NG FINA USI NC HO E L AG RA EN FEDE CY FHFA OIG AL OF ER FI E C N OF E INS G PE C TO R 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 USING FINAN CE HO L AG RA EN FEDE CY FHFA OIG AL OF ER FI E C N OF E INS G PEC TO R 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, 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 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 firstname.lastname@example.org 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 References Federal Housing Finance Agency, Office of Conserva- torship Operations. Accessed: March 1, 2013, at www. Federal Deposit Insurance Corporation, FDIC Out- fhfa.gov/Default.aspx?Page=344. look: Breaking New Ground in U.S. Mortgage Lending. Federal Housing Finance Agency, FHFA Announces Accessed: March 1, 2013, at www.fdic.gov/bank/ana- Suspension of Capital Classifications During Conserva- lytical/regional/ro20062q/na/2006_summer04.html. torship and Discloses Minimum and Risk-Based Capital United States Courts, Bankruptcy Basics: Glossary. Classifications as Undercapitalized for the Second Quar- Accessed: March 1, 2013, at www.uscourts.gov/Feder- ter 2008 for Fannie Mae and Freddie Mac (October alCourts/Bankruptcy/BankruptcyBasics/Glossary.aspx. 9, 2008). Accessed: March 1, 2013, at www.fhfa.gov/ webfiles/775/FHFA_Suspension.PDF. International Monetary Fund, Global Financial Stability Report Statistical Appendix, at 1 (April 2012). World Council of Credit Unions, What is a Credit Accessed: March 1, 2013, at www.imf.org/external/ Union?. Accessed: March 1, 2013, at www.woccu. pubs/ft/gfsr/2012/01/pdf/statapp.pdf. org/about/creditunion. Freddie Mac, Glossary of Finance and Economic Terms. Office of the Special Inspector General for the Accessed: March 1, 2013, at www.freddiemac.com/ Troubled Asset Relief Program, “Glossary of Terms,” smm/a_f.htm#B. “Genesis and Passage of EESA,” SIGTARP: Initial Report to the Congress, at 111, 29, 114 (February 6, Federal Reserve Bank of San Francisco, What is bank 2009). Accessed: March 1, 2013, at www.sigtarp.gov/ capital and what are the levels or tiers of capital? (Sep- Quarterly%20Reports/SIGTARP_Initial_Report_to_ tember 2001). Accessed: March 1, 2013, at www. the_Congress.pdf. frbsf.org/education/activities/drecon/2001/0109.html. Department of Housing and Urban Development, Government Accountability Office, The Cooperative Glossary. Accessed: March 1, 2013, at http://portal. Model as a Potential Component of Structural Reform hud.gov/hudportal/HUD?src=/program_offices/ Options for Fannie Mae and Freddie Mac, GAO-11- housing/sfh/buying/glossary. 33R (November 15, 2010). Accessed: March 1, 2013, at www.gao.gov/new.items/d1133r.pdf. Dodd-Frank Wall Street Reform and Consumer Pro- tection Act of 2010, Pub. L. No. 111-203. Federal Home Loan Bank of Dallas, Glossary of Com- mon Terms. Accessed: March 1, 2013, at www.fhlb. Federal Home Loan Banks, The Federal Home Loan com/Glossary.html#C. Banks. Accessed: March 1, 2013, at www.fhlbanks. com/assets/pdfs/sidebar/FHLBanksWhitePaper.pdf. Census Bureau, 52211 Commercial Banking. Accessed: March 1, 2013, at www.census.gov/econ/ Department of Housing and Urban Development, census02/naics/sector52/52211.htm. The Federal Housing Administration (FHA). Accessed: March 1, 2013, at http://portal.hud.gov/hudportal/ Katherine Samolyk, “Summary,” The Future of Bank- HUD?src=/program_offices/housing/fhahistory. ing in America: The Evolving Role of Commercial Banks in U.S. Credit Markets, FDIC Banking Review, Vol. Freddie Mac, About Freddie Mac. Accessed: March 1, 16, no. 2, at 30 (2004). Accessed: March 1, 2013, at 2013, at www.freddiemac.com/corporate/about_fred- www.fdic.gov/bank/analytical/banking/2004nov/arti- die.html. cle2/br16n1art2.pdf. 72 Federal Housing Finance Agency Office of Inspector General Freddie Mac, “Who Issues Mortgage Securities?,” Activity Reporting Requirements for Insurance Com- “How Safe are Mortgage Securities?,” An Investor’s panies, FIN-2008-G004, at 2 (March 20, 2008). Guide to Pass~Through and Collateralized Mortgage Accessed: March 1, 2013, at www.fincen.gov/stat- Securities: Long-term income paid monthly, quarterly or utes_regs/guidance/pdf/fin-2008-g004.pdf. semiannually, at 2, 12. Accessed: March 1, 2013, at Government Accountability Office, “Introduction,” www.freddiemac.com/mbs/docs/about_MBS.pdf. “Internal Control Standards,” Internal Control: Stan- W. Scott Frame and Lawrence J. White, Regulating dards for Internal Control in the Federal Government, Housing GSEs: Thoughts on Institutional Structure and GAO/AIMD-00-21.3.1, at 4, 6, 8 (November 1999). Authorities, Federal Reserve Bank of Atlanta: Eco- Accessed: March 1, 2013, at www.gao.gov/special. nomic Review, Vol. Q2 2004, at 87 (2004). Accessed: pubs/ai00021p.pdf. March 1, 2013, at www.frbatlanta.org/filelegacydocs/ Arizona State Legislature, 44-141. Joint and several er04_framewhite.pdf. liability of parties to joint obligations. Accessed: March Freddie Mac, Glossary of Finance and Economic Terms. 1, 2013, at www.azleg.gov/FormatDocument.asp?in- Accessed: March 1, 2013, at www.freddiemac.com/ Doc=/ars/44/00141.htm&Title=44&DocType=ARS. smm/g_m.htm. 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 email@example.com 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. 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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). 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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). 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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). 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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
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)