oversight

Fifth Semiannual Report to the Congress

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-03-31.

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

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Federal Housing Finance Agency
  Office of Inspector General

  Se m iann ual R ep ort to t he Cong r e ss
           October 1, 2012, through March 31, 2013
Federal Housing Finance Agency
 Office of Inspector General



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 Semiannual Report                    to the              Congress
       October 1, 2012, through March 31, 2013
Table of Contents	

OIG’s Mission	                                                    iv
A Message from the Inspector General	                              1
Executive Summary	                                                 2
	Overview	                                                         2
	 Section 1: OIG Description, Accomplishments, and Strategy	       2
	 Section 2: FHFA and GSE Operations	                              3
	 Section 3: Enterprise Reform	                                    4
Section 1: OIG Description, Accomplishments, and Strategy	        6
	    OIG Description	                                              6
	    Leadership and Organization	                                  6
	    OIG Accomplishments and Strategy	                             6
	    OIG Audits and Evaluations	                                   6
	    OIG Recommendations	                                         15
	    Other Reports	                                               15
	    OIG Audit and Evaluation Plan	                               19
	    OIG Investigations	                                          19
	    Civil Cases	                                                 26
	    Systemic Implication Reports	                                27
	    OIG Investigations Strategy	                                 27
	    OIG Regulatory Activities	                                   28
	    OIG Communications and Outreach	                             30
Section 2: FHFA and GSE Operations	                               34
	Overview	                                                        34
	 FHFA and the Enterprises	                                       34
	 Enterprises’ Financial Performance and Government Support	      37
	 FHLBank System	                                                 42
	 Selected FHFA and GSE Activities	                               45
Section 3: Enterprise Reform	                                     50
	Introduction	                                                    50
	 Falling Into Crisis	                                            50
	 Enterprises in Conservatorship	                                 53
	 Working to Stabilize the Enterprises	                           53
	 Preparing for Change	                                           57
	 Reformers and Reforms	                                          63
	Conclusion	                                                      65




ii   Federal Housing Finance Agency Office of Inspector General
Appendix A: Glossary and Acronyms	                                     68
Appendix B: OIG Recommendations	                                       78
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	                                           112
Appendix H: Endnotes	                                                 114




                       Semiannual Report to the Congress • October 1, 2012–March 31, 2013   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 Federal Housing Finance Agency (FHFA or agency) programs and
operations; prevent and detect fraud, waste, or abuse in FHFA’s programs and operations; review and, if appro-
priate, 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 oper-
ations; 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
A Message from the Inspector General
I am pleased to present OIG’s fifth Semiannual Report to the Congress, which
covers our activities and operations from October 1, 2012, through March 31,
2013.

During this semiannual reporting period, OIG continued to assess FHFA’s
programs and operations, focusing on high-risk mission areas affecting the
nation’s housing finance system and the agency’s oversight of Fannie Mae,
Freddie Mac, and the Federal Home Loan Banks (FHLBanks). Our work con-
tinues to show that, although the agency has made progress stabilizing Fannie
Mae and Freddie Mac (the enterprises), FHFA can do more to enhance its role
as conservator and regulator.

OIG is mindful, however, that FHFA’s long-term success—and our ability
to assess the enduring effectiveness, efficiency, and economy of the agency’s
actions—is necessarily affected by the uncertainty surrounding the fate of         Steve A. Linick
the enterprises and that of the housing finance system. Until the uncertainty is   Inspector General of the
resolved, we will continue to focus on housing finance matters, such as man-       Federal Housing Finance Agency

aging risks and repaying taxpayers, that will remain useful to stakeholders—
FHFA, Congress, and the public—whatever reform may come.

This Semiannual Report describes our audit and evaluation work during the last six months and the current
status of the significant players under our purview (FHFA, the enterprises, and the FHLBanks). It also broadly
sketches the historical factors that gave rise to the need for housing finance reform and the major reform pro-
posals. Throughout our work, OIG’s goal is not to favor any one reform approach but to provide useful infor-
mation to stakeholders on all sides of the debate.

OIG also remains active on the law enforcement front. During this period, OIG made significant staff and
resource commitments to federal and state prosecutors, who are investigating and prosecuting fraud in connec-
tion with the sale of billions of dollars of private residential mortgage-backed securities purchased by Fannie
Mae, Freddie Mac, and the FHLBanks. In addition, multiple individuals were charged, convicted, and sen-
tenced to significant prison terms based on their participation in a variety of mortgage fraud schemes. OIG
investigators and attorneys made significant contributions to these cases, which were brought by federal, state,
and local partners across the nation.

In closing, I want especially to thank all of the dedicated employees at OIG for their efforts. This report
comes once every six months, but they work continuously throughout the year and the results of their work
are long lasting.

Steve A. Linick
Inspector General
April 30, 2013


                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013             1
Executive Summary

Overview                                                   money from Treasury to pay dividends to Treasury.
                                                           Additionally, FHFA has assisted the enterprises to
This Semiannual Report discusses OIG operations            reduce the number of foreclosed properties in their
and FHFA developments from October 1, 2012,                possession through, among other efforts, the real
through March 31, 2013.1                                   estate owned (REO) pilot initiative.

This reporting period has been particularly significant    As these and other initiatives progress, the future of
for OIG and FHFA. It is the first period since 2008        the enterprises is unclear as policymakers determine
in which the enterprises, under FHFA conservator-          the best course of action for improving the stability
ship, have returned to profitability (after satisfying     of the housing market and defining the enterprises’
their dividend obligations to the Department of the        role in it.
Treasury (Treasury)). It shows the results of previous     Exploring these and other issues, this report is orga-
FHFA actions—such as reforming the enterprises’            nized as follows. Section 1, OIG Description, Accom-
executive pay practices—as well as significant progress    plishments, and Strategy, highlights several OIG audits
toward a more solid strategy for continuing financial      and reports relating to enhanced oversight, reform,
stability—such as releasing an updated strategic plan      and rebuilding. Section 2, FHFA and GSE Opera-
for fiscal years 2013-2017.                                tions, provides a closer look at FHFA and govern-
Developments this reporting period also reflect            ment-sponsored enterprises (GSEs) developments
an ongoing, concerted effort to reduce and man-            during this reporting period. And, finally, Section 3,
age risk—such as through foreclosure prevention            Enterprise Reform, is a detailed discussion of conserva-
efforts—with the ultimate goal of repaying taxpayers’      torship reform and various reform proposals that may
investments in the enterprises.                            decide the future of the enterprises.

At the same time, this reporting period finds the
                                                           Section 1: OIG Description,
enterprises at a crossroads.
                                                           Accomplishments, and Strategy
FHFA has enhanced the relationship between the
enterprises and Treasury through amendments to the         This section provides a brief overview of OIG’s orga-
Senior Preferred Stock Purchase Agreements                 nization and describes its oversight activities, includ-
(PSPAs)*—so that the enterprises are not drawing           ing audits, evaluations, and investigations. It also
                                                           discusses OIG’s priorities and goals.

    *Terms and phrases in bold are defined in              For example, within this section we discuss:
    Appendix A, Glossary and Acronyms. If you
                                                           •	 Case Study: Freddie Mac’s Unsecured Lending to
    are reading an electronic version of this
                                                              Lehman Brothers Prior to Lehman Brothers’ Bank-
    Semiannual Report, then simply move your
                                                              ruptcy (EVL-2013-003, March 14, 2013) in
    cursor to the term or phrase and click for
                                                              which we assessed the actions FHFA has taken to
    the definition.
                                                              understand the circumstances that led


2    Federal Housing Finance Agency Office of Inspector General
  Freddie Mac to make to Lehman Brothers two                •	 OIG Regulatory Activities, which include our
  unsecured loans totaling $1.2 billion less than              assessment of proposed legislation, regulations,
  one month before Lehman filed for bankruptcy                 and policies related to FHFA; and
  protection; to prevent a recurrence of these cir-
                                                            •	 OIG Communications and Outreach Efforts,
  cumstances; and to recover the $1.2 billion from
                                                               which educate a broad audience on OIG, FHFA,
  Lehman’s bankruptcy estate;
                                                               and GSE issues as well as broader issues of fraud,
•	 FHFA’s Oversight of the Asset Quality of Multi-             waste, and abuse.
   family Housing Loans Financed by Fannie Mae
   and Freddie Mac (AUD-2013-004, February 21,              Section 2: FHFA and GSE
   2013) in which we analyzed FHFA’s supervisory
   oversight of the enterprises’ controls over multi-
                                                            Operations
   family loan underwriting; and
                                                            This section describes the organization and operations
•	 FHFA’s Oversight of the Enterprises’ Efforts to Recov-   of FHFA, the enterprises, and the FHLBanks as well
   er Losses from Foreclosure Sales (AUD-2013-001,          as notable developments for each during the report-
   October 17, 2012) in which we examined FHFA’s            ing period.
   oversight of the enterprises’ efforts to recover
   shortfalls between foreclosure sale proceeds and         Among the most notable is the significant improve-
   the unpaid principal balances of properties secur-       ment in the enterprises’ financial results. For example,
   ing their defaulted mortgages.                           Fannie Mae reported net income of $17.2 billion for
                                                            2012, compared with a net loss of $16.9 billion in
We also discuss numerous OIG investigations, which          2011.2 In addition, for the first time since the advent
resulted in indictments and/or convictions of individ-      of the conservatorships, both enterprises were able to
uals responsible for fraud, waste, or abuse in connec-      pay their second, third, and fourth quarter dividends
tion with FHFA’s and the regulated entities’ programs       to Treasury without any draw under the PSPAs.
and operations and in recoveries of more than
$21.3 million for victims and taxpayers.                    The main drivers of this recovery are higher home
                                                            prices and a reduction in credit losses in the
This section also covers:                                   enterprises’ single-family business.
•	 OIG’s Audit and Evaluation Plan, which focuses           This section goes on to map out additional fac-
   on areas of FHFA operations posing the greatest          tors affecting the enterprises’ improvement such as
   risks to the agency and the GSEs;                        enhanced oversight, reform, rebuilding, and risk
                                                            management and reduction. For example, the sec-
•	 Systemic Implication Reports, which identify
                                                            tion touches on an array of FHFA activities during
   potential risks and weaknesses in FHFA’s manage-
                                                            the reporting period, such as issuing new appraisal
   ment control systems that OIG discovered during
                                                            requirements for higher-priced mortgage loans,
   the course of our investigations;
                                                            creating a new national mortgage database, and



                                       Semiannual Report to the Congress • October 1, 2012–March 31, 2013         3
developing a new infrastructure for the secondary           It then examines the work that has been done to
mortgage market.                                            stabilize the enterprises—ensuring their viability to
                                                            participate in a future housing finance system—and
Additionally, the section discusses the recovery of
                                                            the reforms the enterprises have implemented to
losses for Fannie Mae related to loan origination and
                                                            improve overall business operations and encourage
servicing defects for mortgages sold to the enterprise
                                                            greater private-sector participation in the secondary
between 2000 and 2008. This section also takes a
                                                            mortgage market.
look at activities relating directly to FHFA’s involve-
ment in the increased prevention of foreclosures and        The section also discusses FHFA’s preparations for
the REO pilot initiative.                                   change and its five-year strategic plan that would
                                                            support any outcome of the leading legislative reform
And, finally, the section reviews efforts to track per-
                                                            proposals. This plan focuses on actions to reorganize,
formance and accountability—specifically through
                                                            rehabilitate, and wind down the enterprises in order
the release of FHFA’s updated strategic plan for fiscal
                                                            to make way for a new infrastructure in the secondary
years 2013-2017, Preparing a Foundation for a More
                                                            mortgage market.
Efficient and Effective Housing Finance System, and its
2012 Performance and Accountability Report.                 The section concludes with a discussion of the vari-
                                                            ous external (i.e., non-FHFA) proposals designed to
Section 3: Enterprise Reform                                reform the enterprises, which fall into the categories of
                                                            government model, private model, or hybrid model.
The final section in this Semiannual Report sum-
marizes conservatorship reform and various reform
proposals.

This section provides a brief look at the history of the
enterprises, the factors and risks that led up to conser-
vatorship, and Congress’ enactment of the Housing
and Economic Recovery Act (HERA).




4   Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • October 1, 2012–March 31, 2013   5
Section 1: OIG Description, Accomplishments,
and Strategy

OIG Description                                           OIG Accomplishments and
                                                          Strategy
OIG began operations on October 12, 2010. It was
established by HERA, which amended the Inspector          From October 1, 2012, through March 31, 2013,
General Act. OIG conducts audits, evaluations,            OIG’s significant accomplishments included:
investigations, and other law enforcement activities      (1) issuing 13 audit, evaluation, and white paper
relating to FHFA’s programs and operations.               reports; (2) participating in a number of criminal and
                                                          civil investigations; and (3) reviewing and comment-
Leadership and Organization                               ing on proposed FHFA rules.


On April 12, 2010, President Barack Obama nomi-           OIG Audits and Evaluations
nated FHFA’s first Inspector General, Steve A. Linick,
who was confirmed by the Senate on September 29,          During this semiannual period, OIG released
2010, and sworn into office on October 12, 2010.          13 reports, which are briefly summarized below.
Previously, Mr. Linick held several leadership posi-
tions at the Department of Justice (DOJ) between          Evaluations and White Papers
2006 and 2010. Prior to that, Mr. Linick was an
                                                          Case Study: Freddie Mac’s Unsecured Lending
Assistant U.S. Attorney in the Central District of
                                                          to Lehman Brothers Prior to Lehman Brothers’
California (1994-1999) and later in the Eastern
                                                          Bankruptcy (EVL-2013-003, March 14, 2013)
District of Virginia (1999-2006).
                                                          Leading up to the financial crisis in 2008, Freddie
Mr. Linick received his Bachelor of Arts (1985) and
                                                          Mac and Lehman Brothers were two of the largest
Master of Arts (1990) in Philosophy from George-
                                                          participants in the housing finance market, and
town University and his Juris Doctor (1990) from the
                                                          they acted as counterparties on numerous transac-
Georgetown University Law Center.
                                                          tions within that market. On September 15, 2008,
OIG consists of the Inspector General, his senior         Lehman filed for bankruptcy protection, still owing
staff, and OIG offices, principally: the Office of        Freddie Mac $1.2 billion—the result of two short-
Audits (OA), the Office of Evaluations (OE), and          term unsecured loans made less than a month earlier.
the Office of Investigations (OI). Additionally,
                                                          OIG initiated an evaluation to assess what actions
OIG’s Executive Office and Office of Administration
                                                          FHFA has taken to, among other things, assess
provide organization-wide supervision and support.
                                                          the causes of the $1.2 billion loss due to Lehman’s
(See Appendix E for OIG’s organizational chart and
                                                          default, assess the measures put in place to prevent
Appendix F for a detailed description of OIG’s offices
                                                          a recurrence of such losses in the future, and recover
and strategic goals.)
                                                          the $1.2 billion from the Lehman bankruptcy estate.

                                                          We found that between September 2008 and
                                                          December 2009, Freddie Mac and FHFA conducted


6   Federal Housing Finance Agency Office of Inspector General
several investigations. All of which concluded that,      misleading statements—made prior to entering the
although Freddie Mac had taken steps to manage            conservatorships—regarding the enterprises’ holdings
counterparty risk, its risk management policies and       of high-risk mortgages. According to the SEC, these
procedures had been overridden by senior man-             statements were made during media interviews,
agement—multiple senior business executives had           investor and analyst calls, congressional testimony,
disregarded direct advice concerning the risks inher-     investor conferences, and speeches.
ent with the Lehman short-term unsecured loans.
                                                          We found that soon after the conservatorships began,
FHFA has made progress in its efforts to stabilize        FHFA and the enterprises developed an unwritten
the corporate governance environment at Freddie           arrangement through which it was understood that
Mac. The individuals responsible for the governance       the enterprises were prohibited from issuing certain
failures are no longer employed by Freddie Mac,           types of public statements and that other kinds of
and credit risk management is now an independent          communications should be submitted to FHFA
organization within Freddie Mac that no longer            for review prior to public dissemination. However,
needs advice/approval from the business units before      we concluded that written guidelines were war-
making risk management decisions. In addition,            ranted and would have several advantages. Written
FHFA is actively engaged in recovering the                guidelines could reduce FHFA’s and the enterprises’
$1.2 billion loss from Lehman.                            dependency on individuals experienced with the
                                                          unwritten arrangement; create uniformity between
We recommended that FHFA continue to monitor
                                                          the enterprises; improve efficiency, as employees
Freddie Mac’s implementation of its counterparty
                                                          could rely on a specific set of rules; promote a culture
risk management policies and procedures, pursue all
                                                          of compliance within the enterprises; and provide
possible avenues to recover the $1.2 billion in the
                                                          the opportunity to conduct an after-the-fact audit of
Lehman bankruptcy proceedings, and develop an
                                                          enterprise communications.
examination program and procedures encompassing
enterprise-wide risk exposure to all of Freddie Mac’s     During the course of the evaluation, FHFA finalized
counterparties.                                           written communication standards for the enterprises.
                                                          The standards set specific guidelines for a variety of
FHFA agreed with the importance of a strong risk
                                                          public statements, clarify FHFA’s role in the review
management function at the enterprises and will
                                                          process, and mandate that the enterprises maintain
continue to focus on the issues raised in the report.
                                                          appropriate internal policies and procedures. FHFA
FHFA’s Oversight of Public Statements (ESR-               also committed to re-evaluating the standards in the
2013-002, February 28, 2013)                              future, and OIG will monitor FHFA’s implementa-
                                                          tion of the guidelines.
OIG initiated an evaluation of FHFA’s oversight of
the enterprises’ public statements after the Securities
and Exchange Commission (SEC) charged six former
enterprise executives with securities fraud. The SEC
alleged that these executives knew of and approved


                                      Semiannual Report to the Congress • October 1, 2012–March 31, 2013        7
FHFA’s Oversight of the Enterprises’ Compensa-                   compensation. In March 2012, FHFA implemented
tion of Their Executives and Senior Professionals                a revised compensation program that reduced the
(EVL-2013-001, December 10, 2012)                                annual enterprise CEO pay approximately 90%
                                                                 from about $5 million to $600,000 each. However,
FHFA oversees the compensation of enterprise
                                                                 although FHFA directly oversees the enterprises’
executives, including their CEOs, but it generally
                                                                 compensation of their two CEOs and 85 other execu-
delegates to the enterprises responsibility for setting
                                                                 tives (who, in 2011, made a total of $91.8 million),
compensation levels for their approximately
                                                                 FHFA’s oversight of senior professional compensation
11,900 non-executive employees.
                                                                 is comparatively limited, even though their cumu-
In March 2011, OIG issued a report evaluating the                lative compensation is roughly 5 times that of the
enterprises’ executive compensation programs and                 executives—$454.6 million (see Figure 3, below).
pay practices for the six most-senior executives at
both enterprises. The current—December 2012—                     Figure 3. Enterprise Executives’ vs. Senior
report examines pay practices affecting approximately            Professionals’ Pay ($ millions)
2,100 employees, including nearly 90 executives                  $500

                                                                 $450
(CEOs, executive vice presidents, and senior vice
                                                                 $400
presidents, see Figure 1, below) and 2,000 senior                $350

professionals (vice presidents and directors, see Figure         $300

2, below).                                                       $250                                                   $455

                                                                 $200

                                                                 $150
Figure 1. Combined Enterprise Executive
                                                                 $100
Compensation Subject to FHFA Oversight
                                                                                       $92
in 2011                                                           $50

                                                                  $0
            Title                 Number of Employees                               Executives                   Senior Professionals

 CEO                                       2
 Executive Vice President                 23                     For example, FHFA has not reviewed, examined, or
 Senior Vice President                    62                     tested the structures, processes, or controls by which
 Total                                    87                     the enterprises compensate their senior professionals
Note: Enterprise data provided to OIG. The number of
                                                                 to gain assurance of their effectiveness. OIG recog-
employees includes all executives who were on the                nizes that FHFA—having delegated non-executive
enterprises’ payrolls during any portion of the calendar year.
                                                                 compensation decisions to the enterprises—
                                                                 determined       that doing
                                                                       Figure 3. Enterprise          sovs.isSenior
                                                                                            Executives       theProfessionals
                                                                                                                   best wayPayto($ manage
                                                                                                                                   millions)

Figure 2. Combined Senior Professionals in 2011                  them in conservatorship, but OIG believes that the
           Title                  Number of Employees            agency’s lack of independent assessment limits its
 Vice President                          333                     capacity to ensure that the costs associated with senior
 Director                               1,650                    professional compensation are warranted. We rec-
 Total                                  1,983                    ommended that FHFA develop a plan to strengthen
Note: Enterprise data provided to OIG. The number of             its oversight of the enterprises’ compensation of their
employees includes all senior professionals who were on the      senior professionals through reviews or examinations.
enterprises’ payrolls during any portion of the calendar year.
                                                                 FHFA noted that it analyzes pay trends differently
Since OIG’s March 2011 report, FHFA has                          than OIG but agreed with our recommendation.
taken action to strengthen its control of executive


8    Federal Housing Finance Agency Office of Inspector General
White Paper: Analysis of the 2012 Amendments to              Figure 4. Valuation Allowance Related to
the Senior Preferred Stock Purchase Agreements               Deferred Tax Assets as of December 31, 2012
                                                             ($ billions)
(WPR-2013-002, March 20, 2013)
                                                                                      Fannie Mae      Freddie Mac
In August 2012, Treasury and FHFA announced a set            Valuation Allowance        $58.9            $31.7
of modifications to the PSPAs. These amendments
change the structure of dividend payments owed to            positive net worth (above a defined “buffer” amount).
Treasury, increase the enterprises’ rate of mortgage         These dividend payments will not reduce the amount
asset reduction, suspend the periodic commitment             of Treasury’s investment in the enterprises.
fee, require that the enterprises produce annual risk
management plans, and exempt dispositions at fair            However, the long-term impact of the change in the
market value under $250 million from the require-            dividend structure depends on a variety of factors,
ment of Treasury consent.                                    including the magnitude of fluctuations in the
                                                             enterprises’ net worth. These fluctuations may be
Based on a study of the modifications, we concluded          influenced by, among other items, infrastructure,
that the 2012 amendments will have an impact on              operating expenses, and other costs within the
the cash flows to and from Treasury (i.e., dividends         enterprises’ discretion.
and draws), the size of the liquidation preference,
and the total amount of Treasury support available to        The announcement of the 2012 amendments empha-
cover enterprise losses. Thus, the amendments may            sized three overarching themes: benefiting taxpayers,
help to assure investors that Treasury’s commitment          continuing the flow of mortgage credit, and winding
will cover enterprise needs; the enterprises may pay         down the enterprises. To some extent, the amend-
more to Treasury than they would have under the              ments provide the mechanisms to achieve these goals,
previous 10% dividend; and the quarterly net worth           and they position the enterprises to function in a
of the enterprises will gradually be reduced to zero.        holding pattern, awaiting major policy decisions.

We also found that deferred tax accounting treatment         White Paper: The Housing Government-Spon-
coupled with the new dividend structure could result         sored Enterprises’ Challenges in Managing Interest
in a one-time large dividend payment to Treasury             Rate Risks (WPR-2013-01, March 11, 2013)
from each enterprise. In 2008, the enterprises created
                                                             Prior to 2008, the enterprises and some FHLBanks
valuation allowances to counterbalance their unused
                                                             adopted business strategies that involved large interest
tax assets (see Figure 4, above). Further, in light of the
                                                                                     rate risk exposures. At the
enterprises’ newly emerging
                                                                                     same time, the enterprises
profitability, they may be
                                                                                     quickly increased the size of
required to reverse their
valuation allowances for some
                                      By 2008, the size of the                       their retained mortgage
                                                                                     portfolios. In fact, the enter-
or all of their deferred tax          enterprises’ retained                          prises’ combined portfolios
assets. With the new dividend
                                                                                     more than tripled from
structure, this reversal would        mortgage portfolios                            $481 billion in 1997 to
require the enterprises to pay
                                                                                     $1.6 trillion by 2008 (see
Treasury—as a dividend—the            had tripled                                    Figure 5, page 10).
full amount of the deferred
tax assets recognized as


                                        Semiannual Report to the Congress • October 1, 2012–March 31, 2013          9
Figure 5. Enterprises’ Retained Portfolios                         FHFA has recently observed improvements in the
($ billions)                                                       FHLBanks’ ability to manage their interest rate risks.
$1,750
                                           Actual   Projected      However, several FHLBanks continue to maintain
$1,500                                                             large mortgage asset portfolios and, as a result, face
$1,250                                                             ongoing interest rate risk management responsibilities
$1,000
                                                                   and challenges.
 $750                                                              To help overcome these challenges, OIG has deter-
 $500                                                              mined that the GSEs can employ several strategies
 $250
                                                                   and tools to mitigate interest rate risks. Specifically,
                                                                   the enterprises have the option of issuing more
   $0
                                                                   mortgage-backed securities (MBS) to investors,
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                                                                   such as investment banks, which transfers the interest
Although FHFA and Treasury have worked to                          rate risk associated with MBS to the investors. Addi-
significantly reduce the size of the GSEs’ portfolios—             tionally, the GSEs may employ derivatives, which
thereby limiting such risks—interest rate risk                     act like insurance policies, providing the holder with
management remains a significant priority as the                   financial compensation when interest rates rise or fall.
enterprises’ portfolios still contained $1.3 trillion in           Derivatives, however, can be complex instruments
assets at the end of 2011.                                         that require specialized capacity, such as staffing and
                                                                   information systems, to be used effectively.
In light of these ongoing interest rate risks, OIG
issued a white paper examining additional challenges               Based on this white paper, we plan to initiate audits
the GSEs                                                           and evaluations, as warranted, of FHFA’s oversight of
      Figurecurrently   face Retained
             5. Enterprises’ and what    strategies
                                      Portfolios       and tools
                                                 ($ billions)
they can use to more effectively manage interest rate              the GSEs’ management of interest rate risk.
risk.
                                                                   Audits
Currently, the GSEs employ overall risk management
                                                                   FHFA Should Develop and Implement a Risk-
strategies that rely on asset selection and derivatives
                                                                   Based Plan to Monitor the Enterprises’ Oversight
to mitigate the interest rate risks associated with
                                                                   of Their Counterparties’ Compliance with
their mortgage asset portfolios. The GSEs’ boards of
                                                                   Contractual Requirements Including Consumer
directors and senior managers review and approve
                                                                   Protection Laws (AUD-2013-008, March 26,
these risk management strategies and monitor their
                                                                   2013)
effectiveness.
                                                                   The enterprises provide liquidity to the housing
The enterprises continue to use computer models to
                                                                   finance market by purchasing and guaranteeing
assist in the management of interest rate and other
                                                                   residential mortgage loans ($668 billion for Fannie
risks. However, given the increasing percentage of
                                                                   Mae and $296.6 billion for Freddie Mac during the
distressed assets in the enterprises’ mortgage portfo-
                                                                   first nine months of 2012).
lios, they may not be able to employ existing models
effectively. In addition, the enterprises face human               The enterprises’ counterparties—the entities that
capital risks—recruiting and retaining experienced                 sell and service these loans—commit (also known
interest rate risk staff—that could limit the effective-           as represent and warrant), among other things, to
ness of their interest rate risk management.                       comply with all federal and state laws and regulations


10       Federal Housing Finance Agency Office of Inspector General
(including consumer protection statutes) applicable        borrowers’ complaints. The more serious complaints
to originating, selling, and servicing loans. If a coun-   are called “escalated cases” and (according to FHFA
terparty does not comply, the enterprises can require      and Freddie Mac’s servicing guide) involve, among
it to repurchase the noncompliant loan.                    other things, foreclosure actions that violate the
                                                           enterprises’ guidelines; complaints that the borrower
We assessed the agency’s oversight of the enterprises’
                                                           was not evaluated appropriately for a foreclosure
monitoring of their counterparties’ compliance with
                                                           alternative; and violations of the enterprises’ time
their contracts, especially with consumer protection
                                                           frames for borrower outreach.
laws. We found that the agency needs to improve its
oversight.                                                 Between October 2011 and November 2012,
                                                           Freddie Mac and its eight largest servicers received
Currently, the enterprises do not review the loans
                                                           over 34,000 complaints that became escalated cases.
they buy at the time of purchase to assess contractual
                                                           A servicer’s failure to quickly and accurately resolve
compliance, and they generally rely on the counter-
                                                           these escalated cases can prevent foreclosure alterna-
parties’ representations and warranties for assurance
                                                           tives from being adequately explored with borrowers
of their compliance with consumer protection laws.
                                                           and may result in losses to the enterprise.
Because the enterprises can require their counterpar-
ties to repurchase loans if they discover violations,      In early 2011, FHFA announced its Servicing Align-
they only concern themselves with compliance issues        ment Initiative (SAI). SAI requires servicers to report
when they, as purchasers, may be liable for non-           on the escalated cases they receive and to resolve them
compliance. For its part, FHFA has not performed           within 30 days. The enterprises incorporated the SAI
any reviews specific to how the enterprises monitor        requirements into their servicing guides and required
counterparty compliance with contractual and legal         all of their servicers to follow them.
obligations.
                                                           OIG assessed the agency’s oversight of Freddie Mac’s
To assist FHFA with its oversight of legal compliance      controls over servicers’ handling of escalated cases. We
issues associated with loans purchased by the enter-       found that Freddie Mac’s mortgage servicers failed
prises, we recommended that the agency develop a           to effectively and completely implement the SAI and
risk-based plan to monitor the enterprises’ oversight      servicing guide requirements for escalated cases, and
of their counterparties’ contractual compliance with       FHFA and Freddie Mac oversight procedures were
applicable laws and regulations. FHFA agreed with          not adequate to identify servicer noncompliance.
our recommendation, which will help the agency
                                                           Specifically, for escalated cases, Freddie Mac’s servicers
better supervise the legal and economic risks associ-
                                                           did not comply with the reporting, timely resolu-
ated with the enterprises’ purchased and guaranteed
                                                           tion, or resolution categorization requirements. For
mortgage portfolios.
                                                           example, four of Freddie Mac’s largest servicers did
Enhanced FHFA Oversight Is Needed to Improve               not report any escalated cases despite handling more
Mortgage Servicer Compliance with Consumer                 than 20,000 such cases between October 2011 and
Complaint Requirements (AUD-2013-007,                      November 2012. During this same period, 21% of
March 21, 2013)                                            the resolved escalated cases handled by Freddie Mac’s
                                                           eight largest servicers exceeded the 30-day limit (see
The enterprises pay mortgage servicers to collect
                                                           Figure 6, page 12) and 8% of the resolved escalated
payments, interact with borrowers, and handle
                                                           cases were not properly categorized.


                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013          11
Figure 6. Consumer Complaints Taking More                                                         FHFA Can Enhance Its Oversight of FHLBank
Than 30 Days to Resolve                                                                           Advances to Insurance Companies by Improving
Branch Banking & Trust
                                                                                                  Communication with State Insurance Regulators
                GMAC
                                                                                                  and Standard-Setting Groups (AUD-2013-006,
            U.S. Bank                                                                             March 18, 2013)
             Provident
                                                                                                  During the past eight years, FHLBanks’ advances to
           Wells Fargo
                                                                                                  insurance company members have more than
          CitiMortgage
                                                                                                  quadrupled—from $11.5 billion in 2005 to
JPMorgan Chase & Co.

      Bank of America
                                                                                                  $52.4 billion in 2012 (see Figure 7, below). Simul-
                         0%            20%             40%             60%           80%   100%   taneously, the FHLBanks’ advances overall have
                                                                                                  declined, which means the concentration of advances
                              Resolved Under 30 Days         Resolved Over 30 Days                to insurance companies has significantly increased in
                                                                                                  proportion to the FHLBanks’ total advances.
Additionally, Freddie Mac did not implement inde-
                                                                                                  Lending to insurance companies may present unique,
pendent testing procedures during its operational
                                                                                                                        increased risks compared with
reviews of its largest national
                                                                                                                        lending to other FHLBank
and regional servicers and
                                                                                                                        members. Specifically, insur-
as a result made no find-                                             Lending to insurance                              ance companies are not feder-
ings regarding its servicers’
                                                                                                                        ally regulated and, therefore,
handling of escalated cases.                                          companies may present                             are subject to differing state
Thus,6.FHFA’s
Figure  Consumerexamination     of More Than 30 Days to Resolve
                  Complaints Taking
                                                                                                                        laws. In addition, insurance
Freddie Mac’s implementation                                          unique risks                                      companies do not maintain
of SAI—which relied on the
                                                                                                                        customer deposits guaranteed
enterprise’s internal review—
                                                                                                                        by the Federal Deposit Insur-
did not identify servicers’
                                                                                                  ance Corporation, which means it will not pay off an
failures to report escalated cases or resolve them in
                                                                                                  FHLBank advance if a member insurance company
30 days.
                                                                                                  fails.
To address and resolve escalated consumer complaints
                                                                                                  Figure 7. Total FHLBank Advances to Insurance
in a timely and consistent manner, we recommended
                                                                                                  Companies 2005 Through Third Quarter 2012
that the agency ensure Freddie Mac requires its ser-                                              ($ billions)
vicers to report, timely resolve, and accurately catego-
                                                                                                  $60
rize escalated cases; ensure that Freddie Mac enhances
its oversight of the servicers through testing servicer                                           $50

performance and establishing fines for noncompli-                                                 $40

ance; and improve its oversight of Freddie Mac by
                                                                                                  $30
developing and implementing effective examination
                                                                                                  $20
guidance. FHFA agreed with our recommendations,
which may help the agency mitigate Freddie Mac                                                    $10

losses by keeping more homes out of foreclosure.                                                  $0
                                                                                                                                                       12
                                                                                                         05


                                                                                                               06



                                                                                                                     07


                                                                                                                           08



                                                                                                                                 09



                                                                                                                                       10



                                                                                                                                             11


                                                                                                                                                   20
                                                                                                        20


                                                                                                              20



                                                                                                                    20


                                                                                                                          20



                                                                                                                                20



                                                                                                                                      20



                                                                                                                                            20


                                                                                                                                                  3Q




12        Federal Housing Finance Agency Office of Inspector General
Based on the unique risk and the increase in con-        other related compliance requirements related to
centration of advances to insurance companies, OIG       improper payments; reviewing various Government
examined FHFA’s oversight of FHLBank advances to         Accountability Office (GAO) audit reports; inter-
insurance companies.                                     viewing key FHFA officials; obtaining sufficient and
                                                         appropriate evidence regarding compliance actions
We found that although FHFA has taken some action
                                                         taken; and reviewing and assessing improper payment
to address risks associated with FHLBank lending
                                                         element requirements and related activities, we con-
to insurance companies—by issuing a draft advisory
                                                         cluded that FHFA complied with IPIA, as applicable.
bulletin that identifies risks specific to insurance
companies—the agency has not addressed two areas         FHFA’s Oversight of the Asset Quality of Multi-
in particular that could enhance its oversight:          family Housing Loans Financed by Fannie Mae
                                                         and Freddie Mac (AUD-2013-004, February 21,
•	 Neither FHFA nor the FHLBanks obtain con-
                                                         2013)
   fidential supervisory or other regulatory infor-
   mation relating to insurance company members          As the housing crisis intensified, the enterprises
   from state regulators, and without it, assessments    continued to provide a steady source of financing in
   of companies’ overall financial conditions and        the secondary mortgage market for multifamily loans
   creditworthiness may be incomplete.                   (e.g., loans to purchase or rehabilitate apartment
                                                         complexes). In 2011, for example, they bought nearly
•	 Neither FHFA nor the FHLBanks gather infor-
                                                         57% of all domestic multifamily loans, valued at
   mation from National Association of Insurance
                                                         $44 billion (see Figure 8, page 14).
   Commissioners (NAIC) working groups, which
   evaluate legislative and regulatory actions, emerg-   Given the size of the enterprises’ investment, OIG
   ing issues, best practices, and information sharing   assessed the agency’s supervisory oversight of the
   opportunities.                                        enterprises’ controls over multifamily loan under-
                                                         writing. We found that the agency can improve its
We recommended that FHFA strengthen its oversight
                                                         examination policies in the area of sample selection.
of FHLBank advances to insurance companies by
establishing mechanisms to obtain more information       Specifically, FHFA lacks policies or procedures for
from state regulators and NAIC working groups.           selecting review samples to examine the enterprises’
FHFA agreed with the recommendation.                     multifamily assets. In contrast, industry peers—as
                                                         well as FHFA’s FHLBank examiners—have adopted
FHFA’s Controls to Detect and Prevent Improper
                                                         guidance that requires the implementation of repre-
Payments (AUD-2013-005, February 28, 2013)
                                                         sentative or proportional sampling methods to select
The Improper Payments Information Act of 2002            adequate samples from loan populations. Without
(IPIA), as amended by the Improper Payments Elim-        such guidance, FHFA’s examiners adopted different
ination and Recovery Act of 2010, requires federal       sampling methodologies for the two enterprises.
agencies to review, estimate, and report programs        For instance, the agency’s Fannie Mae examiners
and activities that may be susceptible to improper       may have chosen a sample that adequately repre-
payments.                                                sented the enterprise’s multifamily assets, while the
                                                         examiners of Freddie Mac chose a sample that may
OIG conducted an audit of FHFA’s activities from         not have been representative. Freddie Mac’s sample,
October 1, 2011, to September 30, 2012. After            for example, excluded higher-risk loans and only
reviewing applicable statutes, executive orders, and

                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013      13
  Figure 8. Originations and Subsequent Loan                                               was to evaluate the agency’s information security
  Purchases for the Enterprises and Total                                                  program and practices, including its compliance with
  Institutional Multifamily Lending ($ millions)
                                                                                           the Federal Information Security Management Act
  $120,000
                                                                                           and related information security policies, procedures,
                                                                                           standards, and guidelines. Because information in this
  $100,000
                                                                                           report could be used to circumvent FHFA’s internal
    $80,000
                                                                                           controls, its contents have not been released publicly.

                                                                                           FHFA’s Oversight of Contract No. FHF-10-F-0007
    $60,000
                                                                                           with Advanced Technology Systems, Inc. (AUD-
    $40,000
                                                                                           2013-002, November 28, 2012)

                                                                                           OIG audited one of FHFA’s contracts with Advanced
    $20,000
                                                                                           Technology Systems, Inc. (ATSC), which provides IT
          $0
                                                                                           support, to determine whether the agency’s payments
                   2005       2006       2007          2008    2009      2010       2011   made to ATSC were properly supported and the
  Fannie/Freddie
                    27%        27%         29%         62%      85%      63%        57%
                                                                                           goods and services received met contractual require-
  Loan Financing
                                                                                           ments. In general, we identified significant
                   Institutional Multifamily Lending     Fannie Mae   Freddie Mac          weaknesses in FHFA’s overall administration, moni-
                                                                                           toring, and surveillance of the ATSC contract.
  included one loan above the average loan amount
                                                                                           Specifically, we found that FHFA: (1) did not follow
  (i.e., $13 million) in the enterprise’s portfolio, so its
                                                                                           accepted contracting practices when modifying the
  sample may not have been representative of the total
                                                                                           contract/task order; (2) failed to properly negotiate
  population.
                                                                                           contract modifications; (3) needs to strengthen its
  To increase FHFA’s confidence in the efficacy of                                         evaluation of contractor qualifications and contract
Figure  8. Originations
   its loan   reviews,andweSubsequent
                               recommended Loan Purchases
                                                  that theforagency
                                                               the Enterprises             project estimates; and (4) should determine whether
            and Total Institutional Multifamily Lending ($ millions)
  provide its examiners with clear guidance about                                          it reimbursed ATSC for subcontractor costs that
  how to select samples and require them to maintain                                       were not covered. As a result, we questioned over
  adequate documentation to support their sampling                                         $361,000 of costs submitted by the contractor and
  methodology. FHFA agreed with our recommenda-                                            paid by FHFA—approximately 13% of the contract’s
  tions, which will help the agency better supervise the                                   total value of $2.7 million.
  risks associated with the enterprises’ large presence in
                                                                                           OIG made recommendations that FHFA agreed to
  the multifamily secondary mortgage market.
                                                                                           implement, which will help strengthen both FHFA’s
  CliftonLarsonAllen LLP’s Evaluation of the                                               specific contracting controls over ATSC and general
  Federal Housing Finance Agency’s Information                                             controls over the agency’s procurement policies
  Security Program – 2012 (AUD-2013-003,                                                   and procedures. In addition, FHFA recovered a
  November 30, 2012)                                                                       portion of the questioned costs as a result of our
                                                                                           recommendations.
  According to the Federal Information Security
  Management Act of 2002, FHFA is required to have
  an annual independent evaluation of its information
  security program. Accordingly, this audit’s objective

  14        Federal Housing Finance Agency Office of Inspector General
FHFA’s Oversight of the Enterprises’ Efforts to             Other Reports
Recover Losses from Foreclosure Sales (AUD-
2013-001, October 17, 2012)
                                                            Office of the Comptroller of the Currency
In 2011, there were 341,738 foreclosure sales of            Settlement
properties that secured single-family residential mort-
                                                            On February 28, 2013, the Office of the Comptroller
gages owned or guaranteed by the enterprises. With
                                                            of the Currency and the Federal Reserve memori-
respect to these sales, the enterprises pursued deficien-
                                                            alized a $9.3 billion settlement with 13 mortgage
cies—shortfalls between what the property was sold
                                                            servicers for deficiencies in mortgage servicing
for and what was owed on the mortgage—totaling
                                                            practices—including improper foreclosures—related
approximately $2.1 billion but recouped only about
                                                            to foreclosures initiated during 2009 and 2010. Of
$4.7 million, or 0.22%.
                                                            the $9.3 billion, $3.6 billion will be provided directly
We found that FHFA has an opportunity to provide            to affected borrowers in the form of cash payments
the enterprises with guidance about effectively             and the remainder, $5.7 billion, will be allocated to
pursuing and collecting deficiencies from borrowers         borrower assistance, such as loan modifications and
who may possess the ability to repay.                       forgiveness of deficiency judgments (i.e., payments
                                                            owed to creditors, such as the enterprises, based on
Yet, FHFA does not currently oversee the enterprises’       the difference between the sales price of a property
deficiency management. Further, FHFA does not               at a foreclosure sale and the amount the borrower
gather information about the enterprises’ deficiency        owes on the outstanding mortgage plus fees and other
management practices and does not obtain data               obligations).
about the scope or effectiveness of their deficiency
recoveries. Consequently, it is not well positioned to      OIG began monitoring developments in the settle-
determine the benefit that stronger agency oversight        ment negotiations shortly after it was announced in
may provide. We recommended that FHFA obtain                principle on January 7, 2013. Because the servicers
information sufficient to analyze how the enterprises       that are parties to the settlement serviced the majority
manage deficiencies and issue guidance to them on           of the enterprises’ loans during 2009 and 2010,
this topic. Based on the results of its analysis, FHFA      OIG believed that the settlement had the potential
should incorporate deficiency management into its           to result in financial recoveries for the enterprises.
enterprise oversight.                                       Specifically, the $5.7 billion in funds allocated for
                                                            deficiency judgment payments and loan modifica-
FHFA agreed with our recommendations. Imple-                tions could benefit the enterprises financially.
menting these changes, and better managing losses,
presents the opportunity for the enterprises to recover     On February 25, 2013, OIG sent a memorandum to
a larger portion of their single-family foreclosure         FHFA asking the agency to consult with the Office of
deficiencies, strengthen their financial positions, and     the Comptroller of the Currency to obtain informa-
protect taxpayers’ investment in their financial health.    tion on the terms of the settlement and its potential
                                                            impact on the enterprises.
OIG Recommendations

A complete listing of OIG’s audit and evaluation
recommendations is provided in Appendix B.


                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013         15
London Interbank Offered Rate                             On March 14, 2013, Freddie Mac filed a complaint
Assessment                                                against Barclays Bank and more than a dozen other
                                                          financial institutions in the U.S. District Court for
On June 27, 2012, DOJ announced that Barclays
                                                          the Eastern District of Virginia. In its complaint, the
Bank admitted to manipulating the primary global
                                                          enterprise alleges that the “defendants collectively
benchmark for short-term interest rates—the
                                                          manipulated and suppressed [LIBOR], a benchmark
London Interbank Offered
                                                                                   rate indexed to trillions of
Rate (LIBOR). Within days,
                                                                                   dollars in interest-rate swaps
OIG staff began analyzing          Freddie Mac alleges                             and loans that plays a funda-
how that manipulation may
                                                                                   mentally important role in
have affected the enterprises,     banks’ manipulation                             financial systems throughout
specifically whether it may
                                                                                   the world” and that this
have increased losses that         caused substantial                              manipulation “caused substan-
taxpayers ultimately absorbed
through their investment to        losses                                          tial losses to Freddie Mac.”
keep the enterprises solvent. In
November 2012, after weeks
of ongoing discussion with FHFA, OIG formally
sent the agency our preliminary estimate of potential       The following minitutorial (see pages 17-18)
LIBOR-related enterprise losses and recommended             describes LIBOR, its relation to the
that FHFA:                                                  enterprises, and how manipulating it can
                                                            affect their bottom lines.
•	 require the enterprises to conduct detailed analy-
   ses of the potential financial losses due to LIBOR
   manipulation;

•	 consider options for prompt legal action, if
   warranted; and

•	 coordinate efforts and share information with
   other federal and state agencies.3

The agency agreed to implement our
recommendations.




16    Federal Housing Finance Agency Office of Inspector General
                           How LIBOR Affects the Enterprises

LIBOR is the average interest rate that financial institutions around the world, such as
Barclays Bank, estimate it would cost them to borrow money from other institutions. Each
day, a group of large banks are polled, the top and bottom four estimates are dropped, and
the average interest rate is published. Then, banks around the world use that interest rate to
benchmark their loan making and borrowing.

In total, LIBOR is involved in calculating payments for over $300 trillion.

For example, many mortgage lenders rely on LIBOR to determine the interest rates they charge
for adjustable-rate mortgages. Taking into account the borrower’s profile, a lender might add
2-3 percentage points to LIBOR.

LIBOR is also involved in more complicated financial products, such as floating-rate invest-
ments that do not pay a fixed rate (e.g., a savings account that pays 2% each year) but instead
fluctuate. For example, if LIBOR is at 1%, a bond may advertise itself as LIBOR + 1, which
means that it pays 2% interest that month and 3% the next month if LIBOR rises to 2%.


Enterprises’ Floating-Rate Investments

The enterprises purchase, guarantee, and own large volumes of fixed-rate assets because they
buy mortgages. Predominantly, these mortgages relate to 30-year fixed-rate loans, which opens
the enterprises to the interest rate risk associated with fluctuations in prevailing interest rates.

To balance that risk, the enterprises make floating-rate investments, primarily bonds and
interest rate swaps.

       Floating-rate bonds: For example, on entering conservatorship, Freddie Mac held
       approximately $299 billion in floating-rate bonds that pay prevailing rates of interest
       according to agreed schedules.

       Interest rate swaps: Since homeowners generally prefer stable payments, the enter-
       prises’ mortgage portfolios have more fixed-rate loans than floating-rate ones (i.e.,
       adjustable-rate mortgages). To offset risk, the enterprises trade some of their fixed-rate
       interest revenue for other institutions’ floating-rate interest revenue, which leads to a
       stable combined portfolio whether interest rates rise or fall.

In large part, LIBOR determines how much the enterprises receive from their hundreds of
billions of dollars of floating-rate investments. Each month or quarter, the interest rate pay-
ments are recalculated based on LIBOR’s current value, so a small change can have large
effects on the enterprises’ bottom lines.




                             Semiannual Report to the Congress • October 1, 2012–March 31, 2013        17
Lower LIBOR = Higher Losses

Barclays Bank admitted to systematically underestimating how much other banks would
charge to loan it money, on the basis that lenders charge higher interest rates for borrowers
that represent higher risk. This projected a false picture of the bank’s financial condition during
the recent financial crisis. That is, high-risk investment requires a high return. In this case,
Barclays Bank’s low LIBOR estimates projected the bank’s soundness by identifying it—at
least in its own opinion—as low risk. However, while the maneuver strengthened Barclays
Bank, it weakened investment earnings that depended on LIBOR.

Currently, several lawsuits are underway that will help determine how widespread the practice
was, but one way to gauge the effect of LIBOR manipulation on the enterprises’ investments
is by comparing its performance to another benchmark rate, the Federal Reserve’s eurodollar
deposit rate (Fed ED). Like LIBOR, this benchmark rate is determined by polling financial
institutions—in this case, a larger cross section of financial institutions—to measure short-
term borrowing costs. Historically, the two rates performed nearly identically; from 2000 to
mid-2007, for example, the two rates mirrored each other.

However, as Figure 9 (see below) demonstrates, in early 2007 as the financial crisis deep-
ened, LIBOR and Fed ED began to diverge. By the end of September 2008, LIBOR was 3%
lower than Fed ED. For the enterprises, that could have meant 3% less return on hundreds of
billions of dollars of investments if the LIBOR rate was manipulated.

Figure 9. LIBOR vs. Fed ED 2006-2010

                     7%



                     6%



                     5%



                     4%



                     3%



                     2%



                     1%



                     0%

                     January-06   January-07            January-08         January-09   January-10




                                         1 Month Fed ED Deposit      1 Month LIBOR




18   Federal Housing Finance Agency Office of Inspector General
OIG Audit and Evaluation Plan                              Larry Bradshaw
                                                           On March 13, 2013, Larry Bradshaw was indicted,
OIG maintains an Audit and Evaluation Plan that            in the U.S. District Court for the Eastern District of
focuses strategically on the areas of FHFA’s oper-         Missouri, for wire fraud and theft of public funds.
ations posing the greatest risks to the agency and
the GSEs. The plan responds to current events and          In 2008, Bradshaw allegedly devised a scheme to
feedback from FHFA officials, members of Congress,         defraud an elderly woman by using a power of attor-
and others. The plan is available for inspection at        ney to obtain a reverse mortgage on her residence and
www.fhfaoig.gov/Content/Files/Audit%20and%20               then diverting to himself the mortgage proceeds—
Eval%20Plan%20Oct%202012_0.pdf.                            over $70,000. Eventually, Fannie Mae foreclosed on
                                                           the home but is negotiating with the victim to allow
                                                           her to continue living there.
OIG Investigations
                                                           Anthony Jones
OIG investigators have participated in numerous
                                                           On March 13, 2013, in the U.S. District Court for
criminal, civil, and administrative investigations,
                                                           the Eastern District of Texas, Anthony Jones was
which during the semiannual period resulted in the
                                                           indicted for bank fraud.
indictment of over 53 individuals and the conviction
of over 26 individuals. In many of these investiga-        From approximately September 2007 through
tions, we worked with other law enforcement agen-          October 2007, Jones allegedly inflated the sales prices
cies, such as DOJ, the Office of the Special Inspector     of two homes he sold and kicked back a portion
General for the Troubled Asset Relief Program              of the proceeds to the buyers. Jones bought one of
(SIGTARP), the FBI, the Department of Housing              the homes using a stolen identity and sold it to two
and Urban Development Office of Inspector General          separate buyers within a week of each other. The
(HUD-OIG), the Secret Service, and state and local         scheme caused a loss of approximately $709,000 to
entities nationwide. Further, in several investigations,   involved financial institutions. The enterprises, which
OIG investigative counsels were appointed as Special       bought or guaranteed mortgages for the homes, lost
Assistant U.S. Attorneys and supported prosecutions.       $324,000.
Figure 10 (see below) provides a summary of the
criminal and civil recoveries from our investigations.     This was a joint investigation with the Secret Service.
Although most of these investigations remain con-
fidential, details about several of them have been
                                                           Sky Investments
publicly disclosed and are summarized below.               On March 7, 2013, in the U.S. District Court for the
                                                           Southern District of Florida, Yakov Alfasi and Rafael
                                                           Rubinez were sentenced to 10 months’ imprison-
                                                           ment and ordered to pay $2.6 million in restitution.
Figure 10. Criminal and Civil Recoveries for the
Period October 1, 2012, to March 31, 2013                  Earlier, on January 31, 2013, Alfasi and Rubinez pled
                                                           guilty to conspiracy to commit wire fraud.
                            Criminal/Civil Recoveries
Fines                           $135,500                   Alfasi and Rubinez owned Sky Investments, an
Restitutions                    $21.2 million              independent mortgage banker, which sold loans to
Total                           $21.3 million              and serviced them for Fannie Mae. From September


                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013        19
2009 through August 2010, Alfasi and Rubinez              have been convicted for their participation in this
stole $2.6 million from an account Fannie Mae             conspiracy.
established to pay taxes and insurance on properties
                                                          This was a joint investigation with the FBI.
serviced by Sky Investments. Alfasi and Rubinez also
submitted false and misleading documents to Fannie
                                                          Joshua Van Orden
Mae to conceal their theft and to misrepresent their
company’s financial health.                               On February 21, 2013, in the Morris County (New
                                                          Jersey) Superior Court, Joshua Van Orden pled guilty
This was a joint investigation with the FBI. Fannie       to second degree theft by deception. As a result, Van
Mae’s Mortgage Fraud Program provided assistance          Orden will forfeit his mortgage broker license and
to the investigation.                                     pay a fine of $107,000.

Armando Granillo                                          Between September 2009 and February 2010, Van
                                                          Orden obtained the property of another by creating
On March 5, 2013, in the U.S. District Court for the
                                                          or reinforcing the false impression that loan applica-
Central District of California, Armando Granillo was
                                                          tions and settlement forms submitted to a lender for
charged with wire fraud and deprivation of honest
                                                          three borrowers were true and accurate. Van Orden, a
services.
                                                          mortgage broker, knew the information presented to
From January 2013 to March 5, 2013, Granillo,             his employer contained false information and omis-
a foreclosure specialist for Fannie Mae, allegedly        sions, including the existence of straw buyers and
attempted to enrich himself by soliciting payments        his undisclosed financial interest in the transactions.
of at least $11,000 in exchange for favorable actions.    With respect to one of the charged transactions, Van
Specifically, Granillo offered to increase the number     Orden facilitated a short sale from Fannie Mae to a
of foreclosure listings assigned to particular realtors   straw buyer, resulting in the enterprise losing approxi-
in exchange for 20% of their sales commissions when       mately $150,000.
the properties sold.
                                                          This was a joint investigation with New Jersey’s
                                                          Attorney General, Division of Criminal Justice.
Alex Dantzler
On March 1, 2013, in the U.S. District Court for          West Ohio St. Condominiums
the Northern District of Georgia, Alex Dantzler pled
                                                          On February 21, 2013, in the U.S. District Court
guilty to one count of conspiracy to commit bank
                                                          for the Northern District of Illinois, James Vani and
fraud.
                                                          Olabode Rotibi were indicted for conspiracy to com-
From June 2011 to July 2012, Dantzler, then a             mit wire fraud. Earlier, on January 31, 2013, Mat-
Fannie Mae contract employee, used his access to          thew Okusanya and Alex Ogoke were also indicted
Fannie Mae’s database to obtain personally identify-      for conspiracy to commit wire fraud in the U.S.
ing information for numerous Fannie Mae borrowers.        District Court for the Northern District of Illinois.
He then sold this information to an individual in
                                                          From 2007 to 2008, Okusanya and Ogoke allegedly
Atlanta, Georgia, who used it to conduct various
                                                          developed a corporation to buy an apartment
identity theft schemes. Three other individuals
                                                          building in Chicago, Illinois; to convert the rental
                                                          units to condominiums (hence West Ohio St.
                                                          Condominiums); and to recruit straw buyers to buy

20    Federal Housing Finance Agency Office of Inspector General
the condominiums. Vani, a loan officer, placed false      Chemidlin Jr., Christopher Ju, and Jose Martins Jr.
information in the straw buyers’ loan applications,       were charged with conspiracy to commit wire fraud
and Rotibi, an appraiser, inflated the appraised values   in the U.S. District Court for the District of New
of the condominiums. Through the straw buyers             Jersey. The next day, all nine defendants were arrested.
and misleading loan applications, they led lenders
                                                          From March 2008 to July 2012, the defendants
to approve loans they would not normally have
                                                          and other individuals allegedly defrauded financial
approved. The enterprises purchased or guaranteed
                                                          institutions by submitting fraudulent appraisals, sales
several of the loans. As of the date of the indictment,
                                                          contracts, and other documents in connection with
the alleged scheme had caused over $400,000 in
                                                          mortgage loans submitted to lenders. Fannie Mae
actual losses.
                                                          purchased over 100 of the defective loans from the
This was a joint investigation with the FBI.              mortgage lenders. The charges against the defendants
                                                          relate to 15 properties that allegedly caused losses of
American Mortgage Field Services LLC                      approximately $10 million.
On February 20, 2013, Dean Counce, who had been           This was a joint investigation with the FBI, HUD,
convicted of conspiracy to commit wire fraud, was         SIGTARP, the U.S. Postal Inspection Service
sentenced in the U.S. District Court for the Middle       (USPIS), the IRS-Criminal Investigation (IRS-CI),
District of Florida to just over 8 years’ imprisonment    and the Hudson County, New Jersey, prosecutor’s
and 3 years’ supervised release. He was also ordered to   office.
pay over $12.7 million in restitution.

American Mortgage Field Services LLC (AMFS)               Worthington Mortgage Group
was a property inspection and preservation company        On January 22, 2013, in the U.S. District Court
doing business in Florida. From at least 2009 through     for the District of Maryland, Joshua Goldberg was
March 2012, Counce, as president of AMFS, and             indicted for conspiracy to commit wire fraud in
some of his employees conspired to submit fraud-          connection with a scheme allegedly to obtain mort-
ulent reports to Bank of America for inspections          gage loans on at least five properties on the basis of
of foreclosed properties that AMFS was paid for           false documents.
but never performed. Specifically, Counce directed
                                                          From 2004 through 2008, Goldberg controlled
AMFS employees to fabricate numerous property
                                                          Worthington Mortgage Group and allegedly con-
inspections, until these made up at least half of the
                                                          spired with others to obtain loans for his company’s
inspections they submitted to Bank of America each
                                                          clients and others by submitting false appraisals, bank
month. The enterprises reimbursed Bank of
                                                          account and employment information, and monthly
America—as their servicer—for the fake inspections.
                                                          income information. The scheme resulted in multiple
This was a joint investigation with HUD-OIG and           loan defaults, foreclosures, and losses of more than
the Secret Service.                                       $2.5 million. Goldberg and others allegedly also
                                                          concealed the properties’ true sales prices from the
Jose Luis Salguero et al.                                 lenders by falsifying forms and concealing kickbacks.
On January 23, 2013, Jose Luis Salguero Bedoya,           By concealing the sales prices, they manipulated the
Yazmin Soto-Cruz, Carmine Fusco, Kenneth                  lenders into lending more than the actual purchase
Sweetman, Delio Coutinho, Joseph DiValli, Paul            price for the properties. The enterprises purchased all
                                                          of the defective loans.

                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013        21
This was a joint investigation with the FBI and            Edwards submitted fraudulent loan applications to
USPIS.                                                     obtain over $2.2 million to buy or refinance homes.
                                                           Freddie Mac bought some of the fraudulent loans.
Harriet Taylor
                                                           This was a joint investigation with the FBI and was
On January 18, 2013, in the U.S. District Court for        prosecuted by the U.S. Attorney’s Office for the
the District of Maryland, Harriet Taylor was sen-          District of Maryland with assistance from an OIG
tenced to 2 years’ imprisonment and 5 years’ super-        investigative counsel.
vised release and was ordered to pay over $1.5 million
in restitution. Earlier, on September 12, 2012, Taylor     Samer Salami
pled guilty to wire fraud in connection with a scheme
                                                           On January 15, 2013, Samer Salami was charged
to use real estate escrow funds for herself and her
                                                           by the State of Michigan with five criminal counts,
companies.
                                                           including embezzlement and computer crimes.
Taylor co-owned and managed two title insurance
                                                           From 2006 to 2011, Salami, a real estate broker,
companies, Regal Title Company and Loyalty Title
                                                           marketed foreclosed properties for the enterprises and
Company, in Columbia, Maryland. Beginning in
                                                           allegedly misrepresented the value of foreclosed prop-
2009, Taylor caused mortgage lenders to wire money
                                                           erties by undervaluing them. Then, he allegedly sold
for real estate settlements to Regal’s operating account
                                                           the undervalued properties to his family’s and friends’
instead of to an escrow account. Taylor also caused
                                                           companies before flipping them to legitimate buyers,
money in Regal’s and Loyalty’s escrow accounts to be
                                                           keeping both the illicit profit and a second round of
transferred back and forth between their respective
                                                           commissions. In addition, Salami is alleged to have
operating accounts. By using commingled funds
                                                           falsely billed the enterprises for property maintenance
throughout 2009, Taylor kept her two businesses
                                                           and collected kickbacks from other real estate brokers
afloat, while enriching herself with both company
                                                           for steering properties to them.
and escrow funds. Eventually, the escrow accounts
were insufficiently funded, and Taylor could not pay       This was a joint investigation with the FBI and the
the insurance premiums or recording fees nor could         Wayne County, Michigan, prosecutor’s office. Freddie
she pay off prior liens, including four belonging to       Mac’s Financial Investigations Unit provided assis-
the enterprises. As a result, her insurance underwriter    tance to the investigation.
lost over $1.5 million.
                                                           Shelton Assoumou
This was a joint investigation with the FBI and was
prosecuted by the U.S. Attorney’s Office for the           On January 11, 2013, Shelton Assoumou was
District of Maryland with assistance from an OIG           charged with wire and bank fraud in the U.S. District
investigative counsel.                                     Court for the Eastern District of New York.

                                                           From 2008 to 2012, Assoumou allegedly posed as
Dennis Edwards
                                                           a real estate developer doing business as Brooklyn
On January 15, 2013, Dennis Edwards was sen-               Renaissance Development Inc. In that capacity,
tenced in the U.S. District Court for the District of      Assoumou sold Brooklyn homes as investment
Maryland to 21 months’ imprisonment and 3 years’           properties, assuring investors he would manage the
supervised release and was ordered to pay $625,000         properties on their behalf, including collecting rents
in restitution for conspiracy to commit bank fraud.        and making mortgage payments. In fact, Assoumou

22    Federal Housing Finance Agency Office of Inspector General
allegedly made little more than token efforts to           mortgages secured by the units, and to date, they
manage the properties and did not pay their mort-          have lost approximately $2.4 million because of
gages, so all of the loans went into default. Several      related delinquencies, defaults, and foreclosures.
properties were financed with mortgages purchased
                                                           This was a joint investigation with the FBI and the
by the enterprises.
                                                           IRS-CI.
This was a joint investigation with the FBI and
HUD-OIG.                                                   Blas and Nancy Arreola
                                                           On December 27, 2012, Blas Arreola and his wife,
Jerrick Hawkins                                            Nancy Arreola, were charged in the Superior Court of
On January 9, 2013, Jerrick Hawkins pled guilty            Stanislaus County, California, with numerous felony
to one count of bank fraud and two counts of false         counts, including identity theft and conspiracy.
statements in the U.S. District Court for the Eastern
                                                           The Arreolas are alleged to have filed and recorded
District of Missouri. Hawkins had been indicted for
                                                           fraudulent documents, including fractional interest
these offenses on November 14, 2012.
                                                           grant deeds to individuals who were in bankruptcy,
From 2007 until September 2011, Hawkins, a real            in order to impair Freddie Mac’s efforts to foreclose
estate investor, sought loans on the basis of fraudulent   on the Arreolas’ homes. These documents can delay
documents, including pay stubs and W-2 forms.              foreclosure because they require foreclosure compa-
Hawkins also directed potential buyers to apply for        nies to work through more people—and bankruptcy
mortgage loans supported by inaccurate records.            courts—before taking possession of a home. Their
Most of the loans ultimately went into default. The        alleged scheme, known as bankruptcy dumping,
scheme involved over 14 enterprise loans and               allowed the Arreolas to keep their homes while not
21 Federal Housing Administration (FHA) loans.             paying their mortgages. Freddie Mac allegedly lost
                                                           over $125,000 as a consequence of the Arreolas’
This was a joint investigation with HUD-OIG and
                                                           scheme.
USPIS.
                                                           This is a joint investigation with the Stanislaus
Burchell Builder Bailout                                   County District Attorney’s Office and the California
On January 4, 2013, Aref Abaji, Maher Obagi,               Attorney General’s Office.
Jacqueline Burchell, Mohamed Salah, Mohamed El
Tahir, and Wajieh Tbakhi were indicted for con-            Jay Dunlap
spiracy to commit wire and bank fraud in the U.S.          On December 21, 2012, Jay Dunlap was indicted for
District Court for the Central District of California.     bank, mail, and wire fraud in the U.S. District Court
                                                           for the Eastern District of Missouri.
The indictment alleges that from 2007 through 2009,
the defendants negotiated with housing developers          Dunlap is alleged to have defrauded homeowners by
in California, Florida, and Arizona to sell                operating a mortgage rescue scheme in 2006. The
condominiums in exchange for large commissions             scheme—which used a Dunlap employee as a straw
not disclosed to the lenders. The defendants allegedly     buyer—involved buying and financing a property
recruited straw buyers and prepared loan applications      owned by homeowners who were delinquent on
with false information in order to sell more than          their mortgage. The homeowners then rented the
100 units. The enterprises purchased many of the           property back for a year, with the option to purchase

                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013          23
it thereafter. After the year had ended, Dunlap           repay BNC with the proceeds of the sales to the
conducted a fake closing to cause the homeowners to       enterprises and institutional investors. Instead,
believe that they had purchased the property. Dunlap      AMS diverted the proceeds to pay personal, payroll,
made mortgage payments during the first year, but         and operating expenses. AMS then concealed its
the payments stopped following the fraudulent clos-       misapplication of the proceeds by using money from
ing. Fannie Mae owned or guaranteed the mortgage.         earlier mortgage sales to pay back BNC for funding
                                                          current originations. The defendants also falsely
This is a joint investigation with USPIS and the
                                                          represented AMS’ financial health. When the fraud
Secret Service.
                                                          was discovered, AMS ceased operations, owing BNC
                                                          approximately $27.5 million.
Emma Barbosa
On December 4, 2012, Emma Barbosa pled guilty to          This was a joint investigation with SIGTARP and
conspiracy to commit wire fraud in the U.S. District      DOJ criminal division’s fraud section with support
Court for the Eastern District of Virginia.               from the Financial Crimes Enforcement Network
                                                          (FinCEN).
From September 2006 until August 2007, Barbosa
worked as a loan officer with SunTrust Mortgage           Bradford Rieger et al.
in Annandale, Virginia. She allegedly placed false
                                                          On November 16, 2012, Bradford J. Rieger, a closing
information in loan applications and used false
                                                          attorney, was sentenced in the U.S. District Court for
documents, such as W-2 forms, to qualify otherwise
                                                          the District of Connecticut, to 2 years’ imprisonment
unqualified applicants for loans. Barbosa’s activities
                                                          and 5 years’ supervised release and was ordered to
caused losses of about $586,000.
                                                          pay a $10,000 fine. He was also ordered to pay over
This was a joint investigation with the FBI and was       $743,000 in restitution on January 16, 2013. On
prosecuted by the U.S. Attorney’s Office with help        February 14, 2013, Lawrence Dressler, a closing
from an OIG investigative counsel.                        attorney; Genevieve Salvatore, a closing attorney;
                                                          Andrew Constantinou, a loan originator; Kwame
American Mortgage Specialists                             Nkrumah, the owner of All World Realty Enter-
                                                          prises and Homesavers LLC; Charmaine Davis, the
On November 29, 2012, David Kaufman and
                                                          owner of Optimum Mortgage; and Jacques Kelly, an
Lauretta Horton, respectively, pled guilty to obstruc-
                                                          investor, were charged in second superseding indict-
tion and mail fraud in the U.S. District Court for the
                                                          ments in the U.S. District Court for the District of
District of Arizona. Earlier, on November 19, 2012,
                                                          Connecticut. The indictments allege various offenses,
in the U.S. District Court for the District of North
                                                          including mail fraud, wire fraud, and false statements.
Dakota, Scott Powers and David McMasters pled
guilty to conspiracy to commit bank fraud.                From September 2006 to November 2008, Rieger,
                                                          Dressler, Salvatore, Constantinou, Nkrumah, Kelly,
From 2006 to 2010, all four worked for American
                                                          and others allegedly conspired to defraud mortgage
Mortgage Specialists (AMS), a mortgage company
                                                          lenders and financial institutions by obtaining
headquartered in Mesa, Arizona, that used money
                                                          millions of dollars in fraudulent mortgages for the
from BNC National Bank (BNC)—a member of the
                                                          purchase of dozens of multifamily properties in New
FHLBank of Des Moines—to originate residential
                                                          Haven, Connecticut. In addition, from November
mortgage loans that were then sold to the enterprises
                                                          2006 to March 2007, Davis and Nkrumah allegedly
and institutional investors. AMS was supposed to

24    Federal Housing Finance Agency Office of Inspector General
fraudulently obtained more than $1 million in real       by showing the funds were either from the buyers
estate loans. As part of their schemes, sellers agreed   or gifts to them. In return for funding the down
to accept significantly lower contract prices, which     payments, Gumaer and her associates were paid
were not disclosed to the lenders. The conspirators      fees, which were also hidden from the lenders. The
then submitted false HUD-1 forms and other false         scheme caused a loss of over $984,000 to involved
loan documentation for more than $10 million in          financial institutions. Freddie Mac, which bought
fraudulent mortgages on more than 40 properties,         or guaranteed mortgages on seven of the homes, lost
several of which were purchased or guaranteed by the     over $311,000.
enterprises.
                                                         This was a joint investigation with HUD-OIG, the
This was a joint investigation with the FBI, USPIS,      IRS, the FBI, the Secret Service, and USPIS.
and HUD.
                                                         Raymond Morris
Larry Reisman and Yvonne Gumaer                          On November 5, 2012, Raymond Morris, a business
On November 8, 2012, Larry Reisman, owner of LR          man, was sentenced in the U.S. District Court for the
Development, pled guilty to conspiracy to commit         Southern District of West Virginia, to nearly 5 years’
money laundering in the U.S. District Court for the      imprisonment and 5 years’ probation with restitution
Eastern District of Texas.                               (to be determined later) for wire and bank fraud.

From January 2006 to October 2008, Reisman               From 2006 to 2007, Morris was part of a scheme that
inflated the sales price of 53 homes he built            defrauded lenders by inflating the values of
and kicked back a portion of the proceeds to             30 homes. The excess loan funds were used to make
recruiters and buyers. The scheme caused a loss of       borrowers’ down payments and initial mortgage
approximately $5.7 million, including over $500,000      payments, which cost the lenders approximately
lost by the enterprises, which bought or guaranteed      $7 million. Fannie Mae bought nine of the loans and,
mortgages on four of these homes.                        to date, has lost approximately $921,000.

During OIG’s investigation, we found that Reisman        This was a joint investigation with the FBI.
was also involved in a scheme with Yvonne Gumaer.
On January 22, 2013, as a                                                       Audrey Yeboah
result of our work with other                                                   On October 25, 2012, Audrey
federal agencies, Gumaer, in       Straw buyers received                        Yeboah pled guilty to wire
the U.S. District Court for the
District of Eastern Texas, pled    $14 million from                             fraud in the U.S. District
                                                                                Court for the Southern
guilty to conspiracy to make a
false statement to FHA.
                                   $100 million in                              District of California.

                                                                                 From May 2007 through
From 2007 to 2008, Gumaer,         mortgages                                     September 2008, Yeboah
an escrow officer at Regency                                                     and others induced mortgage
Title Company, provided                                                          lenders to approve inflated
money from herself and others to borrowers for           loans for straw buyers based on false loan applica-
property down payments. On at least 11 homes, she        tions. Yeboah created fraudulent employment and
disguised the source of the down payments to lenders     income records for the straw buyers, which allowed

                                   Semiannual Report to the Congress • October 1, 2012–March 31, 2013      25
her co-conspirators to collect at least $14 million       •	 On December 12, 2012, David Arboleda was
in kickbacks from approximately $100 million                 sentenced to 2½ years’ imprisonment and 3 years’
in fraudulently obtained mortgage loans. Due to              supervised release.
foreclosures and defaults, lenders lost approximately
                                                          •	 On January 3, 2013, Sandra Campo pled guilty
$5 million on at least 16 properties in California and
                                                             to conspiracy, and mail and wire fraud.
Washington. Fannie Mae bought mortgages secured
by five of these properties and suffered losses.          •	 On January 11, 2013, Edward Mena was sen-
                                                             tenced to 4½ years’ imprisonment and 5 years’
This was a joint investigation with the FBI.
                                                             supervised release.
Alfonso Carillo                                           •	 On January 15, 2013, Dayanara Montero pled
On October 24, 2012, Alfonso Carrillo, Maria                 guilty to conspiracy, and mail and wire fraud.
Elena Carrillo, and Rudy Breda were indicted, in the      •	 On January 16, 2013, Osbelia Lazardi pled guilty
District Court for the City and County of Denver,            to conspiracy, and mail and wire fraud.
Colorado, on numerous criminal charges, including
conspiracy to commit theft and forgery.                   •	 On February 26, 2013, Marina Superlano and
                                                             Marisa Perez pled guilty to conspiracy.
From 2011 to 2012, the Carrillos and Breda allegedly
fraudulently attempted to sell or rent foreclosed         Sanchez, Mota, Campo, Mena, Montero, Lazardi,
properties owned by the enterprises. To date, their       and others conspired to recruit individuals to pur-
activities are alleged to have caused losses of more      chase condominium units at Marina Oaks
than $150,000.                                            Condominiums, located in southern Florida, and
                                                          then prepared false documents that were submitted to
This was a joint investigation with the Denver            financial institutions in connection with the
District Attorney’s Office.                               individuals’ applications for loans to finance the
                                                          condominium unit purchases. OIG’s investigation
Homefirst Realty Group Inc.
                                                          has examined 165 mortgage transactions involving
As reported in the prior semiannual report, nine          the conspirators and over $39 million in mortgage
defendants were indicted, in the U.S. District Court      loans. Of these, 131 properties have been foreclosed
for the Southern District of Florida, in connection       on, and another 26 are in foreclosure. The enterprises
with a large-scale mortgage fraud conspiracy, doing       purchased many of the mortgages, and Fannie Mae
business as Homefirst Realty Group Inc.                   has reported losses of over $4.1 million to date.

•	 On October 18, 2012, Juan Carlos Sanchez pled
   guilty to conspiracy and wire and bank fraud, and      Civil Cases
   on January 3, 2013, he was sentenced to 15 years’
   imprisonment followed by 3 years’ supervised           During the reporting period, OIG participated in
   release.                                               three civil cases:

•	 On November 28, 2012, Celeste Mota was                 •	 Residential Mortgage-Backed Securities. The
   sentenced to 5 years’ probation and ordered to            New York State Attorney General instituted civil
   pay over $242,000 in restitution.                         proceedings against JP Morgan Chase (as succes-
                                                             sor in interest to Bear Stearns) and Credit Suisse


26    Federal Housing Finance Agency Office of Inspector General
  alleging violations of the New York State Martin         agency promptly so it can strengthen both its systems
  Act in connection with the sale of residential           and those of the entities it supervises and regulates.
  mortgage-backed securities (RMBS). OIG made
                                                           Enterprise Oversight of Property Preservation
  significant contributions—including assisting
                                                           Inspections (SIR-2013-0002, November 26, 2012)
  with the interviews of witnesses and the review of
  documents—in connection with both cases.                 OIG investigations disclosed that a property pres-
                                                           ervation contractor submitted almost $13 million
•	 Countrywide Hustle. On October 24, 2012, the
                                                           in fraudulent claims for enterprise properties. This
   U.S. Attorney for the Southern District of New
                                                           indicates a potential systemic problem industry-wide
   York filed a civil mortgage fraud lawsuit against
                                                           for inspections paid for by the enterprises. In gen-
   Bank of America Corporation and its predeces-
                                                           eral, we concluded that the enterprises’ servicers
   sors, Countrywide Financial Corporation and
                                                           subcontract for property inspections but may lack
   Countrywide Home Loans Inc., for engaging in a
                                                           adequate processes to evaluate their subcontractors’
   scheme to defraud the enterprises. The complaint
                                                           ability to perform the services. Consequently, we
   seeks damages and civil penalties under the
                                                           recommended that FHFA assess the enterprises’
   False Claims Act and the Financial Institutions
                                                           oversight of property preservation inspections.
   Reform, Recovery, and Enforcement Act of 1989.
   Specifically, the complaint alleges that from 2007      Weakness in Enterprises’ Uniform Residential
   through 2009, the defendants implemented a              Loan Application (Freddie Mac Form 65/Fannie
   loan origination process known as the “Hustle.”         Mae Form 1003) (SIR-2013-001, November 15,
   The Hustle was designed to process loans at             2012)
   high speeds and without quality verifications.
   According to the complaint, the Hustle generated        The mortgage applications that the enterprises cur-
   thousands of fraudulent and otherwise defective         rently rely on do not ask borrowers if they have sub-
   residential mortgage loans that were later sold         mitted multiple applications for the same property.
   to the enterprises and caused over $1 billion in        As a result, brokers have, at times, been able to secure
   losses and countless foreclosures. The government       multiple loans from multiple lenders by simultane-
   amended its complaint on January 11, 2013,              ously submitting loan applications for an individual
   among other things, to add a claim against a for-       property to several lenders. We recommended FHFA
   mer Countrywide and current Bank of America             determine whether to include a specific question on
   executive, who was responsible for implementing         the residential loan application about the existence of
   the Hustle. This case is the result of a joint action   pending loans.
   with the U.S. Attorney’s Office for the Southern
   District of New York and SIGTARP.                       OIG Investigations Strategy

Systemic Implication Reports                               OIG has developed and intends to further develop
                                                           close working relationships with other law enforce-
Systemic Implication Reports identify possible risks       ment agencies, including DOJ and the U.S. Attor-
and exploitable weaknesses in FHFA’s management            neys’ Offices; state attorneys general; mortgage fraud
control systems that OIG discovers during the course       working groups; the Secret Service; the FBI; HUD-
of our investigations. We communicate these to the         OIG; the Federal Deposit Insurance Corporation



                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013         27
Office of Inspector General; the IRS-CI; SIGTARP;           collateralization of advances to insurers, and that,
FinCEN; and other federal, state, and local agencies.       consequently, there was no legally enforceable
                                                            mechanism by which to ensure the safety and
During this reporting period, OI has continued to
                                                            soundness of the FHLBanks. FHFA attempted
work closely with FinCEN to review allegations of
                                                            to address our concern by issuing its October 5,
mortgage fraud for follow-up investigations and to
                                                            2012, notice with an opportunity for comments
determine where we can best assign special agents to
                                                            on whether FHFA should consider establishing
investigate fraud against the GSEs. OIG also pursues
                                                            specific and uniform standards for making
innovative approaches to ensure its investigations are
                                                            advances to insurance companies. However, the
prosecuted timely. For example, OIG has provided
                                                            standards continue to be embodied in an advisory
dedicated OIG investigative counsels with substantial
                                                            bulletin rather than in a legally enforceable reg-
criminal prosecution experience to U.S. Attorneys’
                                                            ulation, seeking comment on whether uniform
Offices to help prosecute OIG’s investigations. In
                                                            enforceable standards should be adopted does not
addition, OIG has partnered with a number of state
                                                            address our first concern.
attorneys general to pursue shared law enforcement
goals.                                                      Our second concern is still subject to ongoing
                                                            discussions between FHFA and OIG. Therefore,
OIG Regulatory Activities                                   the substance of our comments and their resolu-
                                                            tion will be published at a later date.
Consistent with the Inspector General Act, OIG            2.	FHFA Final Rule: 2012-2014 Enterprise
assesses whether proposed legislation, regulations, and      Housing Goals (RIN 2590-AA49, Published
policies related to FHFA are efficient, economical,          November 13, 2012)
legal, and susceptible to fraud and abuse. During the
semiannual period, OIG made substantive comments            Two reporting cycles ago, FHFA drafted a pro-
on a final rule, a draft notice, and two draft proposed     posed rule pursuant to section 1128 of HERA that
rules. Additionally, two rules and an advisory bulletin     established annual housing goals. The rule estab-
that OIG previously commented on were finalized             lished annually adjustable benchmarks governing
and published during the reporting period.4                 mortgage purchases by the enterprises from 2012
                                                            through 2014. We commented that, given HERA’s
1.	Advisory Bulletin: Collateralization of                  repeal of section 1334 of the Safety and Soundness
   Advances and Other Credit Products Provided              Act—which authorized race-based considerations
   by FHLBanks to Insurance Companies                       in housing goals for the purpose of complying with
   (Published October 5, 2012)                              the Community Reinvestment Act—FHFA should
                                                            be careful not to import race-conscious decision
  In the last reporting cycle, OIG commented on
                                                            making into the housing goals without laying a
  FHFA’s draft advisory bulletin on the collater-
                                                            proper foundation (i.e., demonstrating what com-
  alization of advances and other credit products
                                                            pelling interest is addressed by the race-conscious
  provided by the FHLBanks to insurance com-
                                                            decision making). We recommended that FHFA
  panies. OIG’s September 28, 2012, comment
                                                            amend the national housing needs factor to clarify
  expressed two concerns. First, we commented that
                                                            that a race-conscious analysis was not intended
  an advisory bulletin rather than a formal rulemak-
                                                            or to adequately justify such analysis if it was
  ing had been used to adopt the standards for the
                                                            intended. On November 13, 2012, FHFA issued


28    Federal Housing Finance Agency Office of Inspector General
  a final rule on the 2012-2014 enterprise housing         been altered to reflect the Freedom of Information
  goals. FHFA did not adopt our recommendation.            Act publication requirement and, therefore, cannot
                                                           be said to appreciate our recommendation.
3.	FHFA Proposed Rule: Availability of Non-
   Public Information (RIN 2590-AA06,                    5.	FHFA Draft Proposed Rule: Enterprise Public
   Published January 29, 2013)                              Use Database and Proprietary Information;
                                                            and Request for Comment on Applicability
  In the last reporting cycle, FHFA proposed a
                                                            to the Federal Home Loan Banks (RIN 2590-
  draft rule prohibiting the disclosure of nonpublic
                                                            AA55, OIG Comments Submitted on
  information by FHFA employees, including those
                                                            November 12, 2012)
  who work in OIG. OIG’s August 23, 2012, com-
  ment on the rule noted that, although the rule can       FHFA forwarded to OIG a draft proposed rule
  ensure that employees, including those who work          implementing HERA’s requirement to make avail-
  for OIG, do not make any unnecessary or unwar-           able to the public the nonproprietary single-family
  ranted disclosures of unpublished information, it        and multifamily loan-level mortgage data elements
  cannot curtail or thwart OIG’s statutory respon-         submitted to FHFA by the enterprises in their
  sibility to publically report the results of audits,     mortgage reports, to maintain a public use data-
  evaluations, and investigations under the Inspector      base for such mortgage data, and to govern the
  General Act. In response to our comments, FHFA           enterprises’ public use database and proprietary
  added regulatory language to the rule published on       information determinations. Due to ongoing
  January 29, 2013, that made clear that it did not        discussions between FHFA and OIG regarding this
  supersede, either in fact or intent, OIG’s statutory     draft, the substance of OIG’s December 12, 2012,
  authority. Specifically, FHFA defined the term           comment and its resolution will be published at a
  “law enforcement proceedings” to authorize OIG           later date.
  to disclose nonpublic information to the extent
                                                         6.	FHFA Draft Notice: Examination Rating
  required by the Inspector General Act.
                                                            System (Published November 13, 2012)
4.	FHFA Final Rule: Organization and Functions,
                                                           Prior to publishing its November 13, 2012, notice
   and Seal (RIN 2590-AA54, OIG Comments
                                                           establishing an examination rating system for the
   Submitted on October 9, 2012)
                                                           FHLBanks and the enterprises, FHFA requested
  Prior to issuing its December 10, 2012, final rule       comment from OIG. Due to ongoing discussions
  concerning FHFA’s organization, functions, and           between FHFA and OIG regarding this notice, the
  seal, FHFA sought OIG’s input. The email trans-          substance of OIG’s November 6, 2012, comment
  mitting the draft rule to OIG for comment stated         and its resolution will be published at a later date.
  that under the final rule future functional and/
                                                         7.	FHFA Proposed Rule: Production of FHFA
  or organizational changes will not require publi-
                                                            Records, Information and Employee Testimony
  cation. OIG’s October 9, 2012, comment noted
                                                            in Legal Proceedings (RIN 2590-AA51,
  that the Freedom of Information Act requires
                                                            Published February 8, 2013)
  publication in the Federal Register of any amend-
  ments to or repeals of the organizational structures     FHFA published a proposed housekeeping rule
  or functions of FHFA’s components (see 5 U.S.C.          that governs the production of FHFA records,
  552(a)(1) and 552(a)(1)(E)). The final rule has not      information, or employee testimony in connection


                                   Semiannual Report to the Congress • October 1, 2012–March 31, 2013       29
  with legal proceedings in which neither the             the Association of Appraisal Regulatory Officials,
  United States nor FHFA is a party. Due to ongoing       describing fraud trends in the mortgage industry.
  discussions between FHFA and OIG regarding this
                                                          To stop mortgage fraud and prevent further exploita-
  notice, the substance of OIG’s November 6, 2012,
                                                          tion, OI reached out to homeowners and victims
  comment and its resolution will be published at a
                                                          of mortgage fraud schemes and worked with the
  later date.
                                                          National Crime Prevention Council.

OIG Communications and                                    Hotline
Outreach                                                  OI operates a Hotline that allows concerned parties
                                                          to report directly and in confidence information
A key component of OIG’s mission                                              regarding possible fraud, waste,
is to communicate clearly with the                                            or abuse related to FHFA or the
GSEs, industry groups, other federal                                          GSEs. We honor all applicable
agencies, Congress, and the public.     The Hotline for                       whistleblower protections. As part
OIG facilitates clear communica-                                              of its effort to raise awareness of
tions through its targeted outreach     fraud, waste, or                      fraud and how to combat it, OIG
efforts, Hotline, coordination with                                           promotes the Hotline through its
other oversight organizations,          abuse related to                      website, posters, emails targeted to
and congressional statements and                                              FHFA and GSE employees, and its
testimony.                              FHFA’s programs                       semiannual reports.

Outreach                                and operations is                    Coordinating with Other
During the reporting period, OI         (800) 793-7724 or                    Oversight Organizations
made over 35 presentations to law                                          OIG shares oversight of federal
enforcement officials, real estate and     oighotline@fhfaoig.gov housing program administration
banking industry professionals, and                                        with several other federal agencies,
homeowners. The presentations to                                           including HUD, the Department
law enforcement officials were made                     of Veterans Affairs (VA), the Department of Agri-
to multiple mortgage fraud working groups across the    culture (USDA), and Treasury’s Office of Financial
country and individual federal agencies responsible     Stability (which manages the Troubled Asset Relief
for investigating mortgage fraud, such as the FBI,      Program); their inspectors general; and other law
HUD-OIG, and the Secret Service. In addition, OI        enforcement organizations. To further the over-
developed a partnership with the National Associa-      sight mission, we coordinate with these entities to
tion of District Attorneys to train local and state law exchange best practices, case information, and profes-
enforcement officials and prosecutors throughout the    sional expertise. During the semiannual period ended
country.                                                March 31, 2013, we participated in the following
With respect to presentations to housing                  cooperative activities:
professionals, OI (as well as other OIG offices) made     •	 RMBS Working Group. On January 27, 2012,
numerous presentations to professional organiza-             shortly after a statement by the President during
tions, such as the Mortgage Bankers Association and          his State of the Union address, the Attorney

30    Federal Housing Finance Agency Office of Inspector General
  General issued a memorandum announcing the                      űű CIGIE Suspension and Debarment Working
  formation of the RMBS Working Group. The                           Group. The Inspector General serves as
  RMBS Working Group is designed to investigate                      co-chairman of the CIGIE Suspension
  misconduct in the market for MBS, particularly                     and Debarment Working Group, which is
  during the period prior to the onset of the finan-                 charged with improving the effectiveness
  cial crisis in 2008. Specifically, it seeks to stream-             of federal suspension and debarment
  line and strengthen current and future efforts to                  practices. The working group regularly
  identify, investigate, and prosecute instances of                  conducts activities to these ends.
  wrongdoing in packaging, selling, and valuing
                                                                     Most recently, the working group presented
  RMBS and related mortgage products. The
                                                                     its 2012 Suspension and Debarment
  RMBS Working Group consists of federal,
                                                                     Workshop on November 16, 2012, in
  state, and local partners, including DOJ, U.S.
                                                                     Alexandria, Virginia. The workshop—
  Attorneys, the New York State Attorney General,
                                                                     which the working group co-sponsored
  HUD, FinCEN, the SEC, the FBI, the IRS-CI,
                                                                     with the Interagency Suspension and
  and the Consumer Financial Protection Bureau.
                                                                     Debarment Committee—focused on
  As a member of the RMBS Working Group since
                                                                     potential suspension or debarment actions
  its formation, OIG has made numerous signifi-
                                                                     based on information obtained through
  cant contributions to the joint effort.
                                                                     routine OIG investigation, audit, evalua-
•	 Council of the Inspectors General on Integrity                    tion, or inspection activities. Such referrals
   and Efficiency. OIG actively participates in                      are commonly known as “fact-based” or
   several Council of the Inspectors General on                      “evidence-based,” as opposed to suspensions
   Integrity and Efficiency (CIGIE) committees and                   or debarments imposed on the basis of
   working groups.                                                   indictments or convictions. The workshop
                                                                     featured speakers from the inspector general
      űű The Inspection and Evaluation (I&E)
                                                                     community, the suspension and debarment
         Committee. The I&E Committee estab-
                                                                     official community, and DOJ. This was the
         lished a working group to conduct a pilot
                                                                     third workshop presented by the working
         “peer review” program for I&E units in
                                                                     group, which looks forward to providing
         the OIG community. The peer review
                                                                     comparable suspension and debarment
         is designed to assess organizations’ work
                                                                     training for federal practitioners in 2013.
         under CIGIE’s Quality Standards for
         Inspection and Evaluation (January 2012)          •	 Council of Inspectors General on Financial
         and to promote credibility of such work              Oversight. OIG actively participates in the
         by validating the organizations’ work                Council of Inspectors General on Financial
         processes and evaluating their objectivity,          Oversight. During the reporting period, we
         independence, and rigorous adherence to              participated in a joint audit of the Financial
         applicable standards.                                Stability Oversight Council’s efforts to evaluate
                                                              Financial Market Utilities to determine whether
         Three members of our staff participated in
                                                              they qualify as systemically important.
         the CIGIE peer review pilot program.
                                                           •	 Federal Housing Inspectors General. OIG
                                                              spearheaded the creation of a new interagency


                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013         31
  working group, the Federal Housing Inspectors           reports and FHFA’s progress in implementing them,
  General. In addition to OIG, this group includes        themes emerging in OIG’s body of work, OIG’s
  the offices of inspector general for other federal      organization and strategy, and areas of ongoing work.
  agencies with primary responsibility for federal
                                                          Additionally, we endeavor to inform Congress
  housing, including HUD, VA, and USDA. The
                                                          through responses to numerous technical assistance
  Federal Housing Inspectors General continue to
                                                          and information requests. During the reporting
  collaborate on multiple joint initiatives.
                                                          period, the Inspector General responded to formal
                                                          written inquiries from members of Congress on var-
Communicating with Congress
                                                          ious topics, including high-priority unimplemented
In fulfilling our mission, OIG works in close part-       recommendations, climate change, and possible
nership with Congress and is committed to keeping         LIBOR manipulation.
Congress fully apprised of our oversight of FHFA.
The Inspector General meets regularly with members        Copies of the Inspector General’s written testimo-
of Congress, and he and his staff provide frequent        ny to Congress are available at www.fhfaoig.gov/
briefings to key congressional committees and offices.    testimony.
Briefing topics include recommendations from OIG




32    Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • October 1, 2012–March 31, 2013   33
Section 2: FHFA and GSE Operations

Overview                                                     FHFA accomplishes its mission by performing onsite
                                                             examinations of the enterprises; coordinating con-
HERA created FHFA in July 2008 to oversee vital              gressional, public, and consumer inquiries; assisting
components of our nation’s secondary mortgage mar-           the enterprises with foreclosure prevention actions;
kets.5 As an independent government agency, FHFA             and developing and implementing a strategic plan for
is responsible for the effective supervision, regulation,    the future of the enterprises’ conservatorships.8
and housing mission oversight of Fannie Mae,                 The enterprises were chartered by Congress to pro-
Freddie Mac, the FHLBanks, and the FHLBanks’                 vide stability and liquidity in the secondary market
Office of Finance to promote their safety and sound-         for home mortgages. They fulfill this charter by pur-
ness, and to support housing finance, affordable             chasing residential loans from loan originators that
housing, and a stable and liquid market.6                    can use the sales proceeds to make additional loans.
In 2012, the enterprises were                                                           These purchased loans are
profitable for the first time                                                           either held by the enterprises
since 2006 and the                                                                      as investments or pooled and
FHLBanks’ profits increased          In 2012, the enterprises                           packaged as MBS that are, in
by 80% compared to the pre-                                                             turn, sold to investors. Addi-
vious year. In this section, we
                                     were profitable again                              tionally, the enterprises—for
                                                                                        a fee—guarantee the payment
provide an overview of FHFA
and its relationship with
                                     and the FHLBanks’                                  of principal and interest on
                                                                                        the loans they package into
Fannie Mae, Freddie Mac,             profits rose 80%                                   MBS. Under HERA, the
and the FHLBanks (collec-
tively known as the housing                                                             enterprises receive financial
GSEs); a brief discussion of                                                            support from Treasury to
the GSEs’ business models and the primary reasons            prevent their liabilities from exceeding their assets,
for their improved financial results; and a summary of       subject to a cap.9
selected FHFA and GSE activities.
                                                             FHFA and the Enterprises’ Role in Housing
                                                             Finance
FHFA and the Enterprises
                                                             As the regulator of the enterprises, FHFA has a
                                                             statutory responsibility to ensure that they operate
Under HERA, FHFA was appointed conservator of the
                                                             in a safe and sound manner and that their activities
enterprises on September 6, 2008, and it serves as their
                                                             support a stable and liquid housing finance market.10
regulator and conservator. As regulator, the agency’s
mission is to ensure the enterprises operate in a safe and   As Figure 11 (see page 35) illustrates, the enterprises
sound manner and that their operations and activi-           support the nation’s housing finance system by pro-
ties contribute to a liquid, efficient, competitive, and     viding liquidity to the secondary mortgage market.
resilient housing finance market.7 As conservator, the       Liquidity is created when the enterprises purchase
agency seeks to conserve and preserve enterprise assets.

34    Federal Housing Finance Agency Office of Inspector General
Figure 11. Overview of the Enterprises and FHFA’s Role


                 Primary                                                                                      Applies for
                 Mortgage Market                                                                               Mortgage

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


                                                                                            Buys
                                                                                          Mortgages
                 Secondary
                 Mortgage Market                                     FANNIE MAE and
                 Market in which                                                                                 Conservator
                                                                     FREDDIE MAC
                 existing mortgages and
                 MBS are traded
                                                                     Credit          Portfolio
                                                                   Guarantee       Investment
                                                                   Business         Business                 Ensures Financial
                                                                                                                Safety and
                                                                                                                Soundness
                                                          Issues                 Issues
                                                           MBS                    Debt




                                                                          Buys                        Buys
                                                                          MBS                         Debt
                                               Sells
                      INVESTORS              MBS & Debt

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




mortgages that lenders—such as banks, credit                                              Enterprises’ Market Share of the
unions, and other retail financial institutions—origi-                                    Secondary Market
nated for homeowners.
                                                           As Figure 12 (see page 36) illustrates, after losing
These mortgages are securitized by pooling and             market share to nonagency competitors during the
packaging them into MBS and are either sold or             housing boom from 2004 through 2007, the enter-
kept by the enterprises as an investment. As part of       prises regained dominant positions in the residential
this process, the enterprises—for a fee—guarantee          housing finance market (with the federal government’s
payment of principal and interest on the mortgages.        financial support) as the financial crisis continued
Historically, the enterprises have benefited
                              Figure         from an
                                     11. Overview          and private-sector
                                                  of the Enterprises          financing
                                                                     and FHFA’s   Role for the secondary market
implied guarantee that the federal government              nearly disappeared. Since entering conservatorship
                                                                               12


would prevent default on their financial obligations,      in September 2008, the enterprises have bought and
and the enterprises assumed dominant positions in          guaranteed approximately three out of every four
the residential housing finance market.11                  mortgages originated in the United States.13 By provid-
                                                           ing a majority of the liquidity to the housing finance


                                             Semiannual Report to the Congress • October 1, 2012–March 31, 2013                             35
Figure 12. Primary Sources of MBS Issuances from 2000 to 2012 ($ 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
                  20


                        20


                              20


                                     20


                                            20


                                                    20


                                                          20


                                                                 20


                                                                        20


                                                                               20


                                                                                      20


                                                                                             20


                                                                                                    20
                                   Ginnie Mae MBS    Enterprise MBS     Nonagency MBS




market, the enterprises (and therefore the taxpayers)          The enterprises’ investment portfolios—currently
own a majority of the mortgage credit risk.14                  capped at $1.3 trillion—represent a smaller but
                                                               substantial credit risk, and FHFA and Treasury have
On February 21, 2012, FHFA issued its strategic plan
                                                               moved to reduce this risk by accelerating the dives-
for the enterprises, which includes plans to gradually
                                                               ture of the portfolios.17
shift mortgage credit risk from the enterprises to
private investors and to eliminate the direct funding       The original PSPAs established a ceiling for the
of mortgages by the    enterprises.
                    Figure          These
                           12. Primary    plans also
                                       Sources              amount
                                                of MBS Issuances  fromof 2000
                                                                         mortgage   assets($the
                                                                               to 2012            enterprises are able to
                                                                                             trillions)
include increasing the enterprises’ guarantee fees          own in their investment portfolios and required them
on MBS to encourage greater mortgage market                 to reduce the size of their portfolios each year by
participation by private firms. Regarding shifting
                                 15
                                                            10%. The ceiling was set at a maximum size of
credit risk from the enterprises, the majority of their     $250 billion each (or $500 billion combined).18 On
credit risk is wrapped up in their MBS guarantees.          August 17, 2012, Treasury issued an amendment
                                                            to the PSPAs. The amendment accelerates the wind
On March 4, 2013, FHFA instructed the enter-
                                                            down of the enterprises’ investment portfolios.19
prises to innovate and test the viability of multiple
                                                            Specifically, it requires each enterprise to reduce the
approaches for sharing credit risk with, or transferring
                                                            size of its portfolio by 15% annually.20 Pursuant to
it to, private investors. For 2013, FHFA established a
                                                            the amended PSPAs, the enterprises are scheduled to
goal of sharing or transferring $30 billion in risk.16
                                                            reach their ceilings by 2018.


36    Federal Housing Finance Agency Office of Inspector General
With respect to guarantee fees and encouraging pri-             Figure 13. Enterprises’ Annual Net Income
vate participation in the secondary market, on                  (Loss) from 2006 to 2012 ($ billions)
April 1, 2012, at the direction of FHFA, the enter-                $40
prises increased guarantee fees by 10 basis points.
                                                                   $20
Under the Temporary Payroll Tax Cut Continuation
                                                                    $0
Act of 2011, the proceeds from this increase are being
                                                                  ($20)
remitted to Treasury on a quarterly basis to fund the
                                                                  ($40)
now expired payroll tax cut.21
                                                                  ($60)

In the fourth quarter of 2012, the enterprises imple-             ($80)

mented, again at FHFA’s direction, an additional                 ($100)

increase in guarantee fees on single-family mortgages            ($120)
by an average of 10 basis points.22




                                                                           06



                                                                                 07



                                                                                          08



                                                                                                    09



                                                                                                               10



                                                                                                                       11



                                                                                                                             12
                                                                          20



                                                                                20



                                                                                         20



                                                                                                   20



                                                                                                             20



                                                                                                                      20



                                                                                                                            20
Additionally, in September 2012, FHFA also requested                                  Fannie Mae        Freddie Mac
public comment on a proposed approach under which
the enterprises would adjust the delivery fees charged
                                                                in 2012 compared to 2011 as derivative losses decreased
on single-family mortgages in states where costs
                                                                significantly.28
related to foreclosures are statistically higher than the
national average. FHFA stated in its September 2012
                                                                Improved Credit Quality of New
announcement that it expects to direct the enterprises
                                                                Single-Family Business
to implement the pricing adjustments in 2013.23
                                                                Fannie Mae’s credit-related income for 2012 was
                                                                $1.1 billion, compared to credit-related expenses of
Enterprises’ Financial
                                                                $27.5 billion for 2011.29 Freddie Mac’s credit-related
Performance and Government                                      expenses for 2012 declined to $1.9 billion, compared
Support                                                         to $11.3 billion for 2011. The reduced credit-related
                                                                expenses
                                                           Figure          are primarily
                                                                  13. Enterprises’        theIncome
                                                                                   Annual Net result of improvements
                                                                                                     2006 Through 2012 in
                                                                                                                       ($ billions)

In 2012, the enterprises had their first profitable year        the credit quality of each enterprise’s single-family
since 2006 (see Figure 13, above).    24
                                                                book of business as higher credit quality leads to
                                                                lower loan delinquencies.30
As shown in Figure 14 (see page 38), Fannie Mae
reported net income of $17.2 billion for 2012, compared         The enterprises’ single-family book of business con-
to a net loss of $16.9 billion for 2011. Freddie Mac
                                            25
                                                                sists of loans purchased and guaranteed that generate
reported net income of $11 billion for 2012, compared           interest and guarantee fee income. The credit quality
to a net loss of $5.3 billion for 2011. The profitability
                                         26
                                                                of the single-family loans acquired by the enterprises
of the enterprises is primarily due to improvements in the      beginning in 2009 (excluding Home Affordable
credit quality of their single-family business—leading          Refinance Program (HARP) and other relief refinance
to reduced credit-related expenses—and the positive             mortgages) is significantly better than that of those
impact that the increase in national home prices has            loans acquired from 2005 to 2008 as measured by
had on reducing estimated loan losses. Additionally,
                                          27
                                                                loan-to-value (LTV) ratios, FICO scores, and the
their interest rate risk and other market risks improved        proportion of loans underwritten with fully docu-
                                                                mented income.31


                                       Semiannual Report to the Congress • October 1, 2012–March 31, 2013                    37
Figure 14. Enterprises’ Summary of Net Income (Loss) for the Years Ended December 31, 2012, and
2011 ($ billions)
                                                       Fannie Mae                                                            Freddie Mac
                                                2012                             2011                              2012                          2011
    Net Interest Income                             $21.5                                 $19.3                         $17.6                          $18.4
    Credit-related Income (Expenses)                   1.1                                (27.5)                             (1.9)                     (11.3)
    Loss on Derivative Agreements                      (3.6)                               (6.6)    a
                                                                                                                             (2.4)                         (9.8)
    Impairment of Securities Considered
                                                       (0.7)                               (0.3)                             (2.2)                         (2.3)
       Other than Temporary
    Other Income (Expense)                             (1.1)                               (1.8)                             (0.1)                         (0.3)
    Net Income (Loss)                               $17.2                             ($16.9)                           $11.0                          ($5.3)
a
    Loss on derivatives referenced to Table 13, p. 79, in the Fannie Mae 2012 10-K Report.



This improved credit quality on loans purchased by             As shown in Figure 15 (see below), the S&P/Case
the enterprises is attributed to: (1) more stringent           Shiller Home Price Indices for the last eight quarters
credit policies and underwriting standards;                    ending December 31, 2012, show a steady increase in
(2) tighter mortgage insurers’ and lenders’ underwrit-         the housing index since the first quarter of 2012.
ing practices; and (3) fewer purchases of loans with
                                                               Figure 15. Home Price Index 2011 Through 2012
higher-risk attributes (e.g., Alt-A, interest-only, credit
                                                                               150
scores below 620, and LTV ratios above 90%).32
                                                                               148

Further, overall, since the beginning of 2009, the                             146

enterprises are holding more loans with higher credit                          144


quality in their single-family new book of business.
                                                               Housing Index




                                                                               142


As of December 31, 2012, Fannie Mae’s and                                      140

                                                                               138
Freddie Mac’s book of business comprised 66% and
                                                                               136
63%, respectively, of these loans.33 Conversely, the
                                                                               134
legacy housing boom loans acquired during 2005
                                                                               132
through 2008, which have a higher probability of                               130
credit defects, have declined to 22% of the single-
                                                                                          11



                                                                                                    11




                                                                                                                        11



                                                                                                                                  12



                                                                                                                                            12



                                                                                                                                                      12



                                                                                                                                                                12
                                                                                                              11
                                                                                      20



                                                                                                20



                                                                                                          20



                                                                                                                    20



                                                                                                                               20



                                                                                                                                        20



                                                                                                                                                  20



                                                                                                                                                             20
family book of business for Fannie Mae and 24% for
                                                                                     1Q



                                                                                               2Q



                                                                                                         3Q



                                                                                                                   4Q



                                                                                                                             1Q



                                                                                                                                       2Q



                                                                                                                                                 3Q



                                                                                                                                                           4Q




Freddie Mac as of December 31, 2012, compared
to 31% (Fannie Mae) and 32% (Freddie Mac) as of                Modest Declines in Interest Swap Rates
December 31, 2011.34                                           Lead to Reduced Derivative Losses
Impact of National Home Prices on Credit                       The enterprises use derivative instruments to manage
Losses                                                         the interest rate and prepayment risk associated with
                                                               their investments in mortgage loans and mortgage-
Another factor influencing credit-related expenses,
                                                               related securities.36 Derivative instruments include
i.e., credit losses, is national home prices. An increase
                                                               written options,    interest rate guarantees, and short-
                                                                        Figure 15. Home Price Index 2011 Through 2012
in home prices can have a positive impact on reducing
                                                               term default guarantee commitments.37 Fannie Mae’s
the likelihood that loans will default and reduce the
                                                               derivative losses for 2012 declined to $3.6 billion,
estimated credit losses on the loans that do default.35

38       Federal Housing Finance Agency Office of Inspector General
compared to $6.6 billion for 2011. Freddie Mac’s
                                                         The following minitutorial (see pages 40-41)
derivative losses for 2012 declined to $2.4 billion,
                                                         provides a detailed explanation of derivatives.
compared to $9.8 billion for 2011. Derivative losses
declined primarily due to modest declines in swap
rates in 2012 compared to 2011, when the swap rates
declined significantly.38




                                  Semiannual Report to the Congress • October 1, 2012–March 31, 2013   39
                                                Derivatives

     Contracts between financial institutions that lay out how much and under what conditions
     money will be paid by or to the parties involved are commonly referred to as derivatives
     because their values are derived from other instruments. For example, Freddie Mac may con-
     tract to pay a premium to a company in exchange for some reimbursement if enterprise-owned
     or -guaranteed mortgages default.

     From an institution’s perspective, purchasing a derivative to hedge against risks is a prudent
     option when the risks of loss outweigh the costs of the derivative contract. Along these lines,
     the enterprises use derivatives to insure against risks that come from having large portfolios
     laden with long-term fixed interest rate mortgage assets. Such assets are susceptible to vari-
     ous risks, such as rising interest rates, prepayment, and defaults.


     Rising Interest Rate Risk

     While a 3.5% fixed mortgage interest rate of return might be a good asset in today’s market, its
     value is vulnerable to rising rates. In 1998, for example, the prevailing interest rate for 30-year
     fixed-rate mortgages was nearly 7%.39 If interest rates climb back to that level in the next
     15 years, the enterprises could be stuck with a portfolio of mortgage assets that are paying
     half the going rate. To hedge against such risk, the enterprises use an interest rate guarantee
     derivative.

            Interest rate guarantees: The enterprises contract with a financial institution to swap
            payments from some of their fixed-interest rate investments with payments from their
            counterparties’ fluctuating (or floating) interest rate investments. This protects the
            enterprises because the additional cash from the floating-rate interest payments will
            offset the declining value of their fixed-rate mortgages.


     Prepayment Risk

     Alternately, interest rates may fall. If they do, then scores of mortgagees may refinance and pay
     off their higher-rate loans. This will cause the enterprises to lose expected income because—
     with prevailing rates lower than 3.5%—they will be unable to reinvest their principal at the prior
     higher rate. To guard against prepayment risk, the enterprises use written option derivatives.

            Written options: The enterprises pay a premium to a financial institution in exchange
            for the option to have it pay them if interest rates fall below an agreed-upon rate.




40    Federal Housing Finance Agency Office of Inspector General
Default Risk

As 2008’s housing crisis demonstrated, the enterprises face the risk of defaults on mortgages
they own or guarantee. Although they may foreclose upon the properties securing their
mortgages, they may still suffer significant losses in the event of default, particularly if housing
prices decline. The enterprises protect themselves against default risk with short-term
guarantee commitments.

       Short-term guarantee commitments: In exchange for a premium, the enterprises
       essentially obtain insurance from financial institutions for an agreed period (e.g., six
       months) against defaults. During the agreed period, the institutions commit to pay a
       certain amount if mortgagees default on the properties securing their assets.

Together, such derivatives help the enterprises manage risks associated with mortgage assets
by partly transferring such risks to their counterparties.40




                              Semiannual Report to the Congress • October 1, 2012–March 31, 2013       41
Treasury Draw Requests and Dividend                        As of March 31, 2013, Freddie Mac’s total draws from
Payments Due Under the Senior Preferred                    Treasury under the PSPA remain at $71.4 billion.47
Stock Purchase Agreements
                                                           During the combined third and fourth quarters of
In August 2012, FHFA and Treasury agreed to a              2012, Fannie Mae and Freddie Mac paid Treasury
third amendment to the PSPAs that, among other             $5.8 billion and $3.6 billion, respectively, in divi-
things, replaced the fixed dividend rate the enterprises   dends without any assistance under the PSPAs.48
pay beginning in the first quarter of 2013.41 This
ended the circular practice of the enterprises drawing     For the first quarter of 2013, Fannie Mae and Freddie
funds from Treasury in order                                                        Mac made dividend payments
to pay dividends back to Trea-                                                      of $4.2 billion and
sury.42 Now, the enterprises’       Amended PSPAs stop                              $5.8 billion, respectively, to
net worth (above a specified                                                        Treasury. As of March 31,
amount) will effectively be
                                    the enterprises from                            2013, Fannie Mae and
distributed to Treasury; for the                                                    Freddie Mac have paid Trea-
first quarter of 2013, approx-
                                    drawing money from                              sury $35.6 billion and
                                                                                    $29.6 billion, respectively, in
imately $10.1 billion will be       Treasury to pay                                 dividends on the senior pre-
distributed.43
                                                                                    ferred stock.49
Fannie Mae’s net worth as of        dividends to Treasury
December 31, 2012, was                                                             Additional Government
$7.2 billion resulting from                                                        Support
comprehensive net income of $18.8 billion less
                                                           The enterprises also benefited from extraordinary
$11.6 billion paid to Treasury in senior preferred
                                                           government measures to support the housing market
stock dividends during 2012. As a result, Fannie Mae
                                                           overall. Since September 2008, the Federal Reserve
did not request a draw from Treasury in 2012 to fund
                                                           and Treasury have purchased more than
the PSPA.44
                                                           $1.3 trillion in enterprise MBS, and the Federal
Freddie Mac’s net worth as of December 31, 2012,           Reserve has purchased an additional $135 billion of
was $8.8 billion resulting from comprehensive net          bonds issued by the enterprises.50 The Federal Reserve
income of $16 billion less $7.2 billion paid to Trea-      became the predominant purchaser of MBS during
sury in senior preferred stock dividends during 2012.      its purchase programs, and its purchases helped to
Freddie Mac made draws from Treasury totaling              prime the nation’s housing finance system.51
$165 million in 2012. Of the $165 million,
$19 million was used to eliminate a deficit in the first   FHLBank System
quarter of 2012 and $146 million eliminated a deficit
in the fourth quarter of 2011.45                           The FHLBanks are GSEs, federally chartered but pri-
As shown in Figure 16 (see page 43), since the incep-      vately capitalized and independently managed. The
tion of the conservatorships in 2008, the enterprises      12 regional FHLBanks together with the Office of
have drawn a total of $187.5 billion and paid              Finance, the fiscal agent of the FHLBanks, comprise
$65.2 billion in dividends. As of March 31, 2013,          the FHLBank System. All FHLBanks operate under
Fannie Mae’s total draws from Treasury under the           the supervisory and regulatory framework of FHFA.52
PSPA remain at $116.1 billion.46                           FHFA’s stated mission with respect to the FHLBanks

42    Federal Housing Finance Agency Office of Inspector General
Figure 16. Enterprises’ Treasury Draws and Dividend Payments Due Under PSPAs ($ billions)

             $70
                                                                    Net Capital to Enterprises: $122.3 billion
                                                                    Dividends Paid: $65.2 billion
             $60
                                                                    Treasury’s Investment: $187.5 billion

             $50


             $40

                                    66.1
             $30     59.8


             $20
                                                                    33.6
                                                    28
             $10                                                                         18.7
                                                                           16.1
                                                         13.5
                                                                                                         10.1
                            0.2            6.6
              $0




                                                                                                        3
                       08




                                     09




                                                     10




                                                                      11




                                                                                      12




                                                                                                        1
                     20




                                   20




                                                   20




                                                                    20




                                                                                    20




                                                                                                     20
                                                                                                  Q1
                                    Total Enterprise Draws      Total Enterprise Dividends




is to provide effective supervision, regulation, and            membership.56 FHLBank members include financial
housing mission oversight to promote the FHLBanks’              institutions such as commercial banks, thrifts, insur-
safety and soundness, support housing finance and               ance companies, and credit unions.57 Figure 17 (see
affordable housing, and support a stable and liquid             page 44) provides a map of the districts of the
mortgage market.53                                              12 FHLBanks.

The FHLBank System was created in 1932 to                   The primary business of the FHLBanks is to raise
improve the availability of funds for home ownership        funds in the capital markets by issuing debt, known
and its mission is to provide local lenders with readily    as consolidated obligations, through the Office of
             Figure 16. Enterprises' Treasury Draws and Dividend Payments Due Under PSPAs ($ billions)
available, low-cost funding to finance housing, jobs,       Finance and to use the consolidated obligations to
and economic growth. The 12 FHLBanks fulfill
                         54
                                                            provide its members with loans, known as advances.58
this mission by providing liquidity to their members,       The interest earned on advances less the interest owed
resulting in an increased availability of credit for resi-  on consolidated obligations is the FHLBanks’ prima-
dential mortgages, community investments, and other         ry source of earnings.59
housing and community development services.55
                                                            In the event of a default on a consolidated obligation,
The FHLBanks are cooperatives that are owned pri-           each FHLBank is jointly and severally liable for
vately and wholly by their members. Each FHLBank            losses, which means that each individual FHLBank
operates as a separate entity within a defined geo-         is responsible for the principal and interest on all
graphic region of the country, known as its district,       consolidated obligations issued by the FHLBanks.60
with its own board of directors, management, and            However, like the enterprises, the FHLBank System
employees. Each member of an FHLBank must pur-              has historically enjoyed benefits (e.g., debt costs akin
chase and maintain capital stock as a condition of its      to those associated with Treasury bonds) stemming


                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013             43
Figure 17. Regional FHLBanks




from an implicit government guarantee of its consoli-     suffered significant losses on these investments.65 As
dated obligations.61                                      certain markets stabilized in 2012, there was a signifi-
                                                          cant reduction in the losses.66
The FHLBanks’ Combined Financial
                                                          Figure 18. FHLBanks’ Net Income for the Years
Performance
                                                          Ended December 31, 2012 and 2011 ($ millions)
The regional housing markets affect the FHLBanks’
                                                                                          2012             2011
demand for advances from member institutions to
                                                              Net Interest Income           $4,052           $4,171
fund residential mortgage loans. After several years
                                                              Provision for Credit
of decreased demand for advances, during 2012,                  Losses
                                                                                                (21)             (71)
the demand for advances showed some signs of                  Other-than-Temporary
regional stabilization and certain FHLBank members                                            (112)             (856)
                                                         Impairment Lossesa
increased their use of advances.62                     Other Income (Loss)                      (48)            (246)
                                                       Total Non-interest
Additionally, as shown in Figure 18Figure     17. RegionalExpense
                                     (see right),           FHLBanks                          (969)           (1,057)
during 2012, the FHLBanks experienced improved
                                                       Total Assessments                      (296)             (348)
financial results, compared to the previous year as    Net Income                           $2,606            $1,593
balances of private-label MBS continued to decline        a
                                                           Of the other-than-temporary impairment losses, private-label
and credit losses on these securities subsided.63 Gains   MBS comprised $109 million and $849 million for the years
                                                          ended December 31, 2012 and 2011, respectively.
and losses on private-label MBS are dependent on the
level and direction of housing prices.64 Accordingly,
                                                          Net income was $2.6 billion for 2012, compared to
when the housing market collapsed, the FHLBanks
                                                          $1.6 billion for 2011.67


44    Federal Housing Finance Agency Office of Inspector General
    Figure 19. FHLBanks’ Retained Earnings                              In January 2013, six federal financial regulatory
    from 2007 to 2012 ($ billions)                                      agencies, including FHFA, issued a final rule that
    $12
                                                                        establishes new appraisal requirements for higher-
    $10                                                                 priced mortgage loans. The rule requires that, for
                                                                        higher-priced mortgage loans (i.e., loans that are
     $8
                                                                        secured by a consumer’s home and have interest rates
     $6
                                                           10.52
                                                                        above certain thresholds), creditors must use a licensed
     $4                                 7.55
                                                   8.58                 or certified appraiser to prepare a written appraisal
                              6.03                                      report based on a physical visit to the interior of the
     $2    3.69
                     2.94                                               property. The rule also requires creditors to disclose
     $0                                                                 the purpose of the appraisal and provide a free copy of
           07




                     08




                              09




                                       10




                                                   11




                                                           12
                                                                        any appraisal report to the mortgage applicants. The
          20




                   20




                            20




                                      20




                                                 20




                                                          20            rule, which implements amendments to the Truth in
    As shown in Figure 19 (see above), the FHLBanks’
                                                                        Lending Act, will be effective on January 18, 2014.70
    retained earnings have increased every year for the last
    five years and now tops $10 billion as of                           In November 2012, FHFA announced a partnership
    December 31, 2012.68 As long as the FHLBanks                        with the Consumer Financial Protection Bureau to
    are profitable, retained earnings should continue to                create a national mortgage database—the first com-
    increase because of the joint capital enhancement                   prehensive repository of detailed mortgage informa-
    plan provisions adopted by the FHLBanks last year                   tion—that will help streamline disparate datasets and
    to set aside 20% of their net income into a separate,               support regulators’ efforts to monitor the market.
    restricted retained earnings account.69                             Although multiple federal and state agencies—as well
Figure 19. FHLBanks’ Retained Earnings 2007 Through 2012 ($ billions)
                                                                        as private vendors—collect and maintain mortgage
    Selected FHFA and GSE Activities                                    information, there is no comprehensive national-scale
                                                                        database with all this information. The national
                                                                        mortgage database is intended to include information
    Over the last six months, there were several sig-
                                                                        spanning the life of a mortgage loan—from origina-
    nificant FHFA and GSE developments related to:
                                                                        tion through servicing—as well as a variety of borrower
    setting new standards within the mortgage industry
                                                                        characteristics. Data will be updated on a monthly
    for appraisals, securitization, and the availability of
                                                                        basis, fulfilling an FHFA requirement under HERA
    mortgage loan information; recovering enterprise
                                                                        to conduct a monthly mortgage market survey.71
    losses from past mortgage origination and servicing
    defects; increasing foreclosure prevention activities;              In October 2012, FHFA released a white paper
    continuing REO-related work; and tracking GSE                       for public input on a proposed new infrastructure
    performance. These developments and OIG’s efforts                   for the secondary mortgage market—a framework
    in relation to them are summarized below.                           for a common securitization platform (CSP) and a
                                                                        model pooling and servicing agreement. The paper
    Mortgage Industry Standards                                         looks to identify the core components of mortgage
    The following developments are examples of activi-                  securitization that will be required in the housing
    ties focused on reducing risk and enhancing stability               finance system moving forward. Identifying these
    within the overall housing market.                                  core components is critical, as they are linked to two
                                                                        cornerstone operational features: a CSP to process


                                               Semiannual Report to the Congress • October 1, 2012–March 31, 2013           45
payments and perform other multiple-issuer func-            On June 27, 2012, in response to OIG’s Evaluation of
tions and a contractual framework supporting the            FHFA’s Oversight of Fannie Mae’s Transfer of Mortgage
new infrastructure. Developing a new infrastructure         Servicing Rights from Bank of America to High Touch
for the secondary mortgage market is one of the key         Servicers (EVL-2012-008, September 18, 2012), the
goals of FHFA’s A Strategic Plan for Enterprise Con-        agency instituted, and transmitted to the enterprises,
servatorships and builds on other initiatives already       a policy governing substantial enterprise settlement
underway to align and improve the business practices        agreements. The policy details the roles and
of the enterprises.72                                       responsibilities of management at the enterprises, the
                                                            agency, the enterprises’ Boards of Directors, and any
On March 4, 2013, FHFA released the 2013 Con-
                                                            third-party reviewers. The purpose of the settlement
servatorship Scorecard for the enterprises. While the
                                                            policy is to ensure that all relevant parties and experts
scorecard details specific priorities for the enterprises
                                                            are given sufficient opportunities to express their
in 2013, of particular note is the creation of a new
                                                            views in order to enable the conservator to make
securitization infrastructure, including a CSP. A
                                                            a well-informed final decision. OIG is reviewing
new business entity will be established between the
                                                            whether the January 2013 agreement was approved in
enterprises that will, among other things, own and
                                                            compliance with applicable standards.
govern the structure of the CSP; develop the design,
scope, and functional requirements for the CSP’s            Foreclosure Prevention
modules; and develop the initial business operational
process model.73 Although this new entity will ini-         FHFA has shown increased involvement in the
tially be owned and funded by the enterprises, it will      prevention of foreclosures. In January 2013, FHFA’s
ultimately be headed by a CEO and Chairman of               Acting Director and HUD’s Secretary announced that
the Board independent from the enterprises and will         FHA and the enterprises will extend foreclosure pro-
have a location that is physically separate from the        tections for homeowners whose properties were dam-
enterprises.74                                              aged or destroyed as a result of Hurricane Sandy. The
                                                            90-day extension applies to homeowners with proper-
Recovery of Enterprise Losses                               ties in states where the President issued major disaster
                                                            declarations following Hurricane Sandy. The exten-
On January 7, 2013, FHFA issued a statement saying
                                                            sion applies to the initiation of foreclosures as well as
it has approved an $11.6 billion agreement between
                                                            foreclosures already in process. FHA is also suspending
Fannie Mae and Bank of America to resolve claims
                                                            evictions from properties secured by FHA mortgages
related to mortgages sold to Fannie Mae between
                                                            in the affected areas through April 30, 2013.76
2000 and 2008. These claims include repurchase
demands involving approximately 30,000 loans sold           Additionally, in its third quarter 2012 Foreclosure
by Bank of America or its affiliates. The agreement         Prevention Report, FHFA detailed actions that have
also provided for the transfer of servicing rights for      helped more than 2.1 million borrowers stay in their
roughly 1 million loans from Bank of America to spe-        homes and indicated that short sales and other mea-
cialty servicers. This transfer is structured to benefit    sures to avoid foreclosure are on the rise. According
borrowers and reduce future credit losses to Fannie         to the report, the enterprises completed more than
Mae. The agreement provides Fannie Mae with a               134,000 foreclosure prevention actions in the third
recovery of losses from origination and servicing           quarter of 2012, bringing the total number of foreclo-
defects that could have been absorbed by taxpayers in       sure prevention actions to more than 2.5 million since
the absence of a resolution of these matters.75

46    Federal Housing Finance Agency Office of Inspector General
the start of conservatorship, with nearly 1.3 million of   FHFA’s 2012 Performance and Accountability Report
those actions being permanent loan modifications.77        discusses the agency’s accomplishments, challenges,
                                                           and ongoing initiatives. Key accomplishments for the
In a recent report, FHFA’s Supervisory Risk Assessment
                                                           fiscal year included the following:
for Single-Family Real Estate Owned (AUD-2012-005,
July 19, 2012), OIG emphasized the importance of           •	 Providing results and conclusions of the enter-
foreclosure alternatives and prevention as the enter-         prises’ and FHLBanks’ 2011 examinations.
prises’ shadow inventory (i.e., a backlog of defaulted
                                                           •	 Producing A Strategic Plan for Enterprise Conser-
loans that is many times larger than their current
                                                              vatorships, which provides a road map for work
REO inventory) looms.
                                                              FHFA and the enterprises will undertake in the
                                                              next phase of conservatorship.
REO Pilot Initiative
FHFA’s A Strategic Plan for Enterprise Conservatorships    •	 Developing a new strategic plan for 2013-2017,
called for the implementation of the pilot REO bulk           which incorporates goals included in A Strategic
sales initiative—single sales of multiple properties,         Plan for Enterprise Conservatorships.
pursuant to an agreement to lease them to tenants          •	 Establishing a new Office of Strategic Initiatives
for an agreed term—and other creative strategies for          to coordinate and oversee the activities associated
placing foreclosed homes back into the marketplace to         with the conservatorship strategic plan.
reduce losses. Under Fannie Mae’s REO pilot initiative,
Pacifica Companies LLC purchased 699 Fannie Mae            •	 Issuing a white paper, Building a New Infrastruc-
properties in Florida, The Cogsville Group LLC                ture for the Secondary Mortgage Market, which
purchased 94 properties in Chicago, and Colony                proposes a CSP to replace the enterprises’ current
Capital LLC purchased 970 properties in California,           proprietary systems.
Arizona, and Nevada. This initiative targets the
                                                           •	 Appointing new CEOs for the enterprises and
hardest-hit metropolitan areas: Atlanta, Chicago, Las
                                                              increasing and realigning FHFA staff supervising
Vegas, Los Angeles, Phoenix, and parts of Florida.78
                                                              the companies.
OIG has continued to track the performance of
                                                           •	 Working with the enterprises to complete foreclo-
the REO initiative since issuing its July 2012 audit
                                                              sure prevention initiatives and enhance HARP to
entitled FHFA’s Supervisory Risk Assessment for
                                                              increase refinancings.
Single-Family Real Estate Owned (AUD-2012-005,
July 19, 2012).                                            •	 Completing the first REO pilot initiative to
                                                              dispose of approximately 1,772 Fannie Mae
FHFA and GSE Performance and                                  single-family foreclosed properties in areas
Accountability                                                hardest hit by the housing downturn.
In order to assess FHFA’s and the GSEs’ performance,       •	 Terminating a cease-and-desist order on the
OIG reviews and analyzes FHFA’s strategic goals and           Chicago FHLBank due to improvements in the
accountability reports. For this period, FHFA released        bank’s financial and capital positions, and deem-
the 2012 Performance and Accountability Report, its           ing the Seattle FHLBank “adequately capitalized”
strategic plan for 2013-2017, and updated projec-             due to its strengthened capital position.79
tions of potential draws for the enterprises. The key
results of these reports are highlighted below.

                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013         47
FHFA’s strategic plan for 2013-2017 sets forth the         In October 2012, FHFA released updated projec-
agency’s initiatives to improve current mortgage pro-      tions of the financial performance of the enterprises,
cesses and sets the stage for recovery in the housing      including potential draws under the PSPAs. These
finance system. The four strategic goals outlined in       updated projections show reduced cumulative Trea-
the plan are:                                              sury draws. Specifically, FHFA now estimates that the
                                                           enterprises will draw between $191 billion and
•	 safe and sound housing GSEs;
                                                           $209 billion by 2015. The key drivers of the
•	 stability, liquidity, and access in housing finance;    improved results include an overall reduction in
                                                           actual and projected credit-related expenses as well
•	 preserving and conserving enterprise assets; and        as changes in the dividend structure contained in the
•	 preparing for the future of housing finance in the      PSPAs, which eliminate the need to borrow from
   United States.                                          Treasury to pay dividends.82 During this report-
                                                           ing period, OIG issued an evaluation of the PSPA
The updated plan also incorporates key components          amendments (see page 9) that, among other things,
of FHFA’s A Strategic Plan for Enterprise Conserva-        analyzes the potential impact of the changes to the
torships released in February 2012.80 Specifically,        dividend framework.
the updated plan reiterates the three strategic goals
outlined in the February document—build, contract,
and maintain. It discusses FHFA’s plan to build a new
infrastructure for the secondary mortgage market,
its efforts to contract the enterprises’ presence in the
market by increasing the role of private sources of
capital, and its plans to continue to recover and mini-
mize taxpayer losses.81




48    Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • October 1, 2012–March 31, 2013   49
Section 3: Enterprise Reform

Introduction                                               and their exact role—and that of the larger housing
                                                           finance system—awaits legislative resolution.
This section offers a framework for understanding          Over time, as it became more obvious that the conser-
proposed reforms of the enterprises in relation to         vatorships would not be temporary, FHFA amended
what contributed to their financial difficulties follow-   its strategic plan to better describe its additional con-
ing the 2004-2007 “housing boom” and what they             servatorship responsibilities. In its strategic plan, FHFA
and FHFA have done to fix their problems while they        advises that its objective is (and has been) to guide the
wait for a legislative decision concerning their future    enterprises in a way that accomplishes what has gen-
role in the housing finance system.                        erally been agreed to—restoring their financial fitness
The enterprises continue to dominate the second-           and reducing their market footprint—while not pre-
ary mortgage market where loans are purchased;             cluding any of the major enterprise reform proposals,
bundled together into MBS;                                                           which range from privatizing to
and then bought, sold, or                                                            eliminating the enterprises.
held as investments. Indeed,        Since 2008, the                               Below, we briefly summarize
since September 2008, the                                                         the enterprises’ history, what
enterprises have owned or           enterprises have owned                        caused their liquidity prob-
guaranteed three out of every
four mortgages in the United
                                    or guaranteed three of                        lems, and FHFA’s strategy for
                                                                                  helping to restore them while
States.83
                                    four U.S. mortgages                           leaving open legislative options
Historically, the enterprises                                                     for reforming them. Against
were intended to help stabilize                                                   this backdrop, we highlight the
the secondary market and facilitate the flow of mort-                             major reform proposals on the
gage credit by purchasing mortgages from lenders,          table and the major stakeholders who offered them.
which, in turn, would be freed up to make more             Our goal is not to promote a particular policy but to
mortgage loans.84 As the housing boom collapsed,           provide useful information for the coming debate.
however, they became insolvent, resulting in their
entering conservatorships under FHFA’s supervision         Falling Into Crisis
in 2008. Since then, the agency has worked to con-
serve and preserve their assets and ensure that they       The housing GSEs have a long history. Understand-
follow prudent business practices.                         ing their role over the years is essential.
Initially, FHFA understood the conservatorships to
                                                           The Great Depression of the 1930s Leads
be more of a temporary “time out” to stabilize the
                                                           to Federal Intervention in the Housing
enterprises while, in the Acting Director’s words,
                                                           Market
“Congress and the Administration could figure out
how best to address future reforms.”85 But, five years     Before the 1930s, housing finance was exclusively
later, the enterprises remain in conservatorship,          the realm of the private sector. Typical loan


50    Federal Housing Finance Agency Office of Inspector General
conditions—up to 50% down payments, terms of             Housing and Urban Development Act reorganized
10 years or less, and large balloon payments—put         Fannie Mae as a private, shareholder-owned company
homeownership out of reach for many Americans.86         with government sponsorship. It also gave HUD
Without a nationwide housing finance market, the         regulatory authority over Fannie Mae and required
availability and pricing of mortgage loans also varied   that a reasonable portion of its mortgage purchases
widely across the country.87                             serve low- and moderate-income families.93

When the Great Depression of the 1930s hit, the          The Depression era reforms and the innovations
effects on housing were disastrous. Unemployment         that they fostered (e.g., the 30-year fixed rate and
climbed to over 23% in 1932. Up to a quarter of          80% LTV mortgage) were wildly successful from a
all mortgages were in default by 1933.88 And due to      homeownership perspective. From 1940 to 1970,
failures and mergers, half as many commercial banks      homeownership rates rose from about 44% to 63%.94
were operating in 1933 as had been in 1921.89 As the     But Fannie Mae had also become a monopoly.
country approached this economic nadir, the federal
                                                         With the Emergency Home Finance Act of 1970,
government created the FHLBank System in 1932
                                                         Congress sought to create a competitor in an
to serve as a reserve credit system to support housing
                                                         expanded secondary mortgage market while further
finance and provide relief to troubled homeowners
                                                         increasing homeownership. Freddie Mac was created
and lenders.90 Several other interventions followed.
                                                         in order to help thrift institutions manage the risk
                                                         associated with interest rate fluctuations.95
Creation of Fannie Mae and Freddie Mac
Fannie Mae was established in 1938 as a govern-          Thrifts are depository institutions, primarily for
ment-held association. Its mandate was to act as         consumer savings, such as savings banks and home
a secondary mortgage market facility to purchase,        loan associations. Often, thrifts funded mortgages—
hold, and sell loans insured by FHA. By purchasing       long-term obligations—with short-term debts (e.g.,
FHA-insured loans from private lenders, Fannie Mae       savings deposits). This presents a risk when the inter-
created liquidity in the mortgage market, providing      est rates of the short-term debts exceed the long-term
lenders with cash to fund new home loans.91              obligations.96

Over the years that followed, Congress altered Fannie    Freddie Mac thus was initially tasked with purchasing
Mae’s form and function in response to shifts in the     long-term mortgages from thrifts, which increased
country’s fiscal and economic situations. In 1954,       their mortgage funding capacity and reduced their
the Housing Act reorganized Fannie Mae as a mixed-       interest rate risk. In 1989, in the aftermath of the
ownership corporation with the federal government        savings and loan crisis of the 1980s that resulted in
and Fannie Mae’s lenders as eligible shareholders.92     billions of dollars of losses, Freddie Mac was reor-
The Housing Act required Fannie Mae to: improve          ganized as a publicly traded shareholder-owned
the availability of capital for home mortgage            corporation.97
financing by providing liquidity for mortgage            In 1992, given ongoing concerns about oversight of
investments and support the mortgage market if there     the enterprises, Congress passed the Federal Housing
was a threat to the economy’s stability. In 1968, the

                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013      51
Enterprises Financial Safety and Soundness Act. The         issued by the enterprises (known as agency MBS) and
law revised the regulatory structure of enterprise over-    private companies (known as private-label MBS).100
sight and clarified their roles in housing finance by:
                                                            The dominant players in the secondary mortgage
•	 reemphasizing the enterprises’ obligations to sup-       market prior to the housing boom, Fannie Mae and
   port mortgage finance through secondary market           Freddie Mac, strove to maintain their market share
   activities, especially during periods of economic        during the housing boom. In 2001, the enterprises
   stress;                                                  began buying—for their own investment portfolios—
                                                            private-label MBS, many of which were collateralized
•	 establishing the Office of Federal Housing Enter-
                                                            by subprime mortgages.101 According to GAO, the
   prise Oversight as an independent agency within
                                                            enterprises’ purchases of private-label MBS increased
   HUD responsible for monitoring the enterprises’
                                                            rapidly as a percentage of their retained mortgage
   safety and soundness;
                                                            portfolios from 2003 through 2006.102 These pur-
•	 requiring the enterprises to meet specific annual        chases—and parallel increases in their guarantee busi-
   goals for the purchase of mortgages serving low-         nesses—helped Fannie Mae’s assets and guaranteed
   and moderate-income families, special affordable         mortgages grow from $1.3 trillion in 2000 to
   housing for families, and housing located in cen-        $3.1 trillion in 2008, while Freddie Mac’s increased
   tral city, rural, and underserved areas; and             from $1 trillion to $2.2 trillion.103

•	 designating HUD as the regulatory authority              As their businesses multiplied, the enterprises
   of the enterprises, and specifying procedures for        expanded the scope of loans they would agree to pur-
   reviewing and approving new enterprise mortgage          chase and guarantee. Traditionally, the enterprises had
   program proposals (i.e., the HUD Secretary had           confined their business to lower-risk prime loans. For
   final approval of any new program proposal).98           example, Fannie Mae’s Selling Guide requires down
                                                            payments of at least 5% (and mortgage insurance for
Recent Housing Crisis Leads to                              mortgages covering more than 80% LTV) and debt-
Conservatorship                                             to-income ratios of 36% in most cases.104
From 2001 to 2006, the U.S. housing market saw a            But during the housing boom, Fannie Mae issued
massive rise in real property valuation. As single-family   unprecedented numbers of variances, or exceptions,
home prices increased an average of 12% per year,           from its underwriting guidelines that permitted it to
potential homebuyers and financial institutions alike       purchase, among other things, zero down payment
fought to participate in the booming market.99 As           mortgages made to buyers with low credit scores and
the housing boom proceeded, lenders increasingly            unverified income and assets.105
approved higher-risk, high-LTV (i.e., the ratio of
the loan value to the value of the home securing it)        Beginning in 2006, home prices started declining
mortgages for borrowers who had little to nothing for       precipitously and borrowers began defaulting, and
down payments, unverified incomes, and high debt            the enterprises owned or guaranteed mortgages worth
ratios. These mortgages were commonly referred to as        more than $5 trillion—nearly half of the U.S. resi-
subprime. The credit risks associated with such mort-       dential mortgage market.106 In 2007 and 2008, the
gages spread throughout the financial system as the         enterprises incurred substantial credit losses due to
mortgages were bundled into publicly traded MBS             borrowers not repaying their mortgages and declines
                                                            in the values of homes securing mortgages that


52    Federal Housing Finance Agency Office of Inspector General
they owned or guaranteed or that collateralized the         OIG audits or evaluations, are summarized below.
private-label MBS that they had purchased.107 The           Additionally, these efforts ensure that the enterprises
enterprises lost billions of dollars on their multi-        are available to implement whatever housing finance
trillion dollar MBS guarantee obligations and invest-       system reform is legislated.
ment portfolios.108
                                                            Over time, as it became more obvious that the
In early to mid-2008, investor confidence in the            conservatorships would not be temporary, FHFA
enterprises also deteriorated. This led to a sharp          began to prepare the enterprises for change. FHFA
increase in the enterprises’ borrowing costs and dras-      has implemented a variety of programmatic ini-
tic declines in shareholder equity as measured by the       tiatives designed to facilitate any reforms that are
prices of their publicly traded common stock.109            ultimately selected.

In response to the enterprises’ deteriorating financial
condition and concerns about the stability of finan-        Working to Stabilize the
cial markets, Congress enacted HERA on July 30,             Enterprises
2008.110 HERA established FHFA as the regulator
of the enterprises and the FHLBank System and set
                                                            Remediating Losses
forth its regulatory responsibilities and supervisory
powers, which include expanded authority to place           In the aftermath of the housing bust, it became
the enterprises in conservatorship. HERA also autho-        apparent that mortgage seller/servicers and financial
rized Treasury to support the enterprises financially.111   institutions had engaged in behavior ranging from
                                                            questionable to illegal in order to profit from mort-
Six weeks later, on September 6, 2008, the                  gages and private-label MBS sold to the enterprises.
enterprises entered into conservatorships overseen by       FHFA has made efforts to remediate those problems.
FHFA due to the significant deterioration in their
financial conditions.112 Along with the conservator-        Lawsuits Against 17 Financial Institutions
ships came substantial financial assistance for the
                                                            The enterprises did not have access to the mortgages
enterprises: to date, Treasury has invested
                                                            underlying the private-label MBS they so heavily
$187.5 billion in the enterprises and the Federal
                                                            invested in, leaving them to rely on financial institu-
Reserve has purchased more than $1.1 trillion of
                                                            tions to accurately describe the mortgages backing the
agency MBS.113
                                                            securities in marketing and sales materials, as required
                                                            by securities laws. Under these laws, financial insti-
Enterprises in Conservatorship                              tutions must accurately describe the mortgages that
                                                            back the securities being sold.115
Initially, FHFA’s conservatorship was regarded as
a temporary “time out”—a chance to stabilize the            During the summer of 2011, FHFA filed lawsuits
enterprises and housing market while legislative            against 17 financial institutions,116 alleging violations
reform was debated and decided. During this time,           of federal and state securities laws in connection with
the agency took steps to stabilize the enterprises by       the sale of private-label MBS to the enterprises.117
focusing on mitigating their losses, ensuring families      FHFA is pursuing claims regarding the inadequate
could get mortgage loans, and helping borrowers             disclosures filed in securities offering documents.118
avoid foreclosure.114 Examples of the agency’s sta-         FHFA alleges in its complaints that the mortgage
bilization efforts, some of which were the focus of

                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013          53
collateral securing the private-label MBS had mate-       are later found not to comply, then the enterprises
rially different and higher risk characteristics than     can require that the sellers repurchase them. Freddie
described in the offering materials.119                   Mac’s settlement resolved most past, present, and
                                                          future repurchase issues associated with 787,000
The complaints seek billions of dollars in damages.120
                                                          loans sold to it by Countrywide. In contrast, Fannie
In addition, FHFA seeks to recover losses for negligent
                                                          Mae’s settlement with Bank of America covered only
misrepresentations.121 Any recovered funds resulting
                                                          past and present claims, not future ones.123
from these efforts may ultimately reduce taxpayers’
losses from the enterprises’ financial difficulties.122   On January 7, 2013, FHFA approved a supplemental
                                                          agreement between Fannie Mae and Bank of America
Bank of America Buyback Settlement                        worth $11 billion to resolve present and future claims
In early 2008, Bank of America purchased Country-         related to mortgages sold to Fannie Mae between
wide, which was on the verge of failure. Countrywide      2000 and 2008. In addition, FHFA approved the
was one of the most aggressive originators of nontra-     transfer of servicing rights for roughly 1 million
ditional mortgages (e.g., Alt-A and no down pay-          loans from Bank of America to specialty servicers.
ment), and it sold a large number of these mortgages      This transfer of servicing rights benefits borrowers
to the enterprises. In late December 2010, FHFA           and reduces future credit losses for Fannie Mae. The
approved two agreements settling various repurchase       agreements provide Fannie Mae with a recovery of
claims between the enterprises and Bank of America,       losses from origination and servicing defects that tax-
totaling $2.87 billion ($1.35 billion for Freddie Mac     payers might have had to absorb without a resolution
and $1.52 billion for Fannie Mae).                        to these matters.124

As a condition of their purchases of mortgages, the
enterprises require sellers to represent and warrant        The following minitutorial (see page 55)
that their mortgages comply with the enterprises’           details OIG’s reports on the enterprises’
underwriting and eligibility standards. If mortgages        settlements and transactions with Bank of
                                                            America.




54    Federal Housing Finance Agency Office of Inspector General
                              Bank of America Settlements

OIG has issued reports on FHFA’s oversight of Freddie Mac’s settlement with Bank of America
and Fannie Mae’s transfer of mortgage servicing rights (MSR) from Bank of America. Regard-
ing Freddie Mac’s settlement, in Evaluation of the Federal Housing Finance Agency’s Oversight
of Freddie Mac’s Repurchase Settlement with Bank of America (EVL-2011-006, September 27,
2011), we raised concerns about the methodology that Freddie Mac used to determine the
number of defective loans purchased from Bank of America that were eligible for repurchase.
We determined that Freddie Mac’s methodology underestimated the number of defective loans
that should have been covered by the settlement because it tended to exclude from its review
defective loans that were originated more than two years prior to default. Thus, for loans origi-
nated in 2006 alone, nearly 100,000 loans were not reviewed for possible repurchase claims.

In a follow-up report, Follow-up on Freddie Mac’s Loan Repurchase Process (EVL-2012-007,
September 13, 2012), we found that FHFA and Freddie Mac had acted on the concerns raised
in the initial report by adopting a more expansive loan review process. Specifically, Freddie
Mac changed its policy to review for potential repurchase claims significantly larger numbers
of loans that defaulted more than two years after origination. We determined that, as a result
of its new loan review process, Freddie Mac will realize between $2.2 billion and $3.4 billion in
additional recoveries.

Regarding MSR, in July 2011, Fannie Mae transferred MSR for 384,000 mortgage loans and
paid Bank of America a $421 million transfer fee. The deal received media attention, and
members of Congress asked OIG to investigate the transaction. In Evaluation of FHFA’s Over-
sight of Fannie Mae’s Transfer of Mortgage Servicing Rights from Bank of America to High Touch
Servicers (EVL-2012-008, September 18, 2012), we concluded the transaction was only the
latest in a series of transactions under the High Touch Servicing Program, the concept behind
which we deemed to be sound, calling it “a fundamentally promising initiative with the potential
to reduce Fannie Mae’s—and, by extension, the taxpayers’—losses on mortgage guarantees.”
However, we found that FHFA could improve its oversight of the program and recommended that
the agency consider revising its delegation of authorities to require its preapproval of “unusual,
high-cost, new initiatives, like the High Touch Servicing Program.”




                             Semiannual Report to the Congress • October 1, 2012–March 31, 2013      55
Lehman Brothers Holdings Inc. Bankruptcy Claim              Preventing Further Losses
On September 15, 2008, Lehman Brothers Hold-                Fannie Mae began the High Touch Servicing Program
ings Inc. filed for Chapter 11 bankruptcy protection,       in 2009 when the enterprise discovered that nearly
which allows a company to reorganize its business.          70% of its losses were the result of nonperforming
Many of Lehman’s U.S. subsidiaries and affiliates soon      mortgages held in a particular mortgage portfolio
did the same (collectively, the Lehman Entities).125        with a principal balance of $300-$400 billion.131
                                                            Fannie Mae decided to transfer to a specialty servicer
When the bankruptcies were filed, Freddie Mac had
                                                            MSR for that portfolio to reduce further losses.132
multiple ongoing business relationships with the
                                                            Unlike the typical loan servicer, specialty servicers
Lehman Entities. These business relationships gave
                                                            make significantly more contact with at-risk
rise to several economic claims.126
                                                            borrowers, for instance, informing them of the
On September 22, 2009, FHFA filed proofs of claim           consequences of defaulting and describing ways of
in the Lehman bankruptcies.127 On December 6,               avoiding foreclosure. High touch servicing, therefore,
2011, the bankruptcy court confirmed Lehman’s plan          has the potential to reduce rates of default and the
for reorganization. Among other things, the plan sets       accompanying foreclosure losses.
aside $1.2 billion for Freddie Mac’s priority claim
                                                            Between 2009 and 2011, Fannie Mae invested
relating to losses incurred on short-term unsecured
                                                            $1.5 billion in the program in order to transfer
loans made to Lehman. In the event that Freddie Mac’s
                                                            1.1 million mortgages to specialty servicers. As part
claim is not accorded priority status, it will be treated
                                                            of the program, Fannie Mae paid transfer fees to the
as a senior unsecured claim under the plan and will
                                                            original servicers above the contractual fee.133 The
receive an estimated distribution of 21% (or approxi-
                                                            justification for paying this premium is an estimated
mately $250 million) over the next three years.128
                                                            savings of 20% on credit losses that Fannie Mae esti-
                                                            mates that specialty servicers can generate.134
Strengthening Underwriting Oversight
As mentioned above, Fannie Mae issued a substantial         Preventing Foreclosure
number of variances to traditional underwriting stan-
                                                            From the start of the conservatorships through
dards to purchase high-risk mortgages, thereby effec-
                                                            December 2011, the enterprises completed
tively loosening these standards. However, FHFA’s
                                                            2.1 million foreclosure prevention transactions,
efforts to address these practices early in its conserva-
                                                            including permanent loan modifications and other
torship were limited, as OIG reported in 2012.129
                                                            forms of assistance.135 About 1.8 million of these
As the housing market collapsed, Fannie Mae drasti-         actions—including nearly 1.1 million permanent
cally reduced the number of variances it had granted.       loan modifications—allowed borrowers to retain
As of September 2011, the enterprise had reduced            homeownership.136 Many borrowers had their
outstanding variances from approximately 11,000             monthly payments reduced by more than 30%.137
for 800 lenders to 638 variances for 188 lenders.
                                                            FHFA’s signature foreclosure prevention initiative is
Many of the canceled variances related to higher-risk
                                                            HARP. Introduced in 2009 to help borrowers who
features, such as loans made with unverified income
                                                            were unable to refinance due to a decline in their
or assets (i.e., Alt-A mortgages).130
                                                            home’s value,138 the program’s goal was to refinance
                                                            mortgage loans held or guaranteed by the enterprises
                                                            at a lower interest rate and to a shorter term that

56    Federal Housing Finance Agency Office of Inspector General
would more quickly build equity and get the                made explicit when FHFA released its own strategic
borrower out of an “underwater” situation.139              plan titled Preparing a Foundation for a More Efficient
                                                           and Effective Housing Finance System.144 The agency’s
To offer the benefits of HARP to more borrowers,
                                                           overarching strategy incorporates key components
FHFA changed the program in 2011 (referred to as
                                                           of its more specific plan for the enterprises under
HARP 2.0). Highlighted changes include the removal
                                                           conservatorships in order to “set the stage for recov-
of certain risk-based fees, LTV ceilings, and particu-
                                                           ery and an improved system of housing finance.”145
lar property appraisals. Certain representations and
                                                           FHFA sees its conservatorship work of contracting
warranties procedures were also waived.140 In addition
                                                           the enterprises and building a new mortgage market
to reducing foreclosure risk, these changes reduce the
                                                           infrastructure to be part of its more general goal of
enterprises’ credit risk and bring greater stability to
                                                           preparing for the future of housing finance.146
the mortgage markets.141 The program’s end date has
been extended to December 31, 2013.142                     Below, we briefly summarize what FHFA has done
                                                           and plans to do under its strategic goal to set the
Preparing for Change                                       enterprises on a path toward reform.

                                                           Additionally, FHFA has made it a goal to shrink the
In February 2012, FHFA recognized that there was           enterprises under its conservatorship; the agency
“no near-term resolution in sight” for the enter-          sees this as consistent with many of the reform
prises and released a five-year strategic plan for the     proposals, which generally envision their reduced
enterprises that would “support any outcome of             role and an increased role for the private sector. For
the leading legislative proposals.” The plan focuses       example, FHFA worked with Treasury to amend the
on extending actions that FHFA has already begun           PSPAs—the investment mechanisms used to rescue
or implemented to meet its mandates of putting             the enterprises from insolvency. Now, every cent
the enterprises on sound financial footing and             of enterprise net worth (above a specified amount)
reorganizing, rehabilitating, or winding up their          must go back to the taxpayers (who have invested
affairs.                                                   $187.5 billion in their operations to date), and
                                                           the enterprises must reduce their investments
Pointedly subtitled The Next Chapter in a Story that
                                                           portfolios by 15% each year.147
Needs an Ending, FHFA’s strategic plan for the con-
servatorships is part of its more general aim to lay the
                                                           Senior Preferred Stock Purchase Agreement
groundwork for housing finance reform. Specifically,
                                                           Amendments
the agency’s goals for its conservatorships are to:
                                                           HERA authorized Treasury to buy obligations and
•	 build a new infrastructure for the secondary            other securities from the enterprises.148 On
   mortgage market;                                        September 7, 2008, Treasury established individual
•	 contract the enterprises’ market presence and           PSPAs with the enterprises through FHFA. The
   shrink them; and                                        PSPAs legally bind the U.S. government, through
                                                           Treasury, to provide the capital necessary to maintain
•	 maintain its attempts to prevent foreclosures and       the enterprises’ net worth at or about zero (sub-
   to keep money for mortgage loans available.143          ject to a cap), thereby, helping to reassure investors
                                                           concerning the enterprises’ debt and their guaran-
A few months later, in October 2012, the agency’s
                                                           teed MBS.149 Treasury’s purchases were intended to
general objective to prepare for housing reform was

                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013       57
Figure 20. Actual and Projected Year-end Values of Total Retained Portfolios Under the Terms of the
PSPAs ($ millions)

         $1,750,000


         $1,500,000


         $1,250,000

                                                                                                  Actual
         $1,000,000
                                                                                                  Projected

          $750,000


          $500,000


          $250,000
                      08


                           09


                                 10


                                        11


                                              12


                                                      13


                                                           14


                                                                   15


                                                                         16


                                                                                17


                                                                                       18
                  20


                           20


                                20


                                      20


                                             20


                                                    20


                                                           20


                                                                   20


                                                                        20


                                                                               20


                                                                                      20
prevent the enterprises’ insolvency and to improve         payment of a fixed dividend could have called into
investor confidence in the enterprises’ ability to meet    question the adequacy of the financial commitment
their obligations and provide the mortgage market          contained in the PSPAs.”154
with liquidity.150
                                                           The August 2012 amendments to the PSPAs also
On May 6, 2009, Treasury amended the initial               require a quicker reduction of their investment port-
agreements by doubling the funding commitment to           folios. The annual reduction rate is now 15% instead
each enterprise, increasing the maximum size of each       of 10% (the rate required by the previous iterations of
enterprise’s retained mortgage portfolio, and              the PSPAs).155 Such a rate of reduction is estimated to
allowing each enterprise to increase its indebtedness      enable the enterprises to reach a maximum retained
(i.e., the amount of money it owed). On                    portfolio of $250 billion each (or $500 billion com-
December 24, 2009, Treasury and FHFA agreed to             bined) by 2018. Figure 20 (see above) shows the actu-
further amendments to the PSPAs, which included            al and projected declines in the enterprises’ retained
additional financial support for each enterprise           mortgage portfolios pursuant to the revised PSPAs.
through the end of 2012 and changes to the limits
                                                           The faster reduction in the retained mortgage port-
on their retained
            Figuremortgage
                     20. Actualportfolios.151
                                   Total Retained Portfoliofolio
                                                            and will
                                                                 Projected   Retained
                                                                     further reduce  risk exposure and simplify
                     Portfolio Under the Terms of the PSPAs ($ millions)
On August 17, 2012, Treasury and FHFA again                the operations of the enterprises.156 FHFA expects
amended the PSPAs. The most notable change was             the amendments to help wind down the enterprises’
the replacement of the fixed 10% dividend payment          investment portfolios more quickly and make sure
with a quarterly sweep of the enterprises’ net worth       that their earnings benefit taxpayers; support the flow
above a specified amount. This was intended to
                            152
                                                           of mortgage credit during a transition to a reformed
ensure stability, fully capture financial benefits for     housing finance market; and provide greater certainty
taxpayers, and eliminate the need for the enterprises      regarding the financial strength of the enterprises.157
to continue borrowing from Treasury to pay divi-
                                                           FHFA also plans to simplify and shrink the
dends.153 According to FHFA’s Acting Director, “As
                                                           enterprises’ operations to reduce their dominance in
Fannie Mae and Freddie Mac shrink, the continued

58    Federal Housing Finance Agency Office of Inspector General
the market across all three of their lines of business—                                   In September 2011, FHFA announced its intention
single-family, multifamily, and capital markets (issuing                                  to continue on a path of gradual price increases based
debt securities).158 Among other means, FHFA is                                           on risk and the cost of capital.162 The Temporary Pay-
working to achieve this by increasing guarantee fee                                       roll Tax Cut Continuation Act of 2011 also directed
pricing.159                                                                               FHFA to raise the average guarantee fees charged
                                                                                          in 2012 by at least 10 basis points greater than the
Increasing Guarantee Fees                                                                 average guarantee fees charged in 2011 (1 basis point
Like insurance companies, each enterprise charges a                                       is equivalent to 1/100 of 1 percentage point, in this
premium in the form of a guarantee fee for its guaran-                                    example, the 10 basis points equals 0.10%).163
tee of principal and interest payments on the loans cov-                                  On August 31, 2012, FHFA announced that the
ered by its MBS. This guarantee fee is intended to offset                                 enterprises will again raise guarantee fees on sin-
expected credit losses from borrower defaults. Lender                                     gle-family mortgages by an average of 10 basis
guarantee fee payments are generally ongoing monthly                                      points.164 This increase will increase borrowing costs
payments and frequently include an up-front payment                                       and will make the guarantee fees for lenders delivering
at the time of purchase. A lender typically passes the                                    large volumes of loans more uniform with fees for
cost of the guarantee fee on to the borrower.160                                          lenders delivering smaller volumes. According to
The enterprises consider many factors in deter-                                           FHFA, this increase is also intended to reduce the sub-
mining the rates of guarantee fees, including the                                         sidization of higher-risk mortgages by lower-risk ones.
estimated cost of guaranteeing specific mortgages,                                        It will do this by applying larger increases on guaran-
competitive conditions in the market for bearing                                          tee fees for loans with maturities longer than
mortgage credit risk, the relative pricing of each                                        15 years.165 Figure 21 (see below) represents the
enterprise’s MBS, the enterprises’ public mission,                                        increasing trend in guarantee fees from 2000 to the
and targeted returns on capital.161                                                       present.


Figure 21. Enterprises’ Single-Family Guarantee Fee Pricing Over Time
                          35


                          33
                                           Housing Boom Years               Pre-conservatorship        Conservatorship Years
                                                                               Crisis Years
                          31


                          29


                          27
           Basis Points




                                                                                                                                     Fannie Mae
                          25
                                                                                                                                     Freddie Mac

                          23


                          21


                          19


                          17


                          15
                                00


                                      01


                                            02


                                                    03


                                                            04


                                                                  05


                                                                        06


                                                                                   07


                                                                                            08


                                                                                                   09


                                                                                                              10


                                                                                                                      11


                                                                                                                                12
                               20


                                     20


                                           20


                                                  20


                                                          20


                                                                 20


                                                                       20


                                                                                20


                                                                                          20


                                                                                                  20


                                                                                                           20


                                                                                                                   20


                                                                                                                               20
                                                                                                                         Q2




                                                         Semiannual Report to the Congress • October 1, 2012–March 31, 2013                        59
FHFA has stated that raising guarantee fees also may        new market infrastructure that, among other things,
lead to greater private-sector participation in the mort-   may reduce obstacles to private participation.168 For
gage market by potentially bringing the enterprises’        example, FHFA has been standardizing business
fees more in line with what private entities—without        practices across both enterprises and is exploring the
government support—would be expected to charge.166          implementation of a new securitization platform
                                                            (the mechanism that bundles mortgages into securi-
However, despite FHFA’s steps to shrink the enter-
                                                            ties that are sold to investors). In addition, FHFA is
prises’ footprint in the secondary mortgage market,
                                                            examining mortgage servicing reform across multiple
there is currently no private-sector entity that can
                                                            areas and improved loan-level data and document
fill their shoes; new mortgages alone account for
                                                            storage. The agency plans for all these elements to
$100 billion in capital per month.167 And, as shown
                                                            comprise an open, accessible structure to encourage
in Figure 22 (see below), the enterprises have once
                                                            investor confidence and entry into the market.169
again assumed the dominant position in the MBS
market since 2008; indeed, Fannie Mae, Freddie
                                                            Securitization
Mac, and Ginnie Mae issued approximately 100%
of MBS in 2012.                                             On March 4, 2013, FHFA announced that a new
                                                            business entity will be established between the enter-
In recognition that the enterprises’ dominant position      prises.170 FHFA believes a new securitization infrastruc-
in the market may change, FHFA intends to create a          ture, separate from the two enterprises, is important


Figure 22. Enterprises’ Dominance in the MBS Market

       100%

        90%

        80%

        70%

        60%

        50%

        40%

        30%

        20%

        10%

          0%
                01


                        02


                               03


                                       04


                                               05


                                                       06


                                                              07


                                                                     08


                                                                              09


                                                                                     10


                                                                                             11


                                                                                                     12
               20


                      20


                              20


                                     20


                                             20


                                                     20


                                                            20


                                                                    20


                                                                             20


                                                                                    20


                                                                                           20


                                                                                                   20




                                        Enterprise    Ginnie Mae    Private Label



60    Federal Housing Finance Agency Office of Inspector General
to support a new secondary                                                       and foreclosure timelines)
mortgage market.                                                                 and introduced a standard
                                    According to FHFA,                           borrower response package
According to FHFA, the new
entity will function as a mar-      a new mortgage                               allowing the servicer to simul-
                                                                                 taneously evaluate a borrower
ket utility and is not intended
to rebuild the infrastructures      market needs new                             for multiple foreclosure
                                                                                 prevention possibilities, as well
of the enterprises. Initially,
it will be owned and funded
                                    securitization                               as new mortgage modification
                                                                                 and evaluation options. The
by the enterprises, but its
functions will be designed to
                                    infrastructure                               package also includes borrower
                                                                                 contact timelines and call
operate as an independent
                                                                                 center standards.175
infrastructure—operable
across several platforms and physically located sep-      Joint Mortgage Servicing Compensation Initiative
arate from the enterprises. FHFA states that the
combination of these attributes will allow access and     The enterprises launched the Joint Servicing Com-
input from industry participants. With the overarch-      pensation Initiative in January 2011 to reform the
ing goal to create something of value for the future      servicing model for single-family mortgage loans.176
mortgage market, FHFA believes that the design is         The current model consists of a servicing fee included
flexible so it can meet the direction and goals policy-   in the loan’s interest rate. When the servicer collects
makers set for housing finance reform.                    a payment from the borrower, it receives a portion of
                                                          the interest as payment for servicing the loan.177 In
The governance and ownership structure described          general (i.e., in an environment of pre-housing boom
above is for the initial phase of the new securitiza-     default rates), this small percentage of the mortgage
tion platform. However, as the enterprises move           interest payment is more than enough to cover the
forward, their securitization infrastructure must be      expense of servicing the loan. However, when a large
updated and maintained as well, and where possi-          number of a servicer’s loans are nonperforming (i.e.,
ble, taxpayers’ dollars should be invested once, not      the borrowers are not making their mortgage pay-
twice.171                                                 ments), the traditional fees received from the per-
                                                          forming loans do not cover the servicer’s expenses.178
Servicing Alignment Initiative
                                                          According to FHFA, the Joint Servicing Compensa-
FHFA’s SAI outlines common guidelines for servicing
                                                          tion Initiative is intended to ensure a profitable and
enterprise loans with special attention to servicing
                                                          accessible business model for servicers, execution and
delinquent loans.172 The initiative has incentives and
                                                          nonperforming loan management options for origi-
penalties intended to encourage servicer compliance
                                                          nators, and the preservation of consumer choice and
with the updated guidelines.173
                                                          market liquidity.179
An important feature of the initiative involves loan
                                                          In September 2011, FHFA presented two alterna-
servicer outreach to delinquent borrowers earlier than
                                                          tive compensation structures. The first consists of a
has ordinarily occurred in order to reduce delinquen-
                                                          reduced servicing fee and a reserve account containing
cies and mitigate credit losses.174 In June 2012, FHFA
                                                          the remainder of the servicing fee available to the ser-
issued new guidance focusing on three major servic-
                                                          vicer for expenses incurred on nonperforming loans.180
ing areas (i.e., borrower contact, loan modification,

                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013        61
The second proposed model is a “fee for service”           the loans they are selling. Representations and warran-
model, in which the guarantor of the loan pays the         ties are outlined in lender contracts and purchasing
servicer a fee per loan, regardless of the size of the     documents, such as underwriting and documentation
mortgage or whether or not the loan is performing.         standards. Representation or warranty violations may
The interest portion of the borrower’s mortgage            breach the lender contract, which provides the enter-
payment is the source of funding for fees paid to the      prises with contractual remedies, including demand-
servicer under both models.181                             ing that the lender repurchase the defective loan
                                                           (known as a “put back” or “buy back”).186 Pursuing a
Uniform Mortgage Data Program                              buy back remedy may help compensate an enterprise
On May 24, 2010, FHFA announced an initiative              for losses that are the legal responsibility of another
to improve the consistency and quality of data for         party. Still, such remedies are costly and, some argue,
appraisals and other loan information. This initiative     have delayed market recovery because they led to new
will enhance the collateral, borrower, and loan data       mortgages being underwritten to stricter standards
submitted to the enterprises. The Uniform Mortgage         than the enterprises require.187
Data Program is a long-term joint effort to create         On September 11, 2012, FHFA announced that the
uniform data standards and collection processes.182        enterprises would be launching a new representation
Though the enterprises are working together on             and warranty framework for conventional loans (loans
this initiative, each enterprise operates as a separate    not insured or guaranteed by FHA, VA, or USDA)
business and, according to FHFA, will continue to          funded, acquired, securitized, or guaranteed on or
exercise independent business judgment on the use of       after January 1, 2013. The new framework clarifies
loan data.183                                              lenders’ long-term repurchase risk on loans by setting
FHFA believes that a common framework will result          time limits on when repurchase claims can be asserted
in better lender efficiency and enterprise risk manage-    (no such time limits exist on loans originated prior
ment. Likewise, common data standards are expected         to 2013).188 The objective of the new framework is
to lead to more consistent data submissions from           enhanced transparency for lenders and other industry
appraisers, mortgage lenders, servicers, and others.       participants, which is expected to result in greater
The enterprises will deploy the data standards pro-        efficiency and better access to mortgage financing.189
gram in phases, through a common platform that will        As long as the mortgages have an acceptable pay-
include stakeholder input.184                              ment history for at least 36 months and meet other
A long-term goal of this initiative is to reduce repre-    eligibility requirements, lenders will not be subject
sentation and warranty risk through up-front moni-         to repurchase demands.190 The lender’s responsibility
toring of loan quality.185                                 to meet the requirements for loan quality, including
                                                           responsible underwriting, remains the same.191
New Representations and Warranties Framework               In a recent speech, FHFA’s Acting Director noted
Loan sellers’ representations and warranties to the        cautious optimism about the housing market’s future
enterprises are intended to protect the enterprises        due to the signs of stabilization he saw in some
from credit losses on loans that do not meet their         sectors of the market.192 Still, one of the biggest
eligibility standards. In effect, they are a lender’s      challenges remaining to FHFA is the lack of guidance
assurance that the enterprises can rely on certain facts   or consensus from the Administration and Congress
(representations) and circumstances (warranties) about     on ending the conservatorships of the enterprises.


62    Federal Housing Finance Agency Office of Inspector General
Indeed, last month before the House Financial Ser-          Below, we identify some of the key reformers and
vices Committee, Acting Director DeMarco testified          summarize the major categories of their reform
that “the biggest impediment, I suppose, for me, or         proposals.
the thing I could use most from Congress is . . . leg-
islative direction.”193 Today, the future of the housing    Reformers
finance system is uncertain.
                                                            The Administration
The following identifies various stakeholders and
                                                            The Administration seeks to change the government’s
describes reform proposals that they have offered.
                                                            role in housing, make the private market the primary
                                                            source of mortgage credit, and ultimately phase out
Reformers and Reforms                                       the enterprises’ role in the mortgage market.197 The
                                                            government, according to the Administration, should
In July 2010, Congress enacted a wide-ranging               provide robust oversight, consumer and investor
legislative response to the nation’s recession: the         protection, targeted assistance for low- and moderate-
Dodd-Frank Wall Street Reform and Consumer                  income homeowners and renters, and support for
Protection Act.194 The law contains several housing         market stability and crisis response.198
finance reforms that are intended to address practices
                                                            With these principles in mind, Reforming America’s
that contributed to the housing boom, including
                                                            Housing Finance Market outlines three options for a
reducing the risk of borrower default. It also requires
                                                            privatized system of housing finance with targeted
MBS issuers, in some circumstances, to retain credit
                                                            assistance from USDA, FHA, and VA. The primary
risk in the assets they securitize, that is, to keep some
                                                            difference between these proposals is that in option
skin in the game.195 Although this law was intended
                                                            one, there is no broad government guarantee; in
to address some important problems that led to the
                                                            option two, there is a broad government guarantee
housing crisis—lenders with little to lose loaning
                                                            only in times of crisis; and in option three, there is
to borrowers with little to repay—it did not resolve
                                                            a standing government guarantee with significant
other fundamental concerns about the current hous-
                                                            private capital requirements.199
ing finance system, such as the appropriate role for
the federal government in housing finance.
                                                            Legislative Proposals
In February 2011, Treasury and HUD, on behalf               Congressional enterprise reform bills have included a
of the Administration, issued a report to Congress,         modification of the enterprises’ current charter or the
Reforming America’s Housing Finance Market, which           creation of a new private or government-owned com-
addresses the role of housing finance reform and out-       pany that would purchase and securitize mortgage
lines varying degrees of government support. Since          loans with guarantee features.200 Proposals concerning
then, other interested parties have proposed plans to       the existing enterprises generally focus on improv-
reform housing finance, government support, and the         ing accountability, lowering the cost to the govern-
enterprises. Congress, academics, industry experts,         ment, and reducing their competitive advantage in
and interest groups have proposed comprehensive             the marketplace.201 Additionally, during the 112th
and incremental reforms.196                                 Congress, members of Congress introduced four bills
                                                            with deadlines for the enterprises to either return to
                                                            shareholder control or be dissolved.202



                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013         63
Academics, Industry Experts, and Interest Groups           addressed, but they need to be resolved if the reforms
Academics and industry experts have suggested a            are intended to respond to the causes of the financial
wide range of enterprise reform proposals. Interest        crisis.
groups, representing consumers, the banking
                                                           Government Model
industry, mortgage originators, and other housing
finance groups have also made reform proposals.203         Generally, in the government model, a wholly owned
Though the proposals vary, they generally envision         government corporation would replace the enterprises
a private mortgage market backed by some type of           for the purpose of purchasing approved residential
governmental guarantee or reinsurance.204                  mortgage products, securitizing them, and selling
                                                           them to investors. Approved mortgage originators
Certain academic proposals argue for less volatility in
                                                           would pay a guarantee fee to the corporation in order
housing credit and more protection in times of finan-
                                                           to secure timely payment of interest and principal on
cial crisis by having an entity step in as a buyer “of
                                                           the resulting security. This type of proposal requires
last resort” providing additional liquidity.205 Another
                                                           the federal government to back all of the corporation’s
proposal argues for splitting the enterprises into enti-
                                                           obligations.212 Alternatively, the corporation under
ties that respectively hold their collective good and
                                                           another variant of this proposal can guarantee the
bad assets (e.g., one enterprise takes control of their
                                                           principal and interest payments of MBS without pur-
combined “good” assets and the other takes the “bad”
                                                           chasing the underlying security similar to the security
assets).206
                                                           wrap provided by Ginnie Mae.213
Reforms                                                    The enterprises could be converted into a government
Regardless of the source, the reform proposals gener-      corporation similar to Ginnie Mae under this model.
ally fall into one of three broad categories:              Further, like Ginnie Mae, the government corpora-
                                                           tion could contract out aspects of its operations to
•	 government model;207                                    minimize staffing.214
•	 private model;208 or
                                                           Private Model
•	 hybrid model.  209
                                                           The private model would allow private companies to
Within these broad categories, some proposals seek         purchase and securitize mortgages from lenders and
modest reforms that may be implemented more                guarantee the payment of principal and interest on
rapidly, while others seek more fundamental changes        the resulting securities. Under this model, there is no
with longer implementation periods—some as long            explicit guarantee of the securities or companies by
as 15 years.210 Some proposals suggest the creation of     the federal government. The key to most of the pri-
a new government or private entity that will pur-          vate model options is the wind down of the existing
chase and securitize mortgage products; a few directly     enterprises over 10- or 15-year periods.215 In theory,
address the existing enterprises and their potential       this will incentivize the private sector as guarantee
resolution.211 What the proposals all have in com-         fees increase to what the market will bear. One vari-
mon is that they have not progressed beyond general        ation on the private model proposes that private com-
concepts and have been presented only at a high level.     panies should purchase and securitize mortgages from
More granular issues, such as establishing underwrit-      loan originators, but a governmental agency would
ing and mortgage eligibility standards have not been       continue to guarantee the timely payment of the


64    Federal Housing Finance Agency Office of Inspector General
principal and interest on those securities. This agency   Among the hybrid model proposals there are divergent
is then phased out after a 10-year period.216             opinions on the appropriate level of federal participa-
                                                          tion in guaranteeing MBS. For instance, one proposal
Some variants on the private model propose utilizing
                                                          suggests limiting the federal guarantee under normal
the existing enterprises as the private securitizer(s).
                                                          circumstances.223 A similar proposal sets the target
Existing stockholders in the enterprises would receive
                                                          during normal market conditions at less than 10%.224
shares in the new private company formed from the
existing enterprises that would trade on one or more      Pricing of the guarantee also is a significant issue for
stock exchanges. This proposal notes that if the exist-   the plans. Risk-based pricing proposals, which price
ing enterprises’ market share is considered too domi-     the guarantee fee based on estimates of risk, are com-
nant, multiple smaller companies may be formed or         mon. One proposal estimates that the fair value of the
even split into specialized market segments.217           guarantee fee lies between 45 and 55 basis points.225
                                                          Another option seeks to finance the guarantee through
Hybrid Model                                              a risk-based tax on the users of the system.226
There are many variants of the hybrid model that          Various hybrid models propose governmental inter-
envision blended roles for the government and private     vention mechanisms in times of economic hardship.
sector. Some of the hybrid models advocate full           For example, there are proposals that suggest leaving
replacement of the enterprises; others are more modest    the mortgage securitization market largely privatized,
and suggest modifying them. In the broadest context       while having a government-owned corporation oper-
though, all the proposals in this group call for a pri-   ating in that market at very low levels during periods
vate entity or group of entities to purchase and secu-    of normal market activity. However, in the event of
ritize mortgages from approved originators with some      a market disruption, such as the one in 2008, the
form of guarantee from the federal government.218         government-owned corporation would step in and
The proposals vary widely regarding the government’s      stabilize the marketplace during the crisis.227
position as guarantor of principal and interest on the
resulting MBS. Some proposals suggest the creation        Conclusion
of a Federal Deposit Insurance Corporation-type
agency to function as the first-in-line guarantor of      In February 2012, FHFA’s Acting Director described
repayment.219 Other proposals recommend that the          the difficulty of fulfilling the agency’s oversight
private issuers initially guarantee repayment, with the   responsibilities in the midst of uncertainty about the
federal government providing some form of reinsur-        enterprises’ future:
ance or catastrophic loss backstop.220 A similar hybrid
approach suggests using private capital and possibly          At FHFA we are faced with a fundamental
private mortgage insurance to absorb credit losses            task of directing the operations of two com-
before the federal guarantee is tapped.221                    panies that account for roughly three-quarters
                                                              of current mortgage originations and have
Interplay between the private issuance of a security          approximately $5 trillion in outstanding obli-
and a governmental guarantee is at the heart of most          gations and credit guarantees. FHFA’s task is
hybrid proposals.222 The degree of government sup-            complicated by the uncertain future of the
port tends to account for the variations among the            Enterprises and increasing dissatisfaction with
proposals.                                                    various aspects of their business operations.228


                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013           65
In other words, FHFA must effectively direct the
enterprises’ operations—which comprise the engine
of residential real estate transactions in the United
States—while fundamental questions about their
future roles and the future of housing finance remain
unanswered.

It is now time for policymakers to begin to make the
decisions that will shape that future.




66    Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • October 1, 2012–March 31, 2013   67
Appendices
                                                          Collateral: Assets used as security for a loan that can
Appendix A:                                               be seized by the lender if the borrower fails to repay

Glossary and Acronyms                                     the loan.

                                                          Commercial Banks: Commercial banks are estab-
                                                          lishments primarily engaged in accepting demand
Glossary of Terms                                         and other deposits and making commercial,
                                                          industrial, and consumer loans. Commercial banks
Alternative A: A classification of mortgages in which     provide significant services in originating, servicing,
the risk profile falls between prime and subprime.        and enhancing the liquidity and quality of credit that
Alternative A (also known as Alt-A) mortgages are         is ultimately funded elsewhere.
generally considered higher risk than prime due to
factors that may include higher loan-to-value and         Conservatorship: Conservatorship is a legal proce-
debt-to-income ratios or limited documentation of         dure for the management of financial institutions for
the borrower’s income.                                    an interim period during which the institution’s con-
                                                          servator assumes responsibility for operating the insti-
Bankruptcy: A legal procedure for resolving debt          tution and conserving its assets. Under the Housing
problems of individuals and businesses; specifically, a   and Economic Recovery Act of 2008, the enterprises
case filed under one of the chapters of Title 11 of the   entered into conservatorships overseen by FHFA. As
U.S. Code.                                                conservator, FHFA has undertaken to preserve and
Basis Points: Refers to hundredths of 1 percentage        conserve the assets of the enterprises and restore them
point. For example, 1 basis point is equivalent to        to safety and soundness. FHFA also has assumed the
1/100 of 1 percentage point.                              powers of the boards of directors, officers, and share-
                                                          holders; however, the day-to-day operational decision
Bonds: Obligations by a borrower to eventually repay      making of each company is still with the enterprises’
money obtained from a lender. The bondholder buy-         existing management.
ing the investment is entitled to receive both
principal and interest payments from the borrower.        Credit Unions: Member-owned, not-for-profit
                                                          financial cooperatives that provide savings, credit, and
Capitalization: In the context of bank supervision,       other financial services to their members.
capitalization refers to the funds a bank holds as a      Credit unions pool their members’ savings deposits
buffer against unexpected losses. It includes share-      and shares to finance their own loan portfolios rather
holders’ equity, loss reserves, and retained earnings.    than rely on outside capital. Members benefit from
Bank capitalization plays a critical role in the safety   higher returns on savings, lower rates on loans, and
and soundness of individual banks and the banking         fewer fees on average.
system. In most cases, federal regulators set require-
ments for adequate bank capitalization.                   Default: Occurs when a mortgagor misses one or
                                                          more payments.




68    Federal Housing Finance Agency Office of Inspector General
Derivatives: Securities whose value depends on that          Foreclosure: The legal process used by a lender to
of another asset, such as a stock or bond. They may          obtain possession of a mortgaged property.
be used to hedge interest rate or other risks related to
                                                             Freddie Mac: A federally chartered corporation that
holding a mortgage.
                                                             purchases residential mortgages, securitizes them,
Dodd-Frank Wall Street Reform and Consumer                   and sells them to investors; thus, Freddie Mac pro-
Protection Act of 2010: Legislation that intends to          vides lenders with funds that can be used to make
promote the financial stability of the United States         loans to homebuyers.
by improving accountability and transparency in the
                                                             Ginnie Mae: A government-owned corporation
financial system, ending “too big to fail,” protecting the
                                                             within HUD. Ginnie Mae guarantees investors the
American taxpayer by ending bailouts, and protecting
                                                             timely payment of principal and interest on privately
consumers from abusive financial services practices.
                                                             issued MBS backed by pools of government-insured
Equity: In the context of residential mortgage               and -guaranteed mortgages.
finance, equity is the difference between the fair mar-
                                                             Government-Sponsored Enterprises: Business
ket value of the borrower’s home and the outstanding
                                                             organizations chartered and sponsored by the fed-
balance on the mortgage and any other debt secured
                                                             eral government.
by the home.
                                                             Guarantee: A pledge to investors that the
Fannie Mae: A federally chartered corporation that
                                                             guarantor will bear the default risk on a pool of
purchases residential mortgages and converts them
                                                             loans or other collateral.
into securities for sale to investors; by purchasing
mortgages, Fannie Mae supplies funds to lenders so           Hedging: The practice of taking an additional step,
they may make loans to homebuyers.                           such as buying or selling a derivative, to offset certain
                                                             risks associated with holding a particular investment,
Federal Home Loan Banks: The FHLBanks are
                                                             such as MBS.
12 regional cooperative banks that U.S. lending
institutions use to finance housing and economic             Housing and Economic Recovery Act: HERA,
development in their communities. Created by                 enacted in 2008, establishes OIG and FHFA, which
Congress, the FHLBanks have been the largest source          oversee the GSEs’ operations. HERA also expanded
of funding for community lending for eight decades.          Treasury’s authority to provide financial support to
The FHLBanks provide funding to other banks but              the GSEs.
not directly to individual borrowers.
                                                             Implied Guarantee: The assumption, prevalent in
Federal Housing Administration: Part of HUD,                 the financial markets, that the federal government
FHA insures residential mortgages made by approved           will cover enterprise debt obligations.
lenders against payment losses. It is the largest insurer
of mortgages in the world, insuring over 34 million          Inspector General Act: Enacted in 1978, this stat-
properties since its inception in 1934.                      ute authorizes establishment of offices of inspectors
                                                             general, “independent and objective units” within


                                      Semiannual Report to the Congress • October 1, 2012–March 31, 2013          69
federal agencies, that: (1) conduct and supervise         11—or any 1 or more of them—would be required
audits and investigations relating to the programs        to step in and cover that debt.
and operations of their agencies; (2) provide leader-
                                                          Lien: The lender’s right to have a specific piece of
ship and coordination and recommend policies for
                                                          the debtor’s property sold if the debt is not repaid.
activities designed to promote economy, efficiency,
                                                          With respect to residential mortgages, the noteholder
and effectiveness in the administration of agency
                                                          retains a lien on the house (as evidenced by the mort-
programs and to prevent and detect fraud, waste, or
                                                          gage or deed of trust) until the loan is repaid.
abuse in such programs and operations; and (3) pro-
vide a means for keeping the head of the agency and       Loan-to-Value: A percentage calculated by dividing
Congress fully and currently informed about prob-         the amount borrowed by the price or appraised value
lems and deficiencies relating to the administration of   of the home to be purchased; the higher the loan-to-
such programs and operations and the necessity for        value (also known as LTV), the less cash a borrower is
and progress of corrective action.                        required to pay as down payment.
Inspector General Reform Act: Enacted in 2008,            Losses on Derivatives: The enterprises acquire
this statute amends the Inspector General Act to          and guarantee primarily longer-term mortgages and
enhance the independence of inspectors general and        securities that are funded with debt instruments.
to create the Council of the Inspectors General on        The companies manage the interest rate risk associ-
Integrity and Efficiency.                                 ated with these investments and funding activities
                                                          with derivative agreements. The losses on derivative
Insurance Company: A company whose primary and
                                                          agreements are caused by changes in interest rates
predominant business activity is the writing of insur-
                                                          that, in turn, cause a net decrease in the fair value of
ance and issuing or underwriting “covered products.”
                                                          these agreements.
Internal Controls: Internal controls are an integral
                                                          Mortgage-Backed Securities: MBS are debt securi-
component of an organization’s management that
                                                          ties that represent interests in the cash flows—
provide reasonable assurance that the
                                                          anticipated principal and interest payments—from
following objectives are achieved: (1) effectiveness
                                                          pools of mortgage loans, most commonly on
and efficiency of operations, (2) reliability of finan-
                                                          residential property.
cial reports, and (3) compliance with applicable laws
and regulations. Internal controls relate to manage-      Operational Risk: Exposure to loss resulting from
ment’s plans, methods, and procedures used to meet        inadequate or failed internal processes, people, and sys-
its mission, goals, and objectives and include the        tems or from external events (including legal events).
processes and procedures for planning, organizing,
directing, and controlling program operations as          Personally Identifiable Information: Information that
well as the systems for measuring, reporting, and         can be used to identify an individual, such as name,
monitoring program performance.                           date of birth, social security number, or address.

Joint and Several Liability: The concept of joint         Preferred Stock: A security that usually pays a fixed
and several liability provides that each obligor in       dividend and gives the holder a claim on corporate
a group is responsible for the debts of all in that       earnings and assets superior to that of holders of
group. In the case of the FHLBanks, if any individual     common stock but inferior to that of investors in the
FHLBank were unable to pay a creditor, the other          corporation’s debt securities.



70    Federal Housing Finance Agency Office of Inspector General
Private-Label Mortgage-Backed Securities: MBS               Servicers: Servicers act as intermediaries between
derived from mortgage loan pools assembled by enti-         mortgage borrowers and owners of the loans, such
ties other than GSEs or federal government agencies.        as the enterprises or MBS investors. They collect
They do not carry an explicit or implicit government        the homeowners’ mortgage payments, remit them
guarantee, and the private-label MBS investor bears         to the owners of the loans, maintain appropriate
the risk of losses on its investment.                       records, and address delinquencies or defaults on
                                                            behalf of the owners of the loans. For their services,
Real Estate Owned: Foreclosed homes owned by
                                                            they typically receive a percentage of the unpaid
government agencies or financial institutions, such as
                                                            principal balance of the mortgage loans they service.
the enterprises or real estate investors. REO homes
                                                            The recent financial crisis has put more emphasis on
represent collateral seized to satisfy unpaid mortgage
                                                            servicers’ handling of defaults, modifications, short
loans. The investor or its representative then must sell
                                                            sales, and foreclosures, in addition to their more tra-
the property on its own.
                                                            ditional duty of collecting and distributing monthly
Reinsurance: Reducing a large amount of risk by             mortgage payments.
dividing it up among several parties, thus reducing
                                                            Short Sale: The sale of a mortgaged property for less
the individual burden.
                                                            than what is owed on the mortgage.
Retained Mortgage Portfolio: Mortgage-related
                                                            Thrift: A financial institution that ordinarily possesses
securities purchased by the enterprises and held as
                                                            the same depository, credit, financial intermediary,
an investment.
                                                            and account transactional functions as a bank but
Securitization: A process whereby a financial insti-        that is chiefly organized and primarily operates to
tution assembles pools of income-producing assets           promote savings and home mortgage lending rather
(such as loans) and then sells an interest in the assets’   than commercial lending.
cash flows as securities to investors.
                                                            Underwater: Term used to describe situations in
Securitization Platform: A mechanism that con-              which the homeowner’s equity is below zero (i.e.,
nects capital market investors to borrowers by bun-         the home is worth less than the balance of the
dling mortgages into securities and tracking loan           loan(s) it secures).
payments.
Senior Preferred Stock Purchase Agreements:
Entered into at the time the conservatorships were
created, the PSPAs authorize the enterprises to
request and obtain funds from Treasury. Under the
PSPAs, the enterprises agreed to consult with Trea-
sury concerning a variety of significant business
activities, capital stock issuance, dividend payments,
ending the conservatorships, transferring assets, and
awarding executive compensation.




                                      Semiannual Report to the Congress • October 1, 2012–March 31, 2013         71
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72    Federal Housing Finance Agency Office of Inspector General
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                                                          Freddie Mac, “Derivative Gains (Losses),” Form 10-K
NASDAQ, Financial Glossary: Hedging. Accessed:            for the Fiscal Year Ended December 31, 2011, at 90,
March 1, 2013, at www.nasdaq.com/investing/               91. Accessed: February 28, 2013, at www.freddiemac.
glossary/h/hedging.                                       com/investors/er/pdf/10k_030912.pdf.

Government Accountability Office, Management              Securities and Exchange Commission, Mortgage-
Report: Opportunities for Improvements in FHFA’s          Backed Securities. Accessed: March 1, 2013, at www.
Internal Controls and Accounting Procedures, GAO-10-      sec.gov/answers/mortgagesecurities.htm.
587R, at 1 (June 3, 2010). Accessed: March 1, 2013,
                                                          Freddie Mac, Glossary of Finance and Economic Terms.
at www.gao.gov/products/GAO-10-587R.
                                                          Accessed: March 1, 2013, at www.freddiemac.com/
Congressional Budget Office, Written Testimony            smm/n_r.htm#O.
of Douglas Holtz-Eakin, Director of CBO, Regula-
                                                          Office of Management and Budget, Memorandum
tion of the Housing Government-Sponsored Enterprises
                                                          for the Heads of Executive Departments and Agencies,
(October 23, 2003). Accessed: March 1, 2013, at
                                                          Guidance for Agency Use of Third-Party Websites and
www.cbo.gov/sites/default/files/cbofiles/ftpdocs/46xx/
                                                          Applications, M-10-23 (June 25, 2010). Accessed:
doc4642/10-23-gse.pdf.
                                                          March 1, 2013, at www.whitehouse.gov/sites/default/
Inspector General Act of 1978, Pub. L. No. 95-452.        files/omb/assets/memoranda_2010/m10-23.pdf.

Inspector General Reform Act of 2008, Pub. L. No.         Office of the Special Inspector General for the Trou-
110-409.                                                  bled Asset Relief Program, “Recent Developments,”
                                                          SIGTARP: Quarterly Report to Congress, at 150 (Octo-
Investment Company Act of 1940, Pub. L. No.
                                                          ber 26, 2010). Accessed: March 1, 2013, at www.
76-768.
                                                          sigtarp.gov/Quarterly%20Reports/October2010_
Department of the Treasury Financial Crimes               Quarterly_Report_to_Congress.pdf.
Enforcement Network, Frequently Asked Questions:
Anti-Money Laundering Program and Suspicious

                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013          73
NASDAQ, Financial Glossary: Reinsurance. Accessed:       Freddie Mac, Glossary of Finance and Economic Terms.
February 28, 2013, at www.nasdaq.com/investing/          Accessed: March 1, 2013, at www.freddiemac.com/
glossary/r/reinsurance.                                  smm/s_z.htm#S.

Freddie Mac, Understanding Securities. Accessed: Feb-    Federal Deposit Insurance Corporation, Resolutions
ruary 28, 2013, at www.freddiemac.com/corporate/         Handbook: Glossary, at 98. Accessed: March 1, 2013,
company_profile/our_business/securities.html.            at www.fdic.gov/bank/historical/reshandbook/glos-
                                                         sary.pdf.
Freddie Mac, Our Business: Single-Family Credit
Guarantee Business. Accessed: March 1, 2013, at          Office of the Special Inspector General for the Trou-
www.freddiemac.com/corporate/company_profile/            bled Asset Relief Program, “Homeowner Support
our_business/index.html.                                 Programs,” SIGTARP: Quarterly Report to Congress,
                                                         at 65 (January 26, 2011). Accessed: March 1, 2013,
Federal Housing Finance Agency, “Introduction,”
                                                         at www.sigtarp.gov/Quarterly%20Reports/Janu-
Building a New Infrastructure for the Secondary
                                                         ary2011_Quarterly_Report_to_Congress.pdf.
Mortgage Market, at 4 (October 4, 2012). Accessed:
February 25, 2013, at www.fhfa.gov/webfiles/24572/
fhfasecuritizationwhitepaper100412final.pdf.

Federal Housing Finance Agency, Senior Preferred
Stock Purchase Agreement. Accessed: March 1, 2013,
at www.fhfa.gov/Default.aspx?Page=364.

Letter from David H. Stevens, Assistant Secretary
of Housing, Department of Housing and Urban
Development, to All Approved Mortgagees, FHA
Refinance of Borrowers in Negative Equity Positions
(August 6, 2010). Accessed: March 1, 2013, at www.
hud.gov/offices/adm/hudclips/letters/mortgagee/
files/10-23ml.pdf.




74   Federal Housing Finance Agency Office of Inspector General
Acronyms and Abbreviations                              HUD-OIG Department of Housing and Urban
                                                                  Development Office of Inspector General
Agency Federal Housing Finance Agency                   I&E Inspection and Evaluation
AMFS American Mortgage Field Services LLC               IPIA Improper Payments Information Act
AMS American Mortgage Specialists                       IRS-CI IRS-Criminal Investigation
ATSC Advanced Technology Systems, Inc.                  LIBOR London Interbank Offered Rate
Blue Book Quality Standards for Inspection and         LTV Loan-to-Value
            Evaluation
                                                        MBS Mortgage-Backed Securities
BNC BNC National Bank
                                                        MSR Mortgage Servicing Rights
CIGIE Council of the Inspectors General on Integrity
       and Efficiency                                   NAIC National Association of Insurance
                                                              Commissioners
CRS Call Report System
                                                        OA Office of Audits
CSP Common Securitization Platform
                                                        OAd Office of Administration
DER Division of Enterprise Regulation
                                                        OC Office of Counsel
DOJ Department of Justice
                                                        OE Office of Evaluations
Enterprises Fannie Mae and Freddie Mac
                                                        OI Office of Investigations
EO Executive Office
                                                        OIG Federal Housing Finance Agency Office of
Fed ED Federal Reserve’s Eurodollar Deposit Rate             Inspector General
FHA Federal Housing Administration                      OPOR Office of Policy, Oversight, and Review
FHFA Federal Housing Finance Agency                     PII Personally Identifiable Information
FHLBanks Federal Home Loan Banks                        PSPAs Senior Preferred Stock Purchase Agreements
FHLBank System Federal Home Loan Bank System            REO Real Estate Owned
FinCEN Financial Crimes Enforcement Network             RMBS Residential Mortgage-Backed Securities
GAO Government Accountability Office                    SAI Servicing Alignment Initiative
GSEs Government-Sponsored Enterprises                   SEC Securities and Exchange Commission
HARP Home Affordable Refinance Program                  SIGTARP Office of the Special Inspector General for
HERA Housing and Economic Recovery Act of 2008                     the Troubled Asset Relief Program

HUD Department of Housing and Urban                    SORN System of Records Notice
      Development

                                  Semiannual Report to the Congress • October 1, 2012–March 31, 2013    75
Treasury Department of the Treasury

USDA Department of Agriculture

USPIS Postal Inspection Service

VA Department of Veterans Affairs

Yellow Book Government Auditing Standards




76   Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • October 1, 2012–March 31, 2013   77
Appendix B:                                               detection of fraud, waste, or abuse. Figure 23 (see
                                                          page 79) summarizes OIG’s formal recommenda-
OIG Recommendations                                       tions that were made, pending, or closed during the
                                                          reporting period. Figure 24 (see page 93) summarizes
In accordance with the provisions of the Inspector        OIG’s formal recommendations derived from reports
General Act, one of the key duties of OIG is to           for which all of the recommendations were closed in
provide to FHFA recommendations that promote              prior semiannual periods.
the transparency, efficiency, and effectiveness of the
agency’s operations and aid in the prevention and




78    Federal Housing Finance Agency Office of Inspector General
Figure 23. Summary of OIG Recommendations

       No.                         Recommendation                            Report                 Status
 EVL-2013-003-1   FHFA should continue to monitor Freddie             Case Study: Freddie    Recommendation
                  Mac’s implementation of its counterparty risk       Mac’s Unsecured        agreed to by FHFA;
                  management policies and procedures by:              Lending to Lehman      implementation of
                  •	 ensuring that the independence and              Brothers Prior to      recommendation
                      decisions of the enterprise’s risk              Lehman Brothers’       pending.
                      management staff are not overridden by          Bankruptcy
                      business management staff; and
                  •	 directing Freddie Mac Internal Audit to audit
                      the counterparty credit risk management
                      function annually.

 EVL-2013-003-2   FHFA should continue to pursue all possible         Case Study: Freddie    Recommendation
                  avenues to recover the $1.2 billion in the          Mac’s Unsecured        agreed to by FHFA;
                  Lehman bankruptcy proceedings.                      Lending to Lehman      implementation of
                                                                      Brothers Prior to      recommendation
                                                                      Lehman Brothers’       pending.
                                                                      Bankruptcy

 EVL-2013-003-3   FHFA should continue to develop an                  Case Study: Freddie    Recommendation
                  examination program and procedures                  Mac’s Unsecured        agreed to by FHFA;
                  encompassing enterprise-wide risk exposure          Lending to Lehman      implementation of
                  to all of Freddie Mac’s counterparties.             Brothers Prior to      recommendation
                                                                      Lehman Brothers’       pending.
                                                                      Bankruptcy

 EVL-2013-001-1   FHFA should develop a long-term plan to             FHFA’s Oversight       Recommendation
                  strengthen its oversight of the enterprises’        of the Enterprises’    agreed to by FHFA;
                  non-executive compensation through                  Compensation of        implementation of
                  reviews or examinations, focusing on senior         Their Executives and   recommendation
                  professional compensation. The plan should          Senior Professionals   pending.
                  set priorities, ensure that available staffing
                  resources are commensurate with them, and
                  establish an appropriate time frame for its
                  implementation. With respect to the reviews
                  and examinations contemplated by its plan,
                  the agency should consider including the
                  following items as priorities:
                  •	 the enterprises’ general structures,
                      processes, and cost controls for senior
                      professional compensation;
                  •	 the enterprises’ controls over
                      compensation offers to new hires; and
                  •	 the enterprises’ compliance with the
                      pay freeze with respect to the use of
                      promotions and changes in responsibility.




                                 Semiannual Report to the Congress • October 1, 2012–March 31, 2013           79
       No.                         Recommendation                             Report                  Status
 EVL-2012-009-1     FHFA should continue to monitor Freddie            FHFA’s Oversight        Recommendation
                    Mac’s hedges and models to ensure the              of Freddie Mac’s        agreed to by FHFA;
                    enterprise’s portfolio is hedged within its        Investment in Inverse   implementation of
                    approved interest rate limits.                     Floaters                recommendation
                                                                                               pending.

 EVL-2012-009-2     FHFA should conduct periodic reviews and           FHFA’s Oversight        Recommendation
                    tests of Freddie Mac’s information wall to         of Freddie Mac’s        agreed to by FHFA;
                    confirm that the enterprise is not trading on      Investment in Inverse   implementation of
                    nonpublic information.                             Floaters                recommendation
                                                                                               pending.

 EVL-2012-009-3     FHFA should ensure that supervisory policies       FHFA’s Oversight        Recommendation
                    are well-founded and coordinated and that the      of Freddie Mac’s        partially agreed
                    agency speaks with one voice by:                   Investment in Inverse   to by FHFA;
                    •	 confirming its position or the agreement       Floaters                implementation of
                        in writing as soon as practical if FHFA is                             recommendation
                        going to take a position or believes it has                            pending.
                        come to an agreement with Freddie Mac
                        regarding a particular investment product;
                        and
                    •	 ensuring that supervisory policies are
                        based on the robust work of agency
                        personnel and not reactions to media or
                        other public scrutiny.

 EVL-2012-009-4     Prior to issuing any public statement, FHFA        FHFA’s Oversight        Recommendation
                    should exercise due diligence to ensure that       of Freddie Mac’s        agreed to by FHFA;
                    statements accurately reflect all relevant         Investment in Inverse   implementation of
                    facts.                                             Floaters                recommendation
                                                                                               pending.

 EVL-2012-008-1     FHFA should consider revising FHFA’s               Evaluation of FHFA’s    Recommendation
                    delegation of authorities to require FHFA          Oversight of Fannie     agreed to by FHFA;
                    approval of unusual, high-cost, new initiatives,   Mae’s Transfer of       implementation of
                    like the High Touch Servicing Program.             Mortgage Servicing      recommendation
                                                                       Rights from Bank        pending.
                                                                       of America to High
                                                                       Touch Servicers

 EVL-2012-008-2     FHFA should ensure that Fannie Mae does            Evaluation of FHFA’s    Recommendation
                    not have to pay a premium to transfer              Oversight of Fannie     agreed to by FHFA;
                    inadequately performing portfolios.                Mae’s Transfer of       implementation of
                                                                       Mortgage Servicing      recommendation
                                                                       Rights from Bank        pending.
                                                                       of America to High
                                                                       Touch Servicers




80   Federal Housing Finance Agency Office of Inspector General
      No.                        Recommendation                             Report                 Status
EVL-2012-008-3   Consistent with the control issues found in         Evaluation of FHFA’s   Recommendation
                 Fannie Mae’s internal audit report on the           Oversight of Fannie    agreed to by FHFA;
                 High Touch Servicing Program, FHFA should           Mae’s Transfer of      implementation of
                 ensure that Fannie Mae applies additional           Mortgage Servicing     recommendation
                 scrutiny and rigor to pricing significant MSR       Rights from Bank       pending.
                 transactions. Specifically, FHFA should:            of America to High
                 •	 consider requiring Fannie Mae to assess         Touch Servicers
                     the valuation methods of multiple MSR
                     valuators in order to discern best practices;
                     and
                 •	 consider requiring two independent
                     valuations in the case of larger MSR
                     transactions (at a threshold to be
                     determined by FHFA).

EVL-2012-008-4   FHFA should assess the efficacy of                  Evaluation of FHFA’s   Recommendation
                 the program and direct any necessary                Oversight of Fannie    agreed to by FHFA;
                 modifications. FHFA should review both the          Mae’s Transfer of      implementation of
                 underlying assumptions and the performance          Mortgage Servicing     recommendation
                 criteria for the High Touch Servicing Program.      Rights from Bank       pending.
                                                                     of America to High
                                                                     Touch Servicers

EVL-2012-007-1   FHFA and Freddie Mac should continue to             Follow-up on           The recommendation
                 carry out the loan review and related reforms       Freddie Mac’s Loan     is unresolved and
                 they have initiated since OIG’s original report     Repurchase Process     a management
                 on the Bank of America settlement with                                     decision has not
                 Freddie Mac was issued.                                                    been made as of
                                                                                            March 31, 2013.

EVL-2012-005-1   FHFA should continue its ongoing horizontal         FHFA’s Oversight       Recommendation
                 review of unsecured credit practices at the         of the Federal         agreed to by FHFA;
                 FHLBanks by:                                        Home Loan Banks’       implementation of
                 •	 following up on any potential evidence of       Unsecured Credit       recommendation
                     violations of the existing regulatory limits    Risk Management        pending.
                     and taking supervisory and enforcement          Practices
                     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.




                                Semiannual Report to the Congress • October 1, 2012–March 31, 2013           81
       No.                          Recommendation                              Report                Status
 EVL-2012-005-2     FHFA should strengthen the regulatory               FHFA’s Oversight       Recommendation
                    framework around the FHLBanks’ extension of         of the Federal         agreed to by FHFA;
                    unsecured credit by:                                Home Loan Banks’       implementation of
                    •	 establishing maximum overall exposure           Unsecured Credit       recommendation
                        limits;                                         Risk Management        pending.
                                                                        Practices
                    •	 lowering the existing individual counterparty
                        limits; and
                    •	 ensuring that the unsecured exposure
                        limits are consistent with the FHLBank
                        System’s housing mission.

 EVL-2012-001-1     FHFA should develop and implement a                 FHFA’s Oversight of    Recommendation
                    clear, consistent, and transparent written          Troubled Federal       agreed to by FHFA;
                    enforcement policy that:                            Home Loan Banks        implementation of
                    •	 requires troubled FHLBanks (those                                      recommendation
                        classified as having supervisory concerns)                             pending.
                        to correct identified deficiencies within
                        specified time frames;
                    •	 establishes consequences for their not
                        doing so; and
                    •	 defines exceptions to the policy.

 EVL-2012-001-2     FHFA should develop and implement a                 FHFA’s Oversight of    Closed—Final action
                    reporting system that permits agency                Troubled Federal       taken by FHFA.
                    managers and outside reviewers to assess            Home Loan Banks
                    readily examination report findings, planned
                    corrective actions and time frames, and their
                    status.

 EVL-2012-001-3     FHFA should consistently document key               FHFA’s Oversight of    Closed—Final action
                    activities, including recommendations to            Troubled Federal       taken by FHFA.
                    remove and replace senior officers and other        Home Loan Banks
                    personnel actions involving FHLBanks.

 EVL-2011-006-1     FHFA should promptly act on the specific,           Evaluation of the      Recommendation
                    significant concerns raised by FHFA staff and       Federal Housing        partially agreed
                    Freddie Mac internal auditors about its loan        Finance Agency’s       to by FHFA;
                    review process.                                     Oversight of Freddie   implementation of
                                                                        Mac’s Repurchase       recommendation
                                                                        Settlement with Bank   pending.
                                                                        of America

 EVL-2011-006-2     FHFA should promptly initiate management            Evaluation of the    Closed—Final action
                    reforms to ensure that senior managers              Federal Housing      taken by FHFA.
                    are apprised of and timely act on significant       Finance Agency’s
                    concerns brought to their attention,                Oversight of Freddie
                    particularly when they receive reports that the     Mac’s Repurchase
                    normal reporting and supervisory process is         Settlement with Bank
                    not working properly.                               of America




82   Federal Housing Finance Agency Office of Inspector General
     No.                        Recommendation                            Report               Status
AUD-2013-008-1   FHFA should develop a risk-based plan to         FHFA Should Develop   Recommendation
                 monitor the enterprises’ oversight of their      and Implement         agreed to by FHFA;
                 counterparties’ compliance with contractual      a Risk-Based          implementation of
                 representations and warranties, including        Plan to Monitor       recommendation
                 those related to federal consumer protection     the Enterprises’      pending.
                 laws.                                            Oversight of Their
                                                                  Counterparties’
                                                                  Compliance
                                                                  with Contractual
                                                                  Requirements
                                                                  Including Consumer
                                                                  Protection Laws

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

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

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

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




                               Semiannual Report to the Congress • October 1, 2012–March 31, 2013        83
      No.                           Recommendation                          Report               Status
 AUD-2013-007-5     To enhance Freddie Mac’s oversight of its        Enhanced FHFA        Recommendation
                    servicers, FHFA should perform supervisory       Oversight Is         agreed to by FHFA;
                    review and follow up to ensure that Freddie      Needed to Improve    implementation of
                    Mac identifies and addresses servicer            Mortgage Servicer    recommendation
                    operational challenges with implementing         Compliance with      pending.
                    the escalated case requirements as part of       Consumer Complaint
                    the testing of the servicers’ performance for    Requirements
                    handling and reporting escalated cases.

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

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

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

 AUD-2013-007-9     To improve its own oversight, FHFA should        Enhanced FHFA        Recommendation
                    develop and implement FHFA examination           Oversight Is         agreed to by FHFA;
                    guidance related to enterprise implementation    Needed to Improve    implementation of
                    and compliance with FHFA directives.             Mortgage Servicer    recommendation
                                                                     Compliance with      pending.
                                                                     Consumer Complaint
                                                                     Requirements




84   Federal Housing Finance Agency Office of Inspector General
     No.                         Recommendation                            Report                Status
AUD-2013-006-1   To enhance its oversight of FHLBank advances      FHFA Can Enhance       Recommendation
                 to insurance companies, FHFA should pursue        Its Oversight of       agreed to by FHFA;
                 memoranda of understanding allowing FHFA          FHLBank Advances to    implementation of
                 to obtain confidential supervisory and other      Insurance Companies    recommendation
                 regulatory information from the insurance         by Improving           pending.
                 regulators of states in the districts of those    Communication with
                 FHLBanks with the highest concentrations of       State Insurance
                 insurance company lending—the FHLBanks            Regulators and
                 of Des Moines, Indianapolis, Topeka, New          Standard-Setting
                 York, and Cincinnati—to improve FHFA’s            Groups
                 ability to evaluate whether the FHLBanks
                 are adequately assessing the condition
                 and operations of their insurance company
                 members.

AUD-2013-006-2   To enhance its oversight of FHLBank advances      FHFA Can Enhance       Recommendation
                 to insurance companies, FHFA should               Its Oversight of       agreed to by FHFA;
                 seek to participate in regular meetings of        FHLBank Advances to    implementation of
                 relevant National Association of Insurance        Insurance Companies    recommendation
                 Commissioners working groups to gather            by Improving           pending.
                 information on current and developing issues      Communication with
                 relevant to the FHLBanks.                         State Insurance
                                                                   Regulators and
                                                                   Standard-Setting
                                                                   Groups

AUD-2013-004-1   FHFA should update its examination guide          FHFA’s Oversight of    Recommendation
                 (Supervision Reference and Procedures             the Asset Quality of   agreed to by FHFA;
                 Manual, Credit Risk-Multifamily), in              Multifamily Housing    implementation of
                 consideration of industry standards, to include   Loans Financed by      recommendation
                 qualitative guidance for examiners to follow      Fannie Mae and         pending.
                 when determining the sampling size and            Freddie Mac
                 testing coverage of loan files.

AUD-2013-004-2   FHFA should require examiners to maintain         FHFA’s Oversight of    Recommendation
                 documentation adequate to support                 the Asset Quality of   agreed to by FHFA;
                 adherence to the sampling methodology             Multifamily Housing    implementation of
                 developed in the updated examination guide.       Loans Financed by      recommendation
                                                                   Fannie Mae and         pending.
                                                                   Freddie Mac

AUD-2013-002-1   FHFA’s Office of Budget and Financial             FHFA’s Oversight of    Recommendation
                 Management Contracting Operations Section         Contract No. FHF-      agreed to by FHFA;
                 contracting officer should review the total       10-F-0007 with         implementation of
                 unallowable payments of $256,343 made             Advanced Technology    recommendation
                 to ATSC under the contract/task order and         Systems, Inc.          pending.
                 recapture the amounts identified as not
                 allocable ($21,329), unreasonable ($47,743),
                 and unsupportable ($187,271).




                               Semiannual Report to the Congress • October 1, 2012–March 31, 2013          85
      No.                          Recommendation                              Report                Status
 AUD-2013-002-2     FHFA’s Office of Budget and Financial               FHFA’s Oversight of   Recommendation
                    Management Contracting Operations Section           Contract No. FHF-     agreed to by FHFA;
                    contracting officer should determine whether        10-F-0007 with        implementation of
                    additional corrective actions are warranted         Advanced Technology   recommendation
                    to recapture additional unreasonable costs          Systems, Inc.         pending.
                    billed by ATSC to FHFA after November 2011.
                    (OIG did not review charges submitted after
                    November 30, 2011.)

 AUD-2013-002-3     FHFA’s Office of Budget and Financial               FHFA’s Oversight of   Recommendation
                    Management Contracting Operations Section           Contract No. FHF-     partially agreed
                    contracting officer’s representative should         10-F-0007 with        to by FHFA;
                    revisit this contract/task order and perform        Advanced Technology   implementation of
                    the necessary analysis to ensure that ATSC          Systems, Inc.         recommendation
                    employees had the education background                                    pending.
                    and experience as required under the General
                    Services Administration master contract. The
                    FHFA contracting officer should recapture
                    all expenses, when applicable, paid to the
                    contractor for employees working in positions
                    without proper qualifications.

 AUD-2013-002-4     The Director of the Office of Budget and            FHFA’s Oversight of   Recommendation
                    Financial Management should issue guidance          Contract No. FHF-     agreed to by FHFA;
                    to all acquisition staff and approving officials,   10-F-0007 with        implementation of
                    including contracting officers and contracting      Advanced Technology   recommendation
                    officer’s representatives, on:                      Systems, Inc.         pending.
                    •	 cost allocation and proper procedures for
                        assigning costs to contracts in accordance
                        with benefits received and based on the
                        appropriate cost objective;
                    •	 proper procedures for ensuring that
                        contract employees meet labor category
                        qualifications specified in time and
                        material/labor hour contracts;
                    •	 proper procedures for obtaining sufficient
                        justification prior to increasing funds,
                        adjusting fixed labor rates, and approving
                        payments on time and material contracts;
                    •	 appropriate procedures for evaluating
                        contractor price proposals and documenting
                        the agency’s pre-negotiation position prior
                        to awarding contract modifications; and
                    •	 appropriate use of contractor employees to
                        substitute for internal agency positions and
                        approving invoices based on contractual
                        terms and provisions.




86   Federal Housing Finance Agency Office of Inspector General
     No.                         Recommendation                             Report                Status
AUD-2013-002-5   The FHFA contracting officer should remove          FHFA’s Oversight of   Recommendation
                 the $105,000 of excess funds from contract          Contract No. FHF-     agreed to by FHFA;
                 line item number 1 to account for technical         10-F-0007 with        implementation of
                 writing services ATSC was no longer required        Advanced Technology   recommendation
                 to perform under the contract line item             Systems, Inc.         pending.
                 number. Thereafter, the contracting officer
                 should compare the new contract ceiling
                 to the actual amount ATSC billed against
                 contract line item number 1 and recapture any
                 unallowable costs that exceed the new ceiling
                 price.

AUD-2013-001-1   FHFA should routinely obtain deficiency-            FHFA’s Oversight      Recommendation
                 related information, such as the size of the        of the Enterprises’   agreed to by FHFA;
                 enterprises’ deficiencies, their effectiveness      Efforts to Recover    implementation of
                 in targeting for deficiency collection defaulting   Losses from           recommendation
                 borrowers who continue to have the ability to       Foreclosure Sales     pending.
                 repay their loans, the number or amount of
                 their collection referrals, and their recovery
                 rate.

AUD-2013-001-2   Based on an analysis of the deficiency              FHFA’s Oversight      Recommendation
                 data, FHFA should incorporate deficiency            of the Enterprises’   agreed to by FHFA;
                 management into FHFA’s supervisory review           Efforts to Recover    implementation of
                 process.                                            Losses from           recommendation
                                                                     Foreclosure Sales     pending.

AUD-2013-001-3   FHFA should issue written guidance to the           FHFA’s Oversight      Recommendation
                 enterprises on managing their deficiency            of the Enterprises’   agreed to by FHFA;
                 collection processes, including at a minimum        Efforts to Recover    implementation of
                 whether they should be pursuing the same            Losses from           recommendation
                 type of defaulted borrowers and pursuing            Foreclosure Sales     pending.
                 collections in the same states.

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

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




                                Semiannual Report to the Congress • October 1, 2012–March 31, 2013          87
      No.                        Recommendation                             Report               Status
AUD-2012-008-3A FHFA should evaluate Fannie Mae’s                    FHFA’s Conservator   Closed—Final action
                mortgage pool policy commutations to                 Approval Process     taken by FHFA.
                determine whether these transactions were            for Fannie Mae
                appropriate and in the best interest of the          and Freddie Mac
                enterprise and taxpayers. This evaluation            Business Decisions
                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 mortgage           FHFA’s Conservator   Closed—Final action
                pool policy commutations to determine                Approval Process     taken by FHFA.
                whether these transactions were appropriate          for Fannie Mae
                and in the best interest of the enterprise and       and Freddie Mac
                taxpayers. This evaluation should include a          Business Decisions
                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 and            FHFA’s Conservator   Closed—Final action
                    process for conservator review of proposed       Approval Process     taken by FHFA.
                    mortgage pool policy commutations to ensure      for Fannie Mae
                    that there is a documented, sound basis for      and Freddie Mac
                    any pool policy commutations executed in the     Business Decisions
                    future.

 AUD-2012-008-5     FHFA should complete actions to establish        FHFA’s Conservator   Recommendation
                    a governance structure at Fannie Mae for         Approval Process     partially agreed
                    obtaining conservator approval of counterparty   for Fannie Mae       to by FHFA;
                    risk limit increases.                            and Freddie Mac      implementation of
                                                                     Business Decisions   recommendation
                                                                                          pending.

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




88   Federal Housing Finance Agency Office of Inspector General
     No.                       Recommendation                           Report                  Status
AUD-2012-008-7   FHFA should develop criteria for conducting     FHFA’s Conservator      Closed—Final action
                 business case analyses and substantiating       Approval Process        taken by FHFA.
                 conservator decisions.                          for Fannie Mae
                                                                 and Freddie Mac
                                                                 Business Decisions

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

AUD-2012-008-9   FHFA should implement a risk-                   FHFA’s Conservator      Recommendation
                 based examination plan to review the            Approval Process        agreed to by FHFA;
                 enterprises’ execution of and adherence to      for Fannie Mae          implementation of
                 conservatorship decisions.                      and Freddie Mac         recommendation
                                                                 Business Decisions      pending.

AUD-2012-007-1   FHFA should issue standards, by regulation      FHFA’s Oversight        Recommendation
                 or guidelines, for the enterprises to develop   of the Enterprises’     agreed to by FHFA;
                 comprehensive contingency plans for their       Management of High-     implementation of
                 high-risk and high-volume seller/servicers      Risk Seller/Servicers   recommendation
                 (individually or by group). At a minimum,                               pending.
                 these standards should include quantitative
                 assessment, event management (e.g.,
                 curtailing business with or transferring
                 business from a seller/servicer or specifying
                 reasonable time frames for reducing risks),
                 monitoring, and testing elements.

AUD-2012-007-2   FHFA should finalize its February 2012 draft    FHFA’s Oversight        Recommendation
                 examination manual to include elements          of the Enterprises’     agreed to by FHFA;
                 related to contingency planning.                Management of High-     implementation of
                                                                 Risk Seller/Servicers   recommendation
                                                                                         pending.

AUD-2012-006-1   FHFA’s Deputy Director of the Division of       FHFA’s Call Report      Closed—Final action
                 Enterprise Regulation (DER) and Office of       System                  taken by FHFA.
                 Financial Analysis’ Senior Associate Director
                 should ensure that the agency analyzes
                 opportunities to use call report system (CRS)
                 information to facilitate supervision and
                 regulation of the enterprises.




                               Semiannual Report to the Congress • October 1, 2012–March 31, 2013         89
      No.                          Recommendation                            Report                Status
 AUD-2012-006-2     FHFA’s Deputy Director of DER and Office of       FHFA’s Call Report    Recommendation
                    Financial Analysis’ Senior Associate Director     System                agreed to by FHFA;
                    should ensure that the agency supports                                  implementation of
                    identified opportunities for using CRS in                               recommendation
                    its oversight planning and monitoring with                              pending.
                    detailed supervisory and support division
                    requirements.

 AUD-2012-006-3     FHFA’s Deputy Director of DER and Office          FHFA’s Call Report    Recommendation
                    of Financial Analysis’ Senior Associate           System                agreed to by FHFA;
                    Director should ensure that the agency, if                              implementation of
                    current CRS capabilities need improvement,                              recommendation
                    directs divisions to work with FHFA’s Office of                         pending.
                    Technology and Information Management and
                    CRS system owners to enhance and improve
                    CRS to meet FHFA’s supervisory needs.

 AUD-2012-005-1     FHFA’s Deputy Director of DER should              FHFA’s Supervisory    Recommendation
                    implement the performance of risk                 Risk Assessment for   agreed to by FHFA;
                    assessments of REO that are more                  Single-Family Real    implementation of
                    comprehensive and link the results to             Estate Owned          recommendation
                    supervisory plans that address those risks                              pending.
                    through specific supervisory activities.

AUD-2012-001-1A FHFA’s DER should implement more                      FHFA’s Supervision    Recommendation
                robust regulations or guidance governing              of Freddie Mac’s      agreed to by FHFA;
                counterparty oversight and risk management            Controls over         implementation of
                for mortgage servicing. The regulations               Mortgage Servicing    recommendation
                or guidance should include requirements               Contractors           pending.
                for contracting with servicers, including a
                contractual provision authorizing FHFA’s
                access to relevant servicer information.

AUD-2012-001-1B FHFA’s DER should implement more                      FHFA’s Supervision    Closed—Final action
                robust regulations or guidance governing              of Freddie Mac’s      taken by FHFA.
                counterparty oversight and risk management            Controls over
                for mortgage servicing. The regulations               Mortgage Servicing
                or guidance should include requirements               Contractors
                for promptly reporting on material poor
                performance and noncompliance by servicers.

AUD-2012-001-1C FHFA’s DER should implement more                      FHFA’s Supervision    Closed—Final action
                robust regulations or guidance governing              of Freddie Mac’s      taken by FHFA.
                counterparty oversight and risk management            Controls over
                for mortgage servicing. The regulations or            Mortgage Servicing
                guidance should include requirements for              Contractors
                minimum, uniform standards for servicing
                mortgages owned or guaranteed by the
                enterprises.




90   Federal Housing Finance Agency Office of Inspector General
     No.                        Recommendation                            Report                 Status
AUD-2012-001-2   FHFA’s DER should direct Freddie Mac to take      FHFA’s Supervision     Recommendation
                 the necessary steps to monitor and track the      of Freddie Mac’s       agreed to by FHFA;
                 performance of its servicers to reasonably        Controls over          implementation of
                 assure achievement of credit loss savings by:     Mortgage Servicing     recommendation
                 (1) implementing servicer account plans for       Contractors            pending.
                 the servicers without account plans that are
                 under consideration to receive a plan, and
                 (2) taking action to maximize credit loss
                 savings among the remaining servicers that
                 are not under consideration for account plans.

AUD-2012-001-3   FHFA’s DER should improve its existing            FHFA’s Supervision     Closed—Final action
                 procedures and controls governing                 of Freddie Mac’s       taken by FHFA.
                 coordination with other federal agencies that     Controls over
                 have oversight jurisdiction with respect to the   Mortgage Servicing
                 enterprises’ mortgage servicers.                  Contractors

AUD-2011-002-1   FHFA should finalize, disseminate, and            Clifton Gunderson      Reopened based
                 implement an agency-wide information              LLP’s Independent      upon follow-
                 security program plan in accordance with          Audit of the Federal   up audit work;
                 the National Institute of Standards and           Housing Finance        implementation of
                 Technology’s special publication 800-53           Agency’s Information   recommendation
                 (revision 3).                                     Security Program –     pending.
                                                                   2011
AUD-2011-002-2   FHFA should update its information security       Clifton Gunderson      Reopened based
                 policies and procedures to address all            LLP’s Independent      upon follow-
                 applicable components of the National             Audit of the Federal   up audit work;
                 Institute of Standards and Technology’s           Housing Finance        implementation of
                 special publication 800-53 (revision 3).          Agency’s Information   recommendation
                                                                   Security Program –     pending.
                                                                   2011
AUD-2011-002-3   FHFA should develop, disseminate, and             Clifton Gunderson      Recommendation
                 implement an agency-wide information              LLP’s Independent      agreed to by FHFA;
                 categorization policy and methodology.            Audit of the Federal   implementation of
                                                                   Housing Finance        recommendation
                                                                   Agency’s Information   pending.
                                                                   Security Program –
                                                                   2011




                                Semiannual Report to the Congress • October 1, 2012–March 31, 2013            91
      No.                          Recommendation                          Report                Status
 AUD-2011-002-4     FHFA should develop, disseminate, and          Clifton Gunderson      Reopened based
                    implement a process to monitor compliance      LLP’s Independent      upon follow-
                    with plans of action and milestones.           Audit of the Federal   up audit work;
                                                                   Housing Finance        implementation of
                                                                   Agency’s Information   recommendation
                                                                   Security Program –     pending.
                                                                   2011

 AUD-2011-002-5     FHFA should establish controls for tracking,   Clifton Gunderson      Closed—Final action
                    monitoring, and remediating weaknesses         LLP’s Independent      taken by FHFA.
                    noted in vulnerability scans.                  Audit of the Federal
                                                                   Housing Finance
                                                                   Agency’s Information
                                                                   Security Program –
                                                                   2011




92   Federal Housing Finance Agency Office of Inspector General
Figure 24. Summary of OIG Reports Where All Recommendations Are Closed

       No.                      Recommendation                             Report                 Status
 EVL-2012-006-1   FHFA should adhere to the requirements           FHFA’s Certifications   Closed—Final action
                  in the PSPAs that it certify: (1) that the       for the Preferred       taken by FHFA.
                  enterprises have complied with the PSPA          Stock Purchase
                  covenants, and (2) that the enterprises’         Agreements
                  financial statements and related documents
                  provided to Treasury under the PSPAs
                  are free of materially false or misleading
                  representations.

 EVL-2012-006-2   FHFA should implement oversight                  FHFA’s Certifications   Closed—Final action
                  procedures to ensure the enterprises’            for the Preferred       taken by FHFA.
                  compliance with PSPA requirements.               Stock Purchase
                                                                   Agreements

 ESR-2012-004-1   FHFA should ensure that the enterprises          Fannie Mae’s and        Closed—Final action
                  conduct a comprehensive review of their          Freddie Mac’s           taken by FHFA.
                  travel and entertainment policies and revise     Participation in the
                  them in a manner consistent with the             2011 Mortgage
                  January 25, 2012, guidance.                      Bankers Association
                                                                   Annual Convention
                                                                   and Exposition

 ESR-2012-004-2   FHFA should review the enterprises’              Fannie Mae’s and        Closed—Final action
                  proposed revisions to ensure that they are       Freddie Mac’s           taken by FHFA.
                  drafted in a manner consistent with the          Participation in the
                  guidance provided by FHFA and that the           2011 Mortgage
                  enterprises have established appropriate         Bankers Association
                  controls to monitor compliance.                  Annual Convention
                                                                   and Exposition

 ESR-2012-003-1   FHFA should continue to monitor the              FHFA’s Oversight        Closed—Final action
                  enterprises’ progress in phasing out their       of the Enterprises’     taken by FHFA.
                  charitable activities.                           Charitable Activities

 ESR-2012-003-2   FHFA should continue to require the              FHFA’s Oversight        Closed—Final action
                  enterprises to issue timely, quarterly           of the Enterprises’     taken by FHFA.
                  reports on their charitable activities via their Charitable Activities
                  websites.




                                 Semiannual Report to the Congress • October 1, 2012–March 31, 2013         93
       No.                         Recommendation                          Report                 Status
 EVL-2012-002-1     FHFA should work to limit legal expenses to    Evaluation of FHFA’s    Closed—Final action
                    the extent possible and reasonable by:         Management of Legal     taken by FHFA.
                    •	 narrowing the reach of future              Fees for Indemnified
                        indemnification agreements;                Executives
                    •	 considering making greater use of
                        directors’ and officers’ insurance; and
                    •	 continuing to invoke the new FHFA
                        regulation establishing the primacy of
                        claims in a receivership in an effort to
                        curtail costly litigation.

 EVL-2012-002-2     FHFA should continue to control costs of       Evaluation of FHFA’s    Closed—Final action
                    legal expenses by:                             Management of Legal     taken by FHFA.
                    •	 identifying the best elements of Fannie    Fees for Indemnified
                        Mae’s and Freddie Mac’s programs           Executives
                        for administering advances and
                        indemnification of legal expenses and
                        developing standardized legal billing
                        practices for both enterprises; and
                    •	 further developing FHFA oversight
                        procedures.

 EVL-2011-005-1     FHFA should assess: (1) the extent to which    Evaluation of Whether   Closed—Final action
                    examination capacity shortfalls may have       FHFA Has Sufficient     taken by FHFA.
                    adversely affected the examination program,    Capacity to Examine
                    and (2) potential strategies to mitigate       the GSEs
                    risks, such as achieving efficiencies in the
                    assignment of examiners or the examination
                    process.

 EVL-2011-005-2     FHFA should monitor the development            Evaluation of Whether   Closed—Final action
                    and implementation of the examiner             FHFA Has Sufficient     taken by FHFA.
                    accreditation program and take needed          Capacity to Examine
                    actions to address any shortfalls.             the GSEs

 EVL-2011-005-3     FHFA should consider using detailees from      Evaluation of Whether   Closed—Final action
                    other federal agencies, retired annuitants,    FHFA Has Sufficient     taken by FHFA.
                    or contractors to augment its examination      Capacity to Examine
                    program in the near term to midterm.           the GSEs




94   Federal Housing Finance Agency Office of Inspector General
      No.                       Recommendation                              Report                 Status
EVL-2011-005-4    FHFA should report periodically to Congress       Evaluation of Whether   Closed—Final action
                  and the public, which might include the           FHFA Has Sufficient     taken by FHFA.
                  augmentation of existing reports, on the          Capacity to Examine
                  agency’s examiner capacity shortfalls,            the GSEs
                  such as the number of examiners needed
                  to meet its responsibilities; the progress
                  in addressing these shortfalls, including
                  status of examiner recruitment and
                  retention efforts; and the development and
                  implementation of its examiner accreditation
                  program.

EVL-2011-004-1    FHFA should closely monitor Fannie Mae’s          Evaluation of FHFA’s Closed—Final action
                  implementation of its operational risk            Oversight of Fannie  taken by FHFA.
                  management program.                               Mae’s Management of
                                                                    Operational Risk

EVL-2011-004-2    FHFA should take decisive and timely              Evaluation of FHFA’s Closed—Final action
                  actions to ensure the implementation of the       Oversight of Fannie  taken by FHFA.
                  program if Fannie Mae fails to establish an       Mae’s Management of
                  acceptable and effective operational risk         Operational Risk
                  program by the end of the first quarter of
                  2012.

EVL-2011-004-3    FHFA should ensure that Fannie Mae                Evaluation of FHFA’s Closed—Final action
                  has qualified personnel to implement its          Oversight of Fannie  taken by FHFA.
                  operational risk management program.              Mae’s Management of
                                                                    Operational Risk

EVL-2011-003-1    FHFA should engage in negotiations with           Evaluation of FHFA’s    Closed—Final action
                  Treasury and the enterprises to amend the         Role in Negotiating     taken by FHFA.
                  Financial Agency Agreements, under which          Fannie Mae’s and
                  the enterprises administer and enforce the        Freddie Mac’s
                  Home Affordable Modification Program, by          Responsibilities in
                  incorporating specific dispute resolution         Treasury’s Making
                  provisions so that the parties may discuss        Home Affordable
                  differences that arise in its administration      Program
                  and establish strategies by which to resolve
                  or mitigate them.

EVL-2011-002-1A   FHFA should review the disparity in               Evaluation of           Closed—Final action
                  compensation levels between the                   Federal Housing         taken by FHFA.
                  enterprises’ executives and the senior            Finance Agency’s
                  executives of housing-related federal             Oversight of Fannie
                  entities that are providing critical support to   Mae’s and Freddie
                  the housing finance system.                       Mac’s Executive
                                                                    Compensation
                                                                    Programs




                                 Semiannual Report to the Congress • October 1, 2012–March 31, 2013          95
      No.                         Recommendation                            Report               Status
EVL-2011-002-1B     FHFA should review the extent to which          Evaluation of         Closed—Final action
                    federal financial support for the enterprises   Federal Housing       taken by FHFA.
                    may facilitate their capacity to meet certain   Finance Agency’s
                    performance targets and, by extension, the      Oversight of Fannie
                    capacity of their executives to achieve high    Mae’s and Freddie
                    levels of compensation that may not be          Mac’s Executive
                    warranted.                                      Compensation
                                                                    Programs

EVL-2011-002-1C     FHFA should review the potential challenges     Evaluation of         Closed—Final action
                    the enterprises might face in recruiting and    Federal Housing       taken by FHFA.
                    retaining technical expertise, which might      Finance Agency’s
                    include the employment of objective metrics     Oversight of Fannie
                    to assess these issues and the extent to        Mae’s and Freddie
                    which existing compensation levels may          Mac’s Executive
                    need to be revised.                             Compensation
                                                                    Programs

EVL-2011-002-2A     FHFA should establish written criteria          Evaluation of         Closed—Final action
                    and procedures for reviewing annual             Federal Housing       taken by FHFA.
                    performance and assessment data, as             Finance Agency’s
                    well as their recommended executive             Oversight of Fannie
                    compensation levels.                            Mae’s and Freddie
                                                                    Mac’s Executive
                                                                    Compensation
                                                                    Programs

EVL-2011-002-2B     FHFA should conduct independent testing         Evaluation of         Closed—Final action
                    and verification, perhaps on a random basis,    Federal Housing       taken by FHFA.
                    to gain assurance that the enterprises’         Finance Agency’s
                    bases for developing recommended                Oversight of Fannie
                    individual executive compensation levels is     Mae’s and Freddie
                    reasonable and justified.                       Mac’s Executive
                                                                    Compensation
                                                                    Programs

EVL-2011-002-2C     FHFA should create and implement                Evaluation of         Closed—Final action
                    policies to ensure that all key executive       Federal Housing       taken by FHFA.
                    compensation documents are stored               Finance Agency’s
                    consistently and remain readily accessible      Oversight of Fannie
                    to appropriate agency officials and staff.      Mae’s and Freddie
                                                                    Mac’s Executive
                                                                    Compensation
                                                                    Programs




96   Federal Housing Finance Agency Office of Inspector General
      No.                       Recommendation                           Report                Status
EVL-2011-002-3A   To improve transparency, FHFA should           Evaluation of          Closed—Final action
                  post on its website information about          Federal Housing        taken by FHFA.
                  executive compensation packages, the           Finance Agency’s
                  enterprises’ corporate performance goals       Oversight of Fannie
                  and performance against those goals, and       Mae’s and Freddie
                  related trend data.                            Mac’s Executive
                                                                 Compensation
                                                                 Programs

EVL-2011-002-3B   To improve transparency, FHFA should post      Evaluation of          Closed—Final action
                  on its website links to the enterprises’       Federal Housing        taken by FHFA.
                  securities filings.                            Finance Agency’s
                                                                 Oversight of Fannie
                                                                 Mae’s and Freddie
                                                                 Mac’s Executive
                                                                 Compensation
                                                                 Programs

EVL-2011-001-1    FHFA should establish time frames and          Federal Housing         Closed—Final action
                  milestones, descriptions of methodologies      Finance Agency’s Exit taken by FHFA.
                  to be used, criteria for evaluating the        Strategy and Planning
                  implementation of the initiatives, and         Process for the
                  budget and financing information necessary     Enterprises’ Structural
                  to carry out its responsibilities.             Reform

EVL-2011-001-2    FHFA should develop an external                Federal Housing         Closed—Final action
                  reporting strategy, which might include        Finance Agency’s Exit taken by FHFA.
                  the augmentation of existing reports, to       Strategy and Planning
                  chronicle FHFA’s progress, including the       Process for the
                  adequacy of its resources and capacity to      Enterprises’ Structural
                  meet multiple responsibilities and mitigate    Reform
                  any shortfalls.

AUD-2012-004-1    FHFA should document fully its efforts to      FHFA’s Supervisory     Closed—Final action
                  ensure that FHLBanks correct identified        Framework for          taken by FHFA.
                  deficiencies in collateral risk management.    Federal Home Loan
                                                                 Banks’ Advances
                                                                 and Collateral Risk
                                                                 Management

AUD-2012-004-2    FHFA should implement and follow up on the     FHFA’s Supervisory     Closed—Final action
                  horizontal review recommendations related      Framework for          taken by FHFA.
                  to the need for additional guidance and        Federal Home Loan
                  training and the need to conduct a follow-up   Banks’ Advances
                  horizontal review of secured credit.           and Collateral Risk
                                                                 Management




                                Semiannual Report to the Congress • October 1, 2012–March 31, 2013        97
      No.                        Recommendation                             Report                Status
 AUD-2012-004-3     FHFA should advise FHLBanks to reassess         FHFA’s Supervisory     Closed—Final action
                    business plans periodically that rely on        Framework for          taken by FHFA.
                    troubled members for advance growth.            Federal Home Loan
                                                                    Banks’ Advances
                                                                    and Collateral Risk
                                                                    Management

 AUD-2012-004-4     FHFA should develop policies and                FHFA’s Supervisory     Closed—Final action
                    procedures to ensure that offsite monitoring    Framework for          taken by FHFA.
                    analyses relevant to supervisory issues,        Federal Home Loan
                    including those related to advances and         Banks’ Advances
                    collateral risk management, are distributed     and Collateral Risk
                    to examination staff and are used to            Management
                    enhance examinations.

 AUD-2012-004-5     FHFA should continue to enhance                 FHFA’s Supervisory     Closed—Final action
                    coordination with the federal banking           Framework for          taken by FHFA.
                    agencies and the FHLBanks, including            Federal Home Loan
                    the use of established memoranda of             Banks’ Advances
                    understanding or other written agreements,      and Collateral Risk
                    to obtain bank examinations and other           Management
                    supervisory information as warranted to
                    ensure improved collateral risk management
                    and to facilitate information sharing related
                    to member banks that present heightened
                    supervisory concerns or that have advance
                    concentrations.

 AUD-2012-004-6     FHFA should continue to pursue greater          FHFA’s Supervisory     Closed—Final action
                    participation in the Federal Financial          Framework for          taken by FHFA.
                    Institutions Examination Council to enhance     Federal Home Loan
                    the agency’s coordination with federal          Banks’ Advances
                    banking agencies and state regulatory           and Collateral Risk
                    authorities responsible for supervising and     Management
                    regulating FHLBank member banks.

 AUD-2012-004-7     FHFA should establish a consolidated global     FHFA’s Supervisory     Closed—Final action
                    watch list of member banks identified by        Framework for          taken by FHFA.
                    the FHLBanks or by FHFA that present            Federal Home Loan
                    heightened supervisory concern and use the      Banks’ Advances
                    global watch list to enhance the agency’s       and Collateral Risk
                    supervision of the FHLBanks.                    Management

 AUD-2012-003-1     FHFA’s Division of Housing Mission and          FHFA’s Oversight of    Closed—Final action
                    Goals should formally establish a policy for    Fannie Mae’s Single-   taken by FHFA.
                    its review process of underwriting standards    Family Underwriting
                    and variances including escalation of           Standards
                    unresolved issues reflecting potential lack
                    of agreement.




98   Federal Housing Finance Agency Office of Inspector General
     No.                       Recommendation                          Report                  Status
AUD-2012-003-2   FHFA’s Division of Examination Program         FHFA’s Oversight of     Closed—Final action
                 and Support should enhance existing            Fannie Mae’s Single-    taken by FHFA.
                 examination guidance for assessing             Family Underwriting
                 adherence to underwriting standards and        Standards
                 variances from them.

AUD-2011-004-1   FHFA should review the circumstances           FHFA’s Oversight        Closed—Final action
                 surrounding its not identifying the            of Fannie Mae’s         taken by FHFA.
                 foreclosure abuses at an earlier stage and     Default-Related Legal
                 develop potential enhancements to its          Services
                 capacity to identify new and emerging risks.

AUD-2011-004-2   FHFA should develop and implement              FHFA’s Oversight        Closed—Final action
                 comprehensive examination guidance and         of Fannie Mae’s         taken by FHFA.
                 procedures, together with supervisory plans,   Default-Related Legal
                 for default-related legal services.            Services

AUD-2011-004-3   FHFA should develop and implement              FHFA’s Oversight        Closed—Final action
                 policies and procedures to address poor        of Fannie Mae’s         taken by FHFA.
                 performance by default-related legal           Default-Related Legal
                 services vendors that have contractual         Services
                 relationships with both of the enterprises.

AUD-2011-003-1   FHFA should document, disseminate, and         Clifton Gunderson       Closed—Final action
                 implement a privacy training plan and          LLP’s Independent       taken by FHFA.
                 implementation approach.                       Audit of the Federal
                                                                Housing Finance
                                                                Agency’s Privacy
                                                                Program and
                                                                Implementation –
                                                                2011

AUD-2011-003-2   FHFA should identify those employees that      Clifton Gunderson       Closed—Final action
                 would benefit from additional job-specific     LLP’s Independent       taken by FHFA.
                 or role-based privacy training based on        Audit of the Federal
                 increased responsibilities related to          Housing Finance
                 personally identifiable information (PII).     Agency’s Privacy
                                                                Program and
                                                                Implementation –
                                                                2011

AUD-2011-003-3   FHFA should develop and implement              Clifton Gunderson       Closed—Final action
                 targeted, role-based training for employees    LLP’s Independent       taken by FHFA.
                 whose job functions require additional job-    Audit of the Federal
                 specific or role-based privacy training.       Housing Finance
                                                                Agency’s Privacy
                                                                Program and
                                                                Implementation –
                                                                2011




                               Semiannual Report to the Congress • October 1, 2012–March 31, 2013        99
      No.                        Recommendation                            Report                Status
 AUD-2011-003-4    FHFA should develop and implement               Clifton Gunderson      Closed—Final action
                   additional training for employees about         LLP’s Independent      taken by FHFA.
                   System of Records Notice (SORN)                 Audit of the Federal
                   requirements, focusing on the inadvertent       Housing Finance
                   creation of systems of records. This training   Agency’s Privacy
                   should stress the legal ramifications           Program and
                   potentially associated with creating systems    Implementation –
                   of records prior to publishing a SORN.          2011

 AUD-2011-003-5    FHFA should strengthen its privacy-related      Clifton Gunderson      Closed—Final action
                   procedures to ensure SORNs are completed        LLP’s Independent      taken by FHFA.
                   prior to systems becoming operational.          Audit of the Federal
                                                                   Housing Finance
                                                                   Agency’s Privacy
                                                                   Program and
                                                                   Implementation –
                                                                   2011

 AUD-2011-003-6    FHFA should require system owners of            Clifton Gunderson      Closed—Final action
                   four FHFA systems with PII to prepare           LLP’s Independent      taken by FHFA.
                   privacy impact assessments according to a       Audit of the Federal
                   checklist or template.                          Housing Finance
                                                                   Agency’s Privacy
                                                                   Program and
                                                                   Implementation –
                                                                   2011

 AUD-2011-003-7    FHFA should document the privacy impact         Clifton Gunderson      Closed—Final action
                   assessments conducted for proposed rules        LLP’s Independent      taken by FHFA.
                   of the agency as required by Section 522.       Audit of the Federal
                                                                   Housing Finance
                                                                   Agency’s Privacy
                                                                   Program and
                                                                   Implementation –
                                                                   2011

 AUD-2011-003-8    FHFA should establish a process for the         Clifton Gunderson      Closed—Final action
                   completion of template- or checklist-based      LLP’s Independent      taken by FHFA.
                   privacy impact assessments and modify           Audit of the Federal
                   policies and procedures as necessary.           Housing Finance
                                                                   Agency’s Privacy
                                                                   Program and
                                                                   Implementation –
                                                                   2011




100   Federal Housing Finance Agency Office of Inspector General
     No.                        Recommendation                           Report                Status
AUD-2011-003-9   FHFA should ensure privacy risk is              Clifton Gunderson      Closed—Final action
                 continuously assessed on systems in             LLP’s Independent      taken by FHFA.
                 production, including when functionalities      Audit of the Federal
                 change or when a major update is done.          Housing Finance
                 The Chief Privacy Officer should document,      Agency’s Privacy
                 disseminate (to system owners and the           Program and
                 Chief Information Security Officer), and        Implementation –
                 implement policies and procedures for           2011
                 continuous monitoring of information
                 systems containing PII after they are placed
                 in production. The policies and procedures
                 at a minimum should:
                 •	 document the privacy-related security
                     controls that are to be monitored to
                     protect information in an identifiable
                     form and information systems from
                     unauthorized access, use, disclosure,
                     disruption, modification, or destruction;
                 •	 determine the frequency of the privacy-
                     related security controls monitoring and
                     reporting process to the privacy office;
                 •	 document review of reports generated
                     by the monitoring of the privacy-related
                     security controls; and
                 •	 if necessary, take action on results of
                     monitoring and document results of
                     action taken.




                              Semiannual Report to the Congress • October 1, 2012–March 31, 2013       101
      No.                        Recommendation                            Report                Status
AUD-2011-001-1A FHFA should design and implement written           Audit of the Federal   Closed—Final action
                policies, procedures, and controls governing       Housing Finance        taken by FHFA.
                the receipt, processing, and disposition of        Agency’s Consumer
                consumer complaints that:                          Complaints Process
                •	 define FHFA’s and the enterprises’ roles
                    and responsibilities regarding consumer
                    complaints;
                •	 require the retention of supporting
                    documentation for all processing and
                    disposition actions;
                •	 require a consolidated management
                    reporting system, including standard
                    record formats and data elements,
                    and procedures for categorizing and
                    prioritizing consumer complaints;
                   •	 e nsure timely and accurate responses to
                       complaints;
                   •	 facilitate the analysis of trends in
                       consumer complaints received and use
                       the resulting analyses to mitigate areas
                       of risk to the agency;
                   •	 safeguard PII; and
                   •	 ensure coordination with OIG regarding
                       allegations involving fraud, waste, or
                       abuse.

AUD-2011-001-1B FHFA should assess the sufficiency of              Audit of the Federal   Closed—Final action
                allocated resources, inclusive of staffing, in     Housing Finance        taken by FHFA.
                light of the additional controls implemented       Agency’s Consumer
                to strengthen the consumer complaints              Complaints Process
                process.

AUD-2011-001-1C FHFA should determine if there are                 Audit of the Federal   Closed—Final action
                unresolved consumer complaints alleging            Housing Finance        taken by FHFA.
                fraud to ensure that appropriate action is         Agency’s Consumer
                taken promptly.                                    Complaints Process




102   Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • October 1, 2012–March 31, 2013   103
Appendix C:                                                Below, OIG presents a table that directs the reader
                                                           to the pages of this report where the information
Information Required                                       required by the Inspector General Act may be found.
by the Inspector                                           The paragraphs and figures below further address the
General Act and                                            status of OIG’s compliance with Sections 5(a)(6), (8),
                                                           (9), (10), (11), (12), and (13) of the Inspector
Subpoenas Issued                                           General Act. Finally, OIG provides information
                                                           concerning administrative subpoenas that it issued
Section 5(a) of the Inspector General Act provides         during the semiannual period.
that OIG shall, not later than April 30 and
October 31 of each year, prepare semiannual reports
summarizing its activities during the immediately
preceding six-month periods ending March 31 and
September 30. Further, Section 5(a) lists more than
a dozen categories of information that OIG must
include in its semiannual reports.

                                         Source/Requirement                                           Pages
Section 5(a)(1)- A description of significant problems, abuses, and deficiencies relating to the       6-15
administration of programs and operations of FHFA.
Section 5(a)(2)- A description of the recommendations for corrective action made by OIG with          6-15
respect to significant problems, abuses, or deficiencies.                                             79-92
Section 5(a)(3)- An identification of each significant recommendation described in previous           80-82
semiannual reports on which corrective action has not been completed.                                 87-92
Section 5(a)(4)- A summary of matters referred to prosecutive authorities and the prosecutions        19-27
and convictions that have resulted.
Section 5(a)(5)- A summary of each report made to the Director of FHFA.                                6-15
Section 5(a)(6)- A listing, subdivided according to subject matter, of each audit and evaluation       6-15
report issued by OIG during the reporting period and for each report, where applicable, the            105
total dollar value 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.                                   6-15
Section 5(a)(8)- Statistical tables showing the total number of audit and evaluation reports and      6-15
the 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      6-15
the 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                    105-106
commencement 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             106
management decision made during the reporting period.
Section 5(a)(12)- Information concerning any significant management decision with which the            106
Inspector General is in disagreement.
Section 5(a)(13)- The information described under section 05(b) of the Federal Financial               106
Management Improvement Act of 1996.




104    Federal Housing Finance Agency Office of Inspector General
Audit and Evaluation Reports                                Audit and Evaluation Reports
with Recommendations of                                     with No Management Decision
Questioned Costs, Unsupported
Costs, and Funds to Be Put to                               Section 5(a)(10) of the Inspector General Act, as
                                                            amended, requires that OIG report on each audit and
Better Use by Management
                                                            evaluation report issued before the commencement
                                                            of the reporting period for which no management
Section 5(a)(6) of the Inspector General Act, as
                                                            decision has been made by the end of the reporting
amended, requires that OIG list its reports during
                                                            period. Figure 26 (see page 106) summarizes recom-
the semiannual period that include questioned costs,
                                                            mendation number 1 of evaluation report Follow-up
unsupported costs, and funds to be put to better
                                                            on Freddie Mac’s Loan Repurchase Process (EVL-2012-
use. Section 5(a)(8) and section 5(a)(9), respectively,
                                                            007, September 13, 2012), which was issued before
require OIG to publish statistical tables showing the
                                                            the beginning of the reporting period and is awaiting
dollar value of questioned and unsupported costs,
                                                            a management decision.
and of recommendations that funds be put to better
use by management. Figure 25 (see below) discloses
OIG’s questioned and unsupported cost findings, and
recommendations that funds be put to better use for
the reporting period.


Figure 25. Funds to Be Put to Better Use by Management, Questioned Costs, and Unsupported Costs
for the Period October 1, 2012, to March 31, 2013

                                                                           Potential Monetary Benefits
   Reports Issued      Recommendation No.            Date          Questioned   Unsupported     Funds Put to
                                                                     Costs           Costs       Better Use
AUD-2013-002                      5             11/28/2012                  $-              $-       $105,000
AUD-2013-002                 1 and 4c           11/28/2012                  $-       $187,271               $-
AUD-2013-002                1, 2, and 4b        11/28/2012           $47,743                $-              $-
AUD-2013-002                 1 and 4a           11/28/2012           $21,329                $-              $-
Total                                                                $69,072         $187,271        $105,000




                                  Semiannual Report to the Congress • October 1, 2012–March 31, 2013       105
Figure 26. Summary of OIG Audit and Evaluation Reports Issued Before the Beginning of the
Reporting Period Where No Management Decision Was Made by the End of the Reporting Period

     No.                        Recommendation                                Report              Status
  EVL-2012-    FHFA and Freddie Mac should continue to carry         Follow-up on Freddie  The recommendation
    007-1      out the loan review and related reforms they          Mac’s Loan Repurchase is unresolved and
               have initiated since OIG’s original report on the     Process               a management
               Bank of America settlement with Freddie Mac                                 decision has not
               was issued.                                                                 been made as of
                                                                                           March 31, 2013.




Significantly Revised                                      federal accounting standards, and the U.S. Gov-
                                                           ernment Standard General Ledger at the transac-
Management Decisions                                       tion level.

Section 5(a)(11) of the Inspector General Act, as          For fiscal year 2012, FHFA received from GAO
amended, requires that OIG report information              an unqualified (clean) audit opinion on its annual
concerning the reasons for any significant revised         financial statements and internal control over
management decision made during the reporting              financial reporting. GAO also reported that it
period. During the six-month reporting period              identified no material weaknesses in internal con-
ended March 31, 2013, there were no significant            trols or instances of noncompliance with laws or
revised management decisions on OIG’s audits               regulations. GAO is required to perform this audit
and evaluations.                                           in accordance with HERA.

Significant Management Decision                            Several OIG reports published during the semi-
with Which the Inspector General                           annual period identified specific opportunities to
Disagrees                                                  strengthen FHFA’s internal controls. These reports
                                                           are summarized on pages 6 through 15.
Section 5(a)(12) of the Inspector General Act, as          Subpoenas Issued
amended, requires that OIG report information
concerning any significant management decision
with which the Inspector General is in disagree-           During the reporting period, OIG issued a num-
ment. During the current reporting period, there           ber of subpoenas as summarized in Figure 27 (see
were no management decisions with which the                below).
Inspector General disagreed.
                                                           Figure 27. Subpoenas Issued for the Period
Federal Financial Management                               October 1, 2012, to March 31, 2013

Improvement Act of 1996                                            Issuing Office      Number of Subpoenas
                                                            OA                                  4
The provisions of HERA require FHFA to imple-               OE                                  0
ment and maintain financial management systems              OI                                 36
that comply substantially with federal financial            Total                              40
management systems requirements, applicable




106    Federal Housing Finance Agency Office of Inspector General
Appendix D:                                            FHFA’s Controls to Detect and Prevent Improper Pay-
                                                       ments (AUD-2013-005, February 28, 2013).
OIG Reports                                            FHFA’s Oversight of the Asset Quality of Multifamily
                                                       Housing Loans Financed by Fannie Mae and Freddie
See www.fhfaoig.gov for OIG’s reports.
                                                       Mac (AUD-2013-004, February 21, 2013).

Evaluation Reports                                     CliftonLarsonAllen LLP’s Evaluation of the Federal
                                                       Housing Finance Agency’s Information Security Program
Case Study: Freddie Mac’s Unsecured Lending to         – 2012 (AUD-2013-003, November 30, 2012).
Lehman Brothers Prior to Lehman Brothers’ Bankruptcy   FHFA’s Oversight of Contract No. FHF-10-F-0007
(EVL-2013-003, March 14, 2013).                        with Advanced Technology Systems, Inc. (AUD-2013-
FHFA’s Oversight of Public Statements (ESR-2013-       002, November 28, 2012).
002, February 28, 2013).                               FHFA’s Oversight of the Enterprises’ Efforts to Recover
FHFA’s Oversight of the Enterprises’ Compensation of   Losses from Foreclosure Sales (AUD-2013-001,
Their Executives and Senior Professionals (EVL-2013-   October 17, 2012).
001, December 10, 2012).
                                                       Other Reports
Audit Reports
                                                       Analysis of the 2012 Amendments to the Senior Pre-
FHFA Should Develop and Implement a Risk-Based         ferred Stock Purchase Agreements (WPR-2013-002,
Plan to Monitor the Enterprises’ Oversight of Their    March 20, 2013).
Counterparties’ Compliance with Contractual Require-   The Housing Government-Sponsored Enterprises’ Chal-
ments Including Consumer Protection Laws (AUD-         lenges in Managing Interest Rate Risks (WPR-2013-01,
2013-008, March 26, 2013).                             March 11, 2013).
Enhanced FHFA Oversight Is Needed to Improve Mort-     Enterprise Oversight of Property Preservation Inspections
gage Servicer Compliance with Consumer Complaint       (SIR-2013-0002, November 26, 2012).
Requirements (AUD-2013-007, March 21, 2013).
                                                       Weakness in Enterprises’ Uniform Residential Loan
FHFA Can Enhance Its Oversight of FHLBank              Application (Freddie Mac Form 65/Fannie Mae Form
Advances to Insurance Companies by Improving           1003) (SIR-2013-001, November 15, 2012).
Communication with State Insurance Regulators and
Standard-Setting Groups (AUD-2013-006, March 18,
2013).




                                 Semiannual Report to the Congress • October 1, 2012–March 31, 2013        107
Appendix E: OIG Organizational Chart



                                                    Inspector General
                                                       Steve Linick

                                                      Principal Deputy
                                                     Inspector General

                    Chief of                                                                               Director of
                                                                                       Chief Counsel
                     Staff                                                                               Special Projects




     Director of                 Director of
 Policy, Oversight,            External Affairs
    and Review




     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:                                              Office of Investigations

Description of OIG                                       OI investigates allegations of misconduct and fraud
                                                         involving FHFA and the GSEs in accordance with
Offices and Strategic                                    CIGIE’s Quality Standards for Investigations and
Plan                                                     guidelines that the Attorney General issues.

                                                         OI’s investigations may address administrative, civil,
                                                         and criminal violations of laws and regulations.
OIG Offices                                              Investigations may relate to FHFA or GSE
                                                         employees, contractors, consultants, and any alleged
Office of Audits                                         wrongdoing involving FHFA’s or the GSEs’ programs
                                                         and operations. Offenses investigated may include
OA provides a full range of professional audit and
                                                         mail, wire, bank, accounting, securities, or mortgage
attestation services for FHFA’s programs and opera-
                                                         fraud, as well as violations of the tax code,
tions. Through its performance audits and attestation
                                                         obstruction of justice, and money laundering.
engagements, OA helps FHFA: (1) promote economy,
efficiency, and effectiveness;                                             To date, OI has opened numerous
(2) detect and deter fraud, waste,                                         criminal and civil investigations,
and abuse; and (3) ensure com-                                             but by their nature, these investi-
pliance with applicable laws and
                                        The Hotline for                    gations and their resulting reports
regulations. Under the Inspector                                           are not generally made public.
General Act, inspectors general
                                        fraud, waste, or                   However, if an investigation reveals
are required to comply with the         abuse related to                   criminal activity, OI refers the mat-
Government Auditing Standards,                                             ter to DOJ for possible prosecution
commonly referred to as the             FHFA’s programs                    or recovery of monetary damages
“Yellow Book,” issued by GAO. OA                                           and penalties. OI reports adminis-
performs its audits and attestation     and operations is                  trative misconduct to management
engagements in accordance with                                             officials for consideration of disci-
the Yellow Book.                        (800) 793-7724 or                  plinary or remedial action.

Office of Evaluations                   oighotline@fhfaoig.gov              OI also manages OIG’s Hotline
                                                                            that receives tips and complaints
OE provides independent and                                                 of fraud, waste, or abuse in FHFA’s
objective reviews, studies, sur-                                            programs and operations. The
vey reports, and analyses of FHFA’s programs and         Hotline allows concerned parties to report their alle-
operations. OE’s evaluations are generally limited in    gations to OIG directly and confidentially. OI honors
scope. The Inspector General Reform Act of 2008          all applicable whistleblower protections. As part of its
requires that inspectors general adhere to the Quality   effort to raise awareness of fraud, OI actively pro-
Standards for Inspection and Evaluation, commonly        motes the Hotline through OIG’s website, posters,
referred to as the “Blue Book,” issued by CIGIE. OE      emails to FHFA and GSE employees, and OIG’s
performs its evaluations in accordance with the Blue     semiannual reports.
Book.


                                  Semiannual Report to the Congress • October 1, 2012–March 31, 2013       109
Executive Office                                          planning and evaluation to organizational and
The Executive Office (EO) provides leadership             individual accomplishment of goals and objectives.
and programmatic direction for OIG’s offices and          Regarding OIG’s budget and financial management,
activities.                                               OAd coordinates budget planning and execution and
                                                          oversees all of OIG’s procedural guidance for finan-
EO includes the Office of Counsel (OC), which             cial management and procurement integrity.
serves as the chief legal advisor to the Inspector
General and provides independent legal advice,            OAd also administratively supports the Chief of Staff
counseling, and opinions to OIG about its programs        and the Deputy Inspector General for Audits as they
and operations. OC also reviews audit and evalua-         implement OIG’s Internal Management Assessment
tion reports for legal sufficiency and compliance with    Program, which requires the routine inspection of
OIG’s policies and priorities. Additionally, it reviews   each OIG office to ensure that it complies with
drafts of FHFA regulations and policies and prepares      applicable requirements. OAd also administers OIG’s
comments as appropriate. OC also coordinates with         Equal Employment Opportunities Program.
FHFA’s Office of General Counsel and manages
OIG’s responses to requests and appeals made under        OIG’s Strategic Plan
the Freedom of Information Act and the Privacy Act.
                                                          On September 7, 2011, OIG published a Strategic
EO also includes the Office of Policy, Oversight, and
                                                          Plan to define its goals and objectives, guide develop-
Review (OPOR), which provides advice, consulta-
                                                          ment of its performance criteria, establish measures
tion, and assistance regarding OIG’s priorities and the
                                                          to assess accomplishments, create budgets, and report
scope of its evaluations, audits, and all other pub-
                                                          on progress. OIG will continue to monitor events;
lished reports. In addition, OPOR manages OIG’s
                                                          make changes to its Strategic Plan as circumstances
Audit and Evaluation Report Production Process and
                                                          warrant; and strive to remain relevant regarding areas
produces special reports and white papers addressing
                                                          of concern to FHFA, the GSEs, Congress, and the
complex housing finance issues.
                                                          American people.
The Office of External Affairs is also within EO, and
                                                          Within the Strategic Plan, OIG has established
it responds to inquiries from the press and members
                                                          several goals that align with FHFA’s strategic goals.
of Congress.

The Office of Special Projects is also within EO,         Strategic Goal 1—Adding Value
and it supports other OIG offices on high-impact          OIG will promote the economy, efficiency, and effec-
projects.                                                 tiveness of FHFA’s programs and operations and assist
                                                          FHFA and its stakeholders to solve problems related
Office of Administration
                                                          to the conservatorships and the conditions that led to
The Office of Administration (OAd) manages and            them.
oversees OIG administration, including budget,
human resources, safety, facilities, financial man-       Strategic Goal 2—Operating with Integrity
agement, information technology, and continuity           OIG will promote the integrity of FHFA’s programs
of operations. For human resources, OAd develops          and operations through the identification and preven-
policies to attract, develop, and retain exceptional      tion of fraud, waste, or abuse.
people, with an emphasis on linking performance

110     Federal Housing Finance Agency Office of Inspector General
Strategic Goal 3—Promoting Productivity                  Organizational Guidance
OIG will deliver quality products and services to its
stakeholders by maintaining an effective and efficient   OIG has developed and promulgated policies and
internal quality control program to ensure that OIG’s    procedural manuals for each of its offices. These man-
results withstand professional scrutiny.                 uals set forth uniform standards and guidelines for
                                                         the performance of each office’s essential responsibil-
Strategic Goal 4—Valuing OIG Employees                   ities and are intended to help ensure the consistency
OIG will maximize the performance of its employees       and integrity of OIG’s operations.
and the organization.




                                 Semiannual Report to the Congress • October 1, 2012–March 31, 2013       111
Appendix G: Figure Sources
Figure 1. Federal Housing Finance Agency Office of Inspector General, “FHFA’s Control and Oversight of Enterprise 	
          Executive Compensation,” FHFA’s Oversight of the Enterprises’ Compensation of Their Executives and	
          Senior Professionals, EVL-2013-001, at 12 (December 10, 2012). Accessed: April 11, 2013, at www.
          fhfaoig.gov/Content/Files/EVL-2013-001.pdf.

Figure 2. Federal Housing Finance Agency Office of Inspector General, “FHFA’s Oversight of Non-Executive
          Compensation,” FHFA’s Oversight of the Enterprises’ Compensation of Their Executives and Senior
          Professionals, EVL-2013-001, at 17 (December 10, 2012). Accessed: April 11, 2013, at www.fhfaoig.
          gov/Content/Files/EVL-2013-001.pdf.

Figure 3. Federal Housing Finance Agency Office of Inspector General, “Preface,” FHFA’s Oversight of the
          Enterprises’ Compensation of Their Executives and Senior Professionals, EVL-2013-001, at 6 (December
          10, 2012). Accessed: April 11, 2013, at www.fhfaoig.gov/Content/Files/EVL-2013-001.pdf.

Figure 4. Fannie Mae, “Notes to Consolidated Financial Statements,” Form 10-K for the Fiscal Year Ended
          December 31, 2012, at F-55. Accessed: April 11, 2013, at www.fanniemae.com/resources/file/ir/pdf/
          quarterly-annual-results/2012/10k_2012.pdf. Freddie Mac, “Deferred Tax Assets, Net,” Form 10-K for
          the Fiscal Year Ended December 31, 2012, at 273. Accessed: April 11, 2013, at www.freddiemac.com/
          investors/er/pdf/10k_022813.pdf.

Figure 5. Federal Housing Finance Agency, “Historical Data Tables,” 2011 Report to Congress, at 75, 92 (June 13,
          2012). Accessed: April 11, 2013, at www.fhfa.gov/webfiles/24009/FHFA_RepToCongr11_6_14_508.
          pdf. Department of the Treasury, Treasury Department Announces Further Steps to Expedite Wind Down of
          Fannie Mae and Freddie Mac (August 17, 2012). Accessed: April 11, 2013, at www.treasury.gov/press-
          center/press-releases/Pages/tg1684.aspx.

Figure 6. Data provided by servicers that OIG reviewed during the course of our audit fieldwork (Enhanced FHFA
          Oversight Is Needed to Improve Mortgage Servicer Compliance with Consumer Complaint Requirements
          (AUD-2013-007, March 21, 2013)).

Figure 7. Federal Home Loan Banks Office of Finance, “Security Ownership of Certain Beneficial Owners,” 2009
          Combined Financial Report, at 186. Accessed: April 11, 2013, at www.fhlb-of.com/ofweb_userWeb/
          resources/09yrend.pdf. Federal Home Loan Banks Office of Finance, “Combined Statement of
          Condition,” Combined Financial Report for the Year Ended December 31, 2011, at 42. Accessed: April
          11, 2013, at www.fhlb-of.com/ofweb_userWeb/resources/11yrend.pdf. Federal Home Loan Banks
          Office of Finance, “Combined Financial Condition,” Combined Financial Report for the Quarterly Period
          Ended September 30, 2012, at 8. Accessed: April 11, 2013, at www.fhlb-of.com/ofweb_userWeb/
          resources/12Q3end.pdf.

Figure 8. Mortgage Bankers Association, Multifamily Real Estate and Multifamily Real Estate Finance Markets
          Presentation (June 2012).

Figure 9. Federal Reserve Bank of St. Louis, 1-Month London Interbank Offered Rate (LIBOR), Based on U.S.
          Dollar (USD1MTD156N). Accessed: April 11, 2013, at http://research.stlouisfed.org/fred2/series/
          USD1MTD156N. Federal Reserve Bank of St. Louis, Graph: 1-Month Eurodollar Deposit Rate (London)
          (DED1). Accessed: April 11, 2013, at www.research.stlouisfed.org/fred2/graph/?id=DED1.

Figure 11. Government Accountability Office, “Management’s Discussion and Analysis,” Financial Audit: Federal
           Housing Finance Agency’s Fiscal Years 2011 and 2010 Financial Statements, GAO-12-161, at 17
           (November 2011). Accessed: April 11, 2013, at http://gao.gov/assets/590/586278.pdf.




112     Federal Housing Finance Agency Office of Inspector General
Figure 12. Inside Mortgage Finance, “Mortgage & Asset Securities Issuance,” Mortgage Market Statistical Annual:
           Volume II: Secondary Market, at 4 (2013).

Figure 13. Federal Housing Finance Agency, “Historical Data Tables,” 2011 Report to Congress, at 72, 89 (June 13,
           2012). Accessed: April 11, 2013, at www.fhfa.gov/webfiles/24009/FHFA_RepToCongr11_6_14_508.pdf.
           Fannie Mae, “Table 9: Summary of Consolidated Results of Operations,” Form 10-K for the Fiscal Year
           Ended December 31, 2012, at 75. Accessed: April 11, 2013, at www.fanniemae.com/resources/file/
           ir/pdf/quarterly-annual-results/2012/10k_2012.pdf. Freddie Mac, “Table 9 — Summary Consolidated
           Statements of Comprehensive Income,” Form 10-K for the Fiscal Year Ended December 31, 2012, at 87.
           Accessed: April 11, 2013, at www.freddiemac.com/investors/er/pdf/10k_022813.pdf.

Figure 14. Fannie Mae, “Table 9: Summary of Consolidated Results of Operations,” “Table 13: Fair Value Losses,
           Net,” Form 10-K for the Fiscal Year Ended December 31, 2012, at 75, 79. Accessed: April 11, 2013, at
           www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2012/10k_2012.pdf. Freddie Mac,
           “Table 9 — Summary Consolidated Statements of Comprehensive Income,” Form 10-K for the Fiscal
           Year Ended December 31, 2012, at 87. Accessed: April 11, 2013, at www.freddiemac.com/investors/er/
           pdf/10k_022813.pdf.

Figure 15. Standard & Poor’s, S&P/Case-Shiller Home Price Indices, 20-City Composite, December 2012, Seasonally
           Adjusted. Accessed: April 11, 2013, at www.standardandpoors.com/indices/sp-case-shiller-home-price-
           indices/en/us/?indexId=spusa-cashpidff--p-us----.

Figure 16. 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,” Data as of March 29, 2013 on Treasury and Federal Reserve Purchase
           Programs for GSE and Mortgage-Related Securities, at 2, 3. Accessed: April 11, 2013, at www.fhfa.gov/
           webfiles/25080/TSYSupport%202013-03-29.pdf.

Figure 17. Federal Home Loan Bank of Boston, FHLB System. Accessed: April 11, 2013, at www.fhlbboston.com/
           aboutus/thebank/06_01_04_fhlb_system.jsp.

Figure 18. Federal Home Loan Banks Office of Finance, “Combined Statement of Income,” Combined Financial
           Report for the Year Ended December 31, 2012, at F-4. Accessed: April 11, 2013, at www.fhlb-of.com/
           ofweb_userWeb/resources/12yrend.pdf. Other-than-temporary impairment losses can be referenced to
           Table 33, p. 60, in the Federal Home Loan Banks Office of Finance’s Combined Financial Report for the
           Year Ended December 31, 2012.

Figure 19. Federal Home Loan Banks Office of Finance, “Selected Financial Data,” Combined Financial Report
           for the Year Ended December 31, 2011, at 34. Accessed: April 11, 2013, 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, 2012, at 35. Accessed: April 11,
           2013, at www.fhlb-of.com/ofweb_userWeb/resources/12yrend.pdf.

Figure 20. Federal Housing Finance Agency, “Historical Data Tables,” 2011 Report to Congress, at 75, 92 (June 13,
           2012). Accessed: April 11, 2013, at www.fhfa.gov/webfiles/24009/FHFA_RepToCongr11_6_14_508.
           pdf. Department of the Treasury, Treasury Department Announces Further Steps to Expedite Wind Down of
           Fannie Mae and Freddie Mac (August 17, 2012). Accessed: April 11, 2013, at www.treasury.gov/press-
           center/press-releases/Pages/tg1684.aspx.

Figure 21. Data provided by FHFA’s Division of Housing, Mission and Goals, Office of Policy, Research and Analysis,
           based on Fannie Mae and Freddie Mac data. The data represent the estimated average guarantee fees
           charged by the enterprises for single-family mortgages delivered from 2000 through June 30, 2012.

Figure 22. Data provided by FHFA’s Division of Housing, Mission and Goals, Office of Financial Analysis.




                                   Semiannual Report to the Congress • October 1, 2012–March 31, 2013         113
Appendix H: Endnotes                                              webfiles/24632/2012FHFAPARF.pdf.

                                                            7	    Id., “FHFA at a Glance,” at 10.
1	    e Inspector General Act of 1978, 5 U.S.C. App.
     Th
     3 § 5, requires that each inspector general compile
     a report of his or her office’s operations for each    8	    Id., “FY 2012 Profile,” at 11.
     six-month period ending March 31 and Septem-
     ber 30.                                                9	    I d., “Fannie Mae and Freddie Mac
                                                                   (the Enterprises),” at 15.
2	   Fannie Mae, Fannie Mae Reports Largest Net
      Income in Company History; $17.2 Billion for 2012     10	   I d., “Regulator of the Enterprises and the FHL-
      and $7.6 Billion for Fourth Quarter 2012, at 1               Banks,” at 10.
      (April 2, 2013). Accessed: April 12, 2013, at www.
      fanniemae.com/resources/file/ir/pdf/quarterly-an-     11	    epartment of the Treasury, Written Testimony by
                                                                  D
      nual-results/2012/q42012_release.pdf.                       Secretary of the Treasury Timothy F. Geithner before
                                                                  the Senate Committee on Banking, Housing &
3	    emorandum from Steve A. Linick, Inspector
     M                                                            Urban Affairs (March 15, 2011). Accessed: March
     General, Federal Housing Finance Agency Office               2, 2013, at www.treasury.gov/press-center/press-re-
     of Inspector General, to Edward J. DeMarco,                  leases/Pages/tg1103.aspx.
     Acting Director, Federal Housing Finance Agen-
     cy, Potential losses to Fannie Mae and Freddie Mac     12	    ederal Housing Finance Agency, “Executive
                                                                  F
     from LIBOR manipulation (November 2, 2012).                  Summary,” Conservator’s Report on the Enterprises’
     Accessed: March 13, 2013, at www.fhfaoig.gov/                Financial Performance, Second Quarter 2010, at 3.
     Content/Files/libor.pdf.                                     Accessed: March 3, 2013, at www.fhfa.gov/web-
                                                                  files/16591/ConservatorsRpt82610.pdf.
4	    s a matter of policy, OIG notes that it has com-
     A
     mented on an unpublished draft rule during the         13	    ederal Housing Finance Agency, “Strategic Goal
                                                                  F
     semiannual period when a comment is made, and                2: Contracting Enterprise Operations,” A Strate-
     then OIG discusses the substance of its comment              gic Plan for Enterprise Conservatorships: The Next
     in a later semiannual report once the rule is final-         Chapter in a Story that Needs an Ending, at 14
     ized and published.                                          (February 21, 2012). Accessed: March 3, 2013, at
                                                                  www.fhfa.gov/webfiles/23344/StrategicPlanCon-
5	    ederal Housing Finance Agency, About FHFA.
     F                                                            servatorshipsFINAL.pdf.
     Accessed: March 2, 2013, at www.fhfa.gov/
     Default.aspx?Page=4.                                   14	   Id.

6	    ederal Housing Finance Agency, “Mes-
     F                                                      15	   I d., “Strategic Goal 2: Contracting Enterprise
     sage from the Acting Director,” 2012 Per-                     Operations,” at 15.
     formance and Accountability Report, at 4.
     Accessed: March 3, 2013, at www.fhfa.gov/              16	    ederal Housing Finance Agency, FHFA Out-
                                                                  F
                                                                  lines 2013 Goals for Fannie Mae and Freddie Mac


114       Federal Housing Finance Agency Office of Inspector General
      (March 4, 2013). Accessed: March 29, 2013, at               com/investors/er/pdf/10k_022813.pdf.
      www.fhfa.gov/webfiles/25025/Scorecard2013.pdf.
      Federal Housing Finance Agency, Conservatorship       20	    epartment of the Treasury, Treasury Department
                                                                  D
      Strategic Plan: Performance Goals for 2013, at 2.           Announces Further Steps to Expedite Wind Down of
      Accessed: April 17, 2013, at www.fhfa.gov/web-              Fannie Mae and Freddie Mac (August 17, 2012).
      files/25023/2013EnterpriseScorecard3413.pdf.                Accessed: March 21, 2013, at www.treasury.gov/
                                                                  press-center/press-releases/Pages/tg1684.aspx.
17	    epartment of the Treasury, “Amendment to Sec-
      D
      tion 5.7 (Relating to Owned Mortgage Assets),”        21	    reddie Mac, “Our Business Segments,” Form
                                                                  F
      Third Amendment to Amended and Restated Senior              10-K for the Fiscal Year Ended December 31, 2012,
      Preferred Stock Purchase Agreement, at 6 (August            at 16. Accessed: March 19, 2013, at www.freddie-
      2012). Accessed: March 19, 2013, at www.trea-               mac.com/investors/er/pdf/10k_022813.pdf.
      sury.gov/press-center/press-releases/Documents/
      Fannie.Mae.Amendement.pdf. Department of              22	   Id.
      the Treasury, “Amendment to Section 5.7 (Relat-
      ing to Owned Mortgage Assets),” Third Amend-          23	   Id.
      ment to Amended and Restated Senior Preferred
      Stock Purchase Agreement, at 6 (August 2012).
                                                            24	    ederal Housing Finance Agency, “Historical
                                                                  F
      Accessed: March 19, 2013, at www.treasury.gov/
                                                                  Data Tables,” 2011 Report to Congress, at 72, 89
      press-center/press-releases/Documents/Freddie.
                                                                  (June 13, 2012). Accessed: April 11, 2013, at
      Mac.Amendment.pdf. The enterprises’ investment
                                                                  www.fhfa.gov/webfiles/24009/FHFA_RepTo-
      portfolios, currently capped at $1.3 trillion ($650
                                                                  Congr11_6_14_508.pdf. Fannie Mae, “Table 9:
      billion for each enterprise), were derived from
                                                                  Summary of Consolidated Results of Operations,”
      Fannie Mae’s and Freddie Mac’s Third Amendment
                                                                  Form 10-K for the Fiscal Year Ended December 31,
      to Amended and Restated Senior Preferred Stock
                                                                  2012, at 75. Accessed: April 11, 2013, at www.
      Purchase Agreement, listed at the links above.
                                                                  fanniemae.com/resources/file/ir/pdf/quarterly-an-
                                                                  nual-results/2012/10k_2012.pdf. Freddie Mac,
18	    ederal Housing Finance Agency, “Strategic Goal
      F                                                           “Table 9 — Summary Consolidated Statements of
      4—Means and Strategies,” Preparing a Foundation             Comprehensive Income,” Form 10-K for the Fiscal
      for a More Efficient and Effective Housing Finance          Year Ended December 31, 2012, at 87. Accessed:
      System: Strategic Plan, Federal Housing Finance             April 11, 2013, at www.freddiemac.com/investors/
      Agency, Fiscal Years 2013-2017, at 21. Accessed:            er/pdf/10k_022813.pdf.
      March 19, 2013, at www.fhfa.gov/webfiles/23930/
      FHFA%20Draft%20Strategic%20Plan%202013-
                                                            25	    annie Mae, “Executive Summary,” Form 10-K
                                                                  F
      2017.pdf.
                                                                  for the Fiscal Year Ended December 31, 2012, at
                                                                  3. Accessed: April 2, 2013, at www.fanniemae.
19	    reddie Mac, “Contracting the Dominant Pres-
      F                                                           com/resources/file/ir/pdf/quarterly-annual-re-
      ence of the GSEs in the Marketplace,” Form 10-K             sults/2012/10k_2012.pdf.
      for the Fiscal Year Ended December 31, 2012, at
      8. Accessed: April 12, 2013, at www.freddiemac.
                                                            26	    reddie Mac, “Consolidated Results of Oper-
                                                                  F
                                                                  ations,” Form 10-K for the Fiscal Year Ended

                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013         115
      December 31, 2012, at 87. Accessed: April 11,               com/investors/er/pdf/10k_022813.pdf.
      2013, at www.freddiemac.com/investors/er/
      pdf/10k_022813.pdf.                                   31	   Id., “Our Primary Business Objectives,” at 6.

27	    annie Mae, “Comprehensive Income (Loss),”
      F                                                     32	   Id.
      Form 10-K for the Fiscal Year Ended December 31,
      2012, at 3. Accessed: April 17, 2013, at www.         33	    annie Mae, “Our Business Objectives and Strate-
                                                                  F
      fanniemae.com/resources/file/ir/pdf/quarter-                gy,” Form 10-K for the Fiscal Year Ended December
      ly-annual-results/2012/10k_2012.pdf. Freddie                31, 2012, at 2. Accessed: April 4, 2013, at www.
      Mac, “Consolidated Financial Results — 2012                 fanniemae.com/resources/file/ir/pdf/quarter-
      versus 2011,” Form 10-K for the Fiscal Year Ended           ly-annual-results/2012/10k_2012.pdf. Freddie
      December 31, 2012, at 11. Accessed: April 17,               Mac, “Single-Family Guarantee,” Form 10-K for
      2013, at www.freddiemac.com/investors/er/                   the Fiscal Year Ended December 31, 2012, at 106.
      pdf/10k_022813.pdf.                                         Accessed: April 4, 2013, at www.freddiemac.com/
                                                                  investors/er/pdf/10k_022813.pdf.
28	    annie Mae, “Comprehensive Income (Loss),”
      F
      Form 10-K for the Fiscal Year Ended December 31,      34	    reddie Mac, “Our Primary Business Objectives,”
                                                                  F
      2012, at 4. Accessed: April 17, 2013, at www.               Form 10-K for the Fiscal Year Ended December 31,
      fanniemae.com/resources/file/ir/pdf/quarter-                2012, at 7. Accessed: April 4, 2013, at www.fred-
      ly-annual-results/2012/10k_2012.pdf. Freddie                diemac.com/investors/er/pdf/10k_022813.pdf.
      Mac, “Consolidated Financial Results — 2012                 Fannie Mae, “Credit Loss Performance Metrics,”
      versus 2011,” Form 10-K for the Fiscal Year Ended           Form 10-K for the Fiscal Year Ended December 31,
      December 31, 2012, at 11. Accessed: April 17,               2012, at 88. Accessed: April 17, 2013, at www.
      2013, at www.freddiemac.com/investors/er/                   fanniemae.com/resources/file/ir/pdf/quarterly-an-
      pdf/10k_022813.pdf.                                         nual-results/2012/10k_2012.pdf.

29	    annie Mae, “Consolidated Results of Opera-
      F                                                     35	    reddie Mac, “Full-Year Net Income and Com-
                                                                  F
      tions,” Form 10-K for the Fiscal Year Ended Decem-          prehensive Income (Loss),” Fourth Quarter 2012
      ber 31, 2012, at 75. Accessed: April 2, 2013, at            Financial Results Supplement, at 4 (February 28,
      www.fanniemae.com/resources/file/ir/pdf/quarter-            2013). Accessed: March 4, 2013, at www.freddie-
      ly-annual-results/2012/10k_2012.pdf.                        mac.com/investors/er/pdf/supplement_4q12.pdf.

30	    reddie Mac, “Consolidated Results of Opera-
      F                                                     36	    reddie Mac, “Quantitative and Qualitative
                                                                  F
      tions,” “Provision for Credit Losses,” Form 10-K            Disclosures About Market Risk,” Form 10-K for
      for the Fiscal Year Ended December 31, 2012, at 87,         the Fiscal Year Ended December 31, 2012, at 195.
      90. Accessed: April 17, 2013, at www.freddiemac.            Accessed: March 4, 2013, at www.freddiemac.
                                                                  com/investors/er/pdf/10k_022813.pdf.

                                                            37	   Id., “Derivative Instruments,” at 263.

                                                            38	   Fannie Mae, “Consolidated Results of

116       Federal Housing Finance Agency Office of Inspector General
      Operations,” “Summary of Our Financial Per-                 edgar/data/1026214/000119312512453228/
      formance for 2012,” Form 10-K for the Fis-                  d420816d10q.htm.
      cal Year Ended December 31, 2012, at 79, 4.
      Accessed: April 9, 2013, at www.fanniemae.            43	    reddie Mac, “Contracting the Dominant
                                                                  F
      com/resources/file/ir/pdf/quarterly-annual-re-              Presence of the GSEs in the Marketplace,”
      sults/2012/10k_2012.pdf. Freddie Mac, “Consol-              Form 10-Q for the Quarterly Period Ended
      idated Results of Operations,” Form 10-K for the            September 30, 2012, at 6. Accessed: March
      Fiscal Year Ended December 31, 2012, at 87, 91.             2, 2013, at www.sec.gov/Archives/edgar/
      Accessed: April 9, 2013, at www.freddiemac.com/             data/1026214/000119312512453228/
      investors/er/pdf/10k_022813.pdf.                            d420816d10q.htm. Federal Housing Finance
                                                                  Agency, “Table 2: Dividends on Enterprise Draws
39	    reddie Mac, 30-Year Fixed-Rate Mortgages Since
      F                                                           from Treasury,” Data as of March 29, 2013 on
      1971. Accessed: March 26, 2013, at www.freddie-             Treasury and Federal Reserve Purchase Programs
      mac.com/pmms/pmms30.htm.                                    for GSE and Mortgage-Related Securities, at 3.
                                                                  Accessed: April 11, 2013, at www.fhfa.gov/
40	    ederal Housing Finance Agency Office of Inspec-
      F                                                           webfiles/25080/TSYSupport%202013-03-29.pdf.
      tor General, “Pre-conservatorship Examination
      Results,” The Housing Government-Sponsored Enter-     44	    annie Mae, “Summary of Our Financial Perfor-
                                                                  F
      prises’ Challenges in Managing Interest Rate Risks,         mance for 2012,” Form 10-K for the Fiscal Year
      WPR-2013-01, at 26 (March 11, 2013). Accessed:              Ended December 31, 2012, at 4. Accessed: April
      March 26, 2013, at www.fhfaoig.gov/Content/                 2, 2013, at www.fanniemae.com/resources/file/ir/
      Files/WPR-2013-01_2.pdf.                                    pdf/quarterly-annual-results/2012/10k_2012.pdf.

41	    ederal Housing Finance Agency Office of Inspec-
      F                                                     45	    reddie Mac, “Summary of Financial Results,”
                                                                  F
      tor General, “Amendments to the PSPAs,” Analysis            “Total Equity (Deficit),” “Liquidity,” “Issuance of
      of the 2012 Amendments to the Senior Preferred              Senior Preferred Stock,” Form 10-K for the Fiscal
      Stock Purchase Agreements, WPR-2013-002, at                 Year Ended December 31, 2012, at 3, 130, 178,
      11 (March 20, 2013). Accessed: April 9, 2013,               269. Accessed: April 12, 2013, at www.freddie-
      at www.fhfaoig.gov/Content/Files/WPR-2013-                  mac.com/investors/er/pdf/10k_022813.pdf.
      002_2.pdf.
                                                            46	    annie Mae, “Summary of Our Financial Perfor-
                                                                  F
42	    annie Mae, “Amendment to Senior Preferred
      F                                                           mance for 2012,” Form 10-K for the Fiscal Year
      Stock Purchase Agreement with Treasury,” Form               Ended December 31, 2012, at 4. Accessed: April
      10-Q for the Quarterly Period Ended September               2, 2013, at www.fanniemae.com/resources/file/ir/
      30, 2012, at 12. Accessed: March 2, 2013, at                pdf/quarterly-annual-results/2012/10k_2012.pdf.
      www.fanniemae.com/resources/file/ir/pdf/quar-
      terly-annual-results/2012/q32012.pdf. Freddie         47	    reddie Mac, “Total Equity (Deficit),” Form
                                                                  F
      Mac, “Amendment to the Purchase Agreement                   10-K for the Fiscal Year Ended December 31,
      with Treasury,” Form 10-Q for the Quarterly                 2012, at 130. Accessed: March 4, 2013, at www.
      Period Ended September 30, 2012, at 2. Accessed:
      March 2, 2013, at www.sec.gov/Archives/


                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013          117
      freddiemac.com/investors/er/pdf/10k_022813.                   Home Loan Banks. Accessed: March 20, 2013,
      pdf.                                                          at www.fhlbanks.com/overview_whyfhlb.htm.
                                                                    Federal Home Loan Banks Office of Finance,
48	    ederal Housing Finance Agency, “Table 1: Quar-
      F                                                             “Business,” Combined Financial Report for the
      terly Draws on Treasury Commitments to Fannie                 Year Ended December 31, 2011, at 2, 3. Accessed:
      Mae and Freddie Mac per the Senior Preferred                  March 20, 2013, at www.fhlb-of.com/ofweb_user-
      Stock Purchase Agreements,” “Table 2: Dividends               Web/resources/11yrend.pdf.
      on Enterprise Draws from Treasury,” Data as of
      March 29, 2013 on Treasury and Federal Reserve          55	    ederal Home Loan Banks Office of Finance,
                                                                    F
      Purchase Programs for GSE and Mortgage-Related                “Business,” Combined Financial Report for the Year
      Securities, at 2, 3. Accessed: April 4, 2013, at www.         Ended December 31, 2011, at 2. Accessed: March
      fhfa.gov/webfiles/25080/TSYSupport%202013-                    20, 2013, at www.fhlb-of.com/ofweb_userWeb/
      03-29.pdf.                                                    resources/11yrend.pdf.

49	   I d., “Table 2: Dividends on Enterprise Draws          56	    ederal Home Loan Banks Office of Finance,
                                                                    F
       from Treasury,” at 3.                                        “Business,” Combined Financial Report for the Year
                                                                    Ended December 31, 2012, at 3. Accessed: April
50	   I d., “Table 3: Treasury Purchases of Freddie Mac            2, 2013, at www.fhlb-of.com/ofweb_userWeb/
       and Fannie Mae MBS,” “Table 4: Federal Reserve               resources/12yrend.pdf.
       GSE and Ginnie Mae MBS Purchase Program,”
       “Table 5: Federal Reserve Purchases of GSE Debt,”      57	   I d., “Table 6 - Membership by Type of Member,”
       at 4, 5, 6, 7.                                                at 31.

51	    iana Hancock and Wayne Passmore, Federal
      D                                                       58	    ederal Home Loan Banks Office of Finance,
                                                                    F
      Reserve Board, “The Structure of the U.S. Sec-                “Financial Discussion and Analysis of Combined
      ondary Mortgage Market: Late-2008 through                     Financial Condition and Combined Results of
      Early 2010,” Did the Federal Reserve’s MBS Pur-               Operations,” Combined Financial Report for the
      chase Program Lower Mortgage Rates?. Accessed:                Quarterly Period Ended September 30, 2012, at 3.
      March 7, 2013, at www.federalreserve.gov/pubs/                Accessed: March 3, 2013, at www.fhlb-of.com/
      feds/2011/201101/index.html.                                  ofweb_userWeb/resources/12Q3end.pdf.

52	    ederal Home Loan Banks Office of Finance,
      F                                                       59	   Id., “Overview,” at 3.
      “Overview,” Combined Financial Report for the
      Quarterly Period Ended September 30, 2012, at 3.        60	   Id., at cover page.
      Accessed: March 3, 2013, at www.fhlb-of.com/
      ofweb_userWeb/resources/12Q3end.pdf.                    61	    e FHLBank System can borrow at favorable
                                                                    Th
                                                                    rates due to the perception in financial markets
53	   I d., “Notes to Combined Financial Statements,” at           that the federal government will guarantee repay-
       F-8.                                                         ment of its debt even though such a guarantee
                                                                    has not been made explicitly. This phenomenon
54	   Federal Home Loan Banks, Overview: The Federal               is known as the “implicit guarantee.” See Federal

118        Federal Housing Finance Agency Office of Inspector General
      Housing Finance Agency Office of Inspector                  “Selected Financial Data,” Combined Financial
      General, “Preface,” FHFA’s Oversight of Troubled            Report for the Year Ended December 31, 2012, at
      Federal Home Loan Banks, EVL-2012-001, at 6                 35. Accessed: April 18, 2013, at www.fhlb-of.com/
      (January 11, 2012). Accessed: March 20, 2013,               ofweb_userWeb/resources/12yrend.pdf.
      at www.fhfaoig.gov/Content/Files/Troubled%20
      Banks%20EVL-2012-001.pdf.                             67	    ederal Home Loan Banks Office of Finance,
                                                                  F
                                                                  “Combined Statement of Income,” Combined
62	    ederal Home Loan Banks Office of Finance,
      F                                                           Financial Report for the Year Ended December 31,
      “Business Environment,” Combined Financial                  2012, at F-4. Accessed: April 3, 2013, at www.
      Report for the Year Ended December 31, 2012, at             fhlb-of.com/ofweb_userWeb/resources/12yrend.
      38. Accessed: April 3, 2013, at www.fhlb-of.com/            pdf.
      ofweb_userWeb/resources/12yrend.pdf.
                                                            68	    ederal Housing Finance Agency, “Message from
                                                                  F
63	   In spite of the recent enhanced performance of the         the Acting Director,” 2012 Performance and
       FHLBanks, OIG’s audits and evaluations continue            Accountability Report, at 5. Accessed: March 2,
       to identify challenges that represent opportuni-           2013, at www.fhfa.gov/webfiles/24632/2012FH-
       ties for improvement. See, e.g., Federal Housing           FAPARF.pdf. Federal Home Loan Banks Office
       Finance Agency Office of Inspector General,                of Finance, “Combined Statement of Condition,”
       FHFA Can Enhance Its Oversight of FHLBank                  Combined Financial Report for the Year Ended
       Advances to Insurance Companies by Improving               December 31, 2012, at F-3. Accessed: April 3,
       Communication with State Insurance Regulators and          2013, at www.fhlb-of.com/ofweb_userWeb/
       Standard-Setting Groups, AUD-2013-006 (March               resources/12yrend.pdf.
       18, 2013). Accessed: April 11, 2013, at www.
       fhfaoig.gov/Content/Files/AUD-2013-006_0.pdf.        69	    ederal Home Loan Banks Office of Finance,
                                                                  F
                                                                  FHLBanks Satisfy REFCORP Obligations; Launch
64	    ederal Housing Finance Agency, “Credit Risk
      F                                                           Joint Capital Enhancement Agreement, at 1 (August
      Management,” 2011 Report to Congress, at 32.                8, 2011). Accessed: March 4, 2013, at www.fhlb-
      Accessed: March 4, 2013, at www.fhfa.gov/web-               of.com/ofweb_userWeb/resources/PR_20110808_
      files/24009/FHFA_RepToCongr11_6_14_508.                     FHLBank_System_Capital_Initiative_Launch.
      pdf.                                                        pdf.

65	    ederal Housing Finance Agency Office of
      F                                                     70	    ederal Housing Finance Agency, Agencies Issue
                                                                  F
      Inspector General, “Troubled FHLBanks Face                  Final Rule on Appraisals for Higher-Priced Mortgage
      Substantial Financial and Operational Challeng-             Loans (January 18, 2013). Accessed: March 1,
      es,” FHFA’s Oversight of Troubled Federal Home              2013, at www.fhfa.gov/webfiles/24893/HRM-
      Loan Banks, EVL-2012-001, at 13 (January 11,                PressRelease011813FINAL.pdf.
      2012). Accessed: March 4, 2013, at www.fhfaoig.
      gov/Content/Files/Troubled%20Banks%20EVL-             71	   Federal Housing Finance Agency, FHFA and
      2012-001.pdf.                                                CFPB Partner on Development of National Mort-
                                                                   gage Database, Initiative will help streamline dispa-
66	   Federal Home Loan Banks Office of Finance,                  rate datasets and support regulators’ efforts to monitor


                                    Semiannual Report to the Congress • October 1, 2012–March 31, 2013               119
      the market (November 1, 2012). Accessed: March              financial-news/2013/5910.html.
      1, 2013, at www.fhfa.gov/webfiles/24621/NMD-
      FHFACFPB110112F.pdf.                                  76	    epartment of Housing and Urban Development,
                                                                  D
                                                                  Federal Housing Finance Agency, Donovan and
72	    ederal Housing Finance Agency, FHFA Seeks
      F                                                           DeMarco Announce Extended Foreclosure Relief for
      Public Input on Building a New Infrastructure               Hurricane Sandy Storm Victims. Accessed: March
      for the Secondary Mortgage Market (October 4,               1, 2013, at www.fhfa.gov/webfiles/24929/FHAF-
      2012). Accessed: March 1, 2013, at www.fhfa.                HFASandy013113Revised.pdf.
      gov/webfiles/24573/InfrastructureWhitePaperRe-
      lease_100412_FINAL.pdf.                               77	    ederal Housing Finance Agency, Fannie Mae
                                                                  F
                                                                  and Freddie Mac Help More Than 2.5 Million with
73	    ederal Housing Finance Agency, FHFA Out-
      F                                                           Foreclosure Prevention Actions, Report Shows Short
      lines 2013 Goals for Fannie Mae and Freddie Mac             Sales and Other Measures to Avoid Foreclosure on the
      (March 4, 2013). Accessed: March 18, 2013, at               Rise (January 3, 2013). Accessed: March 1, 2013,
      www.fhfa.gov/webfiles/25025/Scorecard2013.pdf.              at www.fhfa.gov/webfiles/24859/3Q2012FPRFi-
      Federal Housing Finance Agency, Conservatorship             nal.pdf.
      Strategic Plan: Performance Goals for 2013 (March
      4, 2013). Accessed: March 18, 2013, at www.           78	    ederal Housing Finance Agency, FHFA Statement
                                                                  F
      fhfa.gov/webfiles/25023/2013EnterpriseScore-                on REO Pilot Transactions (November 1, 2012).
      card3413.pdf.                                               Accessed: March 1, 2013, at www.fhfa.gov/web-
                                                                  files/24609/REOColony.pdf.
74	    ederal Housing Finance Agency, “Build,” FHFA’s
      F
      Conservatorship Priorities for 2013, Remarks by       79	    ederal Housing Finance Agency, FHFA Releas-
                                                                  F
      Edward J. DeMarco, Acting Director, National                es 2012 Performance and Accountability Report
      Association for Business Economics 29th Annual              (November 15, 2012). Accessed: March 1, 2013,
      Economic Policy Conference, Washington, D.C., at 7,         at www.fhfa.gov/webfiles/24633/PARPR111512F.
      8 (March 4, 2013). Accessed: March 18, 2013, at             pdf.
      www.fhfa.gov/webfiles/25024/EJDNABESpeech.
      pdf.                                                  80	    ederal Housing Finance Agency, FHFA Releases
                                                                  F
                                                                  Strategic Plan for 2013-2017 (October 9, 2012).
75	    ederal Housing Finance Agency, FHFA State-
      F                                                           Accessed: March 1, 2013, at www.fhfa.gov/web-
      ment on Fannie Mae Agreement with Bank of                   files/24577/FHFAStrategicPlan10912Final.pdf.
      America (January 7, 2013). Accessed: March 1,
      2013, at www.fhfa.gov/webfiles/24863/FHFASt-          81	    ederal Housing Finance Agency, Preparing a
                                                                  F
      mtSettlement.pdf. Fannie Mae, Fannie Mae                    Foundation for a More Efficient and Effective Hous-
      Reaches Comprehensive Resolution with Bank of               ing Finance System: Strategic Plan, Federal Housing
      America, Yielding Positive Outcome for Taxpayers            Finance Agency, Fiscal Years 2013-2017. Accessed:
      (January 7, 2013). Accessed: March 18, 2013,                March 18, 2013, at www.fhfa.gov/webfiles/24576/
      at www.fanniemae.com/portal/about-us/media/                 FinalFHFAStrategicPlan10912F.pdf.

                                                            82	   Federal Housing Finance Agency, FHFA Updates

120       Federal Housing Finance Agency Office of Inspector General
      Projections of Potential Draws for Fannie Mae                htm?_sm_au_=iVVnJqj31.HJZrhF3.
      and Freddie Mac (October 26, 2012). Accessed:
      March 1, 2013, at www.fhfa.gov/webfiles/24611/         87	    enneth A. Snowden, Mortgage Rates and Ameri-
                                                                   K
      Projections102612.pdf. Federal Housing Finance               can Capital Market Development in the Late Nine-
      Agency, “Projected Treasury Draws and Divi-                  teenth Century, The Journal of Economic History,
      dends,” Projections of the Enterprises’ Financial            Vol. 47, no. 3, at 671-691 (1987).
      Performance, at 4 (October 2012). Accessed:
      March 18, 2013, at www.fhfa.gov/webfiles/24611/        88	    obert VanGiezen and Albert E. Schwenk,
                                                                   R
      Projections102612.pdf.                                       Department of Labor, “The Great Depression
                                                                   and the Federal role in the economy,” Com-
83	   F
       ederal Housing Finance Agency, “Strategic Goal             pensation from Before World War I through the
      2: Contracting Enterprise Operations,” A Strate-             Great Depression (January 30, 2003). Accessed:
      gic Plan for Enterprise Conservatorships: The Next           March 20, 2013, at www.bls.gov/opub/cwc/
      Chapter in a Story that Needs an Ending, at 14               cm20030124ar03p1.htm. Congressional Over-
      (February 21, 2012). Accessed: March 19, 2013,               sight Panel, “Annex I: Lessons from the Home
      at www.fhfa.gov/webfiles/23344/StrategicPlan-                Owners’ Loan Corporation of the 1930s and
      ConservatorshipsFINAL.pdf.                                   1940s,” December Oversight Report, A Review of
                                                                   Treasury’s Foreclosure Prevention Programs, at 112
84	    overnment Accountability Office, “Letter,”
      G                                                            (December 14, 2010). Accessed: March 20, 2013,
      Fannie Mae and Freddie Mac: Analysis of Options              at http://books.google.com/books?id=2Etqf-
      for Revising the Housing Enterprises’ Long-term              D1c2w0C&pg=PA111&lpg=PA111&d-
      Structures, GAO-09-782, at 2 (September 2009).               q=Senate+Committee+on+Banking+and+Cur-
      Accessed: February 22, 2013, at www.gao.gov/                 rency,+Subcommittee+on+Home+Mort-
      assets/300/295025.pdf.                                       gages,+Etc.,+%E2%80%9CTestimony+of-
                                                                   +Horace+Russell,%E2%80%9D+General+Coun-
85	   F
       ederal Housing Finance Agency, “Conclu-                    sel,Federal+Home+Loan+Bank+Board+of+At-
      sion,”The Conservatorships of Fannie Mae and                 lanta,+Home+Owners+Loan+Act,+73rd+Con-
      Freddie Mac, Statement of Edward J. DeMarco, Act-            gress,&source=bl&ots=eJtRYMumK5&sig=idQz-
      ing Director, National Association of Federal Credit         PVvjbLPDm6C_L4qLhPog_BU&hl=en&sa=X-
      Unions Congressional Caucus, at 6 (September 13,             &ei=l1lKUcGVLYLm8QTWuIDgCA&ved=0C-
      2012). Accessed: March 19, 2013, at www.fhfa.                DIQ6AEwAQ#v=onepage&q&f=false.
      gov/webfiles/24489/2012_FHFA_-_NAFCU_
      Speech_final.pdf.                                      89	    lmus Wicker, “The banking situation in
                                                                   E
                                                                   the United States, 1921-33,” The Banking
86	   B
       oard of Governors of the Federal Reserve System,           Panics of the Great Depression, at 1 (1996).
      Housing, Housing Finance, and Monetary Policy,               Accessed: March 20, 2013, at http://books.
      Speech by Chairman Ben S. Bernanke at the Federal            google.com/books?id=I9ASJle80XAC&print-
      Reserve Bank of Kansas City’s Economic Sympo-                sec=frontcover&source=gbs_ge_summa-
      sium, Jackson Hole, Wyoming (August 31, 2007).               ry_r&cad=0#v=onepage&q=commercial%20
      Accessed: March 20, 2013, at www.federalreserve.
      gov/newsevents/speech/bernanke20070831a.


                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013         121
      banks&f=false.                                                 hhes/www/housing/census/historic/owner.html.

90	    ent W. Colton, Joint Center for Housing Stud-
      K                                                        95	    overnment Accountability Office, “The Enter-
                                                                     G
      ies, Harvard University, “Efforts at Reform,”                  prises Had a Mixed Record on Achieving Housing
      Housing Finance in the United States: The Transfor-            Mission Objectives, and Risk-Management Defi-
      mation of the U.S. Housing Finance System, W02-5,              ciencies Compromised Their Safety and Sound-
      at 3 (July 2002). Accessed: March 20, 2013, at                 ness,” Fannie Mae and Freddie Mac: Analysis of
      www.jchs.harvard.edu/sites/jchs.harvard.edu/files/             Options for Revising the Housing Enterprises’ Long-
      w02-5_colton.pdf.                                              term Structures, GAO-09-782, at 14 (September
                                                                     2009). Accessed: February 22, 2013, at www.gao.
91	    overnment Accountability Office, “The Enter-
      G                                                              gov/assets/300/295025.pdf.
      prises Had a Mixed Record on Achieving Housing
      Mission Objectives, and Risk-Management Defi-            96	    ational Information Center, Federal Financial
                                                                     N
      ciencies Compromised Their Safety and Sound-                   Institutions Examination Council, All Institution
      ness,” Fannie Mae and Freddie Mac: Analysis of                 Types Defined. Accessed: March 21, 2013, at www.
      Options for Revising the Housing Enterprises’ Long-            ffiec.gov/nicpubweb/Content/HELP/Institu-
      term Structures, GAO-09-782, at 12 (September                  tion%20Type%20Description.htm. Federal Hous-
      2009). Accessed: February 22, 2013, at www.gao.                ing Finance Agency Office of Inspector General,
      gov/assets/300/295025.pdf. Theresa R. DiVenti,                 “Rising Short-Term Interest Rates Pose a Risk of
      Department of Housing and Urban Development,                   Loss on Long-Term Mortgage Assets,” The Hous-
      “A Brief History of the GSEs,” Fannie Mae and                  ing Government-Sponsored Enterprises’ Challenges
      Freddie Mac: Past, Present, and Future, Journal of             in Managing Interest Rate Risks, WPR-2013-01,
      Policy Development and Research, Vol. 11, no.                  at 12, 13 (March 11, 2013). Accessed: April 26,
      3, at 233 (2009). Accessed: February 22, 2013,                 2013, at www.fhfaoig.gov/Content/Files/WPR-
      at www.huduser.org/periodicals/cityscpe/vol-                   2013-01_2.pdf.
      11num3/ch11.pdf.
                                                               97	    overnment Accountability Office, “The Enter-
                                                                     G
92	   Id.                                                           prises Had a Mixed Record on Achieving Housing
                                                                     Mission Objectives, and Risk-Management Defi-
93	    overnment Accountability Office, “The Enter-
      G                                                              ciencies Compromised Their Safety and Sound-
      prises Had a Mixed Record on Achieving Housing                 ness,” Fannie Mae and Freddie Mac: Analysis of
      Mission Objectives, and Risk-Management Defi-                  Options for Revising the Housing Enterprises’ Long-
      ciencies Compromised Their Safety and Sound-                   term Structures, GAO-09-782, at 14 (September
      ness,” Fannie Mae and Freddie Mac: Analysis of                 2009). Accessed: February 22, 2013, at www.gao.
      Options for Revising the Housing Enterprises’ Long-            gov/assets/300/295025.pdf.
      term Structures, GAO-09-782, at 12, 13 (Septem-
      ber 2009). Accessed: February 22, 2013, at www.          98	   I d., “The Enterprises Had a Mixed Record on
      gao.gov/assets/300/295025.pdf.                                  Achieving Housing Mission Objectives, and
                                                                      Risk-Management Deficiencies Compromised
94	    ensus Bureau, Historical Census of Housing Tables.
      C
      Accessed: March 20, 2013, at www.census.gov/


122          Federal Housing Finance Agency Office of Inspector General
       Their Safety and Soundness,” at 15, 16.                      by Fannie Mae,” FHFA’s Oversight of Fannie Mae’s
                                                                    Single-Family Underwriting Standards, AUD-
99	     ederal Housing Finance Agency Office of Inspec-
       F                                                            2012-003, at 2-6 (March 22, 2012). Accessed:
       tor General, “The Financial Crisis and Its Effect            March 20, 2013, at http://fhfaoig.gov/Content/
       on the Enterprises,” Fannie Mae and Freddie Mac:             Files/AUD-2012-003_1.pdf.
       Where the Taxpayers’ Money Went, WPR-2012-02,
       at 10 (May 24, 2012). Accessed: March 20, 2013,       105	   Id.
       at http://fhfaoig.gov/Content/Files/FannieMae-
       andFreddieMac-WheretheTaxpayersMoneyWent.             106	    ederal Housing Finance Agency Office of
                                                                    F
       pdf.                                                         Inspector General, “At a Glance,” Fannie Mae and
                                                                    Freddie Mac: Where the Taxpayers’ Money Went,
100	    ederal Housing Finance Agency Office of Inspec-
       F                                                            WPR-2012-02 (May 24, 2012). Accessed: March
       tor General, “Fannie Mae and Freddie Mac: 2000               20, 2013, at http://fhfaoig.gov/Content/Files/Fan-
       – 2008,” White Paper: FHFA-OIG’s Current Assess-             nieMaeandFreddieMac-WheretheTaxpayersMon-
       ment of FHFA’s Conservatorships of Fannie Mae                eyWent.pdf.
       and Freddie Mac, WPR-2012-001, at 10 (March
       28, 2012). Accessed: February 22, 2013, at www.       107	    overnment Accountability Office, “Back-
                                                                    G
       fhfaoig.gov/Content/Files/WPR-2012-001.pdf.                  ground,” Fannie Mae and Freddie Mac: Analysis of
                                                                    Options for Revising the Housing Enterprises’ Long-
101	   Id.                                                         term Structures, GAO-09-782, at 7 (September
                                                                    2009). Accessed: February 22, 2013, at www.gao.
102	    overnment Accountability Office, “The Enter-
       G                                                            gov/assets/300/295025.pdf.
       prises Had a Mixed Record on Achieving Housing
       Mission Objectives, and Risk-Management Defi-         108	    ederal Housing Finance Agency Office of Inspec-
                                                                    F
       ciencies Compromised Their Safety and Sound-                 tor General, “Fannie Mae and Freddie Mac: 2000
       ness,” Fannie Mae and Freddie Mac: Analysis of               – 2008,” White Paper: FHFA-OIG’s Current Assess-
       Options for Revising the Housing Enterprises’ Long-          ment of FHFA’s Conservatorships of Fannie Mae
       term Structures, GAO-09-782, at 27 (September                and Freddie Mac, WPR-2012-001, at 10 (March
       2009). Accessed: February 22, 2013, at www.gao.              28, 2012). Accessed: February 22, 2013, at www.
       gov/assets/300/295025.pdf.                                   fhfaoig.gov/Content/Files/WPR-2012-001.pdf.

103	    ederal Housing Finance Agency Office of Inspec-
       F                                                     109	   I d., “Fannie Mae and Freddie Mac: 2000 – 2008,”
       tor General, “Fannie Mae and Freddie Mac: 2000                at 11.
       – 2008,” White Paper: FHFA-OIG’s Current Assess-
       ment of FHFA’s Conservatorships of Fannie Mae and     110	   Id.
       Freddie Mac, WPR-2012-001, at 9 (March 28,
       2012). Accessed: March 20, 2013, at www.fhfaoig.      111	    overnment Accountability Office, “Back-
                                                                    G
       gov/Content/Files/WPR-2012-001.pdf.                          ground,” “The Enterprises Had a Mixed Record
                                                                    on Achieving Housing Mission Objectives, and
104	    ederal Housing Finance Agency Office of Inspec-
       F                                                            Risk-Management Deficiencies Compromised
       tor General, “How Loans Qualify for Purchase                 Their Safety and Soundness,” Fannie Mae and

                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013           123
       Freddie Mac: Analysis of Options for Revising the             First Franklin Financial Corp., Morgan Stanley,
       Housing Enterprises’ Long-term Structures, GAO-09-            Nomura Holding America Inc., The Royal Bank
       782, at 7, 18 (September 2009). Accessed: Febru-              of Scotland Group PLC, and Société Générale. See
       ary 22, 2013, at www.gao.gov/assets/300/295025.               Federal Housing Finance Agency, FHFA Sues 17
       pdf.                                                          Firms to Recover Losses to Fannie Mae and Freddie
                                                                     Mac, at 1 (September 2, 2011). Accessed: Febru-
112	   Id., “Background,” at 7.                                     ary 25, 2013, at www.fhfa.gov/webfiles/22599/
                                                                     PLSLitigation_final_090211.pdf.
113	    ederal Housing Finance Agency, “Table 1: Quar-
       F
       terly Draws on Treasury Commitments to Fannie          117	    ederal Housing Finance Agency, FHFA Sues 17
                                                                     F
       Mae and Freddie Mac per the Senior Preferred                  Firms to Recover Losses to Fannie Mae and Freddie
       Stock Purchase Agreements,” “Table 4: Federal                 Mac, at 1 (September 2, 2011). Accessed: Febru-
       Reserve GSE and Ginnie Mae MBS Purchase Pro-                  ary 25, 2013, at www.fhfa.gov/webfiles/22599/
       gram,” Data as of December 18, 2012 on Treasury               PLSLitigation_final_090211.pdf.
       and Federal Reserve Purchase Programs for GSE and
       Mortgage-Related Securities, at 2, 6, 7. Accessed:     118	    ederal Housing Finance Agency, Federal Housing
                                                                     F
       March 21, 2013, at www.fhfa.gov/webfiles/24847/               Finance Agency Statement on Recent Lawsuits Filed,
       TSYSupport%202012-12-18.pdf.                                  at 2 (September 6, 2011). Accessed: February 25,
                                                                     2013, at www.fhfa.gov/webfiles/22606/Lawsuit-
114	    ederal Housing Finance Agency, “Summary,” A
       F                                                             Statement9611.pdf.
       Strategic Plan for Enterprise Conservatorships: The
       Next Chapter in a Story that Needs an Ending, at 2     119	    ederal Housing Finance Agency, FHFA Sues 17
                                                                     F
       (February 21, 2012). Accessed: March 20, 2013,                Firms to Recover Losses to Fannie Mae and Freddie
       at www.fhfa.gov/webfiles/23344/StrategicPlan-                 Mac, at 2 (September 2, 2011). Accessed: Febru-
       ConservatorshipsFINAL.pdf.                                    ary 25, 2013, at www.fhfa.gov/webfiles/22599/
                                                                     PLSLitigation_final_090211.pdf.
115	    ederal Housing Finance Agency, Federal Housing
       F
       Finance Agency Statement on Recent Lawsuits Filed,     120	   I d., at 1. Bob Van Voris and Patricia Hurtado,
       at 2 (September 6, 2011). Accessed: February 25,               Bloomberg, BofA, JPMorgan Among 17 Banks
       2013, at www.fhfa.gov/webfiles/22606/Lawsuit-                  Sued by U.S. for $196 Billion (September 3, 2011).
       Statement9611.pdf.                                             Accessed: March 19, 2013, at www.bloomberg.
                                                                      com/news/2011-09-03/jpmorgan-bofa-among-17-
116	    e complaints included the following defendants:
       Th                                                             banks-sued-by-fhfa-over-196-billion-in-securities.
       Ally Financial Inc. f/k/a GMAC LLC, Bank of                    html.
       America Corporation, Barclays Bank PLC, Citi-
       group Inc., Countrywide Financial Corporation,         121	    ederal Housing Finance Agency, FHFA Sues 17
                                                                     F
       Credit Suisse Holdings (USA) Inc., Deutsche                   Firms to Recover Losses to Fannie Mae and Freddie
       Bank AG, First Horizon National Corporation,                  Mac, at 1 (September 2, 2011). Accessed: Febru-
       General Electric Company, Goldman Sachs                       ary 25, 2013, at www.fhfa.gov/webfiles/22599/
       & Co., HSBC North America Holdings Inc.,
       JPMorgan Chase & Co., Merrill Lynch & Co./


124         Federal Housing Finance Agency Office of Inspector General
       PLSLitigation_final_090211.pdf.                             gov/webfiles/23439/10k_030912.pdf.

122	    ederal Housing Finance Agency, Federal Housing
       F                                                    127	   I d. Fannie Mae, “Institutional Counterparty
       Finance Agency Statement on Recent Lawsuits Filed,           Credit Risk Management,” Form 10-K for the
       at 2 (September 6, 2011). Accessed: February 25,             Fiscal Year Ended December 31, 2011, at 174.
       2013, at www.fhfa.gov/webfiles/22606/Lawsuit-                Accessed: February 25, 2013, at www.fanniemae.
       Statement9611.pdf.                                           com/resources/file/ir/pdf/quarterly-annual-re-
                                                                    sults/2011/10k_2011.pdf.
123	    ederal Housing Finance Agency Office of Inspec-
       F
       tor General, “Preface,” “Background,” Evaluation     128	    reddie Mac, “Lehman Bankruptcy,” Form 10-K
                                                                   F
       of the Federal Housing Finance Agency’s Oversight           for the Fiscal Year Ended December 31, 2011, at
       of Freddie Mac’s Repurchase Settlement with Bank            310. Accessed: February 25, 2013, at www.fhfa.
       of America, EVL-2011-006, at 8, 11 (September               gov/webfiles/23439/10k_030912.pdf.
       27, 2011). Accessed: February 25, 2013, at www.
       fhfaoig.gov/Content/Files/EVL-2011-006.pdf.          129	    ederal Housing Finance Agency Office of Inspec-
                                                                   F
                                                                   tor General, “What FHFA-OIG Found,” FHFA’s
124	    ederal Housing Finance Agency, FHFA Statement
       F                                                           Oversight of Fannie Mae’s Single-Family Underwrit-
       on Fannie Mae Agreement with Bank of America                ing Standards, AUD-2012-003 (March 22, 2012).
       (January 7, 2013). Accessed: February 25, 2013,             Accessed: March 7, 2013, at http://fhfaoig.gov/
       at www.fhfa.gov/webfiles/24863/FHFAStmtSet-                 Content/Files/AUD-2012-003_1.pdf.
       tlement.pdf. Fannie Mae, Fannie Mae Reaches
       Comprehensive Resolution with Bank of America,       130	   I d., “Variances from Underwriting Standards,” at
       Yielding Positive Outcome for Taxpayers (January             6.
       7, 2013). Accessed: March 18, 2013, at www.
       fanniemae.com/portal/about-us/media/finan-           131	    ederal Housing Finance Agency Office of Inspec-
                                                                   F
       cial-news/2013/5910.html.                                   tor General, “The High Touch Servicing Pro-
                                                                   gram,” Evaluation of FHFA’s Oversight of Fannie
125	    reddie Mac, “Lehman Bankruptcy,” Form 10-K
       F                                                           Mae’s Transfer of Mortgage Servicing Rights from
       for the Fiscal Year Ended December 31, 2011, at             Bank of America to High Touch Servicers, EVL-
       310. Accessed: February 25, 2013, at www.fhfa.              2012-008, at 13 (September 18, 2012). Accessed:
       gov/webfiles/23439/10k_030912.pdf. United                   February 25, 2013, at www.fhfaoig.gov/Content/
       States Courts, Chapter 11: Reorganization Under             Files/EVL-2012-008.pdf.
       the Bankruptcy Code. Accessed: February 25, 2013,
       at www.uscourts.gov/FederalCourts/Bankruptcy/        132	   Id.
       BankruptcyBasics/Chapter11.aspx.
                                                            133	   Id., “The High-Touch Servicing Program to Date,”
126	   F
        reddie Mac, “Lehman Bankruptcy,” Form 10-K
       for the Fiscal Year Ended December 31, 2011, at
       310. Accessed: February 25, 2013, at www.fhfa.




                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013          125
       at 25.                                                        Q&A’s, at 3 (October 24, 2011). Accessed: Feb-
                                                                     ruary 25, 2013, at www.fhfa.gov/webfiles/22723/
134	   Id., “The High Touch Servicing Program,” at 13.              HARP%20release%20102411QandA%20Final.
                                                                     pdf. Federal Housing Finance Agency, FHFA,
135	    ederal Housing Finance Agency, “Fourth Quarter
       F                                                             Fannie Mae and Freddie Mac Announce HARP
       2011 Highlights,” Foreclosure Prevention & Refi-              Changes to Reach More Borrowers (October 24,
       nance Report, Fourth Quarter 2011: FHFA Federal               2011). Accessed: April 9, 2013, at www.fhfa.gov/
       Property Manager’s Report, at 3. Accessed: March              webfiles/22721/HARP_release_102411_final.pdf.
       19, 2013, at www.fhfa.gov/webfiles/23522/4q11_
       fpr_finalv2i.pdf.                                      142	    ederal Housing Finance Agency, “Strategic Goal
                                                                     F
                                                                     2—Means and Strategies,” Preparing a Foundation
136	   I d., “Foreclosure Prevention Activity: All Actions          for a More Efficient and Effective Housing Finance
        Completed,” “Fourth Quarter 2011 Highlights,”                System: Strategic Plan, Federal Housing Finance
        at 7, 3.                                                     Agency, Fiscal Years 2013-2017, at 12 (October
                                                                     9, 2012). Accessed: February 25, 2013, at www.
                                                                     fhfa.gov/webfiles/24576/FinalFHFAStrate-
137	   Id., “Fourth Quarter 2011 Highlights,” at 3.
                                                                     gicPlan10912F.pdf.

138	    ederal Housing Finance Agency, “Overview
       F
                                                              143	    ederal Housing Finance Agency, “Summary,” A
                                                                     F
       of the Home Affordable Refinance Program
                                                                     Strategic Plan for the Enterprise Conservatorships:
       (HARP),” Refinance Report, September 2012, at 1
                                                                     The Next Chapter in a Story that Needs an Ending,
       (September 2012). Accessed: February 25, 2013,
                                                                     at 2 (February 21, 2012). Accessed: April 9, 2013,
       at www.fhfa.gov/webfiles/24701/Sept2012Refi-
                                                                     at www.fhfa.gov/webfiles/24102/StrategicPlan-
       nanceReport.pdf.
                                                                     ConservatorshipsFINAL.pdf. Federal Housing
                                                                     Finance Agency, FHFA Sends Congress Strategic
139	    ederal Housing Finance Agency, FHFA, Fan-
       F
                                                                     Plan for Fannie Mae and Freddie Mac Conserva-
       nie Mae and Freddie Mac Announce HARP
                                                                     torships (February 21, 2012). Accessed: March 20,
       Changes to Reach More Borrowers (October 24,
                                                                     2013, at www.fhfa.gov/webfiles/23344/Strate-
       2011). Accessed: February 25, 2013, at www.
                                                                     gicPlanConservatorshipsFINAL.pdf.
       fhfa.gov/webfiles/22722/HARP%20release%20
       102411%20Final.pdf.
                                                              144	    ederal Housing Finance Agency, Preparing a
                                                                     F
                                                                     Foundation for a More Efficient and Effective
140	    ederal Housing Finance Agency, “Strategic Goal
       F
                                                                     Housing Finance System: Strategic Plan, Federal
       2—Means and Strategies,” Preparing a Foundation
                                                                     Housing Finance Agency, Fiscal Years 2013-2017
       for a More Efficient and Effective Housing Finance
                                                                     (October 9, 2012). Accessed: March 3, 2013, at
       System: Strategic Plan, Federal Housing Finance
                                                                     www.fhfa.gov/webfiles/24576/FinalFHFAStrate-
       Agency, Fiscal Years 2013-2017, at 12 (October
                                                                     gicPlan10912F.pdf.
       9, 2012). Accessed: February 25, 2013, at www.
       fhfa.gov/webfiles/24576/FinalFHFAStrate-
                                                              145	    ederal Housing Finance Agency, FHFA Releases
                                                                     F
       gicPlan10912F.pdf.
                                                                     Strategic Plan for 2013-2017 (October 9, 2012).
                                                                     Accessed: March 3, 2012, at www.fhfa.gov/
141	   Federal Housing Finance Agency, HARP Phase II

126         Federal Housing Finance Agency Office of Inspector General
       webfiles/24577/FHFAStrategicPlan10912Final.                    Purchase Agreements,” at 1, 3.
       pdf.
                                                               150	   Id., “Introduction,” at 1.
146	    HFA’s overall strategic goals are to: (1) ensure
       F
       the safety and soundness of the enterprises and         151	   Id., “Introduction,” at 1, 2.
       the FHLBanks; (2) ensure stability, liquidity,
       and access in housing finance; (3) preserve and         152	    ederal Housing Finance Agency, Statement of
                                                                      F
       conserve enterprise assets; and (4) prepare for the            FHFA Acting Director Edward J. DeMarco on
       future of housing finance. Goals 2 and 3 include               Changes to Fannie Mae and Freddie Mac Preferred
       the enterprise-specific strategic plan’s objective to          Stock Purchase Agreements (August 17, 2012).
       maintain agency work to help prevent foreclosures              Accessed: February 25, 2013, at www.fhfa.gov/
       and keep money available for mortgage loans. See               webfiles/24203/FINAL_FHFA_PSPA_8172012.
       Federal Housing Finance Agency, FHFA Releases                  pdf. Federal Housing Finance Agency, “Summary,”
       Strategic Plan for 2013-2017 (October 9, 2012).                Projections of the Enterprises’ Financial Performance,
       Accessed: March 3, 2012, at www.fhfa.gov/web-                  at 4 (October 2012). Accessed: February 25,
       files/24577/FHFAStrategicPlan10912Final.pdf.                   2013, at www.fhfa.gov/webfiles/24611/Projec-
                                                                      tions102612.pdf.
147	    epartment of the Treasury, Treasury Department
       D
       Announces Further Steps to Expedite Wind Down of        153	    epartment of the Treasury, Treasury Department
                                                                      D
       Fannie Mae and Freddie Mac (August 17, 2012).                  Announces Further Steps to Expedite Wind Down of
       Accessed: February 25, 2013, at www.treasury.                  Fannie Mae and Freddie Mac (August 17, 2012).
       gov/press-center/press-releases/Pages/tg1684.aspx.             Accessed: February 25, 2013, at www.treasury.gov/
       Federal Housing Finance Agency, “Table 1: Quar-                press-center/press-releases/Pages/tg1684.aspx.
       terly Draws on Treasury Commitments to Fannie
       Mae and Freddie Mac per the Senior Preferred            154	    ederal Housing Finance Agency, Statement of
                                                                      F
       Stock Purchase Agreements,” Data as of December                FHFA Acting Director Edward J. DeMarco on
       18, 2012 on Treasury and Federal Reserve Purchase              Changes to Fannie Mae and Freddie Mac Preferred
       Programs for GSE and Mortgage-Related Securities,              Stock Purchase Agreements (August 17, 2012).
       at 2. Accessed: March 4, 2013, at www.fhfa.gov/                Accessed: February 25, 2013, at www.fhfa.gov/
       webfiles/24847/TSYSupport%202012-12-18.pdf.                    webfiles/24203/FINAL_FHFA_PSPA_8172012.
                                                                      pdf.
148	    ederal Housing Finance Agency, “Introduction,”
       F
       Mortgage Market Note 10-1 (Update of Mortgage           155	    epartment of the Treasury, Treasury Department
                                                                      D
       Market Notes 09-1 and 09-1A), at 1 (January 20,                Announces Further Steps to Expedite Wind Down of
       2010). Accessed: February 25, 2013, at www.fhfa.               Fannie Mae and Freddie Mac (August 17, 2012).
       gov/webfiles/15362/MMNote_10-1_revision_of_                    Accessed: February 25, 2013, at www.treasury.gov/
       MMN_09-1A_01192010r.pdf.                                       press-center/press-releases/Pages/tg1684.aspx.

149	   Id., “Introduction,” “Senior Preferred Stock           156	    ederal Housing Finance Agency, Statement of
                                                                      F
                                                                      FHFA Acting Director Edward J. DeMarco on
                                                                      Changes to Fannie Mae and Freddie Mac Preferred

                                       Semiannual Report to the Congress • October 1, 2012–March 31, 2013             127
       Stock Purchase Agreements (August 17, 2012).                  Goal 2: Contracting Enterprise Operations,” A
       Accessed: February 25, 2013, at www.fhfa.gov/                 Strategic Plan for Enterprise Conservatorships: The
       webfiles/24203/FINAL_FHFA_PSPA_8172012.                       Next Chapter in a Story that Needs an Ending, at
       pdf.                                                          15 (February 21, 2012). Accessed: February 25,
                                                                     2013, at www.fhfa.gov/webfiles/23344/Strate-
157	    epartment of the Treasury, Treasury Department
       D                                                             gicPlanConservatorshipsFINAL.pdf.
       Announces Further Steps to Expedite Wind Down of
       Fannie Mae and Freddie Mac (August 17, 2012).          163	    ederal Housing Finance Agency, Statement
                                                                     F
       Accessed: February 25, 2013, at www.treasury.gov/             of FHFA Acting Director Edward J. DeMar-
       press-center/press-releases/Pages/tg1684.aspx.                co Regarding Implementation of Guarantee Fee
                                                                     Increase (December 29, 2011). Accessed: Febru-
158	    ederal Housing Finance Agency, “Summary,”
       F                                                             ary 25, 2013, at www.fhfa.gov/webfiles/22982/
       “Strategic Goal 2: Contracting Enterprise Oper-               GFEESTMT122911F.pdf. International Mon-
       ations,” A Strategic Plan for Enterprise Conserva-            etary Fund, Global Financial Stability Report
       torships: The Next Chapter in a Story that Needs an           Statistical Appendix, at 1 (April 2012). Accessed:
       Ending, at 2, 14 (February 21, 2012). Accessed:               February 25, 2013, at www.imf.org/external/pubs/
       February 25, 2013, at www.fhfa.gov/web-                       ft/gfsr/2012/01/pdf/statapp.pdf.
       files/23344/StrategicPlanConservatorshipsFINAL.
       pdf. Fannie Mae, “Introduction,” Form 10-K for         164	   Federal Housing Finance Agency, FHFA Announc-
       the Fiscal Year Ended December 31, 2011, at 1.                 es Increase in Guarantee Fees, G-fee Report for
       Accessed: February 21, 2013, at www.fanniemae.                 2010-2011 Released, at 1 (August 31, 2012).
       com/resources/file/ir/pdf/quarterly-annual-re-                 Accessed: February 25, 2013, at www.fhfa.gov/
       sults/2011/10k_2011.pdf.                                       webfiles/24259/Gfee083112.pdf.

159	    ederal Housing Finance Agency, “Strategic
       F                                                      165	   Id.
       Goal 2: Contracting Enterprise Operations,” A
       Strategic Plan for Enterprise Conservatorships: The    166	   Id.
       Next Chapter in a Story that Needs an Ending, at
       15 (February 21, 2012). Accessed: February 25,         167	   Federal Housing Finance Agency, “Strategic Goal
       2013, at www.fhfa.gov/webfiles/23344/Strate-                   4,” Preparing a Foundation for a More Efficient and
       gicPlanConservatorshipsFINAL.pdf.                              Effective Housing Finance System: Strategic Plan,
                                                                      Federal Housing Finance Agency, Fiscal Years 2013-
160	    ederal Housing Finance Agency, “Executive Sum-
       F                                                              2017, at 19 (October 9, 2012). Accessed: March
       mary,” Fannie Mae and Freddie Mac Single-Family                20, 2013, at www.fhfa.gov/webfiles/24576/FinalF-
       Guarantee Fees in 2010 and 2011, at 4 (August                  HFAStrategicPlan10912F.pdf.
       2012). Accessed: February 25, 2013, at www.fhfa.
       gov/webfiles/24258/gfeestudy_2011_83112.pdf.           168	   Federal Housing Finance Agency, “Summary,”
                                                                      A Strategic Plan for Enterprise Conservatorships:
161	   Id., “Executive Summary,” at 5.                               The Next Chapter in a Story that Needs an Ending,
                                                                      at 2, 3 (February 21, 2012). Accessed: Febru-
162	   Federal Housing Finance Agency, “Strategic                    ary 25, 2013, at www.fhfa.gov/webfiles/23344/

128         Federal Housing Finance Agency Office of Inspector General
       StrategicPlanConservatorshipsFINAL.pdf.                       webfiles/23344/StrategicPlanConservatorships-
                                                                     FINAL.pdf.
169	   I d., “Strategic Goal 1: Building a New Infrastruc-
        ture,” at 12, 13. Federal Housing Finance Agency,     175	    reddie Mac, Servicing Alignment Initiative,
                                                                     F
        “Introduction,” Building a New Infrastructure for            Overview for Freddie Mac Servicers, Pub. No. 887,
        the Secondary Mortgage Market, at 4 (October 4,              at 1 (June 2012). Accessed: February 25, 2013, at
        2012). Accessed: February 25, 2013, at www.fhfa.             www.freddiemac.com/service/factsheets/pdf/ser-
        gov/webfiles/24572/fhfasecuritizationwhitepaper-             vicing_alignment.pdf.
        100412final.pdf.
                                                              176	   Federal Housing Finance Agency, FHFA Announc-
170	    urrently, OIG has an ongoing evaluation of
       C                                                              es Joint Initiative to Consider Alternatives for a
       FHFA’s efforts to oversee the enterprises’ develop-            New Mortgage Servicing Compensation Structure
       ment of a unified securitization platform.                     (January 18, 2011). Accessed: February 25, 2013,
                                                                      at www.fhfa.gov/webfiles/19716/Servicing_
171	    ederal Housing Finance Agency, “Build,” FHFA’s
       F                                                              model11811.pdf.
       Conservatorship Priorities for 2013, Remarks by
       Edward J. DeMarco, Acting Director, National Asso-     177	    ederal Housing Finance Agency, “Current Servic-
                                                                     F
       ciation for Business Economics 29th Annual Econom-            ing Compensation Model,” Alternative Mortgage
       ic Policy Conference, Washington, D.C., at 8 (March           Servicing Compensation Discussion Paper, at 5 (Sep-
       4, 2013). Accessed: March 18, 2013, at www.fhfa.              tember 27, 2011). Accessed: February 25, 2013, at
       gov/webfiles/25024/EJDNABESpeech.pdf.                         www.fhfa.gov/webfiles/22663/ServicingCompDis-
                                                                     cussionPaperFinal092711.pdf.
172	    ederal Housing Finance Agency, “Reviewing the
       F
       Existing Landscape: Considerations for Moving          178	    ederal Housing Finance Agency, “Introduc-
                                                                     F
       Forward,” A Strategic Plan for Enterprise Conserva-           tion,” Servicing Compensation Initiative pursuant
       torships: The Next Chapter in a Story that Needs an           to FHFA Directive in Coordination with HUD:
       Ending, at 11 (February 21, 2012). Accessed: Feb-             Background and Issues for Consideration, at 3
       ruary 25, 2013, at www.fhfa.gov/webfiles/23344/               (February 2011). Accessed: February 25, 2013,
       StrategicPlanConservatorshipsFINAL.pdf.                       at www.fhfa.gov/webfiles/19719/FHFA_Servic-
                                                                     ing_Initiative_-_Background_and_Issues_2011-
173	    ederal Housing Finance Agency, Frequently Asked
       F                                                             02-14_3pm_FINAL.pdf.
       Questions – Servicing Alignment Initiative, at 1.
       Accessed: February 25, 2013, at www.fhfa.gov/          179	    ederal Housing Finance Agency, Edward J.
                                                                     F
       webfiles/21191/FAQs42811Final.pdf.                            DeMarco, Acting Director, MBA’s National Mort-
                                                                     gage Servicing Conference & Expo, The Federal
174	    ederal Housing Finance Agency, “Strategic Goal
       F                                                             Housing Finance Agency’s Efforts Related to Mortgage
       3: Maintaining Foreclosure Prevention Efforts and             Servicing, at 2, 3 (February 23, 2011). Accessed:
       Credit Availability,” A Strategic Plan for Enter-             February 25, 2013, at www.fhfa.gov/web-
       prise Conservatorships: The Next Chapter in a Story           files/19762/MBASpeech22311.pdf.
       that Needs an Ending, at 18 (February 21, 2012).
       Accessed: February 25, 2013, at www.fhfa.gov/          180	   Federal Housing Finance Agency, “Alternative

                                      Semiannual Report to the Congress • October 1, 2012–March 31, 2013           129
       Servicing Compensation Proposals,” Alternative               and Warranties Framework, SEL-2012-08, at 1
       Mortgage Servicing Compensation Discussion Paper,            (September 11, 2012). Accessed: February 25,
       at 19 (September 27, 2011). Accessed: February               2013, at https://www.fanniemae.com/content/
       25, 2013, at www.fhfa.gov/webfiles/22663/Servic-             announcement/sel1208.pdf. Federal Housing
       ingCompDiscussionPaperFinal092711.pdf.                       Finance Agency, Frequently Asked Questions, New
                                                                    Selling Representation and Warranty Framework, at
181	   I d., “Alternative Servicing Compensation Propos-           1 (September 11, 2012). Accessed: February 25,
        als,” at 21.                                                2013, at www.fhfa.gov/webfiles/24366/Reps%20
                                                                    and%20Warrants%20Release%20and%20
182	    ederal Housing Finance Agency, Fannie Mae and
       F                                                            FAQ%20091112.pdf. Federal Housing Finance
       Freddie Mac Launch Joint Effort to Improve Loan              Agency Office of Inspector General, “The Bank of
       and Appraisal Data Collection, New Program to                America/Freddie Mac Settlement of Repurchase
       Boost Risk Management Capabilities, at 1 (May 24,            Claims,” Follow-up on Freddie Mac’s Loan Repur-
       2010). Accessed: February 25, 2013, at www.fhfa.             chase Process, EVL-2012-007, at 7, 8 (September
       gov/webfiles/15748/Uniform_Mortgage_Data_                    13, 2012). Accessed: February 25, 2013, at www.
       Program.pdf.                                                 fhfaoig.gov/Content/Files/EVL-2012-007.pdf.


183	    ederal Housing Finance Agency, Fact Sheet on
       F                                                     187	    ederal Housing Finance Agency, “Strategic Goal
                                                                    F
       Uniform Mortgage Data Program, at 3. Accessed:               3: Maintaining Foreclosure Prevention Efforts and
       February 25, 2013, at www.fhfa.gov/web-                      Credit Availability,” A Strategic Plan for Enter-
       files/15748/Uniform_Mortgage_Data_Program.                   prise Conservatorships: The Next Chapter in a Story
       pdf.                                                         that Needs an Ending, at 18 (February 21, 2012).
                                                                    Accessed: February 25, 2013, at www.fhfa.gov/
                                                                    webfiles/23344/StrategicPlanConservatorships-
184	    ederal Housing Finance Agency, Fannie Mae and
       F
                                                                    FINAL.pdf.
       Freddie Mac Launch Joint Effort to Improve Loan
       and Appraisal Data Collection, New Program to
       Boost Risk Management Capabilities, at 1 (May 24,     188	    ederal Housing Finance Agency, FHFA, Fannie
                                                                    F
       2010). Accessed: February 25, 2013, at www.fhfa.             Mae and Freddie Mac Launch New Representation
       gov/webfiles/15748/Uniform_Mortgage_Data_                    and Warranty Framework, Increased Transparency
       Program.pdf.                                                 and Certainty for Lenders, at 1 (September 11,
                                                                    2012). Accessed: February 25, 2013, at www.
                                                                    fhfa.gov/webfiles/24366/Reps%20and%20War-
185	    ederal Housing Finance Agency, “Strategic Goal
       F
                                                                    rants%20Release%20and%20FAQ%20091112.
       3: Maintaining Foreclosure Prevention Efforts and
                                                                    pdf. Federal Housing Finance Agency, Frequently
       Credit Availability,” A Strategic Plan for Enter-
                                                                    Asked Questions, New Selling Representation and
       prise Conservatorships: The Next Chapter in a Story
                                                                    Warranty Framework, at 2 (September 11, 2012).
       that Needs an Ending, at 18 (February 21, 2012).
                                                                    Accessed: February 25, 2013, at www.fhfa.gov/
       Accessed: February 25, 2013, at www.fhfa.gov/
                                                                    webfiles/24366/Reps%20and%20Warrants%20
       webfiles/23344/StrategicPlanConservatorships-
                                                                    Release%20and%20FAQ%20091112.pdf.
       FINAL.pdf.

                                                             189	   Federal Housing Finance Agency, Frequently
186	   Fannie Mae, New Lender Selling Representations

130        Federal Housing Finance Agency Office of Inspector General
       Asked Questions, New Selling Representation and      196	    epartment of the Treasury, Department of
                                                                   D
       Warranty Framework, at 2 (September 11, 2012).              Housing and Urban Development, Reforming
       Accessed: February 25, 2013, at www.fhfa.gov/               America’s Housing Finance Market, A Report to
       webfiles/24366/Reps%20and%20Warrants%20                     Congress (February 2011). Accessed: February 25,
       Release%20and%20FAQ%20091112.pdf.                           2013, at www.treasury.gov/initiatives/Documents/
                                                                   Reforming%20America%27s%20Housing%20
190	   Id., at 1.                                                 Finance%20Market.pdf. John Griffith, Center for
                                                                   American Progress, The $5 Trillion Question: What
191	   Id., at 2.                                                 Should We Do with Fannie Mae and Freddie Mac?
                                                                   (August 2012). Accessed: February 25, 2013, at
                                                                   www.americanprogress.org/wp-content/uploads/
192	    ederal Housing Finance Agency, “Conclusion,”
       F
                                                                   issues/2012/08/pdf/gsereformmatrix.pdf.
       Recent Accomplishments and a Look Ahead at the
       Future of Housing Finance, Remarks by Edward J.
       DeMarco, Acting Director, The Exchequer Club,        197	    epartment of the Treasury, Department of
                                                                   D
       Washington, DC, at 9 (November 28, 2012).                   Housing and Urban Development, “Introduc-
       Accessed: February 25, 2013, at www.fhfa.gov/               tion,” Reforming America’s Housing Finance Mar-
       webfiles/24700/FHFA2012ExchequerClubSpe-                    ket, A Report to Congress, at 1, 2 (February 2011).
       ech.pdf.                                                    Accessed: February 25, 2013, at www.treasury.
                                                                   gov/initiatives/Documents/Reforming%20Ameri-
                                                                   ca%27s%20Housing%20Finance%20Market.pdf.
193	    ederal Housing Finance Agency, Edward J.
       F
       DeMarco, Acting Director, Testimony Before the
       House Financial Services Committee (March            198	   Id., “Introduction,” at 1.
       19, 2013). Accessed: April 11, 2013, at http://
       financialservices.house.gov/calendar/eventsingle.    199	   I d., “Options for the Long-Term Structure of
       aspx?EventID=323597. This link is to the archived            Housing Finance,” at 27-30.
       webcast of Edward J. DeMarco’s testimony, see
       59:33 to 01:00:01.                                   200	    . Eric Weiss, Congressional Research Service,
                                                                   N
                                                                   “Overview,” “Broadly Focused Proposed Legisla-
194	    odd-Frank Wall Street Reform and Consumer
       D                                                           tion,” Proposals to Reform Fannie Mae and Freddie
       Protection Act of 2010, Pub. L. No. 111-203, §              Mac in the 112th Congress, at 1, 2, 13, 14 (July 25,
       1011, 1021, 1001-1100H, 111th Congress, codi-               2011).
       fied at 12 U.S.C. § 5491, 5511.
                                                            201	   I d., “Narrowly Focused Proposed Legislation,” at
195	    onsumer Financial Protection Bureau, “Qual-
       C                                                            5-11.
       ified Residential Mortgage Rulemaking,” Abil-
       ity-to-Repay and Qualified Mortgage Standards        202	   I d., “Broadly Focused Proposed Legislation,” at
       under the Truth in Lending Act (Regulation Z), RIN           11, 12, 13. See, e.g., Secondary Market Facility for
       3170-AA17, at 33 (January 30, 2013). Accessed:               Residential Mortgages Act of 2011, H.R. 2413,
       February 25, 2013, at http://files.consumerfi-               112th Congress.
       nance.gov/f/201301_cfpb_final-rule_ability-to-re-
       pay.pdf.                                             203	   See, e.g., Qumber Hassan and Mahesh

                                     Semiannual Report to the Congress • October 1, 2012–March 31, 2013             131
       Swaminathan, Credit Suisse, Mortgage Market                   Congress.
       Comment: GSEs – Still the Best Answer for Housing
       Finance (October 6, 2009). Accessed: February          208	   S ee, e.g., GSE Bailout Elimination and Taxpay-
       25, 2013, at www.zigasassociates.com/images/                   er Protection Act of 2011, H.R. 1182, 112th
       uploads/GSEs_-_Still_the_best_answer_for_hous-                 Congress.
       ing_finance.pdf. Council on Ensuring Mortgage
       Liquidity, Mortgage Bankers Association, MBA’s         209	   S ee, e.g., Housing Finance Reform Act of 2011,
       Recommendations for the Future Government Role                 H.R. 1859, 112th Congress.
       in the Core Secondary Mortgage Market (August
       2009). Accessed: February 25, 2013, at www.            210	   S ee, e.g., Qumber Hassan and Mahesh Swamina-
       mortgagebankers.org/files/Advocacy/2009/Rec-                   than, Credit Suisse, Mortgage Market Comment:
       ommendationsfortheFutureGovernmentRole.pdf.                    GSEs – Still the Best Answer for Housing Finance,
                                                                      at 1 (October 6, 2009). Accessed: February 25,
204	   S ee, e.g., Council on Ensuring Mortgage Liquid-              2013, at www.zigasassociates.com/images/uploads/
        ity, Mortgage Bankers Association, “Overview,”                GSEs_-_Still_the_best_answer_for_housing_
        MBA’s Recommendations for the Future Government               finance.pdf. GSE Bailout Elimination and Tax-
        Role in the Core Secondary Mortgage Market, at 5              payer Protection Act of 2011, H.R. 1182, 112th
        (August 2009). Accessed: February 25, 2013, at                Congress.
        www.mortgagebankers.org/files/Advocacy/2009/
        RecommendationsfortheFutureGovernmentRole.            211	    . Eric Weiss, Congressional Research Service,
                                                                     N
        pdf.                                                         “Broadly Focused Proposed Legislation,” Propos-
                                                                     als to Reform Fannie Mae and Freddie Mac in the
205	   S ee, e.g., David Scharfstein and Adi Sunderam,              112th Congress, at 13, 14 (July 25, 2011). Resi-
        Mossavar-Rahmani Center for Business and Gov-                dential Mortgage Market Privatization and Stan-
        ernment, Harvard Kennedy School, “Introduc-                  dardization Act of 2011, S. 1834, 112th Congress.
        tion,” The Economics of Housing Finance Reform,
        RPP-2011-07, at 1, 2, 3 (August 2011). Accessed:      212	   S ee, e.g., Secondary Market Facility for Residen-
        February 25, 2013, at www.hks.harvard.edu/m-                  tial Mortgages Act of 2011, H.R. 2413, 112th
        rcbg/rpp/Working%20papers/RPP_2011_07_                        Congress. See also N. Eric Weiss, Congressional
        Scharfstein_Sunderam.pdf.                                     Research Service, “Option: Privatization,” GSEs
                                                                      and the Government’s Role in Housing Finance:
206	    umber Hassan and Mahesh Swaminathan,
       Q                                                              Issues for the 113th Congress, at 16 (February 11,
       Credit Suisse, “Proposal for the Portfolio Busi-               2013). Accessed: February 25, 2013, at www.fas.
       ness,” Mortgage Market Comment: GSEs – Still the               org/sgp/crs/misc/R40800.pdf.
       Best Answer for Housing Finance, at 1, 9, 10 (Octo-
       ber 6, 2009). Accessed: February 25, 2013, at          213	   S ee, e.g., Bipartisan Policy Center,
       www.zigasassociates.com/images/uploads/GSEs_-_                 “Recommendations for the Single-Family
       Still_the_best_answer_for_housing_finance.pdf.                 Housing Finance System,” Housing America’s
                                                                      Future: New Directions for National Policy, at 50
207	   S ee, e.g., Secondary Market Facility for Residen-            (February 2013). Accessed: March 18, 2013,
        tial Mortgages Act of 2011, H.R. 2413, 112th                  at http://bipartisanpolicy.org/sites/default/

132         Federal Housing Finance Agency Office of Inspector General
       files/BPC_Housing%20Report_web_0.pdf.                         feds/2010/201046/201046pap.pdf.
       The Bipartisan Policy Center’s proposal is best
       categorized as a hybrid model, but the center’s        220	   S ee, e.g., Karen Dynan and Ted Gayer, Brook-
       treatment of the guarantee structure is equally                ings Institution, “Pricing the Credit Guarantee,”
       applicable to the government model.                            The Government’s Role in the Housing Finance
                                                                      System: Where Do We Go from Here?, at 19 (April
214	    . Eric Weiss, Congressional Research Service,
       N                                                              14, 2011). Accessed: February 25, 2013, at
       “Option: Government Agency,” GSEs and the                      www.brookings.edu/events/2011/02/~/media/
       Government’s Role in Housing Finance: Issues for               Events/2011/2/11%20mortgage%20mar-
       the 113th Congress, at 15, 16 (February 11, 2013).             ket/0211_housing_finance_dynan_gayer.PDF.
       Accessed: February 25, 2013, at www.fas.org/sgp/
       crs/misc/R40800.pdf.                                   221	   S ee, e.g., Congressional Budget Office, “A Hybrid
                                                                      Public/Private Model,” Fannie Mae, Freddie
215	   S ee, e.g., Residential Mortgage Market Privatiza-            Mac, and the Federal Role in the Secondary Mort-
        tion and Standardization Act of 2011, S. 1834,                gage Market, Pub. No. 4021, at 42 (December
        112th Congress. GSE Bailout Elimination and                   2010). Accessed: February 25, 2013, at www.
        Taxpayer Protection Act of 2011, H.R. 1182,                   cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/
        112th Congress. Mortgage Finance Act of 2011,                 doc12032/12-23-fanniefreddie.pdf.
        S. 1963, 112th Congress.
                                                              222	    aren Dynan and Ted Gayer, Brookings Insti-
                                                                     K
216	    ortgage Finance Act of 2011, S. 1963, 112th
       M                                                             tution, “Pricing the Credit Guarantee,” The
       Congress.                                                     Government’s Role in the Housing Finance System:
                                                                     Where Do We Go from Here?, at 19-23 (April
217	    . Eric Weiss, Congressional Research Service,
       N                                                             14, 2011). Accessed: February 25, 2013, at
       “Option: Privatization,” GSEs and the Govern-                 www.brookings.edu/events/2011/02/~/media/
       ment’s Role in Housing Finance: Issues for the 113th          Events/2011/2/11%20mortgage%20mar-
       Congress, at 16 (February 11, 2013). Accessed:                ket/0211_housing_finance_dynan_gayer.PDF.
       February 25, 2013, at www.fas.org/sgp/crs/misc/
       R40800.pdf.                                            223	   I d., “Pricing the Credit Guarantee,” at 21, 22.
                                                                      The price of the guarantee under this proposal can
218	   S ee, e.g., N. Eric Weiss, Congressional Research             either be risk-based to cover expected losses or the
        Service, “Broadly Focused Proposed Legislation,”              government can set a percentage of market target
        Proposals to Reform Fannie Mae and Freddie Mac in             and auction a finite number of guarantees, letting
        the 112th Congress, at 13 (July 25, 2011).                    the market participants set the price. The auction
                                                                      option includes an above market price option as
219	   S ee, e.g., Diana Hancock and Wayne Pass-                     a safety valve that is nonbinding during normal
        more, Federal Reserve Board, “Our Proposal,”                  market conditions, but if conditions deteriorate,
        An Analysis of Government Guarantees and the                  it would allow for additional guarantees to be
        Functioning of Asset-Backed Securities Markets, at            purchased by market participants.
        21-24 (September 7, 2010). Accessed: Febru-
        ary 25, 2013, at www.federalreserve.gov/pubs/         224	   David Scharfstein and Adi Sunderam,


                                       Semiannual Report to the Congress • October 1, 2012–March 31, 2013           133
       Mossavar-Rahmani Center for Business and Gov-         228	    ederal Housing Finance Agency, Statement of
                                                                    F
       ernment, Harvard Kennedy School, “Introduc-                  Edward J. DeMarco, Acting Director, Before the U.S.
       tion,” The Economics of Housing Finance Reform,              Senate Committee on Banking, Housing, and Urban
       RPP-2011-07, at 3 (August 2011). Accessed: Feb-              Affairs, On the State of the U.S. Housing Market:
       ruary 25, 2013, at www.hks.harvard.edu/m-rcbg/               Removing Barriers to Economic Recovery (February
       rpp/Working%20papers/RPP_2011_07_Scharf-                     28, 2012). Accessed: March 3, 2013, at www.fhfa.
       stein_Sunderam.pdf.                                          gov/webfiles/23408/02-28-12%20FINAL%20
                                                                    DeMarco%20Testimony%20SBC.pdf.
225	    umber Hassan and Mahesh Swaminathan, Cred-
       Q
       it Suisse, Mortgage Market Comment: GSEs – Still
       the Best Answer for Housing Finance, at 1 (October
       6, 2009). Accessed: February 25, 2013, at www.
       zigasassociates.com/images/uploads/GSEs_-_Still_
       the_best_answer_for_housing_finance.pdf.

226	    iana Hancock and Wayne Passmore, Federal
       D
       Reserve Board, “Introduction,” An Analysis of
       Government Guarantees and the Functioning of
       Asset-Backed Securities Markets, at 3 (September
       7, 2010). Accessed: February 25, 2013, at www.
       federalreserve.gov/pubs/feds/2010/201046/
       201046pap.pdf.

227	   S ee, e.g., David Scharfstein and Adi Sunderam,
        Mossavar-Rahmani Center for Business and Gov-
        ernment, Harvard Kennedy School, “Introduc-
        tion,” The Economics of Housing Finance Reform,
        RPP-2011-07, at 3 (August 2011). Accessed: Feb-
        ruary 25, 2013, at www.hks.harvard.edu/m-rcbg/
        rpp/Working%20papers/RPP_2011_07_Scharf-
        stein_Sunderam.pdf.




134        Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • October 1, 2012–March 31, 2013   135
136   Federal Housing Finance Agency Office of Inspector General
Federal Housing Finance Agency
Office of Inspector General

Se m iann ual R e p ort
to t h e Cong r e ss
October 1, 2012, through March 31, 2013




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