oversight

Fourth Semiannual Report to the Congress

Published by the Federal Housing Finance Agency, Office of Inspector General on 2012-09-30.

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

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Federal Housing Finance Agency
  Office of Inspector General

  Se m iann ual R ep ort to t he Cong r e ss
           April 1, 2012, through September 30, 2012
Federal Housing Finance Agency
  Office of Inspector General



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  Semiann ual Rep ort to t h e C ong r e ss
            April 1, 2012, through September 30, 2012
Table of Contents
  OIG’s Mission. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . i
  A Message from the Inspector General. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 1
  Executive Summary. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 3
      Overview	                                                                                                                        4
      FHFA Developments	                                                                                                               4
      OIG Operations	                                                                                                                  5
      Report Organization	                                                                                                             9
      OIG Reporting Requirements	                                                                                                      9

  Section 1: OIG Description. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 11
      Leadership and Organization	                                                                                                   12
      OIG’s Strategic Plan	                                                                                                          14
      Organizational Guidance	                                                                                                       15

  Section 2: FHFA and GSE Operations .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 17
      FHFA	                                                                                                                          18
      FHFA Authority	                                                                                                                18
      Fannie Mae and Freddie Mac	                                                                                                    19
      FHLBanks	                                                                                                                      25
      Selected FHFA, GSE, and Other Activities	                                                                                      27

  Section 3: OIG’s Accomplishments and Strategy. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 37
      OIG Audits and Evaluations	                                                                                                    38
      OIG Audit and Evaluation Plan	                                                                                                 53
      OIG Investigations	                                                                                                            53
      OIG Investigations Strategy	                                                                                                   63
      OIG Regulatory Activities	                                                                                                     64
      OIG Communications and Outreach Efforts	                                                                                       65

  Section 4: OIG’s Recommendations.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 69
   ection 5: An Overview of the FHLBank System’s Structure, Operations,
  S
  and Challenges. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 83
      Background	                                                                                                                    84
      FHLBank System Risks and Their Management	                                                                                     93
      FHFA’s FHLBank System Safety, Soundness, and Mission Oversight Activities	                                                     96
      FHLBanks and the Enterprises	                                                                                                  97
      Current Risks and Challenges Facing the FHLBank System and FHFA	                                                               99
      Outlook	                                                                                                                      105
Appendices. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 107
     Appendix A: Glossary and Acronyms	                                                                                             108
     Appendix B: Information Required by the Inspector General Act	                                                                 123
     Appendix C: OIG Reports	                                                                                                       127
     Appendix D: OIG Organizational Chart	                                                                                          128
     Appendix E: Enterprises’ Performance Metrics	                                                                                  129
     Appendix F: Endnotes	                                                                                                          131
       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 appropriate, comment on pending legislation and
       regulations; and seek administrative sanctions, civil recoveries, and criminal
       prosecutions of those responsible for fraud, waste, or abuse in connection with
       the programs and operations of FHFA.

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




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




i|   OIG’s Mission
                                                            SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




A Message from the Inspector General

I am pleased to present OIG’s fourth Semiannual Report to the Congress,
which covers OIG’s activities and operations from April 1, 2012, through
September 30, 2012.

OIG provides independent, objective oversight of FHFA’s programs and
operations, including its regulation of the housing government-sponsored
enterprises (GSEs) – the Federal National Mortgage Association (Fannie
Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and
the Federal Home Loan Bank System (FHLBank System). Since September
2008, FHFA has also served as the conservator of Fannie Mae and Freddie
Mac (collectively, the Enterprises).

At a time when housing markets across the nation remain fragile, FHFA,
the Enterprises, and the Federal Home Loan Banks (FHLBanks) continue
to be key players in the nation’s housing finance system. Further, their future
role in that system remains a topic of debate. The work performed by OIG
during this period – and summarized in this report – illustrates the challenges
that confront FHFA, the Enterprises, and the FHLBanks, and we hope
                                                                                   Steve A. Linick
that it will help to inform the debate surrounding the future of the housing       Inspector General of the Federal
finance system.                                                                    Housing Finance Agency


Our reports during this period address the challenges the GSEs encounter
when operating in distressed housing markets. One report focuses on the
Enterprises’ management of their inventories of foreclosed properties and
highlights the significant “shadow inventory” of properties awaiting foreclosure
in the coming months. Another describes the process by which Fannie Mae
has attempted to control its ongoing credit losses through the transfer of over
one million loans to specialty mortgage servicers. Still another analyzes how
a Freddie Mac process change affecting loan repurchase claims – a change
supported by OIG and Freddie Mac’s internal auditors – may produce an
additional $1 billion in income for the Enterprise in 2012 alone.

OIG has also been active on the law enforcement front. During this period,
multiple individuals were charged, convicted, and/or sentenced to significant
prison terms based on their participation in a variety of mortgage fraud
schemes impacting the GSEs. OIG investigators and attorneys made
significant contributions to these cases, which were brought by federal, state,
and local partners across the nation.

We remain mindful of our privilege to serve the public and grateful for the
support of Congress, FHFA, and others as we carry out our important mission.

Steve A. Linick
Inspector General
October 31, 2012


                                                                                            A Message from the Inspector General   | 1
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 2 |   A Message from the Inspector General
executive summary
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                           Executive Summary
                                                           OVERVIEW
                                                           This Semiannual Report discusses FHFA developments and the operations
                                                           of OIG from April 1, 2012, through September 30, 2012.a

                                                           FHFA DEVELOPMENTS
                                                           FHFA is the safety, soundness, and mission regulator of the housing GSEs:
Government-Sponsored                                       Fannie Mae, Freddie Mac, and the FHLBank System. The FHLBank System
Enterprises (GSEs):                                        is comprised of 12 regional FHLBanks and the Office of Finance. FHFA has
Business organizations chartered and                       also been the conservator of the Enterprises since September 2008.
sponsored by the federal government.
                                                           As conservator, FHFA’s powers include:

                                                                • taking over the assets of and operating the Enterprises with all the
                                                                   powers of their shareholders, directors, and officers; and
                                                                • preserving and conserving the assets and property of the Enterprises.
                                                           During the semiannual period, FHFA has exercised those powers by, among
                                                           other things, concluding that the Enterprises should not participate in principal
                                                           reduction programs; announcing further increases to guarantee fees; continuing
                                                           implementation of a real estate owned (REO) pilot program; and agreeing to
                                                           the revision of the terms of the Enterprises’ stock purchase agreements with the
                                                           Department of the Treasury (Treasury).

                                                           After extensive analysis, FHFA indicated that Enterprise participation in the
                                                           Home Affordable Modification Program Principal Reduction Alternative
                                                           (HAMP PRA) would not meaningfully reduce foreclosures in a cost-effective
                                                           way for taxpayers. FHFA asserts that in order to strengthen the Enterprises’
                                                           loss mitigation and borrower assistance efforts and improve the operation of the
                                                           housing finance market, actions should focus on further streamlining refinance
                                                           opportunities, enhancing the short sale process, and reducing lender uncertainty
                                                           that could inhibit new mortgage lending.

                                                           FHFA also announced that the Enterprises will further raise guarantee fees on
Basis Points:                                              single-family mortgages by an average of 10 basis points beginning later this
Refers to hundredths of 1 percentage point.                year as a step toward encouraging greater participation in the mortgage market
For example, 1 basis point is equivalent to                by private firms. The Agency also announced a proposal to implement new
1/100 of 1 percentage point.                               risk-based pricing for its mortgage guarantees based on state-level factors,
                                                           which would result in increased upfront guarantee fees of between 15 and
                                                           30 basis points for mortgages on properties located in Connecticut, Florida,
                                                           Illinois, New Jersey, and New York.

                                                           Additionally, the Agency continued implementation of its REO pilot program
 The Inspector General Act of 1978, 5 U.S.C. App. 3 § 5,   launched earlier in the year by soliciting bids from qualified investors on a pool
a

requires that each inspector general compile a report of
his or her office’s operations for each six-month period   of single-family properties and announcing the first winning bidder.
ending Mar. 31 and Sept. 30.



    4 |   Executive Summary
                                                           SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




As announced by Treasury, FHFA signed a third amendment to the Senior
Preferred Stock Purchase Agreements (PSPAs) that govern the assistance
provided by Treasury to the Enterprises. Notably, the amendments accelerate
the reduction of the Enterprises’ retained mortgage investment portfolios and
change the 10% per annum dividend payment to a quarterly sweep of all positive
net worth each Enterprise accrues going forward.

These and other FHFA developments are discussed in detail in this
Semiannual Report.

OIG OPERATIONS
During the semiannual period, OIG published 14 reports relating to FHFA’s
oversight of significant GSE issues. Among the effects of OIG’s reporting
efforts is Freddie Mac’s likely recovery of approximately $1 billion in added
income in 2012 and up to $3.4 billion in later years. Further, to date, OIG has
made over 80 recommendations to improve the transparency, efficiency, and
effectiveness of FHFA’s operations and aid in the prevention and detection of
fraud, waste, and abuse. FHFA fully or partially agreed to the overwhelming
majority of OIG’s recommendations.

Several of the reports issued during this semiannual period continue to reflect          For information about these
two themes OIG has identified in its overall body of work: first, with regard            themes, see Appendix A of
to the conservatorships, FHFA has often relied on determinations of the                  FHFA-OIG’s Current Assessment
Enterprises without independently testing and validating them, thereby giving            of FHFA’s Conservatorships of
undue deference to Enterprise decision making, and second, with regard to                Fannie Mae and Freddie Mac
its regulatory responsibilities, FHFA faces challenges in risk management,               (WPR-2012-001, March 28, 2012)
including its ability to identify new and emerging risks potentially impacting           available at www.fhfaoig.gov/
the GSEs; issue guidance and regulations governing risk management                       Content/Files/WPR-2012-001.pdf.
oversight at the GSEs; and provide strong, consistent enforcement for
violations of policy.

Conservator Issues
Given the importance of FHFA’s role as conservator, OIG has prioritized
work involving the conservatorships and issued four reports that touch upon
the first theme. In FHFA’s Conservator Approval Process for Fannie Mae and
Freddie Mac Business Decisions (AUD-2012-008, September 27, 2012),b OIG
audited FHFA’s process for approving matters under the conservatorships
and concluded that the Agency can better accomplish its oversight mission
by proactively exerting greater control over its conservator approval process.
Among other aspects, the Agency can improve how it processes requests
for conservatorship decisions. For example, OIG determined that FHFA
approved a multimillion dollar loan purchase without independently verifying
the underlying conditions, stating, “[g]iven the complex nature of this
transaction and the short time in which a decision must be made, it is not
possible for us to assess the reasonableness of this proposal.”                   b
                                                                                      T he full report is available at www.fhfaoig.gov/Content/
                                                                                       Files/AUD-2012-008_2.pdf.



                                                                                                                Executive Summary           | 5
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                            In Evaluation of FHFA’s Oversight of Fannie Mae’s Transfer of Mortgage
                                                            Servicing Rights from Bank of America to High Touch Servicers (EVL-2012-008,
                                                            September 18, 2012),c OIG analyzed Fannie Mae’s purchase from Bank of
                                                            America (BOA) – for $421 million – of mortgage servicing rights (MSR) for
                                                            approximately 384,000 mortgage loans owned or guaranteed by Fannie Mae.
                                                            Fannie Mae’s purchase of MSR from BOA was part of an ongoing initiative –
                                                            the High Touch Servicing Program – that utilizes specialty servicers who work
                                                            with at-risk borrowers to help reduce the number of defaults in mortgages
                                                            owned or guaranteed by Fannie Mae. Although FHFA reviewed the BOA
                                                            transaction and allowed it to proceed, it did not conduct similar reviews of
                                                            other transactions in the High Touch Servicing Program nor did it analyze
                                                            the program as a whole, despite the fact that it involved multiple transfers of
                                                            servicing rights for over 700,000 loans with an unpaid principal balance in
                                                            excess of $130 billion.

                                                            Two other reports suggest positive movement towards additional testing
                                                            and validation by FHFA as conservator. In FHFA’s Certifications for the
                                                            Preferred Stock Purchase Agreements (EVL-2012-006, August 23, 2012),d
                                                            OIG evaluated FHFA’s adherence to certain requirements under the PSPAs,
                                                            pursuant to which Treasury commits funds to the Enterprises. As part of the
                                                            security for Treasury’s investments, the PSPAs require FHFA to make three
                                                            certifications. However, OIG determined that FHFA was making only one of
                                                            the three required certifications and for the other two was relying on the work
                                                            and certifications of the Enterprises. Upon learning of OIG’s preliminary
                                                            evaluation findings, FHFA began providing Treasury with all three of the
                                                            required certifications.

                                                            Similarly, in Follow-up on Freddie Mac’s Loan Repurchase Process (EVL-2012-
                                                            007, September 13, 2012),e OIG followed up on a prior report that raised
                                                            concerns about the method Freddie Mac used to review non-performing loans
                                                            for repurchase claims. Freddie Mac followed a practice of only reviewing
                                                            intensively for repurchase claims those loans that became non-performing
                                                            or had payment problems during the first two years following origination –
                                                            effectively excluding from review housing boom loans that became troubled
                                                            in years three through five. This practice limited Freddie Mac’s potential
                                                            recoveries from repurchase requests, and – in its original report – OIG
                                                            recommended that FHFA promptly act on the concerns raised about Freddie
                                                            Mac’s loan review process. In the follow-up report, OIG found that FHFA
                                                            and Freddie Mac have acted on the concerns by adopting a more expansive
                                                            review process and reviewing a significantly larger number of loans defaulting
                                                            more than two years after origination. It is estimated that the expanded
c
 The full report is available at www.fhfaoig.gov/Content/   review process will generate additional recoveries ranging from $0.8 billion
Files/EVL-2012-008.pdf.                                     to $1.2 billion for loans selected for review in 2012 and $2.2 billion to
d
 The full report is available at www.fhfaoig.gov/Content/
                                                            $3.4 billion overall.
Files/EVL-2012-006_3.pdf.
e
 The full report is available at www.fhfaoig.gov/Content/
Files/EVL-2012-007.pdf.



    6 |    Executive Summary
                                                          SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




Regulator Issues
In an additional five reports, OIG identified instances in which FHFA could
be more proactive in risk oversight and enforcement. Accordingly, within its
regulatory functions, the Agency continues to face challenges in its ability
to identify new and emerging risks potentially impacting the GSEs; issue
guidance and manage risks that have been identified; and provide strong,
consistent enforcement for violations of policy.

The Enterprises work with numerous seller/servicers for post-origination
mortgage work, such as collecting mortgage payments, and these seller/
servicers represent an important risk to the Enterprises. Yet, as OIG found
in FHFA’s Oversight of the Enterprises’ Management of High-Risk Seller/
Servicers (AUD-2012-007, September 18, 2012),f FHFA can strengthen
the Enterprises’ counterparty risk management by, among other things,
publishing standards for the development of contingency plans related to
failing or failed high-risk counterparties. Contingency plans help to manage
such risks because they identify actions to pursue when a counterparty’s
changing financial or other circumstances pose a financial threat to an
Enterprise. Counterparty contingency plans will not eliminate losses, but
they can serve as a road map to help reduce the Enterprises’ risk exposure.
Contingency plans can also prepare the Enterprises for unexpected collapses
of counterparties that handle a concentrated, high-volume of their business.
The report underscored the importance of managing such seller/servicer risk,
noting that the Enterprises have incurred losses of $6.1 billion from failures
at just four of their counterparties since 2008.

Another report, FHFA’s Supervisory Risk Assessment for Single-Family Real
Estate Owned (AUD-2012-005, July 19, 2012),g examined one way FHFA
can better identify, understand, and mitigate the risks related to Enterprise
REO. Since 2008, FHFA has consistently listed the Enterprises’ large
inventories of REO as contributing to “critical concern” ratings in their
quarterly risk assessments. However, in spite of FHFA’s identification of
REO as a prominent and ascending risk, OIG found that FHFA did not
conduct targeted examinations or similar focused reviews of REO until 2011.
To strengthen its supervision of Enterprise REO, FHFA will benefit from
more comprehensive REO risk assessments and using the results of such
assessments when planning examination work. Further, in FHFA’s Call Report
System (AUD-2012-006, July 19, 2012),h OIG found that the call report
system (CRS) – a centralized information system that can provide data for
                                                                                     f
                                                                                      The full report is available at www.fhfaoig.gov/Content/
various oversight analyses – offers another avenue for FHFA to improve its           Files/AUD-2012-007.pdf.
understanding of and response to emerging and other risks confronting the        a
Enterprises. However, FHFA has not fully implemented its use of the system            The full report is available at www.fhfaoig.gov/Content/
                                                                                     g

                                                                                     Files/AUD-2012-005_2.pdf.
with respect to the Enterprises.
                                                                                     h
                                                                                      The full report is available at www.fhfaoig.gov/Content/
OIG analyzed risk management among the FHLBanks in two additional                    Files/AUD-2012-006_1.pdf.
reports. In FHFA’s Supervisory Framework for Federal Home Loan Banks’                i
                                                                                      The full report is available at www.fhfaoig.gov/Content/
Advances and Collateral Risk Management (AUD-2012-004, June 1, 2012),i               Files/AUD-2012-004.pdf.



                                                                                                               Executive Summary          | 7
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                            OIG found that FHFA can improve its framework for supervising advances
                                                            and collateral risk management practices for institutions presenting heightened
                                                            supervisory concerns. Although FHFA conducted a system-wide horizontal
                                                            review of secured credit among the FHLBanks and an internal study that
                                                            identified numerous significant risks, the Agency did not take sufficient steps
                                                            to ensure that the FHLBanks effectively managed risks posed by member
                                                            banks that represented heightened supervisory concerns.

                                                            In the second report, FHFA’s Oversight of the Federal Home Loan Banks’ Unsecured
                                                            Credit Risk Management Practices (EVL-2012-005, June 28, 2012),j OIG
                                                            found a lack of appreciation for the risk associated with unsecured lending and
                                                            a lack of enforcement of existing risk management standards. The FHLBanks
                                                            extend unsecured short-term credit (namely, loans not backed by collateral)
                                                            to domestic and foreign financial institutions. Extensions of unsecured credit
                                                            by the FHLBanks to, among others, European financial institutions increased
                                                            substantially in 2010 and 2011, even as the risks associated with doing so
                                                            were escalating. Unsecured lending by the FHLBanks had grown to more
                                                            than $120 billion by early 2011 but declined sharply by year-end 2011 as
                                                            the European sovereign debt crisis intensified. Although FHFA identified
                                                            extensions of unsecured credit as a risk confronting the FHLBanks, it did
                                                            not prioritize the risk in its examinations until 2011 and 2012. OIG also
                                                            identified potential un-remediated violations by the FHLBanks of the
                                                            Agency’s regulations governing extensions of unsecured credit.

                                                            Other Activities
                                                            In addition to publishing reports covering various aspects of FHFA’s oversight
                                                            of the GSEs, OIG engaged in significant investigative and outreach efforts.
                                                            For example, OIG’s investigations resulted in:

                                                            	       • an indictment of 11 former employees of Abacus Federal
                                                                      Savings Bank, as well as guilty pleas of 8 former employees, in
                                                                      connection with a mortgage fraud scheme involving the sale
                                                                      to Fannie Mae of hundreds of millions of dollars worth of
                                                                      fraudulent loans;

                                                            	       • indictments of 10 defendants in connection with fraudulently
                                                                      obtaining $39 million in mortgages – that were later sold to the
                                                                      Enterprises – for the purchase of condominium units at Marina
                                                                      Oaks Condominiums in Fort Lauderdale, Florida;

                                                            	       • a guilty plea from the former chief credit officer for Appalachian
                                                                      Community Bank – a member of the Atlanta FHLBank – for
                                                                      conspiracy to commit bank fraud for participating in a scheme
                                                                      involving two Florida condominiums valued at $3.7 million and
                                                                      another $13 million in property flips;
j
 The full report is available at www.fhfaoig.gov/Content/
Files/EVL-2012-005_1_0.pdf.



    8 |    Executive Summary
                                                               SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




	       • an indictment of 11 employees of 21st Century Real Estate
          Investment Corporation in connection with an alleged mortgage
          modification scheme that fraudulently collected over $7 million
          from over 4,000 homeowners; and

	       • a guilty plea from the former president of American
          Mortgage Field Services LLC, who conspired to commit wire
          fraud by submitting approximately $13.5 million worth of fraudulent
          inspection reports related to foreclosed properties owned by
          the Enterprises.

Further, OIG also worked closely with Treasury’s Financial Crimes
Enforcement Network (FinCEN) to review allegations of mortgage fraud;
OIG assigned an investigative analyst to work embedded within FinCEN’s
Office of Law Enforcement Support to further refine its analytical efforts to
support complex mortgage fraud cases nationwide.

All of OIG’s publicly disclosed reports, investigations, and other activities are
discussed in detail in this Semiannual Report.

REPORT ORGANIZATION
This Semiannual Report is organized as follows:

	       • Section 1, OIG Description, provides a brief overview of the organization.

	       • Section 2, FHFA and GSE Operations, describes the organization and
          operation of FHFA, Fannie Mae, Freddie Mac, and the FHLBanks.
          It also discusses notable developments related to these organizations.

	       • Section 3, OIG’s Accomplishments and Strategy, describes OIG’s
          oversight activities, including audits, evaluations, and investigations.
          It also discusses OIG’s current priorities and future goals.

	       • Section 4, OIG’s Recommendations, discusses OIG recommendations
          to improve FHFA and GSE operations and transparency and reports
          the implementation status for outstanding recommendations.

Additionally, this Semiannual Report includes Section 5, An Overview of the
FHLBank System’s Structure, Operations, and Challenges, which is a detailed
discussion of the FHLBank System.

OIG REPORTING REQUIREMENTS
The Inspector General Act states that each inspector general is required, no
later than April 30 and October 31 each year, to prepare semiannual reports
summarizing the activities of his or her office during the preceding six-
month periods ending March 31 and September 30.k The specific reporting
requirements, as specified in the Inspector General Act, are listed in Appendix
B.                                                                                          The Inspector General Act of 1978, 5 U.S.C. App. 3 § 5.
                                                                                        k




                                                                                                                     Executive Summary        | 9
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 10 |   Executive Summary
section 1
OIG DESCRIPTION
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                     Section 1: OIG Description
                                     OIG began operations on October 12, 2010. It was established by the Housing
                                     and Economic Recovery Act of 2008 (HERA), which amended the Inspector
                                     General Act. OIG conducts audits, evaluations, investigations, and other law
                                     enforcement activities relating to FHFA’s programs and operations.

                                     LEADERSHIP AND ORGANIZATION
                                     On April 12, 2010, President Barack Obama nominated FHFA’s first Inspector
                                     General, Steve A. Linick, who was confirmed by the Senate on September 29,
                                     2010, and sworn into office on October 12, 2010. Previously, Mr. Linick held
                                     several leadership positions at the Department of Justice (DOJ) between 2006
                                     and 2010. Prior to that, Mr. Linick was an Assistant U.S. Attorney in the
                                     Central District of California (1994-1999) and later in the Eastern District
                                     of Virginia (1999-2006).

                                     Mr. Linick received his Bachelor of Arts (1985) and Master of Arts (1990)
                                     in Philosophy from Georgetown University and his Juris Doctor (1990) from
                                     the Georgetown University Law Center.

                                     OIG consists of the Inspector General, his senior staff, and OIG offices,
                                     principally: the Office of Audits (OA), the Office of Evaluations (OE), and
                                     the Office of Investigations (OI). Additionally, OIG’s Executive Office (EO)
                                     and Office of Administration (OAd) provide organization-wide supervision
                                     and support. (See Appendix D for OIG’s organizational chart.)

                                     Office of Audits
                                     OA provides a full range of professional audit and attestation services for
                                     FHFA’s programs and operations. Through its performance audits and
                                     attestation engagements, OA helps FHFA: (1) promote economy, efficiency,
                                     and effectiveness; (2) detect and deter fraud, waste, and abuse; and (3) ensure
                                     compliance with applicable laws and regulations. Under the Inspector
                                     General Act, inspectors general are required to comply with the Government
                                     Auditing Standards, commonly referred to as the “Yellow Book,” issued by
                                     the Government Accountability Office (GAO). OA performs its audits and
                                     attestation engagements in accordance with the Yellow Book.

                                     Office of Evaluations
                                     OE provides independent and objective reviews, studies, survey reports, and
                                     analyses of FHFA’s programs and operations. OE’s evaluations are generally
                                     limited in scope. The Inspector General Reform Act of 2008 requires
                                     that inspectors general adhere to the Quality Standards for Inspection and
                                     Evaluation, commonly referred to as the “Blue Book,” issued by the Council
                                     of the Inspectors General on Integrity and Efficiency (CIGIE). OE performs
                                     its evaluations in accordance with the Blue Book.


 12 |   Section 1: OIG Description
                                                            SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




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

OI’s investigations may address administrative, civil, and criminal violations of
laws and regulations. Investigations may relate to FHFA or GSE employees,
contractors, consultants, and any alleged wrongdoing involving FHFA’s or
the GSEs’ programs and operations. Offenses investigated may include mail,
wire, bank, accounting, securities, or mortgage fraud, as well as violations of
the tax code, obstruction of justice, and laundering money.

To date, OI has opened numerous criminal and civil investigations, but by
their nature, these investigations and their resulting reports are not generally
made public. However, if an investigation reveals criminal activity, OI refers
the matter to DOJ for possible prosecution or recovery of monetary damages
and penalties. OI reports administrative misconduct to management officials
for consideration of disciplinary or remedial action.

OI also manages OIG’s Hotline, which receives tips and complaints of                OIG’s Hotline:
fraud, waste, or abuse in FHFA’s programs and operations. The Hotline               (800) 793-7724 or
allows concerned parties to report their allegations to OIG directly and            OIGHOTLINE@FHFAOIG.GOV.
confidentially. OI honors all applicable whistleblower protections. As part
of its effort to raise awareness of fraud, OI actively promotes the Hotline
through OIG’s website, posters, e-mails to FHFA and GSE employees, and
OIG’s semiannual reports.

Executive Office
EO provides leadership and programmatic direction for OIG’s offices
and activities.

EO includes the Office of Counsel (OC), which serves as the chief legal
advisor to the Inspector General and provides independent legal advice,
counseling, and opinions to OIG about its programs and operations. OC
reviews audit and evaluation reports for legal sufficiency and compliance with
OIG’s policies and priorities. It also reviews drafts of FHFA regulations and
policies and prepares comments as appropriate. Additionally, OC coordinates
with FHFA’s Office of General Counsel (OGC) and manages OIG’s responses
to requests and appeals made under the Freedom of Information Act and the
Privacy Act.

EO also includes the Office of Policy, Oversight, and Review (OPOR),
which provides advice, consultation, and assistance regarding OIG’s priorities
and the scope of its evaluations, audits, and all other published reports. In
addition, OPOR is responsible for conducting special studies, developing the
semiannual reports, and drafting reports and white papers addressing complex
housing finance issues.


                                                                                             Section 1: OIG Description   | 13
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                             The Office of External Affairs is also within EO, and it responds to inquiries
                                             from the press and members of Congress.

                                             The Office of Special Projects is also within EO, and it supports other OIG
                                             offices on high-impact projects.

                                             Office of Administration
                                             OAd manages and oversees OIG administration, including budget, human
                                             resources, safety, facilities, financial management, information technology,
                                             and continuity of operations. For human resources, OAd develops policies to
                                             attract, develop, and retain exceptional people, with an emphasis on linking
                                             performance planning and evaluation to organizational and individual
                                             accomplishment of goals and objectives. Regarding OIG’s budget and
                                             financial management, OAd coordinates budget planning and execution
                                             and oversees all of OIG’s procedural guidance for financial management and
                                             procurement integrity.

                                             OAd also administratively supports the Chief of Staff and the Deputy
                                             Inspector General for Audits as they implement OIG’s Internal Management
                                             Assessment Program, which requires the routine inspection of each OIG
                                             office to ensure that it complies with applicable requirements. OAd also
                                             administers OIG’s Equal Employment Opportunities program.

OIG’s full Strategic Plan is available at
                                             OIG’S STRATEGIC PLAN
www.fhfaoig.gov/Content/Files/Strategic%20
Plan_0.pdf.                                  On September 7, 2011, OIG published a Strategic Plan to define its goals and
                                             objectives, guide development of its performance criteria, establish measures
                                             to assess accomplishments, create budgets, and report on progress. OIG will
                                             continue to monitor events; make changes to its Strategic Plan as circumstances
                                             warrant; and strive to remain relevant regarding areas of concern to FHFA,
                                             the GSEs, Congress, and the American people.

                                             Within the Strategic Plan, OIG has established several goals that align with
                                             FHFA’s strategic goals.

                                             Strategic Goal 1 – Adding Value
                                             OIG will promote the economy, efficiency, and effectiveness of FHFA’s
                                             programs and operations and assist FHFA and its stakeholders to solve
                                             problems related to the conservatorships and the conditions that led to them.

                                             Strategic Goal 2 – Operating with Integrity
                                             OIG will promote the integrity of FHFA’s programs and operations through
                                             the identification and prevention of fraud, waste, or abuse.




  14 |   Section 1: OIG Description
                                                            SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




Strategic Goal 3 – Promoting Productivity
OIG will deliver quality products and services to its stakeholders by
maintaining an effective and efficient internal quality control program to
ensure that OIG’s results withstand professional scrutiny.

Strategic Goal 4 – Valuing OIG Employees
OIG will maximize the performance of its employees and the organization.

ORGANIZATIONAL GUIDANCE
OIG has developed and promulgated policies and procedures manuals for
each of its offices. These manuals set forth uniform standards and guidelines
for the performance of each office’s essential responsibilities and are intended
to help ensure the consistency and integrity of OIG’s operations.




                                                                                           Section 1: OIG Description   | 15
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 16 |   Section 1: OIG Description
                          SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




section 2
FHFA AND GSE OPERATIONS




                                                  Section 2: FHFA and GSE Operations   | 17
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                         Section 2: FHFA and GSE Operations
                                                         FHFA
                                                         HERA created FHFA in July 2008, as the successor to the Office of Federal
                                                         Housing Enterprise Oversight and the Federal Housing Finance Board. The
Preferred Stock:
                                                         Agency now supervises the Enterprises and the FHLBanks, which previously
A security that usually pays a fixed dividend
                                                         had been respectively regulated by the two predecessor entities. HERA also
and gives the holder a claim on corporate
                                                         expanded Treasury’s authority to financially support the GSEs.1
earnings and assets superior to that of
holders of common stock but inferior to                  Six weeks later, on September 6, 2008, the Enterprises entered conservatorships
that of investors in the corporation’s debt              overseen by FHFA. At the time of the conservatorships, Treasury exercised
securities.                                              its authority to financially support the Enterprises by making preferred stock
                                                         investments in them pursuant to the PSPAs.
Senior Preferred Stock Purchase
Agreements (PSPAs):
Entered into at the time the                             FHFA AUTHORITY
conservatorships were created, the PSPAs                 FHFA serves as the regulator of the GSEs and conservator of the Enterprises.
authorize the Enterprises to request and                 As regulator, the Agency’s mission is to ensure that the GSEs operate in a safe
obtain funds from Treasury. Under the                    and sound manner. As conservator, the Agency seeks to conserve and preserve
PSPAs, the Enterprises agreed to consult                 Enterprise assets. FHFA also has property management responsibilities
with Treasury concerning a variety of                    under the Emergency Economic Stabilization Act (EESA).
significant business activities, capital stock
issuance, dividend payments, ending the                  FHFA’s Duties as Regulator Under HERA
conservatorships, transferring assets, and
awarding executive compensation.                         The principal duties of FHFA, as a regulator, are to oversee the prudential
                                                         operations of each regulated entity and to ensure:

                                                              • each regulated entity operates in a safe and sound manner and maintains
                                                                 adequate capital and internal controls;
                                                              • the operations and activities of each regulated entity foster liquid,
                                                                 efficient, competitive, and resilient national housing finance markets,
                                                                 including activities relating to mortgages on housing for low- and
                                                                 moderate-income families;
                                                              • each regulated entity complies with the rules, regulations, guidelines,
                                                                 and orders issued under law;
                                                              • each regulated entity carries out its statutory mission only through
                                                                 activities that are authorized under law and consistent with the law; and
                                                              • the activities and procedures of each regulated entity are consistent
                                                                 with the public interest.l
                                                         HERA also requires that the Enterprises obtain Agency approval before
                                                         offering new products; prohibits the Enterprises from providing unreasonable
                                                         executive compensation; requires FHFA to establish prudential management
l
 See 12 U.S.C. §§ 4513 et seq. for more information on   and operational standards for the regulated entities; and forbids high-ranking
FHFA’s statutory duties as a regulator.



    18 |   Section 2: FHFA and GSE Operations
                                                              SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




FHFA officials from receiving compensation from the Enterprises within two
years of their departure from FHFA.

FHFA’s Authority as Conservator
As a conservator, FHFA generally may conserve and preserve the assets of the
Enterprises and specifically is authorized to:

     • succeed to all rights, titles, powers, and privileges of the Enterprises
        and any shareholders, officers, or directors of them;
     • operate the Enterprises; and
     • take such action as may be:
           • necessary to put the Enterprises in sound and solvent conditions;
             and
           • appropriate to carry on the businesses of the Enterprises and
             preserve and conserve their assets and property.m
In addition to those powers enumerated by HERA, FHFA has “such incidental
powers as shall be necessary to carry out” its enumerated powers.2 In 2009,
FHFA interpreted its authorization to conserve and preserve the Enterprises’
assets as its “top goal” for its conservatorships3 and often cites this goal.n

FHFA’s Duties Under EESA
EESA requires that FHFA:
     • implement a plan to maximize assistance to homeowners;
     • use its authority to encourage the servicers of the Enterprises’ mortgages,
        considering net present value, to take advantage of federal programs to
        minimize foreclosures;
     • coordinate within the federal government concerning homeowner
        assistance plans; and                                                         m
                                                                                        HERA at § 1145. For example, under HERA, FHFA can:
     • submit monthly reports to Congress detailing the progress of its efforts. 4   (1) promulgate regulations regarding the conduct of the
                                                                                      conservatorship; (2) take title to all books, records, or
                                                                                      assets of the Enterprises; (3) take over the assets of the
                                                                                      Enterprises; (4) collect all obligations and money due to
FANNIE MAE AND FREDDIE MAC                                                            the Enterprises; (5) act in the name of the Enterprises;
In 1938, Congress chartered Fannie Mae to help create stable funding for the          and (6) create contracts to aid in its role.

U.S. housing and mortgage markets. Freddie Mac was established in 1970                n
                                                                                        See Statement of Edward J. DeMarco Before the
with a similar mission of supporting residential mortgage markets in addition         House Financial Services Committee, Subcommittee on
                                                                                      Oversight and Investigations (Dec. 1, 2011) at 3; see also
to expanding opportunities for homeownership and affordable rentals.                  A Strategic Plan for Enterprise Conservatorships: The
                                                                                      Next Chapter in a Story That Needs an Ending (Feb. 21,
                                                                                      2012) at 10 (“FHFA has reported on numerous occasions
                                                                                      that, with taxpayers providing the capital supporting
                                                                                      Enterprise operations, this ‘preserve and conserve’
                                                                                      mandate directs FHFA to minimize losses on behalf
                                                                                      of taxpayers”).




                                                                                           Section 2: FHFA and GSE Operations             | 19
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                As Figure 1 (see below) illustrates, the Enterprises support the nation’s
                                                housing finance system through the secondary mortgage market, but neither
Conventional Conforming Mortgage
                                                entity makes home loans directly. Instead, banks, credit unions, and other
Loans:
                                                retail financial institutions originate home loans. Generally, lenders do not
Mortgages that are not insured or
guaranteed by the Federal Housing
                                                keep the mortgages they originate but instead sell conventional conforming
Administration, the Department of Veterans
                                                mortgage loans to the Enterprises.
Affairs, or the Department of Agriculture       The Enterprises typically securitize the loans they purchase by pooling them
and that meet the Enterprises’ underwriting     into mortgage-backed securities (MBS), which are then sold to investors. As
standards. Conforming mortgage loans            part of this process, for a fee, the Enterprises guarantee payment of principal
have original balances below a specific
                                                and interest on the MBS they sell. Alternatively, the Enterprises may hold
threshold, published by FHFA, known as
                                                these loans or buy MBS for their own investment portfolios, which are funded
the “conforming loan limit.” For 2012,
                                                by issuing debt obligations.
the conforming loan limit is $417,000
for most areas of the contiguous United         Historically, the Enterprises have benefited from an implied guarantee that
States, although generally it can increase      the federal government would prevent default on their financial obligations.
to a maximum of $625,500 in specific            As a result, over time, the Enterprises’ borrowing costs have been lower than
higher-cost areas.                              those of other for-profit companies,5 and the Enterprises assumed dominant
                                                positions in the residential housing finance market. (After the Enterprises
Mortgage-Backed Securities (MBS):
                                                were placed into conservatorships, the implied guarantee effectively became
MBS are debt securities that represent
                                                explicit.)6
interests in the cash flows – anticipated
principal and interest payments – from                                       Figure 1. Overview of the Enterprises and FHFA’s Role
pools of mortgage loans, most commonly
on residential property.
                                                      Primary                                                                                 Applies for
                                                      Mortgage Market                                                                          Mortgage
Guarantee:                                            Market in which financial                                                                                  BORROWER
                                                      institutions provide
A pledge to investors that the guarantor will         mortgage loans to
                                                                                                               LENDER
                                                                                                                                               Provides
bear the default risk on a pool of loans or           homebuyers                                                                                 Loan
                                                                                            Sells Loans that
other collateral.                                                                          Meet Underwriting
                                                                                             and Product
                                                                                              Standards


Implied Guarantee:                                                                                                          Buys
                                                                                                                          Mortgages

The assumption, prevalent in the financial            Seconday
                                                      Mortgage Market                                   FANNIE MAE and
markets, that the federal government will             Market in which                                   FREDDIE MAC
                                                                                                                                                 Conservator
                                                      existing mortgages and
cover Enterprise debt obligations.                    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




                                                  Source: Government Accountability Office, Financial Audit: Federal Housing Finance Agency’s Fiscal Years 2011 and 2010
                                                  Financial Statements, at 17 (Nov. 2011) (GAO/12-161) (online at http://gao.gov/assets/590/586278.pdf).




  20 |    Section 2: FHFA and GSE Operations
                                                                                                   SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                     Figure 2. Primary Sources of MBS Issuances from 2000 to 2011
                                              ($ trillions)


$3.0



$2.5
                                          0.6


$2.0


                                                                                                     0.1
                                0.4
$1.5                                                          1.2
                                                                        1.1       0.7
                                                    0.9                                                          0.1
                      0.3                 1.9                                              0.1                          0.0
$1.0
                                                                                                     1.3
                                1.3                                                                              1.0
                                                                                  1.1      0.9                          0.9
                      0.9                           0.9       0.9
$0.5        0.1                                                         0.8

            0.4
                                                                                                     0.4         0.4
            0.1       0.2       0.2       0.2       0.1       0.1       0.1       0.1      0.3                          0.3
$0.0
           2000      2001      2002       2003     2004      2005      2006      2007      2008      2009        2010   2011




                                      Ginnie Mae MBS           Enterprise MBS           Non-Agency MBS


Source: Inside Mortgage Finance, Volume II: Secondary Market: Mortgage Market Statistical Annual, at 6 (2012).


As Figure 2 (see above) illustrates, after losing market share to non-agency
competitors from 2004 through 2007, the Enterprises added to their
dominant position in the residential housing finance market (with the federal
government’s financial support) as the financial crisis continued and private-
sector financing for the secondary market nearly disappeared.

Enterprise Financial Performance and Government Support
As shown in Figure 3 (see page 22), the Enterprises securitized more lower-
quality mortgages in 2006 and 2007 than in subsequent years. The 2006 and                                                      Alternative A:
2007 mortgages’ higher default and delinquency rates stemmed from a greater                                                    A classification of mortgages in which
percentage of Alternative A loans, interest-only loans, and loans made to                                                      the risk profile falls between prime and
borrowers with below average credit scores. These mortgages have caused the                                                    subprime. Alternative A mortgages are
largest share of the Enterprises’ credit-related losses over the last several years.                                           generally considered higher risk than
                                                                                                                               prime due to factors that may include
                                                                                                                               higher loan-to-value and debt-to-income
                                                                                                                               ratios or limited documentation of the
                                                                                                                               borrower’s income.




                                                                                                                               Section 2: FHFA and GSE Operations     | 21
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                                             Figure 3. Mortgage Credit Quality by Origination Year

                                                                                                   Fannie Mae                                      Freddie Mac
                                                                                         Serious                                          Serious
                                                                                                               Cumulative                                          Cumulative
                                                      Year Originated                  Delinquency                                      Delinquency
                                                                                                               Default Rate                                        Default Rate
                                                                                          Ratea                                            Rateb
                                                             2006                             11.66%                    9.60%                  11.20%                    7.82%
                                                             2007                             12.38%                  10.30%                   12.05%                    8.65%
                                                             2008                              5.98%                    3.10%                    6.30%                   2.74%
                                                             2009                              0.69%                    0.30%                    0.68%                   0.25%
                                                             2010                              0.34%                    0.10%                    0.38%                   0.11%
                                                             2011                              0.11%                    0.00%                    0.13%                   0.02%
                                                          Q2 2012                              0.01%                    0.00%                    0.00%                   0.00%
                                             Sources: Fannie Mae, 2012 Second-Quarter Credit Supplement, at 7 (Aug. 8, 2012) (online at www.fanniemae.com/resources/file/ir/
                                             pdf/quarterly-annual-results/2012/q22012_credit_summary.pdf); Freddie Mac, Second Quarter 2012 Financial Results Supplement,
                                             at 26 (online at www.freddiemac.com/investors/er/pdf/supplement_2q12.pdf) (accessed Aug. 30, 2012); Freddie Mac, Form 10-Q
                                             for the Quarterly Period Ended June 30, 2012, at 79 (online at www.sec.gov/Archives/edgar/data/1026214/000119312512339405/
                                             d378248d10q.htm) (accessed Aug. 30, 2012).
                                             Notes:
                                             a
                                                 Serious delinquencies include loans past due 90 days or more and those where Fannie Mae or the mortgage holder has started the
                                                 process to foreclose on the loan.
                                             b
                                                 Based on the number of loans that are three monthly payments or more past due or in the process of foreclosure.

                                             Due to continued delinquencies and defaults, losses escalated and contributed
                                             to the Enterprises’ rapid financial deterioration. In 2008, the year the
                                             Enterprises entered conservatorship, they reported combined losses of $109
                                             billion, exceeding their total earnings for the preceding 21 years (see Figure
                                             4, page 23).

                                             However, conditions have begun to improve. For the six months ended June
                                             30, 2012, Fannie Mae and Freddie Mac reported net income of $7.8 billion
                                             and $3.6 billion, respectively. The Enterprises’ net income was primarily the
                                             result of lower credit-related losses than in prior years (see Figure 5, page 23).




 22 |   Section 2: FHFA and GSE Operations
                                                                                                     SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                                             Figure 4. Enterprises’ Annual Net Income (Loss) 1986 Through Second Quarter 2012
                                                                                  ($ billions)

  $20



    $0



 $(20)



 $(40)



 $(60)



 $(80)



$(100)



$(120)


           1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q2
                                                                                                                                            2012
                                                                                   Freddie Mac                 Fannie Mae

Sources: Federal Housing Finance Agency, 2011 Report to Congress, at 72, 89 (online at www.fhfa.gov/webfiles/24009/FHFA_RepToCongr11_6_14_508.pdf) (accessed Aug. 30, 2012); Fannie Mae, Form 10-Q
for the Quarterly Period Ended June 30, 2012, at 86 (online at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2012/q22012.pdf) (accessed Aug. 30, 2012); Freddie Mac, Form 10-Q for the
Quarterly Period Ended June 30, 2012, at 106 (online at www.sec.gov/Archives/edgar/data/1026214/000119312512339405/d378248d10q.htm) (accessed Aug. 30, 2012).


                                                           Figure 5. Enterprises’ Summary of Net Income from Operations
                                                                 for the Six Months Ended June 30, 2012 ($ billions)

                                                                                                                     Fannie Mae                   Freddie Mac
                                        Net Interest Income                                                      $           10.63            $            8.89
                                        Credit-related Income (Expenses)                                                       0.77                       (2.12)
                                        Loss on Derivative Agreements                                                         (2.41)a                     (1.94)
                                        Impairment of Securities Considered
                                          Other than Temporary                                                                (0.66)                      (0.66)
                                        Other Net Expense                                                                     (0.49)                      (0.57)
                                        Net Income from Operations                                               $             7.84           $            3.60

                                   Sources: Fannie Mae, Form 10-Q for the Quarterly Period Ended June 30, 2012, at 19 (online at www.sec.gov/Archives/edgar/
                                   data/310522/000031052212000090/fanniemaeq206302012.htm) (accessed Oct. 18, 2012); Freddie Mac, Form 10-Q for the
                                   Quarterly Period Ended June 30, 2012, at 13 (online at www.sec.gov/Archives/edgar/data/1026214/000119312512339405/
                                   d378248d10q.htm) (accessed Sept. 30, 2012).

                                   Notes:
                                   a
                                       Loss on Derivatives referenced to Table 10, p. 24 in the Fannie Mae Second Quarter 2012 10-Q Report.




                                                                                                                                                   Section 2: FHFA and GSE Operations              | 23
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                                            To offset the losses shown above, government support of the Enterprises since
                                                                            2008 has totaled $187.5 billion. Figure 6 (see below) breaks down, by quarter,
                                                                            Treasury’s investment in the Enterprises through September 30, 2012.

                                                                            In accordance with the PSPAs’ terms, the Enterprises are required to make
                                                                            quarterly dividend payments to Treasury at an annual rate equal to 10% of the
                                                                            outstanding investment. The rate was to increase to 12% if, in any quarter, the
                                                                            dividends were not paid in cash until all accrued dividends had been paid in
                                                                            cash. On August 17, 2012, Treasury and FHFA agreed to a third amendment
                                                                            to the terms of the PSPAs that terminates the Enterprises’ 10% per annum
                                                                            dividend requirement, effective January 1, 2013. Instead, the dividend paid
                                                                            by the Enterprises each quarter will consist of all positive net worth accrued
                                                                            during that quarter. The development update entitled “Modifications to
                                                                            Senior Preferred Stock Purchase Agreements” (see page 30) provides further
                                                                            information on the modifications to the PSPAs.


                                                        Figure 6. Treasury Capital and Dividends Due Under PSPAs ($ billions)

                                                      Freddie Mac                                                    Fannie Mae                                                     Combined

                                    Treasury         Dividends Due          Net Capital            Treasury         Dividends Due          Net Capital           Treasury          Dividends Due         Net Capital
       Period Covered             Investment            Treasury            Provided to          Investment            Treasury            Provided to         Investment             Treasury           Provided to
                                 Under PSPAa          Under PSPA            Enterprise          Under PSPAa          Under PSPA            Enterprise         Under PSPAsa          Under PSPAs          Enterprises

    Third Quarter 2008                    $13.8                $-                 $13.8                  $-                   $-                  $-                   $13.8                 $-                   $13.8
    Fourth Quarter 2008                    30.8                   0.2               30.6                  15.2                   -                 15.2                  46.0                  0.2                 45.8
    First Quarter 2009                       6.1                  0.4                5.7                  19.0                   -                 19.0                  25.1                  0.4                 24.7
    Second Quarter 2009                      -                    1.1               (1.1)                 10.7                   0.4               10.3                  10.7                  1.5                  9.2
    Third Quarter 2009                       -                    1.3               (1.3)                 15.0                   0.9               14.1                  15.0                  2.2                 12.8
    Fourth Quarter 2009                      -                    1.3               (1.3)                 15.3                   1.2               14.1                  15.3                  2.5                 12.8
    First Quarter 2010                     10.6                   1.3                9.3                    8.4                  1.5                6.9                  19.0                  2.8                 16.2
    Second Quarter 2010                      1.8                  1.3                0.5                    1.5                  1.9                (0.4)                  3.3                 3.2                  0.1
    Third Quarter 2010                       0.1                  1.6               (1.5)                   2.5                  2.1                0.4                    2.6                 3.7                 (1.1)
    Fourth Quarter 2010                      0.5                  1.6               (1.1)                   2.6                  2.2                0.4                    3.1                 3.8                 (0.7)
    First Quarter 2011                       -                    1.6               (1.6)                   8.5                  2.2                6.3                    8.5                 3.8                  4.7
    Second Quarter 2011                      1.5                  1.6               (0.1)                   5.1                  2.3                2.8                    6.6                 3.9                  2.7
    Third Quarter 2011                       6.0                  1.6                4.4                    7.8                  2.5                5.3                  13.8                  4.1                  9.7
    Fourth Quarter 2011                      0.1                  1.7               (1.6)                   4.6                  2.6                2.0                    4.7                 4.3                  0.4
    First Quarter 2012                       -                    1.8               (1.8)                   -                    2.8               (2.8)                   -                   4.6                 (4.6)
    Second Quarter 2012                      -                    1.8               (1.8)                   -                    2.9               (2.9)                   -                   4.7                 (4.7)
    Third Quarter 2012                       -                    1.8               (1.8)                   -                    2.9               (2.9)                   -                   4.7                 (4.7)
    Total as of
                                          $71.3                $22.0               $49.3               $116.2                $28.4               $87.8                $187.5                $50.4            $137.1
    September 30, 2012


Source: Federal Housing Finance Agency, Data as of September 28, 2012 on Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-Related Securities, at Tables 1-2 (online at www.fhfa.gov/
webfiles/24571/TSYSupport%202012-09-28.pdf) (accessed Oct. 8, 2012).
Notes: Nonzero numbers may display as zero due to rounding.
a
 Excludes $1 billion in liquidation preference on the senior preferred stock position obtained by Treasury from each Enterprise upon initiation of the PSPA. The initial $1 billion is not a draw on Treasury’s
commitment under the agreement.




     24 |     Section 2: FHFA and GSE Operations
                                                                                               SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




Additional Government Support
The Enterprises also benefited from extraordinary government measures
to support the housing market overall. Since September 2008, the Federal
Reserve and Treasury have purchased more than $1.3 trillion in Enterprise
MBS, and the Federal Reserve has purchased an additional $135 billion of
bonds issued by the Enterprises.7

FHLBANKS
In 1932, Congress chartered the FHLBank System to make additional
funding available for residential mortgage lending. The FHLBank System                                                 Capitalization:
is currently comprised of 12 regional FHLBanks and the Office of Finance,                                              In the context of bank supervision,
which issues debt (i.e., consolidated obligations) on the FHLBanks’ behalf.8                                           capitalization refers to the funds a bank
Each FHLBank is a separate legal entity that must adhere to specific                                                   holds as a buffer against unexpected
management and capitalization criteria.9 Figure 7 (see below) shows the                                                losses. It includes shareholders’ equity,
FHLBanks’ geographic areas.                                                                                            loss reserves, and retained earnings. Bank
                                                                                                                       capitalization plays a critical role in the
                                           Figure 7. Regional FHLBanks
                                                                                                                       safety and soundness of individual banks
                                                                                                                       and the banking system. In most cases,
                                                                                                                       federal regulators set requirements for
                                                                                                                       adequate bank capitalization.




Source: Federal Home Loan Bank of Boston, Federal Home Loan Bank System (online at www.fhlbboston.com/aboutus/
thebank/06_01_04_fhlb_system.jsp) (accessed Sept. 10, 2012).



The FHLBanks are privately capitalized and each is cooperatively owned by the
members it serves, which include financial institutions such as commercial banks,
thrifts, insurance companies, and credit unions. To become members, eligible
financial institutions invest in FHLBank stock, which is not publicly traded.10




                                                                                                                       Section 2: FHFA and GSE Operations     | 25
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                The primary business of the FHLBanks is to provide their members with
Collateral:                                     low-cost funding for mortgage lending and other purposes. To do so, each
Assets used as security for a loan that can     FHLBank makes advances (i.e., loans) in a variety of maturities and structures to
be seized by the lender if the borrower fails   its members. Such advances are collateralized by mortgage assets, investment-
to repay the loan.                              grade securities, or, in some cases, agricultural and small business loans. Interest
                                                earned on advances is a primary revenue source for the FHLBanks.
Private-Label MBS:
MBS derived from mortgage loan pools            The FHLBanks also maintain investment portfolios containing mortgage-
assembled by entities other than GSEs           related assets, and some face heightened credit risks due to their holdings of
or federal government agencies. They do         private-label MBS.
not carry an explicit or implicit government
guarantee, and the private-label MBS            To fund member advances, the FHLBanks issue consolidated obligations through
investor bears the risk of losses on            their Office of Finance.11 In the event of a default on a consolidated obligation,
its investment.                                 each FHLBank is jointly and severally liable for losses incurred by other
                                                FHLBanks. Like the Enterprises, the FHLBank System has also historically
Joint and Several Liability:                    enjoyed cost benefits stemming from an implicit government guarantee of its
The concept of joint and several liability      consolidated obligations.
provides that each obligor in a group is
responsible for the debts of all in that                     Figure 8. FHLBanks’ Annual Net Income 2000 Through Second Quarter 2012
group. In the case of the FHLBanks, if any                                                  ($ billions)
individual FHLBank were unable to pay a
creditor, the other 11 – or any 1 or more       $3.0
of them – would be required to step in and
cover that debt.                                $2.5



                                                $2.0



                                                $1.5



                                                $1.0



                                                $0.5



                                                $0.0
                                                          2000      2001     2002     2003     2004      2005     2006     2007     2008      2009     2010     2011    Q2 2012




                                                Sources: Federal Housing Finance Agency, 2010 Report to Congress, at 143 (online at www.fhfa.gov/webfiles/21570/
                                                FHFA2010RepToCongress61311.pdf) (accessed Aug. 30, 2012); Federal Home Loan Banks, Combined Financial Report for the Year
                                                Ended December 31, 2011, at F-5 (online at www.fhlb-of.com/ofweb_userWeb/resources/11yrend.pdf) (accessed Aug. 30, 2012);
                                                Federal Home Loan Banks, Combined Financial Report for the Quarterly Period Ended June 30, 2012, at F-2 (online at www.fhlb-of.com/
                                                ofweb_userWeb/resources/12Q2end.pdf) (accessed Aug. 30, 2012).




  26 |     Section 2: FHFA and GSE Operations
                                                             SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




SELECTED FHFA, GSE, AND OTHER ACTIVITIES
OIG follows significant developments pertaining to FHFA and the GSEs, as
discussed below.

FHFA’s Federal Register Notice on State-Level Guarantee Fee Pricing
On September 20, 2012, FHFA posted a notice in the Federal Register
regarding the adjustment of guarantee fees the Enterprises charge on single-
family mortgages for properties located in states where foreclosure costs
are statistically higher than the national average. The fee adjustments are
intended to reflect the disparity in costs compared to the national average.
The notice seeks public input on the state-level fee adjustment proposal. The
Agency will review the public’s input before determining a final methodology
for state-level guarantee fee pricing.12

The Enterprises Launch New Representation and Warranty Framework
On September 11, 2012, FHFA announced that the Enterprises will launch
a new representation and warranty framework for conventional loans sold or
delivered on or after January 1, 2013. The framework aims to clarify lenders’
repurchase exposure and liability for future mortgage sales. It is part of a
broader series of strategic initiatives directed toward seller/servicer contract
harmonization, as outlined in FHFA’s white paper, A Strategic Plan for
Enterprise Conservatorships: The Next Chapter in a Story That Needs an Ending,
which was released in February 2012.

Pursuant to the revised representation and warranty framework:

	       • lenders will be relieved of certain repurchase obligations for loans
           that meet specific payment requirements; for example, representation
           and warranty relief will be provided for loans with 36 months of
           consecutive, on-time payments;

	       • Home Affordable Refinance Program loans will be eligible for
           representation and warranty relief after an acceptable payment
           history of 12 months following the acquisition date;

	       • information about exclusions from representation and warranty
           relief, such as violations of state, federal, and local laws and
           regulations, will be detailed; and

	       • the Enterprises will continue to develop tools to help improve loan
           quality.

According to FHFA, the new representation and warranty model will allow
the Enterprises to:

	       • conduct quality control reviews earlier in the loan process, generally
           between 30 and 120 days after loan purchase;


                                                                                     Section 2: FHFA and GSE Operations   | 27
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                             	       • establish consistent timelines for lenders to submit requested loan
                                                        files for review;

                                             	       • evaluate loan files on a more comprehensive basis to ensure a focus
                                                        on identifying significant deficiencies;

                                             	       • leverage data from the tools currently used by the Enterprises to
                                                        enable earlier identification of potentially defective loans; and

                                             	       • make more transparent appeals processes available for lenders to
                                                        appeal repurchase requests.13

                                             FHFA’s Next Steps in REO Pilot Program
                                             In August 2011, FHFA, Treasury, and the Department of Housing and
                                             Urban Development (HUD) issued a Request for Information, soliciting
                                             public comment on new and advantageous ways to sell single-family REO
                                             properties held in the portfolios of the Enterprises and the Federal Housing
                                             Administration. In February 2012, FHFA launched a pilot REO program.
                                             In the second quarter, bids were solicited from qualified investors to purchase
                                             approximately 2,500 of Fannie Mae’s foreclosed single-family properties that
                                             were located in geographically concentrated areas across the United States.

                                             On September 10, 2012, FHFA announced Pacifica Companies LLC as
                                             the first winning bidder in the REO pilot initiative.14 This follows FHFA’s
                                             announcement on July 3, 2012, that the winning bidders in the pilot REO
                                             initiative had been selected. Investors were qualified to bid after an evaluation
                                             process, in which they were evaluated on the basis of their financial strength,
                                             asset management experience, property management expertise, and experience
                                             in the geographic area.15

                                             FHFA Increases Guarantee Fees
                                             On August 31, 2012, FHFA announced that the Enterprises will raise
                                             guarantee fees on single-family mortgages by an average of 10 basis points.
                                             In its announcement, FHFA explains that the guarantee fee increases are a
                                             step toward the goal of encouraging greater participation in the mortgage
                                             market by private firms. This goal was set forth in FHFA’s A Strategic Plan for
                                             Enterprise Conservatorships: The Next Chapter in a Story That Needs an Ending.

                                             The increase will go into effect on December 1, 2012, for loans exchanged for
                                             MBS. For loans sold for cash, increases will go into effect on November 1, 2012.

                                             On August 31, 2012, FHFA also released its fourth annual report on single-
                                             family guarantee fees for the years 2010 and 2011. The report noted that
                                             the average guarantee fee charged by the Enterprises increased from 26 basis
                                             points in 2010 to 28 basis points in 2011. In addition, mortgages that posed
                                             higher credit risk were subsidized by lower-risk loans and a majority of the
                                             single-family mortgages acquired by the Enterprises were from a small group


 28 |   Section 2: FHFA and GSE Operations
                                                             SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




of large lenders. FHFA’s guarantee fee modifications were designed to address
these issues by:

	       • making more uniform the guarantee fees that the Enterprises charge
          lenders who deliver large volumes of loans as compared to those
          who deliver smaller volumes; and

	       • reducing cross-subsidies between higher-risk and lower-risk
          mortgages by increasing guarantee fees on loans with maturities
          longer than 15 years more than on shorter maturity loans.16

New Standard Short Sale Guidelines for the Enterprises
On August 21, 2012, FHFA announced the Enterprises’ issuance of new
mortgage servicer guidelines designed to align and consolidate existing short
sales programs into one standard short sale program. In its announcement,
FHFA asserts that the revised rules will enable lenders and servicers to qualify
eligible borrowers for a short sale promptly and effectively. The guidelines will
permit short sales by homeowners with an Enterprise mortgage who have an
eligible hardship – even if they are current on their mortgage. Servicers will
be able to expedite short sales for borrowers with hardships, such as death
of a borrower or co-borrower, divorce, disability, or job relocation, without
additional Enterprise approval. The new guidelines go into effect November
1, 2012, and include the following:

	       •S
          treamlining short sale approach for borrowers most in need. The
         documentation required to demonstrate need has been reduced
         or eliminated for borrowers who have missed several mortgage
         payments, have low credit scores, or experience serious financial
         hardships.

	       •E
          nabling servicers to quickly and easily qualify borrowers current
         on their mortgages for short sales. Common reasons for borrower
         hardship are death, divorce, disability, or relocation (i.e., relocations
         of more than 50 miles from the borrower’s home for a job transfer
         or new employment opportunity). The program changes allow
         servicers to process short sales for borrowers with such hardships
         without additional Enterprise approval, even if the borrowers are
         current on their mortgage payments.

	       • Waiving the Enterprises’ right to pursue deficiency judgments in
           exchange for a financial contribution when a borrower has sufficient
           income or assets to make cash contributions or sign promissory notes.
           Servicers will evaluate borrowers for additional capacity to cover the
           shortfall between the outstanding loan balance and the property
           sales price as part of approving the short sale.

	       • Giving special treatment to military personnel with Permanent
           Change of Station (PCS) orders. Service members who are being


                                                                                     Section 2: FHFA and GSE Operations   | 29
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                       relocated will automatically be eligible for short sales, even if they
                                                       are current on their existing mortgages. Further, they will be under
                                                       no obligation to contribute funds to cover the shortfall between the
                                                       outstanding loan balance and the sales price on their homes.

                                             	       •C
                                                       onsolidating existing short sales programs into a single uniform
                                                      program. Servicers will have clearer and more consistent guidelines,
                                                      making it easier to process and execute short sales.

                                             	       •P
                                                       roviding servicers and borrowers clarity on processing a short sale
                                                      when a foreclosure sale is pending. The new guidance will stipulate
                                                      when a borrower must submit his or her application and a sales
                                                      offer to be considered for a short sale. Therefore, last minute
                                                      communications and negotiations may be handled in a uniform and
                                                      fair manner.

                                                  	 •O
                                                      ffering up to $6,000 to second lien holders to expedite a short sale.
                                                     Previously, second lien holders could slow down the short sale
                                                     process by negotiating for higher amounts.
                                             These guidelines are part of a broader FHFA effort, the Servicing Alignment
                                             Initiative, designed to streamline the Enterprises’ short sale programs and
                                             other foreclosure alternatives to assist struggling homeowners.17

                                             Modifications to Senior Preferred Stock Purchase Agreements
                                             On August 17, 2012, Treasury announced the third amendments to
                                             the Enterprises’ PSPAs. In its announcement, Treasury claims that the
                                             modifications will assist in expediting the wind down of the Enterprises, ensure
                                             that their earnings are used to benefit taxpayers, and support the continued
                                             flow of mortgage credit. The key components of the PSPA modifications
                                             include the following:

                                             	       •A
                                                       ccelerated wind down of the Enterprises’ retained mortgage
                                                      investment portfolios. The size of the Enterprises’ investment
                                                      portfolios will be decreased at an annual rate of 15%, an increase
                                                      from the 10% annual reduction required in the previous iterations
                                                      of the PSPAs. Due to this change, the Enterprises’ investment
                                                      portfolios must be reduced to a $250 billion target four years earlier
                                                      than previously scheduled.

                                             	       • I ncome sweep of future Enterprise earnings to benefit taxpayers. The
                                                       10% per annum dividends the Enterprises pay to Treasury on its
                                                       preferred stock investments have been eliminated. Instead, the fixed
                                                       dividend will change to a quarterly sweep of all positive net worth
                                                       each Enterprise earns going forward.




 30 |   Section 2: FHFA and GSE Operations
                                                             SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




According to Treasury, the modifications are intended to assist in achieving
the following objectives:

	       • Ensuring every dollar of Enterprise earnings will be used to benefit
          taxpayers;

	       • Ending the circular practice of Treasury advancing funds to the
          Enterprises to pay dividends back to Treasury;

	       • Winding down the Enterprises as stipulated in the Administration’s        For further information on the
          2011 white paper, Reforming America’s Housing Finance Market, and          Administration’s white paper, see
          not permitting them to retain profits, rebuild capital, or return to the   page 24 of OIG’s Inaugural Semiannual
          market in their prior form;                                                Report to the Congress.

	       • Supporting the continued flow of mortgage credit; and

	       • Providing greater market certainty regarding the Enterprises’
          financial strength.18

FHFA’s Federal Register Notice on Use of Eminent Domain to
Restructure Performing Loans
On August 9, 2012, FHFA published a notice in the Federal Register seeking
public comments on the use of eminent domain to restructure performing               Eminent Domain:
home loans. Local governments have expressed interest in using their eminent         An exercise of the power of government
domain power to seize and restructure the mortgages of homeowners that are           or quasi-government agencies (such as
current but underwater on their loans. In its notice, FHFA states that it has        airport authorities, highway commissions,
significant concerns regarding the use of eminent domain to revise existing          community development agencies, and
financial contracts and alter the value of the GSEs’ securities holdings and         utility companies) to take private property
their liability on MBS guarantees. FHFA adds that it may need to take action         for public use.
to mitigate risks to the GSEs’ safe and sound operations and avoid taxpayer
expense. FHFA invited public input on this issue.19

FHFA Opposes the Use of Principal Forgiveness by the Enterprises
On July 31, 2012, FHFA’s Acting Director responded to congressional inquiries
regarding whether FHFA would authorize the Enterprises to use principal
forgiveness as a method to assist borrowers by implementing HAMP PRA.
After extensive analysis of the revised HAMP PRA, including Treasury’s
commitment to use Troubled Asset Relief Program (TARP) funds to make
incentive payments to the Enterprises, FHFA announced that HAMP
PRA would not meaningfully reduce foreclosures in a cost-effective way for
taxpayers. Instead, FHFA asserts that in order to strengthen the Enterprises’
loss mitigation and borrower assistance efforts and improve the operation
of the housing finance market, efforts should focus on further streamlining
refinance opportunities, enhancing the short sale process, and reducing lender
uncertainty that could inhibit new mortgage lending.20




                                                                                     Section 2: FHFA and GSE Operations       | 31
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                    FHFA’s Lawsuit Against the State of Illinois
                                                    On June 22, 2012, FHFA filed a lawsuit against the State of Illinois and
                                                    several counties for imposing real estate transfer taxes on the Enterprises.
                                                    According to FHFA, federal statutes and Supreme Court rulings preclude
                                                    states, counties, and municipalities from imposing real estate transfer taxes on
                                                    the Enterprises. In its lawsuit, FHFA explains that pursuant to federal law,
                                                    the Enterprises are required to pay real estate taxes on the value of their real
                                                    estate holdings but not on the transfer of properties. Accordingly, the Agency
                                                    claims that the Enterprises are exempt from the Illinois transfer taxes and
                                                    requests that the court block this taxation.21

                                                    FHFA’s Short Sale Assistance for Military Homeowners with
                                                    Enterprise Loans
                                                    On June 21, 2012, FHFA announced changes to short sale policies. The changes
                                                    are intended to make it easier for military homeowners with Enterprise loans
                                                    to honor their financial commitments if they are required to move. Under the
                                                    new policy, military homeowners receiving PCS orders will be eligible to sell
                                                    their homes in a short sale, even if they are current on their mortgage. Further,
                                                    the Enterprises will not pursue a deficiency judgment against – or seek a cash
                                                    contribution or promissory note from – them. Because PCS orders require
                                                    military homeowners to move quickly, the new policy may help alleviate some
                                                    of the hardships experienced by military homeowners with underwater loans
                                                    who cannot sell their homes without taking a loss. To be eligible, service
                                                    members with PCS orders must have a Fannie Mae or Freddie Mac loan for
                                                    any property purchased on or before June 30, 2012.22

                                                    FHFA Establishes Additional Anti-Fraud Measure for the Enterprises
                                                    and the FHLBanks
In its report, FHFA’s Oversight of Fannie Mae’s     On June 18, 2012, FHFA announced a new initiative called the Suspended
Default-Related Legal Services (AUD-2011-004,       Counterparty Program (SCP) that will complement current fraud reporting
September 30, 2011), OIG noted instances in         by the Enterprises and the FHLBanks. SCP requires the Enterprises and
which Freddie Mac terminated law firms for          the FHLBanks to notify FHFA when an organization or individual with
poor performance, but Fannie Mae continued to       whom they conduct business is adjudicated to have engaged in fraud or other
use the firms. Similarly, Freddie Mac continued     financial misconduct. FHFA implemented SCP to ensure the Enterprises
to do business with a seller/servicer that Fannie   and the FHLBanks are not exposed to unnecessary risk from conducting
Mae had terminated. See FHFA’s Oversight            business with individuals or organizations that have exhibited fraudulent
of the Enterprises’ Management of High-Risk         conduct in the past.
Seller/Servicers (AUD-2012-007, September
18, 2012).                                          Under SCP, FHFA will determine whether an organization or individual
                                                    should be suspended from doing business with the GSEs. Any party found
                                                    to be associated with fraudulent activity will be able to defend himself/herself/
                                                    itself against the possibility of suspension. In appropriate cases, FHFA will
                                                    issue orders directing the GSEs to cease business activities with individuals or
                                                    organizations that are determined to have a history of fraud.



  32 |    Section 2: FHFA and GSE Operations
                                                           SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




OIG assisted FHFA with the development of SCP, which became effective
on August 15, 2012.23

FHFA’s 2011 Annual Report to Congress
On June 13, 2012, FHFA released its 2011 Report to Congress, which detailed
the Agency’s examinations of the Enterprises, the 12 FHLBanks, and the
FHLBank System’s Office of Finance.

The Enterprises received composite examination ratings reflecting “critical
                                                                                           FHFA Supervisory Rating Scale
supervisory concerns.” In its report, FHFA indicates the ratings resulted
from continuing credit losses from loans originated in 2005 through 2007
and forecasts losses yet to be realized from loans originated during that                           CRITICAL CONCERNS
time period. Credit risk from the pre-conservatorship book of business
and operational risk were cited as the most significant concerns. The key                          SIGNIFICANT CONCERNS

challenges facing each of the Enterprises included the ongoing stress in
                                                                                                     LIMITED CONCERNS
the nation’s housing markets, the difficult economic environment, and the
uncertain future of the Enterprises. FHFA also notes that the Enterprises are                           NO OR MINIMAL
                                                                                                          CONCERNS
challenged by planned actions to build a new infrastructure for the secondary
mortgage market, contract the Enterprises’ dominant presence in the
marketplace while simplifying and shrinking their operations, and maintain
                                                                                  Source: Federal Housing Finance Agency, Division of
foreclosure prevention activities and mortgage credit availability. According     Enterprise Regulation Supervision Handbook 2.1, at 14-15
to FHFA, during 2011, the Enterprises’ management and boards of directors         (June 16, 2009) (online at www.fhfa.gov/webfiles/2921/
                                                                                  DERHandbook21.pdf).
were responsive to its findings and took appropriate steps to begin resolving
identified issues.

FHFA’s examination of the FHLBank System indicated that the FHLBanks
of Boston, Chicago, and San Francisco presented “limited supervisory
concerns,” while the FHLBanks of Pittsburgh and Seattle presented
“supervisory concerns.” The FHLBanks of New York, Atlanta, Cincinnati,
Indianapolis, Des Moines, Dallas, and Topeka were described as “satisfactory.”
The FHLBank System’s financial condition and performance was described
as fairly stable in 2011 but continued to be negatively affected by declines in
advance balances, pay down of higher-yielding investments, and exposure to
private-label MBS.

FHFA’s examination of the Office of Finance noted both improvements and
continued deficiencies in corporate governance and operations, as well as
other “supervisory concerns.”24

The Enterprises’ Chief Executive Officers
On June 5, 2012, Fannie Mae announced the appointment of Timothy J.
Mayopoulos as President and Chief Executive Officer (CEO) and a member
of the Board of Directors, effective June 18, 2012. Mr. Mayopoulos succeeds
Michael J. Williams, who announced he would resign as CEO in January
2012. Mr. Mayopoulos joined Fannie Mae in 2009. Prior to his appointment




                                                                                       Section 2: FHFA and GSE Operations              | 33
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                             as CEO, he served as the company’s Executive Vice President, Chief
                                             Administrative Officer, and General Counsel.25

                                             On May 10, 2012, Freddie Mac announced the appointment of Donald H.
                                             Layton as CEO and a member of the Board of Directors. Mr. Layton officially
                                             joined the company on May 21, 2012. He succeeds Charles E. Haldeman Jr.,
                                             who announced in October 2011 that he would be resigning as CEO. Prior
                                             to Mr. Layton’s appointment as CEO, he served as a senior executive in two
                                             financial institutions, was a member of the boards of several financial services
                                             firms, and was a senior adviser to an industry association.26

                                             FHFA’s Draft Strategic Plan
                                             On May 14, 2012, FHFA released the Agency’s draft Strategic Plan: Fiscal
                                             Years 2013-2017. The strategic plan highlights four strategic goals for the
                                             Agency:

                                             	       • Safe and sound housing GSEs;

                                             	       • Stability, liquidity, and access in housing finance;

                                             	       • Preserving and conserving Enterprise assets; and

                                             	       • Preparing for the future of housing finance in the United States.

                                             FHFA indicates it will pursue a series of initiatives and strategies set forth
                                             in the strategic plan in order to improve current mortgage processes, inspire
                                             greater confidence among prospective market participants, and set the stage
                                             for an improved future system of housing finance.27

                                             The Enterprises to Streamline Short Sales to Help Borrowers
                                             and Communities
                                             On April 17, 2012, FHFA announced that it has directed the Enterprises to
                                             develop enhanced and aligned strategies for facilitating short sales and other
                                             foreclosure alternatives, so that more homeowners can avoid foreclosure.
                                             FHFA intends that the effort will be completed in stages. (See pages 29, 30,
                                             and 32 for later developments related to short sales.)

                                             FHFA noted the Enterprises would, by the end of 2012, announce further
                                             enhancements that address borrower eligibility and evaluation, documentation
                                             simplification, property valuation, fraud mitigation, payments to subordinate
                                             lien holders, and mortgage insurance.28




 34 |   Section 2: FHFA and GSE Operations
SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                        Section 2: FHFA and GSE Operations   | 35
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 36 |   Section 2: FHFA and GSE Operations
                       SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




section 3
OIG’S ACCOMPLISHMENTS AND STRATEGY




                                           Section 3: OIG’s Accomplishments and Strategy   | 37
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                         Section 3: OIG’s Accomplishments and
                                                         Strategy
                                                         From April 1, 2012, through September 30, 2012, OIG’s significant
                                                         accomplishments included: (1) issuing 14 audit, evaluation, and white paper
                                                         reports; (2) participating in a number of criminal and civil investigations; and
                                                         (3) reviewing and commenting on proposed FHFA rules.

                                                         OIG AUDITS AND EVALUATIONS
                                                         During this semiannual period, OIG released 14 reports, which are briefly
                                                         summarized below.

The title of each audit, evaluation, and white           Evaluations and White Papers
paper report in this section is linked to the
report on OIG’s website.                                 FHFA’s Oversight of Freddie Mac’s Investment in Inverse Floaters
                                                         (EVL-2012-009, September 26, 2012)
                                                         This evaluation report considered the circumstances surrounding Freddie
                                                         Mac’s investment in inverse floaters. Freddie Mac’s capital markets business
                                                         structures and markets a family of bonds known as collateralized mortgage
                                                         obligations. Freddie Mac may tailor these products to the investment
                                                         preferences of its investors. As investor appetite for floating-rate bonds
                                                         increased, Freddie Mac began to issue these bonds by carving them out of
                                                         securitized mortgages. In the process, it retained by-product variable-rate
                                                         bonds. These variable-rate bonds are known as inverse floaters, as depicted in
                                                         Figure 9 (see below).
                                                                              Figure 9. Collateralized Mortgage Obligations
                                                                                                                                        FLOATERS

                                                                HOMEOWNERS                            TRUSTEE
                                                                                                                            PAL
                                                                                                                       NCI
                                                                                                         $          PRI
                                                                                                                              ST
                                                                                                                          ERE
                                                                                                                      INT
                                                                                     PRINCIPAL

                                                                                      INTEREST                       REM
                                                                                                                      PRIAINDE
                                                                                                                          NCI R O
                                                                                                                             PAL F   INVERSE FLOATERS
                                                                                                                    INT
                                                                                                                        ERE
                                                                                                                            ST




                                                         In January 2012, Freddie Mac’s retention of inverse floaters attracted public
                                                         and congressional attention. Questions arose regarding whether Freddie Mac
                                                         might be deliberately limiting loan refinancings in order to protect the value
                                                         of its inverse floaters, because the value of inverse floaters decreases when the
                                                         underlying mortgages are refinanced.




  38 |   Section 3: OIG’s Accomplishments and Strategy
                                                             SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




OIG found no evidence that Freddie Mac had obstructed homeowners’
abilities to refinance their mortgages in an effort to influence the yields on
its inverse floating-rate bonds. Rather, inverse floaters represent an extremely
small portion of the Enterprise’s portfolio, and efforts to manipulate
refinancings could have an impact elsewhere among the Enterprise’s
investments and activities. Freddie Mac continually monitors and adjusts its
diverse investment portfolio and hedges disparate risks according to a “net
zero” strategy, whereby the Enterprise attempts to minimize losses but at the
same time these attempts could limit gains.

Moreover, OIG found that Freddie Mac has an “information wall” policy to
prevent its capital markets business from using nonpublic information to guide
its investments. This policy would appear to apply to nonpublic information
about homeowner refinancing. OIG found no evidence that this policy had
been violated or that Freddie Mac’s capital markets executives were in any
way utilizing nonpublic information about refinancing to make investment
decisions.

However, OIG found that some of FHFA’s public statements about inverse
floaters (issued in the wake of the increased public and congressional attention)
could have been more clearly articulated.

OIG recommended that FHFA: (1) conduct periodic tests of Freddie Mac’s               A complete listing of all of OIG’s recommendations
information wall; (2) monitor Freddie Mac’s investment models; (3) ensure            and their status is set forth in Section 4 of this
its supervisory policies are well founded and properly communicated; and (4)         Semiannual Report.
exercise care to ensure public statements include all relevant facts.

Evaluation of FHFA’s Oversight of Fannie Mae’s Transfer of Mortgage
Servicing Rights from Bank of America to High Touch Servicers
(EVL-2012-008, September 18, 2012)
This evaluation report considered FHFA’s oversight of a transaction between
Fannie Mae and BOA, in which Fannie Mae paid BOA $421 million for the
transfer of servicing rights to a portfolio of mortgages serviced by BOA but
owned or guaranteed by Fannie Mae. (Figure 10, see page 40, depicts the
mortgage servicing process.)




                                                                                    Section 3: OIG’s Accomplishments and Strategy   | 39
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                                                         Figure 10. The Mortgage Servicing Process




                                                                         HOMEOWNERS                         SERVICER                      ENTERPRISE
                                                                     • Make monthly payments        • Collects payments and          • Owns or guarantees
                                                                       under terms of mortgage        calculates balances              mortgages
                                                                                                    • Distributes principal          • Receives principal and
                                                                                                      and interest to mortgage         interest or guarantee fee
                                                                                                      owner, net of service fees
                                                                                                    • Loss mitigation or
                                                                                                      foreclosure, if required




                                                          The transaction was one of a series arising from Fannie Mae’s High Touch
                                                          Servicing Program. Under this program, the servicing rights to mortgages
                                                          with a high risk of default are transferred by Fannie Mae to specialty servicers
                                                          who have a better record of working with borrowers to prevent defaults.
                                                          Fannie Mae hopes to realize credit loss savings of up to 20% through the
                                                          High Touch Servicing Program.

                                                          In reviewing the BOA transaction, OIG determined that the transfer fee
                                                          paid by Fannie Mae to BOA was consistent with the fees paid in similar
                                                          transactions with other institutions. Further, OIG found that FHFA, prior
                                                          to the BOA transaction, questioned the amounts paid by Fannie Mae to
                                                          transfer MSR and directed the Enterprise to take steps to ensure that it did
                                                          not overpay in such transactions.

                                                          However, OIG questioned whether Fannie Mae had relied too heavily on the
                                                          work of one independent valuation firm when it considered the BOA transfer
                                                          fee. Further, OIG questioned whether FHFA’s oversight of the High Touch
                                                          Servicing Program, in general, had been sufficient, in light of both the novelty
                                                          and size of the program.

                                                          In its report, OIG recommended that FHFA: (1) consider revising its
                                                          Delegation of Authorities to the Enterprises to require FHFA approval of
                                                          unusual or high-cost new initiatives; (2) ensure Fannie Mae applies additional
                                                          scrutiny to pricing significant MSR transactions; (3) review the assumptions
                                                          underlying the High Touch Servicing Program and re-evaluate performance
                                                          criteria for the program; and (4) ensure Fannie Mae fully implements FHFA’s
                                                          earlier direction regarding possible overpayments for MSR.

                                                          Follow-up on Freddie Mac’s Loan Repurchase Process (EVL-2012-
The prior loan repurchase report is available for
                                                          007, September 13, 2012)
review at www.fhfaoig.gov/Content/Files/EVL-              This follow-up evaluation report assessed the likely savings that will result from
2011-006.pdf.                                             acting on concerns raised by OIG in a prior report, Evaluation of the Federal


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Housing Finance Agency’s Oversight of Freddie Mac’s Repurchase Settlement with
Bank of America (EVL-2011-006, September 27, 2011).

In January 2011, FHFA announced that BOA had agreed to pay $1.35 billion
to Freddie Mac to settle existing and possible future repurchase claims arising
from its sale of mortgages (originated by Countrywide Financial Corporation)
to Freddie Mac. OIG’s initial evaluation report raised concerns about the
methodology Freddie Mac used to determine the number of defective loans
purchased from BOA that were eligible for repurchase. OIG 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 originated in 2006 alone, nearly 100,000 loans were
not reviewed for possible repurchase claims, as depicted in Figure 11 (see
below).
                                   Figure 11. Loans Purchased by Freddie Mac
                                        in 2006 That Entered Foreclosure

60,000



50,000
                     Approximately 100,000
                      Loans Not Reviewed

40,000



30,000                                                                                                        Not Reviewed

                                                                                                              Reviewed

20,000



10,000



     0

                  2006                2007                2008               2009               2010

Source: Freddie Mac, QC Disposition of Foreclosures by Funding Year and Foreclosure Year (Jan. 11, 2011).


OIG found in the follow-up report that FHFA and Freddie Mac have 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.

OIG determined that, as a result of its new loan review process, Freddie Mac
will realize additional recoveries ranging from $0.8 billion to $1.2 billion
for loans selected for review in 2012 and $2.2 billion to $3.4 billion overall.
Because these recoveries had not been anticipated and accounted for, the
added income will increase Freddie Mac’s profits and hence the amount paid
to Treasury.



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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        FHFA’s Certifications for the Preferred Stock Purchase Agreements
                                                        (EVL-2012-006, August 23, 2012)
                                                        In order to keep the mortgage market liquid following the 2008 housing
                                                        crisis, Treasury has invested $187.5 billion in the Enterprises. Pursuant to
                                                        the PSPAs, Treasury committed to making this investment and investing
                                                        additional funds if necessary. In return, FHFA committed to several
                                                        conditions, termed “covenants,” on the Enterprises’ and its own behalf.

                                                        Among other things, these covenants obligate FHFA to provide certifications
                                                        to Treasury that: (1) the Enterprises have complied with the covenants; (2)
                                                        the Enterprises’ financial statements and related documents sent to Treasury
                                                        under the PSPAs contained no representations that were materially false or
                                                        misleading when made; and (3) the funds sought by the Enterprises each
                                                        quarter do not exceed the amount allowed under the PSPAs.

                                                        OIG conducted this evaluation to determine if and how FHFA was meeting
                                                        its obligations under the PSPAs. OIG determined that FHFA provided
                                                        Treasury with only one of the three certifications, namely, that the Enterprises
                                                        are seeking no more funds from Treasury than they are allowed. FHFA did
                                                        not provide the other two certifications covering covenant compliance and
                                                        financial statement representations.

                                                        With respect to the certification covering covenant compliance, OIG found
                                                        that FHFA had been forwarding to Treasury certifications made by the
                                                        Enterprises concerning their compliance with the covenants. After OIG
                                                        began this evaluation, however, FHFA strengthened its oversight of the
                                                        Enterprises’ certifications by participating in Enterprise certification meetings
                                                        and by requiring reviews of Enterprise certifications by external audit firms.
                                                        Further, after OIG alerted the Agency to its tentative findings, FHFA began
                                                        to provide the certification covering covenant compliance.

                                                        Regarding the certification about financial statements, FHFA had not been
                                                        providing any certifications to Treasury. However, OIG found that FHFA
                                                        conducted significant oversight of the Enterprises’ financial statements
                                                        and their Securities and Exchange Commission (SEC) filings, which
                                                        were independently audited. Furthermore, pursuant to federal statute,
                                                        the Enterprises’ executive officers certified that there were no material
                                                        misstatements in the filings. Nonetheless, FHFA was silent on the required
                                                        certifications until OIG provided to the Agency its preliminary findings in
                                                        this evaluation.

                                                        In response to these findings, FHFA began to provide Treasury with the
                                                        required certifications.

                                                        OIG recommended and FHFA agreed to: (1) adhere to the requirements that
                                                        it certify both that the Enterprises have complied with the PSPA covenants
                                                        and that their financial statements and related documents are free of materially
                                                        false or misleading representations; and (2) monitor the implementation of its


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oversight procedures to ensure that they are effective. These certifications
enhance oversight of the PSPAs and reduce the potential for errors and waste
of taxpayer dollars.

FHFA’s Oversight of the Federal Home Loan Banks’ Unsecured
Credit Risk Management Practices (EVL-2012-005, June 28, 2012)
To carry out its mission, the FHLBank System’s Office of Finance issues debt
(i.e., consolidated obligations) at the relatively favorable rates available to the
GSEs. The FHLBanks use the consolidated obligation proceeds to make
secured loans, also known as advances, to member financial institutions, such
as banks. The FHLBanks may also extend unsecured short-term credit (i.e.,
loans not backed by collateral) to domestic and foreign financial institutions.
Extensions of unsecured credit by the FHLBanks to, among others, European
banks grew rapidly to more than $120 billion by early 2011. However,
they declined sharply by the end of 2011 as the European sovereign debt
crisis intensified, as depicted in Figure 12 (see below). OIG initiated this
evaluation to assess FHFA’s oversight of the FHLBanks’ unsecured credit risk
management practices.
                 Figure 12. FHLBanks’ Extensions of Unsecured Credit to Foreign Financial
                                     Institutions 2008 Through 2011
                                                ($ billions)
      $100



       $90



       $80



       $70



       $60



       $50



       $40



       $30
                                                                                                                         Dec-11
             Dec-08




                                                      Dec-09




                                                                                               Dec-10




Source: Federal Home Loan Banks Office of Finance, Trends in FHLBank System Unsecured Credit (no date).

Note: The data for 2008 and 2009 are end of the year data. For 2010 and 2011, data are available for each quarter.




                                                                                                                                  Section 3: OIG’s Accomplishments and Strategy   | 43
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        Extensions of unsecured credit by the FHLBanks to, among others, European
                                                        financial institutions increased substantially in 2010 and 2011, even as the
                                                        risks associated with doing so were intensifying. For example, OIG found
                                                        that in 2011 one FHLBank extended more than $1 billion of unsecured credit
                                                        to a European bank despite indications of increased risks associated with
                                                        doing so (e.g., the bank’s credit rating was downgraded and it later suffered
                                                        a multibillion dollar loss). FHFA internal documents from that period also
                                                        noted the rapid, system-wide growth of unsecured credit; certain FHLBanks’
                                                        large exposures to particular financial institutions; and the increasing credit
                                                        and other risks associated with such lending.

                                                        Although FHFA identified extensions of unsecured credit by the FHLBanks
                                                        as an increasing risk in early 2010, the Agency did not immediately prioritize
                                                        it in its examination process. In 2011, however, FHFA initiated a range of
                                                        oversight measures that focused on credit extensions, including prioritizing
                                                        them in the supervisory process and increasing the frequency with which the
                                                        FHLBanks report on their unsecured credit portfolios.

                                                        OIG found that FHFA’s initiatives contributed to the significant decline
                                                        in the amount of unsecured credit the FHLBanks were extending by the
                                                        end of 2011. However, OIG also noted that FHFA could take additional
                                                        actions that would further strengthen its oversight efforts. For example, OIG
                                                        recommended that FHFA investigate potential violations of its regulations
                                                        governing extensions of unsecured credit. Further, OIG recommended that
                                                        FHFA should consider revising current regulatory limits to mitigate the risks
                                                        associated with extensions of unsecured credit by the FHLBanks. FHFA
                                                        agreed with these recommendations.

                                                        White Paper: Overview of the Risks and Challenges the Enterprises
                                                        Face in Managing Their Inventories of Foreclosed Properties (WPR-
                                                        2012-003, June 14, 2012)
                                                        The Enterprises purchase mortgages from lenders and then keep them as
                                                        investments or package them into securities that are sold to investors. When
                                                        borrowers default on such mortgages, they may become subject to foreclosure
                                                        proceedings. In many cases, the Enterprises take possession of foreclosed
                                                        properties and resell them in an effort to recover some of their losses. The
                                                        process of securing, maintaining, repairing, and selling foreclosed properties is
                                                        often referred to as REO management.

                                                        Since the onset of the U.S. housing and financial crises in 2007 and 2008,
                                                        the Enterprises have been dealing with surging foreclosure rates, rising REO
                                                        inventories, and associated costs. By the end of 2011, their REO inventories
                                                        had more than tripled to nearly 180,000 units and their related expenses
                                                        totaled $8.5 billion. (Figure 13, see page 45, depicts fluctuations in the
                                                        Enterprises’ REO inventories between 2007 and 2011.) Further, given the
                                                        financial distress many American homeowners continue to experience, the



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Enterprises are likely to face elevated REO inventories and costs for years to
come.
                               Figure 13. Enterprises’ REO Inventories 2007-2011
                                             (number of properties)
250,000



200,000



150,000



100,000



 50,000



      0
                     2007                     2008                     2009                     2010                     2011



                                                         Fannie Mae                   Freddie Mac

Sources: Fannie Mae, Form 10-K for the Fiscal Year Ended December 31, 2008, at 187 (online at www.sec.gov/Archives/edgar/
data/310522/000095013309000487/w72716e10vk.htm) (accessed Oct. 8, 2012); Fannie Mae, Form 10-K for the Fiscal Year Ended
December 31, 2011, at 168, 173 (online at www.sec.gov/Archives/edgar/data/310522/000119312512087297/d282546d10k.htm)
(accessed Oct. 8, 2012); Freddie Mac, Form 10-K for the Fiscal Year Ended December 31, 2008, at 160 (online at www.freddiemac.
com/investors/sec_filings/index.html) (accessed Oct. 8, 2012); Freddie Mac, Form 10-K for the Fiscal Year Ended December 31, 2011,
at 167 (online at www.freddiemac.com/investors/sec_filings/index.html) (accessed Oct. 8, 2012).

Note: Freddie Mac did not publish a breakdown of its multifamily inventory data in its annual filings for 2007 and 2008. For consistency
across the years, OIG has included Freddie Mac’s multifamily inventory in this data. The impact upon Freddie Mac’s total REO volume
is likely to be negligible: for the years 2009 to 2011, the multifamily inventory comprised less than 0.05% of all REO units and never
exceeded 20 properties.


In this white paper, OIG discussed: (1) the basics of the foreclosure and
REO management processes; (2) the critical role that Enterprise contractor
oversight plays in REO management; (3) key Enterprise REO management
challenges; (4) FHFA’s oversight of the Enterprises’ REO management; and
(5) FHFA’s and Fannie Mae’s development of a REO pilot program under
which investors can purchase, in bulk, foreclosed properties with rental
commitments. The white paper also identified OIG’s strategy for assessing
FHFA’s oversight of the Enterprises’ REO management efforts.

White Paper: Fannie Mae and Freddie Mac: Where the Taxpayers’
Money Went (WPR-2012-002, May 24, 2012)
Shortly after the Enterprises entered the conservatorships in September 2008,
Treasury began making quarterly investments in the Enterprises to prevent
their insolvency because they were rapidly losing billions of dollars. By March
31, 2012, U.S. taxpayers had invested nearly $187.5 billion in the Enterprises.




                                                                                                                                           Section 3: OIG’s Accomplishments and Strategy   | 45
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        Questions have arisen regarding why Fannie Mae and Freddie Mac
                                                        required such federal intervention, how the Enterprises have used Treasury’s
                                                        extraordinary investment, and who may have benefited from it. In this
                                                        white paper, OIG attempted to answer these and other questions relating to
                                                        Treasury’s investments in the Enterprises. Understanding the answers to these
                                                        questions will be important for policymakers as they determine the future of
                                                        the Enterprises and the nation’s housing and related financial markets.

                                                        OIG reported that, when U.S. housing prices began declining rapidly in 2006-
                                                        2007, the Enterprises owned or guaranteed mortgages worth more than $5
                                                        trillion, nearly half of the U.S. mortgage market. They did not have adequate
                                                        capital reserves to continue operating in the face of the growing losses on their
                                                        mortgage portfolios.

                                                        Accordingly, Treasury’s quarterly investments have been used primarily to
                                                        cover losses stemming from single-family mortgage loans that the Enterprises
                                                        had acquired from 2004 through 2008. In addition, Treasury’s investments
                                                        have covered dividend payments owed to Treasury under the terms of the
                                                        PSPAs, as well as losses from investments and other expenses.

                                                        Also, Treasury’s intervention protected numerous creditors – both domestic
                                                        and foreign – who had purchased bonds and MBS issued by the Enterprises.

                                                        Without assistance from Treasury, the Enterprises likely would not have been
                                                        able to repay their debts or honor their MBS guarantees. Further, they likely
                                                        would have been unable to finance new mortgages or create new MBS, two of
                                                        the cornerstones of the U.S. housing finance system.

                                                        However, the cost of rescuing the Enterprises has been high, with total
                                                        Treasury support for the Enterprises currently expected to range from $191
                                                        billion to $209 billion.29

                                                        Audits

                                                        FHFA’s Conservator Approval Process for Fannie Mae and Freddie
                                                        Mac Business Decisions (AUD-2012-008, September 27, 2012)
                                                        As conservator, FHFA has extensive authority over the Enterprises’ operations;
                                                        however, in November 2008, the Agency broadly delegated most of its
                                                        conservatorship authority back to the Enterprises. As part of the delegation,
                                                        the Agency required the Enterprises to obtain Agency approval for selected
                                                        business decisions, such as those involving legal settlements over $50 million
                                                        and counterparty risk limit increases. OIG audited FHFA’s process for
                                                        approving these non-delegated Enterprise business decisions.

                                                        OIG concluded that the Agency can better accomplish its oversight mission
                                                        by proactively exerting greater control over its conservator approval process.
                                                        As of May 17, 2012, FHFA had received and tracked 611 requests for the



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conservator’s approval of actions that the Enterprises proposed to take and
had closed 583 of these requests, as shown in Figure 14 (see below).
                           Figure 14. Tracked Requests for Conservator Approval

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

Source: Federal Housing Finance Agency Office of Inspector General, FHFA’s Conservator Approval Process for Fannie Mae and Freddie
Mac Business Decisions, at 10 (Sept. 27, 2012) (AUD-2012-008) (online at www.fhfaoig.gov/Content/Files/AUD-2012-008_2.pdf).


However, OIG found that FHFA did not require conservatorship approval
for various major business decisions, such as reviewing and approving Fannie
Mae’s single-family underwriting standards and its High Touch Servicing
Program.

Moreover, even when conservatorship approval of Enterprise business decisions
is required, FHFA cannot be assured that the Enterprises always request
such approval. FHFA has informed the Enterprises which actions remain
under FHFA’s authority, but the Agency primarily relies on the Enterprises to
decide when to seek approval for their actions. As a consequence, Enterprise
requests for approval have been inconsistent. For example, OIG determined
that Fannie Mae executed seven insurance settlement discounts totaling
over $306 million that should have been approved by FHFA in advance but
were not submitted for review. By contrast, Freddie Mac executed similar
settlements after seeking FHFA’s approval. OIG also found that over a three-
year period Fannie Mae took over 4,500 actions to increase the Enterprise’s
counterparty risk limits without first obtaining conservator approval. Freddie
Mac, by contrast, had a process for requesting and receiving approval for risk
limit increases.

Additionally, the Agency can improve how it processes requests for
conservatorship decisions and follows up on the decisions it makes. OIG
determined that FHFA has not established criteria or policies to ensure
rigorous review of Enterprise business decisions. OIG also found that
FHFA does not have a formal process to verify that the Enterprises abide
by conservatorship decisions but instead has relied on informal conversations
and unrelated reviews (e.g., routine examinations) to assess compliance.




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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        OIG recommended that the Agency: (1) revisit FHFA’s non-delegated
                                                        authorities to ensure that significant Enterprise business decisions are sent to
                                                        the conservator for approval; (2) guide the Enterprises to establish processes
                                                        to ensure that actions requiring conservator approval are properly submitted
                                                        for consideration; (3) properly analyze, document, and support conservator
                                                        decisions; and (4) confirm compliance by the Enterprises with conservator
                                                        decisions.

                                                        FHFA’s Oversight of the Enterprises’ Management of High-Risk
                                                        Seller/Servicers (AUD-2012-007, September 18, 2012)
                                                        The Enterprises buy mortgages from lenders, such as banks, and primarily
                                                        rely on servicing counterparties for post-origination mortgage-related work,
                                                        such as collecting payments. The Enterprises monitor counterparties that
                                                        they have identified as high risk (e.g., seller/servicers whose circumstances
                                                        represent a financial threat to the Enterprises). As of the third quarter of
                                                        2011, the Enterprises had placed more than 300 high-risk counterparties on
                                                        watch lists and stopped doing business with more than 40 of them. Since
                                                        2008, the Enterprises estimate that they have incurred losses of up to $6.1
                                                        billion from the failures of just four of their counterparties. The Enterprises
                                                        estimate their remaining risk exposure to high-risk seller/servicers to be
                                                        approximately $7.2 billion, based on these counterparties’ mortgage portfolios
                                                        totaling $955 billion. OIG undertook this audit to assess how the Agency
                                                        oversees the Enterprises’ controls over their high-risk counterparties.

                                                        OIG found that FHFA can strengthen the Enterprises’ counterparty risk
                                                        management by, among other things, publishing standards for the development
                                                        of contingency plans related to failing or failed high-risk counterparties.
                                                        Contingency plans help to manage risks by identifying actions to pursue when
                                                        a counterparty’s changing financial or other circumstances pose a financial
                                                        threat to an Enterprise.

                                                        FHFA’s 2012 draft examination manual provides guidance to Agency
                                                        examiners concerning how to review contingency plans. FHFA has been
                                                        field testing the draft manual and expecting that the Enterprises will develop
                                                        contingency plans after learning that the Agency instructs its examiners
                                                        to look for their plans during examinations. However, the Agency has not
                                                        published guidance requiring the Enterprises to develop plans or governing
                                                        the contents of such plans. Accordingly, as of April 2012, the Enterprises had
                                                        not developed comprehensive contingency plans for any of their approximately
                                                        300 high-risk counterparties.

                                                        Contingency plans can also help prepare the Enterprises for unexpected
                                                        collapses of counterparties that handle a concentrated, high-volume of their
                                                        business. As of September 2011, 70% (or $3.1 trillion) of the Enterprises’
                                                        mortgage portfolios were controlled by their top 10 single-family mortgage
                                                        servicers. Although these counterparties may not be on watch lists, their high



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concentration of the Enterprises’ business significantly increases the financial
and operational consequences of their failure. Accordingly, the Enterprises can
benefit from published FHFA guidance about when counterparties’ volume
and concentration of business raise their risk enough to warrant contingency
plans.

OIG recommended that FHFA issue standards for the Enterprises to develop
comprehensive contingency plans for high-risk and high-volume seller/
servicers and that the Agency finalize its examination guidance regarding
contingency planning.

FHFA’s Call Report System (AUD-2012-006, July 19, 2012)
OIG found that FHFA can enhance its supervision of the Enterprises by
analyzing additional opportunities to use the Agency’s CRS. CRS gathers
GSE data and funnels valuable oversight information, such as quarterly
financial reports, into a central database that FHFA divisions can access to
monitor and examine GSE activity. For example, CRS contains data on the
$5.3 trillion total net assets held by the Enterprises through 2011.

However, despite requiring the Enterprises to enter data into CRS, FHFA has
not optimized its use of the system to enhance its oversight. For example, two
FHFA supervisory divisions rarely use CRS in their analysis and oversight of
the Enterprises; instead, they receive from the Enterprises routine submissions
of loan-level data and standard management reports containing relevant
metrics and data. These submissions are supplemented by ad hoc requests for
additional data.

In addition, data produced pursuant to ad hoc requests may not be subject to the
same integrity controls as are associated with CRS information. For example,
CRS security controls have been independently evaluated in accordance with
federal guidelines. Also, FHLBank and Enterprise management attest to the
accuracy of CRS data in their respective call reports.

OIG recommended that FHFA ensure that it: (1) analyzes opportunities to
use CRS information to facilitate supervision of the Enterprises; (2) supports
identified opportunities with detailed supervisory and support division
requirements for using CRS in its oversight planning and monitoring; and (3)
directs divisions to work with FHFA’s Office of Technology and Information
Management and CRS system owners to enhance CRS to meet the Agency’s
supervisory needs.

FHFA’s Supervisory Risk Assessment for Single-Family Real Estate
Owned (AUD-2012-005, July 19, 2012)
The Enterprises purchase mortgages in the secondary mortgage market.
Typically, when borrowers default on these mortgages and efforts to cure the
defaults fail or do not materialize, the mortgages are foreclosed upon. Through



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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        foreclosure, properties that secure the defaulted mortgages revert back to the
                                                        Enterprises as REO.

                                                        Since 2008, FHFA has consistently listed the Enterprises’ large inventories
                                                        of REO as contributing to “critical concern” ratings in their quarterly risk
                                                        assessments. However, in spite of FHFA’s identification of REO as a
                                                        prominent and ascending risk, FHFA did not conduct targeted examinations
                                                        or similar focused reviews of REO until 2011. In the second quarter of
                                                        2011, FHFA began examination planning and risk assessment work in
                                                        preparation for a supervisory review of the REO management activities of the
                                                        Enterprises. In June 2011, OIG announced an audit of FHFA’s oversight of
                                                        the Enterprises’ REO. Subsequently, in July 2011, FHFA announced plans
                                                        to conduct targeted examinations of risks arising from the Enterprises’ use
                                                        of contractors to manage (e.g., appraise, maintain, and sell) REO and their
                                                        efforts to mitigate losses from problematic properties (e.g., unmarketable
                                                        homes and cancelled foreclosures).

                                                        OIG found that FHFA’s targeted examinations, which were completed in
                                                        2012, are positive supervisory steps that the Agency can supplement in the
                                                        future by closely assessing other REO risk areas that need focused supervision
                                                        (i.e., areas in addition to contractor management and the management of
                                                        unmarketable homes and cancelled foreclosures). For example, the Enterprises
                                                        have hundreds of thousands of properties that are in or near foreclosure (the
                                                        “shadow inventory,” see Figure 15, below), which may stress their systems for
                                                        cost-effectively managing, marketing, and disposing of REO.
                                                                              Figure 15. Enterprises’ REO Properties and Shadow Inventory
                                                                                          for the Year Ended December 31, 2011
                                                                                               (number of loans/properties)
                                                        900,000

                                                        800,000

                                                        700,000

                                                        600,000
                                                                                                                                                           Loans 365+ Days
                                                                                                                                                           Delinquent (558,761)
                                                        500,000
                                                                                                                                                           Loans 180-364 Days
                                                        400,000                                                                                            Delinquent (278,472)

                                                                                                                                                           REO Properties (179,063)
                                                        300,000

                                                        200,000

                                                        100,000

                                                                0

                                                                               REO Inventory                   “Shadow Inventory”

                                                        Source: Federal Housing Finance Agency, Foreclosure Prevention & Refinance Report Fourth Quarter 2011, at 44-45 (online at www.
                                                        fhfa.gov/webfiles/23522/4q11_fpr_finalv2i.pdf) (accessed Oct. 8, 2012).




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OIG also found that FHFA will benefit from using a more comprehensive
REO risk assessment and from using this assessment to enhance its planning
of supervisory activities. According to FHFA’s Supervision Handbook, risk
assessment is the process of developing a comprehensive, risk-focused view
of an Enterprise that presents a current look at its emerging and existing risk
characteristics. The handbook specifies that the comprehensive, risk-focused
view of an Enterprise should be used as a blueprint for planning supervisory
activities. However, until early in 2011, FHFA’s supervisory planning did not
focus on the significant risks associated with the Enterprises’ REO, and the
Agency can focus better on emerging risks like the shadow inventory.

OIG recommended that FHFA implement a more comprehensive
performance risk assessment of REO and link the results to supervisory plans
that address those risks through specific supervisory activities.

FHFA’s Supervisory Framework for Federal Home Loan Banks’Advances
and Collateral Risk Management (AUD-2012-004, June 1, 2012)
After having increased in prior years, the FHLBank System’s combined
outstanding advances decreased from over $1 trillion to approximately $415
billion between September 2008 and September 2011. The decrease was
due in part to many member banks’ financial deterioration and to weakened
economic conditions generally.

Advances must be secured by collateral to protect the security interest of
the lending FHLBank. The FHLBanks have a claim on the collateral of
failed member banks with outstanding advances, but historically, they have
not experienced losses on their advances. However, when a member bank
fails, its chartering agency closes the institution and appoints the Federal
Deposit Insurance Corporation (FDIC) as receiver to resolve the failure.
This resolution process includes outstanding advances either being repaid or
assumed by the acquirer of the failed member bank’s assets. Either way, the
process effectively shields the FHLBanks from losses on their advances to
member banks that have FDIC-insured deposits.

OIG initiated this audit to assess FHFA’s supervisory framework related
to the FHLBanks’ advances and collateral risk management practices for
problem member banks. OIG found that although FHFA has taken steps
to mitigate risk at the FHLBanks related to advances and collateral, it can
strengthen its supervisory framework.

FHFA’s mitigation efforts include regular, onsite, annual examinations and the
use of offsite monitoring. In 2009, FHFA completed two reviews concerning
collateral management practices. The first review, a horizontal (i.e., system-
wide) review of the FHLBanks, included seven recommendations to ensure
that FHFA and the FHLBanks implement corrective actions to address
identified collateral management risks. The other review included a suggestion



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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        that the FHLBanks reassess business plans that rely on troubled (otherwise
                                                        referred to as problem) member banks for growth in advances.

                                                        However, as of December 2011, FHFA had implemented only one of seven
                                                        recommendations from its horizontal review; six recommendations had not
                                                        been implemented. Additionally, the other review’s suggestion had not been
                                                        implemented.

                                                        The sole recommendation that FHFA implemented is important and pertains
                                                        to ensuring that the FHLBanks take corrective actions regarding collateral
                                                        management deficiencies that the Agency identified during its examinations.
                                                        However, in spite of the importance of the recommendation, OIG determined
                                                        that FHFA does not adequately document its examination follow-up activities
                                                        so that it can accurately assess the FHLBanks’ corrective actions.

                                                        The six recommendations that FHFA had not implemented are also
                                                        important and include updating the Agency’s examination guidance for
                                                        collateral reviews, providing guidance to the FHLBanks about effective
                                                        collateral risk management, and offering relevant training to FHFA
                                                        examiners. Agency officials acknowledged the importance of implementing
                                                        these recommendations but, as of December 2011, FHFA had not approved
                                                        an implementation plan or schedule for the outstanding recommendations.

                                                        OIG also found that FHFA does not have access to data that could enable
                                                        it to better assess the risk of losses on advances and other risks posed to
                                                        the FHLBanks. For example, FHFA does not avail itself of existing access
                                                        agreements or request that the FDIC and other federal banking agencies
                                                        provide it with copies of examination reports for problem member banks.
                                                        Additionally, FHFA does not maintain a central listing of problem member
                                                        banks identified by the FHLBanks. FHFA would have greater insight into
                                                        the risks posed to the FHLBanks by problem members if it were to have
                                                        greater access to external examination information.

                                                        In light of these findings, OIG recommended that FHFA implement its
                                                        outstanding review recommendations, strengthen its supervisory framework,
                                                        enhance its coordination with other federal banking agencies, and improve
                                                        its oversight of problem member banks. FHFA agreed with OIG’s
                                                        recommendations.

                                                        Other Reports
                                                        Finally, in two other reports, CliftonLarsonAllen LLP’s Audit of FHFA’s Controls
                                                        and Protocols over Sensitive and Proprietary Information Collected and Exchanged
                                                        with the Financial Stability Oversight Council (AUD-2012-009, September 28,
                                                        2012) and CliftonLarsonAllen LLP’s Audit of the Federal Housing Finance Agency’s
                                                        Risk Management Process for External Network Vulnerabilities (AUD-2012-
                                                        010, September 28, 2012), OIG’s contract auditor offered recommendations
                                                        to help FHFA mitigate risks related to the Agency’s information technology.



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Because information in these reports could be abused to circumvent FHFA’s
information technology controls, they have not been released publicly.

OIG AUDIT AND EVALUATION PLAN
OIG maintains an Audit and Evaluation Plan that focuses strategically on            OIG’s most recent plan is available at
the areas of FHFA’s operations posing the greatest risks and providing the          www.fhfaoig.gov/Content/Files/Audit%20
greatest benefits to the Agency, Congress, and the public. The plan responds        and%20Eval%20Plan%20Oct%202012.pdf.
to current events and feedback from FHFA officials, members of Congress,
and others.

OIG INVESTIGATIONS
OIG investigators have participated in numerous criminal, civil, and
administrative investigations, which during the semiannual period resulted in
the indictment of over 60 individuals and the conviction of over 20 individuals.
In many of these investigations, OIG worked in conjunction with one or
more other law enforcement agencies, such as DOJ, the Office of the Special
Inspector General for the Troubled Asset Relief Program (SIGTARP), the
Federal Bureau of Investigation (FBI), the Department of Housing and
Urban Development Office of Inspector General (HUD-OIG), the Federal
Deposit Insurance Corporation Office of Inspector General (FDIC-OIG),
or state and local entities nationwide. Further, in several investigations, OIG
investigative counsel were appointed as Special Assistant U.S. Attorneys and
supported the prosecutions. Although most of these investigations remain
confidential, details about several of them have been publicly disclosed, as
described below.

American Mortgage Specialists
On September 28, 2012, in the U.S. District Court for the District of North
Dakota, criminal charges were filed against Scott Powers, David McMasters,
Lauretta Horton, and David Kaufman, all former employees of American
Mortgage Specialists (AMS). Powers, McMasters, and Horton were charged
with conspiracy to commit bank and wire fraud in connection with a scheme
to defraud BNC National Bank (BNC). In addition, Kaufman was charged
with obstruction of justice for lying to an OIG special agent during the course
of the investigation.

AMS was a mortgage company with headquarters in Mesa, Arizona, that
originated residential mortgage loans, which were later sold to the Enterprises.
BNC is a member of the FHLBank of Des Moines.

BNC funded all mortgages that AMS originated. After AMS sold the
mortgages to investors, such as the Enterprises, AMS was required to repay
BNC. However, the defendants allegedly delayed payoffs and diverted the
funds for personal, payroll, and operating expenses. The defendants temporarily
covered up their diversions by using sales proceeds from mortgages originated


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                                                        later to pay BNC for mortgages originated earlier. When the fraud was
                                                        discovered, AMS shut down, owing BNC approximately $27.5 million.

                                                        This is a joint investigation with SIGTARP and the DOJ Criminal Division’s
                                                        Fraud Section. Additionally, FinCEN supported the investigation.

                                                        Sky Investments
                                                        On September 25, 2012, in the U.S. District Court for the Southern District
                                                        of Florida, indictments were returned against Yakov “Jack” Alfasi and Rafael
                                                        “Rafi” Rubinez. Alfasi and Rubinez, owners and officers of Sky Investments,
                                                        were charged with conspiracy and wire fraud in connection with a scheme to
                                                        defraud Fannie Mae. Sky Investments serviced Fannie Mae loans. Through
                                                        Sky Investments, Alfasi and Rubinez allegedly misappropriated approximately
                                                        $2.6 million from Fannie Mae’s taxes and insurance escrow account and
                                                        concealed the misappropriations by submitting false and misleading financial
                                                        reports to Fannie Mae.

                                                        This is a joint investigation with the FBI and is being prosecuted with
                                                        assistance from an OIG investigative counsel. The Fannie Mae Mortgage
                                                        Fraud Program provided assistance during the course of this investigation.

                                                        Michael Ybarra, Jeremy Lloyd, and Stephan Benjamin
                                                        On September 19, 2012, in the U.S. District Court for the Central District
                                                        of California, a criminal indictment was filed against Michael Ybarra, Jeremy
                                                        Lloyd, and Stephan Benjamin, charging them with conspiracy, bankruptcy
                                                        fraud, and perjury. The indictment alleges the defendants conspired to commit
                                                        bankruptcy fraud by operating businesses that falsely purported to provide
                                                        assistance to homeowners seeking to delay or avoid mortgage foreclosures
                                                        and/or eviction proceedings.

                                                        According to the indictment, the defendants advised homeowners seeking
                                                        to delay or avoid foreclosure and/or eviction that, for a fee, they could assist
                                                        them to keep their homes. After receiving fees from the homeowners, the
                                                        defendants caused the preparation of documents that falsely indicated that
                                                        tenants resided at the homeowners’ properties. Additionally, the defendants
                                                        allegedly caused false bankruptcy petitions to be prepared, signed, and filed
                                                        on behalf of the fictitious tenants, frustrating eviction efforts. The tenancy
                                                        assertions and the fraudulent bankruptcy petitions did not, and could not,
                                                        provide lasting assistance to the struggling homeowners. In total, the
                                                        defendants collected over $1.3 million in upfront fees from approximately
                                                        250 homeowners, including some whose mortgages were owned by Fannie
                                                        Mae.

                                                        This is a joint investigation with the FBI.




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Dean Counce
On September 14, 2012, in the U.S. District Court for the Middle District
of Florida, Dean Counce, the former president of American Mortgage Field
Services LLC (AMFS), pleaded guilty to conspiracy to commit wire fraud.

According to the plea agreement, AMFS performed preservation and
inspection work for homes in various phases of foreclosure, including homes
that were owned by the Enterprises. AMFS’s inspection work required
Counce and other AMFS employees to visit properties and fill out inspection
reports. They then compiled these inspection reports and transmitted them
electronically to the Enterprises’ servicer. The servicer paid AMFS a fee per
inspection, and the Enterprises covered the fee.

As the real estate market declined in Florida and throughout the country, Counce
and AMFS began to receive an increasing number of requests for inspections on
properties in foreclosure. The requests far exceeded AMFS’s capacity to deliver,
and Counce and other AMFS employees began fabricating inspection reports.
It is estimated that 70% of AMFS’s inspection reports submitted between 2009
and March 13, 2012, which cost as much as $13.5 million, were fraudulent.

This is a joint investigation with HUD-OIG and the Secret Service. The
Fannie Mae Mortgage Fraud Program provided assistance during the course
of the investigation.

Harriet Taylor
On September 12, 2012, in the U.S. District Court for the District of
Maryland, Harriet Taylor pleaded guilty to wire fraud in connection with a
scheme to divert over $1.5 million in mortgage closing funds for her personal
use or for the use of her companies.

According to her plea agreement, Taylor co-owned and managed two title
insurance companies, Regal Title Company LLC (Regal) and Loyalty Title
Company LLC (Loyalty). Taylor entered into an agreement with a national
title insurance underwriter, Old Republic National Title Insurance Company
(Old Republic), to establish escrow accounts for her companies, separate from
company operating accounts, for the purpose of holding and disbursing funds
received from lenders for real estate closings. Beginning in 2009, however,
Taylor caused mortgage lenders to wire their funds entrusted for real estate
settlements to her companies’ operating accounts, rather than to the escrow
accounts. Taylor also caused funds in Regal’s and Loyalty’s escrow accounts
to be transferred back and forth between their respective operating accounts.
By using commingled funds throughout 2009, Taylor kept her two businesses
afloat, while enriching herself with both company and escrow funds. From
January through December 2009, Taylor paid herself $477,877 from three
company operating accounts.




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                                                        As shortfalls in the escrow accounts increased, Taylor failed to remit insurance
                                                        premiums to Old Republic; pay recording fees for deeds; and pay off prior liens,
                                                        including four which belonged to the Enterprises. Old Republic incurred
                                                        a total loss of $1,518,532 that resulted from paying off prior liens, paying
                                                        recording fees, and insurance premiums collected by Regal and Loyalty but
                                                        not forwarded to Old Republic.

                                                        Taylor is scheduled to be sentenced on January 17, 2013. This is a joint
                                                        investigation with the FBI, and OIG investigative counsel assisted in the
                                                        prosecution.

                                                        21st Century Real Estate Investment Corporation
                                                        In September 2012, in the U.S. District Court for the Central District of
                                                        California, a criminal indictment was unsealed, charging 11 defendants with
                                                        conspiracy, wire fraud, and mail fraud. The 11 defendants, all employees of
                                                        21st Century Real Estate Investment Corporation (21st Century) or related
                                                        businesses, defrauded financially distressed homeowners by making false
                                                        promises and guarantees regarding 21st Century’s ability to obtain loan
                                                        modifications from the homeowners’ mortgage lenders.

                                                        Specifically, the defendants are alleged to have falsely represented that 21st
                                                        Century was operating a loan modification program sponsored by the U.S.
                                                        government and instructed the homeowners to cease communicating with
                                                        their mortgage lenders and making their mortgage payments. In total, the
                                                        defendants collected over $7 million in fees from over 4,000 defrauded
                                                        homeowners. Further, as directed by 21st Century employees, many
                                                        homeowners stopped making their mortgages payments, causing mortgage
                                                        defaults. Many of these mortgages were owned by the Enterprises.

                                                        This is a joint investigation with the FBI, SIGTARP, the Internal Revenue
                                                        Service-Criminal Investigation (IRS-CI), and the U.S. Postal Inspection
                                                        Service (USPIS).

                                                        Adam Teague
                                                        On August 22, 2012, in the U.S. District Court for the Northern District
                                                        of Georgia, Adam Teague, a former senior vice president of Appalachian
                                                        Community Bank (ACB), pleaded guilty to conspiracy to commit bank fraud.
                                                        Teague and other co-conspirators engaged in illegal schemes to unjustly
                                                        enrich themselves at the expense of ACB and prevented the FDIC from
                                                        discovering certain past due loans on ACB’s books. ACB was a member of
                                                        the FHLBank of Atlanta. ACB received advances from the FHLBank of
                                                        Atlanta and pledged portfolios of its loans as collateral for those advances.
                                                        Due to its poor financial condition, ACB was closed on March 19, 2010, and
                                                        the FDIC was appointed as receiver. At that time, ACB owed the FHLBank
                                                        of Atlanta approximately $67 million.




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Teague and another co-conspirator used shell corporations to purchase two
condominiums in Panama City Beach, Florida, and caused ACB to finance
them at a total cost of approximately $566,000. Approximately two months
later, they refinanced their mortgages and pocketed more than $875,000,
which they then used to pay other personal debts, make monthly loan
payments on the refinanced mortgages, pay condominium fees, and purchase
new furniture for their condominiums. The new loan issued to defendant
Teague was pledged to the FHLBank of Atlanta.

To conceal bad debts from the FDIC, Teague and a co-conspirator created
two shell companies, GPH Investments LLC (GPH) and PHL Investments
LLC. Through the use of these companies, they engaged in a sham real
estate transaction designed to make it appear that GPH had purchased 11
residential properties from ACB’s foreclosure inventory for approximately
$3.7 million. They also caused ACB to loan GPH 90% of the purchase price
and caused GPH to represent at closing that GPH was paying the other 10%
of the purchase price out of its own funds, even though Teague and his co-
conspirator knew that to be untrue. Further, in a separate scheme, in which
they attempted to prevent the FDIC from discovering certain past due loans
on ACB’s books, they arranged a number of sham real estate transactions and
caused ACB to make approximately $7 million in bogus loans to another
co-conspirator in an effort to make it appear that this co-conspirator had
purchased certain properties from ACB’s foreclosure inventory and was
making regular monthly payments on the purchases.

This is a joint investigation with the FDIC-OIG, SIGTARP, and the FBI.

Menachem Yosef Levitin, Jeffrey Weisman, Charles Lesser, and
Bradford J. Rieger
In July 2012, in the U.S. District Court for the District of Connecticut,
Menachem Yosef Levitin, Jeffery Weisman, Charles Lesser, and Bradford J.
Rieger pleaded guilty to participating in a multimillion dollar fraud scheme
located in New Haven, Connecticut. According to court documents, between
2006 and 2008, Levitin, Weisman, Lesser, Rieger, and others conspired to
defraud mortgage lenders and financial institutions by obtaining millions of
dollars in fraudulent mortgages for the purchase of dozens of properties in
New Haven, Connecticut. As part of the scheme, sellers of the properties
agreed to accept sales prices that were significantly lower than the contract
prices. The lower prices were not disclosed to the lenders, from which the
buyers obtained financing to purchase the properties. The scheme participants
submitted to the mortgage lenders false HUD-1 forms (i.e., real estate
settlement disbursement forms) that often did not match undisclosed HUD-
1 forms that were used to disburse the fraudulently obtained proceeds at the
closings. Based upon the false HUD-1 forms and other false documentation
in support of the loans, including falsified monthly rental income assertions
and fictitious leases, mortgage lenders issued mortgages based on inflated


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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        sales prices. As a result, scheme participants paid themselves and others with
                                                        fraudulently obtained mortgage proceeds.

                                                        In most of the fraudulent transactions, the buyers did not make any deposits or
                                                        down payments for the properties they purchased. Rather, the co-conspirators
                                                        used some of the fraudulently obtained mortgage proceeds to cover the down
                                                        payments and deposits. In addition, at or shortly after closing, borrowers
                                                        received payments of several thousand dollars that were not disclosed to the
                                                        lenders.

                                                        Levitin, a licensed real estate agent, identified most of the properties involved
                                                        in the scheme and negotiated with the sellers concerning the sales price.
                                                        Weisman and Rieger acted as closing attorneys. In total, more than $10
                                                        million in fraudulently obtained mortgages, which were owned or guaranteed
                                                        by Fannie Mae or Freddie Mac, on more than 40 properties were involved in
                                                        the conspiracy. Many of the houses purchased during the scheme went into
                                                        default and have been foreclosed upon, causing losses of more than $7 million.

                                                        This is a joint investigation with the FBI, USPIS, and HUD-OIG, in
                                                        coordination with the Financial Fraud Enforcement Task Force (FFETF).

                                                        David C. Christian
                                                        On June 29, 2012, in the U.S. District Court for the District of Maryland, real
                                                        estate appraiser David C. Christian pleaded guilty to a multimillion dollar
                                                        conspiracy to commit wire fraud. Christian appraised properties for purchasers
                                                        seeking financing through a mortgage brokerage company operating in
                                                        Baltimore, Maryland. Between April 2004 and April 2008, Christian prepared
                                                        at least 17 fraudulent appraisals totaling $4.3 million for loans originated
                                                        by the mortgage brokerage firm. Christian developed false appraisals by
                                                        misrepresenting the condition of the properties, providing doctored photos
                                                        and property descriptions, and using inappropriate comparable properties.

                                                        Further, in 2007, Christian refinanced a property that he owned through
                                                        the mortgage brokerage company. Christian inflated the property value by
                                                        using false appraisals and had another appraiser sign the documents to avoid
                                                        the conflict of performing an appraisal on his own property. The mortgage
                                                        brokerage company processed the loan. Freddie Mac purchased Christian’s
                                                        flawed loan and incurred a loss of nearly $140,000 when Christian defaulted.

                                                        This is a joint investigation with the FBI and USPIS.

                                                        Taylor, Bean & Whitaker
                                                        On June 15, 2012, Delton DeArmas, the former chief financial officer of
                                                        Taylor, Bean & Whitaker Mortgage Corporation (TBW), was sentenced to
                                                        60 months in prison for his role in a more than $2.9 billion fraud scheme
                                                        that contributed to the failures of TBW and Colonial Bank. DeArmas had
                                                        previously pleaded guilty to one count of conspiracy to commit bank and wire


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fraud and one count of making false statements. From 2005 through August
2009, he and other co-conspirators engaged in a scheme to defraud financial
institutions that had invested in a TBW-owned lending facility called Ocala
Funding LLC (Ocala).

DeArmas admitted he was aware that, in an effort to mislead investors, a
subordinate who reported to him had falsified Ocala collateral reports and
periodically sent the falsified reports to Ocala’s investors and to other third
parties. DeArmas also acknowledged that he knew the falsified financial
reports were subsequently provided to Freddie Mac to support the renewal of
TBW’s authority to sell and service securities issued by it.

In addition to DeArmas, in June 2011, Lee Bentley Farkas, the chairman of
TBW, was sentenced to 30 years in prison, after having been found guilty of 14
counts of conspiracy and bank, securities, and wire fraud. Six other individuals
have also been convicted and sentenced for their roles in the TBW fraud
scheme, including: Paul Allen, former CEO of TBW, who was sentenced
to 40 months in prison; Raymond Bowman, former president of TBW, who
was sentenced to 30 months in prison; Desiree Brown, former treasurer of
TBW, who was sentenced to 72 months in prison; Catherine Kissick, former
senior vice president of Colonial Bank and head of its Mortgage Warehouse
Lending Division (MWLD), who was sentenced to 96 months in prison;
Teresa Kelly, former operations supervisor for Colonial Bank’s MWLD, who
was sentenced to 3 months in prison; and Sean Ragland, a former senior
financial analyst at TBW, who was sentenced to 3 months in prison.

In addition, all of the TBW conspirators have been suspended and debarred
from doing business with the federal government or have debarment
proceedings pending against them.

The case was prosecuted by the DOJ Criminal Division’s Fraud Section and the
U.S. Attorney’s Office for the Eastern District of Virginia. The investigation
was conducted jointly with SIGTARP, the FBI, HUD-OIG, and the FDIC-
OIG. FinCEN, the SEC, and the Freddie Mac Fraud Investigation Unit also
provided support to the investigation.

Dennis O. Edwards
On June 12, 2012, in the U.S. District Court for the District of Maryland,
Dennis O. Edwards pleaded guilty to conspiracy to commit bank fraud
in connection with a scheme, in which he submitted fraudulent mortgage
applications to obtain over $2.2 million to purchase or refinance multiple
residences.

Among other matters to which he pleaded guilty, in early January 2006,
Edwards purchased a home in Silver Spring, Maryland, claiming on the
mortgage application that he earned a total of $6,000 a month from two
employers. In fact, Edwards was unemployed at the time. Edwards obtained



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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        a mortgage loan totaling $342,000, based upon the fraudulent mortgage
                                                        application.

                                                        Edwards purchased another property in Hyattsville, Maryland, with a
                                                        $384,750 loan that was also based upon false information. The loans were
                                                        purchased by Freddie Mac, and the latter loan fell into delinquency. Edwards
                                                        submitted additional fraudulent mortgage applications for other properties.

                                                        In his plea, Edwards admitted that, given his limited income, he did not qualify
                                                        to borrow in excess of $1.5 million and, by signing the mortgage applications,
                                                        he was facilitating a fraud.

                                                        This case was investigated jointly with the FBI and was prosecuted with
                                                        assistance from an OIG investigative counsel.

                                                        Robert P. George III and Rachel Lynn Randall
                                                        On June 7, 2012, in the U.S. District Court for the District of Arizona, Robert
                                                        P. George III and Rachel Lynn Randall were indicted on wire fraud charges.
                                                        According to the indictment, George and Randall fraudulently represented
                                                        that they worked in the real estate industry and advertised residential property
                                                        that they did not own for lease. They then signed leases and collected the
                                                        rents on such properties.

                                                        They, along with co-defendants, Marshall Home and Margaret Broderick,
                                                        allegedly describe themselves as “sovereign citizens” of the Independent Rights
                                                        Party (IRP). Home allegedly registered a trade name affiliating himself with
                                                        Fannie Mae and subsequently conveyed to IRP titles of foreclosed and REO
                                                        properties actually owned by Fannie Mae in Arizona. IRP members then
                                                        allegedly forcibly entered the properties and prevented foreclosure sales.

                                                        This is a joint investigation with the FBI.

                                                        Abacus Federal Savings Bank
                                                        On May 17, 2012, the Manhattan District Attorney announced the unsealing of
                                                        an 184-count indictment of Abacus Federal Savings Bank (Abacus), a federally
                                                        chartered deposit and lending institution headquartered in New York City, and
                                                        11 of its former employees. The indictment charges violations of New York
                                                        State law including mortgage fraud, securities fraud, grand larceny, conspiracy,
                                                        and falsifying business records. According to the indictment, the Abacus
                                                        employees allegedly participated in a mortgage fraud scheme resulting in the
                                                        sale of hundreds of millions of dollars worth of fraudulently obtained loans to
                                                        Fannie Mae. At the time of the public announcement, it was also disclosed that
                                                        an additional 8 former employees of Abacus had pleaded guilty in connection
                                                        with this fraud scheme.

                                                        The indictment alleges that Abacus, its employees, and its managers engaged
                                                        in a conspiracy involving the regular and systematic falsification of residential


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mortgage application documents. It alleges that the defendants falsified these
documents so that they could earn commissions and fees by ensuring that
otherwise unqualified borrowers would receive loans, which Abacus then sold
to Fannie Mae pursuant to an ongoing agreement. After purchasing these
fraudulent mortgages, Fannie Mae repackaged them into MBS and sold them
to third-party investors. By originating hundreds of millions of dollars in
fraudulent loans, the indictment charges, Abacus earned many millions of
dollars in loan origination, purchasing, and servicing fees.

This is a joint investigation with the Manhattan District Attorney’s Office,
the Office of the Comptroller of the Currency, the IRS-CI, and the FDIC.
This investigation is being coordinated by the Residential Mortgage-Backed
Securities (RMBS) Working Group. The Fannie Mae Mortgage Fraud
Program provided assistance during the course of the investigation.




         Manhattan District Attorney Cyrus Vance Jr. (left), Inspector General of the Federal
         Housing Finance Agency Steve A. Linick (to the right of Vance), and members of
         the Major Economic Crimes Bureau of the District Attorney’s office held a news
         conference about the Abacus Federal Savings Bank mortgage fraud conspiracy.




Southern California Fraud Scheme
Five defendants have been charged or convicted in the U.S. District Court
for the Southern District of California based on their alleged participation in
a multimillion dollar mortgage loan origination fraud and kickback scheme.
Mary Armstrong, William Fountain, and John Allen have been charged;
Justin Mensen and Teresa Rose pleaded guilty on April 18, 2012, and May
30, 2012, respectively.




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                                                        As alleged in the indictment, the defendants carried out their scheme by
                                                        recruiting investors through advertisements in the Los Angeles Times and
                                                        online and encouraging them to purchase homes in Ramona, California,
                                                        and elsewhere. The advertisements offered investors who had good credit
                                                        the chance to buy property with no money down, and the defendants falsely
                                                        claimed they would make the mortgage payments on the investors’ behalf
                                                        using rental income they generated by renting and managing the properties.
                                                        However, the indictment alleges that these investors were nothing more than
                                                        straw buyers who were promised $10,000 for each property purchased. The
                                                        defendants were able to secure mortgages for the properties by falsifying loan
                                                        applications for the straw buyers. Among other things, the loan applications
                                                        falsely claimed exorbitant income from fake employers and used sham
                                                        companies to verify the borrowers’ fabricated employment and rental histories.
                                                        The defendants used these loan applications to obtain mortgages with 100%
                                                        financing, thus avoiding having to make down payments on the properties.

                                                        The bulk of the profits the defendants allegedly made from the scheme
                                                        resulted from convincing sellers to inflate the purchase price of the properties
                                                        by approximately $100,000, which was supposed to be used for construction
                                                        improvements to the properties. In fact, no construction work was ever
                                                        performed and the funds were instead diverted (or “kicked back”) to bank
                                                        accounts controlled by the defendants. The defendants allegedly pocketed
                                                        this money; made few, if any, mortgage payments; and allowed nearly all of the
                                                        properties to fall swiftly into foreclosure.

                                                        The indictment alleges that Armstrong, Rose, and Fountain purchased at
                                                        least 16 properties in California and Washington, secured over $11 million
                                                        in mortgage loans, diverted over $1.5 million in sham construction kickbacks,
                                                        and earned hundreds of thousands of dollars in additional proceeds through
                                                        commissions and fees listed as part of the closing costs for each transaction.
                                                        As a result of the foreclosures and defaults caused by the defendants’ failure
                                                        to make the mortgage payments, the defrauded mortgage lenders suffered
                                                        losses of approximately $5 million. Fannie Mae purchased some of these
                                                        fraudulently obtained mortgages on the secondary market and suffered losses
                                                        as a result of the defaults.

                                                        This is a joint investigation with the FBI, USPIS, and HUD-OIG, in
                                                        coordination with FFETF. An OIG investigative counsel assisted the
                                                        prosecution.

                                                        South Florida Fraud Scheme
                                                        On April 2, 2012, in the U.S. District Court for the Southern District of
                                                        Florida, an indictment was unsealed against eight defendants in connection
                                                        with fraudulently obtaining mortgages for the purchase of condominium
                                                        units at Marina Oaks Condominiums in Fort Lauderdale, Florida. The
                                                        indictment charged the defendants, Juan Carlos Sanchez, Quelyory Rigal,
                                                        Sandra P. Campo, Osbelia Lazardi, Dayanara Montero, Edward R. Mena,


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Celeste Mota, and David Arboleda, with conspiracy, wire fraud, and mail
fraud. On September 25, 2012, a second indictment was filed against Marina
Superlano and Marisa Perez, charging them with conspiracy to commit wire
and mail fraud.

The indictments allege that from January 2007 through November 2008, the
defendants conspired to recruit individuals to purchase condominium units
at Marina Oaks Condominiums. These buyers were promised a “buyers’
incentive,” a payment which was not disclosed to the lenders or reflected on
any of the closing documents. The conspirators would then prepare false
mortgage applications for the buyers. These applications contained false
information regarding the borrowers’ creditworthiness in order to qualify
them for mortgages to purchase the condominiums. The indictments allege
that the conspirators fraudulently obtained approximately $39 million in
mortgage loans, which were purchased by the Enterprises.

OIG special agents arrested Ocampo, who had been a fugitive, on September
5, 2012. Mota and Arboleda pleaded guilty on September 7 and 26, 2012,
respectively.

This is a joint investigation with the IRS-CI and the Broward County, Florida,
Sheriff ’s Office. The Fannie Mae Mortgage Fraud Program and the Freddie
Mac Fraud Investigation Unit provided assistance during the course of this
investigation.

Bank of America
On March 12, 2012, the federal government and several states filed a federal
civil complaint against BOA and its subsidiaries. It is alleged that BOA
violated the terms of the Servicer Participation Agreement, signed with
Treasury on April 17, 2009. The Servicer Participation Agreement required
BOA to use reasonable efforts to assist U.S. homeowners in obtaining
mortgage modifications under the Home Affordable Modification Program
(HAMP), which includes loans owned by the Enterprises. On April 4, 2012,
BOA entered into a consent judgment and financial settlement totaling $6.5
million.

OIG worked on this case with SIGTARP and the U.S. Attorney for the
Eastern District of New York.

OIG INVESTIGATIONS STRATEGY
OIG intends to further develop close working relationships with other law
enforcement agencies, including DOJ and the U.S. Attorneys’ Offices; state
attorneys general; mortgage fraud working groups; the Secret Service; the
FBI; HUD-OIG; the FDIC-OIG; the IRS-CI; SIGTARP; FinCEN; and
other federal, state, and local agencies.




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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                            During this reporting period, OI has continued to work closely with FinCEN
                                                            to review allegations of mortgage fraud for follow-up investigations and to
                                                            determine where OIG can best assign special agents to investigate fraud
                                                            against the GSEs. OIG also pursues innovative approaches to ensure
                                                            its investigations are prosecuted timely. For example, OIG has provided
                                                            dedicated OIG investigative counsels with substantial criminal prosecution
                                                            experience to U.S. Attorneys’ Offices to help prosecute OIG’s investigations.
                                                            In addition, OIG has partnered with a number of state attorneys general to
                                                            pursue shared law enforcement goals.

                                                            OIG REGULATORY ACTIVITIES
                                                            Consistent with the Inspector General Act, OIG considers whether proposed
                                                            legislation, regulations, and policies related to FHFA are efficient, economical,
                                                            legal, and susceptible to fraud and abuse. During the semiannual period, OIG
                                                            made substantive comments on one proposalo and a rule that OIG previously
                                                            commented upon was finalized and published.

                                                            1.	Draft Advisory Bulletin: Collateralization of Advances and Other
                                                                Credit Products Provided by FHLBanks to Insurance Companies
                                                                (OIG Comments Submitted on September 21, 2012)
                                                               FHFA forwarded to OIG a draft advisory bulletin to establish controls
                                                               over the FHLBanks’ advances to insurance company members. Due to
                                                               ongoing discussions between FHFA and OIG regarding this draft, the
                                                               substance of OIG’s comments and their resolution will be published at a
                                                               later date.

                                                            2.	
                                                               FHFA Final Rule: Prudential Management and Operations
                                                               Standards (RIN 2590-AA13, OIG Comments Submitted on
                                                               January 20, 2012)
                                                               HERA requires FHFA to establish and enforce prudential standards
                                                               relating to the management and operations of Fannie Mae, Freddie Mac,
                                                               and the FHLBanks. These standards must address certain specified topics,
                                                               including but not limited to the GSEs’ internal controls; information
                                                               systems; internal audit systems; and management of risk, liquidity, and asset
                                                               and investment portfolio growth. FHFA circulated to OIG a draft rule
                                                               addressing the prudential standards for the GSEs. OIG recommended that
                                                               FHFA revise its original draft standards in various respects to provide the
                                                               GSEs with greater clarity and specificity regarding the plans, practices, and
                                                               policies FHFA requires that they implement. OIG contended that doing
0
  As a matter of policy, OIG notes that it has commented
                                                               so might help improve the due process available to the GSEs and would
on a draft rule during the semiannual period when a            assist OIG in evaluating the efficacy and efficiency of FHFA’s examination
comment is made, and then OIG discusses the substance          processes. On June 8, 2012, FHFA issued a final rule to establish the required
of its comment in a later semiannual report once the rule
is finalized and published.                                    prudential standards. The final rule is substantially similar to the proposed



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                                                           SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




   rule and, therefore, cannot be said to appreciate OIG’s recommendation
   that the draft rule would benefit from further clarification.

OIG COMMUNICATIONS AND OUTREACH EFFORTS
A key component of OIG’s mission is to communicate clearly with the GSEs,
industry groups, other federal agencies, Congress, and the public. OIG
facilitates clear communications through its Hotline, coordination with other
oversight organizations, and congressional statements and testimony.

Hotline
OI operates a Hotline, which allows concerned parties to report directly and            OIG’s Hotline:
in confidence information regarding possible fraud, waste, or abuse related to          (800) 793-7724 or
FHFA or the GSEs. OIG honors all applicable whistleblower protections.                  OIGHOTLINE@FHFAOIG.GOV.
As part of its effort to raise awareness of fraud and how to combat it, OIG
promotes the Hotline through its website, posters, e-mails targeted to FHFA
and GSE employees, and its semiannual reports.

Coordinating with Other Oversight Organizations
OIG shares oversight of federal housing program administration with several
other federal agencies including HUD, the Department of Veterans Affairs,
the Department of Agriculture, and Treasury’s Office of Financial Stability
(which manages TARP); their inspectors general; and other law enforcement
organizations. To further its mission, OIG coordinates with these entities to
exchange best practices, case information, and professional expertise. During
the semiannual period ended September 30, 2012, representatives of OIG
participated in the following cooperative activities:

     •	 R
         MBS Working Group. On January 27, 2012, the Attorney General
        issued a memorandum announcing the formation of the RMBS
        Working Group as a part of the federal FFETF. The RMBS Working
        Group is led by five co-chairs: the Assistant Attorney General of
        the DOJ Criminal Division, the SEC’s Director of Enforcement, the
        Attorney General of the State of New York, the U.S. Attorney for the
        District of Colorado, and the Assistant Attorney General of the DOJ
        Civil Division. The RMBS Working Group is designed to investigate
        misconduct in the market for MBS. Specifically, it seeks to streamline
        and strengthen current and future efforts to identify, investigate, and
        prosecute instances of wrongdoing in packaging, selling, and valuing
        RMBS. The RMBS Working Group consists of federal, state, and
        local partners including OIG, HUD, DOJ, FinCEN, the SEC, the
        FBI, the IRS-CI, and the Consumer Financial Protection Bureau. As




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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                          a member of the RMBS Working Group since its formation, OIG
                                                          has made a number of significant contributions to the joint effort.
                                                        •	 M
                                                            ortgage Fraud Summits. DOJ, HUD-OIG, OIG, and other federal
                                                           and state partners held mortgage fraud summits in Las Vegas and Los
                                                           Angeles to assist homeowners in areas hit hardest by the foreclosure
                                                           crisis. The summits were organized by the FFETF Mortgage Fraud
                                                           Working Group and provided homeowners with the opportunity to
                                                           learn about mortgage fraud trends, the impact of mortgage fraud on
                                                           the community, and how to avoid becoming a victim of a mortgage
                                                           fraud offense.
                                                        •	 C
                                                            IGIE. OIG actively participates in CIGIE.
                                                             • The Inspector General serves on the CIGIE Inspection and
                                                               Evaluation Committee, which provides leadership for improving
                                                               agency effectiveness by maintaining professional standards;
                                                               develops protocols for reviewing management issues that cut
                                                               across departments and agencies; promotes advanced program
                                                               evaluation techniques; and fosters awareness of evaluation and
                                                               inspection practices in the inspector general community. The
                                                               Inspection and Evaluation Committee also provides input to
                                                               CIGIE’s Professional Development Committee with regard to
                                                               employees’ training and development needs.
                                                             • The Inspector General also serves as vice chairman of the CIGIE
                                                               Suspension and Debarment Working Group, which is charged
                                                               with improving the effectiveness of federal suspension and
                                                               debarment practices.
                                                        •	 C
                                                            ouncil of Inspectors General on Financial Oversight. The Inspector
                                                           General is an active member of the Council of Inspectors General on
                                                           Financial Oversight, which was established by the Dodd-Frank Wall
                                                           Street Reform and Consumer Protection Act of 2010 to facilitate
                                                           information sharing among member agencies that are responsible for
                                                           financial oversight.
                                                        •	 F
                                                            ederal Housing Inspectors General. As noted in the second Semiannual
                                                           Report, OIG spearheaded the creation of a new interagency working
                                                           group, the Federal Housing Inspectors General. In addition to OIG,
                                                           this group includes the Offices of Inspector General for other federal
                                                           agencies with primary responsibility for federal housing, including
                                                           HUD, the Department of Veterans Affairs, and the Department of
                                                           Agriculture. The Federal Housing Inspectors General continue to
                                                           collaborate on multiple joint initiatives.
                                                        •	 F
                                                            FETF. OIG actively participates in FFETF, a coalition of state
                                                           and federal law enforcement agencies, prosecutors, and other entities.
                                                           The President established FFETF in November 2009 to investigate
                                                           and prosecute significant financial crimes, ensure just and effective


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                                                            SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




        punishment for those who perpetrate them, recover proceeds for
        victims, and address discrimination in the lending and financial markets.
        Within FFETF, OIG has begun working with its task force partners
        to combat mission-relevant financial crimes. In addition to the RMBS
        Working Group discussed above, OIG also participates in FFETF’s:
           • Mortgage Fraud Working Group;
           • Recovery Act, Procurement, and Grant Fraud Working Group;
             and
           • Securities and Commodities Fraud Working Group.
     •	 O
         ther Partnerships. OIG has established partnerships with several
        federal agencies to share data, analyze internal complaints, and identify
        trends. These agencies include FinCEN, SIGTARP, HUD-OIG, the
        FBI, and the Secret Service. In addition, OIG has partnered with
        state and local law enforcement agencies across the nation, including
        State Attorneys General in New York and California. Each of OIG’s
        partnerships is designed to enhance interagency cooperation. These
        partnerships focus the participating agencies’ combined investigative
        resources on identifying, investigating, and prosecuting those involved
        in fraud related to the entities regulated by the participants.

Communicating with Congress
To fulfill his responsibility to keep Congress fully apprised of OIG’s oversight
of FHFA, the Inspector General meets regularly with members of Congress
and their staffs to brief them on OIG’s reports, organization, and strategy.

Copies of the Inspector General’s written testimony to Congress are available
at www.fhfaoig.gov/testimony.




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 68 |   Section 3: OIG’s Accomplishments and Strategy
                        SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




section 4
OIG’S RECOMMENDATIONS




                                                   Section 4: OIG’s Recommendations   | 69
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                           Section 4: OIG’s Recommendations
                                           In accordance with the provisions of the Inspector General Act, one of the
                                           key duties of OIG is to provide recommendations to FHFA that promote the
                                           transparency, efficiency, and effectiveness of the Agency’s operations and aid
                                           in the prevention and detection of fraud, waste, or abuse. The following table
                                           summarizes OIG’s formal recommendations to date and notes the status of
                                           their implementation.




 70 |   Section 4: OIG’s Recommendations
                                                                                SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012



                                                    Figure 16. Summary of OIG’s Recommendations

       No.                                    Recommendation                                                   Report                                 Status
EVL-2012-009-1   FHFA should continue to monitor Freddie Mac’s hedges and models to              FHFA’s Oversight of Freddie Mac’s       Recommendation agreed to
                 ensure the Enterprise’s portfolio is hedged within its approved interest rate   Investment in Inverse Floaters          by FHFA; implementation of
                 limits.                                                                                                                 recommendation pending.

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

EVL-2012-009-3   FHFA should ensure that supervisory policies are well-founded and               FHFA’s Oversight of Freddie Mac’s       Recommendation
                 coordinated and that the Agency speaks with one voice by:                       Investment in Inverse Floaters          partially agreed to by
                 •• if FHFA is going to take a position or believes it has come to an                                                   FHFA; implementation of
                     agreement with Freddie Mac regarding a particular investment product,                                               recommendation pending.
                     confirming its position or the agreement in writing as soon as practical;
                     and
                 •• e nsuring 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 should exercise due diligence to    FHFA’s Oversight of Freddie Mac’s       Recommendation agreed to
                 ensure that statements accurately reflect all relevant facts.                   Investment in Inverse Floaters          by FHFA; implementation of
                                                                                                                                         recommendation pending.

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

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

EVL-2012-008-3   Consistent with the control issues found in Fannie Mae’s internal audit         Evaluation of FHFA’s Oversight of       Recommendation agreed to
                 report on the High Touch Servicing Program, FHFA should ensure that             Fannie Mae’s Transfer of Mortgage       by FHFA; implementation of
                 Fannie Mae applies additional scrutiny and rigor to pricing significant MSR     Servicing Rights from Bank of           recommendation pending.
                 transactions. FHFA should:                                                      America to High Touch Servicers
                 •• consider requiring Fannie Mae to assess the valuation methods of
                     multiple MSR valuators in order to discern best practices; and
                 •• c onsider 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 the program and direct any necessary         Evaluation of FHFA’s Oversight of       Recommendation agreed to
                 modifications. As the portfolios purchased under the program approach the       Fannie Mae’s Transfer of Mortgage       by FHFA; implementation of
                 five-year mark, FHFA should review both the underlying assumptions and          Servicing Rights from Bank of           recommendation pending.
                 the performance criteria for the High Touch Servicing Program.                  America to High Touch Servicers

EVL-2012-007-1   FHFA and Freddie Mac should continue to carry out the loan review and           Follow-up on Freddie Mac’s Loan         The recommendation is
                 related reforms they have initiated since OIG’s original report on the BOA      Repurchase Process                      unresolved and a management
                 settlement with Freddie Mac was issued.                                                                                 decision has not been made as
                                                                                                                                         of September 30, 2012.

EVL-2012-006-1   FHFA should adhere to the requirements in the PSPAs that it certify: (1)        FHFA’s Certifications for the           Closed – Final action taken by
                 that the Enterprises have complied with the PSPA covenants and (2) that         Preferred Stock Purchase                FHFA.
                 the Enterprises’ financial statements and related documents provided            Agreements
                 to Treasury under the PSPAs are free of materially false or misleading
                 representations.




                                                                                                                                 Section 4: OIG’s Recommendations     | 71
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




        No.                                       Recommendation                                                Report                              Status
EVL-2012-006-2       FHFA should implement oversight procedures to ensure the Enterprises’        FHFA’s Certifications for the        Closed – Final action taken by
                     compliance with PSPA requirements.                                           Preferred Stock Purchase             FHFA.
                                                                                                  Agreements

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


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


ESR-2012-004-1       FHFA should ensure that the Enterprises conduct a comprehensive review       Fannie Mae’s and Freddie Mac’s       Recommendation agreed to
                     of their travel and entertainment policies and revise them in a manner       Participation in the 2011 Mortgage   by FHFA; implementation of
                     consistent with the January 25, 2012, guidance.                              Bankers Association Annual           recommendation pending.
                                                                                                  Convention and Exposition

ESR-2012-004-2       FHFA should review the Enterprises’ proposed revisions to ensure that they   Fannie Mae’s and Freddie Mac’s       Recommendation agreed to
                     are drafted in a manner consistent with the guidance provided by FHFA        Participation in the 2011 Mortgage   by FHFA; implementation of
                     and that the Enterprises have established appropriate controls to monitor    Bankers Association Annual           recommendation pending.
                     compliance.                                                                  Convention and Exposition

ESR-2012-003-1       FHFA should continue to monitor the Enterprises’ progress in phasing out     FHFA’s Oversight of the              Recommendation agreed to
                     their charitable activities.                                                 Enterprises’ Charitable Activities   by FHFA; implementation of
                                                                                                                                       recommendation pending.

ESR-2012-003-2       FHFA should continue to require the Enterprises to issue timely, quarterly   FHFA’s Oversight of the              Recommendation agreed to
                     reports on their charitable activities via their websites.                   Enterprises’ Charitable Activities   by FHFA; implementation of
                                                                                                                                       recommendation pending.

EVL-2012-002-1       FHFA should work to limit legal expenses to the extent possible and          Evaluation of FHFA’s Management      Closed – Final action taken by
                     reasonable by:                                                               of Legal Fees for Indemnified        FHFA.
                     •• narrowing the reach of future indemnification agreements;                 Executives
                     •• considering making greater use of Directors & Officers insurance; and
                     •• c ontinuing 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 legal expenses by:                  Evaluation of FHFA’s Management      Closed – Final action taken by
                     •• identifying the best elements of Fannie Mae’s and Freddie Mac’s          of Legal Fees for Indemnified        FHFA.
                         programs for administering advances and indemnification of legal         Executives
                         expenses and developing standardized legal billing practices for both
                         Enterprises; and
                     •• further developing FHFA oversight procedures.




 72 |   Section 4: OIG’s Recommendations
                                                                                SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




       No.                                     Recommendation                                                   Report                                 Status
EVL-2012-001-1   FHFA should develop and implement a clear, consistent, and transparent            FHFA’s Oversight of Troubled           Recommendation agreed to
                 written enforcement policy that:                                                  Federal Home Loan Banks                by FHFA; implementation of
                 •• requires troubled FHLBanks (those classified as having supervisory                                                   recommendation pending.
                     concerns) to correct identified deficiencies within specified timeframes;
                 •• establishes consequences for their not doing so; and
                 •• defines exceptions to the policy.


EVL-2012-001-2   FHFA should develop and implement a reporting system that permits Agency          FHFA’s Oversight of Troubled           Recommendation agreed to
                 managers and outside reviewers to assess readily examination report               Federal Home Loan Banks                by FHFA; implementation of
                 findings, planned corrective actions and timeframes, and their status.                                                   recommendation pending.

EVL-2012-001-3   FHFA should document consistently key activities, including                       FHFA’s Oversight of Troubled           Recommendation agreed to
                 recommendations to remove and replace senior officers and other                   Federal Home Loan Banks                by FHFA; implementation of
                 personnel actions involving FHLBanks.                                                                                    recommendation pending.

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

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

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

EVL-2011-005-2   FHFA should monitor the development and implementation of the examiner            Evaluation of Whether FHFA Has         Recommendation agreed to
                 accreditation program and take needed actions to address any shortfalls.          Sufficient Capacity to Examine         by FHFA; implementation of
                                                                                                   the GSEs                               recommendation pending.

EVL-2011-005-3   FHFA should consider using detailees from other federal agencies, retired         Evaluation of Whether FHFA Has         Recommendation agreed to
                 annuitants, or contractors to augment its examination program in the near         Sufficient Capacity to Examine         by FHFA; implementation of
                 term to midterm.                                                                  the GSEs                               recommendation pending.

EVL-2011-005-4   FHFA should report periodically to Congress and the public, which might           Evaluation of Whether FHFA Has         Recommendation agreed to
                 include the augmentation of existing reports, on the Agency’s examiner            Sufficient Capacity to Examine         by FHFA; implementation of
                 capacity shortfalls, such as the number of examiners needed to meet its           the GSEs                               recommendation pending.
                 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 implementation of its operational        Evaluation of FHFA’s Oversight         Recommendation agreed to
                 risk management program.                                                          of Fannie Mae’s Management of          by FHFA; implementation of
                                                                                                   Operational Risk                       recommendation pending.

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




                                                                                                                                  Section 4: OIG’s Recommendations     | 73
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




        No.                                       Recommendation                                                  Report                               Status
EVL-2011-004-3       FHFA should ensure that Fannie Mae has qualified personnel to implement         Evaluation of FHFA’s Oversight       Recommendation agreed to
                     its operational risk management program.                                        of Fannie Mae’s Management of        by FHFA; implementation of
                                                                                                     Operational Risk                     recommendation pending.

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

EVL-2011-002-1A      FHFA should review the disparity in compensation levels between the             Evaluation of Federal Housing        Closed – Final action taken by
                     Enterprises’ executives and the senior executives of housing-related federal    Finance Agency’s Oversight of        FHFA.
                     entities that are providing critical support to the housing finance system.     Fannie Mae’s and Freddie Mac’s
                                                                                                     Executive Compensation Programs
EVL-2011-002-1B      FHFA should review the extent to which federal financial support for the        Evaluation of Federal Housing        Closed – Final action taken by
                     Enterprises may facilitate their capacity to meet certain performance targets   Finance Agency’s Oversight of        FHFA.
                     and, by extension, the capacity of their executives to achieve high levels of   Fannie Mae’s and Freddie Mac’s
                     compensation that may not be warranted.                                         Executive Compensation Programs

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

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

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

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

EVL-2011-002-3A      To improve transparency, FHFA should post on its website information about      Evaluation of Federal Housing        Closed – Final action taken by
                     executive compensation packages, the Enterprises’ corporate performance         Finance Agency’s Oversight of        FHFA.
                     goals and performance against those goals, and related trend data.              Fannie Mae’s and Freddie Mac’s
                                                                                                     Executive Compensation Programs

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

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




 74 |   Section 4: OIG’s Recommendations
                                                                                SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




       No.                                     Recommendation                                                  Report                               Status
EVL-2011-001-2    FHFA should develop an external reporting strategy, which might include the     Federal Housing Finance Agency’s     Closed – Final action taken by
                  augmentation of existing reports, to chronicle FHFA’s progress, including the   Exit Strategy and Planning Process   FHFA.
                  adequacy of its resources and capacity to meet multiple responsibilities and    for the Enterprises’ Structural
                  mitigate any shortfalls.                                                        Reform

AUD-2012-008-1    FHFA should reassess the non-delegated authorities to ensure sufficient         FHFA’s Conservator Approval          Recommendation agreed to
                  FHFA involvement with major business decisions.                                 Process for Fannie Mae and           by FHFA; implementation of
                                                                                                  Freddie Mac Business Decisions       recommendation pending.

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

AUD-2012-008-3A   FHFA should evaluate Fannie Mae’s mortgage pool policy commutations             FHFA’s Conservator Approval          The recommendation is
                  to determine whether these transactions were appropriate and in the best        Process for Fannie Mae and           unresolved and a management
                  interest of the Enterprise and taxpayers. This evaluation should include an     Freddie Mac Business Decisions       decision has not been made
                  assessment of Fannie Mae’s methodology used to determine the economic                                                as of September 30, 2012.
                  value of the seven mortgage pool policy commutations (this assessment                                                OIG has requested additional
                  should include a documented review of Fannie Mae’s analysis, the adequacy                                            management comments.
                  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 pool policy commutations             FHFA’s Conservator Approval          The recommendation is
                  to determine whether these transactions were appropriate and in the best        Process for Fannie Mae and           unresolved and a management
                  interest of the Enterprise and taxpayers. This evaluation should include a      Freddie Mac Business Decisions       decision has not been made
                  full accounting and validation of all of the cost components that comprise                                           as of September 30, 2012.
                  each settlement discount (risk in force minus fee charged), such as                                                  OIG has requested additional
                  insurance premiums and time value of money applicable to each listed cost                                            management comments.
                  component.

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

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

AUD-2012-008-6    FHFA should establish a clear timetable and deadlines for Enterprise            FHFA’s Conservator Approval          The recommendation is
                  submission of transactions to FHFA for conservatorship approval.                Process for Fannie Mae and           unresolved and a management
                                                                                                  Freddie Mac Business Decisions       decision has not been made
                                                                                                                                       as of September 30, 2012.
                                                                                                                                       OIG has requested additional
                                                                                                                                       management comments.

AUD-2012-008-7    FHFA should develop criteria for conducting business case analyses and          FHFA’s Conservator Approval          The recommendation is
                  substantiating conservator decisions.                                           Process for Fannie Mae and           unresolved and a management
                                                                                                  Freddie Mac Business Decisions       decision has not been made
                                                                                                                                       as of September 30, 2012.
                                                                                                                                       OIG has requested additional
                                                                                                                                       management comments.




                                                                                                                             Section 4: OIG’s Recommendations       | 75
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




        No.                                       Recommendation                                                    Report                             Status
AUD-2012-008-8       FHFA should issue a directive to the Enterprises requiring them to notify         FHFA’s Conservator Approval         The recommendation is
                     FHFA of any deviation from any previously reviewed action so that FHFA may        Process for Fannie Mae and          unresolved and a management
                     consider the change and revisit its conservatorship decision.                     Freddie Mac Business Decisions      decision has not been made
                                                                                                                                           as of September 30, 2012.
                                                                                                                                           OIG has requested additional
                                                                                                                                           management comments.

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

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

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

AUD-2012-006-1       FHFA’s Deputy Director of the Division of Enterprise Regulation (DER) and         FHFA’s Call Report System           Recommendation agreed to
                     Office of Financial Analysis’ Senior Associate Director should ensure that                                            by FHFA; implementation of
                     the Agency analyzes opportunities to use CRS information to facilitate                                                recommendation pending.
                     supervision and regulation of the Enterprises.

AUD-2012-006-2       FHFA’s Deputy Director of DER and Office of Financial Analysis’ Senior            FHFA’s Call Report System           Recommendation agreed to
                     Associate Director should ensure that the Agency supports identified                                                  by FHFA; implementation of
                     opportunities for using CRS in its oversight planning and monitoring with                                             recommendation pending.
                     detailed supervisory and support division requirements.

AUD-2012-006-3       FHFA’s Deputy Director of DER and Office of Financial Analysis’ Senior            FHFA’s Call Report System           Recommendation agreed to
                     Associate Director should ensure that the Agency, if current CRS capabilities                                         by FHFA; implementation of
                     need improvement, directs divisions to work with FHFA’s Office of                                                     recommendation 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 implement the performance of risk            FHFA’s Supervisory Risk             Recommendation agreed to
                     assessments of REO that are more comprehensive and link the results to            Assessment for Single-Family Real   by FHFA; implementation of
                     supervisory plans that address those risks through specific supervisory           Estate Owned                        recommendation pending.
                     activities.

AUD-2012-004-1       FHFA should document fully its efforts to ensure that FHLBanks correct            FHFA’s Supervisory Framework        Recommendation agreed to
                     identified deficiencies in collateral risk management.                            for Federal Home Loan Banks’        by FHFA; implementation of
                                                                                                       Advances and Collateral Risk        recommendation pending.
                                                                                                       Management

AUD-2012-004-2       FHFA should implement and follow-up on the horizontal review                      FHFA’s Supervisory Framework        Recommendation agreed to
                     recommendations related to the need for additional guidance and training          for Federal Home Loan Banks’        by FHFA; implementation of
                     and the need to conduct a follow-up horizontal review of secured credit.          Advances and Collateral Risk        recommendation pending.
                                                                                                       Management




 76 |   Section 4: OIG’s Recommendations
                                                                               SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




      No.                                      Recommendation                                                  Report                             Status
AUD-2012-004-3    FHFA should advise FHLBanks to reassess business plans periodically that        FHFA’s Supervisory Framework       Closed – Final action taken by
                  rely on troubled members for advance growth.                                    for Federal Home Loan Banks’       FHFA.
                                                                                                  Advances and Collateral Risk
                                                                                                  Management

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

AUD-2012-004-5    FHFA should continue to enhance coordination with the federal banking           FHFA’s Supervisory Framework       Recommendation agreed to
                  agencies and the FHLBanks, including the use of established memoranda           for Federal Home Loan Banks’       by FHFA; implementation of
                  of understanding or other written agreements, to obtain bank examinations       Advances and Collateral Risk       recommendation pending.
                  and other supervisory information as warranted to ensure improved               Management
                  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 participation in the Federal Financial   FHFA’s Supervisory Framework       Closed – Final action taken by
                  Institutions Examination Council to enhance the Agency’s coordination with      for Federal Home Loan Banks’       FHFA.
                  federal banking agencies and state regulatory authorities responsible for       Advances and Collateral Risk
                  supervising and regulating FHLBank member banks.                                Management

AUD-2012-004-7    FHFA should establish a consolidated global watch list of member banks          FHFA’s Supervisory Framework       Recommendation agreed to
                  identified by the FHLBanks or by FHFA that present heightened supervisory       for Federal Home Loan Banks’       by FHFA; implementation of
                  concern and use the global watch list to enhance the Agency’s supervision       Advances and Collateral Risk       recommendation pending.
                  of the FHLBanks.                                                                Management

AUD-2012-003-1    FHFA’s Division of Housing Mission and Goals should formally establish          FHFA’s Oversight of Fannie Mae’s   Recommendation agreed to
                  a policy for its review process of underwriting standards and variances         Single-Family Underwriting         by FHFA; implementation of
                  including escalation of unresolved issues reflecting potential lack of          Standards                          recommendation pending.
                  agreement.

AUD-2012-003-2    FHFA’s Division of Examination Program and Support should enhance               FHFA’s Oversight of Fannie Mae’s   Recommendation agreed to
                  existing examination guidance for assessing adherence to underwriting           Single-Family Underwriting         by FHFA; implementation of
                  standards and variances from them.                                              Standards                          recommendation pending.

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

AUD-2012-001-1C   FHFA’s DER should establish and implement more robust regulations or            FHFA’s Supervision of Freddie      Recommendation agreed to
                  guidance governing counterparty oversight and risk management for               Mac’s Controls over Mortgage       by FHFA; implementation of
                  mortgage servicing. The regulations or guidance should include requirements     Servicing Contractors              recommendation pending.
                  for minimum, uniform standards for servicing mortgages owned or
                  guaranteed by the Enterprises.




                                                                                                                             Section 4: OIG’s Recommendations     | 77
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 the necessary steps to              FHFA’s Supervision of Freddie      Recommendation agreed to
                     monitor and track the performance of its servicers to reasonably assure          Mac’s Controls over Mortgage       by FHFA; implementation of
                     achievement of credit loss savings by: (1) implementing servicer account         Servicing Contractors              recommendation pending.
                     plans for 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 procedures and controls governing         FHFA’s Supervision of Freddie      Closed – Final action taken by
                     coordination with other federal agencies that have oversight jurisdiction        Mac’s Controls over Mortgage       FHFA.
                     with respect to the Enterprises’ mortgage servicers.                             Servicing Contractors

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

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

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

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

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

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

AUD-2011-003-4       FHFA should develop and implement additional training for employees about        Clifton Gunderson LLP’s            Closed – Final action taken by
                     System of Records Notice (SORN) requirements, focusing on the inadvertent        Independent Audit of the Federal   FHFA.
                     creation of systems of records. This training should stress the legal            Housing Finance Agency’s Privacy
                     ramifications potentially associated with creating systems of records prior to   Program and Implementation –
                     publishing a SORN.                                                               2011

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




 78 |   Section 4: OIG’s Recommendations
                                                                               SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




      No.                                     Recommendation                                                 Report                              Status
AUD-2011-003-6   FHFA should require system owners of four FHFA systems with PII to             Clifton Gunderson LLP’s             Closed – Final action taken by
                 prepare privacy impact assessments according to a checklist or template.       Independent Audit of the Federal    FHFA.
                                                                                                Housing Finance Agency’s Privacy
                                                                                                Program and Implementation –
                                                                                                2011

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

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

AUD-2011-003-9   FHFA should ensure privacy risk is continuously assessed on systems in         Clifton Gunderson LLP’s             Closed – Final action taken by
                 production, including when functionalities change or when a major update       Independent Audit of the Federal    FHFA.
                 is done. The Chief Privacy Officer should document, disseminate (to system     Housing Finance Agency’s Privacy
                 owners and the Chief Information Security Officer), and implement policies     Program and Implementation –
                 and procedures for continuous monitoring of information systems containing     2011
                 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;
                 •• d etermine the frequency of the privacy-related security controls
                     monitoring and reporting process to the privacy office;
                 •• d ocument 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.


AUD-2011-002-1   FHFA should finalize, disseminate, and implement an Agency-wide                Clifton Gunderson LLP’s             Closed – Final action taken by
                 information security program plan in accordance with NIST SP 800-53            Independent Audit of the Federal    FHFA.
                 Rev.3.                                                                         Housing Finance Agency’s
                                                                                                Information Security Program –
                                                                                                2011

AUD-2011-002-2   FHFA should update its information security policies and procedures to         Clifton Gunderson LLP’s             Closed – Final action taken by
                 address all applicable NIST SP 800-53 Rev.3 components.                        Independent Audit of the Federal    FHFA.
                                                                                                Housing Finance Agency’s
                                                                                                Information Security Program –
                                                                                                2011

AUD-2011-002-3   FHFA should develop, disseminate, and implement an Agency-wide                 Clifton Gunderson LLP’s             Recommendation agreed to
                 information categorization policy and methodology.                             Independent Audit of the Federal    by FHFA; implementation of
                                                                                                Housing Finance Agency’s            recommendation pending.
                                                                                                Information Security Program –
                                                                                                2011




                                                                                                                            Section 4: OIG’s Recommendations     | 79
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




        No.                                       Recommendation                                                  Report                             Status
AUD-2011-002-4       FHFA should develop, disseminate, and implement a process to monitor            Clifton Gunderson LLP’s            Closed – Final action taken by
                     compliance with Plans of Action and Milestones.                                 Independent Audit of the Federal   FHFA.
                                                                                                     Housing Finance Agency’s
                                                                                                     Information Security Program –
                                                                                                     2011

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

AUD-2011-001-1A      FHFA should design and implement written policies, procedures, and              Audit of the Federal Housing       Closed – Final action taken by
                     controls governing the receipt, processing, and disposition of consumer         Finance Agency’s Consumer          FHFA.
                     complaints that:                                                                Complaints Process
                     •• define FHFA’s and the Enterprises’ roles and responsibilities regarding
                         consumer complaints;
                     •• r equire the retention of supporting documentation for all processing and
                         disposition actions;
                     •• r equire a consolidated management reporting system, including
                         standard record formats and data elements, and procedures for
                         categorizing and prioritizing consumer complaints;
                     •• ensure 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
                     •• e nsure coordination with OIG regarding allegations involving fraud,
                         waste, or abuse.


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

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




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SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                           Section 4: OIG’s Recommendations   | 81
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 82 |   Section 4: OIG’s Recommendations
section 5
AN OVERVIEW OF THE FHLBANK SYSTEM’S
STRUCTURE, OPERATIONS, AND CHALLENGES
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                       Section 5: An Overview of the FHLBank
                                                       System’s Structure, Operations, and Challenges
                                                       The FHLBank System, which is sometimes referred to as the “other housing
                                                       GSE,”30 receives much less attention than the Enterprises. Yet, the FHLBank
                                                       System deserves notice, among other reasons, because it currently has more
                                                       than $600 billion in debt outstanding that is potentially taxpayer guaranteed,31
                                                       and in recent years, it has faced a number of challenges in terms of its safety,
                                                       soundness, and housing mission achievement. Some of these challenges
                                                       include:

                                                               •	 S
                                                                   everal FHLBanks made investments in mortgage securities during
                                                                  the housing boom years – from 2005 through 2007 – that later
                                                                  generated billions of dollars of losses and continue to present financial
                                                                  challenges.
                                                               •	 Th
                                                                   e FHLBank System has faced plummeting member demand
                                                                  for advances that negatively affects the FHLBanks’ financial
                                                                  performance. Declining advance demand has led the FHLBanks
                                                                  to engage in potentially risky non-housing mission activities, such
                                                                  as making unsecured loans to foreign banks. Advances to insurance
                                                                  companies have also increased, exposing new risks, such as the fact
                                                                  that the FDIC does not cover the obligations of insurance companies
                                                                  in the event of a failure.
                                                               •	 Th
                                                                   e Administration has made proposals to reform the FHLBank
                                                                  System that may inadvertently pose challenges. These proposals
                                                                  include limiting FHLBank advances to small- and medium-sized
                                                                  members and reducing their investment portfolios. Although these
                                                                  proposals are intended to strengthen the FHLBank System’s safety
                                                                  and soundness and its focus on housing mission achievement, they
                                                                  involve substantial revisions to some FHLBanks’ current business
                                                                  models.
                                                       In light of these challenges and the potential risk that the FHLBank System
                                                       represents, this section is intended to provide an overview of the FHLBank
                                                       System’s structure, operations, risks, and oversight by FHFA. It also
                                                       summarizes several of the key differences between the FHLBank System and
                                                       the Enterprises and discusses in detail a number of the critical challenges
                                                       facing the FHLBanks and FHFA.

                                                       BACKGROUND
                                                       Overview of the FHLBank System’s Structure
                                                       The FHLBank System was created in 1932 to improve the availability of funds
                                                       for home ownership. It is organized under the authority of the Federal Home
                                                       Loan Bank Act of 1932, and its mission is to provide local lenders with readily


 84 |   Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                                                              SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




available, low-cost funding to finance housing, jobs, and economic growth.32
The 12 FHLBanks fulfill this mission by providing liquidity to their members
through advances, resulting in an increased availability of credit for residential
mortgages, community investments, and other housing and community
development services.33

The FHLBanks are cooperatives that are owned privately and wholly by their
members. Each FHLBank operates as a separate entity within a defined
geographic region of the country, known as its district, with its own board
of directors, management, and employees. Each member of an FHLBank
must purchase and maintain capital stock as a condition of its membership.
FHLBank stock is held at par value and is not traded. FHLBank members
may receive dividends on their investment in capital stock from the earnings                                                      Par Value:
of their bank.34 Figure 17 (see below) provides a map of the locations of the                                                     The face value of a security.
12 FHLBanks.

                                        Figure 17. Regional FHLBanks




Source: Federal Home Loan Bank of Boston, Federal Home Loan Bank System (online at www.fhlbboston.com/aboutus/
thebank/06_01_04_fhlb_system.jsp) (accessed Aug. 8, 2012).




                                                                                     Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges   | 85
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                          Currently, more than 7,700 financial institutions comprise the membership
Commercial Banks:                                         of the FHLBanks. These financial institutions include banks, thrifts, credit
Commercial banks are establishments primarily
                                                          unions, insurance companies, and community development financial
engaged in accepting demand and other
deposits and making commercial, industrial, and
                                                          institutions.35 Figure 18 (see below) shows the composition of the FHLBanks
consumer loans. Commercial banks provide                  by member type. Commercial banks are the largest class of members at 69%.
significant services in originating, servicing, and       Thrifts and credit unions each comprise 14%. Insurance companies comprise
enhancing the liquidity and quality of credit that is     3% and community development financial institutions 0.1%.
ultimately funded elsewhere.
Foreclosure:
                                                                                Figure 18. 2011 FHLBank Composition by Member Type
Thrifts:
The legal process used by a lender to obtain
Apossession
  financial institution that ordinarily
              of a mortgaged            possesses
                                  property.
the same depository, credit, financial                                                     0%
intermediary,
Charge Off: and account transactional functions
as a bank but that is chiefly organized and
An accounting term describing the                                                         3%
primarily operates to promote savings and
elimination of an asset, such as a mortgage                                14%                                                                              Commercial Banks
home mortgage lending rather than commercial
loan, from a company’s books. It does
lending.
not necessarily imply a reduction in the
                                                                                                                                                            Credit Unions
company’s
Credit      assets, depending on the
       Unions:
                                                                 14%
Member-owned,  not-for-profit
allowance established         financial
                        for loan  losses.
cooperatives that provide savings, credit, and                                                                                                              Thrifts
other financial services to their members. Credit                                                                  69%
unions pool their members’ savings deposits and
                                                                                                                                                            Insurance Companies
shares to finance their own loan portfolios rather
than rely on outside capital. Members benefit
from higher returns on savings, lower rates on                                                                                                              Community Development
loans, and fewer fees on average.                                                                                                                           Financial Institutions

Insurance Companies:
A company whose primary and predominant
business activity is the writing of insurance and         Source: Federal Home Loan Banks, Combined Financial Report for the Year Ended December 31, 2011, at 30 (online at www.fhlb-of.
issuing or underwriting “covered products.”               com/ofweb_userWeb/resources/11yrend.pdf) (accessed Aug. 16, 2012).
                                                          Note: Numbers may be affected by rounding.
Community Development Financial
Institutions:
A specialized financial institution that works            Each FHLBank has a board of directors that governs the bank. These boards
in market niches that are underserved by                  range in size from 13 to 18 directors, as determined by FHFA. The directors
traditional financial institutions. Community             are elected by member institutions and serve a four-year term.36 Each
development financial institutions provide a              FHLBank also has a president that reports to the board of directors of the
unique range of financial products and services
                                                          respective FHLBank. The president’s responsibilities include managing the
in economically distressed target markets, such
as mortgage financing for low-income and first-
                                                          FHLBank, administering the FHLBank’s programs, and ensuring compliance
time homebuyers and not-for-profit developers;            with the regulations and policies of FHFA.
flexible underwriting and risk capital for needed
community facilities; and technical assistance,
                                                          The compensation of FHLBank officers and employees is subject to the
commercial loans, and investments to small                approval of management and the board of directors of each individual
start-up or expanding businesses in low-income            FHLBank. FHFA has established principles and guidelines for the
areas. Community development financial                    FHLBanks and the Office of Finance in setting executive compensation
institutions include regulated institutions such as       policies and practices. However, each FHLBank is responsible for creating its
community development banks and credit unions
                                                          own compensation philosophy and objectives.37 Accordingly, compensation
and non-regulated institutions such as loan and
venture capital funds.
                                                          packages for the presidents and CEOs of the 12 FHLBanks ranged from
                                                          approximately $1.2 million to $3.4 million for the year ended 2011.38


   86 |    Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                                                                   SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                                             Figure 19. 2011 CEO Compensation for the Enterprises and the FHLBanks
                                                                       (whole dollars)

                                                                                                                                    Change in
                                                                                                                                     Pension
                                                                                                          Non-Equity
                                                                               Other Deferred                                       Value and
    Organization              Base Salary                  Bonus                                        Incentive Plan                                           Other                     Total
                                                                                   Salary                                          Nonqualified
                                                                                                        Compensation
                                                                                                                                    Deferred
                                                                                                                                  Compensation
      Fannie Maep                $900,000                      $-                 $1,550,000                $2,808,500               $1,268,300                  $11,300                $6,538,100
      Freddie Mac                $900,000                      $-                 $1,550,000                $1,348,500                 $239,255                  $72,915                $4,110,670
       Cincinnati                $621,150                      $-                           $-                $512,671               $2,217,000                  $25,932                $3,376,753
      Indianapolis               $555,438                      $-                           $-                $504,294               $2,083,000                  $14,805                $3,157,537
       New York                  $709,263                      $-                           $-                $523,180               $1,444,000                $120,417                 $2,796,860
     San Francisco               $902,967                      $-                           $-                $869,500                 $732,778                  $63,580                $2,568,825
         Topeka                  $627,500                      $-                           $-                $606,062               $1,169,289                  $55,792                $2,458,643
         Atlanta                 $650,000                   $148                            $-                $599,362               $1,089,000                  $58,710                $2,397,220
        Chicago                  $695,000                      $-                           $-              $1,081,420                 $409,000                  $14,700                $2,200,120
         Seattle                 $391,616                      $-                           $-                        $-             $1,557,435                $181,473                 $2,130,524
         Dallas                  $745,000                      $-                           $-                $334,557                 $373,000                $600,458                 $2,053,015
      Des Moines                 $620,833                      $-                           $-                $487,835                 $441,000                  $64,351                $1,614,019
       Pittsburgh                $625,000                      $-                           $-                $593,156                 $104,000                  $40,508                $1,362,664
         Boston                  $595,000                      $-                           $-                $213,242                 $325,000                  $62,666                $1,195,908

Sources: Fannie Mae, Form 10-K/A (Amendment No. 1) for the Fiscal Year Ended December 31, 2011, at 9, 25 (online at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2011/10ka_2011.
pdf) (accessed July 26, 2012); Freddie Mac, Form 10-K for the Fiscal Year Ended December 31, 2011, at 335, 338, 340, 347 (online at www.freddiemac.com/investors/sec_filings/index.html) (accessed July 26,
2012); Federal Home Loan Banks, Combined Financial Report for the Year Ended December 31, 2011, at S-11 (online at www.fhlb-of.com/ofweb_userWeb/resources/11yrend.pdf) (accessed July 30, 2012).




Figure 19 (see above) provides information on the 2011 executive compensation
for the Enterprises’ CEOs and the CEOs of the 12 FHLBanks.

FHLBank System Assets, Liabilities, and Capital

Assets
Advances are the FHLBanks’ largest assets and they support members’
local lending activities. In order to qualify for an advance, an FHLBank
member must pledge high-quality collateral, such as government securities;
mortgage loans; non-residential real estate loans; or loans for small business,                                                              p
                                                                                                                                               On Mar. 9, 2012, FHFA released the report, FHFA
agriculture, or community development. In addition, the FHLBank member                                                                       Announces New Conservatorship Scorecard for
                                                                                                                                             Fannie Mae and Freddie Mac; Reduces Executive
must purchase additional stock in its FHLBank proportionate to the new
                                                                                                                                             Compensation (Mar. 9, 2012) (online at www.fhfa.gov/
borrowing.39                                                                                                                                 webfiles/23438/ExecComp3912F.pdf). This report
                                                                                                                                             announced a new 2012 executive compensation
                                                                                                                                             program for the Enterprises, which eliminates bonuses,
                                                                                                                                             establishes a compensation target for new CEOs at
                                                                                                                                             $500,000 per year, and reduces compensation for
                                                                                                                                             top executives by roughly 75% since the advent of the
                                                                                                                                             conservatorships.




                                                                                         Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges                        | 87
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        Figure 20 (see below) illustrates trends in FHLBank advances over the past 11
                                                        years. From 2005 to 2008, outstanding advances to members increased from
                                                        approximately $600 billion to over $900 billion. However, as of December
                                                        2011, outstanding advances to members dropped by more than 50% to
                                                        approximately $418 billion.40 As discussed later in this section, the substantial
                                                        decline in advance demand has presented considerable financial challenges to
                                                        the FHLBank System.


                                                                             Figure 20. FHLBank System Advances from 2001 to 2011
                                                                                                  ($ billions)

                                                         $1,000



                                                          $900



                                                          $800



                                                          $700



                                                          $600



                                                          $500



                                                          $400

Federal Funds:                                                    2001     2002       2003        2004        2005        2006       2007        2008        2009       2010         2011

Extensions of unsecured credit between
financial institutions that are generally made
                                                        Sources: Federal Home Loan Banks, Combined Financial Report for the Year Ended December 31, 2011, at 34 (online at www.fhlb-of.
on an overnight basis.                                  com/ofweb_userWeb/resources/11yrend.pdf) (accessed Aug. 8, 2012); Federal Home Loan Banks, 2006 Combined Financial Report,
                                                        at 41 (online at www.fhlb-of.com/ofweb_userWeb/resources/06yrend.pdf) (accessed Aug. 8, 2012); Federal Home Loan Banks, 2001
Certificate of Deposit:                                 Unaudited Combined Financial Information, at 5 (online at www.fhlb-of.com/ofweb_userWeb/resources/01yrend.pdf) (accessed Aug. 8,
                                                        2012).
A certificate of deposit is a relatively low-
risk investment in a special deposit account
with a bank or thrift institution. Investors
                                                        The FHLBanks also maintain investment portfolios for liquidity purposes and
commit a fixed sum of money for a fixed
                                                        to generate income. These investments include federal funds, certificates of
period of time – six months, one year, five
                                                        deposits, MBS, and private-label MBS. The FHLBanks’ investment portfolios
years, or more. A certificate of deposit
                                                        may also include unsecured short-term loans to domestic and foreign financial
typically offers a higher rate of interest
                                                        institutions. Some FHLBanks may also purchase certain whole mortgages on
than a regular savings account. Interest
                                                        single-family properties directly from participating member institutions.41
is paid at regular intervals by the issuing
bank, and when the deposit matures, the                 As shown in Figure 21 (see page 89), advances represented 55% of the
investor receives the original investment               FHLBank System’s total assets as of the end of 2011. Investments such as
amount plus accrued interest. If the deposit            MBS and private-label MBS represented another 34% of total assets, and
is redeemed prior to the maturity date, there           whole mortgages comprised 7%. Cash and miscellaneous assets equaled 4%
may be penalties associated with early                  of total assets.
withdrawal.




  88 |   Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                                                                  SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                       Figure 21. 2011 FHLBank System Consolidated Assets
                                           ($ millions)

                 $37,169 - 4%
    $53,377 - 7%




                                                                                                       Advances

        $257,383 - 34%                                                                                 Investments
                                                    $418,157 - 55%

                                                                                                       Mortgage Loans

                                                                                                       Cash & Other Assets




Source: Federal Home Loan Banks, Combined Financial Report for the Year Ended December 31, 2011, at F-4 (online at www.fhlb-of.
com/ofweb_userWeb/resources/11yrend.pdf) (accessed Aug. 7, 2012).




Liabilities
The FHLBanks fund their operations through the sale of consolidated
obligations, which are bonds and discount notes issued to the public through                                                         Bonds:
the Office of Finance.42 The FHLBanks issue discount notes in maturities                                                             Obligations by a borrower to eventually
ranging from 1 day to 1 year and bonds with maturities of 6 months to 30 years.                                                      repay money obtained from a lender. The
The majority of consolidated obligation maturities are between 1 and 5 years                                                         bondholder buying the investment is entitled
after issuance, and the sizes of these obligations can range from $10 million                                                        to receive both principal and interest
to several billion dollars. The Office of Finance sells the FHLBanks’ debt                                                           payments from the borrower.
through a wide international network of underwriters,43 and the FHLBanks
are jointly and severally liable for their debt. Therefore, if an individual bank                                                    Discount Notes:
is unable to pay a creditor, the other 11 banks – or any 1 or more of them – are                                                     Short-term obligations (debt instruments)
required to step in and cover the debt.44                                                                                            issued at a discount from face value with
                                                                                                                                     maturities ranging from overnight to 360
Figure 22 (see page 90) shows the trends in consolidated obligations over the                                                        days. Discount notes have no periodic
last 11 years. In 2007 and 2008, bond and discount note issuances peaked as                                                          interest payments; the investor receives the
FHLBank members’ demand for advances soared. However, the FHLBanks’                                                                  note’s face value at maturity.
outstanding bonds and discount notes subsequently declined as demand for
advances waned over the past several years.




                                                                                        Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges   | 89
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                                 Figure 22. FHLBank System Consolidated Obligations from 2001 to 2011
                                                                                             ($ billions)

                                                       $1,400



                                                       $1,200



                                                       $1,000


                                                                                                                                              $818
                                                         $800                                                                      $803



                                                         $600
                                                                                                              $736      $777
                                                                                                                                                        $736
                                                                                                   $678                                                            $607
                                                                                         $577
                                                         $400                  $527                                                                                          $507
                                                                     $482


                                                                                                                                             $440
                                                         $200                                                                      $376

                                                                     $140      $147      $164      $168       $180      $158                            $199      $194       $190
                                                           $0
                                                                     2001      2002       2003      2004       2005      2006      2007       2008      2009      2010       2011




                                                                                                                Discount Notes             Bonds


                                                       Sources: Federal Home Loan Banks, Combined Financial Report for the Year Ended December 31, 2011, at 34 (online at www.fhlb-of.
                                                       com/ofweb_userWeb/resources/11yrend.pdf) (accessed Aug. 15, 2012); Federal Home Loan Banks, 2006 Combined Financial Report,
                                                       at 120 (online at www.fhlb-of.com/ofweb_userWeb/resources/06yrend.pdf) (accessed Aug. 15, 2012); Federal Home Loan Banks,
                                                       2004 Unaudited Combined Financial Information, at 16 (online at www.fhlb-of.com/ofweb_userWeb/resources/04yrend.pdf) (accessed
                                                       Aug. 15, 2012); Federal Home Loan Banks, 2003 Unaudited Combined Financial Information, at 90 (online at www.fhlb-of.com/
                                                       ofweb_userWeb/resources/03yrend.pdf) (accessed Aug. 15, 2012); Federal Home Loan Banks, 2001 Unaudited Combined Financial
                                                       Information, at 37 (online at www.fhlb-of.com/ofweb_userWeb/resources/01yrend.pdf) (accessed Aug. 15, 2012).




 90 |   Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                                              SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




As discussed in previous OIG reports, the FHLBank System generally can
issue debt at favorable interest rates compared to other financial institutions                                   Class A Stock:
due to the implicit federal guarantee on its financial obligations.45                                             Common stock issued by the FHLBanks
                                                                                                                  to member institutions at a stated par
Capital                                                                                                           value of $100 per share. Class A stock is
                                                                                                                  redeemable by members at par value with
The Gramm-Leach-Bliley Act of 1999 requires each of the 12 FHLBanks
                                                                                                                  six months written notice.
to maintain sufficient capital pursuant to a capital structure plan. Each
FHLBank is subject to three capital requirements under its plan: (1) total                                        Class B Stock:
regulatory capital compliance, (2) leverage capital compliance, and (3) risk-                                     Common stock issued by the FHLBanks
based capital compliance.46 These capital requirements serve as a cushion that                                    to member institutions at a stated par
protects against unanticipated losses and asset declines that could cause an                                      value of $100 per share. Class B stock is
FHLBank to fail, and FHFA reviews them to ensure the financial soundness                                          redeemable by members at par value with
and adequate capitalization of the FHLBanks.47                                                                    five years written notice.

Figure 23 (see below) summarizes the capital standards of the FHLBank
System.


                                                       Figure 23. FHLBank Capital Standards


                             Capital Standard                          Definition                                         Requirement

  Capital Compliance48   •• Total Regulatory Capital     •• S um of permanent capital, Class     •• 4% of assets
                                                             A stock outstanding, general loss
                                                             allowance, and other amounts from
                                                             sources determined by FHFA as
                                                             available to absorb losses


                         •• Leverage Capital             •• S um of permanent capital weighted   •• 5% of assets
                                                             1.5 times and all other capital
                                                             without a weighting factor


                         •• Risk-based Capital           •• P ermanent capital equal to at       •• P ermanent capital equal to at least the sum of: (1) credit
                                                             least the sum of its credit risk,        risk measured by the weighted sum of asset classes, (2)
                                                             market risk, and operations risk         market risk measured by a value-at-risk model and market
                                                             requirements                             value that falls below 85% of book value, and (3) operations
                                                                                                      risk equal to 30% of total credit and market risk




                                                                     Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges      | 91
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                       Housing Mission Related Programs and Activities
                                                       In addition to their traditional advance business, the FHLBanks support
                                                       economic and community development through affordable housing and other
                                                       programs, as summarized below.

                                                       Affordable Housing Program
                                                       The FHLBanks are required to contribute at least 10% of their net earnings
                                                       to affordable housing efforts established through the Affordable Housing
                                                       Program (AHP), which includes a competitive program that subsidizes the
                                                       cost of owner-occupied housing for individuals and families with incomes
                                                       at or below 80% of the area median income and rental housing in which at
                                                       least 20% of the units are reserved for households with incomes at or below
                                                       50% of the area median income. Members submit applications on behalf of
                                                       one or more sponsors of eligible housing projects. Projects must meet certain
                                                       eligibility criteria and score successfully in order to obtain funding.

                                                       AHP funds are also awarded through a homeownership set-aside program,
                                                       under which an FHLBank may set aside up to $4.5 million or 35% of its
                                                       AHP funds each year to assist low- and moderate-income households to
                                                       purchase homes. At least one-third of the FHLBank’s set-aside allocation
                                                       must be made available to assist first-time homebuyers. Members disburse
                                                       AHP home ownership set-aside funds as grants to eligible households. Set-
                                                       aside funds can be used for down payment, closing costs, counseling, or
                                                       rehabilitation assistance in connection with the purchase or rehabilitation of
                                                       an owner-occupied unit. Each FHLBank sets its maximum grant amount,
                                                       which may not exceed $15,000 per household.49

                                                       To ensure that AHP projects serve local housing needs, each FHLBank is
                                                       advised by a 15-member Affordable Housing Advisory Council.50 OIG is
                                                       currently conducting an evaluation of FHFA’s Oversight of AHP.

                                                       Community Investment Program
                                                       Each FHLBank also operates a Community Investment Program (CIP) that
                                                       offers below market rate loans to members in need of long-term financing for
                                                       housing and economic development that benefits low- and moderate-income
                                                       families and neighborhoods. Members use CIP to fund owner-occupied and
                                                       rental housing; construct roads, bridges, retail stores, and sewage treatment
                                                       plants; and provide small business loans.51

                                                       Economic Community Development Programs
                                                       The FHLBanks also offer long-term advances at below market interest rates
                                                       through Community Investment Cash Advance (CICA) programs. CICA
                                                       programs provide financing for economic development projects. CICA
                                                       lending is targeted to specific beneficiaries that include small businesses and
                                                       certain geographic areas.


 92 |   Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                               SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




Each FHLBank has a Community Lending Plan that describes its program
objectives for economic development. Additionally, several of the FHLBanks
operate other voluntary programs for affordable housing, small business
lending, foreclosure prevention, and financial literacy.52

FHLBANK SYSTEM RISKS AND THEIR MANAGEMENT
The FHLBanks, like other financial institutions, face risks related to business
operations. The following provides an overview of major risk categories
and how the FHLBanks mitigate these risks. Credit risks, interest rate
risks, operational risks, and housing and “image” risks are the primary risks
encountered by the FHLBanks.

Credit Risks
Credit risk relates to the possibility that borrowers will fail to meet their
obligations in accordance with agreed terms (e.g., that they will default on
their loans).53 The FHLBanks face credit risks to varying degrees related to
their advances, unsecured credit extensions, private-label MBS, and whole
mortgages, and they have a variety of options available to mitigate the risks.

Advances
The credit risk associated with advances is that a member financial institution
will fail or otherwise default on an advance from an FHLBank. The potential
exists that such a failure or default could result in the FHLBank incurring a
loss on the advance.54 FHFA has stated that the credit risks associated with
advances, although generally viewed as low, have increased over the past few
years due to the weakening financial condition of many FHLBank member
institutions.55

The FHLBanks primarily manage the credit risks associated with advances
by monitoring their members’ financial health and through collateral
requirements. FHLBank members are required to fully secure all advances
with eligible collateral,56 which include: (1) residential mortgage loans (the
principal form of collateral),57 (2) cash deposits held by the FHLBanks, (3)
Treasury and agency securities, and (4) “other real estate related” collateral.58
Additionally, the FHLBanks apply a percentage discount to the market value of
collateral used to secure an advance; this practice is known as a “haircut.”59 An
FHLBank might apply a haircut of 25% to an advance secured by investment
grade securities, which means the advance would have a value equal to only
75% of the collateral. By this procedure, the FHLBanks can ensure that the
value of their collateral exceeds the value of their advances and that there will
be sufficient collateral available to offset any potential losses associated with a
member’s default on an advance.60

The FHLBanks use a variety of other means to mitigate the credit risks
associated with advances. For example, each FHLBank establishes an


                                                        Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges   | 93
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                         overall credit limit for borrowers designed to mitigate the FHLBank’s credit
                                                         exposure.61 The FHLBanks may also require a troubled member to list or
Delivery Collateral:
                                                         deliver collateral to a third party to ensure it is available in the event it were
The most stringent collateral status used
                                                         to fail or default on its outstanding advances.62
for securing advances. Under it, the
FHLBanks require the member bank to                      Additionally, if an FHLBank member institution fails, the FHLBanks have
deliver collateral to them or to a third-party           a first lien on the member’s assets. Therefore, the banks have priority over
custodian. It allows the FHLBank to have                 all other creditors, including the FDIC, to obtain the collateral necessary to
greater control of the collateral.                       protect against losses on outstanding advances. Typically in a bank failure, the
                                                         FDIC pays off outstanding FHLBank advances in full then takes possession
                                                         of the collateral on the institution’s books to help offset its losses.63

                                                         According to FHFA, no FHLBank has ever suffered a loss on an advance.64
The featured report is available at                      However, in June 2012, OIG issued an audit assessing FHFA’s oversight of
www.fhfaoig.gov/Content/Files/AUD-2012-004.              the FHLBanks’ advances and recommended improvements in the Agency’s
pdf.                                                     related oversight framework.65

                                                         Unsecured Loans
                                                         Unsecured loans, such as short-term loans to domestic or foreign lenders,
                                                         are generally viewed as having higher credit risks than advances because they
                                                         are not backed by collateral.66 However, the short-term nature of unsecured
                                                         lending helps to mitigate the credit risk. Further, the FHLBanks’ unsecured
                                                         loans are generally made only to highly rated private institutions (i.e.,
                                                         institutions rated at the “A” level or above). The FHLBanks also mitigate
                                                         risks by periodically reviewing borrowers and adjusting limits on borrower
                                                         exposure.67
The featured report is available at                      As discussed in Section 3, OIG recently issued an evaluation report that raised
www.fhfaoig.gov/Content/Files/EVL-2012-                  questions about the FHLBanks’ extensions of unsecured credit primarily to
005_1_0.pdf.                                             European banks in 2010 and 2011. The report recommended that FHFA
                                                         take steps to strengthen its oversight process and the regulatory framework
                                                         for such unsecured credit extensions.68

                                                         Private-Label MBS
                                                         The credit risk associated with private-label MBS is that the underlying
                                                         mortgages that support such securities will default and result in a loss. As
                                                         discussed later in this section, several FHLBanks’ investments in private-label
                                                         MBS generated substantial losses in recent years.69 To mitigate such risks,
                                                         FHFA regulations place limits on the FHLBanks’ overall investments in
                                                         MBS to 300% of its regulatory capital. However, FHFA stated it will revisit
                                                         the 300% ceiling in a future rulemaking.70

                                                         Whole Mortgages
                                                         As is the case with other mortgage assets, the credit risk associated with the
                                                         FHLBanks’ whole mortgages is that borrowers will default on such mortgages.



  94 |    Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                                SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




This risk is mitigated by insurance and other credit enhancements. For example,
member institutions obtain mortgage insurance for the mortgages they sell
to the FHLBanks. Further, according to FHFA, the FHLBanks’ mortgage
holdings have fixed rates and are well seasoned, soundly underwritten, and
supported by qualified borrowers.71

Interest Rate Risks
Interest rate risk refers to how changes in interest rates may have an adverse
effect on an institution’s financial condition.72 As stated above, FHLBank
operations (e.g., advances and unsecured lending) are typically funded through
debt issuances (i.e., bonds or discount notes). In other words, the FHLBanks
borrow at one rate and may lend at another. Thus, depending on the terms of
these transactions (i.e., maturity and yield), interest rate risk can be significant.

Prepayment offers a helpful illustration of this risk. Prepayments represent
risk because they can lower the FHLBanks’ expected revenues from their
various asset classes, while their costs of operation remain flat or increase.73

Advances
Prepayments of advances can lead to lower net returns if the prepayments are
reinvested in assets yielding lower returns. Further, the risk can be particularly
acute if an advance was financed by a higher-cost debt.74

Charging members a prepayment fee is one way the FHLBanks mitigate this
risk. Because the FHLBanks would likely experience lower net returns due
to prepayments, prepayment fees compensate for such losses, easing financial
burdens. The FHLBanks also offer advances that a member may prepay
without a fee. These advances are financed with instruments such as callable
debt.75 Callable debt allows an FHLBank, as the issuer, to buy back the debt
when interest rates decline and prepayments are likely to increase.76

MBS and Whole Mortgage Loans
Mortgage-related investments such as MBS and mortgage loans are also
affected by prepayments. Because single-family mortgages routinely include
prepayment options, interest rate changes – particularly decreasing interest
rates – often stimulate prepayments.77

Mitigation of interest rate risk includes FHFA regulations governing the
types of MBS the FHLBanks may own. Other mitigation methods include
funding mortgage-related investments with callable debt.78

Operational Risks
Operational risks occur due to potential losses from systems and people.
According to FHFA’s Oversight of Troubled Federal Home Loan Banks,



                                                         Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges   | 95
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        operational risks can include poor collateral risk management, flaws in the
                                                        institution’s information technology systems, and weak corporate governance.79

Internal Controls:                                      The FHLBanks rely on business and financial models to manage financial
Internal controls are an integral component             risks and assist in making business decisions. Each FHLBank uses different
of an organization’s management that                    models and assumptions to determine fair values of assets, liabilities, and
provide reasonable assurance that the                   derivatives. Models use assumptions to project future trends and performance,
following objectives are achieved: (1)                  and any changes in the models’ underlying assumptions can cause the results
effectiveness and efficiency of operations,             to be materially different. Therefore, the reliability of an FHLBank’s models is
(2) reliability of financial reports, and (3)           key to making good business decisions and, thus, represents operational risk.80
compliance with applicable laws and
regulations. Internal controls relate to
                                                        The FHLBanks’ significant reliance on information systems could have severe
management’s plans, methods, and
                                                        effects on their ability to effectively conduct business if an interruption or
procedures used to meet its mission,
                                                        failure occurs. In addition, failures in their financial reporting controls and
goals, and objectives and include the                   procedures could adversely affect the accuracy of information reported in the
processes and procedures for planning,                  FHLBanks’ financial reports.81
organizing, directing, and controlling
                                                        The FHLBanks mitigate operational risk by, among other means, internal
program operations as well as the systems
                                                        controls and continuity plans and resources. Internal controls are a major
for measuring, reporting, and monitoring
                                                        technique used to detect and prevent operational issues. Each FHLBank has
program performance.
                                                        a business continuity plan and a backup location that is regularly evaluated by
                                                        examiners.82

                                                        Housing and “Image” Risks
                                                        The FHLBanks’ core mission activities include advances; non-core mission
                                                        activities include investing in unsecured credit, private-label MBS, and MBS.83
                                                        A significant investment in these non-core areas exposes the FHLBanks to
                                                        housing mission and “image” risks84 and can impair their reputation. This
                                                        risk is somewhat mitigated by a regulatory limit on investments in MBS (i.e.,
                                                        300% of regulatory capital). However, no such ceiling controls unsecured
                                                        lending.

                                                        FHFA’S FHLBANK SYSTEM SAFETY, SOUNDNESS, AND MISSION
                                                        OVERSIGHT ACTIVITIES
                                                        To carry out its responsibilities with respect to the FHLBanks, FHFA may
                                                        issue regulations, establish capital standards, and conduct on-site safety and
                                                        soundness or mission-related examinations. FHFA may also take enforcement
                                                        actions, such as issuing cease and desist orders, or may place an FHLBank into
                                                        conservatorship or receivership if it becomes undercapitalized or critically
                                                        undercapitalized.85

                                                        FHFA issues regulatory guidance designed to ensure sufficient liquidity and
                                                        to protect against temporary disruptions in the capital markets that affect
                                                        the FHLBanks’ access to funding.86 The prompt corrective action provisions
                                                        under HERA allow FHFA to determine each FHLBank’s capital classification
                                                        on at least a quarterly basis. If an FHLBank is determined to be other


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                                                               SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




than adequately capitalized, that FHLBank becomes subject to additional
supervisory authority by FHFA.87 If FHFA determines an FHLBank is unable
to satisfy its repayment obligations, FHFA has the authority to liquidate or
reorganize the FHLBank. The outstanding liabilities can then be allocated
among the remaining FHLBanks in proportion to their participation in all
consolidated obligations outstanding.88

FHFA’s Division of FHLBank Regulation (DBR) is primarily responsible for
ensuring that the FHLBanks operate in a financially safe and sound manner,
remain adequately capitalized, raise funds in the capital markets, and operate
in a manner consistent with their housing finance mission.89 DBR oversees
and directs all FHLBank examination activities, develops examination
findings, and prepares reports of examination.90

DBR receives support from other FHFA offices. FHFA’s Division of
Examination Programs and Support is responsible for: (1) supporting
FHFA examination activities, (2) developing and maintaining a consistent
examination program, (3) developing examination policy, and (4) developing
and providing FHLBank examiner training.91 Additionally, OGC advises
and supports FHFA on legal matters related to the functions, activities,
and operations of FHFA and the GSEs. OGC also supports supervision
functions, regulation writing, and enforcement actions when warranted.92

FHLBANKS AND THE ENTERPRISES
Although the FHLBanks and the Enterprises are both classified as housing
GSEs, there are substantial differences in terms of their structure and operations.
For example, each FHLBank is a cooperative with its stock held by member
institutions. In contrast, the Enterprises are corporations owned by investors
including Treasury. The FHLBanks’ primary means of facilitating housing
finance is to make advances directly to their member financial institutions.
Whereas, the Enterprises facilitate liquidity in the housing finance system by
purchasing mortgages directly from lenders and either holding them in their
portfolios or securitizing them. Figure 24 (see page 98) illustrates these and
other differences between the FHLBank System and the Enterprises.




                                                        Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges   | 97
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                            Figure 24. Comparison of the FHLBanks and the Enterprises

                                                 FHLBanks                                                                 The Enterprises

 Structure        •• E ach FHLBank is privately owned by its members in a cooperative        •• S hareholder-owned companies that operate under congressional
                      structure.93                                                                charter.98
                  •• M
                      embers of an FHLBank must purchase capital stock in their region’s     •• E ach Enterprise was placed into conservatorship on September 6,
                     FHLBank and the stock is not publicly traded.94                              2008, and each organization has received capital support under the
                  •• F HLBank stock is purchased at the stated par value of $100 per             PSPAs since September 2008.99
                      share.95
                  •• Stock may be redeemed or repurchased at its stated par value.96
                  •• T he Office of Finance issues debt on behalf of the FHLBanks. The
                      FHLBanks are jointly and severally liable for their obligations.97


 Governance       •• E ach FHLBank has its own board of directors, comprised of members      •• T he Enterprises’ boards have a minimum of 9 and no more than 13
                      of that FHLBank and independent (non-member) directors.100                  directors.102
                  •• B
                      y statute, two-fifths of the directors must be independent and at      •• A s a result of conservatorship, FHFA immediately succeeded to all
                     least two of those directors must be public interest directors with at       rights, titles, powers, and privileges of the Enterprises and of any
                     least four years of experience in representing community or consumer         officers and directors of the Enterprises.103
                     interests.101                                                            •• T he board of directors no longer has the power or duty to manage,
                                                                                                  direct, or oversee the business and affairs of the Enterprises without
                                                                                                  approval from FHFA.104


 Primary          •• T he FHLBanks provide members with short- and long-term funding         •• T he Enterprises provide a secondary market for conventional
 Business             through advances, which may be used for mortgage lending and other          conforming mortgage loans.106
 Operations           purposes.105                                                            •• T he Enterprises buy mortgages from lenders and either hold these
                                                                                                  mortgages in their portfolios or package them into MBS that are sold
                                                                                                  to the public.107
                                                                                              •• L enders use the cash raised by selling mortgages to the Enterprises to
                                                                                                  engage in further lending.108
                                                                                              •• T he Enterprises’ purchases help ensure a continuous, stable supply of
                                                                                                  mortgage money.109


 Housing          •• T he FHLBanks contribute 10% of their net income to affordable          •• H
                                                                                                  ERA requires that FHFA establish for the Enterprises four single-
 Mission              housing through AHP.110                                                    family housing goals, one multifamily special affordable housing goal,
                  •• T he FHLBanks operate a CIP that offers below market rate loans to         and requirements relating to multifamily housing for very low-income
                      members in need of long-term financing for housing and economic            families.113
                      development that benefits low- and moderate-income families and         •• T hree of the single-family housing goals target purchase money
                      neighborhoods.111                                                           mortgages for: (1) low-income families, (2) very low-income families,
                  •• T he FHLBanks offer long-term advances at below market interest             and (3) families that reside in low-income areas. The single-family
                      rates through CICA programs that target economic development                housing goals also include one that targets refinancing mortgages for
                      activities.112                                                              low-income families.114
                                                                                              •• T he multifamily special affordable housing goal targets multifamily
                                                                                                  rental housing affordable to low-income families. The multifamily
                                                                                                  special affordable housing subgoal targets multifamily rental housing
                                                                                                  affordable to very low-income families.115
                                                                                              •• T he Enterprises are also required to serve three underserved
                                                                                                  markets including: (1) manufactured housing, (2) affordable housing
                                                                                                  preservation, and (3) rural areas by developing loan products and
                                                                                                  flexible underwriting guidelines to facilitate a secondary market for
                                                                                                  mortgages for very low-, low-, and moderate-income families in those
                                                                                                  markets.116




 98 |   Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                                                                  SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




CURRENT RISKS AND CHALLENGES FACING THE FHLBANK SYSTEM
AND FHFA
The Agency, OIG, and others have identified a number of challenges facing
the FHLBank System and FHFA. These include: housing boom era private-
label MBS investments, declining member advances, large non-core mission
asset portfolios, increasing advances to insurance companies, and significant
advance concentrations. The FHLBank System is also challenged by a
proposal that may involve substantial changes to the current business models
of several FHLBanks. The following summarizes these challenges.

Managing Losses Associated with Housing Boom Era Private-Label
MBS Investments
From 2005 through 2007, several FHLBanks made substantial investments in
private-label MBS because these securities offered higher returns than other
investments in their portfolios.117 During those years, private-label MBS
were highly rated by credit rating agencies.118

Gains and losses on private-label MBS are dependent on the level and direction
of housing prices.119 Accordingly, when the housing market collapsed, the
FHLBanks suffered significant losses on these investments, and they continue
to suffer losses in their investment portfolios.120 Four of the FHLBanks, with
which FHFA has had supervisory concerns, collectively lost approximately $2
billion on their private-label MBS investments in 2009 and 2010, as shown
in Figure 25 (see below).


             Figure 25. Four FHLBanks’ Losses on Private-Label MBS Investments
                                 2009 and 2010 ($ millions)

            FHLBank                          2009                             2010                             Total
  Boston                                      $444                              $85                             $529
  Pittsburgh                                    229                             158                               387
  Chicago                                       437                             163                               600
  Seattle                                       311                             106                               417
  Total                                     $1,421                             $512                           $1,933

Sources: Federal Home Loan Bank of Boston, Form 10-K for the Fiscal Year Ended December 31, 2010, at 52 (online at www.
sec.gov/Archives/edgar/data/1331463/000133146311000046/fhlbboston2010123110k.htm) (accessed Aug. 9, 2012);
Federal Home Loan Bank of Pittsburgh, Form 10-K for the Fiscal Year Ended December 31, 2010, at 34 (online at www.sec.
gov/Archives/edgar/data/1330399/000144530511000445/fhlbpit2010123110k.htm) (accessed Aug. 9, 2012); Federal
Home Loan Bank of Chicago, Form 10-K for the Fiscal Year Ended December 31, 2010, at 30 (online at www.sec.gov/
Archives/edgar/data/1331451/000133145111000053/fhlbchi2010123110k.htm) (accessed Aug. 9, 2012); Federal Home
Loan Bank of Seattle, Form 10-K for the Fiscal Year Ended December 31, 2010, at 80 (online at www.sec.gov/Archives/edgar/
data/1329701/000132970111000064/seattle1231201010k.htm) (accessed Aug. 9, 2012).




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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                       As illustrated in Figure 26 (see below), the FHLBanks experienced losses
                                                       of $616 million on private-label MBS during the first six months of 2011.
                                                       In contrast, through the first six months of 2012, the situation improved
                                                       significantly as private-label MBS losses declined to $86 million.121 However,
                                                       as of June 30, 2012, the fair value of the FHLBanks’ private-label MBS
                                                       holdings hovered above $26 billion,122 and these investments continue to be
                                                       susceptible to deterioration in the housing market. Thus, the FHLBanks are
                                                       at risk of further losses on their private-label MBS investments.123

                                                                              Figure 26. Losses on Private-Label MBS Investments
                                                                         for the Six Months Ended June 30, 2011 and 2012 ($ millions)

                                                                   FHLBank                           2011                            2012                             Total
                                                         San Francisco                               $272                               $30                            $302
                                                         Atlanta                                        89                               15                             104
                                                         Seattle                                        88                                 6                              94
                                                         Boston                                         66                                 5                              71
                                                         Chicago                                        43                               15                               58
                                                         Pittsburgh                                     31                               10                               41
                                                         Indianapolis                                   21                                 3                              24
                                                         Dallas                                           4                                -                               4
                                                         Topeka                                           2                                1                               3
                                                         New York                                         -                                1                               1
                                                         Total                                       $616                               $86                            $702


                                                       Source: Federal Home Loan Banks, Combined Financial Report for the Quarterly Period Ended June 30, 2012, at F-68, F-69 (online at
                                                       www.fhlb-of.com/ofweb_userWeb/resources/12Q2end.pdf) (accessed Aug. 31, 2012).




                                                       Substantially Declining Advance Demand
                                                       As illustrated in Figure 27 (see page 101), member advances have declined by
                                                       more than half since 2008. The reduced demand for advances is attributed to:

                                                                  •	 the availability of lower-cost funding options (e.g., customer deposits);
                                                                  •	 the deterioration of the housing market beginning in 2008;
                                                                  •	 the increase in financial institution failures;
                                                                  •	 voluntary or forced consolidations; and
                                                                  •	 member withdrawals.124
                                                       As a result of these and other factors, the FHLBanks are earning less interest
                                                       income on member advances. Specifically, the FHLBanks reported interest
                                                       income from advances of just over $3 billion in 2011 compared to over $29
                                                       billion in 2008.125


 100 | Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                                                                    SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                Figure 27. FHLBanks’ Advances to Members 2008 Through 2011
                                         ($ billions)

  $1,200



  $1,000



    $800



    $600



    $400



    $200



       $0

                                Dec-08                       Dec-09                        Dec-10                       Dec-11


Sources: Federal Home Loan Banks, Quarterly Combined Financial Report for the Three Months Ended March 31, 2008, at 4 (online at
www.fhlb-of.com/ofweb_userWeb/resources/08q1end.pdf) (accessed Aug. 14, 2012); Federal Home Loan Banks, Quarterly Combined
Financial Report for the Six Months Ended June 30, 2008, at 4 (online at www.fhlb-of.com/ofweb_userWeb/resources/08q2end.pdf)
(accessed Aug. 14, 2012); Federal Home Loan Banks, Quarterly Combined Financial Report for the Nine Months Ended September
30, 2008, at 4 (online at www.fhlb-of.com/ofweb_userWeb/resources/08q3end.pdf) (accessed Aug. 14, 2012); Federal Home Loan
Banks, 2008 Combined Financial Report, at 48 (online at www.fhlb-of.com/ofweb_userWeb/resources/08yrend.pdf) (accessed Aug. 14,
2012); Federal Home Loan Banks, Quarterly Combined Financial Report for the Three Months Ended March 31, 2009, at 4 (online at
www.fhlb-of.com/ofweb_userWeb/resources/09q1end.pdf) (accessed Aug. 14, 2012); Federal Home Loan Banks, Quarterly Combined
Financial Report for the Six Months Ended June 30, 2009, at 4 (online at www.fhlb-of.com/ofweb_userWeb/resources/09q2end.pdf)
(accessed Aug. 14, 2012); Federal Home Loan Banks, Quarterly Combined Financial Report for the Nine Months Ended September 30,
2009, at 4 (online at www.fhlb-of.com/ofweb_userWeb/resources/09q3end.pdf) (accessed Aug. 14, 2012); Federal Home Loan Banks,
2009 Combined Financial Report, at 49 (online at www.fhlb-of.com/ofweb_userWeb/resources/09yrend.pdf) (accessed Aug. 14, 2012);
Federal Home Loan Banks, Quarterly Combined Financial Report for the Three Months Ended March 31, 2010, at 4 (online at www.fhlb-
of.com/ofweb_userWeb/resources/10q1end.pdf) (accessed Aug. 14, 2012); Federal Home Loan Banks, Quarterly Combined Financial
Report for the Six Months Ended June 30, 2010, at 4 (online at www.fhlb-of.com/ofweb_userWeb/resources/10q2end.pdf) (accessed
Aug. 14, 2012); Federal Home Loan Banks, Quarterly Combined Financial Report for the Nine Months Ended September 30, 2010, at 4
(online at www.fhlb-of.com/ofweb_userWeb/resources/10q3end.pdf) (accessed Aug. 14, 2012); Federal Home Loan Banks, Combined
Financial Report for the Year Ended December 31, 2010, at 36 (online at www.fhlb-of.com/ofweb_userWeb/resources/10yrend.pdf)
(accessed Aug. 14, 2012); Federal Home Loan Banks, Quarterly Combined Financial Report for the Three Months Ended March 31,
2011, at F-2 (online at www.fhlb-of.com/ofweb_userWeb/resources/11Q1end.pdf) (accessed Aug. 14, 2012); Federal Home Loan
Banks, Combined Financial Report for the Quarterly Period Ended June 30, 2011, at F-2 (online at www.fhlb-of.com/ofweb_userWeb/
resources/11Q2end.pdf) (accessed Aug. 14, 2012); Federal Home Loan Banks, Combined Financial Report for the Quarterly Period
Ended September 30, 2011, at F-2 (online at www.fhlb-of.com/ofweb_userWeb/resources/11Q3end.pdf) (accessed Aug. 14, 2012);
Federal Home Loan Banks, Combined Financial Report for the Year Ended December 31, 2011, at 34 (online at www.fhlb-of.com/
ofweb_userWeb/resources/11yrend.pdf) (accessed Aug. 14, 2012).




                                                                                       Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges   | 101
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                       Large Non-Core Mission Investment Portfolio and Advances to
                                                       Insurance Companies

                                                       Non-Core Investment Portfolio
                                                       To make up for declining advance demand, some FHLBanks made investments
                                                       that involve significant risks and were not clearly consistent with their housing
                                                       mission.126 From September 2008, when advances peaked, to December 31,
                                                       2011, the proportion of advances to total assets on the FHLBanks’ balance
                                                       sheets decreased from 71% to 55%.127 In contrast, during the same period of
                                                       time, the proportion of investments to total assets on the FHLBanks’ balance
                                                       sheets increased from 23% to 34%.128 These investments include non-core
                                                       mission assets, such as unsecured credit extensions, MBS, and private-label
                                                       MBS.

                                                       FHFA’s Acting Director has expressed concern about the high level of non-
                                                       core mission assets of certain FHLBanks. He has stated “…the FHLBanks’
                                                       various financial problems of the past 20 years have not come from the
                                                       traditional advance business. Instead, investments and mortgage purchase
                                                       programs have been the source of deterioration in the financial condition
                                                       of some FHLBanks .… [It] is not a sustainable operating condition for an
                                                       FHLBank” to have a large investment portfolio.129

                                                       Advances to Insurance Companies
                                                       Some FHLBanks have also sought to offset their declining advances to banks
                                                       and other traditional members by increasing lending to insurance companies.
                                                       Specifically, advances to insurance companies have increased from 3% of total
                                                       advances in 2007 to 13% of total advances in 2011, as shown in Figures 28a
                                                       and 28b (see page 103).

                                                       Although FHLBank advances to insurance companies are permitted,
                                                       they present risks to the FHLBank System that are distinct from risks
                                                       associated with other members. For example, when a failed member bank
                                                       has outstanding FHLBank advances, the FDIC generally is responsible for
                                                       resolving the member’s obligations. To resolve the obligations, the FDIC
                                                       repays the advances in order to obtain clear title to the assets securing the
                                                       advances.130 Conversely, the FDIC does not cover the obligations of failed
                                                       insurance companies.131 Therefore, member advances to a failed insurance
                                                       company will only be covered to the extent the assigned collateral is sufficient
                                                       or state insurance guarantee funds make up the difference.

                                                       FHFA has recognized these risks and has prioritized them in the oversight
                                                       process. OIG has an ongoing survey that is assessing the effectiveness of this
                                                       oversight.




 102 | Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                                                                  SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




      Figure 28a. 2007 FHLBank System                                      Figure 28b. 2011 FHLBank System
          Advances by Member Type                                              Advances by Member Type

                           3%
                                                                                                 13%

                                                                                  Commercial Banks                                           Commercial Banks
      40%
                                                                               24%
                                                   53%                           Credit Unions                                               Credit Unions
                                                                                                                            57%

                                                                                  Thrifts                                                    Thrifts
                                                                                            6%
                      4%
                                                                                  Insurance Companies                                        Insurance Companies




Sources: Federal Home Loan Banks, 2007 Combined Financial Report, at 114 (online at www.fhlb-of.com/ofweb_userWeb/
resources/07yrend.pdf) (accessed Aug. 20, 2012); Federal Home Loan Banks, Combined Financial Report for the Year Ended December
31, 2011, at 42 (online at www.fhlb-of.com/ofweb_userWeb/resources/11yrend.pdf) (accessed Aug. 20, 2012).



Advance Concentration Risk
As illustrated in Figure 29 (see page 104), several of the FHLBanks have
a large percentage of their member advances confined to a relatively small
percentage of members; this creates a concentration of risk. The withdrawal or
failure of one or more of these members could negatively affect an FHLBank
by significantly reducing its net interest income on advances. In addition,
failure of one or more members could cause large losses to an FHLBank if its
advances are not properly collateralized.132




                                                                                     Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges   | 103
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                                  Figure 29. 2011 FHLBanks’ Advances to Their Top Five Members as a
                                                                                     Percentage of Total Advances

                                                         80%


                                                         70%
                                                                                                                                                                       73%
                                                                                                                                                                70%
                                                                                                                                                       68%
                                                         60%


                                                         50%                                                                          56%     57%
                                                                                                                             55%
                                                                                                                     51%
                                                                                                            49%
                                                                                                  48%
                                                         40%
                                                                                         44%

                                                         30%                 35%

                                                                    30%
                                                         20%


                                                         10%


                                                          0%
                                                                    s


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                                                      Sources: Federal Home Loan Banks, Combined Financial Report for the Year Ended December 31, 2011, at 44, 45 (online at www.
                                                      fhlb-of.com/ofweb_userWeb/resources/11yrend.pdf) (accessed Aug. 20, 2012); Federal Home Loan Bank of Seattle, Form 10-K for
                                                      the Fiscal Year Ended December 31, 2011, at 9, 13 (online at www.sec.gov/Archives/edgar/data/1329701/000132970112000049/
                                                      seattle1231201110k.htm) (accessed Oct. 18, 2012).


                                                       Proposals by the Administration That Would Significantly Alter Some
                                                       FHLBanks’ Current Business Models
                                                       On February 11, 2011, Treasury and HUD jointly issued a report to Congress
                                                       on the future of housing finance, Reforming America’s Housing Finance Market
                                                       (the Plan), which outlines the Administration’s position on reforming the U.S.
                                                       housing finance market.

                                                       As with the Enterprises, the Plan proposes that the FHLBanks reduce
                                                       the sizes of their investment portfolios and reorient themselves toward the
                                                       core mission of providing readily available funding to FHLBank member
                                                       institutions. Accordingly, the Plan advocates limiting levels of advances in
                                                       order to focus FHLBank resources on small- and medium-sized financial
                                                       institutions.133

                                                       The Plan is intended to strengthen the FHLBank System, but OIG notes that
                                                       it may present substantial challenges to certain FHLBanks in the short- to
                                                       medium-term. As stated earlier, many FHLBanks have significant advance
                                                       concentrations with large members and, therefore, they depend on them for a
                                                       significant portion of their advance revenues. Further, investment portfolios
                                                       may comprise 50% or more of some FHLBanks’ total assets.

                                                       Accomplishing the Plan’s objectives would likely involve substantially
                                                       downsizing and reorienting certain FHLBanks’ current asset portfolios.134


 104 | Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
                                                             SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




FHFA has also stated that it may be necessary to merge certain FHLBanks to
strengthen the FHLBank System.135 FHFA and the FHLBanks would likely
face substantial challenges in managing the transition to such a structure, and
it is not clear how these changes would be accomplished.

OUTLOOK
The outlook for the FHLBank System is uncertain as reduced demand for
member advances, investments in risky non-core mission activities, and other
factors challenge the economic viability of the FHLBanks. The FHLBanks
have a role in the future of the housing finance system, but they need to
focus on their core business and improve their business models to operate in
profitable and sustainable manners.136




                                                    Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges   | 105
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 106 | Section 5: An Overview of the FHLBank System’s Structure, Operations, and Challenges
appendices
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                             Appendix A: Glossary and Acronyms
                                             GLOSSARY OF TERMS
                                             Alternative A: A classification of mortgages in which the risk profile
                                             falls between prime and subprime. Alternative A mortgages are generally
                                             considered higher risk than prime due to factors that may include higher
                                             loan-to-value and debt-to-income ratios or limited documentation of the
                                             borrower’s income.

                                             Bankruptcy: A legal procedure for resolving debt problems of individuals
                                             and businesses; specifically, a case filed under one of the chapters of Title 11
                                             of the U.S. Code.

                                             Basis Points: Refers to hundredths of 1 percentage point. For example, 1
                                             basis point is equivalent to 1/100 of 1 percentage point.

                                             Bonds: Obligations by a borrower to eventually repay money obtained from
                                             a lender. The bondholder buying the investment is entitled to receive both
                                             principal and interest payments from the borrower.

                                             Capitalization: In the context of bank supervision, capitalization refers
                                             to the funds a bank holds as a buffer against unexpected losses. It includes
                                             shareholders’ equity, loss reserves, and retained earnings. Bank capitalization
                                             plays a critical role in the safety and soundness of individual banks and
                                             the banking system. In most cases, federal regulators set requirements for
                                             adequate bank capitalization.

                                             Certificate of Deposit: A certificate of deposit is a relatively low-risk
                                             investment in a special deposit account with a bank or thrift institution.
                                             Investors commit a fixed sum of money for a fixed period of time ‒ six months,
                                             one year, five years, or more. A certificate of deposit typically offers a higher
                                             rate of interest than a regular savings account. Interest is paid at regular
                                             intervals by the issuing bank, and when the deposit matures, the investor
                                             receives the original investment amount plus accrued interest. If the deposit
                                             is redeemed prior to the maturity date, there may be penalties associated with
                                             early withdrawal.

                                             Class A Stock: Common stock issued by the FHLBanks to member
                                             institutions at a stated par value of $100 per share. Class A stock is redeemable
                                             by members at par value with six months written notice.

                                             Class B Stock: Common stock issued by the FHLBanks to member
                                             institutions at a stated par value of $100 per share. Class B stock is redeemable
                                             by members at par value with five years written notice.

                                             Collateral: Assets used as security for a loan that can be seized by the lender
                                             if the borrower fails to repay the loan.



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Commercial Banks: Commercial banks are establishments primarily
engaged in accepting demand and other deposits and making commercial,
industrial, and consumer loans. Commercial banks provide significant services
in originating, servicing, and enhancing the liquidity and quality of credit that
is ultimately funded elsewhere.

Community Development Financial Institutions: A specialized financial
institution that works in market niches that are underserved by traditional
financial institutions. Community development financial institutions
provide a unique range of financial products and services in economically
distressed target markets, such as mortgage financing for low-income and
first-time homebuyers and not-for-profit developers; flexible underwriting
and risk capital for needed community facilities; and technical assistance,
commercial loans, and investments to small start-up or expanding businesses
in low-income areas. Community development financial institutions include
regulated institutions such as community development banks and credit
unions and non-regulated institutions such as loan and venture capital funds.

Conservatorship: Conservatorship is a legal procedure for the management
of financial institutions for an interim period during which the institution’s
conservator assumes responsibility for operating the institution and
conserving its assets. Under the Housing and Economic Recovery Act of
2008, the Enterprises entered into conservatorships overseen by FHFA. As
conservator, FHFA has undertaken to preserve and conserve the assets of
the Enterprises and restore them to safety and soundness. FHFA also has
assumed the powers of the boards of directors, officers, and shareholders;
however, the day-to-day operational decision making of each company is still
with the Enterprises’ existing management.

Conventional Conforming Mortgage Loans: Mortgages that are not insured
or guaranteed by the Federal Housing Administration, the Department of
Veterans Affairs, or the Department of Agriculture and that meet the Enterprises’
underwriting standards. Conforming mortgage loans have original balances
below a specific threshold, published by FHFA, known as the “conforming loan
limit.” For 2012, the conforming loan limit is $417,000 for most areas of the
contiguous United States, although generally it can increase to a maximum of
$625,500 in specific higher-cost areas.

Credit Unions: Member-owned, not-for-profit financial cooperatives that
provide savings, credit, and other financial services to their members. Credit
unions pool their members’ savings deposits and shares to finance their own
loan portfolios rather than rely on outside capital. Members benefit from
higher returns on savings, lower rates on loans, and fewer fees on average.

Debarment: Disqualification of a firm or an individual from contracting
with the government or participating in government non-procurement




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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                             transactions for a specific period of time. The grounds for debarment include
                                             conviction for fraud or similar offenses.

                                             Default: Occurs when a mortgagor misses one or more payments.

                                             Delivery Collateral: The most stringent collateral status used for securing
                                             advances. Under it, the FHLBanks require the member bank to deliver
                                             collateral to them or to a third-party custodian. It allows the FHLBank to
                                             have greater control of the collateral.

                                             Derivatives: Securities whose value depends on that of another asset, such as
                                             a stock or bond. They may be used to hedge interest rate or other risks related
                                             to holding a mortgage.

                                             Discount Notes: Short-term obligations (debt instruments) issued at a
                                             discount from face value with maturities ranging from overnight to 360 days.
                                             Discount notes have no periodic interest payments; the investor receives the
                                             note’s face value at maturity.

                                             Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010:
                                             Legislation that intends to promote the financial stability of the United States
                                             by improving accountability and transparency in the financial system, ending
                                             “too big to fail,” protecting the American taxpayer by ending bailouts, and
                                             protecting consumers from abusive financial services practices.

                                             Emergency Economic Stabilization Act: A 2008 statute that authorizes
                                             Treasury to undertake specific measures to provide stability and prevent
                                             disruption in the financial system and the economy. It also provides funds to
                                             preserve homeownership.

                                             Eminent Domain: An exercise of the power of government or quasi-
                                             government agencies (such as airport authorities, highway commissions,
                                             community development agencies, and utility companies) to take private
                                             property for public use.

                                             Equity: In the context of residential mortgage finance, equity is the difference
                                             between the fair market value of the borrower’s home and the outstanding
                                             balance on the mortgage and any other debt secured by the home.

                                             Federal Funds: Extensions of unsecured credit between financial institutions
                                             that are generally made on an overnight basis.

                                             Federal Home Loan Banks: The FHLBanks are 12 regional cooperative
                                             banks that U.S. lending institutions use to finance housing and economic
                                             development in their communities. Created by Congress, the FHLBanks
                                             have been the largest source of funding for community lending for eight
                                             decades. The FHLBanks provide funding to other banks but not directly to
                                             individual borrowers.




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Federal Home Loan Mortgage Corporation: A federally chartered
corporation that purchases residential mortgages, securitizes them, and sells
them to investors; thus, Freddie Mac provides lenders with funds that can be
used to make loans to homebuyers.

Federal Housing Administration: Part of HUD, the Federal Housing
Administration insures residential mortgages made by approved lenders
against payment losses. It is the largest insurer of mortgages in the world,
insuring over 34 million properties since its inception in 1934.

Federal National Mortgage Association: A federally chartered corporation
that purchases residential mortgages and converts them into securities for sale
to investors; by purchasing mortgages, Fannie Mae supplies funds to lenders
so they may make loans to homebuyers.

Foreclosure: The legal process used by a lender to obtain possession of a
mortgaged property.

Government National Mortgage Association: A government-owned
corporation within HUD. Ginnie Mae guarantees investors the timely
payment of principal and interest on privately issued MBS backed by pools of
government-insured and government-guaranteed mortgages.

Government-Sponsored Enterprises: Business organizations chartered and
sponsored by the federal government.

Guarantee: A pledge to investors that the guarantor will bear the default risk
on a pool of loans or other collateral.

Hedging: The practice of taking an additional step, such as buying or selling
a derivative, to offset certain risks of holding a particular investment, such as
MBS.

Housing and Economic Recovery Act: HERA, enacted in 2008, establishes
OIG and FHFA, which oversee the GSEs’ operations. HERA also expands
Treasury’s authority to provide financial support to the GSEs.

Implied Guarantee: The assumption, prevalent in the financial markets, that
the federal government will cover Enterprise debt obligations.

Inspector General Act: Enacted in 1978, this statute authorizes establishment
of offices of inspectors general, “independent and objective units” within
federal agencies, that: (1) conduct and supervise audits and investigations
relating to the programs and operations of their agencies; (2) provide
leadership and coordination and recommend policies for activities designed
to promote economy, efficiency, and effectiveness in the administration of
agency programs and to prevent and detect fraud, waste, or abuse in such
programs and operations; and (3) provide a means for keeping the head of
the agency and Congress fully and currently informed about problems and



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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                             deficiencies relating to the administration of such programs and operations
                                             and the necessity for and progress of corrective action.

                                             Inspector General Reform Act: Enacted in 2008, this statute amends the
                                             Inspector General Act to enhance the independence of inspectors general and
                                             to create the Council of the Inspectors General on Integrity and Efficiency.

                                             Insurance Companies: A company whose primary and predominant
                                             business activity is the writing of insurance and issuing or underwriting
                                             “covered products.”

                                             Internal Controls: Internal controls are an integral component of an
                                             organization’s management that provide reasonable assurance that the
                                             following objectives are achieved: (1) effectiveness and efficiency of operations,
                                             (2) reliability of financial reports, and (3) compliance with applicable laws and
                                             regulations. Internal controls relate to management’s plans, methods, and
                                             procedures used to meet its mission, goals, and objectives and include the
                                             processes and procedures for planning, organizing, directing, and controlling
                                             program operations as well as the systems for measuring, reporting, and
                                             monitoring program performance.

                                             Joint and Several Liability: The concept of joint and several liability provides
                                             that each obligor in a group is responsible for the debts of all in that group. In
                                             the case of the FHLBanks, if any individual FHLBank were unable to pay a
                                             creditor, the other 11 – or any 1 or more of them – would be required to step
                                             in and cover that debt.

                                             Lien: The lender’s right to have a specific piece of the debtor’s property sold if
                                             the debt is not repaid. With respect to residential mortgages, the noteholder
                                             retains a lien on the house (as evidenced by the mortgage or deed of trust)
                                             until the loan is repaid.

                                             Mortgage-Backed Securities: MBS are debt securities that represent
                                             interests in the cash flows – anticipated principal and interest payments –
                                             from pools of mortgage loans, most commonly on residential property.

                                             Operational Risk: Exposure to loss resulting from inadequate or failed
                                             internal processes, people, and systems or from external events (including
                                             legal events).

                                             Par Value: The face value of a security.

                                             Personally Identifiable Information: Information that can be used to
                                             identify an individual, such as name, date of birth, social security number, or
                                             address.

                                             Preferred Stock: A security that usually pays a fixed dividend and gives the
                                             holder a claim on corporate earnings and assets superior to that of holders
                                             of common stock but inferior to that of investors in the corporation’s debt
                                             securities.


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Principal Reduction: A write down or forgiveness of a borrower’s principal
balance, in part or whole.

Private-Label Mortgage-Backed Securities: MBS derived from mortgage
loan pools assembled by entities other than GSEs or federal government
agencies. They do not carry an explicit or implicit government guarantee, and
the private-label MBS investor bears the risk of losses on its investment.

Real Estate Owned: Foreclosed homes owned by government agencies or
financial institutions, such as the Enterprises or real estate investors. REO
homes represent collateral seized to satisfy unpaid mortgage loans. The
investor or its representative then must sell the property on its own.

Securitization: A process whereby a financial institution assembles pools of
income-producing assets (such as loans) and then sells an interest in the assets’
cash flows as securities to investors.

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 Treasury concerning a variety of significant business activities,
capital stock issuance, dividend payments, ending the conservatorships,
transferring assets, and awarding executive compensation.

Servicer: Servicers act as intermediaries between mortgage borrowers and
owners of the loans, such as the Enterprises or MBS investors. They collect
the homeowners’ mortgage payments, remit them to the owners of the loans,
maintain appropriate records, and address delinquencies or defaults on
behalf of the owners of the loans. For their services, they typically receive a
percentage of the unpaid principal balance of the mortgage loans they service.
The recent financial crisis has put more emphasis on servicers’ handling of
defaults, modifications, short sales, and foreclosures, in addition to their more
traditional duty of collecting and distributing monthly mortgage payments.

Short Sale: The sale of a mortgaged property for less than what is owed on
the mortgage.

Suspension: The temporary disqualification of a firm or individual from
contracting with the government or participating in government programs,
pending the outcome of an investigation or an indictment or based upon
adequate evidence that supports claims of program violations. A suspension
means that an individual or entity is immediately excluded from participating
in further federal executive branch procurement and non-procurement
programs. Suspension frequently leads to debarment.

Thrifts: A financial institution that ordinarily possesses the same depository,
credit, financial intermediary, and account transactional functions as a bank
but that is chiefly organized and primarily operates to promote savings and
home mortgage lending rather than commercial lending.


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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                             Underwater: Term used to describe situations in which the homeowner’s
                                             equity is below zero (i.e., the home is worth less than the balance of the
                                             loan(s) it secures).




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                                                                                      Appendix A: Glossary and Acronyms   | 115
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




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 116 |   Appendix A: Glossary and Acronyms
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filelegacydocs/er04_framewhite.pdf ) (accessed Sept. 10, 2012).

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                                                                                    Appendix A: Glossary and Acronyms   | 117
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                                             president-obama-s-plan-help-responsible-homeowners-and-heal-h).

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                                             Program, SIGTARP: Quarterly Report to Congress, at 150 (Oct. 26, 2010)
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Letter from David H. Stevens, Assistant Secretary of Housing, Department
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6, 2010) (online at www.hud.gov/offices/adm/hudclips/letters/mortgagee/
files/10-23ml.pdf ).

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(accessed Sept. 27, 2012).

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Program, SIGTARP: Quarterly Report to Congress, at 65 ( Jan. 26, 2011)
(online at www.sigtarp.gov/Quarterly%20Reports/January2011_Quarterly_
Report_to_Congress.pdf ).




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                                             ACRONYMS AND ABBREVIATIONS
                                             Abacus- Abacus Federal Savings        Enterprises- Fannie Mae and
                                             Bank                                  Freddie Mac

                                             ACB- Appalachian Community            EO- Executive Office
                                             Bank
                                                                                   Fannie Mae- Federal National
                                             Agency- Federal Housing Finance       Mortgage Association
                                             Agency
                                                                                   FBI- Federal Bureau of
                                             AHP- Affordable Housing Program       Investigation

                                             AMFS- American Mortgage Field         FDIC- Federal Deposit Insurance
                                             Services LLC                          Corporation

                                             AMS- American Mortgage                FDIC-OIG- Federal Deposit
                                             Specialists                           Insurance Corporation Office of
                                                                                   Inspector General
                                             Blue Book- Quality Standards for
                                             Inspection and Evaluation             FFETF- Financial Fraud
                                                                                   Enforcement Task Force
                                             BNC- BNC National Bank
                                                                                   FHFA- Federal Housing Finance
                                             BOA- Bank of America                  Agency
                                             CEO- Chief Executive Officer          FHLBanks- Federal Home Loan
                                             CICA- Community Investment            Banks
                                             Cash Advance                          FHLBank System- Federal Home
                                             CIGIE- Council of the Inspectors      Loan Bank System
                                             General on Integrity and Efficiency   FinCEN- Financial Crimes
                                             CIP- Community Investment             Enforcement Network
                                             Program                               Freddie Mac- Federal Home Loan
                                             CRS- Call Report System               Mortgage Corporation

                                             DBR- Division of FHLBank              GAO- United States Government
                                             Regulation                            Accountability Office

                                             DER- Division of Enterprise           Ginnie Mae- Government National
                                             Regulation                            Mortgage Association

                                             DOJ- United States Department of      GPH- GPH Investments LLC
                                             Justice                               GSEs- Government-Sponsored
                                             EESA- Emergency Economic              Enterprises
                                             Stabilization Act                     HAMP- Home Affordable
                                                                                   Modification Program



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HAMP PRA- Home Affordable            PCS- Permanent Change of Station
Modification Program Principal
Reduction Alternative                PII- Personally Identifiable
                                     Information
HERA- Housing and Economic
Recovery Act of 2008                 Plan- Reforming America’s
                                     Housing Finance Market
HUD- United States Department of
Housing and Urban Development        PSPAs- Senior Preferred Stock
                                     Purchase Agreements
HUD-OIG- United States
Department of Housing and Urban      Regal- Regal Title Company LLC
Development Office of Inspector      REO- Real Estate Owned
General
                                     RMBS- Residential Mortgage-
IRP- Independent Rights Party        Backed Securities
IRS-CI- Internal Revenue Service-    SCP- Suspended Counterparty
Criminal Investigation               Program
Loyalty- Loyalty Title Company       SEC- Securities and Exchange
LLC                                  Commission
MBS- Mortgage-Backed Securities      SIGTARP- Office of the Special
MSR- Mortgage Servicing Rights       Inspector General for the Troubled
                                     Asset Relief Program
MWLD- Mortgage Warehouse
Lending Division                     SORN- System of Records Notice

OA- Office of Audits                 TARP- Troubled Asset Relief
                                     Program
OAd- Office of Administration
                                     TBW- Taylor, Bean & Whitaker
OC- Office of Counsel                Mortgage Corporation

Ocala- Ocala Funding LLC             Treasury- United States
                                     Department of the Treasury
OE- Office of Evaluations
                                     21st Century- 21st Century Real
OGC- Office of General Counsel       Estate Investment Corporation
OI- Office of Investigations         USPIS- U.S. Postal Inspection
OIG- Federal Housing Finance         Service
Agency Office of Inspector General   Yellow Book- Government
Old Republic- Old Republic           Auditing Standards
National Title Insurance Company

OPOR- Office of Policy, Oversight,
and Review



                                                                                Appendix A: Glossary and Acronyms   | 121
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 122 |   Appendix A: Glossary and Acronyms
                                                                                        SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




Appendix B: Information Required by the
Inspector General Act
Section 5(a) of the Inspector General Act provides 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.

Below, OIG presents a table that directs the reader to the pages of this report
where the information required by the Inspector General Act may be found.

 Source/Requirement                                                                                  Pages

 Section 5(a)(1)- A description of significant problems, abuses, and deficiencies relating to         5-8
 the administration of programs and operations of FHFA.                                              38-53

 Section 5(a)(2)- A description of the recommendations for corrective action made by OIG             38-53
 with respect to significant problems, abuses, or deficiencies.                                      71-80

 Section 5(a)(3)- An identification of each significant recommendation described in previous     72, 73, 74, 77,
 semiannual reports on which corrective action has not been completed.                               78, 79

 Section 5(a)(4)- A summary of matters referred to prosecutive authorities and the
                                                                                                     53-63
 prosecutions and convictions that have resulted.

 Section 5(a)(5)- A summary of each report made to the Director of FHFA.                             38-53

 Section 5(a)(6)- A listing, subdivided according to subject matter, of each audit and
 evaluation report issued by OIG during the reporting period and for each report, where
 applicable, the total dollar value of questioned costs (including a separate category for the       38-53
 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.                                 38-53

 Section 5(a)(8)- Statistical tables showing the total number of audit and evaluation reports
                                                                                                     38-53
 and the total dollar value of questioned and unsupported costs.

 Section 5(a)(9)- Statistical tables showing the total number of audit and evaluation reports
                                                                                                      124
 and the dollar value of recommendations that funds be put to better use by management.

 Section 5(a)(10)- A summary of each audit and evaluation report issued before the
 commencement of the reporting period for which no management decision has been made                  124
 by the end of the reporting period.

 Section 5(a)(11)- A description and explanation of the reasons for any significant revised
                                                                                                      124
 management decision made during the reporting period.

 Section 5(a)(12)- Information concerning any significant management decision with which
                                                                                                      124
 the Inspector General is in disagreement.

 Section 5(a)(13)- The information described under section 05(b) of the Federal Financial
                                                                                                      125
 Management Improvement Act of 1996.




                                                                                                    Appendix B: Information Required by the Inspector General Act   | 123
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                      The paragraphs below further address the status of OIG’s compliance with
                                                      Sections 5(a)(9), (10), (11), (12), and (13) of the Inspector General Act.

                                                      AUDIT AND EVALUATION REPORTS WITH RECOMMENDATIONS THAT
                                                      FUNDS BE PUT TO BETTER USE BY MANAGEMENT
                                                      Section 5(a)(9) of the Inspector General Act, as amended, requires that OIG
                                                      disclose the dollar value of recommendations that funds be put to better use
                                                      by management in its reports. In Follow-up on Freddie Mac’s Loan Repurchase
                                                      Process (EVL-2012-007, September 13, 2012), OIG determined that, as a
                                                      result of Freddie Mac’s new loan review process, the Enterprise will realize
                                                      additional recoveries of approximately $1 billion (i.e., $0.8 billion to $1.2
                                                      billion) for loans selected for review in 2012. Total recoveries are estimated to
                                                      be approximately $2.8 billion (i.e., $2.2 billion to $3.4 billion). Because these
                                                      recoveries had not been anticipated and accounted for, the added income will
                                                      increase Freddie Mac’s profits and hence the amount paid to (or will reduce
                                                      its losses and hence the amount drawn from) Treasury. FHFA and OIG are
                                                      negotiating a mechanism and criteria to track Freddie Mac’s unaccounted
                                                      for recoveries, and OIG will monitor and report on them in subsequent
                                                      semiannual reports.

                                                      AUDIT AND EVALUATION REPORTS WITH NO MANAGEMENT DECISION
                                                      Section 5(a)(10) of the Inspector General Act, as amended, requires that OIG
                                                      report on each audit and evaluation report issued before the commencement of
                                                      the reporting period for which no management decision has been made by the
                                                      end of the reporting period. There were no audit or evaluation reports issued
                                                      before the beginning of the reporting period that are awaiting a management
                                                      decision.

                                                      SIGNIFICANTLY REVISED MANAGEMENT DECISIONS
                                                      Section 5(a)(11) of the Inspector General Act, as amended, requires that
                                                      OIG report information concerning the reasons for any significant revised
                                                      management decision made during the reporting period. During the six-
                                                      month reporting period ended September 30, 2012, there were no significant
                                                      revised management decisions on OIG’s audits and evaluations.

                                                      SIGNIFICANT MANAGEMENT DECISION WITH WHICH THE INSPECTOR
                                                      GENERAL DISAGREES
                                                      Section 5(a)(12) of the Inspector General Act, as amended, requires that
                                                      OIG report information concerning any significant management decision
                                                      with which the Inspector General is in disagreement. During the current
                                                      reporting period, there were no management decisions with which the
                                                      Inspector General disagreed.



 124 |   Appendix B: Information Required by the Inspector General Act
                                                          SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT OF 1996
The provisions of HERA require FHFA to implement and maintain financial
management systems that comply substantially with federal financial
management systems requirements, applicable federal accounting standards,
and the U.S Government Standard General Ledger at the transaction level.

For fiscal year 2011, FHFA received from GAO an unqualified (clean) audit
opinion on its annual financial statements and internal control over financial
reporting. GAO also reported that it identified no material weaknesses in
internal controls or instances of noncompliance with laws or regulations.
GAO is required to perform this audit in accordance with HERA.

Several OIG reports published during the semiannual period identified
specific opportunities to strengthen FHFA’s internal controls. These reports
are summarized on pages 38 through 53.




                                                                    Appendix B: Information Required by the Inspector General Act   | 125
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 126 |   Appendix B: Information Required by the Inspector General Act
                                                               SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




Appendix C: OIG Reports
See www.fhfaoig.gov for complete copies of OIG’s reports.

EVALUATION REPORTS
FHFA’s Oversight of Freddie Mac’s Investment in Inverse Floaters (EVL-2012-
009, September 26, 2012).

Evaluation of FHFA’s Oversight of Fannie Mae’s Transfer of Mortgage Servicing Rights
from Bank of America to High Touch Servicers (EVL-2012-008, September 18, 2012).

Follow-up on Freddie Mac’s Loan Repurchase Process (EVL-2012-007,
September 13, 2012).

FHFA’s Certifications for the Preferred Stock Purchase Agreements (EVL-2012-
006, August 23, 2012).

FHFA’s Oversight of the Federal Home Loan Banks’ Unsecured Credit Risk
Management Practices (EVL-2012-005, June 28, 2012).

AUDIT REPORTS
CliftonLarsonAllen LLP’s Audit of the Federal Housing Finance Agency’s Risk
Management Process for External Network Vulnerabilities (AUD-2012-010,
September 28, 2012).

CliftonLarsonAllen LLP’s Audit of FHFA’s Controls and Protocols over Sensitive
and Proprietary Information Collected and Exchanged with the Financial Stability
Oversight Council (AUD-2012-009, September 28, 2012).

FHFA’s Conservator Approval Process for Fannie Mae and Freddie Mac Business
Decisions (AUD-2012-008, September 27, 2012).

FHFA’s Oversight of the Enterprises’ Management of High-Risk Seller/Servicers
(AUD-2012-007, September 18, 2012).
FHFA’s Call Report System (AUD-2012-006, July 19, 2012).

FHFA’s Supervisory Risk Assessment for Single-Family Real Estate Owned (AUD-
2012-005, July 19, 2012).

FHFA’s Supervisory Framework for Federal Home Loan Banks’ Advances and
Collateral Risk Management (AUD-2012-004, June 1, 2012).

OTHER REPORTS
Overview of the Risks and Challenges the Enterprises Face in Managing Their
Inventories of Foreclosed Properties (WPR-2012-003, June 14, 2012).

Fannie Mae and Freddie Mac: Where the Taxpayers’ Money Went (WPR-2012-
002, May 24, 2012).


                                                                                              Appendix C: OIG Reports   | 127
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




Appendix D: 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




 128 |   Appendix D: OIG Organizational Chart
                                                                                                      SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




Appendix E: Enterprises’ Performance Metrics
                               Figure 30. The Enterprises’ Earnings and Profitability
                                      for the Six Months Ended June 30, 2012
                                                    ($ millions)

                  Earnings and Profitability                                 Fannie Mae                       Freddie Mac
     Mortgage Loans                                                            $        64,593                 $      38,810
     Investment Securities                                                                2,241                         5,715
     Other Interest Earning Assets                                                           121                            34
     Interest Expense on Debt Obligations                                               (56,330)                      (35,673)
     Net Interest Income                                                                 10,625                         8,886
     Credit-related Income (Expenses)                                                         772                      (2,121)
     Loss on Derivative Agreements                                                       (2,409)a                      (1,938)
     Impairment of Securities Considered
       Other than Temporary                                                                 (663)                        (662)

     Administrative Expenses                                                              (1,131)                        (738)
     Other, Net                                                                              643                            170
     Net Income from Operations                                                 $          7,837                $       3,597

Sources: Fannie Mae, Form 10-Q for the Quarterly Period Ended June 30, 2012, at 19, 21 (online at www.sec.gov/Archives/edgar/
data/310522/000031052212000090/fanniemaeq206302012.htm) (accessed Oct. 18, 2012); Freddie Mac, Form 10-Q for the
Quarterly Period Ended June 30, 2012, at 13, 14 (online at www.sec.gov/Archives/edgar/data/1026214/000119312512339405/
d378248d10q.htm) (accessed Sept. 10, 2012).
Notes:
a
    Loss on Derivatives referenced to Table 10, p. 24 in the Fannie Mae Second Quarter 2012 10-Q Report.

                               Figure 31. The Enterprises’ Single-Family REO Activity
                                 Summary for the Six Months Ended June 30, 2012
                                              (number of properties)

                    REO Activity                                       Fannie Mae                  Freddie Mac
                    Beginning Balance                                      118,528                         60,555
                    Total Acquisitions                                      91,483                         43,840
                    Total Dispositions                                    (100,745)                        (51,113)
                    Ending Inventory                                       109,266                         53,282


                  Sources: Fannie Mae, Form 10-Q for the Quarterly Period Ended June 30, 2012, at 66 (online at
                  www.sec.gov/Archives/edgar/data/310522/000031052212000090/fanniemaeq206302012.htm)
                  (accessed Oct. 18, 2012); Freddie Mac, Form 10-Q for the Quarterly Period Ended June 30, 2012, at
                  83 (online at www.sec.gov/Archives/edgar/data/1026214/000119312512339405/d378248d10q.
                  htm) (accessed Sept. 10, 2012).




                                                                                                                                  Appendix E: Enterprises’ Performance Metrics   | 129
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 130 |   Appendix E: Enterprises’ Performance Metrics
                                                         SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




Appendix F: Endnotes
1.	    H
        ousing and Economic Recovery Act of 2008 (HERA), Pub. L.
       No. 110-289, § 1117.
2.	    H
        ERA at § 1145.
3.	    F
        ederal Housing Finance Agency, Statement of Director James
       B. Lockhart, at 12 ( July 30, 2009) (online at www.fhfa.gov/
       webfiles/14715/FHFA1stAnnSpeechandPPT73009.pdf ).
4.	    E
        mergency Economic Stabilization Act of 2008, Pub. L. No. 110-
       343, § 110.
5.	    G
        overnment Accountability Office, Fannie Mae and Freddie Mac:
       Analysis of Options for Revising the Housing Enterprises’ Long-term
       Structures, at 3 (Sept. 2009) (GAO/09-782) (online at www.gao.
       gov/new.items/d09782.pdf ).
6.	    D
        epartment of the Treasury, Written Testimony by Secretary of
       the Treasury Timothy F. Geithner Before the Senate Committee
       on Banking, Housing & Urban Affairs (Mar. 15, 2011) (online at
       www.treasury.gov/press-center/press-releases/Pages/tg1103.aspx).
7.	    F
        ederal Housing Finance Agency, Data as of August 8, 2012 on
       Treasury and Federal Reserve Purchase Programs for GSE and
       Mortgage-Related Securities, at Tables 3-5 (online at www.fhfa.gov/
       webfiles/24145/TSYSupport%202012-08-08.pdf ) (accessed Sept.
       10, 2012).
8.	    F
        ederal Housing Finance Agency, The FHLBank System (online at
       www.fhfa.gov/Default.aspx?Page=22) (accessed Sept. 10, 2012).
9.	    F
        ederal Home Loan Banks Office of Finance, History of Service
       (online at www.fhlb-of.com/ofweb_userWeb/pageBuilder/
       mission--history-29) (accessed Sept. 10, 2012).
10.	   I d.; Federal Home Loan Banks, Frequently Asked Questions:
       Federal Home Loan Bank Advances (online at www.fhlbanks.com/
       overview_faqs_advances.htm) (accessed Sept. 10, 2012).
11.	   F
        ederal Home Loan Banks Office of Finance, Funding (online
       at www.fhlb-of.com//ofweb_userWeb/pageBuilder/funding-30)
       (accessed Sept. 10, 2012); Federal Home Loan Banks, Frequently
       Asked Questions: Federal Home Loan Bank Advances (online at



                                                                                           Appendix F: Endnotes   | 131
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                          www.fhlbanks.com/overview_faqs_advances.htm) (accessed Sept.
                                          10, 2012).
                                   12.	   F
                                           ederal Housing Finance Agency, FHFA Sends Notice to Federal
                                          Register on State-Level Guarantee Fee Pricing (Sept. 20, 2012)
                                          (online at www.fhfa.gov/webfiles/24526/G-fee_State-level_
                                          pricingFINAL.pdf ).
                                   13.	   F
                                           ederal Housing Finance Agency, FHFA, Fannie Mae and
                                          Freddie Mac Launch New Representation and Warranty Framework,
                                          Increased Transparency and Certainty for Lenders (Sept. 11, 2012)
                                          (online at www.fhfa.gov/webfiles/24366/Reps_and_Warrants_
                                          Release_and_FAQs_091112.pdf ).
                                   14.	   F
                                           ederal Housing Finance Agency, FHFA Announces First Winning
                                          Bidder in REO Pilot Initiative (Sept. 10, 2012) (online at www.
                                          fhfa.gov/webfiles/24273/REOInvestor91012.pdf ).
                                   15.	   F
                                           ederal Housing Finance Agency, FHFA Announces Next Steps
                                          in REO Pilot Program ( July 3, 2012) (online at www.fhfa.gov/
                                          webfiles/24041/REOInitiative7312.pdf ).
                                   16.	    ederal Housing Finance Agency, FHFA Announces Increase in
                                          F
                                          Guarantee Fees, G-fee Report for 2010-2011 Released (Aug. 31,
                                          2012) (online at www.fhfa.gov/webfiles/24259/Gfee083112.pdf ).
                                   17.	   F
                                           ederal Housing Finance Agency, FHFA Announces New Standard
                                          Short Sale Guidelines for Fannie Mae and Freddie Mac; Programs
                                          Aligned to Expedite Assistance to Borrowers (Aug. 21, 2012) (online
                                          at www.fhfa.gov/webfiles/24211/Shortsales82112Final.pdf ).
                                   18.	   D
                                           epartment of the Treasury, Treasury Department Announces
                                          Further Steps to Expedite Wind Down of Fannie Mae and Freddie
                                          Mac (Aug. 17, 2012) (online at www.treasury.gov/press-center/
                                          press-releases/Pages/tg1684.aspx).
                                   19.	   F
                                           ederal Housing Finance Agency, FHFA Sends Notice to Federal
                                          Register on Use of Eminent Domain to Restructure Performing
                                          Loans (Aug. 8, 2012) (online at www.fhfa.gov/webfiles/24143/
                                          EminentdomainPR8812F.pdf ).
                                   20.	   F
                                           ederal Housing Finance Agency, Statement by Edward J.
                                          DeMarco, Acting Director, Federal Housing Finance Agency,
                                          on the Use of Principal Forgiveness by Fannie Mae and Freddie
                                          Mac ( July 31, 2012) (online at www.fhfa.gov/webfiles/24113/
                                          PFStatement73112.pdf ); Letter from Edward J. DeMarco,


 132 |   Appendix F: Endnotes
                                                         SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




       Acting Director, FHFA, to Tim Johnson, Chairman, Committee
       on Banking, Housing and Urban Affairs, and Richard C. Shelby,
       Ranking Member, Committee on Banking, Housing and Urban
       Affairs ( July 31, 2012) (online at www.fhfa.gov/webfiles/24110/
       PF_LettertoCong73112.pdf ).
21.	   F
        ederal Housing Finance Agency, Statement by Federal Housing
       Finance Agency on FHFA Lawsuit Against Illinois Tax Officials
       ( June 22, 2012) (online at www.fhfa.gov/webfiles/24028/
       FHFALawsuit62212F.pdf ).
22.	   F
        ederal Housing Finance Agency, FHFA Announces Short Sale
       Assistance for Military Homeowners with Fannie Mae or Freddie Mac
       Loans ( June 21, 2012) (online at www.fhfa.gov/webfiles/24026/
       CFPBFinalwFS.pdf ).
23.	   F
        ederal Housing Finance Agency, Federal Housing Finance Agency
       Establishes Additional Anti-Fraud Measure for Fannie Mae, Freddie
       Mac and Federal Home Loan Banks ( June 18, 2012) (online at
       www.fhfa.gov/webfiles/24018/FHFAAntifraud61812.pdf ).
24.	   F
        ederal Housing Finance Agency, FHFA’s Report to Congress
       Details Annual Examinations of Fannie Mae, Freddie Mac, and
       Federal Home Loan Banks ( June 13, 2012) (online at www.fhfa.
       gov/webfiles/24010/ReporttoCongress61312.pdf ); Federal
       Housing Finance Agency, 2011 Report to Congress ( June
       13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
       RepToCongr11_6_13_FINAL.pdf ).
25.	   F
        annie Mae, Timothy J. Mayopoulos Appointed CEO of Fannie Mae,
       Veteran Financial Services Executive Selected to Lead the Company’s
       Contribution to Building the Future of Housing Finance ( June 5,
       2012) (online at www.fanniemae.com/portal/about-us/media/
       corporate-news/2012/5745.html).
26.	   Freddie Mac, Donald H. Layton Named CEO of Freddie Mac (May
       10, 2012) (online at http://freddiemac.mediaroom.com/index.
       php?s=12329&item=128318).
27.	   F
        ederal Housing Finance Agency, FHFA Releases Draft Strategic
       Plan for Public Comment (May 14, 2012) (online at www.fhfa.
       gov/webfiles/23933/FHFA_Draft_Strategic_Plan_for_Public_
       Comment_release.pdf ); Federal Housing Finance Agency,
       Preparing a Foundation for a More Efficient and Effective Housing
       Finance System, Strategic Plan, Federal Housing Finance Agency


                                                                                           Appendix F: Endnotes   | 133
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                          Fiscal Years 2013-2017 (online at www.fhfa.gov/webfiles/23930/
                                          FHFA%20Draft%20Strategic%20Plan%202013-2017.
                                          pdf ) (accessed June 22, 2012). On October 9, 2012, FHFA
                                          released its final plan. See www.fhfa.gov/webfiles/24577/
                                          FHFAStrategicPlan10912Final.pdf.
                                   28.	   F
                                           ederal Housing Finance Agency, Fannie Mae and Freddie Mac
                                          to Streamline Short Sales to Help Borrowers and Communities, New
                                          Timelines Take Effect in June (Apr. 17, 2012) (online at www.fhfa.
                                          gov/webfiles/23887/Short_Sales_release_041712.pdf ).
                                   29.	   F
                                           ederal Housing Finance Agency, Projections of the Enterprises’
                                          Financial Performance (Oct. 2012) (online at www.fhfa.gov/
                                          webfiles/24611/Projections102612.pdf ).
                                   30.	   F
                                           ederal Reserve Bank of Atlanta, The Federal Home Loan Bank
                                          System: The “Other” Housing GSE (Third Quarter 2006) (online at
                                          www.frbatlanta.org/filelegacydocs/erq306_frame.pdf ) (accessed
                                          Oct. 16, 2012).
                                   31.	    e FHLBank System can borrow at favorable rates due to the
                                          Th
                                          perception in financial markets that the federal government will
                                          guarantee repayment of its debt even though such a guarantee
                                          has not been made explicitly. This phenomenon is known as the
                                          “implicit guarantee.” See Federal Housing Finance Agency Office
                                          of Inspector General, FHFA’s Oversight of Troubled Federal Home
                                          Loan Banks ( Jan. 11, 2012) (EVL-2012-001) (online at www.
                                          fhfaoig.gov/Content/Files/Troubled%20Banks%20EVL-2012-
                                          001.pdf ).
                                   32.	   F
                                           ederal Home Loan Banks, Overview: The Federal Home Loan
                                          Banks (online at www.fhlbanks.com/overview_whyfhlb.htm)
                                          (accessed July 24, 2012); Federal Home Loan Banks, Combined
                                          Financial Report for the Year Ended December 31, 2011, at 2, 3
                                          (online at www.fhlb-of.com/ofweb_userWeb/resources/11yrend.
                                          pdf ) (accessed Oct. 12, 2012).
                                   33.	   F
                                           ederal Home Loan Banks, Combined Financial Report for the Year
                                          Ended December 31, 2011, at 2 (online at www.fhlb-of.com/ofweb_
                                          userWeb/resources/11yrend.pdf ) (accessed July 24, 2012).
                                   34.	   I d. at 3, 30.




 134 |   Appendix F: Endnotes
                                                          SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




35.	   F
        ederal Home Loan Banks, The Federal Home Loan Banks: The
       Basics, at 2 (online at www.fhlbanks.com/assets/pdfs/sidebar/
       FHLBanks_TheBasics_4_2012.pdf ) (accessed July 24, 2012).
36.	   F
        ederal Housing Finance Agency, 2011 Report to Congress, at
       48 ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/
       FHFA_RepToCongr11_6_13_FINAL.pdf ); Federal Home Loan
       Banks, Combined Financial Report for the Year Ended December
       31, 2011, at S-1 (online at www.fhlb-of.com/ofweb_userWeb/
       resources/11yrend.pdf ) (accessed Oct. 12, 2012).
37.	   F
        ederal Home Loan Banks, Combined Financial Report for the Year
       Ended December 31, 2011, at S-6, S-10 (online at www.fhlb-of.
       com/ofweb_userWeb/resources/11yrend.pdf ) (accessed July 24,
       2012).
38.	   I d. at S-11. FHFA is authorized to review the compensation
       packages of FHLBank executives and to prohibit compensation
       that it deems unreasonable or not comparable to compensation of
       employees in similar businesses. See 12 U.S.C. § 4518.
39.	   F
        ederal Home Loan Banks, Frequently Asked Questions: Federal
       Home Loan Bank Advances (online at www.fhlbanks.com/
       overview_faqs_advances.htm) (accessed July 26, 2012); Federal
       Home Loan Banks, Combined Financial Report for the Year Ended
       December 31, 2011, at 4 (online at www.fhlb-of.com/ofweb_
       userWeb/resources/11yrend.pdf ) (accessed Oct. 12, 2012).

       Community development financial institutions (depository
       institutions insured by the FDIC with average total assets over the
       preceding three-year period of less than $1.076 billion) are eligible
       to use expanded statutory collateral provisions for small business,
       agriculture, and community development loans to the extent that
       their FHLBanks accept such loans as collateral for advances. See
       Federal Home Loan Banks, Combined Financial Report for the Year
       Ended December 31, 2011, at 93, F-45 (online at www.fhlb-of.com/
       ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 24, 2012).
40.	   F
        ederal Housing Finance Agency, 2011 Report to Congress, at 31
       ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
       RepToCongr11_6_14_508.pdf ).




                                                                                            Appendix F: Endnotes   | 135
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                   41.	   F
                                           ederal Reserve Bank of Atlanta, The Federal Home Loan Bank
                                          System: The “Other” Housing GSE, at 39, 40 (Third Quarter 2006)
                                          (online at www.frbatlanta.org/filelegacydocs/erq306_frame.pdf )
                                          (accessed July 26, 2012); Federal Housing Finance Agency Office
                                          of Inspector General, FHFA’s Oversight of the Federal Home Loan
                                          Banks’ Unsecured Credit Risk Management Practices, at 8, 9, 11, 12
                                          ( June 28, 2012) (EVL-2012-005) (online at www.fhfaoig.gov/
                                          Content/Files/EVL-2012-005_1_0.pdf ).
                                   42.	   F
                                           ederal Home Loan Banks, Combined Financial Report for the Year
                                          Ended December 31, 2011, at 2, 7 (online at www.fhlb-of.com/
                                          ofweb_userWeb/resources/11yrend.pdf ) (accessed July 24, 2012).
                                   43.	   F
                                           ederal Home Loan Banks, The Federal Home Loan Banks: The
                                          Basics, at 3 (online at www.fhlbanks.com/assets/pdfs/sidebar/
                                          FHLBanks_TheBasics_4_2012.pdf ) (accessed July 24, 2012).
                                   44.	   I d. at 5.
                                   45.	   C
                                           onsequently, the FHLBanks can conceivably rely indefinitely
                                          on debt issued at favorable interest rates to engage in higher-risk
                                          financial transactions that could result in significant financial
                                          losses over time. Therefore, FHFA has a critical responsibility
                                          to conduct vigorous oversight of the FHLBanks to help ensure
                                          their safety and soundness and housing mission achievement. See
                                          Federal Housing Finance Agency Office of Inspector General,
                                          FHFA’s Oversight of Troubled Federal Home Loan Banks, at 6 ( Jan.
                                          11, 2012) (EVL-2012-001) (online at www.fhfaoig.gov/Content/
                                          Files/Troubled%20Banks%20EVL-2012-001.pdf ).
                                   46.	   F
                                           ederal Home Loan Banks, Combined Financial Report for the Year
                                          Ended December 31, 2011, at F-67 (online at www.fhlb-of.com/
                                          ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 22, 2012).
                                   47.	   F
                                           ederal Housing Finance Agency Office of Inspector General,
                                          FHFA’s Oversight of the Federal Home Loan Banks’ Unsecured Credit
                                          Risk Management Practices, at 15 ( June 28, 2012) (EVL-2012-
                                          005) (online at www.fhfaoig.gov/Content/Files/EVL-2012-
                                          005_1_0.pdf ); Federal Housing Finance Agency, Supervision
                                          and Regulations (online at www.fhfa.gov/Default.aspx?Page=6)
                                          (accessed Aug. 22, 2012).
                                   48.	   F
                                           ederal Housing Finance Agency, Mortgage Market Note 09-3,
                                          at 2, 3 ( July 16, 2009) (online at www.fhfa.gov/webfiles/14595/
                                          MMN093FHLBcapital71609.pdf ); Federal Home Loan


 136 |   Appendix F: Endnotes
                                                         SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




       Banks, Combined Financial Report for the Year Ended December
       31, 2011, at F-67 (online at www.fhlb-of.com/ofweb_userWeb/
       resources/11yrend.pdf ) (accessed Aug. 22, 2012).
49.	   F
        ederal Home Loan Banks, Combined Financial Report for the
       Year Ended December 31, 2011, at 15 (online at www.fhlb-of.com/
       ofweb_userWeb/resources/11yrend.pdf ) (accessed July 27, 2012).
50.	   F
        ederal Home Loan Banks, Frequently Asked Questions: Federal
       Home Loan Banks’ Affordable Housing Program (online at www.
       fhlbanks.com/overview_faqs_housing.htm) (accessed July 27,
       2012).
51.	   I d.
52.	   F
        ederal Home Loan Banks, Combined Financial Report for the
       Year Ended December 31, 2011, at 15 (online at www.fhlb-of.com/
       ofweb_userWeb/resources/11yrend.pdf ) (accessed July 27, 2012).
53.	    ederal Housing Finance Agency Office of Inspector General,
       F
       FHFA’s Supervisory Framework for Federal Home Loan Banks’
       Advances and Collateral Risk Management, at 9 ( June 1, 2012)
       (AUD-2012-004) (online at www.fhfaoig.gov/Content/Files/
       AUD-2012-004.pdf ).
54.	   G
        overnment Accountability Office, Testimony Before the
       Committee on Banking, Housing, and Urban Affairs, U.S. Senate,
       Federal Home Loan Bank System: An Overview of Changes and
       Current Issues Affecting the System: Statement of Thomas J. McCool,
       Managing Director Financial Markets and Community Investment,
       at 2 footnote 2 (Apr. 13, 2005) (GAO/05-489T) (online at www.
       gao.gov/assets/120/111492.pdf ).
55.	    ederal Housing Finance Agency, 2011 Report to Congress, at 32
       F
       ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
       RepToCongr11_6_13_FINAL.pdf ).
56.	   F
        ederal Housing Finance Agency Office of Inspector General,
       FHFA’s Supervisory Framework for Federal Home Loan Banks’
       Advances and Collateral Risk Management, at 10 ( June 1, 2012)
       (AUD-2012-004) (online at www.fhfaoig.gov/Content/Files/
       AUD-2012-004.pdf ).
57.	   F
        ederal Home Loan Banks, Combined Financial Report for the
       Year Ended December 31, 2011, at 90 (online at www.fhlb-of.com/
       ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 8, 2012).


                                                                                           Appendix F: Endnotes   | 137
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                   58.	   F
                                           ederal Housing Finance Agency Office of Inspector General,
                                          FHFA’s Supervisory Framework for Federal Home Loan Banks’
                                          Advances and Collateral Risk Management, at 10 ( June 1, 2012)
                                          (AUD-2012-004) (online at www.fhfaoig.gov/Content/Files/
                                          AUD-2012-004.pdf ).
                                   59.	   F
                                           ederal Housing Finance Agency, 2011 Report to Congress, at 32
                                          ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
                                          RepToCongr11_6_13_FINAL.pdf ).
                                   60.	   G
                                           overnment Accountability Office, Federal Housing Finance
                                          Agency: Oversight of the Federal Home Loan Banks’ Agricultural
                                          and Small Business Collateral Policies Could Be Improved, at 7 ( July
                                          2010) (GAO/10-92) (online at www.gao.gov/assets/310/307593.
                                          pdf ).
                                   61.	   F
                                           ederal Home Loan Banks, Combined Financial Report for the
                                          Year Ended December 31, 2011, at 90 (online at www.fhlb-of.com/
                                          ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 8, 2012).
                                   62.	   F
                                           ederal Housing Finance Agency Office of Inspector General,
                                          FHFA’s Supervisory Framework for Federal Home Loan Banks’
                                          Advances and Collateral Risk Management, at 10, 11 ( June 1, 2012)
                                          (AUD-2012-004) (online at www.fhfaoig.gov/Content/Files/
                                          AUD-2012-004.pdf ).
                                   63.	   G
                                           overnment Accountability Office, Federal Housing Finance
                                          Agency: Oversight of the Federal Home Loan Banks’ Agricultural
                                          and Small Business Collateral Policies Could Be Improved, at 8 ( July
                                          2010) (GAO/10-92) (online at www.gao.gov/assets/310/307593.
                                          pdf ).
                                   64.	   F
                                           ederal Housing Finance Agency, 2011 Report to Congress, at 32
                                          ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
                                          RepToCongr11_6_13_FINAL.pdf ).
                                   65.	   F
                                           ederal Housing Finance Agency Office of Inspector General,
                                          FHFA’s Supervisory Framework for Federal Home Loan Banks’
                                          Advances and Collateral Risk Management, at 26 ( June 1, 2012)
                                          (AUD-2012-004) (online at www.fhfaoig.gov/Content/Files/
                                          AUD-2012-004.pdf ).
                                   66.	   F
                                           ederal Housing Finance Agency Office of Inspector General,
                                          FHFA’s Oversight of the Federal Home Loan Banks’ Unsecured Credit
                                          Risk Management Practices, at 6 footnote 2, 7, 13 ( June 28, 2012)



 138 |   Appendix F: Endnotes
                                                         SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




       (EVL-2012-005) (online at www.fhfaoig.gov/Content/Files/
       EVL-2012-005_1_0.pdf ).
67.	   I d. at 13, 14.
68.	   F
        ederal Housing Finance Agency Office of Inspector General,
       FHFA’s Oversight of the Federal Home Loan Banks’ Unsecured Credit
       Risk Management Practices ( June 28, 2012) (EVL-2012-005)
       (online at www.fhfaoig.gov/Content/Files/EVL-2012-005_1_0.
       pdf ).
69.	   F
        ederal Housing Finance Agency, 2011 Report to Congress, at 32
       ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
       RepToCongr11_6_13_FINAL.pdf ).
70.	    ederal Housing Finance Agency Office of Inspector General,
       F
       FHFA’s Oversight of the Federal Home Loan Banks’ Unsecured Credit
       Risk Management Practices, at 17 ( June 28, 2012) (EVL-2012-
       005) (online at www.fhfaoig.gov/Content/Files/EVL-2012-
       005_1_0.pdf ).
71.	   F
        ederal Housing Finance Agency, 2011 Report to Congress, at 33
       ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
       RepToCongr11_6_13_FINAL.pdf ).
72.	   F
        ederal Home Loan Banks, Combined Financial Report for the Year
       Ended December 31, 2011, at 117 (online at www.fhlb-of.com/
       ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 8, 2012).
73.	   F
        ederal Reserve Bank of Atlanta, The Federal Home Loan Bank
       System: The “Other” Housing GSE, at 40, 41 (Third Quarter 2006)
       (online at www.frbatlanta.org/filelegacydocs/erq306_frame.pdf )
       (accessed Aug. 8, 2012).
74.	   F
        ederal Home Loan Banks, Combined Financial Report for the Year
       Ended December 31, 2011, at 117 (online at www.fhlb-of.com/
       ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 8, 2012).
75.	   I d.
76.	   G
        overnment Accountability Office, Federal Home Loan Bank
       System: Establishment of a New Capital Structure, at 16 ( July 2001)
       (GAO/01-873) (online at www.gao.gov/assets/240/232093.pdf ).
77.	   F
        ederal Home Loan Banks, Combined Financial Report for the Year
       Ended December 31, 2011, at 117 (online at www.fhlb-of.com/
       ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 8, 2012).


                                                                                           Appendix F: Endnotes   | 139
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                   78.	   Id.
                                   79.	   F
                                           ederal Housing Finance Agency Office of Inspector General,
                                          FHFA’s Oversight of Troubled Federal Home Loan Banks, at 18 ( Jan.
                                          11, 2012) (EVL-2012-001) (online at www.fhfaoig.gov/Content/
                                          Files/Troubled%20Banks%20EVL-2012-001.pdf ).
                                   80.	   F
                                           ederal Home Loan Banks, Combined Financial Report for the Year
                                          Ended December 31, 2011, at 26, 27 (online at www.fhlb-of.com/
                                          ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 8, 2012).
                                   81.	   I d. at 27.
                                   82.	   F
                                           ederal Housing Finance Agency, 2011 Report to Congress, at 34
                                          ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
                                          RepToCongr11_6_13_FINAL.pdf ).
                                   83.	   F
                                           ederal Housing Finance Agency Office of Inspector General,
                                          FHFA’s Oversight of the Federal Home Loan Banks’ Unsecured Credit
                                          Risk Management Practices, at 10 ( June 28, 2012) (EVL-2012-
                                          005) (online at www.fhfaoig.gov/Content/Files/EVL-2012-
                                          005_1_0.pdf ).
                                   84.	   I d. at 14.
                                   85.	   G
                                           overnment Accountability Office, Federal Housing Finance
                                          Agency: Oversight of the Federal Home Loan Banks’ Agricultural and
                                          Small Business Collateral Policies Could Be Improved, at 9, 10 ( July
                                          2010) (GAO/10-92) (online at www.gao.gov/assets/310/307593.
                                          pdf ).
                                   86.	    ederal Home Loan Banks, Combined Financial Report for the
                                          F
                                          Year Ended December 31, 2011, at 21 (online at www.fhlb-of.com/
                                          ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 28, 2012).
                                   87.	   I d. at 12.
                                   88.	   F
                                           ederal Home Loan Bank Act § 26, 12 U.S.C. § 1446; Federal
                                          Home Loan Banks, Combined Financial Report for the Year Ended
                                          December 31, 2011, at 8 (online at www.fhlb-of.com/ofweb_
                                          userWeb/resources/11yrend.pdf ) (accessed Aug. 28, 2012).
                                   89.	   F
                                           ederal Housing Finance Agency, Supervision and Regulations
                                          (online at www.fhfa.gov/Default.aspx?Page=6) (accessed Aug. 28,
                                          2012).




 140 |   Appendix F: Endnotes
                                                          SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




90.	    F
         ederal Housing Finance Agency, 2011 Performance and
        Accountability Report, at 12 (online at www.fhfa.gov/
        webfiles/22756/FHFAPAR_2011.pdf ) (accessed Aug. 28,
        2012). Supervision activities include conducting on-site annual
        examinations, periodic visits, and off-site monitoring of the
        FHLBanks. See Federal Housing Finance Agency, Supervision
        and Regulations (online at www.fhfa.gov/Default.aspx?Page=6)
        (accessed Aug. 28, 2012).
91.	    F
         ederal Housing Finance Agency, 2011 Performance and
        Accountability Report, at 12 (online at www.fhfa.gov/
        webfiles/22756/FHFAPAR_2011.pdf ) (accessed Aug. 28, 2012).
92.	    Id.
93.	    F
         ederal Home Loan Banks, The Federal Home Loan Banks: The
        Basics, at 2 (online at www.fhlbanks.com/assets/pdfs/sidebar/
        FHLBanks_TheBasics_4_2012.pdf ) (accessed Aug. 21, 2012).
94.	    I d.
95.	    F
         ederal Home Loan Banks, Combined Financial Report for the
        Year Ended December 31, 2011, at 30 (online at www.fhlb-of.com/
        ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 21, 2012).
96.	    I d.
97.	    F
         ederal Home Loan Banks, The Federal Home Loan Banks: The
        Basics, at 3, 5 (online at www.fhlbanks.com/assets/pdfs/sidebar/
        FHLBanks_TheBasics_4_2012.pdf ) (accessed Aug. 21, 2012).
98.	    F
         ederal Housing Finance Agency, Government Sponsored
        Enterprises (online at www.fhfa.gov/Default.aspx?Page=33)
        (accessed Aug. 21, 2012).
99.	    F
         ederal Housing Finance Agency, Senior Preferred Stock Purchase
        Agreement (online at www.fhfa.gov/Default.aspx?Page=364)
        (accessed Aug. 21, 2012).
100.	   F
         ederal Home Loan Banks, The Federal Home Loan Banks: The
        Basics, at 6 (online at www.fhlbanks.com/assets/pdfs/sidebar/
        FHLBanks_TheBasics_4_2012.pdf ) (accessed Aug. 21, 2012).
101.	   I d.
102.	   F
         annie Mae, Board of Directors (online at www.fanniemae.com/
        portal/about-us/governance/board-directors.html?) (accessed


                                                                                            Appendix F: Endnotes   | 141
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                           Aug. 21, 2012); Freddie Mac, About Freddie Mac: Corporate
                                           Governance Under Conservatorship (online at www.freddiemac.
                                           com/governance/) (accessed Aug. 21, 2012).
                                   103.	   I d.
                                   104.	   Id.
                                   105.	   F
                                            ederal Home Loan Banks, The Federal Home Loan Banks: The
                                           Basics, at 2 (online at www.fhlbanks.com/assets/pdfs/sidebar/
                                           FHLBanks_TheBasics_4_2012.pdf ) (accessed July 30, 2012).
                                   106.	   F
                                            ederal Housing Finance Agency, Government Sponsored
                                           Enterprises (online at www.fhfa.gov/Default.aspx?Page=33)
                                           (accessed Aug. 21, 2012).
                                   107.	   I d.
                                   108.	   I d.
                                   109.	   I d.
                                   110.	   F
                                            ederal Home Loan Banks, The Federal Home Loan Banks: The
                                           Basics, at 5 (online at www.fhlbanks.com/assets/pdfs/sidebar/
                                           FHLBanks_TheBasics_4_2012.pdf ) (accessed Aug. 21, 2012).
                                   111.	   F
                                            ederal Home Loan Banks, Frequently Asked Questions: Federal
                                           Home Loan Banks’ Affordable Housing Program (online at www.
                                           fhlbanks.com/overview_faqs_housing.htm) (accessed July 27,
                                           2012).
                                   112.	   F
                                            ederal Home Loan Banks, Combined Financial Report for the
                                           Year Ended December 31, 2011, at 15 (online at www.fhlb-of.com/
                                           ofweb_userWeb/resources/11yrend.pdf ) (accessed July 27, 2012).
                                   113.	   F
                                            reddie Mac, Form 10-K for the Fiscal Year Ended December 31,
                                           2011, at 34 (online at www.freddiemac.com/investors/sec_filings/
                                           index.html) (accessed Sept. 27, 2012).
                                   114.	   I d.
                                   115.	   I d.
                                   116.	   I d. at 35.
                                   117.	   F
                                            ederal Housing Finance Agency Office of Inspector General,
                                           FHFA’s Oversight of Troubled Federal Home Loan Banks, at 13 ( Jan.



 142 |   Appendix F: Endnotes
                                                         SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




        11, 2012) (EVL-2012-001) (online at www.fhfaoig.gov/Content/
        Files/Troubled%20Banks%20EVL-2012-001.pdf ).
118.	   I d. at 19.
119.	   F
         ederal Housing Finance Agency, 2011 Report to Congress, at 32
        ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
        RepToCongr11_6_14_508.pdf ).
120.	   F
         ederal Housing Finance Agency Office of Inspector General,
        FHFA’s Oversight of Troubled Federal Home Loan Banks, at 13 ( Jan.
        11, 2012) (EVL-2012-001) (online at www.fhfaoig.gov/Content/
        Files/Troubled%20Banks%20EVL-2012-001.pdf ).
121.	   F
         ederal Home Loan Banks, Combined Financial Report for the
        Quarterly Period Ended June 30, 2012, at F-24 (online at www.
        fhlb-of.com/ofweb_userWeb/resources/12Q2end.pdf ) (accessed
        Aug. 31, 2012).
122.	   I d. at F-12, F-16.
123.	   F
         ederal Housing Finance Agency, 2011 Report to Congress, at 32
        ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
        RepToCongr11_6_14_508.pdf ).
124.	   F
         ederal Housing Finance Agency Office of Inspector General,
        FHFA’s Supervisory Framework for Federal Home Loan Banks’
        Advances and Collateral Risk Management, at 8 ( June 1, 2012)
        (AUD-2012-004) (online at www.fhfaoig.gov/Content/Files/
        AUD-2012-004.pdf ).
125.	   F
         ederal Home Loan Banks, Combined Financial Report for the Year
        Ended December 31, 2011, at F-5 (online at www.fhlb-of.com/
        ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 31, 2012);
        Federal Home Loan Banks, Combined Financial Report for the Year
        Ended December 31, 2010, at F-5 (online at www.fhlb-of.com/
        ofweb_userWeb/resources/10yrend.pdf ) (accessed Aug. 31, 2012).
126.	   F
         ederal Housing Finance Agency Office of Inspector General,
        FHFA’s Oversight of Troubled Federal Home Loan Banks, at 17, 19
        ( Jan. 11, 2012) (EVL-2012-001) (online at www.fhfaoig.gov/
        Content/Files/Troubled%20Banks%20EVL-2012-001.pdf ).
127.	   F
         ederal Housing Finance Agency, 2011 Report to Congress, at 29
        ( June 13, 2012) (online at www.fhfa.gov/webfiles/24009/FHFA_
        RepToCong11_6_14_508pdf ).


                                                                                           Appendix F: Endnotes   | 143
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                   128.	   F
                                            ederal Home Loan Banks, Combined Financial Report for the Year
                                           Ended December 31, 2011, at F-4 (online at www.fhlb-of.com/
                                           ofweb_userWeb/resources/11yrend.pdf ) (accessed Aug. 7, 2012).
                                   129.	   F
                                            ederal Housing Finance Agency, Statement of FHFA Acting
                                           Director Edward J. DeMarco on the Franchise Value of Federal
                                           Home Loan Banks (May 11, 2011) (online at www.fhfa.gov/
                                           webfiles/21197/FHLB51111Final.pdf ).
                                   130.	   F
                                            ederal Housing Finance Agency Office of Inspector General,
                                           FHFA’s Supervisory Framework for Federal Home Loan Banks’
                                           Advances and Collateral Risk Management, at 21 ( June 1, 2012)
                                           (AUD-2012-004) (online at www.fhfaoig.gov/Content/Files/
                                           AUD-2012-004.pdf ).
                                   131.	   F
                                            ederal Deposit Insurance Corporation, Insured or Not Insured?
                                           (online at www.fdic.gov/consumers/consumer/information/
                                           fdiciorn.html) (accessed Aug. 31, 2012).
                                   132.	   F
                                            ederal Housing Finance Agency Office of Inspector General,
                                           FHFA’s Oversight of Troubled Federal Home Loan Banks, at 15 ( Jan.
                                           11, 2012) (EVL-2012-001) (online at www.fhfaoig.gov/Content/
                                           Files/Troubled%20Banks%20EVL-2012-001.pdf ).
                                   133.	   D
                                            epartment of the Treasury, Department of Housing and Urban
                                           Development, Reforming America’s Housing Finance Market A
                                           Report to Congress, at 14 (Feb. 2011) (online at www.treasury.
                                           gov/initiatives/Documents/Reforming%20America%27s%20
                                           Housing%20Finance%20Market.pdf ).
                                   134.	   Id. at 15.
                                   135.	   F
                                            ederal Housing Finance Agency, Statement of FHFA Acting
                                           Director Edward J. DeMarco on the Future Role of Federal Home
                                           Loan Banks in Housing Finance, at 6 (May 8, 2012) (online
                                           at www.fhfa.gov/webfiles/23921/5-8-12_Future_Role_of_
                                           FHLBanks_in_Housing_Finance_-_Final.pdf ).
                                   136.	   I d.




 144 |   Appendix F: Endnotes
SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                                  Appendix F: Endnotes   | 145
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 146 |   Appendix F: Endnotes
SEMIANNUAL REPORT TO THE CONGRESS | SEPTEMBER 30, 2012




                                  Appendix F: Endnotes   | 147
Federal Housing Finance Agency
Office of Inspector General

Se m iann ual R e p ort
to t h e Cong r e ss
April 1, 2012, through September 30, 2012




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