL-2014-009, June 25, 2014),
increased due to growth in economic activity. Overall
                                                              in which we evaluated the financial impact of
demand for advances continued to increase due
                                                              lender-placed insurance on the Enterprises and
to high member borrowing, particularly by large-
                                                              determined whether FHFA, in its role as the
asset members. However, as the average balances of
                                                              Enterprises’ conservator, has taken sufficient
advances increased, the yields on interest-earning
                                                              measures to conserve the Enterprises’ assets in
                                                              this regard.
    *Terms and phrases in bold are defined in
                                                           •	 Status of the Development of the Common
    Appendix A, Glossary and Acronyms. If you
                                                              Securitization Platform (EVL-2014-008,
    are reading an electronic version of this
                                                              May 21, 2014), in which we evaluated the
    Semiannual Report, then simply move your
                                                              development and implementation of the
    cursor to the term or phrase and click for
                                                              Common Securitization Platform, which
    the definition.



2    Federal Housing Finance Agency Office of Inspector General
  FHFA states will consist of integrated hardware          •	 Regulatory Activities, which include our
  architecture and software applications that the             assessment of proposed legislation, regulations,
  Enterprises will use to perform certain back                and policies related to FHFA; and
  office securitization functions.
                                                           •	 Communications and Outreach Efforts, which
•	 FHFA Oversight of Fannie Mae’s Collection of               educate stakeholders—FHFA, Congress,
   Funds from Servicers that Closed Short Sales Below         policymakers, and the public—about OIG,
   the Authorized Prices (AUD-2014-015, August 7,             FHFA, and GSE developments, as well as broader
   2014), which looked at the effectiveness of                issues of fraud, waste, and abuse.
   FHFA’s oversight and Fannie Mae’s controls over
   delegated servicers to ensure that net proceeds         Section 2: FHFA and GSE
   received for short sales met the minimum
   amount authorized by Fannie Mae.
                                                           Operations

•	 Systemic Implication Report: TBW-Colonial               This section describes the organization and operations
   Investigation Lessons Learned (SIR-2014-0013,           of FHFA, the Enterprises, and the FHLBanks, as well
   August 21, 2014), in which we identified fraud          as key developments for each during the reporting
   indicators and extracted lessons learned from           period.
   the multifaceted and multiyear fraud scheme
   perpetrated by officers and employees of Taylor,        It also details the Enterprises’ financial results. While
   Bean & Whitaker Mortgage Corporation and                the Enterprises continued to be profitable, there was
   Colonial Bank.                                          lower net income as a result of the release of valuation
                                                           allowances against deferred tax assets in prior periods,
We also discuss numerous OIG investigations that           the reduction of average balances in mortgage
resulted in indictments and convictions of individuals     portfolios, lower credit-related income, and derivative
responsible for fraud, waste, or abuse in connection       losses due to a decrease in interest rates. At the
with FHFA’s and the regulated entities’ programs and       same time, the Enterprises saw improvements. For
operations, and in fines and restitution orders totaling   example, the number of seriously delinquent loans
more than $1.6 billion.                                    has declined as the credit quality in the Enterprises’
                                                           single-family business segments continues to improve.
Further, this section addresses our:
                                                           There has also been an increase in non-interest
•	 Audit and Evaluation Plan, which focuses on             income as a result of settlement proceeds related to
   areas of FHFA operations posing the greatest risks      private-label securities litigation.
   to the Agency and to the GSEs;
                                                           In addition, during this time period FHFA sought
•	 Systemic Implication Reports, which identify            comment on multiple items. For example, FHFA
   potential risks and weaknesses in FHFA’s                and four other federal agencies sought comment on
   management control systems that we discovered           a proposed rule to establish margin requirements
   during the course of our investigations;                for swap dealers, major swap participants,


                                       Semiannual Report to the Congress • April 1, 2014–September 30, 2014       3
security-based swap dealers, and major security-
based swap participants. FHFA also sought input on
draft requirements for private mortgage insurance
companies that insure mortgage loans owned or
guaranteed by the Enterprises. And, FHFA sought
public input on two items: the proposed structure for
a Single Security, a type of mortgage-backed bond
that would be issued and guaranteed by Fannie Mae
or Freddie Mac; and on the guarantee fees that the
Enterprises charge lenders. Finally, FHFA proposed
a rule that would establish housing goals for the
Enterprises in an effort to promote safe and sound
lending to lower-income borrowers for single-family
homes and require the Enterprises to continue to
support affordable multifamily housing for low-
and very low-income families. These and other
developments are summarized in Section 2.




4   Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • April 1, 2014–September 30, 2014   5
Section 1: OIG Description, Accomplishments,
and Strategy

Description                                                                    2010. Mr. Linick resigned on September 29, 2013,
                                                                               and his Principal Deputy Inspector General, Michael
OIG began operations on October 12, 2010. It was                               P. Stephens, commenced acting in the capacity of
established by the Housing and Economic Recovery                               Inspector General pursuant to 5 U.S.C. § 3345(a)(1).
Act (HERA), which amended the Inspector                                        Mr. Stephens was appointed as Principal Deputy
General Act. OIG conducts audits, evaluations,                                 Inspector General in September 2011. Prior to
investigations, and other law enforcement activities                           his joining OIG, Mr. Stephens served as Acting
relating to FHFA’s programs and operations.                                    Inspector General and Deputy Inspector General
OIG’s operations are funded by annual assessments                              for the Department of Housing and Urban
that FHFA levies on the Enterprises and the                                    Development (HUD). Earlier, he was the Deputy
FHLBanks pursuant to 12 U.S.C. § 4516. For                                     Assistant Inspector General for Investigations for
fiscal year 2014, OIG’s operating budget (see                                  the Department of Veterans Affairs and a senior
Figure 1, below) was $48 million, with 150 full-time-                          criminal investigator for the Office of Inspector
equivalent staff.                                                              General for the Resolution Trust Corporation. These
                                                                               appointments followed a distinguished 20-year
Figure 1. OIG’s Operating Budget for Fiscal Year                               career with the Secret Service, during which he held
2014                                                                           the distinction of being assigned to the Presidential
                 Supplies and Materials
                           1%
                                                                               Protection Division at the White House, along with
    Equipment                                      Travel and Transportation   various supervisory positions within the agency.
       4%                                                  of Things
                                                              2%
                                                                               On May 22, 2014, President Obama nominated
                                                                               Laura S. Wertheimer to the position of
                Contracts
                  18%                                                          FHFA Inspector General. On June 17, 2014,
                                                                               Ms. Wertheimer testified before the Senate
            Fixed
         Operational
                                                                               Committee on Banking, Housing, and Urban Affairs
                                   Federal Staff
           Costsa
            15%
                                       60%                                     as the nominee for the position of Inspector General
                                                                               (a copy of her testimony is available at www.fhfaoig.
                                                                               gov/testimony). And, on September 17, 2014, the
                                                                               Senate confirmed Ms. Wertheimer for the position of
a
 Fixed operational costs include items such as space rent,                     Inspector General.
shared service agreements with other federal agencies to
provide information technology and administrative services,                    OIG consists of the Acting Inspector General,
printing, and the hotline.
                                                                               senior staff, and OIG offices, principally: the Office
                                                                               of Audits (OA), the Office of Evaluations (OE),
Leadership and Organization
                                                                               and the Office of Investigations (OI). Additionally,
                                                                               OIG’s Executive Office (EO) and the Office of
On April 12, 2010, President Barack Obama
                                                                               Administration (OAd) provide organization-wide
nominated FHFA’s first Inspector General, Steve A.
                                                                               supervision and support. (See Appendix E for OIG’s
Linick, who was sworn into office on October 12,

6    Federal Housing Finance Agency Office of Inspector General
organizational chart and Appendix F for a detailed       liquidated, the servicer seeks reimbursement of its
description of OIG’s offices and strategic goals.)       expenses from Freddie Mac.

                                                       Freddie Mac has a multilayered review process to
Accomplishments and Strategy                           assess the validity of servicer reimbursement claims.
                                                       Before it reimburses servicers, Freddie Mac selects
From April 1, 2014, to September 30, 2014, OIG’s       a random, statistically significant sample of claims
significant accomplishments                                                  for a detailed prepayment
included: (1) issuing 15                                                     review. OIG found that this
audit and evaluation reports;                                                review resulted in Freddie
(2) participating in a number of           In 2013, Freddie                  Mac’s identifying and denying
criminal and civil investigations;                                           approximately $126 million in
and (3) reviewing and                      Mac paid about                    erroneous claims in 2013. This
commenting on FHFA rules.                                                    process appears to be generally
                                           $70 million to                    effective in reducing erroneous
Audits and                                                                   servicer reimbursement expenses.
                                           settle erroneous                  However, OIG estimated that
Evaluations
                                                                             in 2013 Freddie Mac paid about
                                           reimbursement                     $70 million to settle erroneous
During this semiannual period,
                                                                             reimbursement claims that were
OIG released 15 audit and                  claims that were                  not subject to the prepayment
evaluation reports, which are
                                                                             review. Accordingly, OIG
summarized below.                          not subject to the
                                                                             believes that Freddie Mac may
Evaluations                                prepayment review.                achieve additional savings by
                                                                             enlarging the sample of claims for
Freddie Mac Could Further                                                    prepayment review.
Reduce Reimbursement Errors
by Reviewing More Servicer                                                   OIG recommended that FHFA
Claims (EVL-2014-011, August 27, 2014)                 require Freddie Mac to: (1) determine, by means of a
                                                       cost-benefit analysis, whether to increase the sample
This report discussed Freddie Mac’s process for        size of the reimbursement claims for prepayment
reimbursing its servicers for delinquency expenses,    review; and (2) if warranted by the result of the
examined the controls it has in place to minimize      cost-benefit analysis, increase the sample size of the
erroneous payments to servicers, and estimated the     reimbursement claims for prepayment review.
rate of improper payments to servicers in 2013.
When borrowers become delinquent, a servicer may       FHFA agreed that by August 31, 2014, it would
be required to maintain the property, pay taxes and    direct Freddie Mac to complete a cost-benefit
insurance, and liquidate the loan. After the loan is   analysis and, if warranted, increase the sample size by
                                                       October 31, 2014.


                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014        7
Recent Trends in the Enterprises’ Purchases of                                The increase in purchases directly from smaller
Mortgages from Smaller Lenders and Nonbank                                    financial institutions and nonbank mortgage
Mortgage Companies (EVL-2014-010, July 17,                                    companies presents the Enterprises with potential
2014)                                                                         benefits and challenges. The shift in market share
                                                                              reduces the highly concentrated nature of the
In recent years, the Enterprises have seen a shift in the
                                                                              Enterprises’ business with several large financial
composition of their mortgage sellers, with relatively
                                                                              institutions. On the other hand, the shift may also
fewer sales from large depository institutions and
                                                                              increase the Enterprises’ exposure to certain risks and
more sales from smaller lenders and nonbank
                                                                              raises their costs for counterparty risk management.
mortgage companies. OIG conducted this evaluation
                                                                              For example, smaller and nonbank lenders may have
to document the rise in sales from smaller financial
                                                                              relatively limited financial capacity, and the latter are
institutions and nonbank mortgage companies,
                                                                              not subject to federal safety and soundness oversight.
discuss the reasons behind this trend, and assess
                                                                              Thus, the Enterprises face a potential increase in the
FHFA’s oversight of the Enterprises’ risk management
                                                                              risk that those counterparties could default on their
controls.
                                                                              financial obligations.
Traditionally, the Enterprises bought most of
                                                                              Recently, the Enterprises have taken a number of
their loans from the largest commercial banks
                                                                              steps to mitigate these risks; OIG assessed FHFA’s
and mortgage companies. These entities sold the
                                                                              oversight of the Enterprises’ new controls. In
Enterprises mortgages that they originated or
                                                                              the report, OIG found that during 2013, FHFA
purchased from smaller, independent lenders. Since
                                                                              conducted high-level examinations of the Enterprises’
2011, however, the largest sellers have reduced their
                                                                              counterparty risk management and reviewed the
purchases from smaller lenders and, therefore, sold
                                                                              risks associated with certain nonbanks’ servicing
fewer loans to the Enterprises (see Figure 2, below).
                                                                              operations. The Agency also began development of
Smaller mortgage originators and nonbank mortgage
                                                                              guidance intended to strengthen the Enterprises’
companies have responded to the changing market
                                                                              counterparty risk management. However, OIG
by developing direct sales relationships with the
                                                                              concluded that, due to other examination priorities,
Enterprises, thereby increasing their market share.
                                                                              FHFA did not test and validate the effectiveness
                                                                              of the controls put in place by the Enterprises to
Figure 2. Market Share of the Enterprises’ Top
Five Sellers First Quarter 2003 Through Third                                 address risks stemming from the increase in mortgage
Quarter 2013                                                                  sales from smaller and nonbank lenders. OIG will
85%
                                                                              continue monitoring the effectiveness of the Agency’s
                                                                              efforts to oversee this issue.
75%
                                                                              FHFA’s Oversight of the Enterprises’ Lender-
65%                                                                           Placed Insurance Costs (EVL-2014-009, June 25,
                                                                              2014)
55%

                                                                              The Enterprises require borrowers to maintain hazard
45%
                                                                              insurance on their homes; this insurance safeguards
35%                                                                           the value of the homes in the event of a fire or other
       03


             04


                   05


                         06


                               07


                                      08


                                            09


                                                    10


                                                          11


                                                                12

                                                                         13




                                                                              covered incident and thus preserves the Enterprises’
      20


            20


                  20


                        20


                              20


                                     20


                                           20


                                                 20


                                                         20


                                                               20

                                                                     20
                                                                    Q3




                        Fannie Mae    Freddie Mac                             security interests in the homes. When a servicer


8     Federal Housing Finance Agency Office of Inspector General
Figure 3. Enterprise, Servicer, and LPI Provider Relationship

                                 Defines
                                 Servicer                            Outsources
                              Responsibilities                     Responsibilities

              Enterprise                            Servicer                          LPI Provider




                                                                            1. Tracks borrowers’ hazard
                               Borrower          Borrower      Borrower        insurance compliance
                                                                            2. Provides hazard insurance
                                                                               coverage if a borrower’s
                                                                               policy is inadequate or
                                                                               has lapsed




identifies a lapse in hazard insurance, it initiates new
                                                    had taken no steps to seek redress for any potential
coverage known as lender-placed insurance (LPI)     harm sustained by the Enterprises for excessive LPI
(see Figure 3, above). Borrowers are responsible forpremiums. The report noted that some homeowners
paying LPI premiums but do not always do so. When   had sought and obtained substantial settlements
borrowers fail to make LPI payments, the servicers  from LPI providers for excessive and unfair rates, and
make the payments and attempt to recoup the costs.  OIG concluded that the Enterprises were similarly
Ultimately, when a borrower                                             situated to these homeowners.
defaults, the cost of unpaid LPI                                        Accordingly, OIG recommended
premiums is generally borne by                                          that the Agency consider
the Enterprises. In 2012, the                                           initiating litigation against
Enterprises paid approximately
                                              In 2012,
                                                   the                  servicers to remedy potential
$360 million in LPI premiums.                                           damages arising from abuses in
                                          Enterprises paid
                                                                        the LPI market.
In this report, OIG found that
several state insurance regulators        approximately                    FHFA agreed to this
had determined that LPI rates                                              recommendation.
were excessive and had even
                                          $360   million   in
                                                                           Status of the Development of
concluded that rates may have
been driven up by profit-sharing
                                          LPI premiums.                    the Common Securitization
                                                                           Platform (EVL-2014-008,
arrangements between servicers
                                                                           May 21, 2014)
and LPI providers. Moreover,
OIG concluded that the                                                     The Common Securitization
Enterprises may well have been harmed by excessive   Platform (CSP) is very important to the future
LPI rates.                                           operations of the housing finance system. This
                                                     report provides a primer on the CSP, updates on the
OIG also found that FHFA had taken some steps
                                                     project’s status, and identifies certain challenges to the
to prevent profit-sharing arrangements between
                                                     project’s development and implementation.
servicers and LPI providers. However, the Agency

                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014     9
The Enterprises support housing                                                     utility and a way to maintain
finance primarily by purchasing                                                     liquidity in the mortgage market
qualifying mortgages from                           As of December 31,              that could outlive the Enterprises’
lenders, packaging them into                                                        current structures. In this respect,
mortgage-backed securities                          2013, the                       the Agency viewed the CSP as a
(MBS), and selling the securities                                                   means to support congressional
to investors. The process of
                                                    Enterprises                     and executive branch efforts
packaging mortgages into MBS                                                        to reform the nation’s housing
                                                    had spent
is commonly referred to as                                                          finance system.
securitization. The Enterprises’                    approximately                   As of December 31, 2013,
MBS issuances fluctuated from
                                                                                    the Enterprises had spent
2008 through 2013, ranging                          $65 million                     approximately $65 million
from a low of slightly more than
                                                                                    developing the CSP.
$850 billion in 2011 to more                        developing the CSP.
than $1.2 trillion in both 2009                                                     While some progress has been
and 2012 (see Figure 4, below).                                                     made in developing the CSP,
                                                                                    the project faces considerable
In 2012, the Agency concluded
                                                                challenges that could undermine its prospects for
that the back office systems by which the
                                                                success, including:
Enterprises securitize mortgages were outmoded
and in need of being immediately upgraded and                   •	 The difficulties inherent in developing a large-
maintained. Subsequently, FHFA, as conservator,                    scale information technology (IT) system. These
directed the Enterprises to build the CSP to replace               difficulties are compounded by several factors,
some parts of the Enterprises’ back office systems.                including: the number of parties involved in
                                                                   the development of the CSP (FHFA, Fannie
FHFA assumed, but did not verify, that developing
                                                                   Mae, Freddie Mac, and Common Securitization
the CSP would be more cost-effective than requiring
                                                                   Solutions, LLC); the Enterprises’ records of
each Enterprise, individually, to pursue expensive
                                                                   overseeing unsuccessful large-scale IT projects
upgrades to its back office systems. In addition,
                                                                   that failed to satisfy requirements, achieve stated
FHFA envisioned the CSP as a potential market
                                                                   goals in a timely manner, or stay on budget;
                                                                   and the fact that FHFA is a small regulator
Figure 4. Enterprise Single-Family MBS
Issuances 2008 Through 2013 ($ billions)                           with multiple responsibilities and no prior
$1,400
                                                                   experience in overseeing the development and
$1,200                                                             implementation of large-scale IT projects.
$1,000
                                                                •	 The risks involved with preparing the Enterprises
 $800
                                                                   to integrate with the CSP. The Enterprises must
 $600
                                                                   modify their internal financial and information
 $400
                                                                   systems to enable communication with the CSP.
 $200

   $0
                                                                   FHFA and Enterprise officials described the
                                                                   technical challenges associated with integration as
            08




                    09




                             10




                                       11




                                                    12




                                                          13
          20




                  20




                           20




                                      20




                                               20




                                                         20




                                                                   significant and potentially costly.
                         Fannie Mae   Freddie Mac



10       Federal Housing Finance Agency Office of Inspector General
OIG found that FHFA had not fully employed                not yet ripe for evaluation; however, OIG will
two basic project management tools in its effort          monitor developments in the program and initiate
to develop the CSP, specifically: a comprehensive         future work as warranted.
timeline and a total cost estimate for the project.
                                                          Recent Trends in Federal Home Loan Bank
OIG recommended that FHFA: (1) establish                  Advances to JPMorgan Chase and Other Large
schedules and time frames for the completion of           Banks (EVL-2014-006, April 16, 2014)
key components of the project, as well as an overall
                                                          This report noted a significant change in the
completion date; and (2) establish cost estimates for
                                                          business environment impacting the FHLBank
varying stages of the initiative, as well as an overall
                                                          System. Ordinarily, FHLBanks make loans—called
cost estimate.
                                                          “advances”—to their members. However, since the
FHFA agreed with these recommendations.                   housing crisis of 2008, the FHLBanks’ advance
                                                          business had declined 62% by March 2012. Since
FHFA’s Oversight of the MPF Xtra Program (ESR-
                                                          that time, advances began a steep climb, largely
2014-007, April 22, 2014)
                                                          due to advances to the four largest members of the
OIG commenced this study to review FHFA’s                 FHLBank System.
oversight of a program established by the FHLBank
                                                          The report reviewed the causes of the recent surge
of Chicago. This program, called Mortgage
                                                          in advances to the four largest members and
Partnership Finance (MPF) Xtra, was initiated in
                                                          concluded that it was attributable, in large part,
2008. Under it, the FHLBank of Chicago purchases
                                                          to new bank liquidity standards established by
conforming fixed-rate residential mortgages from
                                                          the Basel Committee on Banking Supervision in
participating member banks across the FHLBank
                                                          December 2010. As detailed in the report, under the
System. The FHLBank of Chicago sells those
                                                          new standards banks are required to increase their
mortgages to Fannie Mae. The MPF Xtra program
                                                          holdings of high-quality liquid assets, such as the
offers smaller banks—which do not have the volume
                                                          Department of the Treasury (Treasury) securities. In
of many GSE customers—the opportunity to sell
                                                          order to meet the new standards, some banks have
mortgages to Fannie Mae at favorable rates. The
                                                          taken FHLBank advances in order to purchase the
FHLBank of Chicago earns a fee for its role in the
                                                          more liquid securities required.
process.
                                                          The report noted advantages and risks inherent
In its report, OIG noted that, while there were
                                                          in the business environment caused by the Basel
“unresolved issues related to the FHLBank of
                                                          Committee’s new standards. In particular, while
Chicago’s quality assurance processes,” FHFA was
                                                          OIG acknowledged the advantage of this increase to
aware of those issues and was actively overseeing the
                                                          the FHLBanks’ core business activity, it noted that
FHLBank of Chicago’s efforts to remediate them.
                                                          an increase in advances caused by matters unrelated
Included among the measures being taken under
                                                          to housing could call into question the FHLBanks’
FHFA’s supervision are the consolidation of risk
                                                          housing mission.
management operations at the FHLBank of Chicago
and an increase in the frequency of quality assurance     OIG recommended that the Agency publicly report
reviews of the loans purchased for MPF Xtra. The          on FHLBank advances to large and other members in
report concluded that the MPF Xtra program was            2014, emphasizing the consistency of such advances



                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014   11
with the safety and soundness of the FHLBank              including compliance with associated statutory and
System, as well as the FHLBanks’ housing mission.         regulatory requirements concerning protection of
                                                          personal identifying information (PII). Specifically,
FHFA agreed with the recommendation.
                                                          the audit determined whether FHFA implemented
                                                          comprehensive privacy and data protection
Audits
                                                          procedures and accurately reported on its use of
Kearney & Company, P.C.’s Independent                     privacy information. Because information in this
Evaluation of the Federal Housing Finance Agency          report could be abused to circumvent FHFA’s internal
Office of Inspector General’s Information Security        controls, it was not released publicly.
Program – 2014 (AUD-2014-021, September 30,
2014)                                                     Kearney & Company, P.C.’s Independent
                                                          Evaluation of the Federal Housing Finance
In accordance with the provisions of the Federal          Agency’s Information Security Program – 2014
Information Security Management Act of 2002               (AUD-2014-019, September 26, 2014)
(FISMA), FHFA, inclusive of OIG, is subject to
annual independent evaluations of its information         FISMA requires the inspector general of each agency
security program. OIG contracted with an                  to annually conduct an independent evaluation of
independent public accounting firm, Kearney &             the agency’s information security program. OIG
Company, to perform separate FISMA evaluations            contracted with Kearney & Company to perform
of FHFA’s and OIG’s information security                  this audit. Accordingly, the objective of this audit
programs, since FHFA and OIG maintain separate            was to evaluate FHFA’s information security program
IT infrastructures. This audit focused on the             and practices, including compliance with FISMA
OIG program, and the objective was to evaluate            and related information security policies, procedures,
OIG’s information security program and practices,         standards, and guidelines. Because information in
including compliance with FISMA and related               this report could be abused to circumvent FHFA’s
information security policies, procedures, standards,     internal controls, it was not released publicly.
and guidelines. Because information in this report        FHFA’s Oversight of Risks Associated with the
could be abused to circumvent OIG’s internal              Enterprises Relying on Counterparties to Comply
controls, it has not been released publicly.              with Selling and Servicing Guidelines (AUD-2014-
CliftonLarsenAllen, LLP’s Independent Audit of            018, September 26, 2014)
the Federal Housing Finance Agency’s Privacy              The Enterprises use a delegated business model to
Program – 2014 (AUD-2014-020, September 26,               buy and service mortgage loans. They contract with
2014)                                                     third-party mortgage loan sellers and/or servicers
Section 522 of the Consolidated Appropriations Act        (such as banks) and rely on them to comply with
of 2005 requires the inspector general of each agency     requirements for: (1) originating loans that the
to periodically conduct a review of the agency’s          Enterprises buy; (2) servicing the purchased loans
implementation of the requirements of Section             (e.g., collecting payments); and (3) reporting
522, including the agency’s privacy program. OIG          data about the loans. The Enterprises rely on the
contracted with CliftonLarsenAllen to perform             counterparties for compliance and reporting,
this audit. The objective of this audit was to assess     and thus run the risk of counterparties failing to
the FHFA privacy program and implementation,              meet selling and servicing guidelines. Assurance


12    Federal Housing Finance Agency Office of Inspector General
regarding compliance with selling requirements             disagreement with the recommendation and submit a
is particularly important in light of new limits on        revised response.
how long Fannie Mae and Freddie Mac have to
                                                           FHFA Oversight of Freddie Mac’s Information
perform quality control activities on loans being
                                                           Technology Investments (AUD-2014-017,
acquired and to make decisions about whether sellers
                                                           September 25, 2014)
need to repurchase noncompliant loans. As such,
increased reliance is being placed on controls at the      FHFA, under its supervisory and regulatory
sellers. To better assess the operational and financial    authorities regarding Freddie Mac, has a continuous
risks posed by these counterparties, OIG reviewed          examination program that encompasses Freddie
FHFA’s oversight of how the Enterprises ensure their       Mac’s IT infrastructure. Freddie Mac annually
counterparties comply with their requirements.             makes substantial investments to maintain and
                                                           improve its IT infrastructure, which is vital to its
OIG concluded that the Enterprises could
                                                           mission of helping to provide liquidity, stability, and
require independent assurance that counterparties
                                                           affordability in the nation’s housing market. In fact,
are complying with their selling and servicing
                                                           Freddie Mac maintains an IT investment portfolio
requirements as a complement to other monitoring
                                                           of over 250 individual projects. OIG conducted this
controls already in place. As examples of best practice,
                                                           audit to evaluate FHFA’s oversight of Freddie Mac’s
federal agencies involved in the mortgage market,
                                                           IT investment management processes.
such as the SEC and HUD, and private investors in
MBS commonly require independent assurance of              Overall, OIG found that FHFA could improve its
counterparty compliance. Also, in December 2013,           oversight of IT investments at Freddie Mac. FHFA
one Enterprise’s internal audit function proposed          approves Freddie Mac’s annual operating budget
using independent, third-party attestations of             but does not specifically review and approve the IT
compliance with selling and servicing guidelines, but      component of the budget, or review and approve
the merits of the proposal were not assessed by either     individual IT projects unless an investment would
the Enterprise or FHFA.                                    constitute a significant change to Freddie Mac’s
                                                           operations. FHFA has limited assurance that Freddie
OIG recommended that FHFA direct the Enterprises
                                                           Mac has implemented and enforces effective IT
to assess a risk-based approach to having their
                                                           investment management practices and processes.
counterparties obtain independent, third-party
                                                           Thus, supervisory review of Freddie Mac’s entire
attestations of their compliance with origination and
                                                           IT investment management process is even more
servicing requirements to increase assurance that the
                                                           important to protect FHFA’s interests as there is no
$4.8 trillion in Enterprise-owned and -guaranteed
                                                           corresponding conservatorship control to assess IT
mortgages are appropriately originated and serviced.
                                                           investments at the portfolio level.
Such attestations could complement, but not replace,
Fannie Mae’s and Freddie Mac’s onsite reviews              OIG recommended that FHFA: (1) conduct a
and other performance monitoring controls. The             comprehensive examination to determine whether
attestations can be implemented in a manner that           Freddie Mac has implemented and enforces an
balances their cost-benefit with a given counterparty’s    effective IT investment management process;
size, complexity, performance, and other factors.          (2) develop and issue Enterprise IT investment
                                                           management guidance; and (3) evaluate whether
FHFA did not agree with OIG’s recommendation.
                                                           Freddie Mac reports currently used by FHFA
OIG is requesting that FHFA reconsider its


                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014        13
examiners provide the information necessary to            within the new framework before it went into effect
conduct effective supervisory monitoring of Freddie       in 2013. Second, FHFA’s analysis was not robust
Mac’s portfolio of IT investments. The Agency             enough to consider additional risks of moving to the
generally agreed with the recommendations.                new framework. For example, the Agency mandated
                                                          a 36-month sunset period for representation and
FHFA’s Representation and Warranty Framework
                                                          warranty relief without validating the Enterprises’
(AUD-2014-016, September 17, 2014)
                                                          analyses or performing sufficient additional analysis
In June 2011, FHFA initiated the Contract                 needed to appropriately balance financial risk
Harmonization Project to improve the Enterprises’         between the Enterprises and sellers. Finally, FHFA
contracts and contracting processes with seller/          did not analyze the costs and benefits to determine
servicers to maximize seller/servicer performance         whether the 36-month period would result in an
and, thus, economic return on the Enterprises’ loan       economic return to the Enterprises.
portfolios. The new representation and warranty
                                                          OIG recommended that: (1) FHFA assess whether
framework is a component of the Contract
                                                          the Enterprises’ current operational capabilities
Harmonization Project that FHFA prioritized and
                                                          minimize financial risk that may result from the
implemented in September 2012. The framework’s
                                                          new framework; and (2) FHFA assess whether
objective is to clarify seller repurchase exposure and
                                                          the financial risks associated with the new
liability on future loans sold to the Enterprises.
                                                          framework, including the sunset periods, are
The new framework relieves sellers from certain
                                                          balanced between the Enterprises and the sellers.
representations and warranties, such as those
                                                          FHFA provided responsive comments to the first
relating to credit underwriting and eligibility of the
                                                          recommendation; however, they disagreed with the
borrower and property that were formerly effective
                                                          second recommendation. OIG has requested that
for the life of the loan. Given this elevated risk from
                                                          FHFA reconsider its disagreement with the second
the new framework and the financial magnitude
                                                          recommendation.
of loans involved, OIG audited FHFA’s oversight
of the Enterprises’ implementation of the new             FHFA Oversight of Fannie Mae’s Collection of
representation and warranty framework.                    Funds from Servicers that Closed Short Sales
                                                          Below the Authorized Prices (AUD-2014-015,
In spite of the additional
                                                                           August 7, 2014)
responsibility now borne by the
Enterprises to check the quality                                             Short sales are part of Fannie
of acquired loans earlier, OIG              Fannie Mae and                   Mae’s loss mitigation strategy
identified several weaknesses in                                             to help minimize the severity
the adopted framework. First,               its servicers closed             of losses it incurs due to loan
FHFA mandated this new                                                       defaults. Fannie Mae and its
framework despite significant               over 210,000 short               servicers closed over 210,000
unresolved operational risks                                                 short sales in a three-year period.
to the Enterprises; neither                 sales in a                       OIG initiated this report to look
Enterprise had implemented                                                   at the effectiveness of FHFA’s
the processes, procedures, and
                                            three-year period.               oversight and Fannie Mae’s
systems needed to operate                                                    controls over delegated servicers



14    Federal Housing Finance Agency Office of Inspector General
to ensure that net proceeds from short sales met the       Figure 5. Fannie Mae Recommended Exclusions
minimum amount authorized by Fannie Mae.                   to Remediation Plan

Fannie Mae determined that 4,883 short sale                                             Loan      Indemnification
                                                                   Category
                                                                                        Count         Amount
transactions were potentially closed in violation of
                                                           Population Included           2,434      $16,955,656
servicer delegations of authority between August             in Fannie Mae’s
2010 and December 2013. The violation was in                 Remediation Plan
regard to the net proceeds from the sales, which           1.	Harm Below Tolerable       (943)     ($1,165,930)
were less than the authorized minimum net reserve              Threshold
                                                           2.	Meets National             (652)     ($3,377,674)
(MNR) established by Fannie Mae. Of the 4,883
                                                               Servicing
transactions, Fannie Mae determined that only                  Organization
2,434 should be included in a remediation plan; the            Non-Delegated
                                                                Criteria
total MNR shortfall for the 2,434 transactions was
                                                           3.	Meets Real Estate          (145)     ($1,593,073)
$16,955,656. Nearly half of these transactions were             Asset Management
removed for one of three reasons: (1) they would                Non-Delegated
have been approvable if properly submitted to Fannie             Criteria
Mae for approval; (2) they had already been remedied       4.	Proceeds Exceed            (241)                 $-
                                                                 Estimated MNR
through a make whole agreement or repurchase; or
                                                           Perceived Harm to               453      $10,818,979
(3) they had actually received Fannie Mae review             Fannie Mae
prior to the sale.

Fannie Mae then applied a series of four exclusions        Fannie Mae went to considerable lengths to
to the 2,434 short sale transactions. The exclusions       demonstrate why it should not pursue servicer
further reduced the number of transactions for             noncompliance rather than emphasize the
an indemnification demand to 453, with a total             importance of established controls. Additionally,
MNR shortfall of $10,818,979 (see Figure 5,                Fannie Mae did not fully address this lack of servicer
above). Despite Fannie Mae’s authority to require          compliance through consideration of penalties,
indemnification for each transaction with an MNR           including, for example, interest on shortfalls collected
shortfall, a decision was made to exclude 1,740            and recoupment of incentive fees for completing
transactions with MNR shortfalls of $6,136,677             short sale transactions.
plus 241 transactions where an MNR value was not
obtained by the servicer.                                  OIG made three recommendations, including that
                                                           FHFA: (1) communicate a written supervisory
Fannie Mae furnished OIG with a revised                    expectation to Fannie Mae requiring that its business
remediation plan just prior to the release of this         units perform a review of non-delegated short sale
report; that plan removed delegated transactions           transactions to identify any transactions where the
erroneously included for remediation, yet the              servicer submitted net proceeds that were less than
methodology remained substantially unchanged               the sale amount approved by Fannie Mae and draft
from the initial version, which was this report’s basis.   a remediation plan, as appropriate; (2) communicate
Further, the revised plan did not address potential        a written supervisory expectation to Fannie Mae
shortfalls in non-delegated short sale transactions        requiring its internal audit group to review Fannie
where Fannie Mae retains approval authority.               Mae’s plan to collect funds for delegated and



                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014       15
non-delegated short sale transactions where the           problems at nonbank special servicers, the Agency
net proceeds received were less than the amounts          has not established a risk management process or
authorized by Fannie Mae; and (3) analyze Fannie          overall oversight framework to handle some general
Mae’s actions and remediation plans regarding             risks posed by nonbank special servicers. As an
delegated and non-delegated short sale transactions to    example, one nonbank special servicer used short-
determine whether Fannie Mae has taken necessary          term financing to acquire servicing rights on a large
steps to ensure that servicers are held accountable for   volume of Enterprise-backed, troubled mortgage
servicing violations and credit losses are minimized,     loans. Unfortunately, it lacked adequate infrastructure
including by assessing appropriate penalties and          to handle the loans and had limited credit availability,
recouping incentive fees paid for improperly closed       which led to consumer complaints, increased risk
short sale transactions.                                  in funding its operations, and delayed payments to
                                                          the Enterprises. Using short-term financing to buy
FHFA agreed with OIG’s recommendations and is
                                                          servicing rights for troubled mortgage loans is risky,
taking responsive action.
                                                          as the rights may only begin to pay out after long-
FHFA Actions to Manage Enterprise Risks from              term work is performed to resolve the difficulties.
Nonbank Servicers Specializing in Troubled                This practice can jeopardize the servicers’ operations
Mortgages (AUD-2014-014, July 1, 2014)                    and the Enterprises’ reputation for timely payment
                                                          guarantees.
As part of a review of problems FHFA identified
with a nonbank special servicer, OIG initiated this      OIG recommended that FHFA issue guidance on
performance audit to assess FHFA’s controls to           a risk management process for nonbank special
ensure the Enterprises monitor nonbank special           servicers and develop a comprehensive, formal
servicer performance and mitigate related risks.         oversight framework to examine and mitigate the
Banks that traditionally service mortgage loans          risks these nonbank special servicers pose.
backed by the Enterprises have
                                                                             FHFA generally agreed with
been selling the rights to service
                                                                             OIG’s recommendations and is
troubled loans in bulk to new              Nonbank                           taking responsive action.
companies specialized to handle
them. Nonbank special servicers            special servicers                 CohnReznick LLP’s
currently hold approximately                                                 Independent Audit of FHFA’s
$1.4 trillion in mortgage                  currently     hold                Oversight of Enterprise
servicing rights (MSR) out of                                                Monitoring of the Financial
a nearly $10 trillion market.
                                           approximately                     Condition of Mortgage Insurers
These new servicers have less                                                (AUD-2014-013, May 8, 2014)
stringent regulatory and financial
                                           $1.4    trillion   in
                                                                             OIG contracted with
requirements than banks; this              MSR out of a                      CohnReznick LLP to conduct
poses additional risk to the
                                                                             this performance audit of
Enterprises.                               nearly $10 trillion               FHFA’s oversight of the financial
Overall, OIG concluded that                                                  condition of the mortgage
while FHFA and the Enterprises
                                           market.                           insurers used on loans purchased
have responded well to specific                                              by the Enterprises and their


16    Federal Housing Finance Agency Office of Inspector General
risk exposure. The Enterprises are restricted by their    and update the letter of instruction accordingly,
charters to purchase only loans with loan-to-value        that classifies new mortgage insurers as non-
ratios over 80% if the loans include a form of credit     delegated activities that require FHFA approval;
enhancement. The Enterprises typically require            and (3) develop a methodology for FHFA’s review
mortgage insurance underwritten by private mortgage       of new mortgage insurers and ensure procedures
insurers as a credit enhancement to reduce the            performed are adequately documented and support
amount of loss in the event of borrower default. As of    the conclusions reached during the review.
June 30, 2013, the Enterprises held over $587 billion
                                                          FHFA is taking action that is generally responsive to
in single-family residential mortgage loans insured by
                                                          CohnReznick’s recommendations.
private mortgage insurance companies.

CohnReznick concluded that FHFA has                       Recommendations
opportunities to further strengthen its oversight of
the Enterprises’ monitoring of the financial condition
                                                          A complete list of OIG’s audit and evaluation
of private mortgage insurers and their related
                                                          recommendations is provided in Appendix B.
risk exposure. First, FHFA can better coordinate
oversight of the risk posed by mortgage insurers in
a weakened financial condition through issuance of        Civil Fraud Initiative
a formal oversight plan that defines the roles and
responsibilities of the various FHFA components and       OA launched its Civil Fraud Initiative in June 2013.
the Enterprises. As of June 30, 2013, these distressed    OA, with support from OI and the Office of Counsel
mortgage insurers were potentially responsible for        (OC), conducts civil fraud reviews (also known
over one-third of the mortgage insurance coverage         as nonaudit services) to identify fraud and make
provided to both Enterprises.                             referrals for civil actions and administrative sanctions
                                                          against entities and individuals who commit fraud
Second, FHFA can improve its oversight of the             against FHFA, Fannie Mae, Freddie Mac, or the
approval of new mortgage insurers. CohnReznick            FHLBanks.
determined that FHFA delegated the approval
decision for a new mortgage insurer to the                Currently, OA is working with various Assistant U.S.
Enterprises. Such delegated approval is limited           Attorneys on reviews of lenders’ loan origination
to counterparties where there are no reasonably           practices to determine their compliance with
foreseeable material increases in operational risk,       Enterprise requirements. Lenders are considered for
which is generally not the case for a new mortgage        review through the use of data-mining techniques
insurer. Additionally, FHFA does not have a formal        and requests from government agencies.
process for evaluating new mortgage insurers,
including Enterprise risk assessments and justification   Suspension of Counterparties Referrals
for conditional approval requirements.                    FHFA’s Suspended Counterparty Program is
CohnReznick recommended that FHFA take the                intended to “protect the safety and soundness of the
following actions: (1) establish policies, procedures,    regulated entities” by means of “a process for FHFA
and processes to execute FHFA’s oversight of the          to issue suspension orders directing the regulated
Enterprises’ monitoring of business conducted with        entities to cease or refrain” from doing business
mortgage insurers; (2) develop specific criteria,         with counterparties (and their affiliates) who have


                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014       17
“engaged in covered misconduct.” For purposes of the       to undergo an external peer review every three years.
program, covered misconduct means:                         The objectives of an external peer review are to
                                                           determine, during the period under review, whether:
     Any conviction or administrative sanction
                                                           (1) the audit organization’s system of quality control
     within the past three (3) years if the basis of
                                                           was suitably designed; and (2) the audit organization
     such action involved fraud, embezzlement,
                                                           was complying with its own quality control system to
     theft, conversion, forgery, bribery, perjury,
                                                           provide reasonable assurance that it was conforming
     making false statements or claims, tax
                                                           to applicable professional standards. Federal audit
     evasion, obstruction of justice, or any similar
                                                           organizations can receive a peer review rating of pass,
     offense, in each case in connection with
                                                           pass with deficiencies, or fail.
     a mortgage, mortgage business, mortgage
     securities or other lending product.                  The Council of the Inspectors General on Integrity
                                                           and Efficiency (CIGIE) established the Quality
For the reporting period April 1, 2014, through
                                                           Assurance Review (QAR) program, an independent
September 30, 2014, OIG made 53 referrals to
                                                           peer review process of the investigative operations of
FHFA’s Office of General Counsel, which reviews
                                                           offices of inspectors general. The overall objectives
them and issues suspensions when appropriate.
                                                           of the QAR program are to: (1) ensure that the
                                                           general and qualitative standards adopted by offices
Audit and Evaluation Plan                                  of inspectors general comply with CIGIE’s Quality
                                                           Standards for Investigations; and (2) determine
OIG maintains an Audit and Evaluation Plan                 whether adequate internal control systems and
that focuses strategically on the areas of FHFA’s          management procedures exist to ensure that the
operations that pose the greatest risks to the Agency      law enforcement powers conferred by the Inspector
and the GSEs. The plan responds to current events          General Act, as amended, are in place and operating
and feedback from FHFA officials, members of               effectively to provide reasonable assurance that
Congress, and others. The plan is available for            an office of inspector general is complying with
inspection at www.fhfaoig.gov/Content/Files/               professional investigative standards, as well as other
AuditAndEvaluationPlan.pdf.                                requirements. In conducting a QAR, a peer review
                                                           team will render an opinion on the adequacy
Peer Reviews                                               of a given office of inspector general’s internal
                                                           safeguards, management procedures, and quality
                                                           control in connection with compliance with the
All offices of inspectors general are required to
                                                           Inspector General Act, CIGIE’s Quality Standards for
implement and maintain a system of quality control
                                                           Investigations, and law enforcement powers. An office
for their audit and investigative operations. The
                                                           of inspector general will receive a QAR rating of
system of quality control encompasses an office of
                                                           compliant or noncompliant.2
inspector general’s leadership, with an emphasis on
performing high-quality work that is compliant with        The Inspector General Act, as amended by the
required standards.                                        Dodd-Frank Wall Street Reform and Consumer
                                                           Protection Act of 2010 (Dodd-Frank), mandates
Audit organizations that perform audits of federal
                                                           that offices of inspectors general report semiannually
government programs and operations are required
                                                           the results of peer reviews of their operations
by Generally Accepted Government Auditing Standards
                                                           conducted by other offices of inspectors general, the

18     Federal Housing Finance Agency Office of Inspector General
date and results of the last peer review, outstanding       Letter of Comment accompanying its System
recommendations from peer reviews, and peer                 Review Report, and OIG completed action on
reviews conducted by the inspector general of               this enhancement on June 4, 2014. Copies of the
another office of inspector general. Peer reviews of        System Review Report and Letter of Comment
federal offices of inspectors general are conducted by      can be viewed at www.fhfaoig.gov/Content/Files/
member organizations of CIGIE.                              FHFA-OIG%20audit%20peer%20review_0.pdf.

•	 The results of any peer review conducted by          •	 Outstanding recommendations from any peer
   another office of inspector general during              review conducted by another office of inspector
   the reporting period. In compliance with the            general that have not been fully implemented,
   Inspector General Act, as amended, OIG reports          including a statement describing the status of
   that the Department of Education Office of              the implementation and why implementation
   Inspector General conducted                                                is not complete. There are no
   a QAR of OIG’s OI and                                                      outstanding recommendations
   issued an opinion letter on                                                from FCC-OIG’s external
   August 25, 2014. OI received             OI received                       peer review of OIG’s audit
   a rating of compliant. The                                                 organization. We completed
   Department of Education                  a  rating   of                    corrective action on
   Office of Inspector General                                                June 4, 2014, for the sole
   found that OI’s system of                compliant       —                 recommendation in FCC-OIG’s
   internal safeguards and                                                    Letter of Comment.
   management procedures in
                                            the   best rating
                                                                              •	 Ongoing OIG audit
   effect as of June 30, 2014,
                                            an investigations                 peer review activity. OIG
   provided reasonable assurance
                                                                              completed a peer review of the
   of conforming to professional            organization                      audit operations of the Legal
   standards in the planning,
                                                                              Services Corporation Office of
   execution, and reporting of              can receive.                      Inspector General (LSC-OIG)
   OIG’s investigations. A copy
                                                                              during this reporting period and
   of the opinion letter can be
                                                                              issued a final System Review
   viewed on OIG’s website at
                                                                              Report on September 5, 2014.
   www.fhfaoig.gov/Content/Files/FHFA-OIG
                                                           OIG reported that in our opinion, except for
   investigations peer review.pdf.
                                                           the deficiencies identified, the system of quality
                                                           control for the audit organization of LSC-OIG
   OA was not required to undergo an external peer
                                                           in effect for the year ended March 31, 2014,
   review during this reporting period. The most
                                                           had been suitably designed and complied with
   recent peer review of OA was completed by the
                                                           to provide LSC-OIG with reasonable assurance
   Federal Communications Commission Office
                                                           of performing and reporting in conformity with
   of Inspector General (FCC-OIG) on March 20,
                                                           applicable professional standards in all material
   2014. OIG received a peer review rating of pass,
                                                           respects. LSC-OIG received a peer review rating
   the best rating an audit organization can receive.
                                                           of pass with deficiencies.
   FCC-OIG identified one enhancement in a



                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014    19
  As is customary, OIG also issued a Letter of            Figure 6. Criminal and Civil Recoveries from
  Comment, dated September 5, 2014, that set              April 1, 2014, Through September 30, 2014
  forth findings and recommendations that were                                  Criminal                Civil
  not considered to be of sufficient significance                              Recoveries            Recoveries
  to affect our opinion expressed in the System               Finesa           $41,134,082          $1,268,491,770
  Review Report.                                              Settlements                 $-       $23,650,000,000
                                                              Restitutions    $312,094,553                       $-
                                                              Total           $353,228,635         $24,918,491,770
  OIG made seven recommendations in the System
  Review Report. LSC-OIG agreed to complete               a
                                                           Fines include criminal fines, seizures, forfeiture and special
                                                          assessments, and civil fines imposed by federal court.
  corrective action no later than December 31,
  2014. LSC-OIG has posted its peer review report
  on its website at www.oig.lsc.gov/org/System%20         Fraud Committed Against the Enterprises,
  Review%20Report%20-%202014%20Peer%20                    the FHLBanks, or FHLBank Member
  Review%20of%20LSC%20OIG.pdf.                            Institutions
                                                          Investigations in this category involved multiple
Investigations                                            schemes that targeted Fannie Mae, Freddie Mac, the
                                                          FHLBanks, or members of FHLBanks.
During the semiannual period, OIG investigators
participated in numerous criminal, civil, and             Fraud at Failed FHLBank Member, San Diego,
administrative investigations, which resulted in the      California
filing of criminal charges against 121 individuals
                                                          On September 12, 2014, in the U.S. District Court
and the conviction of 67 individuals. In many of
                                                          for the Southern District of California, Laura
these investigations, we worked with other law
                                                          Ortuondo was sentenced to 36 months’ probation,
enforcement agencies, such as the Department of
                                                          12 months’ home confinement, and ordered to
Justice (DOJ), the Office of the Special Inspector
                                                          pay a fine of $3,000. Previously, on May 1, 2014,
General for the Troubled Asset Relief Program
                                                          Ortuondo had pled guilty to one count of making
(SIGTARP), the Postal Inspection Service (USPIS),
                                                          false statements to federal agents.
the FBI, the Department of Housing and Urban
Development Office of Inspector General (HUD-             In 2008, Ortuondo worked for a local small business
OIG), the Secret Service, IRS-Criminal Investigation      owner named Annand Sliuman (who previously pled
(IRS-CI), and state and local law enforcement entities    guilty in a separate case). In her role as Sliuman’s
nationwide. Further, in several investigations, OIG       assistant, Ortuondo, among other things, helped
investigative counsels were appointed as Special          Sliuman manage loans and loan applications with
Assistant U.S. Attorneys and supported prosecutions.      La Jolla Bank. In May 2008, Ortuondo assisted
Figure 6 (see above) summarizes the criminal and          Sliuman in fraudulently obtaining a $1.8 million
civil recoveries from our investigations. Although        loan from La Jolla Bank by knowingly submitting
most of these investigations remain confidential,         fraudulent tax forms to the bank.
details about several of them have been publicly
disclosed and are summarized in the following             La Jolla Bank was a member of the FHLBank of
section.                                                  San Francisco until February 2010, when it failed
                                                          and was taken over by the Federal Deposit Insurance


20    Federal Housing Finance Agency Office of Inspector General
Corporation (FDIC). At the time of failure, La Jolla    access device, and two counts of aggravated
Bank had outstanding debt of approximately              identification theft.
$1 billion, including approximately $700 million
                                                        Between October 2009 and July 2013, Minor
in outstanding advances from the FHLBank of
                                                        and his co-conspirator, Tilisha Morrison, led this
San Francisco.
                                                        conspiracy, which resulted in the theft of PII of
After assisting Sliuman in defrauding La Jolla Bank,    over 1,000 Fannie Mae customers and others, and
Ortuondo undertook a nearly five-year-long effort to    caused monetary damages to the involved financial
thwart the federal government’s investigation of the    institutions, including JPMorgan Chase and Bank
fraud. The cover-up began in October 2008, when         of America. As part of the conspiracy, Minor and
Ortuondo lied to investigators and claimed that she     Morrison purchased PII that former Fannie Mae
was unaware that she had submitted false documents      employee Katrina Thomas illegally obtained in the
to the bank. Shortly after lying about her knowledge    course of her employment. Minor and Morrison
of the fraud, Ortuondo assisted Sliuman in              then utilized other co-conspirators to misuse this PII
destroying Ortuondo’s personal laptop, knowing that     to commit bank fraud. Morrison and Thomas have
it contained incriminating evidence of their fraud.     already pled guilty and are awaiting sentencing for
Ortuondo proceeded to convince                                               their roles in this matter.
her then-husband to lie to federal
                                                                            This is a joint investigation with
agents and a federal grand jury on
                                              Federal jury                  the Secret Service and the Dallas
her behalf, claiming—falsely—
                                                                            County District Attorney’s
that he had destroyed her laptop.
In November 2011, Ortuondo                    finds Anthony                 Office.
again lied to federal agents about
her role in the fraud and asserted            Minor guilty.                 Loan Officer Sentenced in Ponzi
                                                                            Scheme, St. Louis, Missouri
that her ex-husband was the one
who had destroyed her laptop.                                               On August 19, 2014, in the
                                                                            U.S. District Court for the
This was a joint investigation with the FBI, IRS-CI,    Eastern District of Missouri, Daniela Spiridon was
the Small Business Administration Office of Inspector   sentenced to 78 months in prison and ordered to pay
General (SBA-OIG), Treasury Inspector General for       $2,499,988 restitution and a fine of $5,000.
Tax Administration, and the U.S. Attorney’s Office
for the Southern District of California.                Spiridon was formerly a loan officer for Equity One
                                                        Mortgage in St. Louis. In 2010, she left Equity One
Conviction in Identity Theft Involving Fannie Mae       Mortgage and began operating under the name
Insider, Dallas, Texas                                  Proficio Mortgage and other various business and
                                                        bank names. From 2010 to 2012, Spiridon scammed
On September 9, 2014, a federal jury in the U.S.
                                                        individuals by falsely purporting to have contracts
District Court for the Northern District of Texas
                                                        with Fannie Mae and banking institutions to sell
(Dallas) convicted Anthony Minor on all nine counts
                                                        packages of real estate owned (REO) properties
of an indictment, including one count of conspiracy
                                                        as well as individual foreclosed properties on their
to commit bank fraud, five counts of bank fraud,
                                                        behalf. She did so by presenting fictitious documents
one count of using or trafficking in an unauthorized
                                                        purporting to be from Fannie Mae. She told


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014     21
individuals that if they put more money down, it          After being terminated from employment at Fannie
was more likely Fannie Mae would select them as a         Mae in August 2013, Rajendran repeatedly used
buyer, and then required them to wire earnest money       administrator credentials to log into government
for individual and bundled Fannie Mae and other           servers and make unauthorized changes to the
foreclosed properties. Spiridon obtained large down       CheckMyNPV website, including disabling the
payments (hundreds of thousands of dollars) from          website’s online tool for checking HAMP eligibility.
investors/victims who thought they were paying for        As a result of these actions, Rajendran caused
bundled packages of various foreclosed properties.        damage and loss to Fannie Mae in the amount of
                                                          approximately $69,000.
Spiridon failed to deliver the properties to the
investors and admitted she had no connection              This is a joint investigation with SIGTARP; Fannie
with the properties. After realizing they had been        Mae’s Investigations Unit provided exceptional
defrauded, investors and home buyers requested            assistance as well.
their money back. Spiridon made partial payments
to previous investors with money she received from        Unlicensed Appraiser/Identity Theft Scheme,
newly defrauded investors. Since 2011, Spiridon           Washington State
received over $4 million from her real estate Ponzi       On June 13, 2014, Diana Merritt and Douglas
scheme and caused losses of over $2.4 million.            White were charged by an information filed in the
Spiridon agreed to forfeit money and assets purchased     King County Superior Court of Washington alleging
as a result of the illegal activity, including two        identity theft and mortgage fraud.
Mercedes-Benz vehicles and a $50,000 bond.
                                                          From May 2007 to June 2014, White allegedly
This was a joint investigation with the FBI and           used the fraudulently obtained identity of a licensed
USPIS.                                                    appraiser to prepare real estate appraisals. White, who
                                                          was not a licensed appraiser himself, prepared the
Computer Intrusion at Fannie Mae, Virginia
                                                          appraisals under the name and state license number
On July 10, 2014, Sathish Kumar Chandhun                  of “Tom Reed.” Merritt, president/loan officer at
Rajendran pled guilty in the U.S. District Court for      Merit Home Finance, Inc. and longtime girlfriend
the Eastern District of Virginia to an information        of White, participated in the scheme by steering
alleging unauthorized access to a protected computer      appraisal business to White knowing that he was not
and causing damage to such computer.                      a licensed appraiser. Between 2009 and 2012, White
                                                          submitted over 400 appraisals for use in mortgage
From August 2010 until August 2013, Rajendran
                                                          loans using the stolen identity of “Tom Reed,” with
worked at Fannie Mae as an IT term employee
                                                          at least 21 of these appraisals being part of mortgages
and was assigned to the development of the
                                                          sold to the Enterprises. White was still conducting
CheckMyNPV.com website. Operated by Fannie
                                                          appraisals at the time of his arrest. Losses to the
Mae under the auspices of the Making Home
                                                          Enterprises have not yet been determined.
Affordable Program, the online tool on this website
allowed citizens to determine the net present value of    This is a joint investigation with HUD-OIG and the
their homes and check their eligibility to participate    King County (Washington) Prosecuting Attorney’s
in the Home Affordable Modification Program               Office.
(HAMP), a federal program designed to avoid
mass foreclosures.

22    Federal Housing Finance Agency Office of Inspector General
Multifamily Scheme, Benton,                                                   Property Management and
Illinois                                                                      REO Schemes
                                              Maximus Yaney
On May 6, 2014, Maximus                                                       The wave of foreclosures
Yaney and Jamie Bray were                     and Jamie Bray                  following the housing crisis left
indicted by a grand jury sitting                                              the Enterprises holding a large
in the U.S. District Court for                indicted by a                   inventory of REO properties.
the Southern District of Illinois                                             To minimize losses associated
alleging one count of bank fraud,             grand jury for                  with REO, the Enterprises rely
one count of wire fraud, and a                                                heavily on contractors to secure,
forfeiture allegation.                        allegedly causing               maintain and repair, price, and
                                                                              ultimately sell their properties. In
From April 2007 through                       over $6.8 million               a property management scheme,
February 2010, Yaney and Bray
                                              in losses to                    contractors overbill for work
allegedly knowingly devised and
                                                                              performed or bill for work not
engaged in a scheme to defraud
Washington Mutual Bank and                    Fannie Mae.                     performed.
Greystone Bank.
                                                                             Fannie Mae Employee Receives
As part of the alleged scheme,                                               Kickback in Exchange for
Yaney flipped Marshall Reed Apartments by using           Listings, Los Angeles, California
a straw company he controlled called HG Capital,          On August 4, 2014, in the U.S. District Court for
LLC to sell to another company he owned called            the Central District of California, Armando Granillo
Titan, LLC. Yaney, along with Bray, inflated the          was sentenced to 15 months in prison, to be followed
sale price and used false rent rolls and leases to        by 6 months in a halfway house and 3 years of
obtain an $8.4 million loan. Yaney and Bray then          supervised release. Granillo was previously found
used the false rent rolls and leases to obtain long-      guilty after a jury trial in Santa Ana, California.
term financing with a Fannie Mae multifamily
loan. False information was submitted to Greystone        From November 2012 to March 2013, Granillo,
Servicing Corporation, Inc., a Fannie Mae delegated       a former foreclosure specialist/REO sales associate
underwriting service, to obtain an $8.1 million           for Fannie Mae, attempted to enrich himself by
refinance loan, along with false financials submitted     soliciting payments of at least $11,000 in exchange
to Greystone Bank to obtain an additional $300,000        for favorable action. Granillo offered to increase
gap loan.                                                 the number of REO listings assigned to particular
                                                          realtors in exchange for 20% of the real estate sales
It is alleged that Yaney and Bray caused over             commission received at closing when the properties
$6.8 million in losses to Fannie Mae and over             sold. After a monitored meeting in which Granillo
$1.2 million in losses to Greystone Servicing.            solicited an $11,200 kickback, he was arrested and
A forfeiture allegation was also charged against          found in possession of the funds.
$6.1 million that Yaney allegedly received in proceeds
from the scheme.                                          Property Preservation Fraud Sentencing, Florida
This is a joint investigation with the FBI.               On May 29, 2014, in the U.S. District Court for
                                                          the Middle District of Florida, Tammy Roaderick


                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014      23
was sentenced to 33 months’ incarceration, to be          Condo Conversion and Builder Bailout
followed by 3 years of supervised release, and ordered    Schemes
to pay $2,396,498 in restitution. Roaderick had
                                                          These schemes begin with sellers or developers
previously pled guilty to conspiracy to commit wire
                                                          seeking out investors with good credit who want
fraud. The restitution was ordered joint and several
                                                          low-risk investment opportunities. Investors are
with co-defendant Dean Counce, former president
                                                          offered deals on properties with no money down
of American Mortgage Field Services, LLC (AMFS).
                                                          and other lucrative incentives, such as cash back and
The sentencing order prohibited Roaderick from
                                                          guaranteed and immediate rent collection. To fund
working in the property preservation industry.
                                                          these incentives, the sellers use complicit appraisers to
From at least March 2007 through December 31,             inflate the sales price. The incentives are not disclosed
2009, Roaderick was in a managerial position at           to lenders, who are defrauded into making loans far
AMFS. In that position she conspired with Counce          exceeding property values. When the properties go
and other AMFS employees                                  into foreclosure, lenders suffer large losses.
to oversee the submission of
thousands of fraudulent property                                         Eight Pled Guilty and Three
inspection reports to Bank                                               Sentenced, Miami, Florida
                                           Eight pled guilty
of America for which AMFS                                                On September 26, 2014, in
was paid but never actually                in a straw buyer              the U.S. District Court for the
conducted. Under the terms of                                            Southern District of Florida,
its servicing agreements with              scheme.                       the following individuals were
the Enterprises and the Federal                                          sentenced:
Housing Administration (FHA),
Bank of America would contract                                           •	 Alfredo Chacon was
with companies such as AMFS and pay them for                             sentenced to 31 months’
this and additional property preservation services.     incarceration, 3 years’ supervised release, and
Bank of America would then submit claims for            ordered to pay $1,531,438 in restitution.
reimbursement to the Enterprises and FHA for the     •	 Francisco Martos was sentenced to 30 months’
services rendered during the foreclosure process.       incarceration, 3 years’ supervised release, and
Due to high foreclosure rates in the state of Florida       ordered to pay $393,751 in restitution.
caused by the mortgage crisis, AMFS employees,            •	 Dorian Magarino was sentenced to 24 months’
some of whom were under the direction of                     incarceration and 3 years’ supervised release.
Roaderick, began to falsify an increasing number of
these property inspections. Ultimately, at least half     On August 14 and August 15, 2014, in the same
of the property inspections submitted to Bank of          court, Luis Michael Mendez and Wilkie Perez,
America on a monthly basis were fabricated.               respectively, pled guilty to one count each of
                                                          conspiracy to commit bank and wire fraud.
This was a joint investigation with HUD-OIG and
the Secret Service.                                       On May 15, 2014, in the same court, Leidy
                                                          Masvidal, Chacon, Martos, and Magarino each pled
                                                          guilty. Masvidal pled guilty to one count each of



24    Federal Housing Finance Agency Office of Inspector General
conspiracy to commit bank fraud, bank fraud, and         Plea in Condo Conversion Scheme,
structuring financial transactions. Chacon, Martos,      Chicago, Illinois
and Magarino each pled guilty to conspiracy to
                                                         On September 12, 2014, in the U.S. District Court
commit bank fraud, wire fraud, and mail fraud.
                                                         for the Northern District of Illinois, Olabode Rotibi
On May 14, 2014, in the same court, Douglas              was sentenced to 24 months’ imprisonment, 2 years’
Ponce and Tania Masvidal each pled guilty to an          supervised release, and joint and several restitution in
information that charged them with one count of          the amount of $1.82 million.
conspiracy to commit bank fraud.
                                                         On April 4, 2014, in a trial held in the same court,
On May 2, 2014, in the same court, Leidy Masvidal        James Vani was found guilty by a jury; he was
was charged with one count of bank fraud and one         convicted on two counts of wire fraud.
count of conspiracy to commit bank fraud and Tania
                                                         From 2007 to 2008, Vani, a licensed loan
Masvidal was charged with one count of conspiracy
                                                         officer, prepared loan applications containing
to commit bank fraud.
                                                         misrepresentations as part of a mortgage
On April 29, 2014, in the same court, Chacon,            fraud scheme to sell condominium units at
Martos, Magarino, and Ponce were charged via an          1351 N. Ashland Ave, Chicago, Illinois. The
information with conspiracy to commit wire fraud.        misrepresentations in straw buyer loan applications
                                                         led to lenders approving loans they would not
Between mid-2006 and continuing through 2010,            normally approve. Rotibi was a licensed appraiser
Chacon, Martos, Magarino, and Ponce allegedly            who produced fraudulent appraisal reports as part of
conspired with Luis Mendez (father), Luis Michael        this mortgage fraud scheme.
Mendez (son), Stavroula Mendez, Michael Mendez,
Marie Mendez, and/or Perez to recruit straw              This is a joint investigation with the U.S. Attorney’s
buyers whom they knew were unqualified to obtain         Office for the Northern District of Illinois and the
mortgages and facilitated the approval of loan           FBI.
applications through contacts at different mortgage
brokers. The Masvidals also recruited straw buyers.      Four Charged in Condo Conversion,
Ponce and Chacon allegedly paid straw buyers             West Palm Beach, Florida
kickbacks for purchasing condominium properties          On August 29, 2014, in the U.S. District Court
and participating in the scheme. Eventually,             for the Southern District of Florida, Jose Aller and
the conspirators were unable to make mortgage            Ernesto Rodriguez were both sentenced to 12 months
payments, causing many of the condos to go into          and 1 day of incarceration, to be followed by 2 years
foreclosure and leading to losses by the lenders. The    of supervised release, and were ordered to pay
loss exposure to Fannie Mae and Freddie Mac is           restitution in the amount of $2,951,263, jointly and
$5,216,873.14 and $5,646,264.02, respectively. In        severally.
total, the scheme caused losses to the Enterprises and
other financial institutions of over $20 million.        On August 29, 2014, in the same court, Joaquin
                                                         Cossio pled guilty to one count of conspiracy to
This is a joint investigation with HUD-OIG.              commit bank fraud. Cossio previously was charged
                                                         on August 8, 2014, with one count of conspiracy to
                                                         commit bank fraud.


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014       25
On August 7, 2014, a 38-count superseding                 bank fraud transactions, causing estimated monetary
indictment was filed charging Rashmi Airan-Pace,          damages to the financial institutions of more
Jordana Ende-Tobel, Eli Riesel, and Florencio             than $4.8 million. Ende-Tobel and Tezanos were
Luis Tezanos each with one count of conspiracy to         implicated in several of these alleged bank fraud
commit bank fraud. Riesel and Airan-Pace were             transactions. Cossio participated in at least five
each also charged with 25 counts of bank fraud,           fraudulent transactions, causing monetary damages
while Ende-Tobel and Tezanos were each charged            to Freddie Mac and Wells Fargo of more than
with 9 and 14 counts, respectively, of bank fraud.        $1.4 million. Cossio was a principal of Realty Center
Tezanos was also charged with 12 counts of corrupt        of America and conspired with others to provide
acceptance of gifts and commissions. The indictment       condo buyers with undisclosed incentives.
was filed in the U.S. District Court for the Southern
                                                          This matter was initiated based on a referral from
District of Florida.
                                                          the Freddie Mac Fraud Investigation Unit, which
Previously, on April 16, 2014, in the same court, a       investigated these allegations due to some of the
37-count federal grand jury indictment was unsealed       mortgage loans having been purchased by Freddie
charging Airan-Pace, Ende-Tobel, Riesel, and Tezanos      Mac.
with conspiracy to commit bank fraud.
                                                          This is a joint investigation with the FBI.
The charging documents alleged that the defendants,
along with others, conspired to provide buyers of         $39 Million Builder Bailout Fraud,
condominiums at Kensington at Royal Palm Beach            Ft. Lauderdale, Florida
with incentives that were not disclosed on the            On August 22, 2014, a criminal complaint and arrest
HUD-1 settlement statements and other documents           warrant was issued by the U.S. District Court for
submitted as part of the mortgage loan application        the Southern District of Florida for Jaime Sanchez
and approval process. The charges alleged that the        charging him with conspiracy, bank fraud, mail
relevant mortgage transactions were originated            fraud, wire fraud, and aggravated identity theft.
utilizing financial institutions, including Bank of       Sanchez was arrested by OIG on August 27, 2014.
America, N.A., JPMorgan Chase Bank, N.A., and
Wells Fargo Bank, N.A. The financial institutions         Juan Carlos Sanchez, who was sentenced to 15 years’
were unaware of these incentives and thereby              imprisonment on January 3, 2013, was the leader of
funded the mortgage loans based on materially false       a conspiracy involving numerous mortgage brokers,
and fraudulent information. Finally, the charging         real estate agents, and settlement agents across
documents alleged that the co-conspirators acted in       southern and central Florida who were involved in
furtherance of the scheme by communicating these          the sale of multiple condo conversion properties
undisclosed incentives to marketers and prospective       in Ft. Lauderdale, Orlando, and Tampa. Jaime
buyers, then utilized entities controlled by other        Sanchez’s criminal conduct in the scheme allegedly
unindicted co-conspirators to convert funds provided      includes the purchase of 12 units at Marina Oaks
by the project developer into “cash to close” and         and other properties in southern Florida utilizing
other incentives paid to or on behalf of the buyers.      straw buyers, which resulted in over $3.7 million
                                                          in losses. The investigation has documented 165
From November 2007 through June 2009, Riesel              transactions involving Juan Carlos Sanchez and his
and Airan-Pace allegedly participated in numerous         co-conspirators and over $39 million in mortgage


26    Federal Housing Finance Agency Office of Inspector General
loans. Of the 165 transactions, 131 have been            The scheme benefited homebuilder Flatiron
foreclosed, resulting in a $34 million loss to the       Development, along with its corporate directors, by
various lenders, and another 26 are in the foreclosure   selling homes to straw buyers at inflated prices. The
process. Freddie Mac’s exposure is 36 units totaling     homes subsequently fell into foreclosure, causing
$8.5 million in loans.                                   losses to lending institutions of approximately
                                                         $5.7 million. Freddie Mac suffered a loss of
Plea in Condo Scheme, Tampa, Florida                     $590,989.64.
On August 20, 2014, in the U.S. District Court for       This is a joint investigation with the Secret Service.
the Middle District of Florida, Brendan Bolger pled
guilty to a one-count information alleging conspiracy    Defendant Sentenced in Condo Conversion/
to commit wire, mail, and bank fraud.                    Builder Bailout Scheme, Orlando, Florida

Bolger recruited buyers for a condominium complex        On June 24, 2014, in the U.S. District Court for the
in Tampa named Arbors at Carrollwood and                 Middle District of Florida, Avi Levy was sentenced
conspired with others to submit loan applications        to 22 months’ imprisonment followed by 3 years
that contained false or fraudulent information for       of supervised release. Levy was ordered to pay
otherwise unqualified buyers. After the loans were       restitution of $3,675,839 (jointly and severally with
funded, payments were made from the loan proceeds        co-defendants) and $200,000 in forfeiture.
to Bolger’s shell company, Capital Management
                                                         From March 2008 through January 2009, Levy
Guarantee, LLC, in order to pay buyers undisclosed
                                                         and co-conspirators provided false information
incentives, such as cash to close, cash back, and
                                                         to financial institutions to obtain mortgage loans
leasebacks. Eventually, the buyers were unable to
                                                         for buyers to purchase condominiums at inflated
make mortgage payments, causing many of the
                                                         prices. The proceeds from the condominium sale
condominium units to go into foreclosure and
                                                         prices were used to pay undisclosed incentives and
leading to losses by the lenders. The total loss
                                                         bonuses to buyers, brokers, and other real estate
exposure is $18,394,134. The loss to the Enterprises
                                                         professionals involved in the transactions. The
has yet to be determined.
                                                         undisclosed disbursements were not reflected on the
This is a joint investigation with the FBI.              HUD-1 forms submitted to the financial institutions.
                                                         Levy was involved in approximately 23 fraudulent
Three Pled Guilty in Builder Bailout Scheme,             loan transactions. The scheme caused a loss of
Houston, Texas                                           approximately $3,675,839 to involved institutions.
On July 17, 2014, in the U.S. District Court for the     The loss to Fannie Mae and Freddie Mac was
Southern District of Texas, Robert Rendino pled          $199,000 and $1,559,843, respectively.
guilty to conspiracy to commit wire fraud.               This was a joint investigation with the FBI and the
On April 23, 2014, and April 15, 2014, in the same       Florida Office of Financial Regulation.
court, Christopher Hopper and Theodoros Ezanidis,
                                                         Six Indicted in Builder Bailout Scheme,
respectively, pled guilty to conspiracy to commit wire
                                                         Chicago, Illinois
fraud.
                                                         On May 15, 2014, Robert Lattas, attorney; Jeffrey
                                                         Budzik, attorney; Warren Barr, developer; James


                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014       27
Carroll, developer; Asif Aslam; and Leonardo Sanders       An investigation determined that Lewis was
were indicted for bank fraud by a grand jury sitting       responsible for the submission of fraudulent special
in the U.S. District Court for the Northern District       warranty and quit claim deeds on numerous
of Illinois (Eastern Division).                            properties throughout the state of Florida utilizing
                                                           different fraudulent “trusts” that he created. Lewis
From August 2007 to February 2009, the indicted
                                                           filed false deeds with the local county register’s office
individuals and others allegedly conspired to defraud
                                                           and sold or attempted to sell properties in all-cash
mortgage lenders and financial institutions by
                                                           deals within a very short period of time.
obtaining millions of dollars in fraudulent mortgages
for the purchase of dozens of condominium units            Lewis’ conduct greatly affected the REO operations
in Chicago. As part of the alleged scheme, the             of Fannie Mae. He targeted many of its REO
developers facilitated payment of the buyers’ down         properties for his fraudulent sales. The fraudulent
payments, which were not disclosed to the lenders.         deeds prevented the legitimate sale of their REO
Scheme participants also allegedly submitted false         properties and forced Fannie Mae to hire local
HUD-1 forms, settlement statements, and other              attorneys for various court filings. Lewis’ conviction
false loan documentation to obtain more than               stemmed from his activities on three Fannie Mae
$22 million in fraudulent mortgages on more than           REO properties. Fannie Mae lost $406,213 as a result
60 properties in an apparent builder bailout scheme.       of Lewis’ scheme.
The Enterprises purchased or secured the majority of
                                                           This was a joint investigation with the Florida
these mortgages. The Enterprises lost approximately
                                                           Department of Law Enforcement, the St. Lucie
$4,078,768 as a result of the scheme. The total loss to
                                                           County Sheriff’s Office, the Martin County Sheriff’s
financial institutions was approximately $13,045,318.
                                                           Office, the Broward County Sheriff’s Office, the
This is a joint case with the FBI.                         Florida Office of the Attorney General Office of
                                                           Statewide Prosecution, and the Broward County
Adverse Possession Schemes                                 State Attorney’s Office Economic Crime Unit.
Adverse possession schemes occur when individuals
or entities illegally use adverse possession (also known   Loan Origination Schemes
as “home squatting”) or fraudulent documentation           Loan or mortgage origination schemes are the most
to control distressed homes, foreclosed homes, and         common type of mortgage fraud. These schemes
REO properties.                                            typically involve misrepresentations of buyers’
                                                           income, assets, employment, and credit profile to
Conviction in Scheme to Steal Properties,                  make them more attractive to lenders. Bogus Social
Broward County, Florida                                    Security numbers and fake or altered documents
On July 3, 2014, in the 17th Judicial Circuit Court        such as W-2 forms and bank statements are often
of Florida, Louis Lewis was sentenced to 5 years in        used. These schemes are designed to defraud lenders
prison, to be followed by 2 years of probation.            into making loans they would not otherwise make.
                                                           Perpetrators pocket origination fees or inflate home
Previously, on June 2, 2014, in the same court,            prices and divert proceeds.
Lewis was convicted after a jury trial on five counts
of simulating the legal process (felony filing of false
documents).


28    Federal Housing Finance Agency Office of Inspector General
Settlement Attorney Charged with Conspiracy,              On July 21, 2014, in the U.S. District Court for the
Bethlehem, Pennsylvania                                   District of Hawaii, Jason Kent pled guilty to wire
On September 30, 2014, in the U.S. District Court         fraud affecting a financial institution.
for the Eastern District of Pennsylvania, Edward          From June 2004 until December 2008, real estate
Redding was charged with conspiracy.                      investors Kent and the McColloughs engaged in a
From October 2006 to at least June 2008, the              scheme to acquire investment property funded by
defendant conducted settlements for real estate           mortgage lenders by concealing the true ownership
transactions that contained fraudulent representations    and control of the property from the mortgage
on loan application documents. The loan documents         lenders. They operated their real estate investments
included false statements about a client’s employment     with business associates and co-investors, including
history, income, assets, and liabilities. The defendant   Donald Totten. (Totten is involved in multiple cases
and the previously charged co-conspirators falsely        and was previously indicted.)
represented that their clients’ real estate purchases     Lockard was a mortgage loan processor who worked
were for “primary residences” in order to enable          for Integrated Home Loans, Integrated Lending,
their clients to make smaller down payments and           Money World, and other entities owned and/or
pay lower interest rates on the loans. On multiple        operated by Totten. Totten would find prospective
occasions, the defendant kicked back some of the fees     borrowers by advertising on television and other
he received as a settlement agent to co-conspirators in   media throughout San Diego. He would then direct
return for the business that they sent him.               Lockard and others to create false and fraudulent
Over 60 loans originated during the fraud scheme          loan applications, as well as fraudulent supporting
were sold to the Enterprises. Defaults on those           documents, which were ultimately submitted
mortgages caused them losses of over $1 million.          to mortgage lenders to obtain loans. Kent, the
                                                          McColloughs, and Totten submitted false and
This is a joint investigation with HUD-OIG and            fraudulent information relating to employment,
the Federal Deposit Insurance Corporation Office of       income, assets, liabilities, intent to occupy a property,
Inspector General (FDIC-OIG).                             and other material misinformation. The false loan
                                                          applications and fabricated supporting documents
Conviction, Plea, and Sentencing in Loan                  were submitted to federally chartered financial
Origination Scheme, San Diego, California                 institutions, including members of the FHLBank
On September 30, 2014, in the U.S. District Court         System. Many of these loans subsequently defaulted,
for the Southern District of California, Grant            causing the mortgage lenders and secondary
McCollough and Marisa McCollough each pled                purchasers, including the Enterprises, to suffer
guilty to wire fraud as it pertains to a financial        significant losses as a result of the conspiracy. The
institution.                                              total loss resulting from the conspiracy has not yet
                                                          been determined.
On September 15, 2014, in the same court, Shellie
Lockard was sentenced to 3 years’ supervised release      This is a joint investigation with the FBI, IRS-CI,
and ordered to pay restitution in the amount of           and the U.S. Attorney’s Office for the Southern
$11,075.65.                                               District of California.




                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014          29
$3.5 Million Loan Origination Fraud, Maryland             •	 On May 1, 2014, Mzese was found guilty by a
On various dates the following individuals were              jury on 11 felony counts including conspiracy to
found guilty or sentenced before the U.S. District           commit wire fraud affecting a financial institution
Court for the District of Maryland:                          and aggravated identity theft.

•	 On September 19, 2014, Annika Boas was found           •	 On April 22, 2014, and April 21, 2014, Ligate
   guilty by a jury on five felony counts, including         and Mwihava, respectively, pled guilty to one
   conspiracy to commit wire fraud affecting                 count of conspiracy to commit mail and wire
   a financial institution, wire fraud, and false            fraud affecting a financial institution.
   statements.                                            The defendants allegedly diverted $1.3 million
•	 On September 2, 2014, Abdallah Kitwara                 in funds from over $8.2 million in fraudulently
   pled guilty to conspiracy to commit wire fraud         obtained loans, which resulted in losses of over
   affecting a financial institution.                     $1.2 million to the Enterprises and $3.5 million to
                                                          FHA and conventional lenders.
•	 On August 7, 2014, Mrisho Mzese was due to be
   sentenced but fled back to Tanzania and is now a       This was a joint investigation with HUD-OIG, the
   fugitive from justice.                                 Department of Homeland Security Immigration
                                                          and Customs Enforcement, Treasury Office of the
•	 On July 24, 2014, Ayoub Luziga pled guilty to          Inspector General, and the Secret Service.
   one count of conspiracy to commit wire fraud
   affecting a financial institution.                     Defendants Sentenced in Loan Origination Fraud,
                                                          California
•	 On July 23, 2014, Carmen Johnson was indicted
   on charges including conspiracy to commit wire         On August 25, 2014, in the U.S. District Court
   fraud, wire fraud affecting a financial institution,   for the Central District of California, Lili Ayala
   false statement on a loan application, aiding and      Hernandez was sentenced to 6 months’ incarceration,
   abetting, and one forfeiture count.                    4 months’ home detention, 36 months’ supervised
                                                          release, and was ordered to pay $643,000 in
•	 On July 17, 2014, Raymond Abraham pled                 restitution. Hernandez had previously pled guilty
   guilty to one count of conspiracy to commit wire       to conspiracy to commit bank fraud or wire fraud
   fraud affecting a financial institution.               affecting a financial institution.
•	 On June 16, 2014, Mokorya Cosmas Wambura               From 2005 to 2007, Hernandez, a loan officer at
   was sentenced to 60 months’ incarceration in           Jolu, Inc., and co-conspirators falsified documents
   a federal correctional facility. He will then face     regarding employment, income, and assets and
   deportation back to Tanzania. On the same              created fraudulent rental documentation. They also
   date, Gladyness Silaa was sentenced to 3 years’        purchased fraudulent tax letters that supported the
   probation and ordered to pay $378,602 in               fabricated borrower self-employment claims. They
   restitution, joint and several, with defendants        then submitted the fraudulent documents to financial
   Peter Ligate, Cane Mwihava, and Johnson.               institutions for the purpose of obtaining mortgages.
•	 On June 2, 2014, Flavia Makundi was sentenced          Many of the mortgages were sold to the Enterprises;
   to time served for her role in the fraud scheme.       they suffered losses of approximately $1.5 million.


30    Federal Housing Finance Agency Office of Inspector General
This was a joint investigation with the FBI and the       Suspended Real Estate Agent Sentenced,
Ventura County District Attorney’s Office.                Kansas City, Kansas

                                                          On August 11, 2014, in the U.S. District Court for
Defendants Sentenced in Loan Origination Fraud,
                                                          the District of Kansas, Manjur Alam, a suspended
Sacramento, California
                                                          real estate agent, was sentenced to 6 years in federal
On August 21, 2014, in the U.S. District Court            prison and ordered to pay $258,309 in restitution for
for the Central District of California, Soo Kyung         his previous plea to conspiracy to commit wire and
Hong (also known as Maria Hong) was sentenced to          bank fraud.
36 months in prison and ordered to pay $2,089,000
                                                   From 2006 to approximately 2013, Alam recruited
in restitution, joint and several, with defendant Shing
                                                   co-conspirators who agreed to be straw buyers in a
Yang, including $203,000 to Freddie Mac.
                                                   scheme in which false employment, income, and
On August 4, 2014, in the same court, Yang (also   other documents were used to qualify them for
known as Jack Yang) was sentenced to 14 months’    residential mortgage loans. Some of the loans were
incarceration, 3 years’ probation,                                     purchased by the Enterprises. Six
and ordered to pay restitution                                         co-conspirators were previously
in the amount of $2,257,866                                            sentenced for their roles in the
to victim financial institutions,
                                        Soo    Kyung Hong              scheme. The court determined
including $203,000 to Freddie           (also known as                 that the actual loss totaled more
Mac.                                                                   than $485,000.

Starting in late 2006 and                   Maria Hong) was                This was a joint investigation
continuing until early 2007,                                               with IRS-CI and HUD-OIG.
co-conspirator Hong, whom Yang
                                            sentenced to  36
knew from previous business                                                Former Loan Officer Pleads
                                            months in prison.              Guilty in Straw Buyer Scheme,
dealings, approached Yang and
asked if she could use Yang’s                                              Sherman, Texas
company, Red Gate Enterprises,                                             On July 30, 2014, in the
to falsely verify the employment of home buyers       U.S. District Court for the Eastern District of
who were applying for home loans. Yang agreed         Texas, Marcus Carr was sentenced to 30 months’
and subsequently forwarded all lender employment      incarceration, 3 years’ probation, and was ordered
verification calls to Hong’s cell phone number. Using to pay Fannie Mae $949,597.66 and Freddie Mac
Red Gate Enterprises, Hong was able to have two       $176,310.03 in restitution for his earlier guilty plea
additional co-conspirators act as straw buyers and    to conspiracy to commit bank fraud.
obtain loans on at least four properties. The loss to
the lenders on these four properties is approximately From on or about July 2008 through August 2010,
$1.24 million. One of the loans was purchased by      Carr, a former licensed loan officer, conspired with
Freddie Mac, which suffered a loss of approximately   others, including a seller of a property, to sell the
$245,000.                                             property at an inflated price to straw buyers. Carr
                                                      supplied straw buyers with the down payment funds
This was a joint investigation with the FBI and IRS.  needed to close the transactions. The seller received
                                                      his proceeds after the closing on the property and


                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014     31
kicked back a portion of the proceeds outside of          Six Charged in Origination Scheme,
closing. A conspirator then paid a portion of the         Chicago, Illinois
funds to Carr outside of closing. Carr was involved       On July 30, 2014, Anthony Trice, Jerrod
in similar fraudulent transactions on seven other         Weathersby, Noreen Mian, Warren Taylor, and
homes. The scheme caused a loss of $1,393,129.91 to       David Edwards were indicted by a grand jury
involved financial institutions, which included a loss    sitting in the U.S. District Court for the Northern
of $949,597.66 to Fannie Mae and $176,310.03 to           District of Illinois on 18 counts of bank fraud, wire
Freddie Mac.                                              fraud, and identity theft. In a separate indictment,
This was a joint investigation with HUD-OIG.              Derrek L. Campbell II was charged with two counts
                                                          of making false statements on a mortgage loan
Former Escrow Agent Sentenced in Fraud, Dallas,           application and one count each of wire fraud and
Texas                                                     student loan fraud. Campbell allegedly obtained
                                                          more than $300,000 through false statements
On July 30, 2014, in the U.S. District Court for the
                                                          to mortgage lenders between 2009 and 2013 in
Eastern District of Texas, Lacie Devine was sentenced
                                                          connection with the purchase of two properties in
to 63 months’ incarceration, 3 years’ probation,
                                                          2009, obtaining federal student aid in 2011, and
and ordered to pay Fannie Mae $1,555,484.80 and
                                                          seeking a loan modification on one of the properties
Freddie Mac $239,989.69 in restitution for her
                                                          in 2013.
earlier guilty plea to conspiracy to commit mail fraud.
                                                          From 2006 to 2010, a group of individuals, including
From March 2008 through February 2010, Devine,
                                                          the aforementioned, allegedly conspired to commit
an escrow officer, conspired with others to recruit
                                                          various types of financial fraud, including mortgage
buyers to purchase properties from sellers at inflated
                                                          fraud (FHA and conventional), federal student loan
sales prices, assist the buyers in obtaining mortgage
                                                          fraud, and small business loan fraud.
loans based on these inflated sales prices, cause the
sellers to kickback portions of the loan proceeds         According to the indictments, Trice and Weathersby
to them, pay portions of the loan proceeds to             used their own identities, in addition to collecting
the buyers, and have Devine not disclose these            the PII of others, to fraudulently obtain mortgages
payments to the lenders. Devine was involved with         and student aid through misrepresentation. Mian,
fraudulent transactions on 28 homes. The homes            a loan officer, allegedly created false employment
went into default and caused a loss of $3,718,702.28      and income information in order to gain loan
to involved financial institutions, which included        approval for subjects, including straw buyers. One
$1,555,484.80 of loss to Fannie Mae, which bought         of the straw buyers used to obtain a mortgage was
or secured mortgages on nine of these properties. The     also used to obtain a small business loan, which
scheme also caused $239,989.69 of loss to Freddie         was insured by the federal government. All of the
Mac, which bought mortgages on two of these               conventional loans included in this investigation,
properties.                                               valued at approximately $1 million, were sold to
                                                          the Enterprises. Some of the loans were repurchased
This case was a joint investigation with the FBI,
                                                          by the original lender. Total losses are expected to
HUD-OIG, and the Texas Department of Insurance
                                                          exceed $2 million, which includes mortgages, federal
Fraud Unit.
                                                          student aid, and a small business loan. The mortgage



32    Federal Housing Finance Agency Office of Inspector General
exposure alone is estimated at $1 million and from      by obtaining over $10 million in fraudulent
that the exposure to the Enterprises is approximately   mortgages for the purchase of 20 multifamily
$800,000.                                               properties in New Haven. As part of the scheme,
                                                        sellers agreed to accept significantly lower contract
This was a joint investigation with the Department of
                                                        prices that were not disclosed to the lenders. Scheme
Education Office of Inspector General, HUD-OIG,
                                                        participants submitted false HUD-1 forms, closing
SBA-OIG, and the FBI.
                                                        and repair credits, false leases, and other false loan
                                                        documentation in an apparent seller assistance and
Former Loan Officer/Investor Convicted at Trial;
                                                        short sale scheme wherein the Enterprises purchased
Attorney Sentenced and Suspended, New Haven,
                                                        mortgages for multiple homes.
Connecticut

On July 23, 2014, in the U.S. District Court for        This was a joint investigation with the FBI, USPIS,
the District of Connecticut, Jacques Kelly, former      and HUD-OIG.
Westchester County corrections
                                                                             Multimillion Dollar Mortgage
officer/investor, was sentenced
                                                                             Fraud Scheme, Washington, DC
to 15 months’ incarceration,
5 years’ supervised release, and
                                              Attorney                       On July 22, 2014, an indictment
ordered to pay $179,769.71                                                   was unsealed in the U.S.
                                              Genevieve
in restitution. Previously, on                                               District Court for the District
April 18, 2014, Kelly, along with             Salvatore                      of Columbia alleging conspiracy
Andrew Constantinou, former                                                  and bank, wire, and mail fraud.
GMAC and Countrywide loan                     suspended from                 Named in the indictment were
officer, was convicted by a jury                                             Edward Dacy, settlement agent,
in the same court of one count                the practice of                and A. Conrad Austin, CPA.
of conspiracy to commit mail,
                                              law for 6 years.               On the same date in the same
wire, and bank fraud. In addition,
                                                                             court, the court unsealed four
Kelly was found guilty of one
                                                                             guilty pleas. Frederick Robinson
count of wire fraud and one
                                                                             Sr., Frank Davis Jr., Howard
count of making a false statement
                                                        Tutman III, and Pauline Pilate each pled guilty to
to a financial institution.
                                                        conspiracy to commit bank fraud.
On June 2, 2014, Genevieve Salvatore, closing
                                                        According to the indictment, Dacy and Austin
attorney, was ordered to make restitution in the
                                                        defrauded banks, mortgage lenders, the Enterprises,
amount of $1,262,889.03 based on her previous plea
                                                        and FHA by assisting others to obtain mortgage
in the same court to mail fraud. On June 3, 2014,
                                                        loans on residential real estate properties through
Salvatore was ordered suspended from the practice of
                                                        false loan applications and documents and fraudulent
law in the state of Connecticut for a period of 6 years
                                                        settlements. These fraudulent acts ultimately caused
as of June 24, 2014.
                                                        a loss to banks, lenders, the Enterprises, and FHA
From December 2006 to approximately February            when mortgages were not paid.
2008, Constantinou, Kelly, and others conspired to
                                                        The indictment states that co-conspirators Davis
defraud mortgage lenders and financial institutions
                                                        and Robinson purchased properties in the names


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014     33
of general partnerships. Davis and Robinson                defunct AmTrust Bank. The fraud caused financial
would then recruit individuals to repurchase these         institutions to loan over $5.5 million, which likely
same properties for higher amounts, funded by              would not have occurred if the true details relating to
fraudulently obtained mortgage loans, by promising         the deals had been revealed.
the buyers that they would not be required to make
                                                           Freddie Mac losses to date are $544,593. Fannie Mae
financial contributions toward the purchase of the
                                                           has two properties associated with the scheme, but
properties, pay the monthly mortgage payments
                                                           losses have not been estimated at this time.
or expenses, or maintain the properties. The straw
buyers were used to purchase a number of properties;       This is a joint investigation with the FBI, the FDIC-
the indictment lists 15 transactions in which              OIG, and HUD-OIG.
mortgage loans in excess of $4.3 million were sought
or obtained.                                               Loan Origination Scheme, Ft. Worth, Texas

This is a joint investigation with HUD-OIG, DOJ            On June 18, 2014, in the U.S. District Court for the
Office of Inspector General, the Department of             Northern District of Texas, Richard Calvin Ford III
Homeland Security Office of Inspector General, the         pled guilty to one count of wire fraud.
Secret Service, and the FBI.
                                                           From April 2006 through December 2007, Ford
                                                           allegedly conspired with others to defraud lending
Six Charged in Loan Origination Scheme,
                                                           institutions by inducing them to fund mortgage loans
Brooklyn, New York
                                                           by using material misrepresentations and omissions of
On June 20, 2014, in the U.S. District Court for the       material fact in the HUD-1 forms. The information
Eastern District of New York, Michelle Baker, Samuel       alleged that Ford recruited buyers to purchase homes
Bell, Barthelemy Adjavehouede, Alexander Barrett,          by paying approximately $5,000 to the buyers and
Dirk Ameen Hall, and James Bayfield were each              paying the closing costs. This information was not
indicted with one count of conspiracy to commit            disclosed to the lender. Ford earned $800,000 in
bank fraud and wire fraud and five counts of bank          illegal kickbacks from realtors. In total, Ford received
fraud.                                                     over $4 million on 118 different properties. Freddie
                                                           Mac incurred a $34,069 loss as a result of Ford’s
Hall and others allegedly participated in a short sale
                                                           scheme.
scheme involving a Freddie Mac-owned property.
The investigation uncovered a pattern of short sale        This was a joint investigation with the FBI.
schemes involving straw buyers and co-conspirators
alternately selling properties at inflated prices, which   Former Loan Officer Indicted for Falsifying Loan
impacted additional GSE and FHA properties. The            Documents, St. Louis, Missouri
co-conspirators allegedly used backdated and falsified
                                                           On June 11, 2014, in the U.S. District Court for
documents to conceal from lending institutions the
                                                           the Eastern District of Missouri, Joseph Brogan,
correct date of the sale and made it appear as though
                                                           loan officer with USA Mortgage, was indicted on
a sale from a co-conspirator to the straw purchaser
                                                           one count of conspiracy to commit bank fraud, two
occurred over 60 days prior to the actual date it took
                                                           counts of bank fraud, and one forfeiture count.
place. Mortgages for these transactions were initially
processed through Link One Mortgage, which                 Between 2007 and 2010, Brogan allegedly conspired
purchased mortgages from, among others, the now            with Mike Wallis and Jerrick Hawkins (both of


34    Federal Housing Finance Agency Office of Inspector General
whom previously pled guilty) in a scheme in which          California Developer Indicted, Oakland, California
Brogan used false gift letters to disguise the origin of   On May 15, 2014, Ayman Shahid was indicted by a
down payments he allegedly supplied for customers          federal grand jury sitting in the U.S. District Court
of USA Mortgage. In order to be reimbursed                 for the Northern District of California (Oakland) for
for the down payments and obtain additional                bank fraud and conspiracy to commit bank fraud.
proceeds, false invoices were submitted to title
companies purporting to be expenses for repair work        From approximately November 2006 until October
completed on the properties. Brogan caused losses of       2008, Shahid and others allegedly caused financial
approximately $500,000 to Fannie Mae, FHA, and             institutions and other mortgage lenders to make
other financial institutions.                              residential home mortgage loans to homebuyers
                                                           based on false and misleading loan applications and
This is a joint investigation with HUD-OIG.                in amounts greater than the properties’ true market
                                                           values. Shahid managed Discovery Sales, Inc., which
Sentencing in Origination Scheme, Texas
                                                           was the sales arm of several affiliated residential
On May 28, 2014, in the U.S. District Court for the        construction companies, including Discovery Home
Eastern District of Texas, Donna Cobb was sentenced        Builders and Albert D. Seeno Construction Co.
to 21 months’ incarceration and ordered to pay             Shahid allegedly devised and managed a scheme to
$2,151,367 in restitution.                                 provide undisclosed incentives to unqualified home
                                                           buyers and then allegedly hid the scheme from
On May 15, 2014, in the same court, Donald
                                                           appraisers and bank underwriters so that loans to
Mattox was sentenced to 10 months and 14 days of
                                                           unqualified buyers would be approved.
incarceration, 2 years’ supervised release, and ordered
to pay $965,190 in restitution and $165,197 in             The aggregate sales price of the properties associated
forfeiture.                                                with the fraud was in excess of $227 million,
                                                           resulting in mortgage loans in excess of $154 million
On April 22, 2014, in the same court, Michael
                                                           going into foreclosure or short sale proceedings.
Edwards was sentenced to 51 months’ incarceration,
                                                           Losses to the Enterprises are at least $3 million.
1 year of probation, and ordered to pay $1.7 million
in restitution and $150,000 in forfeiture.                 This is a joint investigation with the FBI and IRS-CI.

From September 2005 through July 2008, Cobb,               Loan Officer Indicted for Money Laundering,
Mattox, Edwards, and others conspired to defraud           Dallas, Texas
lending institutions by inducing them to fund
mortgage loans by using material misrepresentations        On April 9, 2014, in the U.S. District Court for
and omissions of material fact in HUD-1 forms,             the Eastern District of Texas, loan officer Euneisha
settlement statements, loan applications, and other        Hearns was indicted (second superseding indictment)
loan documents. The scheme caused an estimated loss        for conspiracy to commit money laundering and
of $967,989 to Fannie Mae and an estimated loss of         bank fraud.
$130,265 to Freddie Mac.                                   During April 2008, Hearns and others allegedly
This was a joint investigation with the FBI.               conspired to launder proceeds from fraudulent
                                                           real estate transactions. The fraudulent real estate
                                                           transactions scheme caused a loss of $865,940



                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014          35
to involved financial institutions, including the           intentionally misrepresenting or not disclosing
Enterprises, which purchased mortgages that funded          material facts to induce a lender to agree to a short
the fraudulent transactions.                                sale to which they would not otherwise agree.

This is a joint investigation with IRS-CI.                  Mortgage Fraud Scheme Indictments and Arrests,
                                                            Denver, Colorado
Loan Officer Pleads Guilty, Sherman, Texas
                                                            On September 18, 2014, Jose Ricardo Sarabia-
On April 7, 2014, in the U.S. District Court for the
                                                            Martinez, Lauren Maes Sarabia, Pedro Sarabia-
Eastern District of Texas, Briggette Ellis pled guilty to
                                                            Martinez, Pablo Sarabia-Martinez, Ricardo
misprision of a felony.
                                                            Sarabia-Salcido, and Teresa Martinez were indicted
On October 9, 2013, in the same court, Hoa Lee              by a sitting grand jury in the Denver District Court
Perkins and Ellis were indicted for conspiracy to           on multiple criminal violations, including violating
commit money laundering.                                    the Colorado Organized Crime Control Act, forgery,
                                                            theft, and criminal impersonation.
From December 2006 through November 2008,
Perkins, a real estate agent, Ellis, a loan officer, and    The six family members are alleged to have used
others were involved in an illegal property flipping        their status in the real estate industry to perpetrate
scheme. Perkins purchased homes in northern Texas           a fraud-for-profit mortgage scheme. They allegedly
cities in her name or in her associate’s parents’ names     manipulated straw buyers to buy and sell properties
at market value. The homes were then flipped using          going into foreclosure. Twelve properties were named
straw buyers with bogus appraisals reflecting much          in the indictment in relation to $4.6 million in
higher values. False notarized loan documents were          fraudulently obtained loans.
submitted to lenders, with Ellis serving as the loan
                                                            This is a joint investigation with the Colorado State
officer for some of the properties. Perkins made
                                                            Attorney General’s Office, the Colorado Bureau of
the down payment, which was not disclosed on
                                                            Investigation, the FBI, and SBA-OIG.
the HUD-1 form. The loan proceeds were paid to
Perkins through an entity she controlled, Manda             Former Loan Officer and Co-Conspirators
Homes LLC. Perkins and her co-conspirators flipped          Convicted, Newark, New Jersey
26 properties resulting in fraudulent loans totaling
over $8 million. All of the properties were foreclosed      The following individuals all pled guilty to conspiracy
or sold by short sale. The scheme caused a loss of          to commit wire fraud in the U.S. District Court for
approximately $2,041,439 to Fannie Mae and                  the District of New Jersey:
$4,308,000 to Freddie Mac.                                  •	 Jose Salguero, co-owner of property management
This is a joint investigation with the FBI and IRS-CI.         firm, on September 15, 2014;

                                                            •	 Anthony Arthur on September 10, 2014;
Short Sale Schemes
                                                            •	 Paul Chemidlin, unlicensed appraiser, on July 22,
Short sales occur when a lender allows a borrower
                                                               2014;
who is “underwater” on his/her loan—that is, the
borrower owes more than the property is worth—              •	 Yazmin Soto-Cruz, co-owner of property
to sell his/her property for less than the debt                management firm, on June 17, 2014;
owed. Short sale fraud usually involves a borrower

36    Federal Housing Finance Agency Office of Inspector General
•	 Christopher Ju on April 24, 2014; and                   employer contained false information and omissions
                                                           of material facts, including the existence of straw
•	 Delio Coutinho, loan officer, on April 22, 2014.
                                                           buyers and his undisclosed financial interest in the
Salguero, Arthur, Chemidlin, Soto-Cruz, Ju,                transactions. In one of the charged transactions,
Coutinho, and other defendants conspired to cause          Freddie Mac suffered a loss of $334,328.
lenders to release liens on encumbered properties
                                                           This is a joint investigation with the New Jersey
via fraudulently arranged short sale transactions. To
                                                           Office of the Attorney General Division of Criminal
complete the transactions, defendants submitted false
                                                           Justice.
mortgage loan applications, inflated property values,
false bank statements, false tax returns, inflated         Eleven Charged in Short Sale “Flopping” Scheme,
assets and earnings, false employment information,         Los Angeles, California
and false closing documents to lenders. Fannie Mae
purchased over 100 loans from the mortgage lenders.    On June 25, 2014, Eric Wolfe, Della Wolfe, Jackalyn
The charges against defendants involved losses to      Bashara, Deanna Bashara, Billie Bryant, Gerald
financial institutions/lenders of                                        Bryant, Jered Bryant, Brian
approximately $2 million.                                                Deden, Joseph Jaime, James
                                                                         Styring, and Lindsay Petty were
This is a joint investigation with          Eleven individuals           indicted by a grand jury sitting in
the FBI, HUD-OIG, SIGTARP,                                               the Superior Court of California
IRS, USPIS, and the Hudson                  charged in a                 for a number of offenses,
County Prosecutor’s Office.                                              including mortgage fraud,
                                            short sale                   conspiracy, and forgery.
Loan Manager Indicted in Short
Sale Scheme, New Jersey                     “flopping”                           From mid-2007 to mid-2013, FK
                                                                                 Bancorp and the aforementioned
On July 10, 2014, in the Superior        scheme.                                 individuals allegedly engaged in
Court of New Jersey, Brian Lyles,
                                                                                 several schemes to fraudulently
former branch manager of GMI
                                                                                 obtain money, including: a
Home Loans, was charged in
                                                                                 “flopping” scheme where banks
a superseding indictment with conspiracy, money
                                                           were convinced to accept short sale prices that were
laundering, theft by deception, and misconduct by a
                                                           lower than a legitimate buyer would be willing to
corporate official.
                                                           pay; recording false second and third liens; tricking
Between June 2008 and July 2009, the indictment            distressed homeowners into signing their properties
alleges Lyles conspired to defraud lenders of more         over to the conspirators; and renting distressed
than $1.2 million in a short sale flipping scheme by       properties while simultaneously stalling foreclosures
facilitating fraudulent short sales and subsequent         through the use of fraudulent documents. Mortgages
fraudulent loan originations on four properties. Lyles     on at least eight of the properties were owned by the
allegedly made fraudulent misrepresentations on            Enterprises, causing losses to date of $300,000 to
uniform residential loan applications and settlement       Fannie Mae and Freddie Mac.
forms submitted for four borrowers. As the manager
                                                           This is a joint investigation with HUD-OIG, the
of the Jersey City office of GMI Home Loans, Lyles
                                                           California Department of Justice, and the California
allegedly knew the information presented to his
                                                           Franchise Tax Board.

                                     Semiannual Report to the Congress • April 1, 2014–September 30, 2014    37
Two Pleas in Short Sale Fraud, Denver, Colorado            Additionally, various fraud schemes can impact sales
On June 12, 2014, in the Denver District Court,            of Enterprise REO.
Sheila Gaston and Sheila Giberti both pled guilty
                                                           Foreclosure Delay and Sham Property Deed
to conspiracy to commit theft. On the same date,
                                                           Transfers Scheme, Sacramento, California
Giberti was sentenced to 2 years’ probation and
ordered to pay $3,286 in restitution.                      On September 29, 2014, in the U.S. District Court
                                                           for the Eastern District of California, the following
Previously, on November 7, 2013, in the same court,
                                                           four individuals were sentenced for their roles in a
Gaston, Giberti, Wendy Thomas, Christina Nicole
                                                           foreclosure rescue scheme:
Smith, Kurt Smith, Duane Thomas, Christopher
Consol, Janice Gardner, and Joseph Slowey were             •	 Jewel Hinkles (also known as Cydney Sanchez),
indicted on charges of theft, forgery, and violations of      sentenced to 5 years’ imprisonment, 3 years’
the Colorado Organized Crime Control Act.                     supervised release, and a $100 special assessment;

From 2008 to 2013, Wendy Thomas, operator of               •	 Jesse Wheeler, sentenced to 3 years’
Home Support Solutions, and her co-conspirators are           imprisonment, 3 years’ supervised release, and a
alleged to have devised a scheme to acquire control of        $100 special assessment;
distressed properties and negotiate with the servicers
                                                           •	 Cynthia Corn, sentenced to 30 months’
of the mortgages using fraudulent documents to
                                                              imprisonment, 1 year of supervised release, and a
acquire the properties at less than full market value.
                                                              $100 special assessment; and
The defendants then allegedly flipped the properties
for profit through the use of straw buyers. Some           •	 Brent Medearis, sentenced to 22 months’
properties were held in the Enterprises’ portfolios,          imprisonment, 3 years’ supervised release, and a
while others were insured by FHA. Eight properties            $100 special assessment.
were identified in the indictment, including two from
the Enterprises’ portfolios. Overall, 18 of the flipped    Hinkles, the founder of Horizon Property Holdings,
properties were held in the Enterprises’ portfolios.       LLC, offered a service called “Save My Home” or
The alleged fraud resulted in over $500,000 in losses      “Homesaver,” which promised to rescue financially
on the 18 Enterprise properties, with over $100,000        distressed homeowners from foreclosure and
in theft of commissions for the fraudulent short sales.    reduce the principal on homeowners’ mortgages.
                                                           Horizon offered its program directly to clients
This is a joint investigation with the Colorado State      and also through an affiliates program that was
Attorney General’s Office, the Colorado Bureau of          operated by the co-defendants, who promoted
Investigation, and HUD-OIG.                                and sold the program. To prevent foreclosure and
                                                           defraud the existing lenders, the defendants filed
Loan Modification and Property                             fraudulent deeds, which transferred an interest in the
Disposition Schemes                                        homeowner’s property to a fictitious entity. In many
Many companies claim to be able to secure loan             instances, the defendants filed fraudulent petitions
modifications for desperate homeowners. Some even          in bankruptcy court to bring an immediate halt to
claim affiliation with the government. Unfortunately,      any foreclosure actions against a debtor’s property.
the offers usually come with upfront fees and              In total, the scheme collected at least $4.9 million
little action, leaving homeowners even worse off.          from more than 1,000 homeowners, including


38    Federal Housing Finance Agency Office of Inspector General
homeowners whose mortgages were owned by the             of trust) against the clients’ homes, which included
Enterprises.                                             several d/b/a companies as beneficiaries that were also
                                                         used on the bankruptcies. Robinson’s clients’ (the
This is a joint investigation with USPIS, the FBI, and
                                                         homeowners) signatures were forged on the deeds of
the Stanislaus County District Attorney’s Office.
                                                         trust and a “cut and paste” notary stamp and forged
                                                         notary signature were used to complete the deeds of
Foreclosure Delay Scheme, Alameda County,
                                                         trust for recordation. Others engaged Robinson to
California
                                                         file the false bankruptcies and record the false deeds
On September 3, 2014, in the Alameda County              of trust. More than $450,000 was paid to Robinson
Superior Court of California, Karl Robinson was          for these services.
sentenced to 180 days in county jail with half time
and credit for time served and 5 years’ probation.       In total, the subjects collected over $5.9 million in
Previously, on July 8, 2014, Robinson entered a no       proceeds targeting approximately 237 homeowners
contest plea to one count of conspiracy and two          through the use of fraudulent bankruptcies, including
counts of recording a false document.                    homeowners whose mortgages were owned by
                                                         Fannie Mae.
On June 22, 2014, in the same court, Yamen Elasadi
was sentenced to 120 days in county jail and 5 years’    This is a joint case with the FBI.
probation.
                                                         SunTrust Mortgage, Inc. Signs Agreement to
On June 11, 2014, in the same court, Michael             Resolve Criminal Investigation into SunTrust’s
Bachmeier and Elasadi entered no contest pleas           HAMP Program for $320 Million
to forgery and conspiracy to commit forgery,
                                                         On July 3, 2014, SunTrust Mortgage, Inc. entered
respectively. In addition, Bachmeier waived his pre-
                                                         into a $320 million restitution and remediation
sentence report and was sentenced to 30 days with
                                                         agreement with DOJ to resolve the criminal
credit of 9 days served plus 3 years’ probation.
                                                         investigation into SunTrust’s HAMP program in
From 2008 through 2010, Robinson and others              the U.S. District Court for the Western District of
collected approximately $5.9 million in proceeds         Virginia. The settlement stipulated that SunTrust
from his foreclosure-delay/eviction-delay scheme         will pay $10 million in restitution to the Enterprises.
involving at least 237 fraudulent bankruptcies.          In addition, SunTrust will pay $179 million in
Robinson operated Stay in Your Home Today                restitution to compensate affected borrowers and
out of Los Angeles from 2008 to 2010. Robinson           another $95 million will be put into a general
contacted homeowners in foreclosure and facing           reserve in the event it is required at some future date.
a trustee’s sale and promised that he would delay        SunTrust agreed to provide $20 million to a housing
the trustee’s sale for up to 36 months for an initial    grant fund and forfeit $16 million to Treasury.
payment of $1,495 and additional payments of             SunTrust also agreed to a corporate remediation plan.
$1,000 per month thereafter. Robinson caused a
                                                         From March 2009 to December 2010, SunTrust
series of fraudulent bankruptcies to be filed, mostly
                                                         Mortgage, a subsidiary of SunTrust Banks, Inc.,
in the U.S. District Court for the Central District of
                                                         under-resourced and underfunded its operation of
California, to accomplish the delays. Robinson and
                                                         HAMP contracted on behalf of the Enterprises.
others would also file backdated “short form deed of
                                                         In addition, SunTrust misled numerous mortgage
trust and assignment of rent” forms (hereafter deeds
                                                         servicing borrowers who sought mortgage relief

                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014      39
through HAMP. Specifically, SunTrust made material        the “High Speed Swim Lane” or “Hustle,” which was
misrepresentations and omissions to borrowers in          intentionally designed to process loans at high speed
HAMP solicitations and failed to process HAMP             and without consideration to quality checkpoints.
applications in a timely fashion. As a result of          As a result, this loan process generated thousands of
SunTrust’s mismanagement of HAMP, approximately           fraudulent, defective residential mortgage loans that
26,000 homeowners who applied for a HAMP                  were sold to the Enterprises and later defaulted. The
modification with SunTrust suffered financial harm.       losses to the Enterprises were over $1 billion from
                                                          August 2007 to May 2008.
This was a joint investigation with SIGTARP and
USPIS.                                                    This was a joint investigation with SIGTARP.

Employee Misconduct                                       Residential Mortgage-Backed Securities
OIG is also responsible for investigating criminal or     Working Group
civil internal misconduct within FHFA.                    During the reporting period, OIG continued to
                                                          actively participate in the Residential Mortgage-
Threat Against Former FHFA Acting Director                Backed Securities (RMBS) Working Group
On April 30, 2014, Richard Hornsby, FHFA COO,             established by the President in 2012 to investigate
was arrested on a complaint issued by the Superior        those responsible for misconduct contributing to
Court of the District of Columbia alleging threats        the financial crisis through the pooling of mortgage
against an FHFA official. Hornsby was placed on           loans and sale of RMBS. The Working Group is a
paid administrative leave by FHFA and remains in          collaborative effort of dozens of federal and state law
that status as of September 30, 2014.                     enforcement agencies.

OIG was notified that a threat had been made against
the former FHFA Acting Director, and a subsequent
investigation disclosed that threats against the Acting
Director’s person were allegedly made by Hornsby.
The investigation is pending adjudication.


Civil Cases

Bank of America Civil Fine
On July 30, 2014, in the U.S. District Court for the
Southern District of New York, Bank of America was
ordered to pay $1,267,491,770, and former COO
Rebecca Mairone of Countrywide was ordered to pay
$1 million in civil penalties to the U.S. government.

A jury found that Countrywide, and later Bank of
                                                          On July 14, 2014, Associate Attorney General Tony West (left)
America (which acquired Countrywide in 2008),             presented Acting Inspector General Michael Stephens with
implemented a new loan origination process called         an award acknowledging OIG’s significant contribution to the
                                                          RMBS Working Group since its inception in 2012.


40    Federal Housing Finance Agency Office of Inspector General
OIG’s participation has included,                                             of America admitted that many
among other things, providing                                                 of the residential mortgage loans
background advice with regard
                                          RMBS Working                        securitized in RMBS sold to
to the RMBS market, providing             Group negotiates                    investors were defective, and
strategic litigation advice,                                                  statements made in prospectuses
assisting with witness interviews,        settlements worth                   about the quality of the loans
and reviewing documents and                                                   were inaccurate.
other evidence produced by                $23.65 billion.
various parties for members of the                                            Citigroup Settlement
Working Group.                                                                On July 14, 2014, members of
During the six months ended                                                   the Working Group reached a
September 30, 2014, the Working Group was                $7 billion settlement with Citigroup. As part of the
successful in negotiating settlements with two of        settlement, Citigroup acknowledged it made serious
America’s largest banks for illegal behavior conducted   misrepresentations to the investing public about
by the banks and companies they acquired in relation     the mortgage loans it securitized in RMBS before
to the sale of RMBS. These settlements, with Bank        January 1, 2009. The bank paid $4.5 billion to settle
of America and Citigroup, totaled $23.65 billion.        federal and state civil claims by various entities related
OIG played a key role in the investigations leading      to the issuance of RMBS. Citigroup also agreed to
to each of these settlements. When added to the          pay $2.5 billion in the form of consumer relief to aid
previously reported settlement negotiated by the         mortgage borrowers harmed by Citigroup’s conduct.
Working Group with JPMorgan, the total amount
of all such settlements (including the $4 billion from   Systemic Implication Reports
the JPMorgan settlement that went to FHFA) is
$36.65 billion.                                          Systemic implication reports (SIRs) identify
According to DOJ, none of these settlements release      possible risks and exploitable weaknesses in FHFA’s
officers or employees of the banks from civil or         management control systems that OIG discovers
criminal prosecution.                                    during the course of our investigations. We
                                                         communicate these to the Agency promptly so it can
Bank of America Settlement                               strengthen both its systems and those of the entities it
                                                         supervises and regulates.
The settlement reached with Bank of America
on August 21, 2014, constituted the largest civil        SIR: TBW-Colonial Investigation Lessons Learned
settlement with a single entity in American history.     (SIR-2014-0013, August 21, 2014)
The settlement covered claims made against the
                                                         This SIR identifies fraud indicators and extracts
bank as well as two companies the bank acquired:
                                                         lessons learned from the multifaceted and multiyear
Countrywide Financial Corporation and Merrill
                                                         fraud scheme perpetrated by officers and employees
Lynch. The bank agreed to pay $9.65 billion to DOJ,
                                                         of Taylor, Bean & Whitaker Mortgage Corporation
several states, and government agencies, including
                                                         (TBW) and Colonial Bank. The fraud caused billions
the SEC. The bank will also provide $7 billion of
                                                         of dollars in losses to victims, including Freddie Mac,
relief to struggling homeowners, borrowers, and
                                                         and resulted in substantial criminal penalties for
communities affected by the bank’s conduct. Bank


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014         41
conspirators, including 30 years’ imprisonment for          other interested entities—negative performance
Lee Bentley Farkas, former chairman of TBW.                 and compliance data and evidence of illegal
                                                            activities of counterparties. Additionally, in
Farkas and his co-conspirators at TBW and Colonial
                                                            furtherance of this recommendation, FHFA needs
defrauded multiple financial institutions, causing
                                                            to monitor the Enterprises’ sharing and prohibit
billions of dollars of losses over the course of seven
                                                            the formation of nondisclosure agreements with
years. However, there were indicators throughout
                                                            terminated or suspended counterparties; and
the scheme that—had they been appropriately
analyzed and acted upon—could have mitigated the          •	 ordering the Enterprises to require—by means of
extent and impact of the fraud scheme. For example,          their seller/servicer agreements—counterparties
Colonial changed bank regulators three times over            to implement corporate governance procedures
the course of a decade; Fannie Mae terminated its            that direct chief risk officers (and internal
business relationship with TBW; TBW’s business               auditors) to report illegal activities, compliance
volume expanded at an unprecedented rate; TBW                violations, and unresolved suspicions of the same
failed to satisfy its repurchase responsibilities and        to both the CFO and the board of directors.
comply with a collateral demand; and TBW’s
internal controls were ineffective.                       Investigations Strategy
To avoid a recurrence of such losses, the Enterprises
need to improve counterparty monitoring, contract         OIG has developed and intends to further
enforcement, and communication. Accordingly, OIG          develop close working relationships with other law
recommended that FHFA should consider:                    enforcement agencies, including DOJ and the U.S.
                                                          Attorneys’ Offices; state attorneys general; mortgage
•	 coordinating with Ginnie Mae on best practices         fraud working groups; the Secret Service; the FBI;
   related to how long an independent public              HUD-OIG; the FDIC-OIG; IRS-CI; SIGTARP; the
   accountant (IPA) may audit a counterparty before       Financial Crimes Enforcement Network; and other
   it must be replaced;                                   federal, state, and local agencies.
•	 issuing guidance limiting the number of years          During this reporting period, OI provided 45 fraud
   that an IPA can audit a counterparty’s annual          awareness briefings to various audiences.
   financial statements before it must be replaced;

•	 ordering the Enterprises to require IPAs to            Regulatory Activities
   perform supplemental compliance tests;

•	 ordering the Enterprises to increase their             Consistent with the Inspector General Act, OIG
   monitoring of counterparties that exhibit              assesses whether proposed legislation, regulations, and
   abnormal or unusual characteristics;                   policies related to FHFA are efficient, economical,
                                                          legal, and susceptible to fraud and abuse. During
•	 implementing guidance to the Enterprises that          the semiannual period, FHFA responded to OIG’s
   will govern their discretion to waive contractual      prior-period notification that it had not implemented
   obligations of counterparties;                         the government-wide suspension and debarment
                                                          system and the Program Fraud Civil Remedies Act of
•	 requiring the Enterprises to share—between
   themselves and with FHFA, Ginnie Mae, and


42    Federal Housing Finance Agency Office of Inspector General
1986 (PFCRA). Additionally, OIG made substantive           it is funded with taxpayer dollars. FHFA is an
comments on two proposed rules and one advisory            executive agency and is therefore subject to the
bulletin.                                                  Executive Order and PFCRA. Yet, it has not
                                                           implemented either provision.
1.	Implementation of the Government-wide
   Suspension and Debarment System and                     On March 12, 2014, OIG apprised FHFA of its
   PFCRA                                                   responsibility to implement the government-wide
                                                           suspension and debarment system and PFCRA
  The government-wide suspension and debarment
                                                           and requested that the Agency advise what it
  system was established in 1986 by Executive Order
                                                           intends to do to remedy these deficiencies.
  12549. Section 1 of the Executive Order requires
  agencies to participate in the nonprocurement            On April 2, 2014, FHFA advised OIG that it
  suspension and debarment system, and section             would implement PFCRA. However, to date,
  3 provides that executive agencies “shall issue          FHFA has neither implemented PFCRA nor
  regulations governing their implementation” of           issued a draft regulation designed to do so.
  it.3 The regulations were to be issued no later          With regard to suspension and debarment,
  than 12 months after the Office of Management            FHFA advised that it would not implement the
  and Budget issued appropriate guidance to                government-wide suspension and debarment
  the agencies.4 The Office of Management and              system. FHFA explained that as a nonappropriated
  Budget issued such guidance in 1987.5 Thus,              agency, it is not required to comply with FAR,
  the requirement that agencies issue suspension           and that it does not make grants, cooperative
  and debarment regulations has been fully                 agreements, loans, loan guarantees, or subsidies
  effective since at least 1988. Further, the Federal      that invoke the application of the Executive Order.
  Acquisition Regulation (FAR) specifically directs
                                                        2.	FHFA Proposed Rule: FHLBank Membership
  agencies to “establish appropriate procedures to
                                                           (79 Fed. Reg. 54848 (September 12, 2014),
  implement” FAR’s policies and procedures on
                                                           RIN 2590-AA39)
  procurement-related suspensions and debarments.6
                                                           FHFA proposed an amendment to its FHLBank
  PFCRA provides agencies with an administrative
                                                           membership regulation requiring each applicant
  remedy for low-dollar frauds (i.e., $150,000
                                                           and member institution to hold 1% of its total
  or less) involving false claims and statements.7
                                                           assets in home mortgage loans to satisfy the
  PFCRA permits agencies to recover up to twice
                                                           FHLBank Act’s mandate that member banks
  the amount of the loss (i.e., potentially up to
                                                           make “long-term home mortgage loans.” The
  $300,000) plus a penalty per false claim or
                                                           FHLBank Act does not establish a minimum
  statement. Section 3809 of Title 31 of the U.S.
                                                           threshold for such investments, and FHFA
  Code requires agencies to “promulgate rules and
                                                           exercised its discretion to set the threshold at
  regulations necessary to implement” PFCRA
                                                           1% of assets. OIG urged FHFA to consider
  within 180 days from the statute’s enactment in
                                                           establishing a higher minimum threshold because
  1986.
                                                           such a 1% level could inadvertently decrease
  The applicability of Executive Order 12549               members’ cumulative commitment to home
  and PFCRA do not hinge upon an agency’s                  mortgage lending. In that regard, OIG noted
  size, whether it distributes funds, or whether           that in the preamble to the draft proposed rule


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014        43
  FHFA states that Federal Financial Institutions           in its draft proposal and does not require a yearly
  Examination Council data shows that only 0.8%             reassessment of those goals.
  of the commercial banks and savings association
                                                            Additionally, OIG noted that the revised
  members would have failed to comply with the
                                                            regulatory definition of “families in low-income
  proposed minimum threshold, and that the failure
                                                            areas” appears to conflict with the statutory
  rate would rise to only 5% if the threshold were
                                                            definition found in the amended Federal Housing
  raised to 5% of assets. With respect to insurer
                                                            Enterprises Financial Safety and Soundness Act.
  members, the failure rates are higher (i.e., 16% if
                                                            FHFA’s proposed rule omits “block numbering
  the threshold is established at 1%, and 41.5% at
                                                            areas” from the calculus for determining
  the 5% level), but still the overwhelming majority
                                                            whether families are in low-income areas,
  of members already meet an asset level that is
                                                            while the Safety and Soundness Act includes it.
  five times what FHFA proposes to establish as
                                                            Despite OIG’s warning that an agency may not
  its threshold. This higher level of performance
                                                            exercise regulatory discretion where a statute is
  by current members exists against a backdrop of
                                                            unambiguous and clear, FHFA opted to maintain
  FHFA’s current requirement (i.e., 12 C.F.R. §
                                                            the revised definition of the term “families in
  1263.6(c)), which does not include a quantitative
                                                            low-income areas” in the proposed rule that it
  threshold. Thus, it seems possible that members—
                                                            published.
  upon learning that they now need to retain
  mortgage loans totaling only 1% of their assets to     4.	FHFA Draft Advisory Bulletin: Mortgage
  maintain eligibility for membership—may begin             Servicing Transfers (AB 2014-06, OIG
  to divest their home loan investments that exceed         Comments Submitted on June 11, 2014)
  the 1% minimum threshold. The proposed rule
  was published with the 1% minimum quantitative            OIG commented on a draft advisory bulletin
  threshold intact.                                         concerning supervisory expectations for risk
                                                            management practices in conjunction with the sale
3.	FHFA Proposed Rule: Enterprise Housing                   and transfer of MSR. Specifically, OIG expressed
   Goals (79 Fed. Reg. 54482 (September 11,                 its concern that FHFA has opted to use a legally
   2014), RIN 2590-AA65)                                    unenforceable mechanism to establish critical
                                                            duties that are essential to the safe and sound
  Section 1128 of HERA requires the establishment
                                                            operation of the Enterprises. OIG explained that
  of annually adjustable benchmarks governing
                                                            because the advisory bulletin uses terms that
  mortgage purchases. FHFA drafted a proposed
                                                            read as suggestions (e.g., “should”) rather than as
  rule that would establish the 2015-2017 goals for
                                                            requirements (e.g., “shall,” “must,” “are required”),
  the Enterprises. OIG objected to FHFA’s proposal
                                                            the actions FHFA hopes to facilitate are legally
  to establish static housing goals for the next three
                                                            and practically unenforceable. OIG added that
  years instead of assessing what the goals should be
                                                            the use of an advisory bulletin in lieu of a legally
  on an annual basis. Although FHFA may set up
                                                            enforceable regulation means that the Enterprises
  prospective single-family targets for up to three
                                                            could approve MSR that are inconsistent with
  years, each year it must revisit those goals and
                                                            sound business practices, unaligned with the
  assess whether to maintain them at their existing
                                                            Enterprises’ board-approved risk appetite, or out
  levels or revise them. FHFA’s published proposed
                                                            of compliance with regulatory and conservatorship
  rule maintains the static housing goals set forth
                                                            requirements, and that FHFA would have no


44   Federal Housing Finance Agency Office of Inspector General
   legal recourse. Again, FHFA declined to convert        Bankers Association, the Ohio Department of
   the advisory bulletin into a proposed rule and         Commerce Division of Real Estate and Professional
   published the final advisory bulletin without          Licensing, and the National Association of Realtors.
   change.                                                The presentations focused on fraud trends in the
                                                          mortgage industry.
Communications and Outreach
                                                          Hotline
A key component of OIG’s mission is to                   OI operates a hotline that allows concerned parties
communicate clearly with the GSEs, industry groups,      to report directly and in confidence information
other federal agencies, Congress,                                             regarding possible fraud, waste,
and the public. OIG facilitates                                               or abuse related to FHFA or the
clear communications through its                                              GSEs. We honor all applicable
targeted outreach efforts, hotline,        Report fraud,                      whistleblower protections. As part
coordination with other oversight                                             of our effort to raise awareness of
organizations, and congressional           waste, or abuse                    fraud and how to combat it, OIG
statements and testimony.                                                     promotes the hotline through our
                                           related to FHFA’s                  website, posters, emails targeted
Outreach                                                                      to FHFA and GSE employees,
During the reporting period,
                                           programs and                       and our semiannual reports.
OIG staff made over 45
                                           operations                         During the reporting period, the
presentations to law enforcement                                              hotline received 960 contacts.
agencies, prosecutors, industry            by visiting                        Of the contacts received, that
groups, and homeowners. The                                                   number includes: tips referred
presentations to law enforcement           www.fhfaoig.gov                    to OI for potential civil and/
officials were made to multiple                                               or criminal investigation, items
mortgage fraud working groups              or calling                         referred to other agencies as they
across the country and individual                                             were not OIG-related issues,
federal agencies responsible for           (800)      793-7724.               noncritical issues that received
investigating mortgage fraud,                                                 assistance, and complaints on
such as HUD-OIG, the FBI, and                                                 OIG-related issues.
the Secret Service. In addition,
OI continued its partnership with the National           Coordinating with Other Oversight
District Attorneys Association to train local and state  Organizations
law enforcement officials and prosecutors throughout
                                                         OIG shares oversight of federal housing program
the country, putting on presentations in three cities:
                                                         administration with several other federal agencies,
Cleveland, Ohio; Phoenix, Arizona; and San Diego,
                                                         including HUD, the Department of Veterans Affairs,
California.
                                                         the Department of Agriculture, and Treasury’s Office
With respect to presentations to housing                 of Financial Stability (which manages the Troubled
professionals, OIG staff made presentations to           Asset Relief Program); their inspectors general; and
professional organizations such as the Mortgage          other law enforcement organizations. To further the


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014       45
oversight mission, we coordinate with these entities        the FDIC, the SEC, and others. FSOC has
to exchange best practices, case information, and           issued a transparency policy that formalizes
professional expertise. During the semiannual period        the commitment to conducting its business as
ended September 30, 2014, we participated in the            openly and transparently as practicable given
following cooperative activities:                           the confidential supervisory and sensitive
                                                            information at the center of its work. OIG
•	 RMBS Working Group. OIG continued to take
                                                            participates in a CIGFO working group, which
   part in the activity of the RMBS Working Group,
                                                            conducted a review of FSOC’s compliance with
   as discussed in “Civil Cases” (see page 40).
                                                            its transparency policy. Specifically, the review
•	 CIGIE. OIG actively participates in several              assessed the extent to which FSOC’s operations
   CIGIE committees and working groups.                     are consistent with the expectations outlined
                                                            in the transparency policy, including such
  űű The Inspection and Evaluation Committee                requirements as holding open meetings on an
     established a working group to conduct a               annual basis and recording all votes on final and
     pilot “peer review” program for inspection             proposed rules, then reflecting those votes in the
     and evaluation units in the inspector                  FSOC minutes. (The report is available at www.
     general community. The peer review is                  treasury.gov/about/organizational-structure/ig/
     designed to assess organizations’ work under           Documents/CIGFO%20Audit%20July%20
     CIGIE’s Quality Standards for Inspection and           2014.pdf.) Further, OIG is leading a CIGFO
     Evaluation (January 2012) and to promote               working group that will audit FSOC’s oversight
     credibility of such work by validating the             of interest rate risk to the financial system.
     organizations’ work processes and evaluating           We will continue to report progress on this
     their objectivity, independence, and rigorous          assignment, as well as the final results, in our
     adherence to applicable standards.                     semiannual reports.
  űű The Investigation Committee advises the
     inspector general community on issues                Communicating with Congress
     involving criminal investigations, criminal          In fulfilling our mission, OIG works in close
     investigations personnel, and establishing           partnership with Congress and is committed to
     criminal investigative guidelines. During this       keeping it fully apprised of our oversight of FHFA.
     semiannual period, the committee coordinated         OIG met regularly with members of Congress
     with DOJ regarding implementation of the             and provided briefings to key congressional
     new recording policy.                                committees and offices. Briefing topics included
                                                          recommendations from OIG reports and FHFA’s
•	 Council of Inspectors General on Financial
                                                          progress in implementing them, themes emerging in
   Oversight. The Council of Inspectors General
                                                          OIG’s body of work, OIG’s organization and strategy,
   on Financial Oversight (CIGFO) was created by
                                                          and areas of ongoing work.
   Dodd-Frank to oversee the Financial Stability
   Oversight Council (FSOC), which is charged             Additionally, we endeavor to inform Congress
   with strengthening the nation’s financial system.      through responses to numerous technical assistance
   OIG is a permanent member of CIGFO,                    and information requests, as well as replies to formal
   along with the inspectors general of Treasury,         written inquiries from members of Congress on
                                                          various topics.

46    Federal Housing Finance Agency Office of Inspector General
Copies of the Inspector General’s written testimony
to Congress are available at www.fhfaoig.gov/
testimony.




                                 Semiannual Report to the Congress • April 1, 2014–September 30, 2014   47
Section 2: FHFA and GSE Operations

Overview                                                  home mortgages. They fulfill this charter by purchasing
                                                          residential loans from loan originators that can use the
In July 2008, HERA created FHFA to oversee                sales proceeds to make additional loans.
vital components of our nation’s secondary                Under HERA, the Enterprises receive financial
mortgage market.8 FHFA is responsible for the             support from Treasury to prevent their liabilities from
effective supervision, regulation, and housing            exceeding their assets, subject to a cap.12
mission oversight of Fannie Mae, Freddie Mac, the
FHLBanks, and the FHLBanks’ Office of Finance to          FHFA’s and the Enterprises’ Roles in
promote their safety and soundness and to support         Housing Finance
housing finance, affordable housing, and a stable and
                                                          As the regulator of the Enterprises, FHFA has a
liquid market.9
                                                          statutory responsibility to ensure that they operate
In this section, we provide an overview of FHFA and       in a safe and sound manner and that their activities
its relationship with the GSEs; a brief discussion of     support a stable and liquid housing finance market.13
the GSEs’ business models and financial results; and a
                                                          As Figure 7 (see page 49) illustrates, the Enterprises
summary of selected FHFA and GSE activities.
                                                          support the nation’s housing finance system by
                                                          providing liquidity to the secondary mortgage
FHFA and the Enterprises                                  market. Liquidity is created when the Enterprises
                                                          purchase mortgages that lenders—such as banks,
Under HERA, FHFA was appointed conservator of             credit unions, and other retail financial institutions—
the Enterprises on September 6, 2008, and it serves       originated for homeowners.
as their regulator and conservator. As regulator, the
Agency’s mission is to ensure the Enterprises operate     These mortgages are securitized by pooling and
in a safe and sound manner and that their operations      packaging them into MBS and are either sold or
and activities contribute to a liquid, efficient,         kept by the Enterprises as an investment. As part of
competitive, and resilient housing finance market.10      this process, the Enterprises—for a fee—guarantee
As conservator, the Agency seeks to conserve and          payment of principal and interest on the mortgages.
preserve Enterprise assets.                               Historically, the Enterprises have benefited from
FHFA accomplishes its mission by performing               an implied guarantee that the federal government
onsite examinations of the Enterprises; coordinating      would prevent default on their financial obligations,
congressional, public, and consumer inquiries;            and the Enterprises assumed dominant positions in
assisting the Enterprises with foreclosure prevention     the residential housing finance market.14
actions; and developing and implementing a
strategic plan for the future of the Enterprises’         Enterprises’ Market Share of the
conservatorships.11                                       Secondary Mortgage Market
                                                          As Figure 8 (see page 50) illustrates, after losing
The Enterprises were chartered by Congress to provide
                                                          market share to nonagency competitors during
stability and liquidity in the secondary market for

48    Federal Housing Finance Agency Office of Inspector General
Figure 7. Overview of FHFA’s and the Enterprises’ Roles


      Primary
      Mortgage Market                                                                                  Applies for
                                                                                                        Mortgage
      Market in which financial                                                                                           BORROWER
      institutions provide
                                                            LENDER
      mortgage loans to
      homebuyers                                                                                         Provides
                                                                                                           Loan
                                                   Sells Loans that
                                                  Meet Underwriting
                                                       and Product
                                                         Standards


                                                                                      Lenders
      Secondary                                                                       Receive
                                                                                      Cash or MBS
      Mortgage Market
      Market in which                                          FANNIE MAE and                             Conservator
      existing mortgages and                                   FREDDIE MAC
      MBS are traded

                                                              Credit             Portfolio
                                                            Guarantee          Investment
                                                            Business            Business              Ensures Financial
                                                                                                         Safety and
                                                                                                         Soundness

                                                   Issues                    Issues
                                                     MBS                       Debt

                                Sells MBS
                            Received from        Lenders
                            Fannie Mae or        Receive
                              Freddie Mac        Cash                 Buys                     Buys
                                                                      MBS                      Debt

                                                                                                         Sells
                                                                                                       MBS & Debt           INVESTORS
                                                             WALL
                                                            STREET                                                           • Individual
                                                                                                                             • Institutional
                                                                                                         Buys                • Foreign
                                                                                                       MBS & Debt




the housing boom from 2004 through 2007, the          the housing finance market, the Enterprises (and,
Enterprises regained dominant positions in the        therefore, the taxpayers) own a majority of the
residential housing finance market (with the federal  mortgage credit risk.16
government’s financial support) as the financial
crisis continued and private-sector financing for the Enterprises’ Financial
secondary market nearly disappeared.15 Since entering
conservatorships in September 2008, the Enterprises
                                                      Performance
have bought and guaranteed approximately three
out of every four mortgages originated in the United  The Enterprises continued to report profits for the
States. By providing a majority of the liquidity to   six months ended June 30, 2014. Since 2012, the
                 Overview of the Enterprises and FHFA’s Role - UPDATED 9-11-14

                                            Semiannual Report to the Congress • April 1, 2014–September 30, 2014                               49
Figure 8. Primary Sources of MBS Issuances from 2000 to 2013 ($ trillions)

     $3.0



     $2.5



     $2.0



     $1.5



     $1.0



     $0.5



     $0.0
             00


                   01


                          02


                                03


                                       04


                                              05


                                                    06


                                                           07


                                                                   08


                                                                         09


                                                                               10


                                                                                        11


                                                                                              12


                                                                                                    13
            20


                  20


                        20


                               20


                                     20


                                            20


                                                   20


                                                          20


                                                                20


                                                                        20


                                                                              20


                                                                                    20


                                                                                             20


                                                                                                   20
                                 Ginnie Mae MBS     Enterprise MBS      Nonagency MBS



Enterprises have remained profitable (see Figure 9,       credit-related income; and (4) derivative losses
page 51) and have continued to offset their losses that   due to a decrease in interest rates.
began in 2007 (see Figure 10, page 51).17
                                                          In other areas the Enterprises saw improvements.
As shown in Figure 11 (see page 51), Fannie Mae           These areas include: (1) continued improvements in
reported net income of $9 billion for the six months      the single-family business segment driven by stronger
ended June 30, 2014, compared with net income of          credit quality; (2) increases in guarantee fee income as
$68.8 billion for the same period in 2013.18 Freddie      a result of FHFA direction; (3) an increase in home
Mac reported net income of $5.4 billion for the six       prices causing a reduction in defaults; and (4) higher
months ended June 30, 2014, compared with net             non-interest income as a result of settlement proceeds
income of $9.6 billion for the same period in 2013.19     related to private-label securities litigation.

While the Enterprises continued to be profitable,         Release of Valuation Allowances Against
key year-over-year areas experienced declines, which      Deferred Tax Assets
resulted in lower net income. These areas include:
(1) the release of valuation allowances against           The release of the valuation allowances played a
deferred tax assets in prior periods; (2) a decrease      significant role in the Enterprises’ 2013 profits.
in net interest income due to the reduction of            However, the Enterprises no longer maintain
average balances in mortgage portfolios; (3) lower        valuation allowances.20


50    Federal Housing Finance Agency Office of Inspector General
Figure 9. Enterprises’ Annual Net Income (Loss)                                                                Figure 10. Enterprises’ Combined Losses from
2006 Through Second Quarter 2014                                                                               2007 Through 2011 and Combined Profits from
($ billions)                                                                                                   2012 Through Second Quarter 2014 ($ billions)

 $140                                                                                                           $300
 $120
 $100                                                                                                           $250
   $80
   $60
                                                                                                                $200
   $40
   $20
    $0                                                                                                          $150
                                                                                                                                $258
                                                                                                                                $300
  ($20)
  ($40)                                                                                                         $100
                                                                                                                                                           $175
  ($60)
  ($80)                                                                                                          $50
($100)
($120)                                                                                                            $0
               06        07        08          09        10          11        12        13          0   14
          20        20        20          20        20          20        20        20            22
                                                                                              Q

                                        Fannie Mae            Freddie Mac                                                              Losses    Profits



The Enterprises were required to maintain                                                                      full valuation allowance later in 2013, and as a result
valuation allowances for deferred tax assets that they                                                         it did not experience as dramatic a decrease in net
determined may not be realized. This caused them                                                               income for the six months ended June 30, 2014.21
to establish substantial valuation allowances during
the years that they experienced net losses. In 2013,                                                           Decrease in Net Interest Income Due to
the Enterprises determined that the factors in favor                                                           Mortgage Portfolio Reduction
of releasing the allowances outweighed the factors in                                                          One of the Enterprises’ primary sources of revenue
favor of maintaining the allowances. Therefore, a key                                                          is net interest income. Net interest income is the
factor underlying the decrease in Fannie Mae’s net                                                             difference between interest income earned on the
income over the six months ended June 30, 2014,                                                                assets in the retained mortgage portfolio and the
was the release of a substantial portion of its valuation                                                      interest expense associated with the debt that funds
allowance against deferred tax assets during the                                                               those assets.22
comparable period of 2013. Freddie Mac released its

Figure 11. Enterprises’ Summary of Net Income for the Six Months Ended June 30, 2014, and 2013
($ billions)
                                                                                                               Fannie Mae                      Freddie Mac
                                                                                                          2014           2013              2014          2013
    Net Interest Income                                                                                      $9.6          $12.0              $7.0          $8.4
    Credit-related Income                                                                                      2.9           6.9               0.5           1.2
    Gain (Loss) on Derivative Agreements                                                                      (2.5)          1.7a             (4.3)          1.7
    Impairment of Securities Considered
                                                                                                              (0.1)           (0.0)             (0.5)             (0.0)
      Other-than-Temporary
    Other Income (Expense)                                                                                     3.4           (0.4)               5.1              (1.8)
    Income Tax Benefit (Expense)                                                                              (4.3)          48.6               (2.4)              0.1
    Net Income                                                                                                $9.0          $68.8               $5.4              $9.6
a
    Gain (loss) on derivatives referenced to Table 6, p. 21, in the Fannie Mae 2014 Second Quarter 10-Q Report.


                                                                 Semiannual Report to the Congress • April 1, 2014–September 30, 2014                                51
Fannie Mae’s net interest income for the six months         2014, of $533 million, compared with $1.1 billion
ended June 30, 2014, was $9.6 billion, compared             over the same period in 2013—a 53% decrease.29
with $12 billion for the same period in 2013—a
                                                            The decreases in the benefit for credit losses were, in
19% decrease; Freddie Mac’s net interest income for
                                                            part, the result of moderate home price increases that,
the six months ended June 30, 2014, was $7 billion,
                                                            year-over-year, were lower for the six months ended
compared with $8.4 billion for the same period in
                                                            June 30, 2014.30
2013—a 17% decrease.23

The decreases in the Enterprises’ net interest income       Decrease in Interest Rates Leads to
were primarily due to the continued reduction of            Derivative Losses
their retained mortgage portfolios, as mandated by          The Enterprises use derivative instruments to
the Senior Preferred Stock Purchase Agreements              manage the interest rate and prepayment risk
(PSPAs). Under the PSPAs, the Enterprises are               associated with their investments in mortgage
required to reduce the size of their retained mortgage      loans and mortgage-related securities.31 Derivative
portfolios by 15% each year until the amount of the         instruments include written options, interest rate
Enterprises’ retained portfolios reach $250 billion         swap guarantees, and short-term default guarantee
by 2018.24 As of June 30, 2014, Fannie Mae owned            commitments.32
$452.8 billion in mortgage assets, compared with
$490.7 billion as of December 31, 2013. As of               Fannie Mae’s derivative losses for the six months
June 30, 2014, Freddie Mac owned $420 billion in            ended June 30, 2014, were $2.5 billion, compared
mortgage assets, compared with $461 billion as of           with a gain of $1.7 billion for the same period in
December 31, 2013.25                                        2013. Freddie Mac’s derivative losses for the six
                                                            months ended June 30, 2014, were $4.3 billion,
Declines in Credit-Related Income as a                      compared with a gain of $1.7 billion for the same
Result of Lower Benefits for Credit Losses                  period in 2013.33
Fannie Mae’s credit-related income (comprised of            These overall derivative losses were primarily due to
foreclosed property income and the benefit for credit       long-term interest rate decreases during the first six
losses) for the six months ended June 30, 2014, was         months of 2014.34
$2.9 billion, compared with credit-related income of
$6.9 billion over the same period in 2013.26 Freddie        Continued Improvement in Credit Quality
Mac’s credit-related income for the six months ended        of New Single-Family Business
June 30, 2014, was $524 million, compared with
                                                            The Enterprises’ single-family books of business
credit-related income of $1.2 billion over the same
                                                            consist of loans purchased and guaranteed that
period in 2013.27
                                                            generate interest and guarantee fee income. The
The benefit for credit losses decreased significantly for   credit quality of the single-family loans acquired by
the Enterprises. Fannie Mae recognized a benefit for        the Enterprises beginning in 2009 is significantly
credit losses for the six months ended June 30, 2014,       better than that of loans acquired from 2005 to 2008,
of $2.4 billion, compared with a benefit for credit         as measured by loan-to-value (LTV) ratios, FICO
losses of $6.3 billion over the same period in 2013—        scores, and the proportion of loans underwritten with
a 62% decrease.28 Freddie Mac recognized a benefit          fully documented income.35
for credit losses for the six months ended June 30,


52    Federal Housing Finance Agency Office of Inspector General
This improved credit quality is                                                                             As the credit quality in the
attributed to: (1) more stringent                                                                           Enterprises’ single-family books
credit policies and underwriting
                                                                   Improved credit                          of business has improved, the
standards; (2) tighter                                             quality attributed                       number of seriously delinquent
mortgage insurers’ and lenders’                                                                             loans (also known as the shadow
underwriting practices; and                                        in part to more                          inventory) has declined (see
(3) fewer purchases of loans with                                                                           Figure 12, below).40
higher-risk attributes (e.g., Alt-A,                               stringent credit
                                                                             As of June 30, 2014, the
interest-only, credit scores below
                                                                             Enterprises’ combined shadow
620, and LTV ratios above                  policies and
                                                                             inventory (loans that are
90%).36
                                           underwriting                      considered to be 90 or more
Further, the Enterprises are now                                             days delinquent or in the process
holding more loans with higher             standards.                        of foreclosure) totaled 576,596
credit quality acquired from                                                 loans, compared with 783,438
2009 to present in their single-                                             as of June 30, 2013—a 26%
family books of business. As of                                              decrease.41 For the six months
June 30, 2014, loans acquired after 2008 comprised     ended June 30, 2014, Fannie Mae disposed of 70,007
79% and 77%, respectively, of Fannie Mae’s and         single-family properties, compared with 83,569 for
Freddie Mac’s books of business. The legacy housing
                                  37
                                                       the same period in 2013.42 For the six months ended
boom loans acquired from 2005 through 2008,            June 30, 2014, Freddie Mac disposed of 36,149
which have a higher probability of credit defects,     single-family properties, compared with 38,747 for
have declined to 13% of the single-family book of      the same period in 2013.43
business for Fannie Mae and 15% for Freddie Mac
as of June 30, 2014, compared with 17% and 19%,        Guarantee Fee Prices
respectively, as of June 30, 2013. A continued
                                  38
                                                       A significant source of income for the Enterprises
improvement in the credit quality of each Enterprise’s comes from receiving guarantee fees.44 The
single-family book of business was due, in part, to a  Enterprises receive these fees for taking the risk of
decline in the number of delinquent loans.39           loan default and providing MBS investors with a
Figure 12. Decline in Seriously Delinquent Loans                                       guarantee for principal and interest payments.45
and REO Inventory
                                                                                       Fannie Mae’s combined single-family and multifamily
1,200,000
                                                                                       guarantee fee income for the six months ended
1,000,000                                                                              June 30, 2014, was $6.4 billion, compared with
 800,000                                                                               $5.5 billion for the same period in 2013—a 16%
 600,000                                                                               increase. Freddie Mac’s combined single-family and
 400,000
                                                                                       multifamily guarantee fee income for the six months
                                                                                       ended June 30, 2014, was $2.5 billion, compared
 200,000
                                                                                       with $2.6 billion for the same period in 2013—a
       0
                                                                                       3.5% decrease.46
             12

                      12

                            12

                                     12

                                           13

                                                    13

                                                          13

                                                                   13

                                                                         14

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            20

                  20

                           20

                                 20

                                          20

                                                20

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                                                                              20




                                                                                       In 2012, FHFA directed the Enterprises to increase
      Q1

                 Q2

                       Q3

                                Q4

                                      Q1

                                               Q2

                                                     Q3

                                                              Q4

                                                                    Q1

                                                                             Q2




                            Total Shadow Inventory        REO Inventory
                                                                                       their average guarantee fees.47 Fannie Mae’s guarantee

                                                     Semiannual Report to the Congress • April 1, 2014–September 30, 2014                 53
fee income increased for the six months ended              Proceeds from Private-Label
June 30, 2014, compared with the same period               Securities Litigation
in 2013; this is a result of: (1) loans with higher
                                                           In 2011, FHFA, on behalf of the Enterprises,
guarantee fees have become a larger part of its single-
                                                           initiated litigation against 18 financial institutions
family book of business due to the cumulative impact
                                                           alleging securities violations in the sale of private-
of guarantee fee price increases implemented in 2012;
                                                           label MBS to the Enterprises. During the six months
and (2) increased amortization of upfront fees.48
                                                           ended June 30, 2014, FHFA settled a number of
Freddie Mac, however, experienced a small decline
                                                           these lawsuits. As a result, Fannie Mae’s mortgage-
in guarantee fee income for the six months ended
                                                           related securities settlements for the six months
June 30, 2014, compared with the same period in
                                                           ended June 30, 2014, were $4.2 billion, compared
2013, as a result of decreased amortization of upfront
                                                           with $145 million for the same period in 2013, and
fees resulting from higher interest rates and lower
                                                           Freddie Mac’s were $4.9 billion, compared with
refinancing activity.49
                                                           $111 million for the same period in 2013—both
Additional increases to the guarantee fees were            substantial increases.55
planned to take effect in March and April 2014.
                                                           Settlement proceeds related to private-label securities
However, on January 8, 2014, FHFA announced that
                                                           litigation are recorded as other non-interest income
it had directed the Enterprises to delay these increases
                                                           and affect the non-interest income portion of the
until further evaluation could be completed.50 In
                                                           income statement. The proceeds from the settlement
June 2014, FHFA requested public input on its
                                                           agreements contributed to the Enterprises’ continued
guarantee fee policy and implementation. FHFA
                                                           financial improvement.56
sought opinions on the optimum level of guarantee
fees required to protect taxpayers from credit losses      Fannie Mae’s non-interest income for the six months
on Enterprise MBS and implications for mortgage            ended June 30, 2014, was $3.2 billion, compared
credit availability.51 The comment period ended on         with $3.1 billion for the same period in 2013.57
September 8, 2014.52                                       Freddie Mac’s non-interest income for the six months
                                                           ended June 30, 2014, was $1.7 billion, compared
Impact of Home Prices on Credit Losses                     with $1.1 billion for the same period in 2013.58
A factor positively influencing credit losses is home
prices. An increase in home prices can decrease the        Government Support
likelihood that loans will default and reduce the
estimated credit losses on the loans that do default.53    Due to their continued profitability, as of
The S&P/Case-Shiller Home Price Index shows                September 30, 2014, the Enterprises did not request
a decrease in the index for each quarter in 2011.          a draw from Treasury in 2014 to date and are paying
Then, beginning in the first quarter of 2012 through       significant dividends.
the first quarter of 2014, it shows a steady increase;
in the second quarter of 2014, however, the index          Draw Requests and Dividend Payments
experienced a marginal decrease (see Figure 13, page       Due Under the PSPAs
55). Overall, since 2013, the index has increased by
                                                           In August 2012, FHFA and Treasury agreed to a third
8.1%, year-over-year, as of June 30, 2014.54
                                                           amendment to the PSPAs that, among other things,



54    Federal Housing Finance Agency Office of Inspector General
Figure 13. Home Price Index 2011 Through Second Quarter 2014

                       174
                       172
                       170
                       168
                       166
                       164
                       162
                       160
                       158
       Housing Index




                       156
                       154
                       152
                       150
                       148
                       146
                       144
                       142
                       140
                       138
                       136
                       134
                       132
                       130
                              11


                                       11


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                                                                               Q4


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                                                                                                    Q3


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                                                                                                                   Q1


                                                                                                                            Q2
replaced the fixed dividend rate the Enterprises pay as                         June 30, 2014. As a result, Fannie Mae did not
of the first quarter of 2013. The modification called                           request a draw from Treasury in 2014 under the
for a full net worth sweep of all future Enterprise                             PSPA.60
earnings, with a quarterly sweep of every dollar of
                                                                                Freddie Mac’s net worth as of June 30, 2014, was
net worth, instead of a fixed percentage dividend
                                                                                $4.3 billion, a decrease from $12.8 billion as of
payment. This was intended to end the circular
                                                                                December 31, 2013, primarily due to its payment
practice of the Enterprises drawing funds from
                                                                                to Treasury of $14.9 billion in senior preferred
Treasury in order to pay dividends back to Treasury.
                                                                                stock dividends during the first six months of 2014,
The Enterprises’ net worth (above a specified buffer
                                                                                partially offset by comprehensive net income of
amount, which was initially $3 billion) is now
                                                                                $6.4 billion for the six months ended June 30, 2014.
effectively distributed to Treasury; for the six months
                                                                                As a result, Freddie Mac did not request a draw from
ended June 30, 2014, approximately $27.8 billion
                                                                                Treasury in 2014 under the PSPA.61
was distributed, with an additional $5.6 billion paid
in the third quarter of 2014.59                                                 For the third quarter of 2014, Fannie Mae and
                                                                                Freddie Mac made additional payments of
Fannie Mae’s net worth as of June 30, 2014, was
                                                                                $3.7 billion and $1.9 billion, respectively, under
$6.1 billion, a decrease from $9.6 billion as of
                                                                                the terms of the PSPAs. As of September 30, 2014,
December 31, 2013. This was primarily due to
                                                                                Fannie Mae and Freddie Mac have paid Treasury a
its payment to Treasury of $12.9 billion in senior
                                                                                total of $130.5 billion and $88.2 billion, respectively,
preferred stock dividends during the first six
                                                                                in dividends on the senior preferred stock.62 These
months of 2014, partially offset by its comprehensive
                                                                                dividend payments do not reduce the principal
net income of $9.4 billion for the six months ended
                                                                                balance of Treasury’s investments in the Enterprises.63


                                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014                55
Figure 14. Enterprises’ Treasury Draws and Dividend Payments Due Under PSPAs ($ billions)

             $140


             $120
                                          Dividends Paid: $218.7 billion
                                     Draws from Treasury: $187.5 billion
             $100


              $80

                                                                                            130.1
              $60


              $40
                                  66.1
                     59.8
              $20                                            33.6
                                               28.0                                                       33.4
                                                      13.5          16.1        18.8
                            0.2          6.6
               $0
                        08




                                     09




                                                  10




                                                                11




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                                                                                        13




                                                                                                         14
                      20




                                   20




                                                20




                                                              20




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                                                                                                     20
                                                                                                    Q3
                                    Total Enterprise Draws           Total Enterprise Dividends




As of September 30, 2014, Fannie Mae’s total                         programs, and its purchases helped to support the
draws from Treasury under the PSPA remain                            nation’s housing finance system.66
at $116.2 billion and Freddie Mac’s remain at
                                                                     Treasury’s last purchase of Enterprise MBS, through
$71.3 billion. Since the conservatorships began in
                                                                     the purchase facility, was in December 2009, while
2008 through September 30, 2014, the Enterprises
                                                                     the Federal Reserve last purchased Enterprise MBS
have drawn a total of $187.5 billion from Treasury
                                                                     through the same facility in March 2010. However, as
and paid $218.7 billion in dividends (see Figure 14,
                                                                     of September 30, 2014, the Federal Reserve continues
above).64
                                                                     to purchase Enterprise MBS through the Open
                                                                     Market Trading Desk at the Federal Reserve Bank of
Additional Government Support
                                                                     New York. Between September 2012 and December
The Enterprises also benefited from extraordinary                    2013, purchases were at a pace of $40 billion per
government measures to support the housing                           month; that rate has since decreased to a pace of
market overall. During the period from September                     $10 billion per month. This pace does not include
2008 through March 2010, the Federal Reserve                         purchases to replace paid down principal.67
and Treasury purchased more than $1.3 trillion in
Enterprise MBS through the GSE MBS Purchase
Facility. Additionally, the Federal Reserve
                                                                     FHLBank System
purchased nearly $135 billion of bonds issued by
the Enterprises.65 The Federal Reserve became the                    The FHLBanks are GSEs, federally chartered but
predominant purchaser of MBS during its purchase                     privately capitalized and independently managed


56    Federal Housing Finance Agency Office of Inspector General
Figure 15. Regional FHLBanks




by a board of directors. The 12 regional FHLBanks          mortgages, community investments, and other
together with the Office of Finance, the fiscal agent of   housing and community development services.71
the FHLBanks, comprise the FHLBank System. All
                                                           The FHLBanks are cooperatives that are owned
FHLBanks and the Office of Finance operate under
                                                           privately and wholly by their members. Each
the supervisory and regulatory framework of FHFA.68
                                                           FHLBank operates as a separate entity within a
FHFA’s stated mission with respect to the FHLBanks
                                                           defined geographic region of the country, known
is to provide effective supervision, regulation, and
                                                           as its district, with its own board of directors,
housing mission oversight to promote the FHLBanks’
                                                           management, and employees. Each member of
safety and soundness, support housing finance and
                                                           an FHLBank must purchase and maintain capital
affordable housing, and facilitate a stable and liquid
                                                           stock as a condition of its membership.72 FHLBank
mortgage market.69
                                                           members include financial institutions such as
The FHLBank System was created in 1932 to                  commercial banks, thrifts, insurance companies,
improve the availability of funds for home ownership,      and credit unions.73 Figure 15 (see above) provides a
and its mission is to provide local lenders with readily   map of the districts of the 12 FHLBanks.
available, low-cost funding to finance housing, jobs,
                                                           The primary business of the FHLBanks is to raise
and economic growth.70 The 12 FHLBanks fulfill
                                                           funds in the capital markets by issuing debt, known
this mission primarily by providing secured loans
                                                           as consolidated obligations, through the Office of
known as advances to their members, resulting in
                                                           Finance and to use the consolidated obligations
an increased availability of credit for residential
                                                           to provide their members with advances.74 In the


                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014      57
event of a default on a consolidated obligation,           decreased, resulting in lower returns on mortgage
each FHLBank is jointly and severally liable for           loans, advances, and investments. This was partially
losses, which means that each individual FHLBank           offset by lower interest expense on interest-bearing
is responsible for the principal and interest on all       liabilities that were the result of the issuance of new
consolidated obligations issued by the FHLBanks.75         consolidated obligations, including the effect of
However, like the Enterprises, the FHLBank System          redemptions and refinancing higher-cost consolidated
has historically enjoyed benefits (e.g., debt costs akin   obligations.80 As shown in Figure 16 (see below), the
to those associated with Treasury bonds) stemming          combined effects of declines in non-interest income
from an implicit government guarantee of its               and increases in non-interest expense, partially offset
consolidated obligations.76                                by a marginal increase in net interest income, resulted
                                                           in an 18% decrease in the FHLBanks’ net income for
FHLBanks’ Combined Financial                               the six months ended June 30, 2014, compared to
Performance                                                the same period in 2013.81
The regional housing markets affect the FHLBanks’
demands for advances from member institutions              Decrease in Interest Income
to fund residential mortgage loans. During the six         Returns on interest-earning assets—the main
months ended June 30, 2014, FHLBank members’               factor influencing net income—are largely derived
borrowing increased, due in part to growth in              from interest income on advances, investments,
economic activity, which resulted in a stable              prepayment fees, and mortgage loans. For the six
environment for debt issuance. Further, during             months ended June 30, 2014, interest income
this period, the demand for advances continued             decreased from $4.2 billion to $4 billion—a
to increase due to high member borrowing,                  5% decline compared with the same period in
particularly by large-asset members. However, as           2013. Interest on advances makes up a significant
the average balances of advances and investments
increased, the yields on interest-earning assets and       Figure 16. FHLBanks’ Net Income for the Six
                                                           Months Ended June 30, 2014, and 2013
the average balances of mortgage loans decreased,
                                                           ($ millions)
which contributed to the overall decline in interest
income.77                                                                                         2014        2013
                                                               Interest Income                   $4,035      $4,255
The primary source of each FHLBank’s earnings is               Interest Expense                   (2,319)     (2,573)
net interest income, which is the interest earned on           Net Interest Income                 1,716       1,682
advances, investments, and mortgage loans, less the            Reversal of (Provision for)
                                                                                                      15          10
                                                                 Credit Losses
interest paid on consolidated obligations, deposits,
                                                               Other-than-Temporary
and other borrowings.78 Fluctuations in short-term               Impairment Lossesa
                                                                                                       (6)         (6)
interest rates affect the FHLBanks’ interest income            Derivative and Hedging Gains
                                                                                                    (114)        293
and expense because a considerable portion of the                (Losses)
FHLBanks’ assets and liabilities are either directly or        Other Income (Loss)                   91        (103)
indirectly tied to short-term interest rates.79                Total Non-interest Expense          (502)       (422)
                                                               Total Assessments                   (131)       (144)
For the six months ended June 30, 2014, compared               Net Income                        $1,069      $1,310
with the same period in 2013, interest income              a
                                                             Private-label MBS accounted for the FHLBanks’ other-than-
decreased as average short-term interest rates generally   temporary impairment losses for the six months ended
                                                           June 30, 2014, and 2013.


58    Federal Housing Finance Agency Office of Inspector General
portion of interest income ($1.26 billion in 2014        Net losses from derivative and hedging activities
and $1.28 billion in 2013), and the decline was          were $114 million for the six months ended June 30,
minimal—or 1%. Interest income on investments            2014, compared with net gains of $293 million for
decreased from $1.94 billion to $1.88 billion—a          the same period in 2013—a substantial change.85
3.5% decline—for the six months ended June 30,           The net losses from derivatives and hedging activities
2014, compared with the same period in 2013. Also        for the six months ended June 30, 2014, were due
during this period, interest income on prepayment        primarily to changes in the fair value of derivatives
fees was reduced from $64 million to $32 million—        not designated as qualifying accounting hedges,
or 50%—and interest income on mortgage loans             particularly economic hedges. The FHLBanks use
decreased from $969 million to $866 million—an           economic hedges for asset-liability management and
11% decline—compared with the same period in             for accounting purposes; these derivatives are treated
2013.82                                                  differently than other types of derivatives because
                                                         they do not meet certain hedging criteria.86
Interest Expense
During the six months ended June 30, 2014, interest      Non-interest Expense
expense declined from $2.6 billion to $2.3 billion—      Non-interest expense for the six months ended
or 10%—compared with the same period in 2013,            June 30, 2014, increased from $422 million to
which helped to prevent additional declines in net       $502 million compared to the same period in 2013,
interest income. The decrease was driven by lower        an increase of 19%. The increase was primarily due
yields on new consolidated obligations, including        to a one-time reduction in expenses of $50 million
the effect of redemptions and refinancings of higher-    in the second quarter of 2013 by the FHLBank of
cost consolidated obligations. The refinancing of        Chicago.87
consolidated obligations, which resulted in lower
interest payments, was a key contributor to this         Retained Earnings
decline. Due to these lower payments, consolidated       As shown in Figure 17 (see below), the FHLBanks’
obligation expenses decreased from $2.5 billion to       combined year-end retained earnings have increased
$2.2 billion—or 11%—for the six months ended             every year for the last six years and now exceed
June 30, 2014, compared with the same period in
2013.83
                                                         Figure 17. FHLBanks’ Retained Year-End Earnings
                                                         2007 Through Second Quarter 2014 ($ billions)
Derivative and Hedging Activity
                                                         $14
The FHLBanks are exposed to interest rate risk
                                                         $12
primarily from the effect of interest rate changes on
their interest-earning assets, as well as the funding    $10

sources for these assets. The goal of the FHLBanks        $8

is not to eliminate interest rate risk entirely but to    $6                                              12.21
                                                                                                                  12.70

manage it within appropriate limits. To achieve this                                              10.52
                                                          $4                               8.58
                                                                                    7.54
goal, the FHLBanks use derivatives (e.g., interest                           6.02
rate swaps, options, and swaptions), which help           $2   3.69
                                                                      2.94
reduce funding costs, maintain favorable interest rate    $0
                                                                                                                     14
                                                                07


                                                                       08


                                                                              09


                                                                                     10


                                                                                            11


                                                                                                   12


                                                                                                           13




spreads, and manage overall assets and liabilities.84
                                                                                                                  20
                                                               20


                                                                      20


                                                                             20


                                                                                    20


                                                                                           20


                                                                                                  20


                                                                                                          20


                                                                                                                Q2




                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014               59
$12 billion as of June 30, 2014.88 As long as the         Dodd-Frank Requirements
FHLBanks are profitable, retained earnings should
continue to increase because of the Joint Capital         Swap Margin Requirements
Enhancement Agreement provisions adopted by        In September 2014, FHFA and four other federal
the FHLBanks in 2011. The agreement calls for the  agencies sought comment on a proposed rule to
FHLBanks to set aside 20% of their net income into establish margin requirements for swap dealers,
a separate, restricted retained earnings account.89 The
                                                   major swap participants, security-based swap dealers,
joint capital enhancements help to provide members’and major security-based swap participants as
access to liquidity during times of economic stress,
                                                   required by Dodd-Frank. The proposed rule would
create an additional buffer to absorb FHLBank losses,
                                                   establish minimum requirements for the exchange of
provide protection on members’ capital investments,initial and variation margin between covered swap
and provide additional assurance that the FHLBanks entities and their counterparties to non-cleared
will meet their consolidated obligations.90        swaps and non-cleared security-based swaps. The
                                                   amount of margin that would be required under the
Selected FHFA and GSE Activities proposed rule would vary based on the relative risk of
                                                   the counterparty and of the non-cleared swap or non-
Over the last six months, there were several       cleared security-based swap. The margin requirements
significant FHFA and GSE developments related      mandated by Dodd-Frank are intended to address a
to: swap margin requirements; proposed revisions   number of weaknesses in the regulation and structure
to FHLBank membership eligibility requirements;    of the swap markets that were revealed during the
proposed Enterprise housing goals for 2015-2017;   recent financial crisis. The requirements are intended
requirements for private mortgage insurance        to reduce risk, increase transparency, and promote
companies that insure loans owned or guaranteed    market integrity. In addition to FHFA, the other four
by the Enterprises; proposed                                             agencies making the proposal
amendments to require the                                                are the Federal Reserve Board,
                                                                         the Farm Credit Administration,
FHLBanks and the Office of                 FHFA sought                   the FDIC, and the Office of the
Finance to collect demographic
data about their boards of                 comment on a                  Comptroller of the Currency.91
directors; public input regarding
the implementation of guarantee            proposed rule                  Mortgage Industry
fee changes; proposed structure                                           Standards
for the issuance of a Single               that would revise
                                                                          FHFA’s Proposed Revisions to
Security; recovery of Enterprise
losses stemming from alleged               the requirements               FHLBank Membership Eligibility
                                                                          Requirements
violations of securities laws in the
sale of private-label MBS; and
                                           for membership                 In September 2014, FHFA
FHFA and GSE performance.                                                 sought comment on a proposed
                                           in one of the 12               rule that would revise the
These developments are
                                                                          requirements for financial
summarized in the following                FHLBanks.                      institutions to apply for and
section.
                                                                          retain membership in one of the


60    Federal Housing Finance Agency Office of Inspector General
12 FHLBanks. The goal of FHFA’s proposed rule is         retrospective market-level measure based on data
to ensure that members maintain a commitment to          collected under the Home Mortgage Disclosure
housing finance and that only eligible entities can      Act. The proposed benchmarks would maintain the
gain access to Bank advances and the benefits of         low- and very low-income family home purchase
membership. To achieve these goals, the proposed         goals of 23% and 7%, respectively, the same levels
rule would establish a new quantitative test requiring   as the current single-family benchmark goals. Under
all members to hold 1% of their assets in home           the proposed rule, the benchmark subgoal for low-
mortgage loans on an ongoing basis. Currently,           income area home purchases would be increased from
applicants for membership need only demonstrate          the current 11% to 14%, and the benchmark low-
a nominal amount of home mortgage loans on               income families refinance goal would be increased
their balance sheet at the time of their application     from the current 20% to 27%. The second alternative
but not thereafter. The proposed rule would also         approach would set only prospective benchmark
require certain members that are subject to the 10%      levels, and the third proposed approach would use
residential mortgage loans requirement to adhere         only the retrospective market-level measure. The
to this requirement on an ongoing basis. Currently,      proposed rule also includes benchmark levels for
these members are subject to the 10% residential         multifamily housing goals and would establish for the
mortgage loans requirement only when they                first time a subgoal for small, multifamily properties
initially apply for membership. It would also define     of 5-50 units that are affordable to low-income
“insurance company” to mean a company that has           families.93 Consistent with the Inspector General
as its primary business the underwriting of insurance    Act, OIG assessed the proposed rule and provided
for nonaffiliated persons, thereby excluding captive     comment, which can be found on page 44.
insurers from membership so as to prevent entities
not eligible for membership from gaining access          FHFA’s Proposed Draft Requirements for Private
to FHLBank advances through a captive insurer.           Mortgage Insurance Companies
Membership of existing captive insurers would phase      In July 2014, FHFA sought input on draft
out over five years with defined limits on advances.92   requirements for private mortgage insurance
Consistent with the Inspector General Act, OIG           companies that insure mortgage loans owned or
assessed the proposed rule and provided comment,         guaranteed by the Enterprises. The Enterprises
which can be found on pages 43 to 44.                    are required by their charters to obtain credit
                                                         enhancement, such as private mortgage insurance,
FHFA’s Proposed 2015-2017 Housing Goals for
                                                         for loans they purchase or securitize that have LTV
the Enterprises
                                                         ratios that exceed 80%. By using private mortgage
In August 2014, as required by HERA, FHFA                insurance from a sound counterparty, the first-loss
proposed a rule that would establish single-family       exposure is shifted from the taxpayers to the private
and multifamily housing goals for the Enterprises for    market.94 FHFA’s The 2014 Strategic Plan for the
2015 through 2017. The current housing goals are         Conservatorships of Fannie Mae and Freddie Mac called
effective until the end of 2014. The proposed rule       on the Enterprises to strengthen the requirements
offers three alternative approaches for establishing     for private mortgage insurance companies that do
single-family housing goals. The first approach          business with them as part of the goal to shift risk
uses the current two-step process, which involves        away from the Enterprises and protect taxpayers.95
setting both a prospective benchmark level and a


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014     61
As conservator of the Enterprises, FHFA has directed      fee for all mortgages by 10 basis points, update
Fannie Mae and Freddie Mac to revise, expand,             the upfront guarantee fee grid, and eliminate the
and align their risk management requirements for          upfront 25 basis point adverse market fee that has
mortgage insurance counterparties. FHFA’s draft           been assessed on all mortgages purchased by the
requirements are part of its multiyear effort to          Enterprises since 2008.100 FHFA’s request for input
produce a clear and comprehensive set of standards.       included questions related to guarantee fee policy
The updated financial requirements incorporate a          and the optimum level of guarantee fees required
new, risk-based framework that is meant to ensure         to protect taxpayers, as well as the implications
that approved insurers have a sufficient level of         of increased guarantee fees for mortgage credit
liquid assets with which to pay claims. The draft         availability.101 FHFA extended the deadline for
requirements also include enhanced operational            guarantee fee input from August 4, 2014, to
performance expectations and provide remedial             September 8, 2014, to coincide with the deadline for
actions that would apply if an insurer failed to          FHFA’s request for input on draft private mortgage
comply with the revised requirements.96                   insurer eligibility requirements.102

FHFA’s Proposed Amendments to Regulation on               Market Liquidity Initiative
Minority and Women Inclusion
                                                          In August 2014, FHFA published a request for
In June 2014, FHFA proposed to amend its                  input on the proposed structure for a Single Security,
regulation on minority and women inclusion by             a type of mortgage-backed bond that would be
requiring the FHLBanks and the Office of Finance to       issued and guaranteed by Fannie Mae or Freddie
include in the contents of their annual reports certain   Mac. The development of the Single Security is a
demographic information related to their boards           key goal of FHFA’s The 2014 Strategic Plan for the
of directors as well as a description of their related    Conservatorships of Fannie Mae and Freddie Mac and
activities during the reporting year.97 The current       is a 2014 Scorecard item for the Enterprises. FHFA’s
regulation does not require the FHLBanks or the           Single Security project is intended to improve the
Office of Finance to collect demographic data about       overall liquidity of the Enterprises’ MBS by creating
the boards of directors. FHFA believes that requiring     a Single Security that is eligible for trading in the
the FHLBanks and the Office of Finance to report          to-be-announced (TBA) market, where buyers and
on the demographic profile of their boards will help      sellers of MBS agree to terms in advance of specifying
promote demographic diversity.98                          which pools of mortgages will back the bonds.
                                                          FHFA requested public input on all aspects of the
FHFA’s Request for Input on Guarantee Fees                proposed Single Security structure, especially issues
In June 2014, FHFA requested input from the public        regarding the transition from the current system to
on the guarantee fees that the Enterprises charge         a Single Security. FHFA’s specific questions relate to
lenders.99 In January 2014, the FHFA Director             TBA eligibility, legacy Enterprise securities, potential
suspended the implementation of guarantee fee             effects on the industry, and risk of market disruption.
changes announced by FHFA in December 2013.               FHFA requested input by October 13, 2014.103
FHFA had planned to increase the base guarantee




62    Federal Housing Finance Agency Office of Inspector General
Figure 18. FHFA’s Private-Label Securities Settlements to Date

                                                                                     Settlement                 Settlement
                                    Bank
                                                                                      Amount               Announcement Date
    General Electric Company                                                             $6.25 million        January 2013
    CitiGroup Inc.                                                                        $250 million          May 2013
    UBS Americas Inc.                                                                     $885 million           July 2013
    Wells Fargo Bank, N.A.a                                                           $335.23 million       September 2013
    JPMorgan Chase & Co.                                                                     $4 billion       October 2013
    Ally Financial Inc.                                                                   $475 million        October 2013
    Deutsche Bank AG                                                                    $1.925 billion       December 2013
    Morgan Stanley                                                                        $1.25 billion       February 2014
    Société Générale                                                                      $122 million        February 2014
    Credit Suisse                                                                         $885 million         March 2014
    Bank of America Corp.                                                                 $5.83 billion        March 2014
    Barclays Bank PLC                                                                     $280 million          April 2014
    First Horizon National Corp.                                                          $110 million          April 2014
    RBS Securities, Inc.                                                                 $99.5 million          June 2014
    Goldman Sachs & Co.                                                                    $1.2 billion        August 2014
    HSBC North America Holdings Inc.                                                      $550 million      September 2014
    Total                                                                                 $18.2 billion
a
    The Wells Fargo Bank settlement is a non-litigation private-label securities settlement.



Lawsuits/Settlements                                                  lawsuit alleging violations of federal, Virginia, and
                                                                      District of Columbia securities laws in connection
FHFA Private-Label MBS Lawsuits                                       with private-label MBS purchased by the Enterprises.
As of September 2014, FHFA had recovered nearly                       HSBC will pay $374 million to Freddie Mac and
$18.2 billion on behalf of taxpayers in 2013 and                      $176 million to Fannie Mae.105
2014 through settlements
                                                                                               In August 2014, FHFA reached
with financial institutions that
                                                                                               a $3.15 billion settlement
sold private-label MBS to the
Enterprises between 2005 and               As of September                                     with Goldman Sachs & Co.,
                                                                                               related companies, and named
2007 (see Figure 18, above).
FHFA had sued 18 institutions
                                           2014, FHFA had                                      individuals addressing alleged
                                                                                               violations of federal and state
alleging securities law violations,
and in some cases, fraud.104
                                           recovered nearly                                    securities laws in connection with
                                                                                               private-label MBS purchased
In September 2014, FHFA                            $18.2 billion                               by the Enterprises. Goldman
reached a $550 million settlement                                                              Sachs will pay approximately
with HSBC North America                            on behalf                                   $2.15 billion to Freddie Mac
Holdings Inc., related companies,                                                              and approximately $1 billion
and specifically named
                                                   of taxpayers.                               to Fannie Mae. The settlement
individuals resolving claims in a                                                              also resolves claims involving


                                          Semiannual Report to the Congress • April 1, 2014–September 30, 2014               63
a Goldman Sachs security in a lawsuit against Ally        a definitive agreement to merge the two Banks.
Financial Inc. FHFA previously settled claims against     The merger agreement was unanimously approved
Ally Financial for $475 million in October 2013.106       by the boards of directors of both FHLBanks.110
                                                          The FHLBanks’ formal merger application must
In June 2014, FHFA reached a settlement of
                                                          be approved by FHFA and ratified by the members
$99.5 million with RBS Securities, Inc., resolving
                                                          of the FHLBanks of Des Moines and Seattle. The
claims against RBS alleging violations of federal and
                                                          FHFA Director said the Agency views the merger
state securities laws in connection with private-label
                                                          agreement positively.111 The FHLBank of Des Moines
MBS purchased by Freddie Mac during 2005-
                                                          is a source of funding for nearly 1,200 members
2007. The case stems from a lawsuit filed against
                                                          in Iowa, Minnesota, Missouri, North Dakota, and
Ally Financial that named RBS and other banks
                                                          South Dakota. As of June 30, 2014, the FHLBank
as the underwriters of Ally’s MBS. The June 2014
                                                          of Des Moines had $82.2 billion in assets. The
settlement does not affect a separate lawsuit filed
                                                          FHLBank of Seattle provides low-cost, long- and
against RBS.107
                                                          short-term funding to more than 330 members in
In April 2014, FHFA settled two lawsuits alleging         Alaska, Hawaii, Idaho, Montana, Oregon, Utah,
violations of federal and state securities laws in        Washington, and Wyoming and the U.S. territories
connection with private-label MBS purchased by the        of American Samoa, Guam, and the Commonwealth
Enterprises during 2005-2007. The first settlement        of the Northern Mariana Islands. The FHLBank
resolves claims in a lawsuit against Barclays Bank        of Seattle had $36.5 billion in assets as of June 30,
PLC, related companies, and named individuals, as         2014.112
well as claims against Barclays in the Ally Financial
suit. Barclays will pay $227 million to Freddie           FHFA Strategic Plan for 2015-2019
Mac and $53 million to Fannie Mae.108 Later in            In August 2014, FHFA requested input on its
April, FHFA reached a settlement for $110 million         Strategic Plan for the fiscal years 2015-2019. FHFA’s
with First Horizon National Corporation, a large          Strategic Plan sets out the Agency’s priorities as
Tennessee bank holding company, and a number              regulator of the Enterprises as well as the FHLBank
of other related companies and individuals. The           System. The 2015-2019 FHFA Strategic Plan also
settlement resolves claims in a lawsuit alleging          has three major goals: (1) ensure that the regulated
violations of federal and District of Columbia            entities are safe and sound; (2) ensure liquidity,
securities laws in connection with private-label MBS      stability, and access in housing finance; and
purchased by the Enterprises during 2005-2007.            (3) manage the Enterprises’ ongoing conservatorships.
Pursuant to the agreement, First Horizon will pay         The Strategic Plan also reflects the priorities outlined
$61.6 million to Fannie Mae and $48.4 million to          for the Enterprises in The 2014 Strategic Plan for the
Freddie Mac.109                                           Conservatorships of Fannie Mae and Freddie Mac,
                                                          which the Agency released in May.113
FHFA and GSE Performance and
Accountability                                            The goals outlined in The 2014 Strategic Plan for
                                                          the Conservatorships of Fannie Mae and Freddie Mac
FHLBanks Announce Merger Agreement                        were: (1) maintain, in a safe and sound manner,
In September 2014, the FHLBanks of Des Moines             foreclosure prevention activities and credit availability
and Seattle announced that they have entered into         for new and refinanced mortgages to foster liquid,
                                                          efficient, competitive, and resilient national

64    Federal Housing Finance Agency Office of Inspector General
housing finance markets; (2) reduce taxpayer risk          stress in certain housing markets. In addition,
through increasing the role of private capital in the      counterparty risk remains an area of concern,
mortgage market; and (3) build a new single-family         especially given the evolving changes in the mortgage
securitization infrastructure for use by the Enterprises   industry and the greater prominence of new types of
and adaptable for use by other participants in the         seller/servicers.118
secondary market in the future.114 FHFA requested
                                                           In regard to the FHLBanks, the report stated that
input from members of Congress, the public, and
                                                           all FHLBanks were profitable for 2013 and the
interested stakeholders by September 15, 2014.115
                                                           FHLBanks’ advance business continued to operate
                                                           with no credit losses. The report went on to say that
FHFA 2013 Report to Congress
                                                           the FHLBank of Seattle remained under an FHFA
On June 13, 2014, FHFA released its 2013 Report to         consent order, which was revised in November 2013.
Congress, which detailed the findings of the Agency’s      It said that although the FHLBank of Seattle’s overall
2013 annual examinations of the Enterprises, the 12        financial performance continued to improve during
FHLBanks, and the FHLBanks’ Office of Finance.             2013, weaknesses persist due to the deteriorated
For the 2013 annual examinations, FHFA used a new          value of the institution’s private-label MBS, elevated
composite rating system called CAMELSO, which is           operational risk, poor earnings, and insufficient
an acronym describing the seven rating components:         retained earnings. The revised consent order requires
capital, asset quality, management, earnings, liquidity,   FHFA’s non-objection before the FHLBank of Seattle
sensitivity to market risk, and operational risk.116       pays dividends or repurchases or redeems capital
The report noted that while each Enterprise                stock.119
continues to have significant exposure to credit
                                                           Enterprise Stress Tests
losses from mortgages originated in the several years
prior to conservatorship, they had record amounts          In April 2014, FHFA issued a report providing
of net income in 2013 totaling $132.7 billion. The         updated information on possible ranges of future
Enterprises’ 2013 levels of net income benefited from      financial results of the Enterprises under certain
a number of nonrecurring items, such as the release        scenarios. The report Projections of the Enterprises’
of valuation allowances against deferred tax assets and    Financial Performance (Stress Tests) reflects the
various legal settlements. Other major contributors        results of stress tests the Enterprises are required to
included the overall improvement in the housing            conduct starting this year under Dodd-Frank. The
market and income from the Enterprises’ retained           stress tests are designed to determine whether the
portfolios.117                                             Enterprises could absorb losses as a result of adverse
                                                           economic conditions.120 Importantly, the stress test
The report said the conservatorships of the
                                                           projections are not expected outcomes.121 The stress
Enterprises, combined with Treasury’s financial
                                                           test instructions noted that the Enterprises’ capital
support, have stabilized the Enterprises but not
                                                           positions are unique in that they are supported and
restored them to a sound financial condition. It
                                                           restricted by the PSPAs with Treasury.122
said the Enterprises remain exposed to credit,
counterparty, and operational risks. Credit risk           The stress tests modeled “what if” scenarios based
management remains a key priority for both                 on assumptions about Enterprise operations, loan
Enterprises because of their substantial amount of         performance, macroeconomic and financial market
remaining distressed legacy assets and the ongoing         conditions, and house prices. The Enterprises were


                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014         65
provided with the key assumptions for each scenario
and used their respective internal models to project
their financial results based on the assumptions.123

The key assumptions used for the Dodd-Frank Act
Stress Test severely adverse scenario included a 25%
decline in house prices for nine quarters, a fall in
nonagency security prices by 20% to 90%, and
a default of the largest counterparty for securities
financing transactions and derivatives. The report
said that in this scenario, incremental Treasury draws
would range between $84.4 billion and $190 billion,
depending on the treatment of deferred tax assets.
The remaining funding commitment under the
PSPAs would range between $173.7 billion and
$68 billion. The report also gave the results of
three FHFA stress test scenarios, which have been
done since 2010. In the FHFA stress test scenarios,
cumulative, combined Treasury draws at the end of
2015 would remain unchanged at $187.5 billion, as
neither Enterprise would require additional Treasury
draws in any of the three scenarios. The combined
remaining commitment under the PSPAs would be
unchanged at $258.1 billion. In the three scenarios,
the Enterprises would pay additional senior preferred
dividends to Treasury ranging between $54 billion
and $36.3 billion.124




66    Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • April 1, 2014–September 30, 2014   67
Appendices

Appendix A:                                               Carryforwards: A provision of tax law that allows
                                                          current losses or certain tax credits to be utilized in
Glossary and Acronyms                                     future tax returns.

                                                          Collateral: Assets used as security for a loan that can
Glossary of Terms                                         be seized by the lender if the borrower fails to repay
                                                          the loan.
Alt-A: A classification of mortgages in which the risk
                                                          Commercial Banks: Commercial banks are
profile falls between prime and subprime. Alternative
                                                          establishments primarily engaged in accepting
A (also known as Alt-A) mortgages are generally
                                                          demand and other deposits and making commercial,
considered higher risk than prime due to factors
                                                          industrial, and consumer loans. Commercial banks
that may include higher loan-to-value and debt-
                                                          provide significant services in originating, servicing,
to-income ratios or limited documentation of the
                                                          and enhancing the liquidity and quality of credit that
borrower’s income.
                                                          is ultimately funded elsewhere.
Back Office Systems: Back office systems are
                                                          Conforming Loan Limit: A conforming loan is a
those related to the inner workings of a business or
                                                          conventional loan with an origination balance that
institution.
                                                          does not exceed a specified amount (i.e., conforming
Bankruptcy: A legal procedure for resolving debt          loan limit). The Enterprises are restricted by law to
problems of individuals and businesses; specifically, a   purchasing conforming loans, with the loan limits
case filed under one of the chapters of Title 11 of the   varying by unit size and region, e.g., high-cost areas.
U.S. Code.                                                The loan limits for 2014 remain unchanged from
                                                          2013. For 2014, the maximum general loan limit for a
Basis Points: A hundredth of 1 percentage point.
                                                          single-family one-unit dwelling is $417,000, while the
For example, 1 basis point is equivalent to 1/100 of 1
                                                          maximum high-cost area loan limit for a single-family
percentage point.
                                                          one-unit dwelling is $625,500.
Bonds: Obligations by a borrower to eventually repay
                                                          Conservatorship: Conservatorship is a legal
money obtained from a lender. The buyer of the bond
                                                          procedure for the management of financial
(or “bondholder”) is entitled to receive payments from
                                                          institutions for an interim period during which the
the borrower.
                                                          institution’s conservator assumes responsibility for
Capitalization: In the context of bank supervision,       operating the institution and conserving its assets.
capitalization refers to the funds a bank holds           Under the Housing and Economic Recovery Act of
as a buffer against unexpected losses. It includes        2008, the Enterprises entered into conservatorships
shareholders’ equity, loss reserves, and retained         overseen by FHFA. As conservator, FHFA has
earnings. Bank capitalization plays a critical role in    undertaken to preserve and conserve the assets of the
the safety and soundness of individual banks and the      Enterprises and restore them to safety and soundness.
banking system. In most cases, federal regulators set     FHFA also has assumed the powers of the boards
requirements for adequate bank capitalization.            of directors, officers, and shareholders; however,

68    Federal Housing Finance Agency Office of Inspector General
the day-to-day operational decision making of each           agreement providing parties to the agreement
company is delegated by FHFA to the Enterprises’             with the obligation or the choice to buy, sell, or
existing management.                                         exchange something at a future date. They may be
                                                             used to hedge interest rate or other risks related to
Credit Unions: Member-owned, not-for-profit
                                                             holding a mortgage.
financial cooperatives that provide savings, credit,
and other financial services to their members. Credit        Dodd-Frank Wall Street Reform and Consumer
unions pool their members’ savings deposits and              Protection Act of 2010: Legislation that intends
shares to finance their own loan portfolios rather than      to promote the financial stability of the United
rely on outside capital. Members benefit from higher         States by improving accountability and transparency
returns on savings, lower rates on loans, and fewer fees     in the financial system, ending “too big to fail,”
on average.                                                  protecting the American taxpayer by ending
                                                             bailouts, and protecting consumers from abusive
Credit-Related Income (Expense): Comprised of
                                                             financial services practices.
foreclosed property income (expense) and the benefit
(provision) for credit losses.                               Emergency Economic Stabilization Act of 2008:
                                                             Legislation that authorizes Treasury to undertake
Default: Occurs when a mortgagor misses one or
                                                             specific measures to provide stability and prevent
more payments.                                               disruption in the financial system and the economy. It
Deferred Tax Assets: Deferred tax assets are                 also provides funds to preserve homeownership.
recognized for temporary differences that will result        Fannie Mae: A federally chartered corporation that
in deductible amounts and for carryforwards. For             purchases residential mortgages and pools them into
example, a temporary difference is created between           securities that are sold to investors. By purchasing
the reported amount and the tax basis of a liability for     mortgages, Fannie Mae supplies funds to lenders so
estimated expenses if, for tax purposes, those estimated     they may make loans to homebuyers.
expenses are not deductible until a future year.
                                                             Federal Home Loan Banks: The FHLBanks are
Derivative Gains (Losses): The Enterprises acquire
                                                             12 regional cooperative banks that U.S. lending
and guarantee primarily longer-term mortgages and            institutions use to finance housing and economic
securities that are funded with debt instruments. The        development in their communities. Created by
companies manage the interest rate risk associated           Congress, the FHLBanks have been the largest
with these investments and funding activities with           source of funding for community lending for
derivative agreements. The gains (losses) on derivative      eight decades. The FHLBanks provide loans (or
agreements are caused by changes in interest rates that,     “advances”) to their member banks but do not lend
in turn, cause a net increase (decrease) in the fair value   directly to individual borrowers.
of these agreements.
                                                             Federal Housing Administration: Part of HUD,
Derivatives: A financial contract whose value
                                                             FHA insures residential mortgages made by approved
depends on that of another asset, such as a stock            lenders against payment losses. It is the largest insurer
or bond. A derivative contract is, essentially, an

                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014           69
of mortgages in the world, insuring over 34 million         Home Mortgage Disclosure Act: The Home
properties since its inception in 1934.                     Mortgage Disclosure Act was enacted by Congress in
                                                            1975 and was originally implemented by the Federal
Foreclosure: A legal process used by a lender to
                                                            Reserve Board’s Regulation C. On July 21, 2011, rule-
obtain possession of a mortgaged property in order to
                                                            writing authority for the Home Mortgage Disclosure
repay part or all of the debt.
                                                            Act transferred from the Federal Reserve Board to
Freddie Mac: A federally chartered corporation that         the Consumer Financial Protection Bureau. The
purchases residential mortgages, pools them into            Consumer Financial Protection Bureau’s Regulation
securities, and sells them to investors. By purchasing      C, which now implements the Home Mortgage
mortgages, Freddie Mac supplies funds to lenders so         Disclosure Act, requires lending institutions to report
they may make loans to homebuyers.                          public loan data.

Ginnie Mae: A government-owned corporation                  Housing and Economic Recovery Act of 2008:
within HUD. Ginnie Mae guarantees investors the             Legislation that establishes OIG and FHFA, which
timely payment of principal and interest on privately       oversee the GSEs’ operations. HERA also expanded
issued MBS backed by pools of government-insured            Treasury’s authority to provide financial support to
and -guaranteed mortgages.                                  the GSEs.

Government-Sponsored Enterprise Mortgage-                   Implied Guarantee: The assumption, prevalent in
Backed Securities Purchase Facility: The                    the financial markets, that the federal government will
function of the GSE MBS Purchase Facility was               cover Enterprise debt obligations.
to help improve the availability of mortgage credit
                                                            Inspector General Act of 1978: Legislation that
to American homebuyers and mitigate pressures
                                                            authorizes establishment of offices of inspectors
on mortgage rates. To promote the stability of the
                                                            general, “independent and objective units” within
mortgage market, Treasury purchased GSE MBS in
                                                            federal agencies, that: (1) conduct and supervise
the secondary market. By purchasing these securities,
                                                            audits and investigations relating to the programs and
Treasury sought to broaden access to mortgage
                                                            operations of their agencies; (2) provide leadership
funding for current and prospective homeowners, as
                                                            and coordination and recommend policies for
well as to promote market stability.
                                                            activities designed to promote economy, efficiency,
Government-Sponsored Enterprises: Business                  and effectiveness in the administration of agency
organizations chartered and sponsored by the federal        programs and to prevent and detect fraud, waste,
government.                                                 or abuse in such programs and operations; and
                                                            (3) provide a means for keeping the head of the
Guarantee: A pledge to investors that the guarantor         agency and Congress fully and currently informed
will bear the default risk on a pool of loans or other      about problems and deficiencies relating to the
collateral.                                                 administration of such programs and operations and
Hedging: The practice of taking an additional step,         the necessity for and progress of corrective action.
such as buying or selling a derivative, to offset certain   Inspector General Reform Act of 2008: Legislation
risks associated with holding a particular investment,      that amends the Inspector General Act to enhance
such as MBS.                                                the independence of inspectors general and to create
                                                            the Council of the Inspectors General on Integrity
                                                            and Efficiency.

70    Federal Housing Finance Agency Office of Inspector General
Insurance Company: A company whose primary                  Margin Requirements: When buying securities on
and predominant business activity is the writing            margin (the difference between the market value of
of insurance and issuing or underwriting “covered           a stock and the loan a broker makes), the proportion
products.”                                                  of the total market value of the securities that the
                                                            investor must pay for in cash are margin requirements.
Interest Rate Swap: An interest rate swap is
an agreement in which two parties make interest             Mortgage-Backed Securities: MBS are debt
payments to each other for a set period based upon          securities that represent interests in the cash flows—
a notional principal. The notional principal is only        anticipated principal and interest payments—from
used to calculate the interest payments; no risk is         pools of mortgage loans, most commonly on
attached to it. Interest rate swaps commonly involve        residential property.
exchanging payments based on a fixed interest rate
                                                            Non-Cleared Swap: A derivative that has not been
for payments based on a floating rate (e.g., London
                                                            cleared through a central counterparty, which is an
Interbank Offered Rate). The fixed rate is known as
                                                            entity that manages credit risk between two parties
the swap rate.
                                                            during a swap transaction and assumes the credit risk.
Internal Controls: Internal controls are an integral
                                                            Operational Risk: Exposure to loss resulting from
component of an organization’s management that
                                                            inadequate or failed internal processes, people, and
provide reasonable assurance that the following
                                                            systems or from external events (including legal
objectives are achieved: (1) effectiveness and
                                                            events).
efficiency of operations, (2) reliability of financial
reports, and (3) compliance with applicable laws and        Options: Contracts that give the buyer the right, but
regulations. Internal controls relate to management’s       not the obligation, to buy or sell a specified quantity
plans, methods, and procedures used to meet its             of a commodity or other instrument at a specific price
mission, goals, and objectives and include the              within a specified period of time, regardless of the
processes and procedures for planning, organizing,          market price of that instrument.
directing, and controlling program operations as
well as the systems for measuring, reporting, and           Preferred Stock: A security that usually pays a fixed
monitoring program performance.                             dividend and gives the holder a claim on corporate
                                                            earnings and assets superior to that of holders of
Joint and Several Liability: The concept of joint and       common stock but inferior to that of investors in the
several liability provides that each member in a group      corporation’s debt securities.
is responsible for the debts of all in that group. In the
case of the FHLBanks, if any individual FHLBank             Private-Label Mortgage-Backed Securities: MBS
were unable to pay a creditor, the other 11—or any 1        issued or guaranteed by entities other than GSEs or
or more of them—would be required to step in and            federal government agencies. They do not carry an
cover that debt.                                            explicit or implicit government guarantee, and the
                                                            private-label MBS investor bears the risk of losses on
Loan-to-Value: A percentage calculated by dividing          its investment.
the amount borrowed by the price or appraised value
of the home to be purchased; the higher the loan-to-        Real Estate Owned: Foreclosed homes owned by
value (also known as LTV), the less cash a borrower is      government agencies or financial institutions, such as
required to pay as down payment.                            the Enterprises or real estate investors. REO homes
                                                            represent collateral seized to satisfy unpaid mortgage

                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014        71
loans. The investor or its representative then must         to qualify for a mortgage loan, causing loans that
sell the property on its own.                               would ordinarily be declined to be approved. Straw
                                                            buyers may be paid a fee for their involvement in
Securitization: A process whereby a financial
                                                            purchasing a property and usually never intend to
institution assembles pools of income-producing assets
                                                            own or occupy the property.
(such as loans) and then sells securities representing an
interest in the assets’ cash flows to investors.            Swap: Refers to an exchange of one financial
                                                            instrument for another between two parties. This
Securitization Platform: A mechanism that connects
                                                            exchange takes place at a predetermined time, as
capital market investors to borrowers by bundling
                                                            specified in the contract. Swaps can be used to hedge
mortgages into securities and tracking loan payments.
                                                            risk of various kinds, including interest rate risk and
Senior Preferred Stock Purchase Agreements:                 currency risk.
Entered into at the time the conservatorships were
                                                            Swap Dealers: A swap dealer is any person who: is
created, the PSPAs authorize the Enterprises to
                                                            a dealer in swaps; makes a market in swaps; regularly
request and obtain funds from Treasury, among
                                                            enters into swaps with counterparties as an ordinary
other matters. Under the PSPAs, the Enterprises
                                                            course of business; or, engages in activity causing
agreed to consult with Treasury concerning a
                                                            the person to be commonly known in the trade as a
variety of significant business activities, capital
                                                            dealer or marker maker in swaps.
stock issuance, dividend payments, ending the
conservatorships, transferring assets, and awarding         Swaption: An option on a swap that gives the
executive compensation.                                     holder the right, but not the obligation, to enter,
                                                            for example, into an interest rate swap as either the
Servicers: Servicers act as intermediaries between
                                                            payer or the receiver of the fixed side of the swap.
mortgage borrowers and owners of the loans, such
as the Enterprises or MBS investors. They collect           Thrift: A financial institution that ordinarily
the homeowners’ mortgage payments, remit them               possesses the same depository, credit, financial
to the owners of the loans, maintain appropriate            intermediary, and account transactional functions
records, and address delinquencies or defaults on           as a bank but that is chiefly organized and primarily
behalf of the owners of the loans. For their services,      operates to promote savings and home mortgage
they typically receive a percentage of the unpaid           lending rather than commercial lending.
principal balance of the mortgage loans they service.
                                                            Underwater: Term used to describe situations in
The recent financial crisis has put more emphasis
                                                            which the homeowner’s equity is below zero (i.e., the
on servicers’ handling of defaults, modifications,
                                                            home is worth less than the balance of the loan(s) it
short sales, and foreclosures, in addition to their
                                                            secures).
more traditional duty of collecting and distributing
monthly mortgage payments.                                  Underwriting: The process of analyzing a loan
                                                            application to determine the amount of risk
Short Sale: The sale of a mortgaged property for less
                                                            involved in making the loan; it includes a review of
than what is owed on the mortgage.
                                                            the potential borrower’s credit worthiness and an
Straw Buyer: A straw buyer is a person whose                assessment of the property value.
credit profile is used to serve as a cover in a loan
transaction. Straw buyers are chosen for their ability


72    Federal Housing Finance Agency Office of Inspector General
Upfront Fees: One-time payments made by lenders
when a loan is acquired by an Enterprise. Fannie
Mae refers to upfront fees as “loan level pricing
adjustments” and Freddie Mac refers to them as
“delivery fees.”

Valuation Allowance: Method of lowering or raising
an object’s current value by adjusting its acquisition
cost to reflect its market value by offsetting another
account. A valuation allowance is recognized if, based
on the weight of available evidence, it is more likely
than not that some portion or all of a deferred tax
asset will not be realized.




                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014   73
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www.hud.gov/offices/adm/hudclips/letters/mortgagee/      Freddie Mac, “PCs,” Form 10-K for the Fiscal Year
files/10-23ml.pdf.                                       Ended December 31, 2013, at 10. Accessed: October
                                                         9, 2014, at www.freddiemac.com/investors/er/
Freddie Mac, Glossary of Finance and Economic Terms.
                                                         pdf/10k_022714.pdf.
Accessed: September 22, 2014, at www.freddiemac.
com/smm/s_z.htm#S.                                       New York State Society of Certified Public
                                                         Accountants, Glossary: Valuation Allowance. Accessed:
Freddie Mac, “Straw Buyers,” Shut the Door on
                                                         September 10, 2014, at www.nysscpa.org/glossary/
Mortgage Fraud: Information on How to Avoid
                                                         term/645.
Mortgage Fraud, at 13, 15. Accessed: September
22, 2014, at www.freddiemac.com/singlefamily/
preventfraud/toolkit.html (scroll to “Shut the Door
on Mortgage Fraud,” then click “English [PPT]”
under “Educational Presentation: Avoid Mortgage
Fraud,” then download the PowerPoint file).

The Economic Times, “Definition of ‘Swap’,”
Mutual Fund. Accessed: September 18, 2014, at
http://economictimes.indiatimes.com/definition/swap.

Commodity Futures Trading Commission, Office of
Public Affairs, “Definition of ‘Swap Dealer’,” Final
Rules Regarding Further Defining “Swap Dealer,”
“Major Swap Participation” and “Eligible Contract
Participant,” at 1. Accessed: September 18, 2014,
at www.cftc.gov/ucm/groups/public/@newsroom/



                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014    77
Acronyms and Abbreviations                                  FSOC	      Financial Stability Oversight Council

                                                            GAO	       Government Accountability Office
Agency	        Federal Housing Finance Agency
                                                            GSEs	      Government-Sponsored Enterprises
AMFS	          American Mortgage Field Services, LLC
                                                            HAMP	      Home Affordable Modification Program
Blue Book	 Quality Standards for Inspection and 	
               Evaluation                                   HERA	      Housing and Economic Recovery Act of
                                                                       2008
CIGFO	         Council of Inspectors General on 		
               Financial Oversight                          HUD	       Department of Housing and Urban
                                                                       Development
CIGIE	         Council of the Inspectors General on 	
               Integrity and Efficiency                     HUD-OIG	   Department of Housing and Urban
                                                                       Development Office of Inspector
CSP	           Common Securitization Platform                          General
DHMG	          Division of Housing Mission and Goals        IPA	       Independent Public Accountant
Dodd-Frank	 Dodd-Frank Wall Street Reform and               IRS-CI	    IRS-Criminal Investigation
               Consumer Protection Act of 2010
                                                            IT	        Information Technology
DOJ	           Department of Justice
                                                            LPI	       Lender-Placed Insurance
Enterprises	 Fannie Mae and Freddie Mac
                                                            LSC-OIG	   Legal Services Corporation Office of
EO	            Executive Office                                        Inspector General
FAR	           Federal Acquisition Regulation               LTV	Loan-to-Value
FCC-OIG	       Federal Communications Commission            MBS	       Mortgage-Backed Securities
               Office of Inspector General
                                                            MNR	       Minimum Net Reserve
FDIC	          Federal Deposit Insurance Corporation
                                                            MPF	       Mortgage Partnership Finance
FDIC-OIG	      Federal Deposit Insurance Corporation
               Office of Inspector General                  MSR	       Mortgage Servicing Rights

FHA	           Federal Housing Administration               OA	        Office of Audits

FHFA	          Federal Housing Finance Agency               OAd	       Office of Administration

FHLBank 	      Federal Home Loan Bank System                OC	        Office of Counsel
System	
                                                            OE	        Office of Evaluations
FHLBanks	 Federal Home Loan Banks
                                                            OI	        Office of Investigations
FISMA	         Federal Information Security
                                                            OIG	       Federal Housing Finance Agency Office
               Management Act of 2002
                                                                       of Inspector General


78      Federal Housing Finance Agency Office of Inspector General
OR	        Office of Oversight and Review            SIGTARP	     Office of the Special Inspector General
                                                                  for the Troubled Asset Relief Program
PFCRA	     Program Fraud Civil Remedies Act of
           1986                                      SIR	         Systemic Implication Report

PII	       Personal Identifying Information          TBA	To-be-Announced

PSPAs	     Senior Preferred Stock Purchase           TBW	         Taylor, Bean & Whitaker Mortgage
           Agreements                                             Corporation

QAR	       Quality Assurance Review                  Treasury	    Department of the Treasury

REO	       Real Estate Owned                         USPIS	       Postal Inspection Service

RMBS	      Residential Mortgage-Backed Securities    Yellow	      Government Auditing Standards
                                                     Book
SAI	       Servicing Alignment Initiative

SBA-OIG	   Small Business Administration Office of
           Inspector General




                               Semiannual Report to the Congress • April 1, 2014–September 30, 2014   79
Appendix B:                                               Agency’s operations and aid in the prevention and
                                                          detection of fraud, waste, or abuse. Figure 19 (see
OIG Recommendations                                       page 81) summarizes OIG’s formal recommendations
                                                          that were made, pending, or closed during the
In accordance with the provisions of the Inspector        reporting period. Figure 20 (see page 101) lists OIG’s
General Act, one of the key duties of OIG is to           audit and evaluation reports for which all of the
provide to FHFA recommendations that promote              recommendations were closed in prior semiannual
the transparency, efficiency, and effectiveness of the    periods.




80    Federal Housing Finance Agency Office of Inspector General
Figure 19. Summary of OIG Recommendations

       No.                     Recommendation                         Report                 Status

  AUD-2014-018-1    FHFA should direct the Enterprises to       FHFA’s Oversight of    Recommendation
                    assess the cost-benefit of a risk-based     Risks Associated       not accepted
                    approach to requiring their sellers and     with the Enterprises   by FHFA;
                    servicers to provide independent, third-    Relying on             recommendation
                    party attestation reports on compliance     Counterparties to      remains open and
                    with Enterprise origination and servicing   Comply with Selling    will continue to be
                    guidance.                                   and Servicing          monitored.
                                                                Guidelines


  AUD-2014-017-1    FHFA should conduct a comprehensive         FHFA Oversight         Recommendation
                    examination to determine whether            of Freddie Mac’s       partially agreed
                    Freddie Mac has implemented and             Information            to by FHFA;
                    enforces an effective IT investment         Technology             implementation of
                    management process.                         Investments            recommendation
                                                                                       pending.


  AUD-2014-017-2    FHFA should develop and issue               FHFA Oversight         Recommendation
                    Enterprise IT investment management         of Freddie Mac’s       agreed to by FHFA;
                    guidance.                                   Information            implementation of
                                                                Technology             recommendation
                                                                Investments            pending.


  AUD-2014-017-3    FHFA should evaluate whether Freddie        FHFA Oversight         Recommendation
                    Mac reports currently used by FHFA          of Freddie Mac’s       agreed to by FHFA;
                    examiners provide the information           Information            implementation of
                    necessary to conduct effective              Technology             recommendation
                    supervisory monitoring of Freddie Mac’s     Investments            pending.
                    portfolio of IT investments.


  AUD-2014-016-1    FHFA should assess the current              FHFA’s                 Recommendation
                    state of the Enterprises’ critical risk     Representation         partially agreed to
                    assessment tools, representations           and Warranty           by FHFA; however,
                    and warranties tracking systems, and        Framework              OIG found FHFA’s
                    any other systems, processes, or                                   planned actions
                    infrastructure to determine whether                                “potentially
                    the Enterprises are in a position to                               responsive.”
                    minimize financial risk that may result                            Recommendation
                    from the new framework. The results                                remains open and
                    of this assessment should document                                 will continue to be
                    any areas of identified risk, planned                              monitored.
                    actions, and corresponding timelines
                    to mitigate each area of identified
                    risk. Further, this assessment should
                    provide an estimate of when each
                    Enterprise will be reasonably equipped
                    to work safely and soundly within the
                    new framework.



                             Semiannual Report to the Congress • April 1, 2014–September 30, 2014        81
        No.                       Recommendation                        Report                Status

 AUD-2014-016-2        FHFA should perform a comprehensive        FHFA’s                Recommendation
                       analysis to assess whether financial       Representation        not accepted
                       risks associated with the new              and Warranty          by FHFA;
                       representation and warranty framework,     Framework             recommendation
                       including with regard to sunset periods,                         remains open and
                       are appropriately balanced between                               will continue to be
                       the Enterprises and sellers. This                                monitored.
                       analysis should be based on consistent
                       transactional data across both
                       Enterprises, identify potential costs
                       and benefits to the Enterprises, and
                       document consideration of the Agency’s
                       objectives.


 AUD-2014-015-1        FHFA should communicate a written          FHFA Oversight        Recommendation
                       supervisory expectation to Fannie          of Fannie Mae’s       agreed to by FHFA;
                       Mae requiring that its business units      Collection of Funds   implementation of
                       perform a review of non-delegated          from Servicers        recommendation
                       short sale transactions to identify        that Closed Short     pending.
                       any transactions where the servicer        Sales Below the
                       submitted net proceeds that were less      Authorized Prices
                       than the sale amount approved by
                       Fannie Mae and draft a remediation
                       plan, as appropriate.


 AUD-2014-015-2        FHFA should communicate a written          FHFA Oversight        Recommendation
                       supervisory expectation to Fannie          of Fannie Mae’s       agreed to by FHFA;
                       Mae requiring its internal audit group     Collection of Funds   implementation of
                       to review Fannie Mae’s plan to collect     from Servicers        recommendation
                       funds for delegated and non-delegated      that Closed Short     pending.
                       short sale transactions where the net      Sales Below the
                       proceeds received were less than the       Authorized Prices
                       amounts authorized by Fannie Mae.


 AUD-2014-015-3        FHFA should analyze Fannie Mae’s           FHFA Oversight        Recommendation
                       actions and remediation plans in           of Fannie Mae’s       agreed to by FHFA;
                       response to recommendations 1 and          Collection of Funds   implementation of
                       2 to determine whether Fannie Mae          from Servicers        recommendation
                       has taken necessary steps to ensure        that Closed Short     pending.
                       that servicers are held accountable for    Sales Below the
                       servicing violations and credit losses     Authorized Prices
                       are minimized. FHFA should also
                       require modification by Fannie Mae of
                       its remediation plans, as appropriate.




82   Federal Housing Finance Agency Office of Inspector General
     No.                    Recommendation                       Report                Status

AUD-2014-014-1   FHFA should issue guidance to the         FHFA Actions to       Recommendation
                 Enterprises on the risk management        Manage Enterprise     agreed to by FHFA;
                 process that should be employed to        Risks from            implementation of
                 identify and mitigate risks related to    Nonbank Servicers     recommendation
                 nonperformance under Enterprise           Specializing in       pending.
                 contracts with nonbank special            Troubled Mortgages
                 servicers.


AUD-2014-014-2   FHFA should develop a comprehensive,      FHFA Actions to       Recommendation
                 formal framework to mitigate the risks    Manage Enterprise     partially agreed
                 nonbank special servicers pose to the     Risks from            to by FHFA;
                 Enterprises that includes routine FHFA    Nonbank Servicers     implementation of
                 examinations, Enterprise reviews, and     Specializing in       recommendation
                 capacity testing before acquisition       Troubled Mortgages    pending.
                 of servicing rights to ensure these
                 servicers can continue to fulfill their
                 servicing requirements.


AUD-2014-013-1   FHFA should establish policies,           CohnReznick LLP’s     Recommendation
                 procedures, and processes to execute      Independent Audit     partially agreed
                 FHFA’s oversight of the Enterprises’      of FHFA’s Oversight   to by FHFA;
                 monitoring of business conducted with     of Enterprise         implementation of
                 mortgage insurers. These policies         Monitoring of the     recommendation
                 should provide for the coordinated        Financial Condition   pending.
                 involvement of necessary FHFA             of Mortgage
                 divisions and define their roles and      Insurers
                 responsibilities in matters pertaining
                 to managing risks to the Enterprises
                 associated with mortgage insurers.


AUD-2014-013-2   FHFA should develop specific criteria,    CohnReznick LLP’s     Recommendation
                 and update the letter of instruction      Independent Audit     agreed to by FHFA;
                 accordingly, that classifies new          of FHFA’s Oversight   implementation of
                 mortgage insurers as non-delegated        of Enterprise         recommendation
                 activities that require FHFA approval.    Monitoring of the     pending.
                                                           Financial Condition
                                                           of Mortgage
                                                           Insurers


AUD-2014-013-3   FHFA should develop a methodology for     CohnReznick LLP’s     Recommendation
                 FHFA’s review of new mortgage insurers    Independent Audit     agreed to by FHFA;
                 and ensure procedures performed are       of FHFA’s Oversight   implementation of
                 adequately documented and support         of Enterprise         recommendation
                 the conclusions reached during the        Monitoring of the     pending.
                 review.                                   Financial Condition
                                                           of Mortgage
                                                           Insurers




                          Semiannual Report to the Congress • April 1, 2014–September 30, 2014    83
        No.                       Recommendation                         Report                Status

 AUD-2014-012-1        FHFA should direct the Enterprises to       FHFA Oversight        Recommendation
                       jointly assess the effectiveness of their   of Enterprise         partially agreed
                       pre-foreclosure property inspection         Controls Over         to by FHFA;
                       processes. OIG identified several           Pre-Foreclosure       implementation of
                       specific areas to review as part of the     Property              recommendation
                       assessment, including: (1) identifying      Inspections           pending.
                       pre-foreclosure property inspection
                       risk and objectives, (2) identifying
                       cost-effective control alternatives
                       for achieving the objective(s), and
                       (3) recommending inspection standards
                       and quality controls with regard to the
                       content and frequency of inspections.


 AUD-2014-012-2        Based on the results of the                 FHFA Oversight        Recommendation
                       Enterprises’ assessment of their            of Enterprise         not accepted by
                       pre-foreclosure property inspection         Controls Over         FHFA; however,
                       processes, FHFA should direct the           Pre-Foreclosure       OIG considers
                       Enterprises to establish uniform pre-       Property              FHFA’s response to
                       foreclosure inspection quality standards    Inspections           recommendation
                       and quality control processes for                                 2 to be potentially
                       inspectors.                                                       responsive to
                                                                                         resolve the
                                                                                         recommendation.
                                                                                         Recommendation
                                                                                         remains open and
                                                                                         will continue to be
                                                                                         monitored.


 AUD-2014-009-1        FHFA should promptly quantify the           FHFA Oversight of     Recommendation
                       potential benefit of implementing a         Enterprise Handling   agreed to by FHFA;
                       repurchase late fee program at Fannie       of Aged Repurchase    implementation of
                       Mae, and then determine whether             Demands               recommendation
                       the potential cost of from $500,000                               pending.
                       to $5.4 million still outweighs the
                       potential benefit.




84   Federal Housing Finance Agency Office of Inspector General
     No.                    Recommendation                        Report                Status

AUD-2014-009-2   FHFA should direct Freddie Mac to          FHFA Oversight of     Closed—Final
                 develop a repurchase late fee report to    Enterprise Handling   action taken by
                 be given routinely to FHFA that expands    of Aged Repurchase    FHFA.
                 on information already provided by         Demands
                 adding summary information by seller
                 on outstanding repurchases, aging
                 of repurchases, late fees assessed
                 and collected, discretionary late fee
                 waivers, and global late fee exclusions.
                 Such a report would provide Freddie
                 Mac and FHFA management with
                 needed information to manage and
                 assess Freddie Mac’s repurchase late
                 fee program more effectively.


AUD-2014-009-3   FHFA should direct Freddie Mac to          FHFA Oversight of     Closed—Final
                 provide FHFA with information on any       Enterprise Handling   action taken by
                 assessed but uncollected late fees         of Aged Repurchase    FHFA.
                 associated with the repurchase claims      Demands
                 that are included in the 2013 bulk
                 settlements so that these fees can
                 be considered in the negotiations and
                 documented in accordance with the
                 Office of Conservatorship Operations’
                 Settlement Policy.


AUD-2014-008-1   FHFA should perform supervisory            FHFA’s Oversight      Recommendation
                 review and follow-up to ensure that        of the Enterprises’   agreed to by FHFA;
                 Fannie Mae takes action to change the      Use of Appraisal      implementation of
                 portal message type from automatic         Data Before They      recommendation
                 override to manual override or fatal       Buy Single-Family     pending.
                 for the 25 proprietary messages            Mortgages
                 related to underwriting requirements,
                 which will require lenders to take
                 action to address the appraisal-
                 related messages warning of potential
                 underwriting violations prior to
                 delivering the loans.


AUD-2014-008-2   FHFA should perform supervisory            FHFA’s Oversight      Recommendation
                 review and follow-up to ensure that        of the Enterprises’   agreed to by FHFA;
                 Freddie Mac takes action to develop        Use of Appraisal      implementation of
                 and implement additional proprietary       Data Before They      recommendation
                 messages related to its property           Buy Single-Family     pending.
                 underwriting requirements.                 Mortgages




                          Semiannual Report to the Congress • April 1, 2014–September 30, 2014      85
        No.                       Recommendation                         Report                Status

 AUD-2014-008-3        FHFA should perform supervisory review      FHFA’s Oversight      Recommendation
                       and follow-up to ensure that Freddie        of the Enterprises’   agreed to by FHFA;
                       Mac takes action to establish the           Use of Appraisal      implementation of
                       additional proprietary messages related     Data Before They      recommendation
                       to property underwriting requirements       Buy Single-Family     pending.
                       as manual override or fatal, which          Mortgages
                       will require the lenders to take action
                       to address the messages prior to
                       delivering the loans.


 AUD-2014-008-4        FHFA should perform supervisory review      FHFA’s Oversight      Recommendation
                       and follow-up to ensure that Freddie        of the Enterprises’   agreed to by FHFA;
                       Mac takes action to review the type of      Use of Appraisal      implementation of
                       message related to the existing nine        Data Before They      recommendation
                       proprietary messages for consideration      Buy Single-Family     pending.
                       of converting the type of message from      Mortgages
                       automatic override to manual override
                       or fatal, which will require the lenders
                       to take action to address the messages
                       prior to delivering the loans.


 AUD-2014-008-5        FHFA should perform supervisory review      FHFA’s Oversight      Recommendation
                       of both Enterprises to ensure the portal    of the Enterprises’   agreed to by FHFA;
                       warning messages distinguish between        Use of Appraisal      implementation of
                       inactive appraisers and unverified          Data Before They      recommendation
                       appraisers, as of the date the appraisal    Buy Single-Family     pending.
                       is performed.                               Mortgages


 AUD-2014-008-6        FHFA should perform supervisory review      FHFA’s Oversight      Recommendation
                       of both Enterprises to ensure that the      of the Enterprises’   agreed to by FHFA;
                       portal tests whether appraisers are         Use of Appraisal      implementation of
                       licensed and active at the time the         Data Before They      recommendation
                       appraisal is performed.                     Buy Single-Family     pending.
                                                                   Mortgages


 AUD-2014-008-7        FHFA should perform supervisory review      FHFA’s Oversight      Recommendation
                       of both Enterprises to change the           of the Enterprises’   agreed to by FHFA;
                       message type, for messages relating         Use of Appraisal      implementation of
                       to appraiser license status, from           Data Before They      recommendation
                       automatic override to manual override       Buy Single-Family     pending.
                       or fatal, which will require lenders to     Mortgages
                       take action to address the message
                       prior to delivering the loan. This action
                       can be taken once the system logic
                       is fixed and the historical records are
                       available to determine the status of
                       an appraiser’s license at the time the
                       appraisal work is performed, and the
                       states are updating in real time.



86   Federal Housing Finance Agency Office of Inspector General
      No.                    Recommendation                         Report                Status

AUD-2014-008-8    FHFA should perform supervisory review      FHFA’s Oversight      Recommendation
                  of both Enterprises to seek remedy for      of the Enterprises’   agreed to by FHFA;
                  the 23 loans, valued at $3.4 million,       Use of Appraisal      implementation of
                  delivered to the Enterprises by the two     Data Before They      recommendation
                  suspended appraisers in violation of        Buy Single-Family     pending.
                  underwriting requirements.                  Mortgages


AUD-2014-008-9    FHFA should perform supervisory             FHFA’s Oversight      Recommendation
                  review and follow-up to ensure that         of the Enterprises’   agreed to by FHFA;
                  Freddie Mac takes action to implement       Use of Appraisal      implementation of
                  an internal control policy and related      Data Before They      recommendation
                  procedures to follow up on appraisal        Buy Single-Family     pending.
                  license status messages generated by        Mortgages
                  the portal.


AUD-2014-008-10   FHFA should perform supervisory review      FHFA’s Oversight      Recommendation
                  and follow-up to ensure that Freddie        of the Enterprises’   agreed to by FHFA;
                  Mac takes action to review loans            Use of Appraisal      implementation of
                  purchased since the portal’s inception      Data Before They      recommendation
                  that generated messages related to the      Buy Single-Family     pending.
                  appraiser’s license status.                 Mortgages


AUD-2014-008-11   FHFA should perform supervisory review      FHFA’s Oversight      Recommendation
                  and follow-up to ensure that Freddie        of the Enterprises’   agreed to by FHFA;
                  Mac takes action to use the results         Use of Appraisal      implementation of
                  of the review to repurchase the loans       Data Before They      recommendation
                  that contained appraisals that were         Buy Single-Family     pending.
                  performed by unlicensed appraisers, as      Mortgages
                  appropriate.


AUD-2014-008-12   FHFA should pursue retention of             FHFA’s Oversight      Recommendation
                  historical records of the status of         of the Enterprises’   agreed to by FHFA;
                  appraisers’ licenses in the National        Use of Appraisal      implementation of
                  Registry of Appraisers sufficient to        Data Before They      recommendation
                  determine the status of appraisers’         Buy Single-Family     pending.
                  licenses at the time the appraisal work     Mortgages
                  is performed.


AUD-2014-008-13   FHFA should pursue having the National      FHFA’s Oversight      Recommendation
                  Registry of Appraisers updated to           of the Enterprises’   agreed to by FHFA;
                  reflect the status of state-certified and   Use of Appraisal      implementation of
                  -licensed appraisers on a real-time         Data Before They      recommendation
                  basis.                                      Buy Single-Family     pending.
                                                              Mortgages




                           Semiannual Report to the Congress • April 1, 2014–September 30, 2014      87
        No.                       Recommendation                        Report                Status

 AUD-2014-008-14       FHFA should perform supervisory            FHFA’s Oversight      Recommendation
                       review and follow-up to ensure that the    of the Enterprises’   agreed to by FHFA;
                       Enterprises develop and implement the      Use of Appraisal      implementation of
                       portal as intended by FHFA’s uniform       Data Before They      recommendation
                       mortgage data program directive.           Buy Single-Family     pending.
                                                                  Mortgages


 AUD-2014-006-1        FHFA should document purchase card         FHFA’s Use of         Closed—Final
                       policies and procedures related to the     Government            action taken by
                       purchase of training above the $5,000      Purchase Cards        FHFA.
                       micro-purchase threshold.


 AUD-2014-006-2        FHFA should document purchase card         FHFA’s Use of         Recommendation
                       policies and procedures related to the     Government            agreed to by FHFA;
                       use of employee Continued Service          Purchase Cards        implementation of
                       Agreements for high-cost training.                               recommendation
                                                                                        pending.


 AUD-2014-006-3        FHFA should document purchase card         FHFA’s Use of         Closed—Final
                       policies and procedures related to the     Government            action taken by
                       approval and resetting of temporary        Purchase Cards        FHFA.
                       increases in transactions limits in a
                       cardholder’s purchase authority.


 AUD-2014-006-4        FHFA should document purchase card         FHFA’s Use of         Closed—Final
                       policies and procedures related to the     Government            action taken by
                       management of Merchant Category            Purchase Cards        FHFA.
                       Code exceptions, which should be
                       allowed only on a case-by-case basis
                       and removed in a timely manner after
                       the allowed purchase is transacted.


 AUD-2014-004-1        FHFA should review Fannie Mae’s            FHFA Oversight        Closed—Final
                       remediation plan to ensure that            of Fannie Mae’s       action taken by
                       the plan provides for the return of        Remediation           FHFA.
                       borrower contributions to borrowers in     Plan to Refund
                       a consistent manner by Fannie Mae          Contributions to
                       and its servicers, and issue guidance      Borrowers for
                       as deemed appropriate regarding the        the Short Sale of
                       execution of the remediation plan.         Properties




88   Federal Housing Finance Agency Office of Inspector General
     No.                    Recommendation                        Report                Status

AUD-2014-004-2   FHFA should oversee the execution          FHFA Oversight        Closed—Final
                 of Fannie Mae’s remediation plan to        of Fannie Mae’s       action taken by
                 ensure that a good faith effort is made    Remediation           FHFA.
                 to promptly refund inappropriately         Plan to Refund
                 collected borrower contributions to        Contributions to
                 borrowers.                                 Borrowers for
                                                            the Short Sale of
                                                            Properties


AUD-2014-004-3   FHFA should examine Freddie Mac’s          FHFA Oversight        Recommendation
                 controls over the collection of borrower   of Fannie Mae’s       agreed to by FHFA;
                 contributions for the short sales of       Remediation           implementation of
                 properties located in California, and      Plan to Refund        recommendation
                 issue guidance to strengthen controls      Contributions to      pending.
                 as deemed appropriate based on the         Borrowers for
                 results of the examination.                the Short Sale of
                                                            Properties


AUD-2014-003-1   To strengthen controls over short          Fannie Mae’s          Recommendation
                 sales, FHFA should direct Fannie           Controls Over Short   agreed to by FHFA;
                 Mae to enforce the requirement             Sale Eligibility      implementation of
                 that all borrowers not eligible for the    Determinations        recommendation
                 Streamlined Documentation Program          Should be             pending.
                 provide a borrower-certified Uniform       Strengthened
                 Borrower Assistance Form and
                 supporting documentation in order to
                 make eligibility determinations and
                 assess borrower contributions.


AUD-2014-003-2   To strengthen controls over short          Fannie Mae’s          Recommendation
                 sales, FHFA should direct Fannie Mae       Controls Over Short   agreed to by FHFA;
                 to establish controls to identify and      Sale Eligibility      implementation of
                 resolve inconsistencies between the        Determinations        recommendation
                 Uniform Borrower Assistance Form and       Should be             pending.
                 supporting information used in making      Strengthened
                 short sale eligibility determinations.


AUD-2014-003-3   To strengthen controls over short          Fannie Mae’s          Closed—Final
                 sales, FHFA should direct Fannie Mae       Controls Over Short   action taken by
                 to assess its servicer compensation        Sale Eligibility      FHFA.
                 structure to determine if it should        Determinations
                 consider the quality of borrower           Should be
                 eligibility determinations for short       Strengthened
                 sales and success in limiting losses,
                 including through contributions by
                 borrowers with the ability to pay.




                          Semiannual Report to the Congress • April 1, 2014–September 30, 2014      89
        No.                       Recommendation                         Report                 Status

 AUD-2014-003-4        To strengthen controls over short           Fannie Mae’s           Recommendation
                       sales, FHFA should direct Fannie Mae        Controls Over Short    agreed to by FHFA;
                       to enhance controls over collection         Sale Eligibility       implementation of
                       and use of electronic information from      Determinations         recommendation
                       servicers on the financial condition of     Should be              pending.
                       borrowers to ensure data is reliable        Strengthened
                       and effectively used in both borrower
                       eligibility and servicer performance
                       evaluation processes.


 AUD-2014-003-5        FHFA should review the Streamlined          Fannie Mae’s           Closed—Final
                       Documentation Program to determine          Controls Over Short    action taken by
                       whether the program should be               Sale Eligibility       FHFA.
                       available to borrowers seeking approval     Determinations
                       to short sell non-owner-occupied            Should be
                       properties.                                 Strengthened


 AUD-2014-003-6        FHFA should provide examination             Fannie Mae’s           Recommendation
                       coverage of Fannie Mae’s short sale         Controls Over Short    agreed to by FHFA;
                       activities with particular emphasis on      Sale Eligibility       implementation of
                       identifying systemic deficiencies related   Determinations         recommendation
                       to borrower submissions, Enterprise         Should be              pending.
                       eligibility determinations, servicer        Strengthened
                       compensation structure, and reliability
                       of electronic information used in
                       managing short sales.


 AUD-2013-009-1        To strengthen its Enterprise information    Action Needed          Closed—Final
                       security and privacy programs, FHFA         to Strengthen          action taken by
                       should define and issue Enterprise          FHFA Oversight         FHFA.
                       information security and privacy            of Enterprise
                       program requirements.                       Information
                                                                   Security and Privacy
                                                                   Programs


 AUD-2013-009-2        To strengthen its Enterprise information    Action Needed          Closed—Final
                       security and privacy programs, FHFA         to Strengthen          action taken by
                       should implement the workforce              FHFA Oversight         FHFA.
                       plan and ensure the plan of action          of Enterprise
                       addresses the need to have an               Information
                       adequate number of IT examiners.            Security and Privacy
                       Specifically, FHFA should provide an        Programs
                       appropriate level of management
                       oversight during the annual supervisory
                       examination planning and execution
                       processes to ensure completion of
                       the annual plan and compliance with
                       established IT examination policies and
                       procedures.



90   Federal Housing Finance Agency Office of Inspector General
     No.                    Recommendation                        Report                 Status

AUD-2013-009-3   To strengthen its Enterprise information   Action Needed          Closed—Final
                 security and privacy programs, FHFA        to Strengthen          action taken by
                 should ensure that planning for            FHFA Oversight         FHFA.
                 future IT examinations is based on         of Enterprise
                 fully executed risk assessments, as        Information
                 required by FHFA policy.                   Security and Privacy
                                                            Programs


AUD-2013-009-4   To strengthen its Enterprise information   Action Needed          Closed—Final
                 security and privacy programs, FHFA        to Strengthen          action taken by
                 should consistently deploy the             FHFA Oversight         FHFA.
                 automated tools needed for ongoing         of Enterprise
                 monitoring and tracking of previously      Information
                 identified security and privacy issues     Security and Privacy
                 in order to enhance the efficiency         Programs
                 and effectiveness of the examination
                 process.


AUD-2013-009-5   To strengthen its Enterprise information   Action Needed          Recommendation
                 security and privacy programs, FHFA        to Strengthen          agreed to by FHFA;
                 should establish and document a            FHFA Oversight         implementation of
                 process for placing formal reliance on     of Enterprise          recommendation
                 the work of internal audit divisions at    Information            pending.
                 the Enterprises.                           Security and Privacy
                                                            Programs


AUD-2013-008-1   FHFA should develop a risk-based plan      FHFA Should            Recommendation
                 to monitor the Enterprises’ oversight      Develop and            agreed to by FHFA;
                 of their counterparties’ compliance        Implement a            implementation of
                 with contractual representations and       Risk-Based Plan        recommendation
                 warranties, including those related to     to Monitor the         pending.
                 federal consumer protection laws.          Enterprises’
                                                            Oversight of Their
                                                            Counterparties’
                                                            Compliance
                                                            with Contractual
                                                            Requirements
                                                            Including Consumer
                                                            Protection Laws




                          Semiannual Report to the Congress • April 1, 2014–September 30, 2014       91
        No.                       Recommendation                       Report               Status

 AUD-2013-007-1        To improve servicer compliance with        Enhanced FHFA       Recommendation
                       escalated case requirements, FHFA          Oversight Is        agreed to by FHFA;
                       should perform supervisory review          Needed to Improve   implementation of
                       and follow up to ensure that Freddie       Mortgage Servicer   recommendation
                       Mac requires its servicers to report       Compliance          pending.
                       escalated consumer complaint               with Consumer
                       information—to include a negative          Complaint
                       response if servicers have not received    Requirements
                       any escalated complaints—on a
                       monthly basis.


 AUD-2013-007-2        To improve servicer compliance with        Enhanced FHFA       Recommendation
                       escalated case requirements, FHFA          Oversight Is        agreed to by FHFA;
                       should perform supervisory review          Needed to Improve   implementation of
                       and follow up to ensure that Freddie       Mortgage Servicer   recommendation
                       Mac requires its servicers to resolve      Compliance          pending.
                       escalated consumer complaint               with Consumer
                       information within 30 days.                Complaint
                                                                  Requirements


 AUD-2013-007-3        To improve servicer compliance with        Enhanced FHFA       Recommendation
                       escalated case requirements, FHFA          Oversight Is        agreed to by FHFA;
                       should perform supervisory review and      Needed to Improve   implementation of
                       follow up to ensure that Freddie Mac       Mortgage Servicer   recommendation
                       requires its servicers to categorize       Compliance          pending.
                       resolved escalated consumer complaint      with Consumer
                       information in accordance with             Complaint
                       resolution categories defined in the       Requirements
                       servicing guide.


 AUD-2013-007-4        To enhance Freddie Mac’s oversight         Enhanced FHFA       Recommendation
                       of its servicers, FHFA should perform      Oversight Is        agreed to by FHFA;
                       supervisory review and follow up to        Needed to Improve   implementation of
                       ensure that Freddie Mac includes           Mortgage Servicer   recommendation
                       testing of servicers’ performance for      Compliance          pending.
                       handling and reporting escalated cases     with Consumer
                       as part of its reviews of servicers’       Complaint
                       performance.                               Requirements


 AUD-2013-007-5        To enhance Freddie Mac’s oversight         Enhanced FHFA       Recommendation
                       of its servicers, FHFA should perform      Oversight Is        agreed to by FHFA;
                       supervisory review and follow up to        Needed to Improve   implementation of
                       ensure that Freddie Mac identifies         Mortgage Servicer   recommendation
                       and addresses servicer operational         Compliance          pending.
                       challenges with implementing the           with Consumer
                       escalated case requirements as             Complaint
                       part of the testing of the servicers’      Requirements
                       performance for handling and reporting
                       escalated cases.




92   Federal Housing Finance Agency Office of Inspector General
     No.                    Recommendation                        Report               Status

AUD-2013-007-6   To enhance Freddie Mac’s oversight         Enhanced FHFA        Recommendation
                 of its servicers, FHFA should perform      Oversight Is         agreed to by FHFA;
                 supervisory review and follow up to        Needed to Improve    implementation of
                 ensure that Freddie Mac establishes        Mortgage Servicer    recommendation
                 penalties in the servicing guide, such     Compliance           pending.
                 as fines or fees, for servicers’ lack of   with Consumer
                 reporting escalated cases.                 Complaint
                                                            Requirements


AUD-2013-007-7   To enhance Freddie Mac’s oversight         Enhanced FHFA        Recommendation
                 of its servicers, FHFA should perform      Oversight Is         agreed to by FHFA;
                 supervisory review and follow up to        Needed to Improve    implementation of
                 ensure that Freddie Mac expands            Mortgage Servicer    recommendation
                 the servicer scorecard and servicer        Compliance           pending.
                 performance evaluations to include         with Consumer
                 reporting of escalated cases.              Complaint
                                                            Requirements


AUD-2013-007-8   To enhance Freddie Mac’s oversight         Enhanced FHFA        Recommendation
                 of its servicers, FHFA should perform      Oversight Is         agreed to by FHFA;
                 supervisory review and follow up to        Needed to Improve    implementation of
                 ensure that Freddie Mac provides           Mortgage Servicer    recommendation
                 information on escalated cases             Compliance           pending.
                 received from servicers to internal        with Consumer
                 staff (the counterparty operational risk   Complaint
                 evaluation team) responsible for testing   Requirements
                 servicer performance.


AUD-2013-007-9   To improve its own oversight, FHFA         Enhanced FHFA        Closed—Final
                 should develop and implement               Oversight Is         action taken by
                 FHFA examination guidance related          Needed to Improve    FHFA.
                 to Enterprise implementation and           Mortgage Servicer
                 compliance with FHFA directives.           Compliance
                                                            with Consumer
                                                            Complaint
                                                            Requirements


AUD-2012-008-1   FHFA should reassess the non-              FHFA’s Conservator   Closed—Final
                 delegated authorities to ensure            Approval Process     action taken by
                 sufficient FHFA involvement with major     for Fannie Mae       FHFA.
                 business decisions.                        and Freddie Mac
                                                            Business Decisions




                           Semiannual Report to the Congress • April 1, 2014–September 30, 2014    93
        No.                       Recommendation                        Report               Status

 AUD-2012-008-2        FHFA should evaluate the internal          FHFA’s Conservator   Recommendation
                       controls established by the Enterprises,   Approval Process     agreed to by FHFA;
                       including policies and procedures, to      for Fannie Mae       implementation of
                       ensure they communicate all major          and Freddie Mac      recommendation
                       business decisions requiring approval      Business Decisions   pending.
                       to the Agency.


 AUD-2012-008-3A       FHFA should evaluate Fannie Mae’s          FHFA’s Conservator   Closed—Final
                       mortgage pool policy commutations          Approval Process     action taken by
                       to determine whether these                 for Fannie Mae       FHFA.
                       transactions were appropriate and          and Freddie Mac
                       in the best interest of the Enterprise     Business Decisions
                       and taxpayers. This evaluation should
                       include 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.


 AUD-2012-008-3B       FHFA should evaluate Fannie Mae’s          FHFA’s Conservator   Closed—Final
                       mortgage pool policy commutations          Approval Process     action taken by
                       to determine whether these                 for Fannie Mae       FHFA.
                       transactions were appropriate and          and Freddie Mac
                       in the best interest of the Enterprise     Business Decisions
                       and taxpayers. This evaluation should
                       include 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.


 AUD-2012-008-4        FHFA should develop a methodology          FHFA’s Conservator   Closed—Final
                       and process for conservator review         Approval Process     action taken by
                       of proposed mortgage pool policy           for Fannie Mae       FHFA.
                       commutations to ensure that there is a     and Freddie Mac
                       documented, sound basis for any pool       Business Decisions
                       policy commutations executed in the
                       future.




94   Federal Housing Finance Agency Office of Inspector General
     No.                    Recommendation                       Report                Status

AUD-2012-008-5   FHFA should complete actions to           FHFA’s Conservator    Closed—Final
                 establish a governance structure at       Approval Process      action taken by
                 Fannie Mae for obtaining conservator      for Fannie Mae        FHFA.
                 approval of counterparty risk limit       and Freddie Mac
                 increases.                                Business Decisions


AUD-2012-008-6   FHFA should establish a clear             FHFA’s Conservator    Closed—Final
                 timetable and deadlines for Enterprise    Approval Process      action taken by
                 submission of transactions to FHFA for    for Fannie Mae        FHFA.
                 conservatorship approval.                 and Freddie Mac
                                                           Business Decisions


AUD-2012-008-7   FHFA should develop criteria for          FHFA’s Conservator    Closed—Final
                 conducting business case analyses and     Approval Process      action taken by
                 substantiating conservator decisions.     for Fannie Mae        FHFA.
                                                           and Freddie Mac
                                                           Business Decisions


AUD-2012-008-8   FHFA should issue a directive to          FHFA’s Conservator    Closed—Final
                 the Enterprises requiring them to         Approval Process      action taken by
                 notify FHFA of any deviation from any     for Fannie Mae        FHFA.
                 previously reviewed action so that FHFA   and Freddie Mac
                 may consider the change and revisit its   Business Decisions
                 conservatorship decision.


AUD-2012-008-9   FHFA should implement a risk-             FHFA’s Conservator    Closed—Final
                 based examination plan to review          Approval Process      action taken by
                 the Enterprises’ execution of and         for Fannie Mae        FHFA.
                 adherence to conservatorship              and Freddie Mac
                 decisions.                                Business Decisions


EVL-2014-011-1   FHFA should require Freddie Mac to        Freddie Mac Could     Closed—Final
                 determine, by means of a cost-benefit     Further Reduce        action taken by
                 analysis, whether to increase the size    Reimbursement         FHFA.
                 of the sample of reimbursement claims     Errors by Reviewing
                 that it subjects to the prepayment        More Servicer
                 review.                                   Claims


EVL-2014-011-2   FHFA should require Freddie Mac to,       Freddie Mac Could     Recommendation
                 if warranted by the result of the cost-   Further Reduce        agreed to by FHFA;
                 benefit analysis, increase the size of    Reimbursement         implementation of
                 the sample of reimbursement claims        Errors by Reviewing   recommendation
                 that it subjects to prepayment review.    More Servicer         pending.
                                                           Claims




                          Semiannual Report to the Congress • April 1, 2014–September 30, 2014     95
        No.                       Recommendation                        Report                Status

 EVL-2014-009-1        FHFA should assess the merits of           FHFA’s Oversight      Recommendation
                       litigation by the Enterprises against      of the Enterprises’   agreed to by FHFA;
                       their servicers and LPI providers to       Lender-Placed         implementation of
                       remedy potential damages caused by         Insurance Costs       recommendation
                       past abuses in the LPI market and,                               pending.
                       then, take appropriate action in this
                       regard.


 EVL-2014-008-1        To strengthen its management of the        Status of the         Recommendation
                       CSP, FHFA should establish schedules       Development           agreed to by FHFA;
                       and time frames for completing key         of the Common         implementation of
                       components of the project, as well         Securitization        recommendation
                       as an overall completion date as           Platform              pending.
                       appropriate.


 EVL-2014-008-2        To strengthen its management of            Status of the         Recommendation
                       the CSP, FHFA should establish cost        Development           agreed to by FHFA;
                       estimates for varying stages of the        of the Common         implementation of
                       initiative, as well as an overall cost     Securitization        recommendation
                       estimate.                                  Platform              pending.


 EVL-2014-006-1        As FHFA collects and analyzes              Recent Trends in      Recommendation
                       information on FHLBank advances to         Federal Home Loan     agreed to by FHFA;
                       large and other members in calendar        Bank Advances to      implementation of
                       year 2014, FHFA should report publicly     JPMorgan Chase        recommendation
                       on such items as advance trends,           and Other Large       pending.
                       the reasons for such advances,             Banks
                       the effectiveness of FHLBank risk
                       management practices, the consistency
                       of such advances with the FHLBank
                       System’s housing mission, and other
                       topics as deemed appropriate.


 EVL-2014-005-1        FHFA should review the 2013 director       FHFA’s Reporting      Recommendation
                       expense data submitted by the              of Federal Home       agreed to by FHFA;
                       FHLBanks to identify and correct any       Loan Bank Director    implementation of
                       inconsistencies and inaccuracies prior     Expenses              recommendation
                       to the publication of the 2013 annual                            pending.
                       report, to the extent feasible, and
                       disclose in the report any remaining
                       data limitations.


 EVL-2014-005-2        FHFA should issue guidance designed        FHFA’s Reporting      Recommendation
                       to ensure the consistency and utility of   of Federal Home       agreed to by FHFA;
                       the director expense data submitted to     Loan Bank Director    implementation of
                       the Agency.                                Expenses              recommendation
                                                                                        pending.




96   Federal Housing Finance Agency Office of Inspector General
     No.                    Recommendation                        Report                 Status

EVL-2014-003-1   FHFA’s Deputy Director of Division of      FHFA’s Oversight       Recommendation
                 Housing Mission and Goals (DHMG)           of the Servicing       partially agreed
                 should establish an ongoing process to     Alignment Initiative   to by FHFA;
                 evaluate servicers’ Servicing Alignment                           recommendation
                 Initiative (SAI) compliance and the                               remains open and
                 effectiveness of the Enterprises’                                 will continue to be
                 remediation efforts.                                              monitored.


EVL-2014-003-2   FHFA’s Deputy Director of DHMG             FHFA’s Oversight       Recommendation
                 should direct the Enterprises to provide   of the Servicing       partially agreed
                 routinely their internal reports and       Alignment Initiative   to by FHFA;
                 reviews for DHMG’s assessment.                                    recommendation
                                                                                   remains open and
                                                                                   will continue to be
                                                                                   monitored.


EVL-2014-003-3   FHFA’s Deputy Director of DHMG should      FHFA’s Oversight       Recommendation
                 regularly review SAI-related guidelines    of the Servicing       partially agreed
                 for enhancements or revisions, as          Alignment Initiative   to by FHFA;
                 necessary, based on servicers’ actual                             recommendation
                 versus expected performance.                                      remains open and
                                                                                   will continue to be
                                                                                   monitored.


EVL-2014-002-1   FHFA should review its implementation      Update on              Recommendation
                 of the 2013 Enterprise examination         FHFA’s Efforts to      agreed to by FHFA;
                 plans and document the extent to           Strengthen its         implementation of
                 which resource limitations, among other    Capacity to Examine    recommendation
                 things, may have impeded their timely      the Enterprises        pending.
                 and thorough execution.


EVL-2014-002-2   FHFA should develop a process that         Update on              Recommendation
                 links annual Enterprise examination        FHFA’s Efforts to      agreed to by FHFA;
                 plans with core team resource              Strengthen its         implementation of
                 requirements.                              Capacity to Examine    recommendation
                                                            the Enterprises        pending.


EVL-2014-002-3   FHFA should establish a strategy to        Update on              Recommendation
                 ensure that the necessary resources        FHFA’s Efforts to      agreed to by FHFA;
                 are in place to ensure timely and          Strengthen its         implementation of
                 effective Enterprise examination           Capacity to Examine    recommendation
                 oversight.                                 the Enterprises        pending.




                          Semiannual Report to the Congress • April 1, 2014–September 30, 2014       97
        No.                       Recommendation                        Report               Status

 EVL-2013-012-1        FHFA should ensure Fannie Mae takes         Evaluation of       Closed—Final
                       the actions necessary to reduce             Fannie Mae’s        action taken by
                       servicer reimbursement processing           Servicer            FHFA.
                       errors. These actions should include        Reimbursement
                       utilizing its process accuracy data         Operations for
                       in a more effective manner and              Delinquency
                       implementing a red flag system.             Expenses


 EVL-2013-012-2        FHFA should require Fannie Mae to:          Evaluation of       Recommendation
                       •	 quantify and aggregate its              Fannie Mae’s        agreed to by FHFA;
                           overpayments to servicers regularly;    Servicer            implementation of
                                                                   Reimbursement       recommendation
                       •	 implement a plan to reduce these
                                                                   Operations for      pending.
                           overpayments by (1) identifying their
                                                                   Delinquency
                           root causes, (2) creating reduction
                                                                   Expenses
                           targets, and (3) holding managers
                           accountable; and
                       •	 report its findings and progress to
                           FHFA periodically.


 EVL-2013-012-3        FHFA should publish Fannie Mae’s            Evaluation of       Closed—Final
                       reduction targets and overpayment           Fannie Mae’s        action taken by
                       findings.                                   Servicer            FHFA.
                                                                   Reimbursement
                                                                   Operations for
                                                                   Delinquency
                                                                   Expenses


 EVL-2013-005-1        FHFA should, preferably in consultation     FHFA’s Initiative   Recommendation
                       with FHA, develop definitions and           to Reduce the       agreed to by FHFA;
                       performance measures that would             Enterprises’        implementation of
                       permit Congress, financial market           Dominant Position   recommendation
                       participants, and the public to assess      in the Housing      pending.
                       the progress and the effectiveness of       Finance System by
                       its initiative.                             Raising Gradually
                                                                   Their Guarantee
                                                                   Fees




98   Federal Housing Finance Agency Office of Inspector General
     No.                    Recommendation                         Report               Status

EVL-2013-005-2   FHFA should assess the feasibility           FHFA’s Initiative   Recommendation
                 of establishing a formal working             to Reduce the       agreed to by FHFA;
                 arrangement with FHA to assess such          Enterprises’        implementation of
                 critical issues as:                          Dominant Position   recommendation
                 •	 (1) the implementation of their          in the Housing      pending.
                     pricing initiatives and prospects for    Finance System by
                     success in achieving their objectives,   Raising Gradually
                     and (2) the potential for shifts         Their Guarantee
                     of mortgage business and risks           Fees
                     between government-supported or
                     -guaranteed markets;
                 •	 briefing the Federal Housing Finance
                     Oversight Board and/or Financial
                     Stability Oversight Council (FSOC) on
                     the findings of the assessment; and
                 •	 d
                     isclosing the assessment publicly
                    in an appropriate format.


EVL-2012-005-1   FHFA should continue its ongoing             FHFA’s Oversight    Closed—Final
                 horizontal review of unsecured credit        of the Federal      action taken by
                 practices at the FHLBanks by:                Home Loan Banks’    FHFA.
                 •	 following up on any potential            Unsecured Credit
                     evidence of violations of the            Risk Management
                     existing regulatory limits and taking    Practices
                     supervisory and enforcement actions
                     as warranted; and
                 •	 determining the extent to which
                     inadequate systems and controls
                     may compromise the FHLBanks’
                     capacity to comply with regulatory
                     limits and taking any supervisory
                     actions necessary to correct such
                     deficiencies as warranted.


EVL-2012-005-2   FHFA should strengthen the regulatory        FHFA’s Oversight    Recommendation
                 framework around the FHLBanks’               of the Federal      agreed to by FHFA;
                 extension of unsecured credit by             Home Loan Banks’    implementation of
                 considering the utility of:                  Unsecured Credit    recommendation
                 •	 establishing maximum overall             Risk Management     pending.
                     exposure limits;                         Practices
                 •	 lowering the existing individual
                     counterparty limits; and
                 •	 ensuring that the unsecured
                     exposure limits are consistent with
                     the FHLBank System’s housing
                     mission.




                          Semiannual Report to the Congress • April 1, 2014–September 30, 2014      99
100   Federal Housing Finance Agency Office of Inspector General
Figure 20. Summary of OIG Reports Where All Recommendations Are Closed
                                     Report                                        No. of Recommendations
 FHFA’s Use of Government Travel Cards                                                       4
 (AUD-2014-010)

 FHFA Oversight of Fannie Mae’s Reimbursement Process for Pre-Foreclosure                    4
 Property Inspections (AUD-2014-005)

 FHFA Can Strengthen Controls over Its Office of Quality Assurance                           7
 (AUD-2013-013)

 Additional FHFA Oversight Can Improve the Real Estate Owned Pilot Program                   3
 (AUD-2013-012)

 FHFA Can Improve Its Oversight of Fannie Mae’s Recoveries from Borrowers                    1
 Who Possess the Ability to Repay Deficiencies (AUD-2013-011)

 FHFA Can Improve Its Oversight of Freddie Mac’s Recoveries from Borrowers                   4
 Who Possess the Ability to Repay Deficiencies (AUD-2013-010)

 FHFA Can Enhance Its Oversight of FHLBank Advances to Insurance Companies                   2
 by Improving Communication with State Insurance Regulators and Standard-
 Setting Groups (AUD-2013-006)

 FHFA’s Oversight of the Asset Quality of Multifamily Housing Loans Financed by              2
 Fannie Mae and Freddie Mac (AUD-2013-004)

 FHFA’s Oversight of Contract No. FHF-10-F-0007 with Advanced Technology                     5
 Systems, Inc. (AUD-2013-002)

 FHFA’s Oversight of the Enterprises’ Efforts to Recover Losses from Foreclosure             3
 Sales (AUD-2013-001)

 FHFA’s Oversight of the Enterprises’ Management of High-Risk Seller/Servicers               2
 (AUD-2012-007)

 FHFA’s Call Report System                                                                   3
 (AUD-2012-006)

 FHFA’s Supervisory Risk Assessment for Single-Family Real Estate Owned                      1
 (AUD-2012-005)

 FHFA’s Supervisory Framework for Federal Home Loan Banks’ Advances and                      7
 Collateral Risk Management (AUD-2012-004)

 FHFA’s Oversight of Fannie Mae’s Single-Family Underwriting Standards                       2
 (AUD-2012-003)

 FHFA’s Supervision of Freddie Mac’s Controls over Mortgage Servicing                        5
 Contractors (AUD-2012-001)




                                Semiannual Report to the Congress • April 1, 2014–September 30, 2014   101
                                      Report                                     No. of Recommendations
 FHFA’s Oversight of Fannie Mae’s Default-Related Legal Services                           3
 (AUD-2011-004)

 Clifton Gunderson LLP’s Independent Audit of the Federal Housing Finance                  9
 Agency’s Privacy Program and Implementation - 2011 (AUD-2011-003)

 Clifton Gunderson LLP’s Independent Audit of the Federal Housing Finance                  5
 Agency’s Information Security Program - 2011 (AUD-2011-002)

 Audit of the Federal Housing Finance Agency’s Consumer Complaints Process                 3
 (AUD-2011-001)

 FHFA’s Oversight of Derivative Counterparty Risk                                          1
 (ESR-2014-001)

 FHFA’s Oversight of Fannie Mae’s 2013 Settlement with Bank of America                     1
 (EVL-2013-009)

 FHFA’s Oversight of the Federal Home Loan Banks’ Compliance with Regulatory               2
 Limits on Extensions of Unsecured Credit (EVL-2013-008)

 FHFA’s Oversight of the Federal Home Loan Banks’ Affordable Housing                       3
 Programs (EVL-2013-04)

 Case Study: Freddie Mac’s Unsecured Lending to Lehman Brothers Prior to                   3
 Lehman Brothers’ Bankruptcy (EVL-2013-03)

 FHFA’s Oversight of the Enterprises’ Compensation of Their Executives and                 1
 Senior Professionals (EVL-2013-001)

 FHFA’s Oversight of Freddie Mac’s Investment in Inverse Floaters                          4
 (EVL-2012-009)

 Evaluation of FHFA’s Oversight of Fannie Mae’s Transfer of Mortgage Servicing             4
 Rights from Bank of America to High Touch Servicers (EVL-2012-008)

 Follow-up on Freddie Mac’s Loan Repurchase Process                                        1
 (EVL-2012-007)

 FHFA’s Certifications for the Preferred Stock Purchase Agreements                         2
 (EVL-2012-006)

 Fannie Mae’s and Freddie Mac’s Participation in the 2011 Mortgage Bankers                 2
 Association Convention and Exposition (ESR-2012-004)

 FHFA’s Oversight of the Enterprises’ Charitable Activities                                2
 (ESR-2012-003)

 Evaluation of FHFA’s Management of Legal Fees for Indemnified Executives                  2
 (EVL-2012-002)




102    Federal Housing Finance Agency Office of Inspector General
                                   Report                                       No. of Recommendations
FHFA’s Oversight of Troubled Federal Home Loan Banks                                      3
(EVL-2012-001)

Evaluation of the Federal Housing Finance Agency’s Oversight of Freddie Mac’s             2
Repurchase Settlement with Bank of America (EVL-2011-006)

Evaluation of Whether FHFA Has Sufficient Capacity to Examine the GSEs                    4
(EVL-2011-005)

Evaluation of FHFA’s Oversight of Fannie Mae’s Management of Operational                  3
Risk (EVL-2011-004)

Evaluation of FHFA’s Role in Negotiating Fannie Mae’s and Freddie Mac’s                   1
Responsibilities in Treasury’s Making Home Affordable Program
(EVL-2011-003)

Evaluation of Federal Housing Finance Agency’s Oversight of Fannie Mae’s and              8
Freddie Mac’s Executive Compensation Programs (EVL-2011-002)

Federal Housing Finance Agency’s Exit Strategy and Planning Process for the               2
Enterprises’ Structural Reform (EVL-2011-001)




                               Semiannual Report to the Congress • April 1, 2014–September 30, 2014   103
Appendix C:                                                 dozen categories of information that we must include
                                                            in our semiannual reports.
Information Required                                        Below, OIG presents a table that directs the reader
by the Inspector General                                    to the pages of this report where the information
Act and Subpoenas Issued                                    required by the Inspector General Act may be found.

                                                            The text that follows further addresses the status of
Section 5(a) of the Inspector General Act provides          OIG’s compliance with sections 5(a)(6), (8), (9),
that OIG shall, not later than April 30 and                 (10), (11), (12), and (13) of the Inspector General
October 31 of each year, prepare semiannual reports         Act. Finally, OIG provides information concerning
summarizing our activities during the immediately           administrative subpoenas that it issued during the
preceding six-month periods ending March 31 and             semiannual period.
September 30. Further, section 5(a) lists more than a

                                           Source/Requirement                                              Pages
Section 5(a)(1)- A description of significant problems, abuses, and deficiencies relating to the            7-17
administration of programs and operations of FHFA.                                                         41-42
Section 5(a)(2)- A description of the recommendations for corrective action made by OIG with respect        7-17
to significant problems, abuses, or deficiencies.                                                          41-42
                                                                                                           81-99
Section 5(a)(3)- An identification of each significant recommendation described in previous                84-94
semiannual reports on which corrective action has not been completed.                                      96-99
Section 5(a)(4)- A summary of matters referred to prosecutive authorities and the prosecutions and         20-41
convictions that have resulted.
Section 5(a)(5)- A summary of each report made to the Director of FHFA.                                     7-17
                                                                                                           41-42
Section 5(a)(6)- A listing, subdivided according to subject matter, of each audit and evaluation report    7-17
issued by OIG during the reporting period and for each report, where applicable, the total dollar value    105
of questioned costs (including a separate category for the dollar value of unsupported costs) and the
dollar value of recommendations that funds be put to better use.
Section 5(a)(7)- A summary of each particularly significant report.                                         7-17
                                                                                                           41-42
Section 5(a)(8)- Statistical tables showing the total number of audit and evaluation reports and the       7-17
total dollar value of questioned and unsupported costs.                                                    105
Section 5(a)(9)- Statistical tables showing the total number of audit and evaluation reports and the       7-17
dollar value of recommendations that funds be put to better use by management.                             105
Section 5(a)(10)- A summary of each audit and evaluation report issued before the commencement              105
of the reporting period for which no management decision has been made by the end of the reporting
period.
Section 5(a)(11)- A description and explanation of the reasons for any significant revised management       105
decision made during the reporting period.
Section 5(a)(12)- Information concerning any significant management decision with which the               105-106
Inspector General is in disagreement.
Section 5(a)(13)- The information described under section 05(b) of the Federal Financial Management         106
Improvement Act of 1996.


104    Federal Housing Finance Agency Office of Inspector General
Audit and Evaluation Reports                               Significantly Revised
with Recommendations of                                    Management Decisions
Questioned Costs, Unsupported
Costs, and Funds to Be Put to                              Section 5(a)(11) of the Inspector General Act, as
                                                           amended, requires that OIG report information
Better Use by Management
                                                           concerning the reasons for any significant revised
                                                           management decision made during the reporting
Section 5(a)(6) of the Inspector General Act, as
                                                           period. During the six-month reporting period ended
amended, requires that OIG list its reports during
                                                           September 30, 2014, FHFA significantly revised its
the semiannual period that include questioned costs,
                                                           management decisions on OIG’s evaluation titled
unsupported costs, and funds to be put to better
                                                           FHFA’s Oversight of the Servicing Alignment Initiative
use. Section 5(a)(8) and section 5(a)(9), respectively,
                                                           (EVL-2014-003). Management, which had previously
require OIG to publish statistical tables showing the
                                                           disagreed with OIG’s recommendations, changed its
dollar value of questioned and unsupported costs,
                                                           position and has taken subsequent actions accordingly.
and of recommendations that funds be put to better
use by management. Figure 21 (see below) discloses
OIG’s questioned and unsupported cost findings, and        Significant Management Decision
recommendations that funds be put to better use for        with Which the Inspector General
the reporting period.                                      Disagrees

Audit and Evaluation Reports                               Section 5(a)(12) of the Inspector General Act, as
with No Management Decision                                amended, requires that OIG report information
                                                           concerning any significant management decision
                                                           with which the Inspector General is in disagreement.
Section 5(a)(10) of the Inspector General Act, as
                                                           During the current reporting period, there was
amended, requires that OIG report on each audit and
                                                           one management decision with which the Acting
evaluation report issued before the commencement
                                                           Inspector General disagreed.
of the reporting period for which no management
decision has been made by the end of the reporting         OIG disagrees with FHFA’s decision in response
period. There were no audit or evaluation reports          to the evaluation titled Evaluation of Fannie Mae’s
issued before April 1, 2014, that await a management       Servicer Reimbursement Operations for Delinquency
decision.                                                  Expenses (EVL-2013-012). FHFA did not agree with

Figure 21. Funds to Be Put to Better Use by Management, Questioned Costs, and Unsupported Costs
for the Period April 1, 2014, to September 30, 2014

                                                                         Potential Monetary Benefits
   Report Issued       Recommendation No.           Date         Questioned      Unsupported    Funds Put to
                                                                   Costs            Costs        Better Use
AUD-2014-015                   1, 2              8/7/2014                 TBD               $-              $-
EVL-2014-011                   1, 2             8/27/2014                   $-              $-           TBD
EVL-2014-009                    1               6/25/2014                 TBD               $-              $-
Total                                                                     TBD               $-           TBD


                                Semiannual Report to the Congress • April 1, 2014–September 30, 2014      105
OIG’s recommendation to publish Fannie Mae’s                   Several OIG reports published during the semiannual
reduction targets and overpayment findings.*                   period identified specific opportunities to strengthen
                                                               FHFA’s internal controls. These reports are
Federal Financial Management                                   summarized on pages 7 through 17 and 41 through
                                                               42.
Improvement Act of 1996

The provisions of HERA require FHFA to implement               Subpoenas Issued
and maintain financial management systems
that comply substantially with federal financial               During the reporting period, OIG issued 26
management systems requirements, applicable federal            subpoenas as summarized in Figure 22 (see below).
accounting standards, and the U.S. Government
Standard General Ledger at the transaction level.              Figure 22. Subpoenas Issued for the Period
                                                               April 1, 2014, Through September 30, 2014
For fiscal year 2013, FHFA received from the
                                                                       Issuing Office       Number of Subpoenas
Government Accountability Office (GAO) an
                                                               OA                                    5
unqualified (clean) audit opinion on its annual                OE                                    0
financial statements and internal control over financial       OI                                   21
reporting. GAO also reported that it identified no             Total                                26
material weaknesses in internal controls or reportable
instances of noncompliance with laws or regulations.
HERA requires GAO to conduct this audit.




*This disagreement was recorded March 18, 2014, but was
not reported in the October 1, 2013, through March 31, 2014,
Semiannual Report to the Congress.


106     Federal Housing Finance Agency Office of Inspector General
Appendix D:                                              CohnReznick LLP’s Independent Audit of FHFA’s
                                                         Oversight of Enterprise Monitoring of the Financial
OIG Reports                                              Condition of Mortgage Insurers (AUD-2014-013,
                                                         May 8, 2014).
See www.fhfaoig.gov for OIG’s reports.
                                                         Evaluation Reports
Audit Reports
                                                         Freddie Mac Could Further Reduce Reimbursement
Kearney & Company, P.C.’s Independent Evaluation of      Errors by Reviewing More Servicer Claims
the Federal Housing Finance Agency Office of Inspector   (EVL-2014-011, August 27, 2014).
General’s Information Security Program – 2014
                                                         Recent Trends in the Enterprises’ Purchases of Mortgages
(AUD-2014-021, September 30, 2014).
                                                         from Smaller Lenders and Nonbank Mortgage
CliftonLarsenAllen, LLP’s Independent Audit of the       Companies (EVL-2014-010, July 17, 2014).
Federal Housing Finance Agency’s Privacy Program –
                                                         FHFA’s Oversight of the Enterprises’ Lender-Placed
2014 (AUD-2014-020, September 26, 2014).
                                                         Insurance Costs (EVL-2014-009, June 25, 2014).
Kearney & Company, P.C.’s Independent Evaluation
                                                         Status of the Development of the Common Securitization
of the Federal Housing Finance Agency’s Information
                                                         Platform (EVL-2014-008, May 21, 2014).
Security Program – 2014 (AUD-2014-019,
September 26, 2014).                                     FHFA’s Oversight of the MPF Xtra Program
                                                         (ESR-2014-007, April 22, 2014).
FHFA’s Oversight of Risks Associated with the
Enterprises Relying on Counterparties to Comply with     Recent Trends in Federal Home Loan Bank Advances to
Selling and Servicing Guidelines (AUD-2014-018,          JPMorgan Chase and Other Large Banks
September 26, 2014).                                     (EVL-2014-006, April 16, 2014).
FHFA Oversight of Freddie Mac’s Information
Technology Investments (AUD-2014-017,                    Other Reports
September 25, 2014).
                                                         TBW-Colonial Investigation Lessons Learned
FHFA’s Representation and Warranty Framework
                                                         (SIR-2014-0013, August 21, 2014).
(AUD-2014-016, September 17, 2014).

FHFA Oversight of Fannie Mae’s Collection of Funds
from Servicers that Closed Short Sales Below the
Authorized Prices (AUD-2014-015, August 7, 2014).

FHFA Actions to Manage Enterprise Risks from
Nonbank Servicers Specializing in Troubled Mortgages
(AUD-2014-014, July 1, 2014).




                                 Semiannual Report to the Congress • April 1, 2014–September 30, 2014       107
Appendix E: OIG Organizational Chart




                                                   Acting Inspector General
                                                     Michael P. Stephens



                     Chief of                                                                                   Director of
                                                                                            Chief Counsel
                      Staff                                                                                   Special Projects




     Director of                  Director of
   Communications               External Affairs




      Deputy                                  Deputy                               Deputy                        Deputy
 Inspector General                       Inspector General                    Inspector General             Inspector General
   Administration                             Audits                             Evaluations                  Investigations




108    Federal Housing Finance Agency Office of Inspector General
Appendix F:                                              OE is the Office of Oversight and Review (OR),
                                                         which provides advice and consultation services across
Description of OIG                                       OIG. OR also produces special reports and white
Offices and Strategic                                    papers that address complex housing finance issues.

Plan                                                     Office of Investigations

                                                         The Office of Investigations (OI) investigates
                                                         allegations of misconduct and fraud involving FHFA
OIG Offices
                                                         and the GSEs in accordance with CIGIE’s Quality
                                                         Standards for Investigations and guidelines that the
Office of Audits                                         Attorney General issues.
The Office of Audits (OA) provides a full range of     OI’s investigations may address administrative, civil,
professional audit and attestation services for FHFA’s and criminal violations of laws and regulations.
programs and operations. Through its performance       Investigations may relate to FHFA or GSE employees,
audits and attestation engagements, OA helps FHFA:     contractors, consultants, and any alleged wrongdoing
(1) promote economy, efficiency, and effectiveness;    involving FHFA’s or the GSEs’ programs and
(2) detect and deter fraud, waste, and abuse; and      operations. Offenses investigated may include mail,
(3) ensure compliance with applicable laws and         wire, bank, accounting, securities, or mortgage fraud,
regulations. Under the Inspector General Act,          as well as violations of the tax code, obstruction of
inspectors general are required to comply with GAO’s   justice, and money laundering.
Government Auditing Standards, commonly referred
to as the “Yellow Book.” OA                                                  To date, OI has opened 430
performs its audits and attestation                                          criminal and civil investigations,
engagements in accordance with                                               but by their nature, these
the Yellow Book.                            Report fraud,                    investigations and their resulting
                                                                             reports are not generally
Office of Evaluations
                                            waste, or abuse                  made public. However, if an
                                                                             investigation reveals criminal
The Office of Evaluations (OE)              related to FHFA’s                activity, OI refers the matter to
provides independent and
                                                                             DOJ for possible prosecution or
objective reviews, studies, survey          programs and                     recovery of monetary damages
reports, and analyses of FHFA’s
                                                                             and penalties. OI reports
programs and operations. The                operations
                                                                             administrative misconduct
Inspector General Reform Act
of 2008 requires that inspectors            by visiting                      to management officials for
                                                                             consideration of disciplinary or
general adhere to the Quality
Standards for Inspection and                www.fhfaoig.gov                  remedial action.
Evaluation, commonly referred                                                OI also manages OIG’s hotline
to as the “Blue Book,” issued
                                            or calling                       that receives tips and complaints
by CIGIE. OE performs its                                                    of fraud, waste, or abuse in
                                            (800) 793-7724.
evaluations in accordance with                                               FHFA’s programs and operations.
the Blue Book. Included within                                               The hotline allows concerned

                               Semiannual Report to the Congress • April 1, 2014–September 30, 2014      109
parties to report their allegations to OIG directly and     For human resources, OAd develops policies to
confidentially. OI honors all applicable whistleblower      attract, develop, and retain exceptional people,
protections. As part of its effort to raise awareness       with an emphasis on linking performance planning
of fraud, OI actively promotes the hotline through          and evaluation to organizational and individual
OIG’s website, posters, emails to FHFA and GSE              accomplishment of goals and objectives. Regarding
employees, and OIG’s semiannual reports.                    OIG’s budget and financial management, OAd
                                                            coordinates budget planning and execution and
Executive Office                                            oversees all of OIG’s procedural guidance for financial
The Executive Office (EO) provides leadership               management and procurement integrity.
and programmatic direction for OIG’s offices and            OAd also administratively supports the Chief of Staff
activities.                                                 and the Deputy Inspector General for Audits as they
EO includes the Office of Counsel (OC), which               implement OIG’s Internal Management Assessment
serves as the chief legal advisor to the Acting Inspector   Program, which requires the routine inspection of
General and provides independent legal advice,              each OIG office to ensure that it complies with
counseling, and opinions to OIG about its programs          applicable requirements.
and operations. OC also reviews audit and evaluation
reports for legal sufficiency and compliance with           OIG’s Strategic Plan
OIG’s policies and priorities. Additionally, it reviews
drafts of FHFA regulations and policies and prepares        OIG’s Strategic Plan for fiscal years 2015-2017 sets
comments as appropriate. OC also coordinates with           out OIG’s plan to ensure the integrity, transparency,
FHFA’s Office of General Counsel and manages                effectiveness, and soundness of FHFA’s operations
OIG’s responses to requests and appeals made under          and the operations of the organizations that FHFA
the Freedom of Information Act and the Privacy Act.         oversees. OIG will continue to monitor events;
                                                            make changes to the Strategic Plan as circumstances
The Office of External Affairs is within EO, and it
                                                            warrant; and strive to remain relevant regarding areas
responds to inquiries from members of Congress.
                                                            of concern to FHFA, the GSEs, Congress, and the
The Office of Communications is within EO, and it           American people.
responds to inquiries from the press and public.
                                                            Within the Strategic Plan, OIG has established
OIG’s Equal Employment Opportunity Program is               several goals that will be used as a blueprint for OIG’s
also within EO.                                             oversight of FHFA and independent reporting.

The Office of Special Projects is also within EO, and it
                                                            Strategic Goal 1—Promote FHFA’s Effective
supports other OIG offices on high-impact projects.
                                                            Oversight of the GSEs’ Safety and Soundness and
                                                            Housing Missions
Office of Administration
                                                            OIG will promote effective risk oversight by FHFA,
The Office of Administration (OAd) manages
                                                            assess FHFA’s oversight of the GSEs’ housing mission
and oversees OIG administration, including
                                                            and goal responsibilities, and assess the effectiveness of
budget, human resources, safety, facilities, financial
                                                            FHFA’s operations.
management, IT, and continuity of operations.



110     Federal Housing Finance Agency Office of Inspector General
Strategic Goal 2—Promote FHFA’s Effective                Organizational Guidance
Management and Conservatorship of the
Enterprises                                              OIG has developed and promulgated policies and
OIG will assess FHFA’s and the Enterprises’              procedural manuals for each of its offices. These
plans and progress on their strategic goals; assess      manuals set forth uniform standards and guidelines
FHFA’s effectiveness in controlling the costs of the     for the performance of each office’s essential
conservatorships; and detect and deter fraud, waste,     responsibilities and are intended to help ensure the
and abuse.                                               consistency and integrity of OIG’s operations.

Strategic Goal 3—Promote Effective FHFA Internal
Operations

OIG will detect and deter fraud, waste, and abuse.

Strategic Goal 4—Promote Effective OIG Internal
Operations

OIG will maintain workforce expertise and
collaboration to meet goals, maintain access and data
security protocols with FHFA and the GSEs, and
ensure reporting processes are useful to stakeholders.




                                Semiannual Report to the Congress • April 1, 2014–September 30, 2014     111
112   Federal Housing Finance Agency Office of Inspector General
Appendix G: Figure Sources
Figure 2.   Federal Housing Finance Agency Office of Inspector General, “At A Glance,” Recent Trends in the Enterprises’
            Purchases of Mortgages from Smaller Lenders and Nonbank Mortgage Companies, EVL-2014-010, at 2 (July 17,
            2014). Accessed: September 17, 2014, at www.fhfaoig.gov/Content/Files/EVL-2014-010_0.pdf.
Figure 3.   Federal Housing Finance Agency Office of Inspector General, “The Enterprise that Holds the Mortgage Is Liable for
            a Borrower’s Unpaid LPI Premiums after Foreclosure,” FHFA’s Oversight of the Enterprises’ Lender-Placed Insurance
            Costs, EVL-2014-009, at 8 (June 25, 2014). Accessed: September 18, 2014, at www.fhfaoig.gov/Content/Files/
            EVL-2014-009.pdf.
Figure 4.   Federal Housing Finance Agency Office of Inspector General, “How the Mortgage Securitization Process Works,”
            Status of the Development of the Common Securitization Platform, EVL-2014-008, at 11 (May 21, 2014). Accessed:
            September 18, 2014, at www.fhfaoig.gov/Content/Files/EVL-2014-008.pdf.
Figure 5.   Federal Housing Finance Agency Office of Inspector General, “Fannie Mae’s Remediation Plan,” FHFA Oversight of
            Fannie Mae’s Collection of Funds from Servicers that Closed Short Sales Below the Authorized Prices, AUD-2014-015,
            at 11 (August 7, 2014). Accessed: September 17, 2014, at www.fhfaoig.gov/Content/Files/AUD-2014-015.pdf.
Figure 7.   Federal Housing Finance Agency, “Meet the Housing Government-Sponsored Enterprises,” 2013 Performance
            and Accountability Report, at 23. Accessed: September 11, 2014, at www.fhfa.gov/AboutUs/Reports/
            ReportDocuments/2013_PAR_N508.pdf.
Figure 8.   Inside Mortgage Finance, “Mortgage & Asset Securities Issuance,” Mortgage Market Statistical Annual 2014
            Yearbook, at 106 (2014).
Figure 9.   Federal Housing Finance Agency, “Table 3. Fannie Mae Earnings,” “Table 12. Freddie Mac Earnings,” 2013
            Report to Congress, at 73, 90 (June 13, 2014). Accessed: August 4, 2014, at www.fhfa.gov/AboutUs/Reports/
            ReportDocuments/FHFA_2013_Report_to_Congress.pdf. Fannie Mae, “Table 3: Summary of Condensed
            Consolidated Results of Operations,” Form 10-Q for the Quarterly Period Ended June 30, 2014, at 17. Accessed:
            August 11, 2014, at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2014/q22014.pdf.
            Freddie Mac, “Table 4 – Summary Consolidated Statements of Comprehensive Income,” Form 10-Q for the Quarterly
            Period Ended June 30, 2014, at 13. Accessed: August 7, 2014, at http://api40.10kwizard.com/cgi/convert/pdf/
            FEDERALHOMELOANMORTGAGECORP-20140807-10Q-20140630.pdf?ipage=9739289&xml=1&quest=1&rid=23&s
            ection=1&sequence=-1&pdf=1&dn=1.
Figure 10. Federal Housing Finance Agency, “Table 3. Fannie Mae Earnings,” “Table 12. Freddie Mac Earnings,” 2013
           Report to Congress, at 73, 90 (June 13, 2014). Accessed: August 4, 2014, at www.fhfa.gov/AboutUs/Reports/
           ReportDocuments/FHFA_2013_Report_to_Congress.pdf. Fannie Mae, “Table 3: Summary of Condensed
           Consolidated Results of Operations,” Form 10-Q for the Quarterly Period Ended June 30, 2014, at 17. Accessed:
           August 11, 2014, at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2014/q22014.pdf.
           Freddie Mac, “Table 4 – Summary Consolidated Statements of Comprehensive Income,” Form 10-Q for the Quarterly
           Period Ended June 30, 2014, at 13. Accessed: August 7, 2014, at http://api40.10kwizard.com/cgi/convert/pdf/
           FEDERALHOMELOANMORTGAGECORP-20140807-10Q-20140630.pdf?ipage=9739289&xml=1&quest=1&rid=23&s
           ection=1&sequence=-1&pdf=1&dn=1.
Figure 11. Fannie Mae, “Table 3: Summary of Condensed Consolidated Results of Operations,” “Table 6: Fair Value
           (Losses) Gains, Net,” “Condensed Consolidated Statements of Operations and Comprehensive Income —
           (Unaudited),” Form 10-Q for the Quarterly Period Ended June 30, 2014, at 17, 21, 84. Accessed: August 11,
           2014, at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2014/q22014.pdf. Freddie Mac,
           “Table 4 — Summary Consolidated Statements of Comprehensive Income,” Form 10-Q for the Quarterly Period
           Ended June 30, 2014, at 13. Accessed: August 7, 2014, at http://api40.10kwizard.com/cgi/convert/pdf/
           FEDERALHOMELOANMORTGAGECORP-20140807-10Q-20140630.pdf?ipage=9739289&xml=1&quest=1&rid=23&s
           ection=1&sequence=-1&pdf=1&dn=1.
Figure 12. Federal Housing Finance Agency, “Enterprises Single-Family Book Profile - As of March 31, 2012,” Foreclosure
           Prevention Report, First Quarter 2012: FHFA Federal Property Manager’s Report, at 40. Accessed: August 8,
           2014, at www.fhfa.gov/AboutUs/Reports/ReportDocuments/20121Q_FPR_508.pdf. Federal Housing Finance
           Agency, “Enterprises Single-Family Book Profile – As of June 30, 2012,” Foreclosure Prevention Report, Second
           Quarter 2012: FHFA Federal Property Manager’s Report, at 40. Accessed: August 8, 2014, at www.fhfa.gov/
           AboutUs/Reports/ReportDocuments/20122Q_FPR_508.pdf. Federal Housing Finance Agency, “Enterprises
           Single-Family Book Profile - As of September 30, 2012,” Foreclosure Prevention Report, Third Quarter 2012:
           FHFA Federal Property Manager’s Report, at 40. Accessed: August 8, 2014, at www.fhfa.gov/AboutUs/Reports/
           ReportDocuments/20123Q_FPR_508.pdf. Federal Housing Finance Agency, “Enterprises Single-Family Book Profile
           - As of December 31, 2012,” Foreclosure Prevention Report, Fourth Quarter 2012: FHFA Federal Property Manager’s



                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014                 113
           Report, at 41. Accessed: August 8, 2014, at www.fhfa.gov/AboutUs/Reports/ReportDocuments/20124Q_FPR_
           N508.pdf. Federal Housing Finance Agency, “Enterprises Single-Family Book Profile - As of March 31, 2013,”
           Foreclosure Prevention Report, First Quarter 2013: FHFA Federal Property Manager’s Report, at 42. Accessed:
           August 8, 2014, at www.fhfa.gov/AboutUs/Reports/ReportDocuments/20131Q_FPR_N508.pdf. Federal Housing
           Finance Agency, “Enterprises Single-Family Book Profile - As of June 30, 2013,” Foreclosure Prevention Report,
           Second Quarter 2013: FHFA Federal Property Manager’s Report, at 41. Accessed: August 8, 2014, at www.fhfa.
           gov/AboutUs/Reports/ReportDocuments/20132Q_FPR_N508.pdf. Federal Housing Finance Agency, “Enterprises
           Single-Family Book Profile – As of September 30, 2013,” Foreclosure Prevention Report, Third Quarter 2013:
           FHFA Federal Property Manager’s Report, at 41. Accessed: August 8, 2014, at www.fhfa.gov/AboutUs/Reports/
           ReportDocuments/20133Q_FPR_508.pdf. Federal Housing Finance Agency, “Enterprises Single-Family Book Profile
           - As of December 31, 2013,” Foreclosure Prevention Report, Fourth Quarter 2013: FHFA Federal Property Manager’s
           Report, at 41. Accessed: August 8, 2014, at www.fhfa.gov/AboutUs/Reports/ReportDocuments/2013Q4_
           FPR_N508.pdf. Federal Housing Finance Agency, “Enterprises Single-Family Book Profile - As of March 31,
           2014,” Foreclosure Prevention Report, First Quarter 2014: FHFA Federal Property Manager’s Report, at 41.
           Accessed: August 8, 2014, at www.fhfa.gov/AboutUs/Reports/ReportDocuments/Foreclosure%20Prevention%20
           Report_1Q14_FINAL.pdf. Fannie Mae, “Table 35: Single-Family Foreclosed Properties,” Form 10-Q for the Quarterly
           Period Ended June 30, 2014, at 64. Accessed: August 19, 2014, at www.fanniemae.com/resources/file/ir/pdf/
           quarterly-annual-results/2014/q22014.pdf. Freddie Mac, “Table 40 – REO Activity by Region,” Form 10-Q for the
           Quarterly Period Ended June 30, 2014, at 72. Accessed: August 19, 2014, at http://api40.10kwizard.com/cgi/
           convert/pdf/FEDERALHOMELOANMORTGAGECORP-20140807-10Q-20140630.pdf?ipage=9739289&xml=1&que
           st=1&rid=23&section=1&sequence=-1&pdf=1&dn=1. Federal Housing Finance Agency, “Enterprises Single-Family
           Book Profile - As of June 30, 2014,” Foreclosure Prevention Report, Second Quarter 2014: FHFA Federal Property
           Manager’s Report, at 41. Accessed: September 29, 2014, at www.fhfa.gov/AboutUs/Reports/ReportDocuments/
           ForeclosurePreventionReport2Q14FINAL.pdf.
Figure 13. Standard & Poor’s Dow Jones Indices, S&P/Case-Shiller 20-City Composite Home Price Index (August 26, 2014).
           Accessed: August 26, 2014, at http://us.spindices.com/indices/real-estate/sp-case-shiller-20-city-composite-
           home-price-index (click on “Additional Info,” then click “Seasonally Adjusted Home Price Index Levels,” then
           download the Excel file).
Figure 14. Federal Housing Finance Agency, “Table 1: Quarterly Draws on Treasury Commitments to Fannie Mae and Freddie
           Mac per the Senior Preferred Stock Purchase Agreements,” “Table 2: Dividends on Enterprise Draws from Treasury,”
           Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-Related Securities Data as of October 1,
           2014, at 2, 3. Accessed: October 2, 2014, at www.fhfa.gov/DataTools/Downloads/Documents/Market-Data/
           TSYSupport10012014.pdf.
Figure 15. Federal Home Loan Bank of Boston, The FHLBanks. Accessed: August 8, 2014, at www.fhlbboston.com/aboutus/
           thebank/06_01_04_fhlb_system.jsp.
Figure 16. Federal Home Loan Banks Office of Finance, “Combined Statement of Income,” Combined Financial Report for the
           Quarterly Period Ended June 30, 2014, at F-2. Accessed: August 15, 2014, at www.fhlb-of.com/ofweb_userWeb/
           resources/14Q2end.pdf. Other-than-temporary impairment losses can be referenced to Table 30, p. 35, in the
           Federal Home Loan Banks Office of Finance’s Combined Financial Report for the Quarterly Period Ended June 30,
           2014.
Figure 17. Federal Home Loan Banks Office of Finance, “Selected Financial Data,” Combined Financial Report for the
           Year Ended December 31, 2011, at 34. Accessed: August 15, 2014, at www.fhlb-of.com/ofweb_userWeb/
           resources/11yrend.pdf. Federal Home Loan Banks Office of Finance, “Selected Financial Data,” Combined Financial
           Report for the Year Ended December 31, 2013, at 35. Accessed: August 15, 2014, at www.fhlb-of.com/ofweb_
           userWeb/resources/13yrend.pdf. Federal Home Loan Banks Office of Finance, “Selected Financial Data,” Combined
           Financial Report for the Quarterly Period Ended June 30, 2014, at 1. Accessed: August 15, 2014, at www.fhlb-of.
           com/ofweb_userWeb/resources/14Q2end.pdf.




114     Federal Housing Finance Agency Office of Inspector General
Figure 18. Federal Housing Finance Agency, FHFA Recovers Nearly $8 Billion for Taxpayers in 2013 Through Settlements
           (January 2, 2014). Accessed: August 22, 2014, at www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Recovers-
           Nearly-$8-Billion-for-Taxpayers-in-2013.aspx. Federal Housing Finance Agency, FHFA’s Update on Private Label
           Securities Actions 2013 and 2014 Settlements and Remaining Cases (September 12, 2014). Accessed: September
           15, 2014, at www.fhfa.gov/Media/PublicAffairs/Pages/FHFAs-Update-on-Private-Label-Securities-Actions.aspx.
           Freddie Mac, “Non-Agency Mortgage-Related Security Issuers,” Form 10-K for the Fiscal Year Ended December 31,
           2013, at 247. Accessed: August 22, 2014, at www.freddiemac.com/investors/er/pdf/10k_022714.pdf. Fannie
           Mae, “FHFA Private-Label Mortgage-Related Securities Litigation,” Form 10-K for the Fiscal Year Ended December
           31, 2013, at 61. Accessed: August 22, 2014, at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-
           results/2013/10k_2013.pdf. Federal Housing Finance Agency, FHFA Announces Settlement with UBS (July 25,
           2013). Accessed: August 22, 2014, at www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Settlement-
           with-UBS.aspx. Federal Housing Finance Agency, FHFA Announces $5.1 Billion in Settlements with J.P. Morgan
           Chase & Co.; Settlements Include Private-Label Securities and Representation and Warranty Claims (October 25,
           2013). Accessed: August 22, 2014, at www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-$5-1-Billion-
           in-Settlements.aspx. Federal Housing Finance Agency, FHFA Announces $1.9 Billion Settlement With Deutsche
           Bank (December 20, 2013). Accessed: August 22, 2014, at www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-
           Announces-$1-9-Billion-Settlement-With-Deutsche-Bank.aspx. Federal Housing Finance Agency, FHFA Announces
           $1.25 Billion Settlement With Morgan Stanley (February 7, 2014). Accessed: August 22, 2014, at www.fhfa.gov/
           Media/PublicAffairs/Pages/FHFA-Announces-$1-25-Billion-Settlement-With-Morgan-Stanley.aspx. Federal Housing
           Finance Agency, FHFA Announces $122 Million Settlement With Société Générale (February 27, 2014). Accessed:
           August 22, 2014, at www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-$122-Million-Settlement-With-
           Soci%C3%A9t%C3%A9-G%C3%A9n%C3%A9rale.aspx. Federal Housing Finance Agency, FHFA Announces $885
           Million Settlement With Credit Suisse (March 21, 2014). Accessed: August 22, 2014, at www.fhfa.gov/Media/
           PublicAffairs/PublicAffairsDocuments/CORRECTEDCreditSuisseSettlement032114F.pdf. Federal Housing Finance
           Agency, FHFA Announces $9.3 Billion Settlement With Bank of America Corporation; Agreement Includes Private-label
           Securities Settlement As Well As Securities Purchases (March 26, 2014). Accessed: August 22, 2014, at www.fhfa.
           gov/Media/PublicAffairs/Pages/FHFA-Announces-$9-3-Billion-Settlement-With-Bank-of-America-Corporation.aspx.
           Federal Housing Finance Agency, FHFA Announces $280 Million Settlement with Barclays Bank PLC (April 24, 2014).
           Accessed: August 22, 2014, at www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-$280-Million-Settlement-
           with-Barclays-Bank-PLC.aspx. Federal Housing Finance Agency, FHFA Announces $110 Million Settlement with First
           Horizon National Corporation (April 29, 2014). Accessed: August 22, 2014, at www.fhfa.gov/Media/PublicAffairs/
           Pages/FHFA-Announces-$110-Million-Settlement-with-First-Horizon-National-Corporation.aspx. Federal Housing
           Finance Agency, FHFA Announces Settlement with RBS (June 19, 2014). Accessed: August 22, 2014, at www.fhfa.
           gov/Media/PublicAffairs/Pages/FHFA-Announces-Settlement-with-RBS.aspx. Federal Housing Finance Agency, FHFA
           Announces Settlement with Goldman Sachs (August 22, 2014). Accessed: September 4, 2014, at www.fhfa.gov/
           Media/PublicAffairs/Pages/FHFA-Announces-Settlement-with-Goldman-Sachs.aspx. Federal Housing Finance Agency,
           FHFA Announces Settlement with HSBC (September 12, 2014). Accessed: September 15, 2014, at www.fhfa.gov/
           Media/PublicAffairs/Pages/FHFA-Announces-Settlement-with-HSBC.aspx.




                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014               115
Appendix H: Endnotes                                        12	   I d., “Fannie Mae and Freddie Mac (the
                                                                   Enterprises),” at 22, 23.

1	    The Inspector General Act of 1978, 5 U.S.C.          13	   Id., “Did You Know?,” at 4.
       App. 3 § 5, requires that each inspector general
       compile a report of his or her office’s operations   14	    epartment of the Treasury, Written Testimony
                                                                  D
       for each six-month period ending March 31 and              by Secretary of the Treasury Timothy F. Geithner
       September 30.                                              before the Senate Committee on Banking, Housing
                                                                  & Urban Affairs (March 15, 2011). Accessed:
2	    Council of the Inspectors General on Integrity             August 4, 2014, at www.treasury.gov/press-center/
       and Efficiency, Qualitative Assessment Review              press-releases/Pages/tg1103.aspx.
       Guidelines for Investigative Operations of Federal
       Offices of Inspector General, at 1, 3, 12, 13        15	    ederal Housing Finance Agency, “Executive
                                                                  F
       (December 2011). Accessed: November 4,                     Summary,” Conservator’s Report on the Enterprises’
       2014, at www.ignet.gov/sites/default/files/files/          Financial Performance, Second Quarter 2010, at
       invprg1211.pdf.                                            3. Accessed: August 4, 2014, at www.fhfa.gov/
                                                                  AboutUs/Reports/ReportDocuments/2010-
3	    Exec. Order No. 12,549 § 3 (1986).                         2Q_ConservatorsRpt_508.pdf.

4	    Exec. Order No. 12,549 §§ 3, 6 (1986).                16	    ederal Housing Finance Agency, “Strategic
                                                                  F
                                                                  Goal 2: Contracting Enterprise Operations,”
5	    See 52 Fed. Reg. 20,360 (May 29, 1987).                     A Strategic Plan for Enterprise Conservatorships:
                                                                  The Next Chapter in a Story that Needs an
6	    48 C.F.R. § 9.402(e).                                       Ending, at 14 (February 21, 2012). Accessed:
                                                                  August 4, 2014, at www.fhfa.gov/AboutUs/
                                                                  Reports/ReportDocuments/20120221_
7	    31 U.S.C. §§ 3801-3812.
                                                                  StrategicPlanConservatorships_508.pdf.

8	    Federal Housing Finance Agency, About FHFA:
                                                            17	    annie Mae, Fannie Mae Reports Net Income of
                                                                  F
       Who We Are & What We Do. Accessed: August 4,
                                                                  $3.7 Billion and Comprehensive Income of $3.7
       2014, at www.fhfa.gov/AboutUs.
                                                                  Billion for Second Quarter 2014, at 1 (August
                                                                  7, 2014). Accessed: August 17, 2014, at www.
9	    Federal Housing Finance Agency, “Message from
                                                                  fanniemae.com/resources/file/ir/pdf/quarterly-
       the Acting Director,” 2013 Performance and
                                                                  annual-results/2014/q22014_release.pdf. Freddie
       Accountability Report, at 6. Accessed: September
                                                                  Mac, “Second Quarter 2014 Financial Results,”
       11, 2014, at www.fhfa.gov/AboutUs/Reports/
                                                                  Freddie Mac Reports Net Income of $1.4 Billion,
       ReportDocuments/2013_PAR_N508.pdf.
                                                                  Comprehensive Income of $1.9 Billion for Second
                                                                  Quarter 2014, at 1 (August 7, 2014). Accessed:
10	   Id., “Did You Know?,” at 4.                                August 17, 2014, at www.freddiemac.com/
                                                                  investors/er/pdf/2014er-2q14_release.pdf. Federal
11	   Id., “FY 2013 Profile,” at 18.                             Housing Finance Agency, “Table 3. Fannie Mae


116       Federal Housing Finance Agency Office of Inspector General
      Earnings,” “Table 12. Freddie Mac Earnings,”                Year Ended December 31, 2013, at 69. Accessed:
      2013 Report to Congress, at 73, 90 (June 13,                August 11, 2014, at www.freddiemac.com/
      2014). Accessed: August 20, 2014, at www.                   investors/er/pdf/10k_022714.pdf.
      fhfa.gov/AboutUs/Reports/ReportDocuments/
      FHFA_2013_Report_to_Congress.pdf.                     21	    annie Mae, “Deferred Tax Assets and Liabilities,”
                                                                  F
                                                                  Form 10-K for the Fiscal Year Ended December
18	   Fannie Mae, “Table 3: Summary of Condensed                 31, 2013, at F-51, F-52. Accessed: August 20,
       Consolidated Results of Operations,” Form                  2014, at www.fanniemae.com/resources/file/ir/
       10-Q for the Quarterly Period Ended June 30,               pdf/quarterly-annual-results/2013/10k_2013.
       2014, at 17. Accessed: August 11, 2014, at www.            pdf. Freddie Mac, “Deferred Tax Assets and
       fanniemae.com/resources/file/ir/pdf/quarterly-             Liabilities,” Form 10-K for the Fiscal Year
       annual-results/2014/q22014.pdf.                            Ended December 31, 2013, at 97. Accessed:
                                                                  August 20, 2014, at www.freddiemac.com/
19	   Freddie Mac, “Table 4 — Summary Consolidated               investors/er/pdf/10k_022714.pdf. Fannie
       Statements of Comprehensive Income,” Form                  Mae, Fannie Mae Reports Net Income of $5.3
       10-Q for the Quarterly Period Ended June 30,               Billion and Comprehensive Income of $5.7 Billion
       2014, at 13. Accessed: August 7, 2014, at                  for First Quarter 2014, at 1 (May 8, 2014).
       http://api40.10kwizard.com/cgi/convert/pdf/                Accessed: August 18, 2014, at www.fanniemae.
       FEDERALHOMELOANMORTGAGECORP-                               com/resources/file/ir/pdf/quarterly-annual-
       20140807-10Q-20140630.pdf?ipage=9739289                    results/2014/q12014_release.pdf.
       &xml=1&quest=1&rid=23&section=1&sequen
       ce=-1&pdf=1&dn=1.                                    22	    annie Mae, “Net Interest Income,” Form 10-Q
                                                                  F
                                                                  for the Quarterly Period Ended June 30, 2014,
20	   Freddie Mac, “Sustainability of Earnings,” Freddie         at 17. Accessed: August 21, 2014, at www.
       Mac Reports Net Income of $48.7 Billion for                fanniemae.com/resources/file/ir/pdf/quarterly-
       Full-Year 2013; Comprehensive Income of $51.6              annual-results/2014/q22014.pdf.
       Billion, at 3 (February 27, 2014). Accessed:
       August 11, 2014, at www.freddiemac.com/              23	   I d., “Table 3: Summary of Condensed
       investors/er/pdf/2013er-4q13_release.pdf. Fannie            Consolidated Results of Operations,” at 17.
       Mae, Fannie Mae Reports Comprehensive Income                Freddie Mac, “Table 4 — Summary Consolidated
       of $84.8 Billion for 2013 and $6.6 Billion for              Statements of Comprehensive Income,” Form
       Fourth Quarter 2013, at 1 (February 21, 2014).              10-Q for the Quarterly Period Ended June 30,
       Accessed: August 11, 2014, at www.fanniemae.                2014, at 13. Accessed: August 7, 2014, at
       com/resources/file/ir/pdf/quarterly-annual-                 http://api40.10kwizard.com/cgi/convert/pdf/
       results/2013/q42013_release.pdf. Fannie Mae,                FEDERALHOMELOANMORTGAGECORP-
       “Deferred Tax Assets and Liabilities,” Form 10-K            20140807-10Q-20140630.pdf?ipage=9739289
       for the Fiscal Year Ended December 31, 2013,                &xml=1&quest=1&rid=23&section=1&sequen
       at F-52. Accessed: August 11, 2014, at www.                 ce=-1&pdf=1&dn=1.
       fanniemae.com/resources/file/ir/pdf/quarterly-
       annual-results/2013/10k_2013.pdf. Freddie Mac,             Percent changes based on actual versus rounded
       “Income Tax Benefit,” Form 10-K for the Fiscal             values.


                                   Semiannual Report to the Congress • April 1, 2014–September 30, 2014        117
24	   Federal Housing Finance Agency, “Mortgage                  com/resources/file/ir/pdf/quarterly-annual-
       Asset Reduction,” Senior Preferred                         results/2014/q22014.pdf.
       Stock Purchase Agreements. Accessed:
       October 6, 2014, at www.fhfa.gov/                          Percent changes based on actual versus rounded
       senior-preferred-stock-purchase-agreements.                values.

25	   Fannie Mae, “The Capital Markets Group’s             29	    reddie Mac, “Table 4 — Summary Consolidated
                                                                  F
       Mortgage Portfolio,” Form 10-Q for the                     Statements of Comprehensive Income,” Form
       Quarterly Period Ended June 30, 2014, at                   10-Q for the Quarterly Period Ended June 30,
       35. Accessed: August 19, 2014, at www.                     2014, at 13. Accessed: August 19, 2014, at
       fanniemae.com/resources/file/ir/pdf/                       http://api40.10kwizard.com/cgi/convert/pdf/
       quarterly-annual-results/2014/q22014.pdf.                  FEDERALHOMELOANMORTGAGECORP-
       Freddie Mac, “Outlook,” Form 10-Q for the                  20140807-10Q-20140630.pdf?ipage=9739289
       Quarterly Period Ended June 30, 2014, at                   &xml=1&quest=1&rid=23&section=1&sequen
       11. Accessed: August 19, 2014, at http://                  ce=-1&pdf=1&dn=1.
       api40.10kwizard.com/cgi/convert/pdf/
       FEDERALHOMELOANMORTGAGECORP-                               Percent changes based on actual versus rounded
       20140807-10Q-20140630.pdf?ipage=9739289                    values.
       &xml=1&quest=1&rid=23&section=1&sequen
       ce=-1&pdf=1&dn=1.                                    30	    annie Mae, “Quarterly Results,” “Benefit for
                                                                  F
                                                                  Credit Losses,” Form 10-Q for the Quarterly Period
26	   Fannie Mae, “Year-to-Date Results,” Form 10-Q              Ended June 30, 2014, at 3, 24. Accessed: August
       for the Quarterly Period Ended June 30, 2014, at           19, 2014, at www.fanniemae.com/resources/file/
       3. Accessed: August 17, 2014, at www.fanniemae.            ir/pdf/quarterly-annual-results/2014/q22014.
       com/resources/file/ir/pdf/quarterly-annual-                pdf. Freddie Mac, “Benefit for Credit Losses,”
       results/2014/q22014.pdf.                                   Form 10-Q for the Quarterly Period Ended June
                                                                  30, 2014, at 15. Accessed: August 19, 2014, at
27	   Freddie Mac, “Table 4 — Summary Consolidated               http://api40.10kwizard.com/cgi/convert/pdf/
       Statements of Comprehensive Income,” Form                  FEDERALHOMELOANMORTGAGECORP-
       10-Q for the Quarterly Period Ended June 30,               20140807-10Q-20140630.pdf?ipage=9739289
       2014, at 13. Accessed: August 17, 2014, at                 &xml=1&quest=1&rid=23&section=1&sequen
       http://api40.10kwizard.com/cgi/convert/pdf/                ce=-1&pdf=1&dn=1.
       FEDERALHOMELOANMORTGAGECORP-
       20140807-10Q-20140630.pdf?ipage=9739289              31	    reddie Mac, “Interest-Rate Risk and Other
                                                                  F
       &xml=1&quest=1&rid=23&section=1&sequen                     Market Risks,” Form 10-K for the Fiscal Year
       ce=-1&pdf=1&dn=1.                                          Ended December 31, 2013, at 163. Accessed:
                                                                  August 17, 2014, at www.freddiemac.com/
28	   Fannie Mae, “Table 3: Summary of Condensed                 investors/er/pdf/10k_022714.pdf. Fannie Mae,
       Results of Operations,” Form 10-Q for the                  “Interest Rate Risk Management Strategy,” Form
       Quarterly Period Ended June 30, 2014, at 17.               10-K for the Fiscal Year Ended December 31, 2013,
       Accessed: August 19, 2014, at www.fanniemae.               at 152, 153. Accessed: August 17, 2014, at www.


118       Federal Housing Finance Agency Office of Inspector General
      fanniemae.com/resources/file/ir/pdf/quarterly-            &xml=1&quest=1&rid=23&section=1&sequen
      annual-results/2013/10k_2013.pdf.                         ce=-1&pdf=1&dn=1.

32	    reddie Mac, “Derivative Instruments,” Form
      F                                                   35	    reddie Mac, “Characteristics of the Single-
                                                                F
      10-K for the Fiscal Year Ended December 31, 2013,         Family Credit Guarantee Portfolio,” Form
      at 239. Accessed: August 17, 2014, at www.                10-Q for the Quarterly Period Ended June 30,
      freddiemac.com/investors/er/pdf/10k_022714.               2014, at 50. Accessed: August 21, 2014, at
      pdf. Fannie Mae, “Derivative Instruments,” Form           http://api40.10kwizard.com/cgi/convert/pdf/
      10-K for the Fiscal Year Ended December 31, 2013,         FEDERALHOMELOANMORTGAGECORP-
      at 153. Accessed: August 17, 2014, at www.                20140807-10Q-20140630.pdf?ipage=973928
      fanniemae.com/resources/file/ir/pdf/quarterly-            9&xml=1&quest=1&rid=23&section=1&seq
      annual-results/2013/10k_2013.pdf.                         uence=-1&pdf=1&dn=1. Fannie Mae, “Credit
                                                                Risk Profile,” “Guaranty Fees on Recently
33	   Fannie Mae, “Table 6: Fair Value (Losses) Gains,         Acquired Single-Family Loans,” Form 10-K for
       Net,” Form 10-Q for the Quarterly Period Ended           the Fiscal Year Ended December 31, 2013, at 4, 5.
       June 30, 2014, at 21. Accessed: August 17,               Accessed: August 19, 2014, at www.fanniemae.
       2014, at www.fanniemae.com/resources/file/ir/            com/resources/file/ir/pdf/quarterly-annual-
       pdf/quarterly-annual-results/2014/q22014.pdf.            results/2013/10k_2013.pdf.
       Freddie Mac, “Table 4 — Summary Consolidated
       Statements of Comprehensive Income,” Form          36	    reddie Mac, “Single-Family Guarantee Segment
                                                                F
       10-Q for the Quarterly Period Ended June 30,             Strategies,” “Competitive and Market Risks,”
       2014, at 13. Accessed: August 17, 2014, at               Form 10-K for the Fiscal Year Ended December
       http://api40.10kwizard.com/cgi/convert/pdf/              31, 2013, at 5, 6, 40. Accessed: August 19,
       FEDERALHOMELOANMORTGAGECORP-                             2014, at www.freddiemac.com/investors/er/
       20140807-10Q-20140630.pdf?ipage=9739289                  pdf/10k_022714.pdf. Fannie Mae, “Credit Risk
       &xml=1&quest=1&rid=23&section=1&sequen                   Profile,” “Single-Family Portfolio Diversification
       ce=-1&pdf=1&dn=1.                                        and Monitoring,” Form 10-K for the Fiscal
                                                                Year Ended December 31, 2013, at 4, 123.
34	   Fannie Mae, “Risk Management Derivatives                 Accessed: August 19, 2014, at www.fanniemae.
       Fair Value (Losses) Gains, Net,” “Mortgage               com/resources/file/ir/pdf/quarterly-annual-
       Commitment Derivatives Fair Value (Losses)               results/2013/10k_2013.pdf.
       Gains, Net,” Form 10-Q for the Quarterly Period
       Ended June 30, 2014, at 21, 22. Accessed: August   37	    annie Mae, “Executive Summary,” Form 10-Q
                                                                F
       17, 2014, at www.fanniemae.com/resources/file/           for the Quarterly Period Ended June 30, 2014,
       ir/pdf/quarterly-annual-results/2014/q22014.             at 2. Accessed: August 17, 2014, at www.
       pdf. Freddie Mac, “Derivative Gains (Losses),”           fanniemae.com/resources/file/ir/pdf/quarterly-
       Form 10-Q for the Quarterly Period Ended June            annual-results/2014/q22014.pdf. Freddie Mac,
       30, 2014, at 17. Accessed: August 17, 2014, at           “Table 28 — Single-Family Credit Guarantee
       http://api40.10kwizard.com/cgi/convert/pdf/              Portfolio Data by Year of Origination,” Form
       FEDERALHOMELOANMORTGAGECORP-                             10-Q for the Quarterly Period Ended June 30,
       20140807-10Q-20140630.pdf?ipage=9739289                  2014, at 49. Accessed: August 17, 2014, at


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014       119
      http://api40.10kwizard.com/cgi/convert/pdf/                 quarterly-annual-results/2013/10k_2013.pdf.
      FEDERALHOMELOANMORTGAGECORP-
      20140807-10Q-20140630.pdf?ipage=9739289               40	    annie Mae, “REO Management,” Form 10-K
                                                                  F
      &xml=1&quest=1&rid=23&section=1&sequen                      for the Fiscal Year Ended December 31, 2013,
      ce=-1&pdf=1&dn=1.                                           at 135. Accessed: August 21, 2014, at www.
                                                                  fanniemae.com/resources/file/ir/pdf/quarterly-
38	   Fannie Mae, “Table 33: Single-Family                       annual-results/2013/10k_2013.pdf. Freddie Mac,
       Conventional Serious Delinquent Loan                       “Delinquencies,” Form 10-K for the Fiscal Year
       Concentration Analysis,” Form 10-Q for the                 Ended December 31, 2013, at 121, 122. Accessed:
       Quarterly Period Ended June 30, 2014, at 62.               August 21, 2014, at www.freddiemac.com/
       Accessed: August 17, 2014, at www.fanniemae.               investors/er/pdf/10k_022714.pdf.
       com/resources/file/ir/pdf/quarterly-annual-
       results/2014/q22014.pdf. Freddie Mac,                41	    ederal Housing Finance Agency, “Enterprises
                                                                  F
       “Table 28 — Single-Family Credit Guarantee                 Single-Family Book Profile - As of December
       Portfolio Data by Year of Origination,” Form               31, 2012,” Foreclosure Prevention Report,
       10-Q for the Quarterly Period Ended June 30,               Fourth Quarter 2012: FHFA Federal Property
       2014, at 49. Accessed: August 17, 2014, at                 Manager’s Report, at 41. Accessed: August 21,
       http://api40.10kwizard.com/cgi/convert/pdf/                2014, at www.fhfa.gov/AboutUs/Reports/
       FEDERALHOMELOANMORTGAGECORP-                               ReportDocuments/20124Q_FPR_N508.pdf.
       20140807-10Q-20140630.pdf?ipage=9739                       Federal Housing Finance Agency, “Enterprises
       289&xml=1&quest=1&rid=23&section=1                         Single-Family Book Profile - As of December
       &sequence=-1&pdf=1&dn=1. Freddie Mac,                      31, 2013,” Foreclosure Prevention Report,
       “Table 30 — Single-Family Credit Guarantee                 Fourth Quarter 2013: FHFA Federal Property
       Portfolio Data by Year of Origination,” Form               Manager’s Report, at 41. Accessed: August 21,
       10-Q for the Quarterly Period Ended June 30,               2014, at www.fhfa.gov/AboutUs/Reports/
       2013, at 52. Accessed: August 17, 2014, at                 ReportDocuments/2013Q4_FPR_N508.pdf.
       http://api40.10kwizard.com/cgi/convert/pdf/
       FEDERALHOMELOANMORTGAGECORP-                         42	    annie Mae, “Table 35: Single-Family Foreclosed
                                                                  F
       20130807-10Q-20130630.pdf?ipage=9066647                    Properties,” Form 10-Q for the Quarterly Period
       &xml=1&quest=1&rid=23&section=1&sequen                     Ended June 30, 2014, at 64. Accessed: August 21,
       ce=-1&pdf=1&dn=1.                                          2014, at www.fanniemae.com/resources/file/ir/
                                                                  pdf/quarterly-annual-results/2014/q22014.pdf.
39	   Freddie Mac, “Benefit (Provision) for
       Credit Losses,” Form 10-K for the Fiscal Year        43	    reddie Mac, “Table 40 — REO Activity
                                                                  F
       Ended December 31, 2013, at 64. Accessed:                  by Region,” Form 10-Q for the Quarterly
       August 21, 2014, at www.freddiemac.com/                    Period Ended June 30, 2014, at 72.
       investors/er/pdf/10k_022714.pdf. Fannie                    Accessed: August 21, 2014, at http://
       Mae, “Comprehensive Income,” Form                          api40.10kwizard.com/cgi/convert/pdf/
       10-K for the Fiscal Year Ended December 31,                FEDERALHOMELOANMORTGAGECORP-
       2013, at 3. Accessed: August 21, 2014, at                  20140807-10Q-20140630.pdf?ipage=9739289
       www.fanniemae.com/resources/file/ir/pdf/                   &xml=1&quest=1&rid=23&section=1&sequen


120       Federal Housing Finance Agency Office of Inspector General
      ce=-1&pdf=1&dn=1.                                         pdf. Freddie Mac, “Table 11 — Segment
                                                                Earnings and Key Metrics — Single-Family
44	    annie Mae, “Single-Family Business Results,”
      F                                                         Guarantee,” “Table 14 — Segment Earnings
      “Multifamily Business Results,” Form 10-Q                 and Key Metrics — Multifamily,” Form 10-Q
      for the Quarterly Period Ended June 30, 2014,             for the Quarterly Period Ended June 30, 2014,
      at 28, 31. Accessed: August 17, 2014, at                  at 23, 31. Accessed: August 17, 2014, at
      www.fanniemae.com/resources/file/ir/pdf/                  http://api40.10kwizard.com/cgi/convert/pdf/
      quarterly-annual-results/2014/q22014.pdf.                 FEDERALHOMELOANMORTGAGECORP-
      Freddie Mac, “Single-Family Guarantee,” Form              20140807-10Q-20140630.pdf?ipage=9739289
      10-Q for the Quarterly Period Ended June 30,              &xml=1&quest=1&rid=23&section=1&sequen
      2014, at 24. Accessed: August 17, 2014, at                ce=-1&pdf=1&dn=1.
      http://api40.10kwizard.com/cgi/convert/pdf/
      FEDERALHOMELOANMORTGAGECORP-                              Percent changes based on actual versus rounded
      20140807-10Q-20140630.pdf?ipage=9739289                   values.
      &xml=1&quest=1&rid=23&section=1&sequen
      ce=-1&pdf=1&dn=1.                                   47	    ederal Housing Finance Agency, Statement
                                                                F
                                                                of FHFA Acting Director, Edward J. DeMarco,
45	   Freddie Mac, “Glossary,” Form 10-K for the               Regarding Implementation of Guarantee Fee
       Fiscal Year Ended December 31, 2013, at                  Increase (December 29, 2011). Accessed: October
       319. Accessed: August 17, 2014, at www.                  8, 2014, at www.fhfa.gov/Media/PublicAffairs/
       freddiemac.com/investors/er/pdf/10k_022714.              Pages/Statement-of-FHFA-Acting-Director-
       pdf. Fannie Mae, “Single-Family Business                 Edward-J-DeMarco-Regarding-Implementation-
       Results,” “Multifamily Business Results,” Form           of-Guarantee-Fee-Increase.aspx. Federal Housing
       10-Q for the Quarterly Period Ended June 30,             Finance Agency, FHFA Announces Increase in
       2014, at 28, 31. Accessed: August 17, 2014,              Guarantee Fees (August 31, 2012). Accessed:
       at www.fanniemae.com/resources/file/ir/                  October 8, 2014, at www.fhfa.gov/Media/
       pdf/quarterly-annual-results/2014/q22014.                PublicAffairs/Pages/FHFA-Announces-Increase-
       pdf. Federal Housing Finance Agency, “The                in-Guarantee-Fees.aspx.
       Single-Family Mortgage Guarantee Business,”
       Fannie Mae And Freddie Mac Single-Family           48	    annie Mae, “Table 12: Single-Family Business
                                                                F
       Guarantee Fees In 2012, at 11 (December 2013).           Results,” Form 10-Q for the Quarterly Period
       Accessed: October 8, 2014, at www.fhfa.gov/              Ended June 30, 2014, at 29, 30. Accessed: August
       AboutUs/Reports/ReportDocuments/20131209_                17, 2014, at www.fanniemae.com/resources/file/
       GFeeReport_2012_N508.pdf.                                ir/pdf/quarterly-annual-results/2014/q22014.pdf.

46	   Fannie Mae, “Table 12: Single-Family Business      49	    reddie Mac, “Single-Family Guarantee,” Form
                                                                F
       Results,” “Table 13: Multifamily Business                10-Q for the Quarterly Period Ended June 30,
       Results,” Form 10-Q for the Quarterly Period             2014, at 26. Accessed: August 17, 2014, at
       Ended June 30, 2014, at 29, 32. Accessed: August         http://api40.10kwizard.com/cgi/convert/pdf/
       17, 2014, at www.fanniemae.com/resources/file/           FEDERALHOMELOANMORTGAGECORP-
       ir/pdf/quarterly-annual-results/2014/q22014.             20140807-10Q-20140630.pdf?ipage=9739289


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014     121
      &xml=1&quest=1&rid=23&section=1&sequen                      index (click on “Additional Info,” then click
      ce=-1&pdf=1&dn=1.                                           “Seasonally Adjusted Home Price Index Levels,”
                                                                  then download the Excel file).
50	   Federal Housing Finance Agency, FHFA Directs
       Fannie Mae and Freddie Mac To Delay Guarantee        55	    ederal Housing Finance Agency, FHFA Sues
                                                                  F
       Fee Changes (January 8, 2014). Accessed: August            17 Firms to Recover Losses to Fannie Mae and
       19, 2014, at www.fhfa.gov/Media/PublicAffairs/             Freddie Mac (September 2, 2011). Accessed:
       Pages/FHFA-Directs-Fannie-Mae-and-Freddie-                 August 19, 2014, at www.fhfa.gov/Media/
       Mac-To-Delay-Guarantee-Fee-Changes.aspx.                   PublicAffairs/Pages/FHFA-Sues-17-Firms-to-
                                                                  Recover-Losses-to-Fannie-Mae-and-Freddie-Mac.
51	    ederal Housing Finance Agency, FHFA Seeks
      F                                                           aspx. Freddie Mac, “Non-Agency Mortgage-
      Input on Fannie Mae and Freddie Mac Guarantee               Related Securities Settlements,” “Non-Agency
      Fees (June 5, 2014). Accessed: October 8, 2014,             Mortgage-Related Security Issuers,” Form 10-Q
      at www.fhfa.gov/Media/PublicAffairs/Pages/                  for the Quarterly Period Ended June 30, 2014,
      FHFA-Seeks-Input-on-Fannie-Mae-and-Freddie-                 at 18, 145. Accessed: August 21, 2014, at
      Mac-Guarantee-Fees.aspx.                                    http://api40.10kwizard.com/cgi/convert/pdf/
                                                                  FEDERALHOMELOANMORTGAGECORP-
52	   Federal Housing Finance Agency, FHFA Extends               20140807-10Q-20140630.pdf?ipage=973928
       Deadline for G-Fee Input to September 8 (July              9&xml=1&quest=1&rid=23&section=1&sequ
       29, 2014). Accessed: September 26, 2014,                   ence=-1&pdf=1&dn=1. Fannie Mae, “Fee and
       at www.fhfa.gov/Media/PublicAffairs/Pages/                 Other Income,” “FHFA Private-Label Mortgage-
       FHFA-Extends-Deadline-for-G-Fee-Input-to-                  Related Securities Litigation,” Form 10-Q for the
       September-8.aspx.                                          Quarterly Period Ended June 30, 2014, at 20, 163.
                                                                  Accessed: August 21, 2014, at www.fanniemae.
                                                                  com/resources/file/ir/pdf/quarterly-annual-
53	   Freddie Mac, “Full-Year Net Income and
                                                                  results/2014/q22014.pdf.
       Comprehensive Income (Loss),” Fourth
       Quarter 2012 Financial Results Supplement, at
       4 (February 28, 2013). Accessed: August 19,          56	    reddie Mac, “Other Income (Loss),” Form
                                                                  F
       2014, at www.freddiemac.com/investors/er/pdf/              10-Q for the Quarterly Period Ended June 30,
       supplement_4q12.pdf. Fannie Mae, “Summary of               2014, at 18. Accessed: August 21, 2014, at
       Our Financial Performance for 2013,” Form 10-K             http://api40.10kwizard.com/cgi/convert/pdf/
       for the Fiscal Year Ended December 31, 2013, at 3.         FEDERALHOMELOANMORTGAGECORP-
       Accessed: August 19, 2014, at www.fanniemae.               20140807-10Q-20140630.pdf?ipage=9739289&
       com/resources/file/ir/pdf/quarterly-annual-                xml=1&quest=1&rid=23&section=1&sequence=-
       results/2013/10k_2013.pdf.                                 1&pdf=1&dn=1. Fannie Mae, “Fee and Other
                                                                  Income,” Form 10-Q for the Quarterly Period
                                                                  Ended June 30, 2014, at 88. Accessed: August 21,
54	   S tandard & Poor’s Dow Jones Indices, S&P/
                                                                  2014, at www.fanniemae.com/resources/file/ir/
       Case-Shiller 20-City Composite Home Price Index
                                                                  pdf/quarterly-annual-results/2014/q22014.pdf.
       (August 26, 2014). Accessed: August 26, 2014,
       at http://us.spindices.com/indices/real-estate/
       sp-case-shiller-20-city-composite-home-price-        57	   Fannie Mae, “Condensed Consolidated


122       Federal Housing Finance Agency Office of Inspector General
      Statements of Operation and Comprehensive                  June 30, 2014, at 48. Accessed: August 11, 2014,
      Income — (Unaudited),” Form 10-Q for the                   at http://api40.10kwizard.com/cgi/convert/pdf/
      Quarterly Period Ended June 30, 2014, at 84.               FEDERALHOMELOANMORTGAGECORP-
      Accessed: August 17, 2014, at www.fanniemae.               20140807-10Q-20140630.pdf?ipage=9739289
      com/resources/file/ir/pdf/quarterly-annual-                &xml=1&quest=1&rid=23&section=1&sequen
      results/2014/q22014.pdf.                                   ce=-1&pdf=1&dn=1.

58	   Freddie Mac, “Consolidated Statements of            62	    ederal Housing Finance Agency, “Table 2:
                                                                 F
       Comprehensive Income (Unaudited),” Form                   Dividends on Enterprise Draws from Treasury,”
       10-Q for the Quarterly Period Ended June 30,              Treasury and Federal Reserve Purchase Programs
       2014, at 98. Accessed: August 18, 2014, at                for GSE and Mortgage-Related Securities Data as
       http://api40.10kwizard.com/cgi/convert/pdf/               of October 1, 2014, at 3. Accessed: October 2,
       FEDERALHOMELOANMORTGAGECORP-                              2014, at www.fhfa.gov/DataTools/Downloads/
       20140807-10Q-20140630.pdf?ipage=9739289                   Documents/Market-Data/TSYSupport10012014.
       &xml=1&quest=1&rid=23&section=1&sequen                    pdf.
       ce=-1&pdf=1&dn=1.
                                                           63	    ederal Housing Finance Agency, “Enterprises,”
                                                                 F
59	   Federal Housing Finance Agency Office of                  2013 Report to Congress, at iii (June 13, 2014).
       Inspector General, “Amendments to the PSPAs,”             Accessed: August 11, 2014, at www.fhfa.
       Analysis of the 2012 Amendments to the Senior             gov/AboutUs/Reports/ReportDocuments/
       Preferred Stock Purchase Agreements, WPR-                 FHFA_2013_Report_to_Congress.pdf.
       2013-002, at 10, 11, 12 (March 20, 2013).
       Accessed: August 11, 2014, at www.fhfaoig.gov/      64	    ederal Housing Finance Agency, “Table 1:
                                                                 F
       Content/Files/WPR-2013-002_2.pdf. Federal                 Quarterly Draws on Treasury Commitments
       Housing Finance Agency, “Table 2: Dividends               to Fannie Mae and Freddie Mac per the Senior
       on Enterprise Draws from Treasury,” Treasury and          Preferred Stock Purchase Agreements,” “Table 2:
       Federal Reserve Purchase Programs for GSE and             Dividends on Enterprise Draws from Treasury,”
       Mortgage-Related Securities Data as of October 1,         Treasury and Federal Reserve Purchase Programs
       2014, at 3. Accessed: October 2, 2014, at www.            for GSE and Mortgage-Related Securities Data as
       fhfa.gov/DataTools/Downloads/Documents/                   of October 1, 2014, at 2, 3. Accessed: October 2,
       Market-Data/TSYSupport10012014.pdf.                       2014, at www.fhfa.gov/DataTools/Downloads/
                                                                 Documents/Market-Data/TSYSupport10012014.
60	   Fannie Mae, “Net Worth,” “Table 18: Summary               pdf.
       of Condensed Consolidated Balance Sheets,”
       Form 10-Q for the Quarterly Period Ended June       65	   I d., “Table 3: Treasury Purchases of Freddie
       30, 2014, at 4, 39. Accessed: August 11, 2014,             Mac and Fannie Mae MBS,” “Table 4a: Federal
       at www.fanniemae.com/resources/file/ir/pdf/                Reserve GSE and Ginnie Mae MBS Purchase
       quarterly-annual-results/2014/q22014.pdf.                  Program, January 2009-March 2010,” “Table 5:
                                                                  Federal Reserve Purchases of GSE Debt,” at 4, 5,
61	   Freddie Mac, “Table 27 — Changes in Total                  6, 8.
       Equity,” Form 10-Q for the Quarterly Period Ended


                                  Semiannual Report to the Congress • April 1, 2014–September 30, 2014       123
66	   Diana Hancock and Wayne Passmore, Board                70	    ederal Home Loan Banks, Overview: The Federal
                                                                    F
       of Governors of the Federal Reserve System,                  Home Loan Banks. Accessed: August 14, 2014,
       “The Structure of the U.S. Secondary Mortgage                at www.fhlbanks.com/overview_whyfhlb.htm.
       Market: Late-2008 through Early 2010,” Did                   Federal Home Loan Banks Office of Finance,
       the Federal Reserve’s MBS Purchase Program Lower             “General Information,” Combined Financial
       Mortgage Rates? Accessed: August 11, 2014, at                Report for the Year Ended December 31, 2013, at 2.
       www.federalreserve.gov/pubs/feds/2011/201101/                Accessed: August 14, 2014, at www.fhlb-of.com/
       index.html.                                                  ofweb_userWeb/resources/13yrend.pdf.

67	   Federal Housing Finance Agency, “GSE                   71	    ederal Home Loan Banks Office of Finance,
                                                                    F
       Mortgage-Backed Securities Purchase Facility,”               “Advances,” Combined Financial Report for the
       Mortgage Market Note 10-1 (Update of Mortgage                Quarterly Period Ended June 30, 2014, at 7.
       Market Notes 09-1 and 09-1A), at 5 (January                  Accessed: August 14, 2014, at www.fhlb-of.com/
       20, 2010). Accessed: August 11, 2014, at                     ofweb_userWeb/resources/14Q2end.pdf.
       www.fhfa.gov/PolicyProgramsResearch/
       Research/PaperDocuments/20100120_                      72	    ederal Home Loan Banks Office of Finance,
                                                                    F
       MMNote_10-1_508.pdf. Federal Housing                         “General Information,” Combined Financial
       Finance Agency, “Table 4a: Federal Reserve GSE               Report for the Year Ended December 31, 2013, at 3.
       and Ginnie Mae MBS Purchase Program, January                 Accessed: August 14, 2014, at www.fhlb-of.com/
       2009-March 2010,” “Table 5: Federal Reserve                  ofweb_userWeb/resources/13yrend.pdf.
       Purchases of GSE Debt,” Treasury and Federal
       Reserve Purchase Programs for GSE and Mortgage-        73	    ederal Home Loan Banks Office of Finance,
                                                                    F
       Related Securities Data as of October 1, 2014, at 5,         “Table 42 - Membership by Type of Member,”
       6, 8. Accessed: October 2, 2014, at www.fhfa.gov/            Combined Financial Report for the Quarterly Period
       DataTools/Downloads/Documents/Market-Data/                   Ended June 30, 2014, at 50. Accessed: August
       TSYSupport10012014.pdf. Federal Reserve                      14, 2014, at www.fhlb-of.com/ofweb_userWeb/
       Bank of New York, FAQs: Agency MBS Purchases.                resources/14Q2end.pdf.
       Accessed: August 11, 2014, at www.newyorkfed.
       org/markets/ambs/ambs_faq.html. Board of               74	   Id., “Overview,” at 4.
       Governors of the Federal Reserve System, Press
       Release (July 30, 2014). Accessed: October 9,
                                                              75	   Id., at cover page.
       2014, at www.federalreserve.gov/newsevents/
       press/monetary/20140730a.htm.
                                                              76	    e FHLBank System can borrow at favorable
                                                                    Th
                                                                    rates due to the perception in financial markets
68	   Federal Home Loan Banks Office of Finance,
                                                                    that the federal government will guarantee
       “Overview,” Combined Financial Report for the
                                                                    repayment of its debt even though such
       Quarterly Period Ended June 30, 2014, at 3.
                                                                    a guarantee has not been made explicitly.
       Accessed: August 14, 2014, at www.fhlb-of.com/
                                                                    This phenomenon is known as the “implicit
       ofweb_userWeb/resources/14Q2end.pdf.
                                                                    guarantee.” See Federal Housing Finance Agency
                                                                    Office of Inspector General, “Preface,” FHFA’s
69	   Id., “Background Information,” at F-8.                       Oversight of Troubled Federal Home Loan Banks,

124       Federal Housing Finance Agency Office of Inspector General
      EVL-2012-001, at 6 (January 11, 2012).                  84	    ederal Home Loan Banks Office of Finance,
                                                                    F
      Accessed: August 14, 2014, at www.fhfaoig.gov/                “Note 11 - Derivatives and Hedging Activities,”
      Content/Files/Troubled%20Banks%20EVL-                         Combined Financial Report for the Year Ended
      2012-001.pdf.                                                 December 31, 2013, at F-45, F-46, F-47.
                                                                    Accessed: August 15, 2014, at www.fhlb-of.com/
77	   Federal Home Loan Banks Office of Finance,                   ofweb_userWeb/resources/13yrend.pdf.
       “Economy and Financial Markets,” “Combined
       Financial Condition,” “Table 16 – Net Interest         85	    ederal Home Loan Banks Office of Finance,
                                                                    F
       Income after Provision (Reversal) for Credit                 “Table 10.2 - Net Gains (Losses) on Derivatives
       Losses,” Combined Financial Report for the                   and Hedging Activities,” Combined Financial
       Quarterly Period Ended June 30, 2014, at 4, 6, 16.           Report for the Quarterly Period Ended June
       Accessed: August 21, 2014, at www.fhlb-of.com/               30, 2014, at F-30. Accessed: August 17,
       ofweb_userWeb/resources/14Q2end.pdf.                         2014, at www.fhlb-of.com/ofweb_userWeb/
                                                                    resources/14Q2end.pdf.
78	   Id., “Net Interest Income after Provision
       (Reversal) for Credit Losses,” at 16.                  86	   I d., “Gains (Losses) on Derivatives and Hedging
                                                                     Activities,” at 22. Federal Home Loan Banks
79	   I d., “Interest Rate Levels and Volatility,”                  Office of Finance, “How do the FHLBanks
       “Investments,” at 5, 10.                                      account for their derivatives?,” Derivatives Q&A,
                                                                     at 3, 4 (August 13, 2014). Accessed: October
80	   Id., “Interest Rate Levels and Volatility,”                   6, 2014, at www.fhlb-of.com/ofweb_userWeb/
       “Combined Results of Operations,” “Factors                    resources/derivativesqanda.pdf.
       Negatively Affecting Net Interest Income,” at 5,
       6, 20.                                                 87	    ederal Home Loan Banks Office of Finance,
                                                                    F
                                                                    “Non-interest Expense,” Combined Financial
81	   Id., “Combined Statement of Income,” at F-2.                 Report for the Quarterly Period Ended June 30,
                                                                    2014, at 22. Accessed: October 9, 2014, at www.
      Percent changes based on actual versus rounded                fhlb-of.com/ofweb_userWeb/resources/14Q2end.
      values.                                                       pdf.


82	   Id., “Combined Results of Operations,”                 88	    ederal Home Loan Banks Office of Finance,
                                                                    F
       “Combined Statement of Income,” at 16, F-2.                  “Selected Financial Data,” Combined Financial
                                                                    Report for the Year Ended December 31, 2011, at
      Percent changes based on actual versus rounded                34. Accessed: August 17, 2014, at www.fhlb-of.
      values.                                                       com/ofweb_userWeb/resources/11yrend.pdf.
                                                                    Federal Home Loan Banks Office of Finance,
                                                                    “Selected Financial Data,” Combined Financial
83	   Id.
                                                                    Report for the Year Ended December 31, 2013, at
                                                                    35. Accessed: August 17, 2014, at www.fhlb-of.
      Percent changes based on actual versus rounded
                                                                    com/ofweb_userWeb/resources/13yrend.pdf.
      values.
                                                                    Federal Home Loan Banks Office of Finance,


                                      Semiannual Report to the Congress • April 1, 2014–September 30, 2014        125
      “Selected Financial Data,” Combined Financial               Pages/FHFA-Proposes-Revisions-to-Federal-
      Report for the Quarterly Period Ended June 30,              Home-Loan-Bank-Membership-Eligibility-
      2014, at 1. Accessed: August 17, 2014, at www.              Requirements.aspx.
      fhlb-of.com/ofweb_userWeb/resources/14Q2end.
      pdf.                                                  93	    ederal Housing Finance Agency, FHFA Proposes
                                                                  F
                                                                  2015-2017 Housing Goals for Fannie Mae and
89	   Federal Home Loan Banks Office of Finance,                 Freddie Mac (August 29, 2014). Accessed:
       FHLBanks Satisfy REFCORP Obligations; Launch               September 11, 2014, at www.fhfa.gov/Media/
       Joint Capital Enhancement Agreement, at 1                  PublicAffairs/Pages/FHFA-Proposes-2015-2017-
       (August 8, 2011). Accessed: August 14, 2014,               Housing-Goals-for-Fannie-Mae-and-Freddie-
       at www.fhlb-of.com/ofweb_userWeb/resources/                Mac.aspx.
       PR_20110808_FHLBank_System_Capital_
       Initiative_Launch.pdf.                               94	    ederal Housing Finance Agency, FHFA Requests
                                                                  F
                                                                  Input on Draft Private Mortgage Insurer Eligibility
90	   Federal Home Loan Bank of Dallas, “What                    Requirements for Fannie Mae and Freddie Mac
       Are the Potential Benefits of the Agreement?,”             Counterparties (July 10, 2014). Accessed: August
       Joint Capital Enhancement Agreement Questions              21, 2014, at www.fhfa.gov/Media/PublicAffairs/
       and Answers, at 1 (March 1, 2011). Accessed:               Pages/FHFA-requests-input-on-draft-PMIERs.
       August 14, 2014, at www.fhlb.com/data/                     aspx.
       REFCORP_QA.pdf.
                                                            95	    ederal Housing Finance Agency, “Strengthen
                                                                  F
91	   Federal Housing Finance Agency, Agencies                   Mortgage Insurance Counterparty Standards,”
       Seek Comment on Swap Margin Requirements                   “Reduce Taxpayer Risk through Increasing the
       (September 3, 2014). Accessed: September 11,               Role of Private Capital in the Mortgage Market,”
       2014, at www.fhfa.gov/Media/PublicAffairs/                 The 2014 Strategic Plan for the Conservatorships of
       Pages/Agencies-Seek-Comment-on-Swap-Margin-                Fannie Mae and Freddie Mac, at 15, 16, 12
       Requirements.aspx. Federal Housing Finance                 (May 13, 2014). Accessed: August 21, 2014,
       Agency, “Summary,” “Background,” Notice                    at www.fhfa.gov/AboutUs/Reports/
       of Proposed Rulemaking: Margin and Capital                 ReportDocuments/2014StrategicPlan-
       Requirements for Covered Swap Entities, at 2, 11,          05132014Final.pdf.
       13 (September 3, 2014). Accessed: September 11,
       2014, at www.fhfa.gov/SupervisionRegulation/         96	    ederal Housing Finance Agency, FHFA Requests
                                                                  F
       Rules/RuleDocuments/Margin_and_Capital_                    Input on Draft Private Mortgage Insurer Eligibility
       Requirements_for_Covered_Swap_Entities_                    Requirements for Fannie Mae and Freddie Mac
       Notice_of_Proposed_Rule.pdf.                               Counterparties (July 10, 2014). Accessed: August
                                                                  21, 2014, at www.fhfa.gov/Media/PublicAffairs/
92	   Federal Housing Finance Agency, FHFA                       Pages/FHFA-requests-input-on-draft-PMIERs.
       Proposes Revisions to Federal Home Loan                    aspx.
       Bank Membership Eligibility Requirements
       (September 2, 2014). Accessed: September 11,         97	    ederal Housing Finance Agency, Minority and
                                                                  F
       2014, at www.fhfa.gov/Media/PublicAffairs/                 Women Inclusion Amendments (June 25, 2014).


126       Federal Housing Finance Agency Office of Inspector General
       Accessed: September 15, 2014, at www.fhfa.gov/              Input on Single Security (August 12, 2014).
       SupervisionRegulation/Rules/Pages/Minority-                 Accessed: August 21, 2014, at www.fhfa.gov/
       and-Women-and-Inclusion-Amendments.aspx.                    Media/PublicAffairs/Pages/FHFA-Seeks-Input-
       79 Fed. Reg. 35,960 (proposed June 25, 2014)                on-Single-Security.aspx. Federal Housing
       (to be codified at 12 C.F.R. pt. 1207). Accessed:           Finance Agency, “Exhibit A: Proposed Single
       October 8, 2014, at www.gpo.gov/fdsys/pkg/                  Security Structure,” “Background,” Request for
       FR-2014-06-25/pdf/2014-14512.pdf.                           Input: Proposed Single Security Structure, at 9, 4
                                                                   (August 12, 2014). Accessed: August 21, 2014,
98	    79 Fed. Reg. 35,960 (proposed June 25, 2014)               at www.fhfa.gov/PolicyProgramsResearch/
        (to be codified at 12 C.F.R. pt. 1207). Accessed:          Policy/Documents/RFI-Single-Security-
        October 8, 2014, at www.gpo.gov/fdsys/pkg/                 FINAL-8-11-2014.pdf.
        FR-2014-06-25/pdf/2014-14512.pdf.
                                                            104	    ederal Housing Finance Agency, FHFA’s Update
                                                                   F
99	    Federal Housing Finance Agency, FHFA Seeks                 on Private Label Securities Actions 2013 and 2014
        Input on Fannie Mae and Freddie Mac Guarantee              Settlements and Remaining Cases (September 12,
        Fees (June 5, 2014). Accessed: August 21, 2014,            2014). Accessed: September 15, 2014, at www.
        at www.fhfa.gov/Media/PublicAffairs/Pages/                 fhfa.gov/Media/PublicAffairs/Pages/FHFAs-
        FHFA-Seeks-Input-on-Fannie-Mae-and-Freddie-                Update-on-Private-Label-Securities-Actions.aspx.
        Mac-Guarantee-Fees.aspx.                                   Federal Housing Finance Agency, FHFA Recovers
                                                                   Nearly $8 Billion for Taxpayers in 2013 Through
100	   Federal Housing Finance Agency, FHFA Directs               Settlements (January 2, 2014). Accessed: August
        Fannie Mae and Freddie Mac To Delay Guarantee              21, 2014, at www.fhfa.gov/Media/PublicAffairs/
        Fee Changes (January 8, 2014). Accessed: August            Pages/FHFA-Recovers-Nearly-$8-Billion-for-
        21, 2014, at www.fhfa.gov/Media/PublicAffairs/             Taxpayers-in-2013.aspx. Federal Housing Finance
        Pages/FHFA-Directs-Fannie-Mae-and-Freddie-                 Agency, FHFA Sues 17 Firms to Recover Losses
        Mac-To-Delay-Guarantee-Fee-Changes.aspx.                   to Fannie Mae and Freddie Mac (September 2,
                                                                   2011). Accessed: August 21, 2014, at www.fhfa.
                                                                   gov/Media/PublicAffairs/Pages/FHFA-Sues-17-
101	   Federal Housing Finance Agency, FHFA Seeks
        Input on Fannie Mae and Freddie Mac Guarantee              Firms-to-Recover-Losses-to-Fannie-Mae-and-
                                                                   Freddie-Mac.aspx.
        Fees (June 5, 2014). Accessed: August 21, 2014,
        at www.fhfa.gov/Media/PublicAffairs/Pages/
        FHFA-Seeks-Input-on-Fannie-Mae-and-Freddie-         105	    ederal Housing Finance Agency, FHFA
                                                                   F
        Mac-Guarantee-Fees.aspx.                                   Announces Settlement with HSBC (September
                                                                   12, 2014). Accessed: September 16, 2014, at
                                                                   www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-
102	   Federal Housing Finance Agency, FHFA Extends
                                                                   Announces-Settlement-with-HSBC.aspx.
        Deadline for G-Fee Input to September 8 (July 29,
        2014). Accessed: August 21, 2014, at www.fhfa.
        gov/Media/PublicAffairs/Pages/FHFA-Extends-         106	    ederal Housing Finance Agency, FHFA
                                                                   F
        Deadline-for-G-Fee-Input-to-September-8.aspx.              Announces Settlement with Goldman Sachs
                                                                   (August 22, 2014). Accessed: August 28, 2014,
                                                                   at www.fhfa.gov/Media/PublicAffairs/Pages/
103	   Federal Housing Finance Agency, FHFA Seeks

                                    Semiannual Report to the Congress • April 1, 2014–September 30, 2014          127
       FHFA-Announces-Settlement-with-Goldman-                      www.fhlbsea.com/OurCompany/News/
       Sachs.aspx. Federal Housing Finance Agency,                  NewsReleases/2014/20140925.aspx.
       FHFA’s Update on Private Label Securities Actions
       2013 and 2014 Settlements and Remaining Cases         111	    ederal Housing Finance Agency, Statement
                                                                    F
       (September 12, 2014). Accessed: September 15,                of FHFA Director Melvin L. Watt on FHLB
       2014, at www.fhfa.gov/Media/PublicAffairs/                   Seattle and FHLB Des Moines Merger Agreement
       Pages/FHFAs-Update-on-Private-Label-Securities-              (September 25, 2014). Accessed: October 2,
       Actions.aspx. Freddie Mac, “Non-Agency                       2014, at www.fhfa.gov/Media/PublicAffairs/
       Mortgage-Related Security Issuers,” Form 10-K for            Pages/Statement-of-FHFA-Director-Watt-on-
       the Fiscal Year Ended December 31, 2013, at 247.             FHLB-Seattle-and-FHLB-Des-Moines-Merger-
       Accessed: August 21, 2014, at www.freddiemac.                Agreement.aspx.
       com/investors/er/pdf/10k_022714.pdf.
                                                             112	    ederal Home Loan Bank Des Moines, FHLB
                                                                    F
107	   Federal Housing Finance Agency, FHFA                        Des Moines and FHLB Seattle Announce Merger
        Announces Settlement with RBS (June 19, 2014).              Discussions (July 31, 2014). Accessed: October 2,
        Accessed: August 21, 2014, at www.fhfa.gov/                 2014, at www.fhlbdm.com/homepage-news-feed/
        Media/PublicAffairs/Pages/FHFA-Announces-                   fhlb-des-moines-and-fhlb-seattle-announce-
        Settlement-with-RBS.aspx. Settlement                        merger-discussions/.
        Agreement, Federal Housing Finance Agency v. Ally
        Financial Inc., et al., S.D.N.Y. (No. 11 Civ. 7010   113	    ederal Housing Finance Agency, FHFA Requests
                                                                    F
        (DLC)).                                                     Input on Agency Strategic Plan for 2015-2019
                                                                    (August 15, 2014). Accessed: August 21, 2014,
108	   Federal Housing Finance Agency, FHFA                        at www.fhfa.gov/Media/PublicAffairs/Pages/
        Announces $280 Million Settlement with Barclays             FHFA-Requests-Input-on-Agency-Strategic-Plan-
        Bank PLC (April 24, 2014). Accessed: August                 for-2015-2019.aspx.
        21, 2014, at www.fhfa.gov/Media/PublicAffairs/
        Pages/FHFA-Announces-$280-Million-                   114	    ederal Housing Finance Agency, “FHFA’s
                                                                    F
        Settlement-with-Barclays-Bank-PLC.aspx.                     Strategic Goals In Context,” The 2014 Strategic
                                                                    Plan for the Conservatorships of Fannie Mae and
109	   Federal Housing Finance Agency, FHFA                        Freddie Mac, at 5 (May 13, 2014). Accessed:
        Announces $110 Million Settlement with First                September 11, 2014, at www.fhfa.gov/AboutUs/
        Horizon National Corporation (April 29, 2014).              Reports/ReportDocuments/2014StrategicPlan-
        Accessed: August 21, 2014, at www.fhfa.gov/                 05132014Final.pdf.
        Media/PublicAffairs/Pages/FHFA-Announces-
        $110-Million-Settlement-with-First-Horizon-          115	   Federal Housing Finance Agency, FHFA Requests
        National-Corporation.aspx.                                   Input on Agency Strategic Plan for 2015-2019
                                                                     (August 15, 2014). Accessed: August 21, 2014,
110	   Federal Home Loan Bank Seattle, Federal                      at www.fhfa.gov/Media/PublicAffairs/Pages/
        Home Loan Banks of Des Moines and Seattle                    FHFA-Requests-Input-on-Agency-Strategic-Plan-
        Enter into Merger Agreement (September                       for-2015-2019.aspx.
        25, 2014). Accessed: October 2, 2014, at


128        Federal Housing Finance Agency Office of Inspector General
116	    ederal Housing Finance Agency, FHFA Releases
       F                                                            Instructions_and_Guidance_11202013.pdf.
       2013 Report to Congress (June 13, 2014).
       Accessed: August 21, 2014, at www.fhfa.gov/           123	    ederal Housing Finance Agency, “Background,”
                                                                    F
       Media/PublicAffairs/Pages/FHFA-Releases-                     Projections of the Enterprises’ Financial
       2013-Report-to-Congress.aspx. Federal Housing                Performance (Stress Tests), at 4 (April 30, 2014).
       Finance Agency, “Rating System,” 2013 Report to              Accessed: August 21, 2014, at www.fhfa.
       Congress, at i, 7 (June 13, 2014). Accessed: August          gov/AboutUs/Reports/ReportDocuments/
       21, 2014, at www.fhfa.gov/AboutUs/Reports/                   GSEFinProj2014FINAL.pdf.
       ReportDocuments/FHFA_2013_Report_to_
       Congress.pdf.                                         124	   I d., “Scenario Assumptions,” “Summary,”
                                                                     “Background,” at 5, 3, 4.
117	   Federal Housing Finance Agency, “Enterprises,”
        2013 Report to Congress, at iii (June 13, 2014).
        Accessed: August 21, 2014, at www.fhfa.
        gov/AboutUs/Reports/ReportDocuments/
        FHFA_2013_Report_to_Congress.pdf.

118	   Id., “Enterprises,” at iv.

119	   Id., “FHLBanks,” at v.

120	   Federal Housing Finance Agency, FHFA
        Announces Results of Fannie Mae and Freddie Mac
        Stress Tests (April 30, 2014). Accessed: August
        21, 2014, at www.fhfa.gov/Media/PublicAffairs/
        Pages/FHFA-Announces-Results-of-Fannie-Mae-
        and-Freddie-Mac-Stress-Tests.aspx.

121	   Federal Housing Finance Agency, “Background,”
        Projections of the Enterprises’ Financial
        Performance (Stress Tests), at 4 (April 30, 2014).
        Accessed: August 21, 2014, at www.fhfa.
        gov/AboutUs/Reports/ReportDocuments/
        GSEFinProj2014FINAL.pdf.

122	   Federal Housing Finance Agency, “Introduction,”
        Dodd-Frank Stress Tests Summary Instructions
        and Guidance, at 3 (November 26, 2013).
        Accessed: August 21, 2014, at www.fhfa.gov/
        Media/PublicAffairs/Documents/411/Fannie_
        Mae/2014_FHFA_Dodd-Frank_Summary_

                                     Semiannual Report to the Congress • April 1, 2014–September 30, 2014        129
Federal Housing Finance Agency
Office of Inspector General

Se m iann ual R e p ort
to t h e Cong r e ss
April 1, 2014, through September 30, 2014




Federal Housing Finance Agency
Office of Inspector General
400 Seventh Street, SW
Washington, DC 20024
Main (202) 730-0880
Hotline (800) 793-7724
www.fhfaoig.gov