oversight

Sixth Semiannual Report to the Congress

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-09-30.

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

Federal Housing Finance Agency
 Office of Inspector General



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 Semiannual Report                     to the              Congress
       April 1, 2013, through September 30, 2013
Table of Contents	

OIG’s Mission	                                                                                iv
OIG’s Accomplishments from 2010 to Present	                                                    v
A Message from the Acting Inspector General	                                                   1
Executive Summary	                                                                             2
	 Overview	                                                                                    2
	 Section 1:     OIG Description, Accomplishments, and Strategy	                               2
	 Section 2:     FHFA and GSE Operations	                                                      3
	 Section 3:     Lessons for Housing Finance Reform: Five Years After the Federal Government’s 		
			              Takeover of Fannie Mae and Freddie Mac	                                       4
Section 1: OIG Description, Accomplishments, and Strategy	                                    6
	    Description	                                                                             6
	    Leadership and Organization	                                                             6
	    Accomplishments and Strategy	                                                            6
	    Audits and Evaluations	                                                                  7
	    Recommendations	                                                                        18
	    Other Reports	                                                                          18
	    Civil Fraud Initiative	                                                                 18
	    Audit and Evaluation Plan	                                                              18
	    Investigations	                                                                         19
	    Civil Cases	                                                                            32
	    Systemic Implication Reports	                                                           32
	    Investigations Strategy	                                                                33
	    Regulatory Activities	                                                                  33
	    Communications and Outreach	                                                            35
Section 2: FHFA and GSE Operations	                                                          38
	    Overview	                                                                               38
	    FHFA and the Enterprises	                                                               38
	    Enterprises’ Financial Performance	                                                     40
	    Government Support	                                                                     43
	    FHLBank System	                                                                         45
	    Selected FHFA and GSE Activities	                                                       48




ii   Federal Housing Finance Agency Office of Inspector General
Section 3: Lessons for Housing Finance Reform: Five Years After the Federal 		
		         Government’s Takeover of Fannie Mae and Freddie Mac	             52
	   Introduction	                                                                                   52
	   Context: Reforms and Reformers	                                                                 52
	   Soundness: Lessons from the Past	                                                               54
	   Oversight: Lessons of the Present	                                                              61
	   Balance: Lessons for the Future	                                                                64
	   Conclusion	                                                                                     70
Appendix A: Glossary and Acronyms	                                     72
Appendix B: OIG Recommendations	                                       84
Appendix C: Information Required by the Inspector General Act and 				
            Subpoenas Issued	                                        106
Appendix D: OIG Reports	                                              109
Appendix E: OIG Organizational Chart	                                 110
Appendix F: Description of OIG Offices and Strategic Plan	            111
Appendix G: Figure Sources	                                           114
Appendix H: Endnotes	                                                 118




                             Semiannual Report to the Congress • April 1, 2013–September 30, 2013   iii
OIG’s Mission
The mission of the Federal Housing Finance Agency Office of Inspector General (OIG) is to: promote the
economy, efficiency, and effectiveness of the programs and operations of the Federal Housing Finance Agency
(FHFA or agency); prevent and detect fraud, waste, and abuse in FHFA’s programs and operations; review
and, if appropriate, comment on pending legislation and regulations; and seek administrative sanctions, civil
recoveries, and criminal prosecutions of those responsible for fraud, waste, or abuse in connection with the
programs and operations of FHFA.

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




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




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

                     27                  23                     4                   5                                        4
                                                                                                                                   Systemic
                                                                    Evaluation                                                    Implication
                          Audits              Evaluations                               White Papers   Investigations
                                                                     Surveys                                                     Reports (SIRs)



                                                               Reports by Subject Area
       Work                                                                                                                                       Results

         63                                                                                                                                    $3.6 billion
       Reports                                                                                                                                    Restitutions

        149                                                                                                                                    $2.8 billion
  Recommendations                  Conservatorship and                  FHLBank System                  FHFA Internal                             Recoveries
                                   Enterprise Oversight                    Oversight                     Operations
        311                                                                                                                                   $6.5 million
    Investigations                                                                                                                          Financial Settlements
                                        Conservatorship                    Conservatorship              Conservatorship
                                          8 Evaluations                      1 Evaluation                   1 Audit
        132                           3 Evaluation Surveys                                                                                   $20.9 million
     Subpoenas                           3 White Papers                      Credit Risk                Operational Risk                            Other*
                                                                              2 Audits                      10 Audits
                                                                            2 Evaluations              1 Evaluation Survey
        157                               Credit Risk
                                           5 Audits
                                                                                1 SIR                                                     *Other is comprised of funds
                                                                                                                                          put to better use, questioned
 Indictments/Charges                     3 Evaluations                                                                                    costs, unsupported costs,
                                                                     Housing Mission and Goals                                            and fines.
                                                                            1 Evaluation
         86                            Interest Rate Risk
  Convictions/Pleas                        1 Evaluation
                                          1 White Paper
          4                             Operational Risk
     Civil Cases                           2 Audits
                                         3 Evaluations
         27                                  1 SIR
 Regulatory Activities                Real Estate Owned
                                           2 Audits
          6                             1 White Paper
  Additional Actions                        1 SIR
                                   Housing Mission and Goals
                                         2 Evaluations

                                      Mortgage Servicing
                                           5 Audits
                                        2 Evaluations
                                            1 SIR




                                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013                                                  v
vi   Federal Housing Finance Agency Office of Inspector General
A Message from the Acting Inspector General
I am pleased to present OIG’s sixth Semiannual Report to the Congress,
which covers our activities and operations from April 1, 2013, to
September 30, 2013.
During this semiannual reporting period, OIG continued to reinforce the
effectiveness, integrity, and transparency of FHFA’s programs and operations.
At the same time, OIG experienced a watershed event: our founder departed.
Effective September 29, 2013, Steve A. Linick resigned from OIG and was
appointed the State Department Inspector General. During his three years
with OIG, Mr. Linick established our vision and mission; recruited seasoned
professionals with backgrounds in housing, securities, finance, investigations,
statistics, and economics; built our infrastructure; and led audit, evaluative,
and investigative efforts that resulted in the recovery of billions of dollars and
the indictments and convictions of hundreds of individuals. We are grateful
for his extraordinary leadership.
It is now my honor to lead OIG, pending the appointment of a permanent            Michael P. Stephens
Inspector General. I look forward to the challenge and am gratified by OIG’s      Acting Inspector General of the
accomplishments during the reporting period. OIG issued 16 audit, evaluation, Federal Housing Finance Agency
and other reports focusing on high-risk mission areas affecting the nation’s
housing finance system. These reports address a range of topics from concerns relating to the security of
information technology owned by Fannie Mae and Freddie Mac (collectively, the enterprises) to a mid-program
assessment of the Home Affordable Refinance Program (HARP) to an evaluation of FHFA’s efforts to gradually
increase the guarantee fees charged by the enterprises to reduce their dominant position in the housing finance
system.
Additionally, OIG remains active on the law enforcement front. During this period, OIG’s investigative
efforts resulted in the indictment of 75 individuals and the conviction of 55 individuals, as well as the award
of more than $104 million in criminal fines and restitution orders.
All of OIG’s reports and selected law enforcement actions are detailed herein.
This Semiannual Report also describes the current status of the significant players under our purview
(i.e., FHFA, the enterprises, and the Federal Home Loan Banks (FHLBanks)). It then includes a detailed
discussion of three important factors that bear on housing finance reform—soundness, oversight, and
balance—all of which are important for a stable and liquid mortgage market. We present this discussion,
which draws from our experience, to provide FHFA, Congress, policymakers, and the public with
information that may be useful during the debate on housing finance reform.
I want to thank all of the dedicated employees at OIG for their efforts in making this report possible. This
report comes once every six months, but they work continuously throughout the year and the results of their
work are long lasting.


Michael P. Stephens
Acting Inspector General
October 31, 2013


                                      Semiannual Report to the Congress • April 1, 2013–September 30, 2013     1
Executive Summary

Overview                                                   Exploring these and other issues, this report is
                                                           organized as follows. Section 1, OIG Description,
This Semiannual Report discusses OIG operations            Accomplishments, and Strategy, highlights several
and FHFA developments from April 1, 2013, to               OIG audits, evaluations, and investigations relating
September 30, 2013.1                                       to the programs and operations of FHFA. Section 2,
                                                           FHFA and GSE Operations, provides a closer look
The changing conditions noted in our last                  at FHFA and government-sponsored enterprise
Semiannual Report have continued during this               (GSE) developments during this reporting period.
period. The enterprises’ dominance of the secondary        And, finally, Section 3, Lessons for Housing Finance
market for residential mortgages persists in an            Reform: Five Years After the Federal Government’s
environment of escalating home prices, improved
                                                           Takeover of Fannie Mae and Freddie Mac, discusses
credit quality, and increasing guarantee* fees.
                                                           three important factors that bear on housing finance
Thus, their profitability has steadily improved since
                                                           reform—soundness, oversight, and balance—all of
the end of 2011. Further, in light of the August
                                                           which are important for a stable and liquid mortgage
2012 amendments to the Senior Preferred Stock
                                                           market.
Purchase Agreements (PSPAs), the enterprises’
profits are beginning to offset losses that began in
2007.                                                      Section 1: OIG Description,
                                                           Accomplishments, and Strategy
As the enterprises’ profits have increased, their need
for government financial assistance has decreased.
                                                           This section provides a brief overview of OIG’s
Accordingly, for the third semiannual reporting
period, the Department of the Treasury (Treasury)          organization and describes its oversight activities,
was not required to increase its investment in             including audits, evaluations, and investigations. It
the enterprises, which remains at approximately            also discusses OIG’s priorities and goals.
$187.5 billion.                                            For example, in this section we discuss:
Meanwhile, during the first six months of 2013,            •	 FHFA’s Initiative to Reduce the Enterprises’
advance demand among the FHLBanks continued                   Dominant Position in the Housing Finance System
to show signs of stabilizing, and the FHLBanks                by Raising Gradually Their Guarantee Fees (EVL-
experienced a marginal increase in profitability.             2013-005, July 16, 2013), in which we analyzed
                                                              the agency’s initiative to increase the enterprises’
    *Terms and phrases in bold are defined in                 guarantee fees to encourage greater private-sector
    Appendix A, Glossary and Acronyms. If you                 investment in mortgage credit risk and reduce
    are reading an electronic version of this                 the enterprises’ dominant position in housing
    Semiannual Report, then simply move your                  finance. We also assessed FHFA’s communication
    cursor to the term or phrase and click for                and interaction with the Federal Housing
    the definition.                                           Administration (FHA), a government agency that



2    Federal Housing Finance Agency Office of Inspector General
  insures mortgages against credit losses, which           Further, this section addresses our:
  recently announced a cessation of its mortgage
                                                           •	 Audit and Evaluation Plan, which focuses on
  premium increases.
                                                              areas of FHFA operations posing the greatest risks
•	 Home Affordable Refinance Program: A                       to the agency and to Fannie Mae, Freddie Mac,
   Mid-Program Assessment (EVL-2013-006,                      and the FHLBanks (collectively, the GSEs);
   August 1, 2013), in which we analyzed FHFA’s
                                                           •	 Systemic Implication Reports, which identify
   administration and oversight of HARP, which is a
                                                              potential risks and weaknesses in FHFA’s
   streamlined refinance program for loans owned or
                                                              management control systems that we discovered
   guaranteed by the enterprises. HARP is designed
                                                              during the course of our investigations;
   to assist borrowers who are current on their loans
   but have not been able to refinance because they        •	 Regulatory Activities, which include our
   have little or no equity in their homes.                   assessment of proposed legislation, regulations,
                                                              and policies related to FHFA; and
•	 FHFA’s Oversight of the Federal Home Loan
   Banks’ Compliance with Regulatory Limits on             •	 Communications and Outreach Efforts, which
   Extensions of Unsecured Credit (EVL-2013-008,              educate stakeholders—FHFA, Congress,
   August 6, 2013), in which we examined the                  policymakers, and the public—about OIG,
   agency’s implementation of its 2012 horizontal             FHFA, and GSE developments, as well as broader
   review of unsecured credit risk management                 issues of fraud, waste, and abuse.
   practices and supervisory and enforcement
   responses to violations identified during the           Section 2: FHFA and GSE
   review.
                                                           Operations
•	 FHFA Can Improve Its Oversight of Freddie
   Mac’s Recoveries from Borrowers Who Possess the         This section describes the organization and operations
   Ability to Repay Deficiencies (AUD-2013-010,            of FHFA, the enterprises, and the FHLBanks, as
   September 24, 2013), in which we assessed               well as notable developments for each during the
   Freddie Mac’s deficiency recovery practices             reporting period.
   for borrowers who possess the ability to pay
                                                           Among the most notable developments during the
   amounts owed on foreclosed mortgages owned or
                                                           semiannual period was the unprecedented size of the
   guaranteed by the enterprise.
                                                           dividends the enterprises paid Treasury under the
We also discuss numerous OIG investigations, which         PSPAs for the six months ended June 30, 2013—
resulted in indictments and convictions of individuals     Fannie Mae and Freddie Mac paid $63.6 billion and
responsible for fraud, waste, or abuse in connection       $12.8 billion, respectively. Fannie Mae’s extraordinary
with FHFA’s and the regulated entities’ programs and       dividend payment resulted from the release of a
operations, and in fines and restitution orders totaling   valuation allowance on deferred tax assets, as well as
more than $104.6 million.                                  its improved profitability. Moreover, the $76.4 billion


                                     Semiannual Report to the Congress • April 1, 2013–September 30, 2013        3
in quarterly dividend payments does not reduce the        a multi-trillion-dollar industry? As policymakers
outstanding balance of Treasury’s investment.             debate these and other issues, we offer, in Section 3,
                                                          a discussion of three factors that are important to a
Additionally, over the last six months, FHFA and the
                                                          safe, stable, and liquid mortgage market—whatever
enterprises made significant progress in their efforts
                                                          its ultimate structure.
to develop a common securitization infrastructure for
residential mortgage-backed securities (RMBS); the        First, soundness. The recent housing crisis has shown
agency released reports from the enterprises assessing    that, at minimum, the secondary mortgage market
the viability of their multifamily lending businesses     needs quality underwriting, robust risk assessment,
in the absence of a government guarantee; Freddie         and market-aligned servicing. Second, oversight. Our
Mac—in compliance with FHFA’s directive to test           work demonstrates that effective housing finance
credit risk sharing transactions—made the first in a      oversight requires well-equipped regulators to verify
series of bond offerings that are not guaranteed by       decision making and enforce compliance. Third,
the enterprise; and lawmakers introduced two major        balance. Whatever the future mortgage market’s
bills intended to reform housing finance and the          structure, participants will have to balance between
Administration announced core principles that it          interrelated laws, roles, and practices.
believes should underlie such reform. These and other
                                                          Section 3 draws on our experience and is not
developments and OIG’s efforts in relation to them
                                                          intended to take sides. Rather it is intended to
are summarized in Section 2.
                                                          provide our stakeholders with information that
Section 3: Lessons for Housing                            will be useful during the debate on housing finance
                                                          reform.
Finance Reform: Five Years
After the Federal Government’s
Takeover of Fannie Mae and
Freddie Mac
It is no longer a question of if the nation’s housing
finance system will be reformed, but how. Will
the government continue to play a role, or will it
exit the secondary mortgage market entirely? How
will the government reduce its huge footprint in




4   Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • April 1, 2013–September 30, 2013   5
Section 1: OIG Description, Accomplishments,
and Strategy

Description                                                      Linick, who was sworn into office on October 12,
                                                                 2010. Mr. Linick resigned on September 29, 2013,
OIG began operations on October 12, 2010. It was                 and his Principal Deputy Inspector General, Michael
established by the Housing and Economic Recovery                 P. Stephens, commenced acting in the capacity of
Act (HERA), which amended the Inspector                          Inspector General pursuant to 5 U.S.C. § 3345(a)(1).
General Act. OIG conducts audits, evaluations,                   Mr. Stephens was appointed as Principal Deputy
investigations, and other law enforcement activities             Inspector General in September 2011. Prior to
relating to FHFA’s programs and operations.                      his joining OIG, Mr. Stephens served as Acting
OIG’s operations are funded by annual assessments                Inspector General and Deputy Inspector General
that FHFA levies on the enterprises and the                      for the Department of Housing and Urban
FHLBanks pursuant to 12 U.S.C. § 4516. For                       Development (HUD). Earlier, he was the Deputy
fiscal year 2013, OIG’s operating budget (see Figure             Assistant Inspector General for Investigations for the
1, below) was $48 million, with 150 full-time-                   Department of Veterans Affairs and a senior criminal
equivalent staff.                                                investigator for the Office of Inspector General for
                                                                 the Resolution Trust Corporation. Each of these
Figure 1. OIG’s Operating Budget for                             appointments followed a distinguished 20-year
Fiscal Year 2013                                                 career with the Secret Service, during which he held
            Supplies and Materials                               the distinction of being assigned to the Presidential
                      2%             Travel and Transportation
    Equipment                                of Things           Protection Division at the White House, along with
       3%                                       2%
                                                                 various supervisory positions within the agency.

                                                                 OIG consists of the Acting Inspector General, his
              Contracts                                          senior staff, and OIG offices, principally: the Office
                17%                                              of Audits (OA), the Office of Evaluations (OE), and
                                 Federal Staff
                                                                 the Office of Investigations (OI). Additionally, OIG’s
                Fixed                57%                         Executive Office and the Office of Administration
              Operational
                Costsa                                           provide organization-wide supervision and support.
                 19%
                                                                 (See Appendix E for OIG’s organizational chart and
                                                                 Appendix F for a detailed description of OIG’s offices
                                                                 and strategic goals.)
a
 Fixed operational costs include items such as space rent
and shared service agreements.                                   Accomplishments and Strategy

                                                                 From April 1, 2013, to September 30, 2013, OIG’s
Leadership and Organization                                      significant accomplishments included: (1) issuing 16
                                                                 audit, evaluation, and other reports; (2) participating
On April 12, 2010, President Barack Obama
nominated FHFA’s first Inspector General, Steve A.

6      Federal Housing Finance Agency Office of Inspector General
in a number of criminal and civil investigations; and      and examination support functions. Further,
(3) reviewing and commenting on FHFA rules.                OIG validated that in four of OQA’s reports the
                                                           conclusions, findings, and recommendations were
Audits and Evaluations                                     supported by adequate evidence.

                                                           However, most of OQA’s 22 recommendations have
During this semiannual period, OIG released 14             not been fully or promptly resolved (see Figure 2,
audit and evaluation reports, which are summarized         below), primarily because OQA did not (1) require
below.                                                     FHFA to respond formally in writing and commit
                                                           to specific timelines for completing corrective
Audits                                                     actions and (2) follow up on corrective actions. As of
FHFA Can Strengthen Controls over Its                      March 31, 2013:
Office of Quality Assurance (AUD-2013-013,
                                                           •	 8 recommendations remained open, 6 of them
September 30, 2013)
                                                              for 520 or more days; and
FHFA’s Office of Quality Assurance (OQA) is a
                                                           •	 14 recommendations were reported as “closed,”
crucial internal control for the agency’s examinations
                                                              but OQA had not validated 7 of them to ensure
of the GSEs. Internal controls, when effective,
                                                              that the proposed corrective actions had been
give FHFA management greater assurance that the
                                                              implemented or adequately addressed the
agency can achieve its mission, operate effectively and
                                                              recommendations.
efficiently, report reliably, and comply with applicable
laws and regulations.
                                                           Figure 2. Status of OQA Recommendations
Per its charter, OQA conducts internal reviews
of FHFA’s divisions that carry out the agency’s             Issuance Date      2011         2012         Total
                                                            Open                 6            2            8
examination and examination support functions. The
                                                            Closed               5            9           14
agency uses OQA reviews to enhance the effectiveness
                                                            Total                11          11           22
of FHFA’s supervision of the housing GSEs, helping
                                                            Percent Open        55%          18%         36%
to ensure that they operate in a safe and sound
manner and provide liquidity for the housing market.

OIG conducted this performance audit to assess             Addressing OQA recommendations in a complete
controls related to the (1) effectiveness of OQA’s         and timely manner can help FHFA ensure the quality
review of FHFA’s examination and examination               of its examinations and maximize the value of its
support functions and (2) extent of OQA’s coverage         investment in OQA.
of other FHFA functions that may pose significant
                                                           In addition, OQA’s risk-based reviews do not cover
risks.
                                                           all of FHFA’s offices. The present focus of OQA
OIG found that OQA generally conducted effective,          on examination and related support functions
risked-based reviews of FHFA’s examination                 excludes key agency operations, such as the Office


                                     Semiannual Report to the Congress • April 1, 2013–September 30, 2013        7
of Conservatorship Operations, which approves             in the REO Pilot Program. OIG found that FHFA
management decisions affecting the enterprises.           established a sound process for reviewing, scoring,
                                                          and recommending investors to qualify as bidders
OIG recommended that FHFA should strengthen
                                                          under the pilot program. However, Fannie Mae’s
controls over OQA reporting and follow-up; evaluate
                                                          bidder qualification contractor did not fully comply
the roles and responsibilities of OQA across the
                                                          with important provisions of the established process.
agency and revise OQA’s charter accordingly; assess
                                                          Specifically, the contractor did not properly score
the risks across all agency operations for the purposes
                                                          the risk attributes for 12 of 47 potential investors,
of planning OQA review coverage; and direct
                                                          6 of whom were determined to be eligible to bid
performance reviews of those areas that pose the most
                                                          even though they did not meet prescribed bidder
significant risks to FHFA.
                                                          qualification scoring criteria. Figure 3 (see page 9)
FHFA provided comments agreeing with the                  provides a summary of the results of OIG’s analysis of
recommendations in the report.                            the scoring of investor applications. Moreover, certain
                                                          areas of the application and scoring criteria require
Additional FHFA Oversight Can Improve the Real            clarification if used for similar programs in the future.
Estate Owned Pilot Program (AUD-2013-012,
September 27, 2013)                                       Additionally, Fannie Mae did not always follow
                                                          its contractor’s scores and recommendations. For
Typically, when borrowers default on enterprise-          example, the enterprise, with FHFA’s concurrence,
owned or -guaranteed mortgages and efforts to cure        permitted two potential investors to bid on mortgage
the defaults are unsuccessful, the mortgages are          pools even though both were scored by the contractor
foreclosed on. Through foreclosure, properties that       as high risk and not recommended to bid. Further,
secure the defaulted mortgages can be acquired by the     FHFA did not independently verify the work
enterprises as real estate owned (REO) properties.        performed by Fannie Mae’s bidder qualification
The enterprises’ REO inventory levels increased           contractor, and thus, the instances of noncompliance
dramatically in the years following the financial         were not discovered by the agency.
crisis. In accordance with its broad conservatorship      In addition, FHFA had not clarified several goals that
objective to minimize costs and maximize the              are applicable to the REO Pilot Program. Specifically,
net present value of REO, FHFA initiated a pilot          FHFA had not clarified how the goals and objectives
program in 2012 to assist with REO disposition            of the pilot program will be achieved or how the
efforts. The REO Pilot Program was the first, and         agency intends to monitor and assess the performance
to date only, transaction to be conducted under a         of the pilot or any other future initiatives under the
broader FHFA initiative to develop and implement          overall REO disposition program.
an improved REO disposition program. For the
pilot transaction, about 2,500 single-family Fannie       OIG recommended that FHFA: (1) establish
Mae REO properties, many with tenants, were               verification controls to ensure enterprise contractors
consolidated into pools in eight geographic areas and     are performing in accordance with agreed-upon
offered to prequalified investors for sale.               criteria and that any proposed waivers to the criteria
                                                          are documented and submitted for FHFA review
OIG audited FHFA’s oversight of Fannie Mae’s              and approval; (2) clarify guidance regarding bidder
policies, procedures, and practices with respect to the   submission of financial statements and explanation
selection and administration of investors participating   of adverse financial events as part of the bidder


8   Federal Housing Finance Agency Office of Inspector General
Figure 3. Scoring of Investor Qualification Applications

                 Bidder Score Given
                                                No. of                   Correctly                Incorrectly
                    by Fannie Mae
                                             Applications                 Scored                    Scored
                      Contractor
                Low                               9                          8                         1
                Medium                            31                         23                        8
                High                              7                          4                         3
                Total Applications                47                         35                        12
                Scored



                                         No. of Bidders with Incorrect     No. of Bidders with Incorrect
            Bidder Score Given by
                                          Score that Resulted in an          Score that Resulted in a
            Fannie Mae Contractor
                                            Unchanged Risk Score               Changed Risk Score
        Low                                            0                                  1
        Medium                                         2                                  6
        High                                           3                                  0
        Total Applications Scored                      5                                  7




       Bidder Score Given by                            Resultant Risk Score
       Fannie Mae Contractor                   Medium                             High
Low                                               1                                  0
Medium                                            0                                  6
High                                             N/A                              N/A
Total Applications Scored                         1                                  6




qualification process; and (3) issue formal guidance       FHFA Can Improve Its Oversight of Fannie Mae’s
for the REO disposition program, including the             Recoveries from Borrowers Who Possess the
REO Pilot Program, requiring a program plan                Ability to Repay Deficiencies (AUD-2013-011,
with clearly defined goals and objectives, a program       September 24, 2013)
monitoring and oversight mechanism, criteria to
                                                           FHFA Can Improve Its Oversight of Freddie
measure and evaluate program success, and the means
                                                           Mac’s Recoveries from Borrowers Who Possess the
to assess alternative REO disposition strategies.
                                                           Ability to Repay Deficiencies (AUD-2013-010,
FHFA generally agreed with OIG’s recommendations           September 24, 2013)
and will implement corrective action if transactions
                                                           If either a foreclosure sale’s proceeds or the value at
beyond the initial REO Pilot Program are pursued.
                                                           which an enterprise records a property in its REO
                                                           portfolio is less than the borrower’s mortgage loan




                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013             9
balance, the shortfall (or deficiency) represents a loss   Freddie Mac—unlike Fannie Mae—did not pursue
to the enterprise. Losses of this type can be reduced      deficiencies arising from third-party sales.
if the enterprises recover deficiencies from borrowers
                                                         Second, delays in the deficiency collection vendors’
who possess the ability to repay. Enhanced deficiency
                                                         evaluation process limited Freddie Mac’s opportunity
management practices can also serve as a deterrent to
                                                         to pursue deficiencies related to more than 6,000
those who would choose to strategically default on
                                                         foreclosed mortgages for which state statutes of
their mortgage obligations.
                                                         limitations had expired. The delays were caused
In October 2012, OIG issued a report that assessed       by challenges associated with coordinating among
the agency’s oversight of the deficiency management      Freddie Mac’s various foreclosure/deficiency
efforts of the enterprises. In that audit, OIG found     collection counterparties—servicers, attorneys, and
that FHFA had an unfulfilled                                                   vendors. Specifically, the vendors
opportunity to provide the                                                     did not timely receive from
enterprises with guidance about                                                the servicers and attorneys the
effectively pursuing and collecting         Enhanced deficiency information needed to calculate
deficiencies from borrowers who                                                deficiency balances and pursue
may possess the ability to repay.           management                         collection.
In these follow-up audits, OIG
focused in more detail on the               practices can                      OIG also found that Fannie
                                                                               Mae’s deficiency collection
enterprises’ deficiency recovery
practices for borrowers who
                                            deter those who                    vendors generally did not pursue
                                                                               deficiencies on foreclosure sales
possess the ability to pay amounts
owed on foreclosed mortgages
                                            would choose to                    when, in their view, applicable
                                                                               statutes of limitation for filing
owned or guaranteed by the                  strategically default              deficiency claims against borrowers
enterprises.
                                                                               provided insufficient time to
OIG concluded that FHFA                     on   their mortgage                obtain the necessary information
can improve its oversight of the                                               from servicers and foreclosure
enterprises’ deficiency recovery
                                            obligations.                       attorneys to evaluate if deficiency
processes. First, OIG found                                                    balances existed.
that Freddie Mac did not refer
                                                                               OIG recommended that
nearly 58,000 foreclosures with
                                                         FHFA: (1) evaluate periodically the efficiency and
estimated deficiencies of approximately $4.6 billion
                                                         effectiveness of Freddie Mac’s deficiency recovery
to its deficiency collection vendors to evaluate the
                                                         strategies for pursuit of borrowers with the ability to
borrowers’ ability to repay those deficiencies. Most
                                                         repay; (2) review Freddie Mac’s monitoring controls
of these foreclosed mortgages were associated with
                                                         over its servicers, foreclosure attorneys, and collection
properties in states where Freddie Mac did not pursue
                                                         vendors involved in deficiency recovery activities to
deficiencies but where Fannie Mae did, with some
                                                         ensure that oversight across these counterparties is
success. The remainder were foreclosure sales to third
                                                         maintained; (3) direct Freddie Mac to establish and
parties rather than the enterprise; these third-party
                                                         implement controls for its counterparties to deliver
sales can result in deficiencies, but as a practice,
                                                         timely documents to deficiency collection vendors



10    Federal Housing Finance Agency Office of Inspector General
and provide for financial consequences to those            security. Although guidance states that FHFA
counterparties that fail to meet delivery deadlines;       examiners review outstanding issues and assess staff
and (4) direct the enterprises to implement a control      levels and skills of internal auditors, these activities
to consider time frames in state statutes of limitations   alone are insufficient for establishing reliance. FHFA’s
in prioritizing, coordinating, and monitoring              reliance on enterprise internal audit work—without
deficiency collection activity for borrowers with the      properly establishing and documenting grounds for
ability to repay.                                          such reliance—increases the risk that examination
                                                           analysis and results could be based on inaccurate or
FHFA provided comments agreeing with the
                                                           unsubstantiated work.
recommendations in these reports.
                                                           To strengthen FHFA’s oversight of enterprise
Action Needed to Strengthen FHFA Oversight
                                                           information security and privacy programs, we
of Enterprise Information Security and Privacy
                                                           recommended that the agency: (1) establish formal
Programs (AUD-2013-009, August 30, 2013)
                                                           program requirements, (2) implement a workforce
Recent reports have emphasized the growing threat          plan for IT examination staffing, (3) complete
of cyber attacks against government and private-           required risk assessments, (4) consistently deploy
sector computers and networks. These attacks pose          tools for monitoring IT security activities, and
a significant risk to the safety and soundness of          (5) establish and document a process for relying on
financial organizations, including the enterprises,        enterprise internal audit activities.
which store personal protected information (PPI) for
                                                           FHFA agreed with these recommendations and stated
28 million active borrowers, as well as other sensitive
                                                           that it has adopted a new approach to supervision
financial information. If that PPI is compromised,
                                                           activities.
the enterprises, FHFA, and Treasury could be exposed
to significant financial risk; trust in the enterprises    Evaluations
would also suffer greatly. The objective of this audit
was to assess the effectiveness of FHFA’s oversight of     Evaluation of Fannie Mae’s Servicer
enterprise information security and privacy programs.      Reimbursement Operations for Delinquency
                                                           Expenses (EVL-2013-012, September 18, 2013)
Key aspects of FHFA’s oversight of these programs
were ineffective during our January 2010 to                This report evaluates Fannie Mae’s servicer
November 2012 audit period. The agency did                 reimbursement operations for delinquency expenses.
not issue formal information security and privacy          Fannie Mae relies on servicers to make various
guidance to the enterprises, complete a risk               payments on behalf of delinquent borrowers.
assessment for information security and privacy            Generally, these payments are for property
necessary to support the annual examination plan,          preservation expenses, insurance, taxes, and
conduct ongoing monitoring of some key IT security         foreclosure costs and expenses. Figure 4 (see page 12)
issues, or address some previously identified findings     provides examples of the line items covered by these
regarding information security.                            payments. Fannie Mae uses a contractor to administer
                                                           major aspects of the servicer reimbursement function,
Further, FHFA did not have an adequate process to          including manually processing claims.
support its reliance on the work of the enterprises’
internal audit divisions related to information            OIG assessed FHFA’s oversight of Fannie Mae’s
                                                           servicer reimbursement operations.


                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013        11
Figure 4. Examples of Reimbursement                       (2) require Fannie Mae to quantify and aggregate its
Categories and Line Items                                 overpayments to servicers regularly and implement
        Category                         Line Item        a plan to reduce these overpayments by identifying
Property Preservation        •	 	Landscaping             their root causes, creating reduction targets, holding
  Expenses                   •	 	Trash Removal           managers accountable, and reporting its findings
                             •	 	Locksmith               and progress to FHFA periodically; and (3) publish
Insurance                    •	 	Hazard Premium          Fannie Mae’s reduction targets and overpayment
                             •	 	Mortgage Insurance      findings.
                                  Premium
                             •	 	Title Insurance         FHFA agreed with the first and second
Taxes                        •	 	State Taxes             recommendations.
                             •	 	Property Taxes
Foreclosure Costs and        •	 	Eviction Costs          Reducing Risk and Preventing Fraud in the New
  Expenses                   •	 	Sheriff’s Fees and      Securitization Infrastructure (EVL-2013-010,
                                  Costs                   August 22, 2013)

                                                                             The objective of this evaluation
We concluded that Fannie Mae’s                                               was to assess risks and fraud threats
oversight of its contractor’s                                                in the securitization infrastructure
manual claim processing focuses           Fannie Mae’s                       that FHFA and the enterprises
on measuring contractual                                                     are developing, and to address
performance rather than                   oversight of its                   such risks by recommending
minimizing overpayments to                                                   countermeasures for the emerging
servicers. Currently, FHFA is             contractor’s
                                                                             policies, procedures, internal
not aware of the impact of this
approach; neither FHFA nor
                                          processing of                      controls, and organizational
                                                                             structures as they are designed.
Fannie Mae aggregates the amount
of overpayments to servicers
                                          servicers’ claims                  Because information in this
                                                                             report could be used to exploit
that result from its contractor’s         for reimbursement                  vulnerabilities and circumvent
processing errors. OIG estimates
                                                                             recommended countermeasures, it
that the enterprise’s contractor          focuses on                         was not released publicly.
incorrectly approved 3.1% of
servicer reimbursements in 2012.          measuring the                      FHFA’s Oversight of Fannie
These processing errors prompted                                             Mae’s 2013 Settlement with
Fannie Mae to pay servicers               contractor’s                       Bank of America (EVL-2013-
$89 million in overpayments.                                                 009, August 22, 2013)
                                          performance rather
We recommended that FHFA:                                                    In January 2013, FHFA approved
(1) ensure Fannie Mae takes               than minimizing                    an $11.6 billion settlement with
the actions necessary to reduce                                              Bank of America (see Figure
processing errors, including              overpayments to                    5, page 13) that resolved issues
utilizing its process accuracy data                                          involving repurchase claims and
in a more effective manner and            servicers.                         servicing penalties. In addition,
implementing a red flag system;                                              FHFA allowed the transfer of

12    Federal Housing Finance Agency Office of Inspector General
Figure 5. Agreements Between Fannie Mae and             agreed with this recommendation and committed to
Bank of America ($ billions)                            establish guidelines by January 31, 2014.
                                  Settlement Cash
          Agreement                                     Fannie Mae’s Compliance with FHFA Email
                                     Proceeds
Representation and Warranty
                                                        Retention Requirements (EVL-2013-011,
  Settlement                                            August 16, 2013)
   Cash “Make-Whole”                    $3.6
     Payment                                            In November 2011, while conducting an
   Repurchases                           6.7            investigation, OIG special agents learned that
  Total Representation and              10.3            although Fannie Mae permanently retained the
    Warranty Settlement                                 email of most employees in sensitive positions, it
Compensatory Fees for                    1.3            automatically deleted the unsaved email of other
  Failure to Meet Delinquency                           employees after 60 days. In October 2012, FHFA
  Timelines
                                                        directed Fannie Mae to immediately begin saving all
Transfer of Mortgage            No funds to or from
  Servicing Rights                  Fannie Mae          employee email records and establish and implement
Total                                  $11.6            a corporate five-year email retention policy.

                                                        OIG reviewed Fannie Mae’s compliance with the
servicing rights on about 1.1 million mortgages from    email retention directive and confirmed that the
Bank of America to other servicers.                     enterprise is now in compliance.

When approving the settlement, FHFA employed a          OIG will continue to monitor FHFA’s oversight of
new policy governing the review of repurchase claim     the enterprises’ email retention practices and records
settlements that it developed in part as a response     management policies to ensure that they fulfill their
to an earlier OIG evaluation and recommendation.2       intended purposes.
Because FHFA’s policy applied to one, but not all,
                                                        FHFA’s Oversight of the Federal Home Loan
portions of the settlement, the 2013 settlement
                                                        Banks’ Compliance with Regulatory Limits on
enabled OIG to evaluate FHFA’s oversight under its
                                                        Extensions of Unsecured Credit (EVL-2013-008,
settlement policy in the context of its oversight of
                                                        August 6, 2013)
matters that fell outside of that policy.
                                                        In addition to making secured loans, known as
OIG found that FHFA adhered to its new policy
                                                        advances, to member financial institutions, the
when reviewing the settlement of repurchase claims
                                                        FHLBanks extend short-term, unsecured credit to
between Fannie Mae and Bank of America. This
                                                        domestic and foreign-owned financial institutions.
policy did not apply, however, to the resolution of
                                                        In June 2012, we reported that some FHLBanks
claims related to servicing penalties or the transfer
                                                        followed potentially risky unsecured credit
of mortgage servicing rights (MSR). Consequently,
                                                        management practices, including undertaking large
FHFA’s consideration of these aspects of the
                                                        exposures to counterparties located in the financially
settlement did not benefit from an established review
                                                        troubled Eurozone.3 Furthermore, we found that
process.
                                                        some FHLBanks violated FHFA’s regulatory limits
OIG recommended that FHFA establish a formal            on unsecured credit extensions. We recommended
review process for claims related to servicing          that FHFA: (1) assess the extent of such violations
deficiencies and significant MSR transfers. FHFA        in its 2012 horizontal review of unsecured credit risk


                                  Semiannual Report to the Congress • April 1, 2013–September 30, 2013     13
Figure 6. FHFA’s Supervisory Actions Taken in                      implementing the required remedies. Although
Response to Unsecured Credit Violations                            FHFA had not yet decided on a supervisory strategy
                                                                   for the FHLBank, the case shows the importance of
                                Supervisory Remediation
    FHLBank     Violations                                         continued, diligent monitoring and enforcement of
                                  Action       Date
    FHLBank A       474             MRA          3/31/2013
                                                                   compliance with MRAs and other requirements.
    FHLBank B    201 Primary,       MRA         12/31/2012
                201 Secondary
                                                                   We recommended that FHFA assess the FHLBanks’
    FHLBank C       33a             MRA          3/31/2013         compliance with its unsecured credit supervisory
    FHLBank D         9             MRA         10/31/2012         requirements during the 2013 and 2014 examination
    FHLBank E         6             MRA          3/31/2013         cycles, and take enforcement actions as required
    FHLBank F     1 Primary,        MRA         12/31/2012         to ensure that corrective and remedial actions are
                 1 Secondary
                                                                   implemented over time. FHFA agreed with these
    FHLBank G         1           Violation      9/30/2012
                                                                   recommendations.
a
  FHFA determined that FHLBank C’s aggregate term
extensions of credit to two counterparties exceeded                FHFA’s Oversight of Capital Markets Human
the regulatory limits for a combined total of 33 months,
15 months of which are attributable to one counterparty and        Capital (ESR-2013-007, August 2, 2013)
18 months of which are attributable to the other. The number
of individual transactions in excess of the regulation is likely   The enterprises’ combined capital markets businesses,
higher.
                                                                   which include their funding, hedging, and
                                                                   investment activities, manage portfolios of more than
management practices and (2) consider revising its                 $1.1 trillion of mortgage-related assets. Although
regulations to mitigate associated risks.                          generally profitable, certain elements of these
                                                                   businesses have incurred tens of billions of dollars
In this follow-up evaluation, we assessed FHFA’s                   in losses since September 2008, the start of FHFA’s
(1) implementation of the 2012 horizontal review                   conservatorships. For this reason, we initiated a series
and (2) supervisory and enforcement responses to                   of evaluations relating to FHFA’s supervision of the
identified violations.                                             enterprises’ capital markets businesses. This evaluation
                                                                   began after the enterprises disclosed concerns about
We found that FHFA conducted a proactive and
                                                                   voluntary attrition among employees with specialized
thorough review that identified over 900 unsecured
                                                                   skills in their 2011 annual filings.
credit violations at seven FHLBanks and risk
management deficiencies at the other five.                         Since the start of the conservatorships, voluntary
                                                                   attrition of staff with specialized skills has risen
We also found that FHFA’s responses to the violations
                                                                   markedly. However, as of late 2012, human capital
at the seven FHLBanks were consistent with its
                                                                   risk posed by such attrition, while still a concern,
policy. The agency issued matters requiring attention
                                                                   appears to have dissipated. Specifically, the Fannie
(MRAs), among other actions, requiring the banks to
                                                                   Mae group that manages the enterprise’s investment
remediate deficiencies within specified time periods.
                                                                   activity saw a rise in its rate of voluntary attrition
See Figure 6 (above) for a list of FHFA’s supervisory
                                                                   from January 2010 to September 2012, but the
actions in response to FHLBank unsecured credit
                                                                   group grew over the same period, suggesting that the
violations.
                                                                   human capital risks posed by the increase in attrition
As FHFA began to monitor compliance with MRAs,                     rate were mitigated. The attrition rate for Freddie
however, it found that one FHLBank had difficulty                  Mac’s investment management group also rose from


14      Federal Housing Finance Agency Office of Inspector General
2010 to 2012, but the attrition rate appears to be           As a result of the initial HARP 2.0 program
stabilizing, as its 2012 rate was lower than its 2011        modifications and subsequent changes made
rate.                                                        throughout 2012 and 2013, HARP refinance volume
                                                             has substantially increased (see Figure 7, page 16). As
We concluded that human capital risks associated
                                                             of March 2013, 2.4 million HARP refinances had
with voluntary attrition rates within the enterprises’
                                                             been completed. It is difficult, however, to project
capital market businesses had been adequately
                                                             how many HARP-eligible loans will ultimately be
managed and that no additional study on this topic
                                                             refinanced. Several unknown variables, including
was needed. However, voluntary attrition rates are
                                                             interest rates, lender participation, and borrowers’
not static, and an improving economy puts additional
                                                             willingness to refinance, make any estimate uncertain.
pressure on the enterprises’ attrition rates as attractive
opportunities become available to their employees.           Additionally, challenges to the program’s success
Therefore, we will continue to monitor FHFA’s                remain. These challenges include educating borrowers
oversight of the enterprises’ human capital resources        and encouraging their participation in the program.
and planning associated with human capital risk,             FHFA is planning to address the challenges by
and we will initiate additional work on this topic as        implementing a nationwide public education
warranted.                                                   campaign.

Home Affordable Refinance Program: A                         FHFA’s Initiative to Reduce the Enterprises’
Mid-Program Assessment (EVL-2013-006,                        Dominant Position in the Housing Finance
August 1, 2013)                                              System by Raising Gradually Their Guarantee Fees
                                                             (EVL-2013-005, July 16, 2013)
FHFA, in coordination with Treasury, announced
HARP in March 2009. HARP is a streamlined                    FHFA has argued that federal financial support for
refinance program for loans owned or guaranteed by           the enterprises over the years has permitted them
Fannie Mae or Freddie Mac. It is designed to assist          to set their guarantee fees—charged to protect
borrowers who are current on their loans but have            investors’ mortgage-backed securities (MBS)
not been able to refinance because they have little or       against potential credit losses—at artificially low
no equity in their homes. We conducted this program          levels. At such levels, the fees priced competitors
evaluation to assess FHFA’s administration and               out of the conforming loan market and increased
oversight of HARP.                                           the enterprises’ risks. The agency has directed the
                                                             enterprises to increase guarantee fees to encourage
When HARP was announced, Treasury estimated
                                                             greater private-sector investment in mortgage credit
that 4 to 5 million borrowers would have the
                                                             risk, reduce the enterprises’ dominant position in
opportunity to refinance under the program. As
                                                             housing finance, and limit potential taxpayer losses.
of September 2011, however, fewer than 1 million
of those borrowers had refinanced. Based on                  We conducted this evaluation to: (1) analyze FHFA’s
consultations with lenders and feedback from                 initiative and (2) assess FHFA’s communication and
borrowers, FHFA directed the enterprises to modify           interaction with FHA, a government agency that
the program; this resulted in HARP 2.0, which is             insures mortgages against credit losses, which recently
scheduled to expire on December 31, 2015.                    announced a cessation of its mortgage premium
                                                             increases.



                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013        15
Figure 7. Total HARP Refinances for April 2009 Through March 2013

140,000

120,000

100,000

 80,000

 60,000

 40,000

 20,000

        0
                  9

                        09

                               09

                                      10

                                               0

                                                     10

                                                            10

                                                                   11

                                                                            1

                                                                                  11

                                                                                         11

                                                                                                12

                                                                                                         2

                                                                                                               12

                                                                                                                      12

                                                                                                                             13
              00




                                           01




                                                                        01




                                                                                                     01
                      20

                             20

                                    20



                                                   20

                                                          20

                                                                 20



                                                                                20

                                                                                       20

                                                                                              20



                                                                                                             20

                                                                                                                    20

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             e2




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                   ber

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                                                                                                          ber

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            Jun




                                         Jun




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                                 Ma




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                                                                                                                        Ma
                  tem

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                                               tem

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                                                                                                                cem
              Sep




                                           Sep




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                        De




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                                                                                                               De
We found that although the enterprises’ average       Further, we found that FHFA may realize additional
combined guarantee fees have nearly doubled           benefits by seeking to establish a more formal
since 2011 (see Figure 8, page 17), FHFA has not      working relationship with FHA and jointly assessing
determined how high the                                                        the key issues that may affect
enterprises must increase                                                      their pricing initiatives.
guarantee fees to achieve           Although the enterprises’                  For example, coordination
FHFA’s objectives. The agency                                                  may help to avoid a pricing
also has not yet defined            average combined                           disparity between guarantee
or developed measures for                                                      fees and insurance premiums
increasing private-sector           guarantee fees have nearly that could shift a portion
investment in mortgage                                                         of the enterprises’ mortgage
credit risk. In addition, the
                                    doubled     since 2011,                    business and associated risks
            Figure 7. Total HARP Refinances for April 2009 Through                  March
                                                                               to FHA’s        2013
                                                                                          market   without an
agency must confront related
                                    FHFA has not determined overall increase in private-
challenges: too-high increases
                                                                               sector investment in mortgage
could dampen consumer               how high guarantee fees                    credit risk.
demand for mortgages and
certain federal initiatives—        must increase to achieve                   We recommended that FHFA
designed to combat abusive                                                     establish definitions and
lending—could limit private-        its objectives.                            performance measures for its
sector investment.                                                             initiative to raise enterprise

16   Federal Housing Finance Agency Office of Inspector General
Figure 8. Estimated Enterprise Aggregated Annual Single-Family Guarantee Fee Pricing 2008 Through
March 31, 2013

                            60
                            55
                            50
                            45
             Basis Points




                            40
                            35
                            30
                            25
                            20
                            15
                            10
                              2008   2009         2010         2011           2012        1Q 2013



guarantee fees and assess the feasibility of establishing   it generally relies on the FHLBanks, their member
a formal working arrangement with FHA. FHFA                 institutions, and various private and public entities to
did not agree with our recommendations. We will             monitor projects. The FHLBanks’ oversight of AHP
continue to monitor these issues.                           projects is also primarily paper based. Further, the
                                                            FHLBanks have varying practices regarding whether
FHFA’s Oversight of the Federal Home Loan
                                                            and when they conduct site visits of projects. For
Banks’ Affordable Housing Programs (EVL-2013-               example, although some FHLBanks visit projects
04, April 30, 2013)                                         during construction, others only visit projects that
Funded by the FHLBanks, the Affordable Housing              receive a certain level of funding or are placed on
Program (AHP) is the largest private source of grant        watch lists.
funds for affordable housing in the United States.     As the regulator of the FHLBank System, FHFA is
Since 1990, the FHLBanks have awarded over             well positioned to provide cross-cutting feedback
$4 billion to subsidize low-income rental or owner-    and analyses to the FHLBanks to improve oversight
occupied  housing.
      Figure   8. Estimated Enterprise Aggregated Annual
                                                       of theirSingle-Family
                                                                programs, but Guarantee      Fee
                                                                               it typically has notPricing
                                                                                                    published
                                         2008 Through March 31,   2013
                                                       such data. In addition, agency officials noted that
Although AHP projects must meet specific regulatory
requirements and eligibility criteria, the FHLBanks    they had limited resources and staffing levels. Though
have some leeway in how they weigh scoring criteria.   the FHLBanks work together to share best practices,
FHFA is responsible for ensuring that the FHLBank      unbiased analyses from FHFA could better inform
System fulfills its affordable housing objectives.     policy and administrative decisions regarding these
                                                       programs.
We initiated this evaluation to examine FHFA’s
                                                       We recommended that FHFA: (1) develop a policy
oversight of the FHLBanks’ administration and
                                                       for FHLBank site visits of AHP projects that
management of their AHPs.
                                                       includes guidance on their frequency, scope, and
We found that FHFA conducts annual examinations        administration; (2) conduct and report cross-cutting
and collects data regarding each FHLBank’s AHP, but    analyses of common issues and themes across the

                                     Semiannual Report to the Congress • April 1, 2013–September 30, 2013       17
FHLBanks, using analytically rigorous methods;            Public Company Accounting Oversight Board
and (3) analyze staffing levels needed to perform         Criticisms of Public Accounting Firms that Do
additional cross-cutting analyses and oversee housing     Business with the GSEs (May 3, 2013)
project site visits by the FHLBanks, and take
                                                          The Public Company Accounting Oversight Board
appropriate actions to meet those staffing targets.
                                                          inspects selected audit work of public accounting
FHFA agreed with our recommendations and noted            firms to assess compliance with requirements
specific steps it will undertake to address them.         established by the Sarbanes-Oxley Act of 2002, the
                                                          Securities and Exchange Commission (SEC), and
Recommendations                                           professional standards. The board found that two
                                                          firms, which conduct annual financial statement
                                                          audits for the GSEs, had failed to satisfy concerns it
A complete list of OIG’s audit and evaluation
                                                          had identified in previous inspections. While those
recommendations is provided in Appendix B.
                                                          concerns were unrelated to the firms’ work for the
                                                          GSEs, we recommended that FHFA request that
Other Reports                                             the GSEs confirm that their audit committees and
                                                          management provide elevated attention to the work
In addition to its audits and evaluations, OIG issued     conducted by the two firms.
two management alerts.

Management Alert: Delay Implementing Advisory             Civil Fraud Initiative
Bulletin No. 2012-02 (August 5, 2013)
                                                          OA launched its Civil Fraud Initiative in June 2013.
In a memo to the FHFA Acting Director, OIG raised
                                                          OA, with support from OI and the Office of Counsel
concerns about the delay, authorized by FHFA, in
                                                          (OC), conducts civil fraud reviews (also known
the enterprises’ compliance with Advisory Bulletin
                                                          as nonaudit services) to identify fraud and make
No. 2012-02. The bulletin directed the enterprises to
                                                          referrals for civil actions and administrative sanctions
change their current practices and classify any single-
                                                          against entities and individuals who commit fraud
family loan that is delinquent for 180 or more days
                                                          against FHFA, Fannie Mae, Freddie Mac, or the
as a loss. The bulletin initially called for compliance
                                                          FHLBanks.
in April 2012, although FHFA agreed to extensions
until January 1, 2015.                                    Currently, OA is working with various assistant U.S.
                                                          Attorneys on reviews of lenders’ loan origination
Given this lengthy delay and because the advisory
                                                          practices to determine their compliance with
bulletin involves matters central to sound risk
                                                          enterprise requirements. Lenders are considered for
management and accounting practices at the
                                                          review through the use of data-mining techniques
enterprises, OIG recommended that FHFA require
                                                          and requests from government agencies.
the enterprises to report the estimated impact on
their financial statements as if the bulletin were in
effect. The agency agreed with the recommendation.        Audit and Evaluation Plan

                                                          OIG maintains an Audit and Evaluation Plan
                                                          that focuses strategically on the areas of FHFA’s


18    Federal Housing Finance Agency Office of Inspector General
operations that pose the greatest risks to the agency    Figure 9. Criminal and Civil Recoveries from
and the GSEs. The plan responds to current events        April 1, 2013, Through September 30, 2013
and feedback from FHFA officials, members of                                     Criminal/Civil Recoveries
Congress, and others. The plan is available for           Fines                        $20,451,359
inspection at www.fhfaoig.gov/Content/Files/              Restitutions                 $84,175,968
audit%26evaluation%20plan_0.pdf.                          Total                       $104,627,327



Investigations
                                                                           Fraud Committed Against
                                                                           the Enterprises, FHLBanks,
OIG investigators have
                                         During this period,               or FHLBank Member
participated in numerous
                                                                           Institutions
criminal, civil, and administrative
investigations, which during the         OIG’s investigative               Investigations in this category
semiannual period resulted in the                                          involved multiple schemes
indictment of 75 individuals and         efforts   resulted   in           that targeted the enterprises,
the conviction of 55 individuals.                                          the FHLBanks, or FHLBank
In many of these investigations,
                                         the   indictment     of           members.
we worked with other law
                                         75 individuals and                Mortgage Company Diverts
enforcement agencies, such as the
                                                                           Loan Sales Proceeds, Mesa,
Department of Justice (DOJ), the         the conviction of
Office of the Special Inspector                                            Arizona
General for the Troubled Asset           55 individuals, as                On June 28, 2013, Scott
Relief Program (SIGTARP), the                                              Powers and David McMaster
FBI, HUD Office of Inspector             well as the award of              were sentenced to serve 96 and
General (HUD-OIG), the Secret                                              188 months of incarceration,
Service, and state and local entities    more than                         respectively, in the U.S. District
nationwide. Further, in several                                            Court for the District of North
investigations, OIG investigative        $104 million in                   Dakota. In addition to their prison
counsels were appointed as                                                 terms, Powers and McMaster
Special Assistant U.S. Attorneys         criminal fines and
                                                                           were ordered to pay a money
and supported prosecutions.
Figure 9 (see above) summarizes
                                         restitution orders.               judgment (jointly and severally) of
                                                                           $28.5 million to BNC National
the criminal and civil recoveries                                          Bank (BNC), which is a member
from our investigations during                                             of the FHLBank of Des Moines.
the reporting period. Although most of these            On May 6, 2013, Lauretta Horton and David
investigations remain confidential, details about       Kaufman were sentenced in the same court to two
several of them have been publicly disclosed and are    years of supervised release.
summarized below.




                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013   19
From 2006 to 2010, all four worked for American         additional conspirators. A total of four individuals,
Mortgage Specialists, which was a mortgage company      including Dantzler, were convicted for their
headquartered in Mesa, Arizona. American Mortgage       participation in this conspiracy.
Specialists used money provided by BNC to originate
                                                        This was a joint investigation with the FBI.
residential mortgage loans that were then sold
to commercial investors, such as the enterprises.
                                                        Bank Vice President Defrauds Employer, Atlanta,
American Mortgage Specialists was supposed to
                                                        Georgia
repay BNC with the sales proceeds, but the money
was diverted to the company’s payroll and operating     On April 5, 2013, former Appalachian Community
expenses. Money from earlier mortgage sales was used    Bank Vice President, Adam Teague, was sentenced
to pay back BNC for funding current originations,       in the U.S. District Court for the Northern
causing the defendants to falsely represent their       District of Georgia to 5 years and 10 months of
company’s financial health. When                                            incarceration for conspiring to
the fraud was discovered, the                                               defraud Appalachian. He was
company shut down, owing BNC
                                           Bank vice president further ordered to serve 5 years
$28.5 million.                                                              of supervised release and pay

This was a joint investigation with        sentenced to 5 years restitution of $5.8 million. Teague
                                                                            had previously pled guilty to
SIGTARP and DOJ’s Criminal
Division Fraud Section with
                                           and 10 months                    conspiracy to commit bank fraud.

support from the Financial Crimes                                           Teague engaged in illegal schemes
Enforcement Network (FinCEN).
                                           incarceration     and
                                                                            to unjustly enrich himself at
                                           $5.8 million in                  the expense of Appalachian and
Fannie Mae Contractor Sells                                                 prevented the Federal Deposit
Customer Information, Atlanta,             restitution.                     Insurance Corporation (FDIC)
Georgia                                                                     from discovering certain past
On April 29, 2013, Alex Dantzler                                            due loans on Appalachian’s
was sentenced in the U.S. District                                          books. Specifically, Teague and
Court for the Northern District of Georgia to 15        an unindicted co-conspirator arranged a number of
months of incarceration and 24 months of supervised     sham real estate transactions and caused Appalachian
release. Dantzler previously pled guilty to conspiracy  to issue approximately $7 million in fraudulent loans
to commit bank fraud.                                   to another unindicted co-conspirator, making it
                                                        appear that the loan proceeds were used to purchase
From June 2011 to July 2012, Dantzler, then a           certain properties from Appalachian’s foreclosure
Fannie Mae contract employee assigned to the            inventory and that regular monthly payments on the
National Underwriting Center in Dallas, Texas, used     new mortgages were being made.
his access to Fannie Mae’s Quality Assurance System
database to obtain PPI about numerous Fannie Mae        Appalachian was a member of the FHLBank of
borrowers. Dantzler then sold the information to        Atlanta. As such, it received advances from the
an individual in Atlanta, Georgia, who used it to       FHLBank of Atlanta and pledged portfolios of its
conduct various identity theft schemes involving        loans as collateral for those advances. Due to its



20   Federal Housing Finance Agency Office of Inspector General
poor financial condition, Appalachian was closed          Condo Conversion and Builder Bailout
on March 19, 2010, and FDIC was appointed                 Schemes
as receiver. At that time, Appalachian owed the
                                                          These schemes begin with sellers or developers
FHLBank of Atlanta approximately $67 million.
                                                          seeking out investors with good credit who want
This was a joint investigation with the FBI, FDIC         low-risk investment opportunities. Investors are
Office of Inspector General (FDIC-OIG), and               offered deals on properties with no money down
SIGTARP.                                                  and other lucrative incentives, such as cash back and
                                                          guaranteed and immediate rent collection. To fund
Property Management Scheme                                these incentives, sellers use complicit appraisers to
                                                          inflate the sales price. The incentives are not disclosed
The wave of foreclosures following the housing crisis
                                                          to lenders, who are defrauded into making loans far
left the GSEs holding a large inventory of REO.
                                                          exceeding property values. When the properties go
To minimize losses associated with REO, the GSEs
                                                          into foreclosure, lenders suffer large losses.
rely heavily on contractors to secure, maintain and
repair, price, and ultimately sell their properties. In
                                                          Condo Conversion, West Palm Beach, Florida
a property management scheme, contractors overbill
for work performed or bill for work not performed.        On September 26, 2013, in the U.S. District Court
                                                          for the Southern District of Florida, an information
Mortgage Servicer Falsifies Property Inspections,         was filed, charging Jose Aller and Ernesto Rodriguez
Tampa, Florida                                            with conspiracy to commit bank fraud.
On July 18, 2013, in the U.S. District Court for the      The information alleges that between February
Middle District of Florida, Tammy Roaderick pled          and December 2008, Aller and Rodriguez, former
guilty to conspiracy to commit wire fraud.                co-owners of JAER Guaranteed Investments,
From about March 2007 to December 2009,                   conspired with others to provide buyers of
Roaderick, Vice President of American Mortgage            condominiums at Kensington of Royal Palm Beach
Field Services, ordered and oversaw the submission        with incentives that were not disclosed on the
to Bank of America of fraudulent property inspection      HUD-1 statements that were submitted as part of the
reports for inspections of foreclosed properties for      loan application and approval process. The allegedly
which American Mortgage Field Services was paid           fraudulently induced mortgages were sold to Freddie
but never performed. The enterprises reimbursed           Mac by the originating lenders.
Bank of America, as their servicer, for the fake          This was a joint investigation with the FBI.
inspections. As part of her plea deal, Roaderick also
agreed to forfeit $2.4 million to Bank of America and     Escrow Agent Pleads Guilty After Defrauding the
the enterprises. The overall loss for the conspiracy,     Enterprises, Los Angeles, California
involving company president, Dean Counce, and
                                                          On June 13, 2013, Jacqueline Burchell pled guilty
other employees, was estimated at $12.8 million.
                                                          to conspiracy to commit bank and wire fraud in
This was a joint investigation with HUD-OIG and           the U.S. District Court for the Central District of
the Secret Service.                                       California.




                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013        21
From 2008 to 2011, Burchell, an escrow agent,             in restitution. The sentences and verdict were all
conspired with other individuals who negotiated with      rendered by the U.S. District Court for the Southern
the builders of new condo developments in Arizona,        District of Florida.
California, and Florida to sell units on their behalf
                                                          Montero, Rigal, Campo, Lazardi, Perez, Superlano,
in exchange for large commissions that were not
                                                          and others participated in condo conversion schemes
disclosed to the lenders. The defendants recruited
                                                          in the Florida cities of Ft. Lauderdale, Orlando, and
straw buyers and prepared loan applications with
                                                          Tampa. Of the 165 transactions involved in their
false information to sell more than 100 units. The
                                                          schemes, 131 have been foreclosed and another 26
enterprises have lost approximately $2.4 million
                                                          are in foreclosure. The targeted lenders have lost
because they purchased some of the fraudulently
                                                          $34 million of the $39 million loaned, Freddie
originated loans.
                                                          Mac’s exposure is $8.5 million, and Fannie Mae has
This was a joint investigation with the FBI and IRS-      reported losses of $4.2 million.
Criminal Investigation (IRS-CI).
                                                                            Loan Origination Schemes
A $39 Million Florida Condo                                              Loan or mortgage origination
Conspiracy, Ft. Lauderdale,               Mortgage broker                schemes are the most common
Florida                                                                  type of mortgage fraud, as the
                                           sentenced to
On April 9, 2013, Dayanara                                               volume of cases below attests.
Montero was sentenced to 22                70 months                     These schemes typically involve
months of incarceration, 3 years of                                      misrepresentations of buyers’
supervised release, and $1,746,567         incarceration and             income, assets, employment,
in restitution. On April 24, 2013,                                       and credit profile to make them
Quelyory Rigal was found guilty            $3.6 million in               more attractive to lenders. Bogus
of wire fraud, mail fraud, and                                           Social Security numbers and fake
conspiracy to commit wire and              restitution.                  or altered documents, such as
mail fraud. On April 29, 2013,                                           W-2 forms and bank statements,
Sandra Campo was sentenced                                               are often used. These schemes
to 70 months of incarceration,                                           are designed to defraud lenders
5 years of supervised release, and $3,575,981 in      into making loans they would not otherwise make.
restitution. On May 3, 2013, Osbelia Lazardi was      Perpetrators pocket origination fees or inflate home
sentenced to 25 months of incarceration, 3 years      prices and divert proceeds into personal accounts.
of supervised release, and $912,575 in restitution.
On July 11, 2013, Marisa Perez was sentenced to           Unlicensed Broker Alleged to Have Originated
5 years of supervised release, 9 months of home           Fraudulent Mortgages, San Diego, California
confinement with electronic monitoring, 300 hours         On July 31, 2013, Shellie Lockard pled guilty to
of community service, and $278,878 in restitution.        conspiracy to commit wire and bank fraud in the
On September 20, 2013, Marina Superlano was               U.S. District Court for the Southern District of
sentenced to one year and one day of incarceration,       California. In addition, on August 8, 2013, Donald
three years of supervised release, and $278,878           V. Totten was indicted for conspiracy to commit wire




22    Federal Housing Finance Agency Office of Inspector General
fraud and wire fraud involving a financial institution       in Annandale, Virginia. In this capacity, she placed
in the same court.                                           false information in loan applications and used false
                                                             documents, such as W-2 forms, to qualify otherwise
From approximately 2002 until 2007, Totten was
                                                             unqualified applicants for loans. The enterprises
a loan officer who acted as an unlicensed mortgage
                                                             suffered losses exceeding $800,000 as a result of
broker (operating under broker licenses held by
                                                             Delgado’s conduct.
others). During this time, Totten owned or operated
Integrated Home Loans, Integrated Lending, Money             This was a joint investigation with the FBI and was
World, and other entities and generated business             prosecuted with assistance from an OIG investigative
by advertising on television and other media. In             counsel.
2006, Totten allegedly obtained $2.2 million in
mortgage loans on behalf of a single straw buyer by          Servicer Allegedly Diverted Over $18 Million
allegedly using false information on the straw buyer’s       Owed to the Enterprises, Ft. Lauderdale, Florida
loan applications and then collected kickbacks and
                                                             On July 11, 2013, in the U.S. District Court for the
commissions on the sales. Lockard, a loan processor,
                                                             Southern District of Florida, a criminal information
worked for Totten from January 2006 through
                                                             was filed against Patrick Mansell, alleging conspiracy
June 2007, during which time she processed these
                                                             to commit wire fraud. Mansell pled guilty on
and other fraudulent loans. Lockard created and
                                                             August 5, 2013.
processed fraudulent loan applications and fraudulent
supporting documents, such as false Certified Public         Starting in April 2007, Mansell used his position as
Accountant letters, false bank statements, and false         vice president, secretary, and director of Coastal States
verification of deposit forms. She submitted them            Mortgage Corporation to defraud the enterprises.
to mortgage lenders including FHLBank members.               Through February 2012, Coastal States withheld
Many of the loans subsequently defaulted, causing            mortgage loan payoffs due to the enterprises for
the mortgage lenders and secondary purchasers,               extended periods. Coastal States would use these
including the enterprises, to suffer significant losses as   funds for its own business purposes and to make
a result of the conspiracy.                                  monthly mortgage payments on paid-off loans,
                                                             misrepresenting them as performing loans. Payoffs
This was a joint investigation with the FBI, IRS-CI,
and U.S. Attorney’s Office for the Southern District         fraudulently retained by Coastal States were also used
of California.                                               to remit funds due to the enterprises for previously
                                                             withheld payoffs. Daily and monthly servicing reports
Loan Officer Sentenced, Annandale, Virginia                  were supplied to the enterprises containing false
                                                             information and altered loan-identifying numbers,
On July 30, 2013, in the U.S. District Court for
                                                             which enabled the scheme to go undetected. The
the Eastern District of Virginia, Rina Delgado was
                                                             enterprises lost more than $18 million as a result.
sentenced to 12 months of incarceration and 3 years
of supervised release. She was also ordered to pay           The Florida Office of Financial Regulation provided
$1,160,611 in restitution. She previously pled guilty        assistance to OIG during the initial stages of the
to conspiracy to commit wire fraud.                          investigation.

From September 2006 until August 2007, Delgado
worked as a loan officer with SunTrust Mortgage


                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013          23
Inflated Sales Prices and Multiple Sales of Single        This was a joint investigation with the FBI, HUD-
Properties, Dallas, Texas                                 OIG, and the Secret Service.
On July 10, 2013, Herbert Williams was indicted
                                                          Former Broker Sentenced, Morristown, New
for conspiracy to commit bank fraud and aggravated
                                                          Jersey
identity theft in the U.S. District Court for the
Eastern District of Texas.                                On June 21, 2013, Joshua Van Orden was sentenced
                                                          in the Superior Court of New Jersey, County of
Williams and a conspirator allegedly inflated the
                                                          Morris, to five years of incarceration.
sales prices of a home that was sold in two fraudulent
transactions. Williams was also involved in similar     Between September 2009 and February 2010,
schemes with five other properties. The combined        Van Orden, while a mortgage broker at Superior
schemes caused a loss of $1.2 million to the involved   Mortgage Corporation, knew that loan applications
financial institutions, including a loss of $900,000    for three borrowers that he presented to his employer
to the enterprises, which bought mortgages on the       contained false information and omissions of material
properties.                                             facts. Additionally, with respect to one of the three
                                                        transactions, Van Orden facilitated a short sale
This was a joint investigation with the Secret Service.
                                                                            from Fannie Mae to a straw buyer
                                                                            that resulted in a loss to Fannie
Mortgage Fraud Conspiracy
                                                                            Mae of approximately $150,000.
Charges, Oxnard, California
                                          Mortgage broker                   A judgment was ordered for
On June 26, 2013, Jose Garcia,                                              $107,000 in favor of Fannie Mae.
Lucy Garcia, Jose Fernando                sentenced to five
Murguia, Sesilia Garcia, Lili                                               This was a joint investigation with
Ayala Hernandez, Gregg Quinn,             years incarceration. the New Jersey Attorney General
Lidubina Perez, and Cesar                                                   and the New Jersey Division of
Rodriquez Azamar were indicted                                              Criminal Justice.
in the U.S. District Court for
                                                        Indictments in a $3.5 Million Mortgage Fraud
the Central District of California for conspiracy to
                                                        Scheme, Baltimore, Maryland
commit wire and bank fraud. On September 27,
2013, Quinn pled guilty to conspiracy to commit         On June 10, 2013, Edgar Tibakweitira, Flavia
bank and wire fraud.                                    Makundi, Annika Boas, Makorya Wambura, Carmen
                                                        Johnson, and Cane Mwihava were indicted in the
According to the indictment, the conspirators
                                                        U.S. District Court for the District of Maryland
allegedly generated dozens of mortgage loans
                                                        for wire fraud, conspiracy to commit wire fraud,
for unqualified borrowers. For these unqualified
                                                        aggravated identity theft, and aiding and abetting.
borrowers, the conspirators allegedly prepared
mortgage applications that contained false              The defendants allegedly diverted funds from
information about borrowers’ income, employment,        $3.5 million in fraudulently obtained loans, which
and assets. The defendants in these cases generated     resulted in losses of over $1 million to lenders, FHA,
huge commissions and fees through the mortgage          and the enterprises.
application process—typically at least $10,000 per
mortgage.


24    Federal Housing Finance Agency Office of Inspector General
This was a joint investigation with HUD-OIG,              From January 2008 to January 2009, Bartlett,
the Secret Service, IRS-CI, Treasury Office of the        Lattas, and Burge allegedly used straw buyers to
Inspector General, and Immigration and Customs            obtain $1.5 million in loans. The properties subject
Enforcement-Homeland Security Investigations.             to the loans were then sold at inflated prices in a
                                                          loan origination and property flipping scheme. The
Inflated Loans and Kickbacks, Dallas, Texas               enterprises purchased several of the loans and suffered
                                                          losses of $890,000.
On May 30, 2013, in the U.S. District Court for the
Eastern District of Texas, Ronzell Mitchell pled guilty   This was a joint investigation with HUD-OIG and
to mail fraud. On June 4, 2013, and June 12, 2013,        the Postal Inspection Service (USPIS).
respectively, Christi Wyatt pled guilty to conspiracy
to commit mail fraud and Lacie Devine was indicted        Indictments and Guilty Pleas in a $2 Million
for conspiracy to commit mail fraud in the same           Diversion, Denver, Colorado
court.
                                                          On May 16, 2013, Michael Martinez, Katherine
From about March 2008 through February 2010,              Norman, and Benjamin Velasquez were indicted for
Mitchell and Wyatt conspired with others to recruit       theft and forgery in the City and County of Denver
buyers to purchase properties from sellers at inflated    District Court, Colorado. On June 3, 2013, Norman
sales prices, to help the buyers obtain mortgage          pled guilty to theft, and she was sentenced to five
loans based on these inflated sales prices, to cause      years of supervised release on July 15, 2013. Martinez
the sellers to kickback portions of the loan proceeds,    pled guilty to theft on July 15, 2013.
to pay portions of the loan proceeds to the buyers,       From 2010 to 2011, Martinez, operator of Martinez
and to cause the escrow officer not to disclose these     Investments, and Norman, his bookkeeper, devised
payments to the lender. Mitchell was involved with        a scheme to divert funds designated for specific
fraudulent transactions on seven homes and Wyatt          real estate transactions. The scheme resulted in
on eight homes. Devine, an escrow officer, is alleged     over $2 million in losses by Quantum Title, one
to have been involved in several of these transactions.   of Martinez Investments’ holdings. Martinez,
The enterprises bought a number of the loans, and         Norman, and Velasquez, a straw buyer, also allegedly
the scheme caused losses of $1.6 million to Fannie        committed loan origination fraud on three enterprise-
Mae and $240,000 to Freddie Mac.                          owned properties by acting as straw buyers and
                                                          providing false employment, income, and residency
This was a joint investigation with the FBI, HUD-
                                                          documents to lenders. As a result, Freddie Mac lost
OIG, and the Texas Department of Insurance Fraud
                                                          $178,000.
Unit.
                                                          This was a joint investigation with the Colorado State
Real Estate Company Uses Straw Buyers to Flip             Attorney General’s Office.
Properties, Chicago, Illinois
                                                          Company Owners Plead Guilty to Conspiracy to
On May 30, 2013, Steven Bartlett, owner of SSB
                                                          Commit Mortgage Fraud, New Haven, Connecticut
Real Estate Solutions; Robert Lattas, an attorney; and
Nicholas Burge, a loan originator, were indicted in       On May 14, 2013, in the U.S. District Court for
the U.S. District Court for the Northern District of      the District of Connecticut, Kwame Nkrumah
Illinois for mail and wire fraud.                         (also known as Roger Woodson) pled guilty to


                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013      25
conspiracy to commit mail, wire, and bank fraud.           to commit mail fraud. On September 25, 2013,
As a result of his plea, Nkrumah was sentenced to          Morrison pled guilty to the charge.
48 months of incarceration, 5 years of supervised
                                                           Johnson, a former personal banker; Morrison,
release, $2,940 in restitution to Fannie Mae, and a
                                                           a former owner of CEM Title, Inc.; and other
$113,080 forfeiture. On June 14, 2013, in the same
                                                           individuals engaged in a scheme to defraud financial
court, Charmaine Davis pled guilty to making a false
                                                           institutions and mortgage lenders by producing
statement for the purpose of influencing the action of
                                                           fraudulent documents to support untruthful loan
a financial institution. As a result of her plea, Davis
                                                           applications. Fannie Mae purchased a number of
was sentenced to 24 months of incarceration, 5 years
                                                           these fraudulently originated mortgages and faces
of supervised release, a $6,000 fine, and a $39,434
                                                           exposure to a potential loss exceeding $1 million.
forfeiture.
                                                           This was a joint investigation with the Department
Nkrumah and others fraudulently obtained more
                                                           of State Bureau of Diplomatic Security, the Central
than $1 million in loans, submitted fake documents
                                                           Intelligence Agency Office of Inspector General,
for more than $10 million in mortgages in a short
                                                           DOJ Office of Inspector General, the Department of
sale scheme involving enterprise loans, and attempted
                                                           Homeland Security Office of Inspector General, the
to fraudulently purchase dozens of multifamily
                                                           Secret Service, the FBI, and HUD-OIG.
properties.

This was a joint investigation with the FBI, USPIS,        Mortgage Company Falsifies Documents for 50
and HUD-OIG.                                               Loans, Philadelphia, Pennsylvania

                                                           On May 1, 2013, an indictment was unsealed in
Guilty Plea in a $1 Million Fraud Conspiracy,
                                                           the U.S. District Court for the Eastern District of
Dallas, Texas
                                                           Pennsylvania, charging six former employees of the
On May 8, 2013, Michael Burnham was indicted for           now defunct Madison Funding of Allentown—Joel
conspiracy to commit bank fraud in the U.S. District       Tillett, Jason Boggs, Claribel Gonzalez, Florentina
Court for the Eastern District of Texas. He pled           Peralta, Ghovanna Gonzalez, and Angela Diaz—with
guilty on July 3, 2013.                                    conspiracy, bank fraud, false statements, and aiding
                                                           and abetting. On August 14, 2013, Tillett was
From March to August 2010, Burnham conspired to
                                                           sentenced to four years of incarceration and ordered
sell seven properties at inflated prices to straw buyers
                                                           to pay restitution of $979,562, after pleading guilty
in exchange for kickbacks. The scheme caused losses
                                                           to conspiracy and to uttering and publishing false
of $948,000 for the enterprises.
                                                           documents to obtain a loan insured by FHA. On
This was a joint investigation with HUD-OIG.               August 16, 2013, a seventh former employee of
                                                           Madison Funding of Allentown, Denise Peralta, was
Former Banker Flips Properties, Washington, DC             sentenced to 4 years of supervised release, 60 hours of
                                                           community service, and a fine of $500.
On May 2, 2013, Lonnie Johnson pled guilty to
conspiracy to commit bank fraud in the U.S. District       From October 2006 until at least June 2008, the
Court for the District of Columbia. On August              defendants allegedly conspired to defraud mortgage
30, 2013, in the same court, an information was            lenders by submitting loan applications supported
filed against Cheryl Morrison, alleging conspiracy



26    Federal Housing Finance Agency Office of Inspector General
by falsified, forged, and altered documents. Many of      Suspended Real Estate Agent and Six
the fraudulently originated loans were sold to Fannie     Conspirators Indicted, Kansas City, Kansas
Mae, which lost approximately $1.3 million from           On April 23, 2013, in the U.S. District Court for
defaults associated with the loans.                       the District of Kansas, Manjur Alam was indicted
This was a joint investigation with HUD-OIG and           for conspiracy, wire fraud, bank fraud, and money
FDIC-OIG.                                                 laundering; Janice Young, Bruce Dykes, Christopher
                                                          Ginyard, Henry Pearson Sr., and Steven Pelz
A $20 Million Mortgage Fraud Scheme, San                  were indicted for conspiracy and wire fraud; and
Diego, California                                         Henry Pearson Jr. was indicted for conspiracy. On
                                                          September 3, 2013, Pearson Sr., Ginyard, and Young
On April 25, 2013, Mary Armstrong pled guilty to
                                                          pled guilty to wire fraud, and Pearson Jr. pled guilty
wire fraud, money laundering, and conspiracy. As a
                                                          to bank fraud. Dykes pled guilty to wire fraud on
result of her plea, Armstrong was sentenced to 100
                                                          September 5, 2013.
months of incarceration and 36 months of supervised
release. On May 6, 2013, William Fountain pled          From 2006 to the present, Alam and his conspirators
guilty to conspiracy to commit                                              allegedly schemed to sell properties
wire fraud and money laundering.                                            using bogus sellers, buyers, and
As a result of his plea, Fountain                                           documentation. Several loans
                                              Mortgage broker
was sentenced to 42 months                                                  involved in their scheme were
of incarceration, 36 months of                sentenced to                  purchased by the enterprises.
supervised release, and $532,687
                                                                            This was a joint investigation with
in restitution. On June 17,                   100 months                    IRS-CI and HUD-OIG.
2013, John Allen pled guilty to
conspiracy to commit wire fraud               incarceration.                Recruiter, Escrow Officer,
and money laundering. As a result
                                                                            Builders, and Loan Officers
of his plea, Allen was sentenced to
                                                                            Charged, Dallas, Texas
1 year and 1 day of incarceration and 36 months of
supervised release. All pleas and sentences occurred in On April 11, 2013, in the U.S. District Court for the
the U.S. District Court for the Southern District of    Eastern District of Texas, Lawrence Day was indicted
California.                                             for conspiracy to commit wire and mail fraud, wire
                                                        fraud, aggravated identity theft, and aiding and
With the help of her co-conspirators, Armstrong, an     abetting; Donna Cobb, Bryan Scott, and Donald
unlicensed mortgage broker, operated a nationwide       Mattox were indicted for conspiracy to commit wire
loan origination fraud and kickback scheme,             and mail fraud; and Michael Edwards and Scott
defrauding lenders through the sale of $100 million     Sherman were indicted for wire fraud and conspiracy
of real estate at inflated prices. She siphoned         to commit wire and mail fraud.
overpayments to bank accounts she controlled and
collected up to $14.5 million in kickbacks. Purchasers From September 2005 through July 2008, the
of her fraudulently originated loans, including the     defendants allegedly conspired to defraud lending
enterprises, suffered losses of up to $20 million.      institutions by using material misrepresentations

This was a joint investigation with the FBI.


                                  Semiannual Report to the Congress • April 1, 2013–September 30, 2013       27
and omissions of material fact in loan documents          including $144,917 in restitution to Fannie Mae.
to induce lenders to fund mortgage loans. Day             Hawkins previously pled guilty to bank fraud and
allegedly recruited buyers and helped loan officers,      false statements.
builders, and escrow officers to perpetrate the fraud
                                                          As a real estate investor, Hawkins supported loan
for at least 28 properties. Financial institutions have
                                                          applications with fraudulent documents and received
lost $13.2 million in the scheme. Fannie Mae’s and
                                                          substantial payments for directing buyers into loans
Freddie Mac’s estimated losses total $968,000 and
                                                          that tended to default. The scheme involved over 14
$130,000, respectively.
                                                          enterprise loans and 21 FHA loans.
This was a joint investigation with the FBI.
                                                          This was a joint investigation with HUD-OIG and
                                                          USPIS.
Realtor Launders Money Through Real Estate
Transactions, Dallas, Texas
                                                          Appraiser and Borrower Sentenced, Baltimore,
On April 10, 2013, realtor Stephen King and loan     Maryland
officer Euneisha Hearns were indicted for conspiracy
                                                                            On April 3, 2013, Kenneth
to commit money laundering in
                                                                            Koehler was sentenced to 18
the U.S. District Court for the
                                                                            months of incarceration, 2 years of
Eastern District of Texas. On
July 11, 2013, King pled guilty
                                        Appraiser sentenced                 supervised release, and $1 million
                                                                            in restitution, after pleading guilty
to conspiracy to commit money
                                        to 15 months                        to conspiracy to commit wire
laundering.
                                                                            fraud. On April 19, 2013, David
During April 2008, King,                   incarceration     and            C. Christian was sentenced to
Hearns, and others allegedly                                                15 months of incarceration, 3
conspired to launder proceeds
                                           $2.4    million  in              years of supervised release, and
from fraudulent real estate                                                 $2.4 million in restitution, after
transactions. The fraudulent real
                                           restitution.                     pleading guilty to conspiracy to
estate transactions scheme caused                                           commit wire fraud. Both were
a loss of $686,000 to the involved                                          sentenced in the U.S. District
financial institutions, including the enterprises, which Court for the District of Maryland.
purchased mortgages that funded the fraudulent
                                                         Christian prepared at least 17 fraudulent appraisals
transactions.
                                                         for $4.3 million in loan originations. Koehler
This was a joint investigation with IRS-CI.              obtained fraudulent loans on six properties. The
                                                         enterprises purchased many of the loans involved in
Real Estate Investor Falsifies Loan Documents,           the scheme and suffered losses of $3.5 million.
St. Louis, Missouri
                                                          This was a joint investigation with the FBI and
On April 4, 2013, in the U.S. District Court for the      USPIS. It was prosecuted by the U.S. Attorney’s
Eastern District of Missouri, Jerrick Hawkins was         Office for the District of Maryland with assistance
sentenced to 37 months of incarceration, 60 months        from an OIG investigative counsel.
of supervised release, and $2,392,237 in restitution,



28    Federal Housing Finance Agency Office of Inspector General
Short Sale Schemes                                        and Freddie Mac by making false statements about
                                                          the short sale of his home. Simon knowingly failed
A short sale occurs when a lender allows a borrower
                                                          to disclose an agreement that would ultimately allow
who is “underwater” on his/her loan—that is,
                                                          him to regain ownership of his home following
the borrower owes more than the property is
                                                          the short sale. The transaction caused a loss of
worth—to sell his/her property for less than the debt
                                                          $107,000 to Freddie Mac and a loss of $247,000
owed. Short sale fraud usually involves a borrower
                                                          to Tri Counties Bank, a federally insured financial
intentionally misrepresenting or not disclosing
                                                          institution.
material facts to induce a lender to agree to a short
sale to which they would not otherwise agree.             This was a joint investigation with the FBI, IRS-CI,
                                                          and Stanislaus County District Attorney’s Office.
Las Vegas Realtors Use Straw Buyer to Commit
Short Sale Fraud, Las Vegas, Nevada                       Loan Modification and Property
On June 12, 2013, Robert and Cynthia Hosbrook             Disposition Schemes
were indicted in the U.S. District Court for the          Many companies claim to be able to secure loan
District of Nevada for bank fraud and conspiracy.         modifications for desperate homeowners. Some even
                                                          claim affiliation with the government. Unfortunately,
On June 7, 2010, a short sale was approved for
                                                          the offers usually come with upfront fees and
the Hosbrook’s personal residence allegedly based
                                                          little action, leaving homeowners even worse off.
on fraudulent representations that the short sale
                                                          Additionally, various fraud schemes can impact sales
was due to personal hardships, the transaction was
                                                          of enterprise REO.
arms-length (i.e., the sellers and buyers were not
family members), and the seller would not remain in
                                                          Former Loan Officer Defrauds Real Estate
the property subsequent to the sale. In contrast, the
                                                          Investors, Saint Louis, Missouri
Hosbrooks, real estate professionals, allegedly made
a cash sale of their personal residence to a relative     On September 26, 2013, in the U.S. District Court
acting as a straw buyer and remained in their home        for the Eastern District of Missouri, Daniela Spiridon
after the sale. Freddie Mac suffered a loss of $174,000   pled guilty to wire fraud.
as a consequence of the short sale.
                                                          Spiridon, operating under various business names
This was a joint investigation with the Nevada            including Proficio Mortgage, defrauded individuals
Attorney General’s Office.                                by misrepresenting that she had contracts with
                                                          Fannie Mae and banking institutions allowing
Homeowner Commits Short Sale Fraud,                       her to sell packages of REO properties, as well as
Sacramento, California                                    individual foreclosed properties, on their behalf.
                                                          Spiridon required individuals to wire earnest
On May 14, 2013, Agustin Simon pled guilty to
                                                          money for foreclosed properties and told them that
conspiracy to commit bank fraud in the U.S. District
                                                          if they put more money down it was more likely
Court for the Eastern District of California.
                                                          that Fannie Mae would select them as the buyer.
From March through October 2010, Simon                    Spiridon obtained large down payments (hundreds
conspired with others, including a real estate broker     of thousands of dollars) from investors/victims who
and a straw buyer, to defraud his financial institution   thought they were paying for packages of bundled



                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013     29
foreclosed properties. Spiridon failed to deliver the     The pleas occurred in the U.S. District Court for the
properties to the investors and admitted she had no       Eastern District of California.
connection with the properties. Since 2011, Spiridon
                                                          Wheeler, Medearis, Hinkles, and Corn, employees
received over $4 million from her scheme and caused
                                                          of Horizon Property Holdings, conspired to defraud
losses of over $2.4 million.
                                                          distressed homeowners out of fees to accomplish
This was a joint investigation with the FBI and           mortgage modifications. From 2008 through at least
USPIS.                                                    February 2010, Horizon received some $5 million in
                                                          fees from more than 1,000 homeowners who were
Distressed Homeowners Targeted, Alameda                   facing foreclosure in exchange for false promises that
County, California                                        it would help them modify their mortgages. The
On September 24, 2013, in Alameda County                  conspirators told homeowners that for a substantial
Superior Court, California, Karl Robinson, Michael        upfront payment and a monthly fee they would
Bachmeier, Thomas Powell, Yamen Elasadi, and Jahi         save the homeowners’ residences from foreclosure.
Kokayi were charged with conspiracy to offer a false      However, the conspirators failed to arrange the
or forged instrument.                                     modifications.

The complaint alleges that between 2008 and 2010,         This was a joint investigation with USPIS, the FBI,
the conspirators received over $5 million from            and the Stanislaus County District Attorney’s Office.
victims who were promised delayed foreclosures and
evictions in exchange for upfront cash payments and       Lease Back Fraud Scheme, St. Louis, Missouri
monthly fees. The conspirators accomplished the           On April 18, 2013, Jay Dunlap was convicted of
delays by recording backdated and forged deeds of         wire, bank, and mail fraud in the U.S. District
trust, filing false bankruptcies, and forging clients’    Court for the Eastern District of Missouri. On
signatures on deeds of trust.                             July 31, 2013, he was sentenced to 60 months of
                                                          incarceration, $346,000 in restitution, and 5 years of
This was a joint investigation with the Alameda
                                                          supervised release.
County District Attorney’s Office, U.S. Office of
Trustees, Riverside County Sheriff’s Department,          Dunlap defrauded homeowners by operating a
Orange County Sheriff’s Department, Newport               mortgage rescue scheme in 2006. The scheme—
Beach Police Department, Los Angeles County               which used a Dunlap employee as a straw buyer—
Sheriff’s Department, U.S. Attorney’s Office,             involved buying and financing a property owned by
and the FBI.                                              homeowners who were delinquent on their mortgage.
                                                          The homeowners then rented the property back
Four Employees of Mortgage Modification Mill              for a year, with the option to purchase it thereafter.
Plead Guilty, Sacramento, California                      After the year had ended, Dunlap conducted a fake
On June 24, 2013, Jesse Wheeler and Brent Medearis        closing to cause the homeowners to believe that they
pled guilty to bankruptcy fraud. On July 8, 2013,         had purchased the property. Dunlap made mortgage
Jewel Hinkles (also known as Cydney Sanchez)              payments during the first year, but the payments
pled guilty to bankruptcy fraud. On July 15, 2013,        stopped following the fraudulent closing. Fannie Mae
Cynthia Corn pled guilty to misprision of a felony.       owned or guaranteed the mortgage.



30    Federal Housing Finance Agency Office of Inspector General
This was a joint investigation with USPIS and the        Home Equity Conversion Mortgage
Secret Service.                                          Scheme
                                                         FHA’s Home Equity Conversion Mortgage program
Fraudulent Loan Modification Scheme Lures
                                                         offers federally insured reverse mortgages for seniors
Clients with Infomercials and Fake Attorneys,
                                                         to convert equity to cash by borrowing against the
Sacramento, California
                                                         value of their home. The program is intended to
On April 11, 2013, in Sacramento County Superior         provide otherwise inaccessible cash to seniors, who
Court, California, Cynthia Flahive pled no contest       often have limited income. However, fraudsters have
to taking advance fees associated with a loan            devised a number of ways to rob seniors of the equity
modification scheme and then not performing              they have built over their lives. For example, a loan
the legal services as represented in violation of a      officer may convince a senior to purchase unnecessary
California statute. As a result of her plea, Flahive was yet costly insurance using their loan proceeds. In
sentenced to 3 years of supervised release, 240 hours    other cases, a family member or caretaker may divert
of community service, and $9,000 in restitution          loan proceeds to their personal accounts. Fannie Mae
payable to six specific clients. On August 2, 2013,      has actively purchased Home Equity Conversion
Gregory Flahive pled guilty                                                   Mortgage loans.
to grand theft in Sacramento
County Superior Court for his
role in the mortgage modification
                                             Attorney sentenced             Conviction for Defrauding Elderly
                                                                            Homeowner, St. Louis, Missouri
scheme. As a result of his plea,             to one year                     On May 30, 2013, Larry
Flahive was sentenced to one year
                                                                             Bradshaw pled guilty to theft of
of incarceration, three years of             incarceration.                  public funds and wire fraud in the
supervised release, and $30,609 in
                                                                             U.S. District Court for the Eastern
restitution.
                                                                             District of Missouri. As a result
From January 2009 to December 2010, the Flahives         of his plea, Bradshaw was sentenced to 18 months
and conspirators at Flahive Law Corporation              of incarceration, 3 years of supervised release, and
marketed a fraudulent mortgage modification scheme       $89,245.73 in restitution.
using radio ads and infomercials. Clients purportedly
                                                         In 2008, Bradshaw, a former tenant of an elderly
spoke with attorneys in an intake department but
                                                         victim, devised a scheme to defraud the victim
were actually speaking with unlicensed office workers.
                                                         by using a power of attorney to obtain a reverse
Clients paid mortgage modification fees in advance,
                                                         mortgage on her residence and diverting over
but in most cases, no modifications were actually
                                                         $54,000 in loan proceeds to himself. Eventually,
obtained. Included in the group of mortgages for
                                                         Fannie Mae foreclosed on the home when the victim
which modifications were to be requested were
                                                         failed to make payments on an insurance policy she
mortgages owned by the enterprises.
                                                         never knew she had. To date, the enterprise has not
This was a joint investigation with the State of         taken action to force the victim out of her home.
California Attorney General’s Office and SIGTARP.




                                  Semiannual Report to the Congress • April 1, 2013–September 30, 2013      31
Civil Cases                                               Systemic Implication Reports

During the reporting period, OIG continued to             Systemic Implication Reports identify possible risks
actively participate in the RMBS Working Group,           and exploitable weaknesses in FHFA’s management
which was established by the President in 2012            control systems that OIG discovers during the course
to investigate those responsible for misconduct           of our investigations. We communicate these to the
contributing to the financial crisis through the          agency promptly so it can strengthen both its systems
pooling and sale of RMBS. The working group is a          and those of the entities it supervises and regulates.
collaborative effort of dozens of federal and state law
                                                          Servicer Mortgage Payment Remittance (SIR-
enforcement agencies.
                                                          2013-5, June 17, 2013)
OIG’s participation has included acting as a source
                                                          A mortgage servicer did not follow the Home
of information about the secondary finance market,
                                                          Affordable Modification Program (HAMP) directives
providing strategic litigation advice, supporting
                                                          pertaining to processing payments for GSE-held
witness interviews, and obtaining and reviewing           mortgages, resulting in financial losses to Fannie Mae
documents and other evidence. To date, OIG has            and potentially leading the enterprise to foreclose
played a significant role in four cases brought by        on properties inappropriately. Rather than apply
members of the working group:                             borrowers’ payments to their mortgages while it
•	 The New York Attorney General instituted two           determined their eligibility for loan modification—a
   civil proceedings against Bear Stearns—and its         process that could take the servicer up to two years
   successor, JP Morgan Chase—and Credit Suisse,          due to backlogs—a servicer held those funds in
   alleging fraud in connection with the sale of          suspense accounts. This made it appear to Fannie
   RMBS.                                                  Mae as though borrowers were delinquent—a
                                                          precursor for foreclosure proceedings. Further, if the
•	 The U.S. Attorney for the Western District of          servicer found borrowers to be ineligible for HAMP,
   North Carolina instituted a civil proceeding           it returned the held funds to the borrowers rather
   against Bank of America alleging violations of         than to Fannie Mae, as required. The enterprise did
   the Financial Institutions Reform, Recovery and        not detect the issues due to oversight weaknesses.
   Enforcement Act of 1989 (FIRREA).
                                                          We recommended that FHFA consider reviewing
•	 The U.S. Attorney for the Southern District            Fannie Mae’s oversight of servicers to ensure
   of New York instituted a civil proceeding              compliance with these HAMP directives.
   against Bank of America and its predecessors,
                                                          Federal Home Loan Bank Collateral Verification
   Countrywide Financial Corporation and
                                                          Reviews (SIR-2013-4, June 17, 2013)
   Countrywide Home Loans, Inc., alleging
   that they engaged in a scheme to defraud the           To support $67 million in outstanding advances,
   enterprises in connection with sales of mortgage       Appalachian Community Bank pledged fraudulent
   loans. The complaint seeks damages and civil           and overvalued collateral to the FHLBank of Atlanta.
   penalties under the False Claims Act and               The problematic collateral pledges derived from
   FIRREA.                                                various schemes. In one scheme, senior managers




32    Federal Housing Finance Agency Office of Inspector General
at Appalachian concealed past due loans from bank        1.	FHFA Final Rule: Stress Testing of Regulated
regulators by using Appalachian funds to purchase           Entities (RIN 2590-AA47, OIG Comments
the related properties through a shell company. In          Submitted on July 15, 2013)
another scheme, the senior managers used shell
                                                           FHFA forwarded to OIG a draft of a final rule
companies to buy condos in Florida, which they then
                                                           adopted to implement section 165(i)(2) of the
refinanced through Appalachian at inflated values for
                                                           Dodd-Frank Wall Street Reform and Consumer
their personal enrichment. The FHLBank failed to
                                                           Protection Act (Dodd-Frank). This section
recognize obvious fraud indicators associated with the
                                                           requires primary financial regulators for certain
pledged collateral.
                                                           nonbank financial institutions to conduct annual
We recommended that FHFA assess FHLBank                    stress tests under at least three different sets of
reviews of assets pledged as collateral and that           conditions, including baseline, adverse, and
FHLBank credit and collateralization departments be        severely adverse, and to publish a summary of
notified when fraud indicators are found.                  the results of the required tests. See 12 U.S.C.
                                                           § 5365(i)(2)(C)(ii) and 5365(i)(2)(C)(iv). The
Investigations Strategy                                    statute does not vest regulators with the authority
                                                           to allow institutions to publish a summary of
                                                           some, but not all, of the required stress tests.
OIG has developed and intends to further
                                                           To the contrary, the statute makes clear that the
develop close working relationships with other law
                                                           summary shall include the results of all the tests.
enforcement agencies, including DOJ and the U.S.
Attorneys’ Offices; state attorneys general; mortgage      Notwithstanding the statute’s plain language,
fraud working groups; the Secret Service; the FBI;         FHFA’s draft final rule proposed to require the
HUD-OIG; FDIC-OIG; IRS-CI; SIGTARP;                        GSEs to publish summaries of the results of stress
FinCEN; and other federal, state, and local agencies.      tests only under severely adverse conditions. OIG
                                                           recommended that FHFA conform the final rule
During this reporting period, OI provided 48 Fraud
                                                           to the plain language of Dodd-Frank.
Awareness Briefings to various audiences.
                                                           FHFA published the final rule on September 26,
Regulatory Activities                                      2013, see 78 Fed. Reg. 58,219, which requires the
                                                           GSEs to publish summaries of the results of stress
Consistent with the Inspector General Act, OIG             tests only under severely adverse conditions.
considers whether proposed legislation, regulations,     2.	FHFA Proposed Rule: Removal of References
and policies related to FHFA are efficient,                 to Credit Ratings in Certain FHLBank
economical, legal, and susceptible to fraud and             Regulations (RIN 2590-AA40, OIG Comments
abuse. During the semiannual period, OIG made               Submitted on April 5, 2013)
substantive remarks on a final rule and a proposed
rule. Additionally, two rules that OIG previously          FHFA has adopted a proposed rule to implement
commented on were finalized and published.4                section 939A of Dodd-Frank, which requires
                                                           federal agencies to review regulations that require
                                                           the use of an assessment of the creditworthiness




                                  Semiannual Report to the Congress • April 1, 2013–September 30, 2013      33
  of a security or money market instrument,                from entity-affiliated parties who have been
  to remove any references or requirements                 unjustly enriched.
  regarding credit ratings in them, and to adopt
                                                           Second, the draft final rule could lead to a
  appropriate alternative standards for determining
                                                           violation of the Administrative Procedures Act
  creditworthiness. Although OIG neither concurred
                                                           (APA). The earlier proposed rule set specific
  nor nonconcurred with the draft proposed rule,
                                                           requirements for the entities when submitting to
  it noted that the rule lacked sufficient discussion
  about what factors the FHLBanks should consider          FHFA executive compensation information (e.g.,
  (and how) when assessing investment quality.             concrete time frames for submission). The draft
  OIG urged FHFA to address how the FHLBanks               final rule, however, excised these requirements
  are expected to assess investment quality and to         in exchange for issuing informal guidance later.
  emphasize the importance of independence. FHFA           In OIG’s view, these information submission
  did not address these concerns or implement              requirements qualify as a “legislative rule” for APA
  OIG’s suggestions in the published version of the        purposes and, therefore, notice-and-comment
  proposed rule.                                           rulemaking is required for their adoption. See
                                                           5 U.S.C. § 553(a). Thus, issuing requirements later
3.	FHFA Interim Final Rule: Executive                      as informal guidance without notice-and-comment
   Compensation (RIN 2590-AA12, OIG                        threatens to violate APA. Instead of reinstating
   Comments Submitted on February 28, 2011)                the proposed rule’s information submission
  FHFA drafted a proposed final rule to implement          requirements, FHFA modified the language in the
  its responsibility to prohibit and withhold              interim final rule to indicate that the GSEs are not
  unreasonable and incomparable compensation for           required to submit particular information.
  executives of the GSEs pursuant to HERA. The             Third, the draft final rule should be revised to
  draft final rule was based upon a proposed rule,         clarify how FHFA will review compensation
  which was published more than a year prior to the        arrangements put into place many years before
  commencement of OIG’s operations. See 74 Fed.            the enactment of HERA. Because HERA does
  Reg. 26,989 (June 5, 2009).                              not appear to prohibit FHFA from evaluating
  OIG made three comments on the proposed                  pre-HERA compensation arrangements, OIG
  final rule. First, the draft final rule erred by         believes that FHFA should specify the criteria that
  discarding the previously published proposed             it will apply to such reviews to ensure that they are
  rule’s provision authorizing enforcement actions         conducted in a consistent, equitable, and auditable
  against noncompliant entities. FHFA published            manner. FHFA made no revisions to the interim
  an interim final rule on May 15, 2013, see 78 Fed.       final rule in this regard.
  Reg. 28,442, and FHFA neither reinstated the
                                                         4.	FHFA Proposed Rule: Golden Parachute and
  enforcement provision of the proposed rule nor
                                                            Indemnification Payments (RIN 2590-AA08,
  included any comparable regulatory language that
                                                            OIG Comments Submitted on February 28,
  allows FHFA to take supervisory action. Instead,
                                                            2011)
  FHFA modified the preamble to explain that there
  is statutory enforcement authority that allows           During this reporting cycle, FHFA published a
  FHFA to obtain restitution or reimbursement              proposed rule concerning golden parachute and



34   Federal Housing Finance Agency Office of Inspector General
indemnification payments that OIG previously                not specify how FHFA will evaluate such factors or
commented on. See 78 Fed. Reg. 28,452 (May 14,              what showing would rebut the presumption. OIG
2013).                                                      recommended that FHFA should articulate the
                                                            criteria that it will apply when weighing negative
OIG made two comments concerning the rule.
                                                            factors and define the showing required to rebut
OIG’s first comment critiqued the efficiency of
                                                            the presumption against approval. These revisions
FHFA’s proposed two-stage approval process.
                                                            would avoid future claims alleging arbitrary and
FHFA plans initially to review and approve any
                                                            capricious action by FHFA and would facilitate
golden parachute agreement into which a GSE
                                                            development of an accurate, transparent audit
seeks to enter and then to review and approve
                                                            trail, allowing OIG and other interested parties to
the actual payments made pursuant to such an
                                                            review FHFA’s decision making.
agreement if the GSE is subject to a specified
“triggering event.” Such events include a GSE               FHFA did not revise the proposed rule to address
being insolvent, subject to control by a conservator        OIG’s comments.
or receiver, in a troubled condition, or suffering
from a poor composite rating. OIG contended               Communications and Outreach
that this two-stage approval requirement will
render the first approval meaningless and, thus,          A key component of OIG’s mission is to
will create a perverse disincentive for FHFA staff to     communicate clearly with the GSEs, industry groups,
scrupulously analyze golden parachute agreements          other federal agencies, Congress, and the public. OIG
because oversight mistakes theoretically can be           facilitates clear communications through its targeted
fixed at the payment stage, assuming a triggering         outreach efforts, hotline, coordination with other
event occurs. OIG also noted that the two-stage           oversight organizations, and congressional statements
process could hinder the GSEs’ ability to recruit         and testimony.
and retain well-qualified employees, who may
not work for them if compensation agreements              Outreach
are subject to later revision (i.e., years later at the
                                                          During the reporting period, OIG staff made over 50
payment stage).
                                                          presentations to law enforcement officials, real estate
OIG’s second comment pertained to the                     and banking industry professionals, and homeowners.
procedures applicable to FHFA’s payment approval          The presentations to law enforcement officials were
process (i.e., the “second approval”). The draft rule     made to multiple mortgage fraud working groups
provided that when deciding whether to approve            across the country and individual federal agencies
payments, FHFA might consider negative factors,           responsible for investigating mortgage fraud, such
such as any fraudulent act or omission; breach of         as the FBI, HUD-OIG, and the Secret Service.
fiduciary duty; violation of law, rule, regulation,       In addition, OI developed its partnership with
order, or written agreement; and the level of willful     the National Association of District Attorneys to
misconduct and malfeasance on the part of the             train local and state law enforcement officials and
party who would benefit from the payments.                prosecutors throughout the country, putting on 11
Further, the draft rule stated that such factors may      presentations in 11 cities: Ft. Myers, Florida; Boston,
create a presumption against approval, but it did         Massachusetts; Princeton, New Jersey; Portland,



                                 Semiannual Report to the Congress • April 1, 2013–September 30, 2013        35
Oregon; Atlanta, Georgia; San Juan, Puerto Rico;         expertise. During the semiannual period ended
New York, New York; Chicago, Illinois; Las Vegas,        September 30, 2013, we participated in the following
Nevada; Seattle, Washington; and Denver, Colorado.       cooperative activities:

With respect to presentations to housing                 •	 RMBS Working Group. OIG continued to
professionals, OIG staff made presentations to              actively participate in the RMBS Working Group,
professional organizations, such as the Mortgage            as discussed in “Civil Cases” (see page 32).
Bankers Association and the Association of Appraisal
                                                       •	 Joint Report on Federally Owned or Overseen
Regulatory Officials. The presentations focused on
                                                          Real Estate Owned Properties. We partnered
fraud trends in the mortgage
                                                                            with HUD-OIG to report on our
industry.
                                                                            efforts to shrink the inventory of
                                                                            REO properties held by the GSEs
Hotline                                      Report fraud,                  and HUD.5 As of September 30,
OI operates a hotline that allows                                           2012, the GSEs held 158,138
concerned parties to report directly         waste, or abuse
                                                                            REO properties, while HUD held
and in confidence information
regarding possible fraud, waste,
                                             related to FHFA’s              37,445. In addition, the GSE
                                                                            and HUD “shadow inventory”—
or abuse related to FHFA or the
                                             programs and                   residential loans at least 90 days
GSEs. We honor all applicable                                               delinquent but not yet owned
whistleblower protections. As part           operations by                  by the GSEs or HUD—totaled
of our effort to raise awareness of                                         1,708,033 properties. Even a
fraud and how to combat it, OIG              visiting www.                  fraction of the shadow inventory
promotes the hotline through our                                            falling into foreclosure could
website, posters, emails targeted to         fhfaoig.gov/                   considerably swell HUD and
FHFA and GSE employees, and                                                 GSE REO inventories and
our semiannual reports.                      ReportFraud                    result in profoundly negative
                                                                            consequences for communities,
During the reporting period, the             or calling (800)               financial markets, and taxpayers.
hotline received over 250 tips.
                                                                            The report discusses areas that our
                                             793-7724.
Coordinating with Other                                                     offices have examined or plan to
Oversight Organizations                                                     evaluate to help ensure that our
                                                                            respective agencies address REO
OIG shares oversight of federal                           issues effectively and efficiently.
housing program administration with several other
federal agencies, including HUD, the Department        •	 Council of Inspectors General on Financial
of Veterans Affairs, the Department of Agriculture,       Oversight. The Council of Inspectors General
and Treasury’s Office of Financial Stability (which       on Financial Oversight (CIGFO) was created by
manages the Troubled Asset Relief Program); their         Dodd-Frank to oversee the Financial Stability
inspectors general; and other law enforcement             Oversight Council (FSOC), which is charged
organizations. To further the oversight mission,          with strengthening the nation’s financial system.
we coordinate with these entities to exchange             OIG is a permanent member of CIGFO, along
best practices, case information, and professional        with the inspectors general of Treasury, FDIC,


36   Federal Housing Finance Agency Office of Inspector General
  the SEC, and others. In July 2013, CIGFO               Additionally, we endeavor to inform Congress
  published its Audit of the Financial Stability         through responses to numerous technical assistance
  Oversight Council’s Designation of Financial           and information requests. During the reporting
  Market Utilities.6 Among other activities,             period, the former Inspector General responded
  FSOC designates financial market utilities,            to formal written inquiries from members of
  which provide infrastructure for processing            Congress on various topics, including high-priority
  transactions among financial institutions, as          unimplemented recommendations, consumer
  “systemically important” if their failure could        protection laws, and FHFA progress and remaining
  create liquidity or credit problems in financial       challenges in reducing reliance on enterprise decision
  sectors. If designated as such, a utility is subject   making.
  to enhanced monitoring. The report made several
  recommendations to FSOC, including that it             Further, the former Inspector General testified
  consider foreign utilities, establish guidelines       before the Senate Banking, Housing and Urban
  for monitoring activities, and conduct periodic        Affairs Committee on April 18, 2013, at a hearing
  reviews.                                               entitled Oversight of Federal Housing Finance Agency:
                                                         Evaluating FHFA as a Regulator and Conservator.
Communicating with Congress                              The hearing covered a variety of topics, including
                                                         enforcement of agency directives, examination
In fulfilling our mission, OIG works in close
                                                         capacity, FHFA’s ability to implement and oversee
partnership with Congress and is committed to
                                                         multiple new initiatives, implementation of OIG
keeping it fully apprised of our oversight of FHFA.
                                                         recommendations, PSPA amendments, and
The former Inspector General met regularly
                                                         challenges stemming from ongoing uncertainty.
with members of Congress, and he and his staff
provided frequent briefings to key congressional         Copies of the Inspector General’s written testimony
committees and offices. Briefing topics included         to Congress are available at www.fhfaoig.gov/
recommendations from OIG reports and FHFA’s              testimony.
progress in implementing them, themes emerging in
OIG’s body of work, OIG’s organization and strategy,
and areas of ongoing work.




                                 Semiannual Report to the Congress • April 1, 2013–September 30, 2013       37
Section 2: FHFA and GSE Operations

Overview                                                  The enterprises were chartered by Congress to
                                                          provide stability and liquidity in the secondary
In July 2008, HERA created FHFA to oversee                market for home mortgages. They fulfill this charter
vital components of our nation’s secondary                by purchasing residential loans from loan originators
mortgage market.7 FHFA is responsible for the             that can use the sales proceeds to make additional
effective supervision, regulation, and housing            loans.
mission oversight of Fannie Mae, Freddie Mac, the
                                                          Under HERA, the enterprises receive financial
FHLBanks, and the FHLBanks’ Office of Finance to
                                                          support from Treasury to prevent their liabilities from
promote their safety and soundness and to support
                                                          exceeding their assets, subject to a cap.11
housing finance, affordable housing, and a stable and
liquid market.8
                                                          FHFA and the Enterprises’ Role in Housing
In this section, we provide an overview of FHFA and       Finance
its relationship with the GSEs; a brief discussion of
                                                          As the regulator of the enterprises, FHFA has a
the GSEs’ business models and the primary reasons
                                                          statutory responsibility to ensure that they operate
for their improved financial results; and a summary of
                                                          in a safe and sound manner and that their activities
selected FHFA and GSE activities.
                                                          support a stable and liquid housing finance market.12

FHFA and the Enterprises                                  As Figure 10 (see page 39) illustrates, the
                                                          enterprises support the nation’s housing finance
Under HERA, FHFA was appointed conservator of             system by providing liquidity to the secondary
the enterprises on September 6, 2008, and it serves       mortgage market. Liquidity is created when the
as their regulator and conservator. As regulator, the     enterprises purchase mortgages that lenders—such
agency’s mission is to ensure the enterprises operate     as banks, credit unions, and other retail financial
in a safe and sound manner and that their operations      institutions—originated for homeowners.
and activities contribute to a liquid, efficient,
                                                          These mortgages are securitized by pooling and
competitive, and resilient housing finance market.9 As
conservator, the agency seeks to conserve and preserve    packaging them into MBS and are either sold or
enterprise assets.                                        kept by the enterprises as an investment. As part of
                                                          this process, the enterprises—for a fee—guarantee
FHFA accomplishes its mission by performing               payment of principal and interest on the mortgages.
onsite examinations of the enterprises; coordinating
congressional, public, and consumer inquiries;            Historically, the enterprises have benefited from an
assisting the enterprises with foreclosure prevention     implied guarantee that the federal government
actions; and developing and implementing a                would prevent default on their financial obligations,
strategic plan for the future of the enterprises’         and the enterprises assumed dominant positions in
conservatorships.10                                       the residential housing finance market.13


38    Federal Housing Finance Agency Office of Inspector General
Figure 10. Overview of the Enterprises and FHFA’s Role


      Primary                                                                                         Applies for
      Mortgage Market                                                                                  Mortgage

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


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




                                                                  Buys                        Buys
                                                                  MBS                         Debt
                                       Sells
           INVESTORS                 MBS & Debt

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




Enterprises’ Market Share of the                                                  enterprises regained dominant positions in the
Secondary Market                                                                  residential housing finance market (with the federal
As Figure 11 (see page 40) illustrates, after losing                              government’s financial support) as the financial
market share to nonagency competitors during                                      crisis continued and private-sector financing for the
the housing boom from 2004 through 2007, the                                      secondary market nearly disappeared.14




                              Figure 10. Semiannual
                                         Overview Report
                                                    of thetoEnterprises
                                                             the Congress and
                                                                          • AprilFHFA’s Role
                                                                                  1, 2013–September 30, 2013                          39
Figure 11. Primary Sources of MBS Issuances from 2000 to 2012 ($ trillions)

          $3.0



          $2.5



          $2.0



          $1.5



          $1.0



          $0.5



          $0.0
                  00


                        01


                              02


                                     03


                                            04


                                                    05


                                                          06


                                                                 07


                                                                        08


                                                                              09


                                                                                      10


                                                                                            11


                                                                                                  12
                 20


                       20


                             20


                                    20


                                          20


                                                   20


                                                         20


                                                               20


                                                                      20


                                                                             20


                                                                                   20


                                                                                           20


                                                                                                 20
                                  Ginnie Mae MBS    Enterprise MBS    Nonagency MBS




Since entering                                                                   Enterprises’
conservatorships in                  Since entering                              Financial
September 2008, the
                                                                                 Performance
enterprises have bought and          conservatorships in
guaranteed approximately                                                         For the six months
three out of every four              September 2008,                             ended June 30, 2013, the
                  Figure
mortgages originated                                                             enterprises
                       in 12. Primary Sources of MBS Issuances from 2000 to 2012 ($ trillions) reported record
the United States.15 By
                                     the enterprises have                        profits. These profits have
                                                                                 risen since 2012 and are
providing a majority of the          bought and guaranteed                       beginning to offset the
liquidity to the housing
                                                                                 losses that started in 2007
finance market, the                  approximately three out                     (see Figure 12, page 41).17
enterprises (and, therefore,
the taxpayers) own a                 of every four mortgages                     As shown in Figure 13
majority of the mortgage                                                         (see page 41), Fannie Mae
credit risk.16
                                     originated in the                           reported net income of
                                                                                 $68.8 billion for the six
                                     United States.                              months ended June 30,
                                                                                 2013, compared with net


40   Federal Housing Finance Agency Office of Inspector General
          Figure 12. Enterprises’ Annual Net Income (Loss)                         it. Therefore, Fannie Mae released a substantial
          2006 Through Second Quarter 2013 ($ billions)                            portion of its valuation allowance during the first
                $100                                                               quarter of 2013, which resulted in the recognition of
                                                                                                   Freddie Mac
                  $80
                  $60                                                              $50.6 billion as a federal income tax benefit.20
                                                                                                   Fannie Mae
                  $40
                 $20
                   $0                                                              The release of the valuation allowance on Fannie Mae’s
                ($20)
                ($40)                                                              deferred tax assets does not include $491 million of
                ($60)
                ($80)                                                              the valuation allowance that pertains to capital loss
              ($100)
              ($120)                                                               carryforwards. Additionally, Fannie Mae expects that




                                                                          13
                         06


                               07


                                     08


                                            09


                                                  10


                                                          11


                                                                12
                                                                                   any remaining valuation allowance not related to capital




                                                                      20
                        20


                              20


                                    20


                                          20


                                                 20


                                                        20


                                                               20


                                                                     Q2
                                                                                   loss carryforwards will be reduced against income
                                    Fannie Mae   Freddie Mac
                                                                                   before federal income taxes throughout the remaining
                                                                                   quarters of 2013 until that amount is reduced to zero
          income of $7.8 billion for the same period in 2012.18                    by December 31, 2013.21
          Freddie Mac reported net income of $9.5 billion for                     Freddie Mac, on the other hand, continues to evaluate
          the six months ended June 30, 2013, compared with                       the pros and cons (on a quarterly basis) regarding
          net income of $3.6 billion for the same period in                       whether a valuation allowance is necessary for their
          2012.19                                                                 deferred tax assets. As of June 30, 2013, Freddie Mac
                                                                                  determined that the cons continue to outweigh the
           A key factor in Fannie Mae’s net income for this
                                                                                  pros in supporting a release of the valuation allowance;
           period is the
Figure 12. Enterprises’    release
                        Annual       of a substantial
                               Net Income               portion
                                           (Loss) 2006 Through   of itsQuarter 2013 ($ billions)
                                                               Second
                                                                                  and, therefore, it will not be able to realize deferred tax
           valuation allowance against its deferred tax assets.
                                                                                  assets. However, with recent continued improvements
           The enterprises are required to maintain a valuation
                                                                                  in earnings, the evidence for releasing the valuation
           allowance for deferred tax assets that they determine
                                                                                  allowance (i.e., positive evidence) has been improving
           will not be realized. This caused them to establish
                                                                                  and additional evidence could become positive as early
           substantial allowances to balance deferred tax assets
                                                                                  as the third quarter of 2013.22
           during the years that they experienced net losses. As
           of March 31, 2013, however, Fannie Mae determined Other key factors in the enterprises’ continued
           that the factors in favor of releasing the allowance                   profitability are discussed below. These factors include:
           outweighed the factors in favor of maintaining                         (1) continued improvements in the single-family
          Figure 13. Enterprises’ Summary of Net Income for the Six Months Ended June 30, 2013 and 2012
          ($ billions)

                                                                                   Fannie Mae                        Freddie Mac
                                                                               2013          2012                2013          2012
              Net Interest Income                                                $12.0         $10.6                $8.4          $8.9
              Credit-related Income (Expenses)                                     6.9           0.8                 1.2           (2.1)
              Gain (Loss) on Derivative Agreements                                 1.8          (2.4)a               1.7           (1.9)
              Impairment of Securities Considered Other
                                                                                  (0.0)            (0.7)            (0.1)            (0.7)
                than Temporary
              Other Income (Expense)                                              48.1             (0.5)             (1.7)           (0.6)
              Net Income                                                         $68.8            $7.8              $9.5            $3.6
          a
              Loss on derivatives referenced to Table 8, p. 21, in the Fannie Mae 2013 Second Quarter 10-Q Report.


                                                       Semiannual Report to the Congress • April 1, 2013–September 30, 2013             41
business segment driven by stronger credit quality,         present in their single-family books of business. As of
(2) increases in guarantee fee income as a result of        June 30, 2013, loans acquired after 2008 comprised
FHFA direction, (3) an increase in home prices              72% and 70%, respectively, of Fannie Mae’s and
causing a reduction in defaults, and (4) derivative         Freddie Mac’s books of business.28 Conversely, the
gains due to an increase in swap rates.                     legacy housing boom loans acquired from 2005
                                                            through 2008, which have a higher probability of
Continued Improvement in Credit Quality                     credit defects, have declined to 17% of the single-
of New Single-Family Business                               family book of business for Fannie Mae and 19% for
Fannie Mae’s credit-related income for the six              Freddie Mac as of June 30, 2013, compared with 26%
months ended June 30, 2013, was $6.9 billion,               and 28%, respectively, as of June 30, 2012.29
compared with $772 million for the same period in
2012.23 Freddie Mac’s credit-related income for the         Increase in Guarantee Fee Prices
six months ended June 30, 2013, was $1.2 billion,           A significant source of income for the enterprises
compared with credit-related expenses of $2.1 billion       comes from receiving guarantee fees.30 MBS investors
for the same period in 2012.24 The increase in credit-      of both single-family and multifamily loans pay these
related income is primarily the result of continued         fees to gain an enterprise guarantee of the principal
improvements in the credit quality of each enterprise’s     and interest payment.31 In 2012, FHFA directed
single-family book of business—as higher credit             the enterprises to increase their guarantee fees, and
quality leads to fewer loan delinquencies—and the           FHFA intends to direct further gradual guarantee
increase in national home prices.25                         fee increases to achieve several objectives, such as
                                                            increasing private-sector investment in mortgage
The enterprises’ single-family books of business consist
                                                            credit risk.32 As a result, guarantee fee income
of loans purchased and guaranteed that generate
                                                            increased for the six months ended June 30, 2013,
interest and guarantee fee income. The credit quality
                                                            with an expectation that future increases will further
of the single-family loans acquired by the enterprises
                                                            augment revenue. Additionally, Fannie Mae’s increase
beginning in 2009 (excluding HARP and other
                                                            for the six months ended June 30, 2013, is a result
relief refinance mortgages) is significantly better than
                                                            of liquidating loans with lower guarantee fees while
that of those loans acquired from 2005 to 2008, as
                                                            adding loans with higher guarantee fees to their
measured by loan-to-value (LTV) ratios, FICO scores,
                                                            multifamily book of business.33
and the proportion of loans underwritten with fully
documented income.26                                        Fannie Mae’s combined single-family and multifamily
                                                            guarantee fee income for the six months ended
This improved credit quality is attributed to:
                                                            June 30, 2013, was $5.5 billion, compared with
(1) more stringent credit policies and underwriting
                                                            $4.4 billion for the same period in 2012—a 26%
standards, (2) tighter mortgage insurers’ and lenders’
                                                            increase; Freddie Mac’s combined single-family and
underwriting practices, and (3) fewer purchases of
                                                            multifamily guarantee fee income for the six months
loans with higher-risk attributes (e.g., Alt-A, interest-
                                                            ended June 30, 2013, was $2.6 billion, compared
only, credit scores below 620, and LTV ratios above
                                                            with $2.1 billion for the same period in 2012—a 25%
90%).27
                                                            increase.34
Further, the enterprises are now holding more loans
with higher credit quality acquired from 2009 to


42   Federal Housing Finance Agency Office of Inspector General
Figure 14. Home Price Index 2011 Through Second Quarter 2013

                              160
                              158
                              156
                              154
                              152
              Housing Index

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




                                                    11


                                                             11


                                                                   12


                                                                            12


                                                                                   12


                                                                                           12
                                              11




                                                                                                  13


                                                                                                          13
                                    20


                                          20


                                                   20


                                                         20


                                                                  20


                                                                         20


                                                                                 20


                                                                                        20


                                                                                                20


                                                                                                       20
                                1Q


                                         2Q


                                               3Q


                                                        4Q


                                                              1Q


                                                                       2Q


                                                                              3Q


                                                                                      4Q


                                                                                             1Q


                                                                                                     2Q
Impact of National Home Prices on                                      ended June 30, 2013, were $1.7 billion, compared
Credit Losses                                                          with a loss of $1.9 billion for the same period in
                                                                       2012.39
Another factor positively influencing credit-related
expenses, i.e., credit losses, is national home prices.
                                            These overall derivative gains were primarily
An increase in home prices can decrease the likelihood
                                            due to gains in risk management derivatives and
that loans will default and reduce the estimated credit
                                            mortgage commitment derivatives. The gains in risk
                                            management derivatives were a result of increases
losses on the loans that default.35 As shown in Figure
                                            on swap rates, and the increases in mortgage
14 (see above), the S&P/Case-Shiller Home Price
                                            commitment derivatives were a result of gains on
Indices for the last 10 quarters ending June 30, 2013,
                                            commitments to sell mortgage-related securities, as
show a steady increase in the housing index since the
first quarter of 2012.36                    a consequence of a decrease in prices as interest rates
                                            increased during the commitment period.40
Higher Increases in Swap
              Figure      RatesPrice
                     14. Home   LeadIndex
                                      to 2011 Through Second Quarter 2013
Derivative Gains
                                                                       Government Support
The enterprises use derivative instruments to manage
the interest rate and prepayment risk associated with                  Due to the continued profitability of the enterprises,
their investments in mortgage loans and mortgage-                      they are no longer requesting draws from Treasury,
related securities.37 Derivative instruments include                   are paying significant dividends, and do not currently
written options, interest rate guarantees, and short-                  require additional government support.
term default guarantee commitments.38
                                                                       Treasury Draw Requests and Dividend
Fannie Mae’s derivative gains for the six months ended                 Payments Due Under the Senior Preferred
June 30, 2013, were $1.8 billion, compared with                        Stock Purchase Agreements
a loss of $2.4 billion for the same period in 2012.
                                                                       In August 2012, FHFA and Treasury agreed to a
Freddie Mac’s derivative gains for the six months
                                                                       third amendment to the PSPAs that, among other


                                              Semiannual Report to the Congress • April 1, 2013–September 30, 2013          43
Figure 15. Enterprises’ Treasury Draws and Dividend Payments Due Under PSPAs ($ billions)
              $100
                                                    Net Capital to Enterprises: $41.3 billion
               $90
                                                    Dividends Paid: $146.2 billion
               $80
                                                    Treasury's Investment: $187.5 billion
               $70
               $60
               $50                                                                                   91.0
               $40
                                       66.1
               $30     59.8
               $20                                                    33.6
                                                       28.0                              18.8
               $10                                                           16.1
                              0.2             6.6             13.5
                $0
                          08




                                          09




                                                         10




                                                                        11




                                                                                                     3
                                                                                     12




                                                                                                    1
                        20




                                        20




                                                       20




                                                                      20




                                                                                    20




                                                                                                 20
                                                                                                Q3
                                    Total Enterprise Draws            Total Enterprise Dividends



things, replaced the fixed dividend rate the enterprises             less $12.8 billion paid to Treasury in senior preferred
pay as of the first quarter of 2013. This ended the                  stock dividends during the first half of 2013. As a
circular practice of the enterprises drawing funds                   result, Freddie Mac did not request a draw from
from Treasury in order to pay dividends back to                      Treasury in the second quarter of 2013 under the
Treasury. The enterprises’ net worth (above a specified              PSPA.43
amount) is now effectively distributed to Treasury; for
                                                          As shown in Figure 15 (see above), since the
the six months ended June 30, 2013, approximately
                                                          conservatorships began in 2008 through
$76.4 billion was distributed, with an additional
                                                          September 30, 2013, the enterprises have drawn
$14.6 billion due in the third quarter of 2013.41
                                                          a total of $187.5 billion from Treasury and paid
Fannie Mae’s net worth, including noncontrolling          $146.2 billion in dividends. As of June 30, 2013,
      Figure   15.  Enterprises'  Treasury    Draws
interests, as of June 30, 2013, was $13.2 billion,    and Dividend
                                                          Fannie Mae’sPayments     Due
                                                                         total draws    Under
                                                                                     from       PSPAs
                                                                                          Treasury under the PSPA
resulting from comprehensive net income of                remain at $116.2 billion and Freddie Mac’s remain at
$69.6 billion for the six months ended June 30, 2013, $71.3 billion.44
and a beginning equity balance of $7.2 billion—i.e.,
                                                          For the second quarter of 2013, Fannie Mae and
the enterprise’s net worth as of December 31, 2012—
                                                          Freddie Mac made dividend payments of $59.4 billion
less $63.6 billion paid to Treasury in senior preferred
                                                          and $7 billion, respectively, to Treasury without any
stock dividends during the first half of 2013. As
                                                          assistance under the PSPAs. For the third quarter
a result, Fannie Mae did not request a draw from
                                                          of 2013, Fannie Mae and Freddie Mac will make
Treasury in the second quarter of 2013 under the
                                                          additional payments of $10.2 billion and $4.4 billion,
PSPA.42
                                                          respectively, under the terms of the PSPAs. As of
Freddie Mac’s net worth as of June 30, 2013, was          September 30, 2013, Fannie Mae and Freddie Mac
$7.3 billion, resulting from comprehensive net income will have paid Treasury a total of $105.3 billion and
of $11.3 billion for the six months ended June 30,        $40.9 billion, respectively, in dividends on the senior
2013, and a beginning equity balance of $8.8 billion      preferred stock.45 These dividend payments do not

44   Federal Housing Finance Agency Office of Inspector General
reduce the principal balance of Treasury’s investments   and economic growth.52 The 12 FHLBanks fulfill
in the enterprises.46                                    this mission by providing liquidity to their members,
                                                         resulting in an increased availability of credit for
Additional Government Support                            residential mortgages, community investments, and
The enterprises also benefited from extraordinary        other housing and community development services.53
government measures to support the housing market        The FHLBanks are cooperatives that are owned
overall. Since September 2008, the Federal Reserve       privately and wholly by their members. Each
and Treasury have purchased more than $1.3 trillion      FHLBank operates as a separate entity within a
in enterprise MBS, and the Federal Reserve has           defined geographic region of the country, known as its
purchased an additional $135 billion of bonds issued     district, with its own board of directors, management,
by the enterprises.47 The Federal Reserve became the     and employees. Each member of an FHLBank must
predominant purchaser of MBS during its purchase         purchase and maintain capital stock as a condition
programs, and its purchases helped to prime the          of its membership.54 FHLBank members include
nation’s housing finance system.48                       financial institutions such as commercial banks,
                                                         thrifts, insurance companies, and credit unions.55
As of the second quarter of 2013, the enterprises
currently do not require additional government           Figure 16 (see page 46) provides a map of the districts
support. Treasury’s last purchase of enterprise MBS,     of the 12 FHLBanks.
through the GSE MBS Purchase Facility, was               The primary business of the FHLBanks is to raise
in December 2009, and the Federal Reserve last           funds in the capital markets by issuing debt, known as
purchased MBS and bonds from the enterprises in          consolidated obligations, through the Office of Finance
March 2010.49                                            and to use the consolidated obligations to provide
                                                         their members with loans, known as advances.56 The
FHLBank System                                           interest earned on advances less the interest owed on
                                                         consolidated obligations is the FHLBanks’ primary
The FHLBanks are GSEs, federally chartered but           source of earnings.57
privately capitalized and independently managed.         In the event of a default on a consolidated obligation,
The 12 regional FHLBanks together with the Office        each FHLBank is jointly and severally liable for
of Finance, the fiscal agent of the FHLBanks,            losses, which means that each individual FHLBank
comprise the FHLBank System. All FHLBanks                is responsible for the principal and interest on all
operate under the supervisory and regulatory             consolidated obligations issued by the FHLBanks.58
framework of FHFA.50 FHFA’s stated mission with          However, like the enterprises, the FHLBank System
respect to the FHLBanks is to provide effective          has historically enjoyed benefits (e.g., debt costs akin
supervision, regulation, and housing mission oversight   to those associated with Treasury bonds) stemming
to promote the FHLBanks’ safety and soundness,           from an implicit government guarantee of its
support housing finance and affordable housing, and      consolidated obligations.59
facilitate a stable and liquid mortgage market.51

The FHLBank System was created in 1932 to improve        The FHLBanks’ Combined Financial
the availability of funds for home ownership and         Performance
its mission is to provide local lenders with readily     The regional housing markets affect the FHLBanks’
available, low-cost funding to finance housing, jobs,    demands for advances from member institutions

                                  Semiannual Report to the Congress • April 1, 2013–September 30, 2013        45
Figure 16. Regional FHLBanks




to fund residential mortgage loans. During the six       and liabilities are either directly or indirectly tied to
months ended June 30, 2013, FHLBank members’             short-term interest rates.62
borrowing increased but remained
                                                                              For the six months ended
below historical levels due in
                                                                              June 30, 2013, compared with the
part to a slow economic recovery       During this                            same period in 2012, short-term
combined with higher consumer
deposits and weakened lending.         period, the                            interest rates generally decreased,
                                                                              and the FHLBanks had a modest
Further, during this period, the
demand for advances continued to       demand for                             increase—1.9%—in net income.63

show signs of regional stabilization                                          As shown in Figure 17 (see page
and certain FHLBank members,
                                       advances                               47), during the six months ended
particularly large-asset members,      continued to show                      June 30, 2013, the FHLBanks
increased their use of advances.60                                            experienced a marginal increase in

The main source of the
                                       signs
                                    Figure 16.of regional
                                               Regional FHLBanks              profitability, compared with the
                                                                              same period in 2012. Their net
FHLBanks’ income is interest           stabilization and                      income was $1.3 billion for the
earned on advances, mortgage
                                                                              six months ended June 30, 2013,
loans, and investments (i.e.,          certain FHLBank                        an increase of only $25 million
assets).61 Fluctuations in short-
                                                                              compared with the same period in
term interest rates affect the         members                                2012.64
FHLBanks’ interest income and
expense because a considerable         increased their use                    Lower returns on interest-
portion of the FHLBanks’ assets                                               earning assets—the main factor
                                       of advances.                           influencing net income—largely


46   Federal Housing Finance Agency Office of Inspector General
Figure 17. FHLBanks’ Net Income for the Six                     The FHLBanks are exposed to interest rate risk
Months Ended June 30, 2013 and 2012 ($ millions)                primarily from the effect of interest rate changes on
                                       2013        2012         their interest-earning assets, as well as the funding
    Net Interest Income               $1,682      $2,048        sources for these assets. The goal of the FHLBanks
    Reversal of (Provision for)                                 is not to eliminate interest rate risk entirely but to
                                           10          (13)
      Credit Losses                                             manage it within appropriate limits. To achieve this
    Other-than-Temporary                                        goal, the FHLBanks use derivatives (e.g., interest
                                            (6)        (86)
      Impairment Lossesa
                                                                rate swaps, options, and swaptions), which help
    Other Income (Loss)                  189          (31)
    Total Non-interest Expense          (421)       (485)       reduce funding costs, maintain favorable interest rates,
    Total Assessments                   (144)       (148)       and manage overall assets and liabilities.67
    Net Income                        $1,310      $1,285
                                                                Changes in mark-to-market items prevented further
a
 Of the other-than-temporary impairment losses, private-label
MBS comprised $6 million and $84 million for the six months
                                                                declines in overall profitability, adding gains on
ended June 30, 2013 and 2012, respectively.                     derivatives and hedging activities. Specifically, the
                                                                gains accounted for additional non-interest income
                                                                of $293 million for the six months ended June 30,
derive from decreases in interest income on advances,
                                                                2013, compared with a loss of $1 million for the same
held-to-maturity securities, prepayment fees,
                                                                period in 2012—a substantial increase.68
and mortgage loans. Interest income on advances
decreased from $1.6 billion to $1.3 billion—i.e.,               As shown in Figure 18 (see below), the FHLBanks’
21%—and interest income on held-to-maturity                     combined retained earnings have increased every year
securities decreased from $1.3 billion to                       for the last six years and now approach $12 billion
$1.1 billion—a 19% decline—for the six months                   as of June 30, 2013.69 As long as the FHLBanks
ended June 30, 2013, compared with the same period              are profitable, retained earnings should continue to
in 2012. Also during this period, interest income               increase because of the joint capital enhancement plan
on prepayment fees was reduced from $158 million                provisions adopted by the FHLBanks last year. The
to $64 million—or 59%—and interest income                       plan calls for the FHLBanks to set aside 20% of their
on mortgage loans decreased from $1.1 billion to                net income into a separate, restricted retained earnings
$969 million—a 15% decline, compared with the                   account.70 The joint capital enhancements ensure
same period in 2012.65
                                                                Figure 18. FHLBanks’ Retained Earnings 2007
On the other hand, a decrease in interest expense from          Through Second Quarter 2013 ($ billions)
$3.2 billion to $2.6 billion—i.e., 20%—prevented                $12

additional declines in net interest income. The decrease        $10

was driven by lower funding costs and reductions in the          $8
                                                                                                                         11.45
                                                                 $6
balances of interest-bearing liabilities. The refinancing
                                                                                                            10.52

                                                                                                    8.58
                                                                 $4                          7.55

of consolidated obligations, which resulted in lower             $2    3.69
                                                                              2.94
                                                                                     6.03



interest payments, was a key contributor to this decline.        $0
                                                                                                                         13
                                                                       07



                                                                               08



                                                                                      09



                                                                                             10



                                                                                                     11



                                                                                                            12




Due to these lower payments, consolidated obligation
                                                                                                                     20
                                                                      20



                                                                              20



                                                                                     20



                                                                                            20



                                                                                                    20



                                                                                                           20


                                                                                                                    Q2




expenses decreased from $3.1 billion to $2.4 billion,
or 22%, for the six months ended June 30, 2013,
compared with the same period in 2012.66

                                      Semiannual Report to the Congress • April 1, 2013–September 30, 2013                 47
members’ access to liquidity during times of economic      Based on this feedback, the update noted progress
stress; create an additional buffer to absorb FHLBank      on the design, scope, and building of a securitization
losses; provide protection on members’ capital             platform to perform functions related to data
investments; and ensure that the FHLBanks will meet        validation, issuance, disclosures, master servicing,
their consolidated obligations.71                          and bond administration. Additionally, it reported
                                                           that efforts to align enterprise contracts and standards
Selected FHFA and GSE Activities                           for agency MBS are continuing. The update also
                                                           noted that the development of uniform contracts
                                                           and standards for credit risk transfer activities is
Over the last six months, there were several significant
                                                           proceeding according to plan.73
FHFA and GSE developments related to: developing
a common securitization infrastructure; creating           On August 22, 2013, OIG issued to FHFA a report
exemptions to appraisal requirements for higher-           assessing risks and fraud threats in the securitization
priced mortgages; assessing the viability of the           infrastructure under development and recommending
enterprises’ multifamily lending businesses in the         countermeasures for potential threats. Because
absence of a government guarantee; sharing credit risk     information in this report could be used to exploit
with private investors; proposing legislation designed     vulnerabilities and circumvent recommended
to replace the activities of the enterprises with a        countermeasures, it has not been released publicly.
system more reliant on private capital; and recovering
enterprise losses stemming from alleged violations of      Appraisal Requirements for Higher-Priced
securities laws in the sale of private-label MBS. These    Mortgages
developments and OIG’s efforts in relation to them
                                                           In July 2013, six federal financial regulatory agencies
are summarized below.
                                                           issued a proposed rule creating three exemptions to
                                                           appraisal requirements for higher-priced mortgage
Mortgage Industry Standards
                                                           loans. In January, the agencies had issued a rule
Common Securitization Infrastructure                       requiring creditors making higher-priced mortgage
                                                           loans to use a licensed or certified appraiser to prepare
In April 2013, FHFA issued a progress report               a written appraisal report based on a physical visit
on the development of a common securitization              to the interior of the property. Loans are considered
infrastructure for RMBS. Earlier, in an October 2012       higher priced if they are secured by a consumer’s home
white paper, FHFA called for a two-pronged approach        and have interest rates above a certain threshold. The
involving the creation of a new securitization             July 2013 proposed rule exempts from the appraisal
platform and a model contractual and disclosure
                                                           requirements loans of $25,000 or less, certain
framework. The proposal was designed to contract the       “streamlined” refinancings, and certain loans secured
dominant presence of the enterprises in the secondary      by manufactured housing.74
mortgage market while simplifying and shrinking
their operations. FHFA received public responses           Mortgage Transactions
to the white paper from a broad cross-section of
industry participants and other stakeholders in the        Multifamily Housing
securitization process.72
                                                           In May 2013, FHFA released reports from the
                                                           enterprises assessing the potential viability of their



48   Federal Housing Finance Agency Office of Inspector General
multifamily housing lending businesses without the       capital back to the U.S. housing finance market.”79
benefit of a government guarantee. The enterprises       FHFA’s Conservatorship Strategic Plan: Performance
had also been asked by FHFA, as part of the 2012         Goals for 2013 called on each enterprise to test the
Conservatorship Scorecard, to analyze the likelihood     viability of multiple types of risk transfer transactions
of the firms operating on a stand-alone basis            involving single-family mortgages with at least
after attracting private-sector capital and making       $30 billion of unpaid principal balances in 2013.80
adjustments for pricing. The reports concluded that
without government guarantees, the enterprises’          FHFA and GSE Performance and
multifamily businesses would have little inherent        Accountability
value and the sale of those businesses would return      On June 13, 2013, FHFA released its 2012 Report to
little value to Treasury or the taxpayers.75             Congress, which detailed the agency’s examinations of
Since the conservatorships began, the enterprises        the enterprises, the 12 FHLBanks, and the FHLBanks’
have used their government guarantees to provide         Office of Finance.81
a secondary market for $30 billion to $50 billion        For 2012, FHFA assigned the enterprises composite
in annual multifamily loan production. Fannie            ratings of critical concerns, which were unchanged
Mae, currently the largest lender in the multifamily     from 2011. It said they exhibit critical financial
market, said that because of the need to capitalize      weaknesses stemming from lack of capital, the
an independent firm’s balance sheet, neither Fannie      quality of legacy assets, and uncertainty about the
Mae nor Treasury would benefit from the sale of the      conservatorship status.82 Figure 19 (see below) depicts
business. In addition, it said the withdrawal of the     FHFA’s supervisory ratings.
government guarantee would have serious negative
consequences for independent lenders, borrowers, and      The report noted that the conservatorships of the
the renters they serve.76                                 enterprises, combined with Treasury’s financial
                                                          support, have stabilized the enterprises but have not
Risk Reduction Initiative                                 restored them to a sound financial condition. It said
                                                          the enterprises remain exposed to credit, counterparty,
In July 2013, Freddie Mac offered $500 million of
                                                          and operational risks. Because of their large volume
bonds designed to reduce credit exposure and taxpayer
                                                          of distressed assets and ongoing stress in certain
risk. The Structured Agency Credit Risk Debt Notes
                                                          housing markets, the FHFA report noted that credit
were the first in a planned series of bond offerings that
                                                          risk management is a key priority for both enterprises.
are not guaranteed by Freddie Mac.77

Due to investor demand, the size of the bond offering     Figure 19. FHFA’s Supervisory Ratings
was increased from $400 million to $500 million and
attracted 50 diversified investors, including mutual                         CRITICAL CONCERNS
funds, hedge funds, real estate investment trusts,
pension funds, banks, insurance companies, and                             SIGNIFICANT CONCERNS

credit unions.78
                                                                             LIMITED CONCERNS
FHFA’s Acting Director noted that the transaction
                                                                                NO OR MINIMAL
was “a key step in the process of attracting private                              CONCERNS




                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013        49
In addition, counterparty risk is an area of concern,     Semiannual Report, we featured a discussion of key
especially given the changes in the mortgage industry     reformers and reform proposals. Since then, lawmakers
and the greater prominence of new types of seller-        introduced two major bills intended to reform housing
servicers. The report also singled out operational risk   finance, and the Administration announced core
as an area of concern because of challenges related to    principles that it believes should underlie such reform.
legacy systems, recordkeeping, and ongoing concerns       These recent developments are summarized below.
about human capital.83
                                                          In June 2013, the Corker-Warner Housing Finance
FHFA’s discussion of the FHLBank System indicated         Reform and Taxpayer Protection Act was introduced
that the FHLBanks of Boston,                                                 in the Senate.86 The bill calls
Chicago, and Pittsburgh                                                      for the winding down of the
presented “limited supervisory              Lawmakers                        enterprises and FHFA within
concerns,” while the FHLBank                                                 five years of the bill’s passage. It
of Seattle presented “supervisory           introduced                       would transfer the functions of the
concerns.” The FHLBanks of
New York, Atlanta, Cincinnati,              two major bills                  entities to the Federal Mortgage
                                                                             Insurance Corporation (FMIC),
Indianapolis, Des Moines, Dallas,
San Francisco, and Topeka were
                                            intended to                      modeled on FDIC.87

                                                                              Under the bill, the FMIC would
described as “satisfactory.”84
                                            reform housing                    collect insurance premiums and
FHFA’s summary of the
FHLBanks’ Office of Finance                 finance, and the                  maintain a deposit fund on all
                                                                              outstanding obligations. It would
noted improvements in corporate
governance and operational risk
                                            Administration                    provide backstop insurance that
                                                                              will kick in after a substantial
management processes. Principal
supervisory concerns included
                                            announced core                    amount of private capital is
                                                                              exhausted. The FMIC would
weaknesses in the director                  principles that it                capitalize the housing finance
compensation policy, weaknesses
                                                                              system by separating credit
in certain internal controls,               believes should                   risk from interest rate risk and
incomplete implementation of a
                                                                              bringing in private capital to take
vendor management program, and              underlie such                     on both. In addition, the FMIC
the lack of a formalized process
for collecting from the FHLBanks            reform.                           would leave the securitization and
                                                                              insurance functions to private-
selected data related to dealer
                                                                              market participants.88
eligibility.85
                                                          In July 2013, the Protecting American Taxpayers
Housing Finance Reform                                    and Homeowners Act was introduced in the House
One of OIG’s strategic goals is to contribute to          of Representatives.89 The bill would end the FHFA
the dialogue on enterprise reform and collaborate         conservatorships of the enterprises in five years.
with Congress on legislative policy initiatives before    During the transition period, it would reduce the
they become program requirements. In our fifth            enterprises’ mortgage portfolios by 15% a year.90



50   Federal Housing Finance Agency Office of Inspector General
The bill would replace the enterprises with a              When announcing the Administration’s plan, President
nonprofit National Mortgage Market Utility. The            Obama indicated that he supports the Senate bill.94
utility, which would not be a government entity,
                                                           Section 3 of this Semiannual Report provides a
would operate the securitization infrastructure
                                                           discussion of the roles of soundness, oversight, and
platform, currently being developed by FHFA and
                                                           balance in a reformed mortgage market.
the enterprises, for eligible private-sector lenders.
However, the utility would not originate, service,
                                                           Lawsuits/Settlements
insure, or guarantee any residential mortgage or
financial instrument associated with residential           On July 25, 2013, FHFA announced that it had
mortgages.91                                               reached an $885 million settlement with UBS
                                                           Americas Inc. covering claims for alleged violations
In August 2013, President Obama announced the              of federal and state securities laws in connection
Administration’s plans for reforming the enterprises.      with private-label MBS purchased by the enterprises.
“I believe that our housing system should operate          Under the terms of the agreement, UBS Americas
where there’s a limited government role and private        Inc. will pay approximately $415 million to Fannie
lending should be the backbone of the housing              Mae and $470 million to Freddie Mac to resolve
market,” Obama said. “We can’t leave taxpayers on          claims related to securities sold to the companies
the hook for irresponsibility or bad decisions by some     between 2004 and 2007.95
of these lenders or Fannie Mae or Freddie Mac. We’ve
got to encourage the pursuit of profit, but the era of     FHFA alleged that the company failed to perform
expecting a bailout after you pursue your profit and       proper due diligence during the underwriting
you don’t manage your risk well—well, that puts the        process and that disclosure documents contained
whole country at risk. And we’re ending those days.”92     misstatements and omissions about the mortgage
                                                           loans underlying the private-label MBS, including
The Administration’s plan includes four core principles:   false or inadequate characterizations of the mortgage
•	 Put private capital at the center of the housing        borrowers’ creditworthiness, the quality of the
                                                           origination process, and the practices used to evaluate
   finance system;
                                                           and approve the loans.96
•	 Wind down the enterprises;
                                                           The case was 1 of 18 filed by FHFA against financial
•	 Ensure widespread access to safe, responsible           services firms involving private-label MBS; it is the
   financing, like the 30-year fixed-rate mortgage; and    third case that has been reported as settled.97

•	 Support affordability and access for renters and
   homeownership for first-time buyers.93




                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013       51
Section 3: Lessons for Housing Finance Reform:
Five Years After the Federal Government’s
Takeover of Fannie Mae and Freddie Mac

Introduction                                               mortgage loans.100 When the housing bubble burst,
                                                           though, the enterprises became insolvent, which
Five years have passed since the enterprises entered       ultimately resulted in their entering conservatorships
conservatorships in September 2008, where they             under FHFA’s supervision. Since then, the agency has
still remain. In the meantime, Congress continues          worked to conserve and preserve their assets and to
to consider the future of the secondary mortgage           ensure that they follow prudent business practices.
market and what, if any, role the government should        Initially, FHFA understood the conservatorships
play in it.98 As policymakers deliberate, we offer this    to be temporary while, in the Acting Director’s
discussion, which draws on our experience, of three        words, “Congress and the Administration could
factors that are important to a safe, stable, and liquid   figure out how best to address future reforms.”101
mortgage market—whatever its ultimate structure.99         As the conservatorships became more long term,
•	 First, soundness. The recent housing crisis             the agency advised that it would continue to guide
   has shown that, at minimum, the secondary               the enterprises to accomplish generally agreed-
   mortgage market needs quality underwriting,             upon objectives—restoring their financial fitness
   robust risk assessment, and market-aligned              and reducing their market footprint—while not
   servicing.                                              precluding any of the major enterprise reform
                                                           proposals, which range from privatization to
•	 Second, oversight. Our work demonstrates that           elimination.
   effective housing finance oversight requires well-
   equipped regulators to verify decision making           In July 2010, Congress responded to the nation’s
   and to enforce compliance.                              recession with Dodd-Frank. This law contains
                                                           several housing finance reforms that are intended
•	 Third, balance. Whatever the future mortgage            to address practices that contributed to the housing
   market’s structure, participants will have to find      boom, including reducing the risk of borrowers
   a balance among interrelated laws, roles,               defaulting.102 It also requires MBS issuers to retain
   and practices.                                          credit risk in the assets they securitize, that is, to
Below, we discuss how these factors bear on housing        keep some skin in the game.103 Although this law
finance. Our goal is not to take sides but to provide      addressed some important problems that led to the
our stakeholders—FHFA, Congress, policymakers,             housing crisis—lenders with little to lose loaning
and the public—with information that will be useful        to borrowers with little to repay—it did not resolve
during the debate on housing finance reform.               other fundamental concerns, such as the appropriate
                                                           role for the government in housing finance.
Context: Reforms and Reformers                             In February 2011, the Administration published
                                                           its vision of the government’s role in Reforming
Historically, the enterprises have facilitated the flow    America’s Housing Finance Market. In general, the
of mortgage credit by purchasing mortgages from            Administration argues for replacing the enterprises
lenders, who, in turn, are freed up to make more           with the private market as the primary source of

52    Federal Housing Finance Agency Office of Inspector General
mortgage credit. For its part, the government would        However, in spite of the diversity of sources,
explicitly provide robust oversight, protect consumers     essentially there are only three categories of
and investors, assist low- and moderate-income             proposals:110
homeowners and renters, help stabilize the market,
                                                           •	 Private—the private sector takes over the
and respond to crises.104
                                                              secondary mortgage market;111
In August 2013, President Obama clarified the
                                                           •	 Public—the government takes over the
Administration’s plan for reforming the enterprises.
                                                              enterprises’ current role;112 or
The Administration’s plan includes four core principles:
                                                           •	 Private/Public—the government provides some
•	 Put private capital at the center of the housing
                                                              safety for private participants.113
   finance system;
                                                           The private model relies upon private companies
•	 Wind down the enterprises;
                                                           to buy and securitize mortgages and to guarantee
•	 Ensure widespread access to safe, responsible           payment of principal and interest on the resulting
   financing, like the 30-year fixed-rate mortgage; and    securities. Under this model, the government does
                                                           not guarantee the companies or the securities. The
•	 Support affordability and access for renters and        key to most of the private model options is to wind
   homeownership for first-time buyers.105                 down the enterprises over a defined period of years.114
Individual members of Congress have also made              In theory, this will provide an incentive for private-
proposals. For example, on June 25, 2013, eight            sector participation as guarantee fees increase to what
members of the Senate Banking, Housing and Urban           the market will bear.
Affairs Committee introduced a bill, the Housing           In the public model, a government corporation
Finance Reform and Taxpayer Protection Act of              replaces the enterprises, and it buys, securitizes, and
2013.106 The bill calls for greater private-sector         sells residential mortgages. Approved lenders pay
participation in the secondary mortgage market,            guarantee fees to the corporation in order to ensure
winding down the enterprises over five years, and          timely payment of interest and principal on the
creating a new government insurance entity.107 On          resulting securities.115 This type of proposal requires
July 22, 2013, five members of the House Financial         the federal government to back all of the corporation’s
Services Committee introduced housing finance              obligations, or at least to guarantee MBS’ principal
reform legislation, entitled the Protecting American       and interest payments.
Taxpayers and Homeowners Act of 2013.108 The bill
                                                           Many envision a private and public hybrid model
winds down the enterprises over a five-year transition
                                                           for the secondary mortgage market. In the broadest
period and reduces the government’s role in the
                                                           context, the hybrid model calls for private participants
housing finance market.109
                                                           to buy and securitize mortgages from approved
Academics, industry experts, and interest groups also      lenders with some form of government guarantee.116
have made housing finance reform proposals.                Such proposals tend to vary according to the level

                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013        53
of government support, with many models also               mortgages.120 According to the Government
proposing government intervention during economic          Accountability Office (GAO), the enterprises’
crises.117                                                 holdings of private-label MBS increased rapidly from
                                                           2003 to 2006.121 This helped Fannie Mae’s assets
Figure 20 (see page 55) highlights the major reforms
                                                           and guaranteed mortgages grow from $1.3 trillion in
and reformers.
                                                           2000 to $3.1 trillion in 2008, while Freddie Mac’s
These proposals can be expected to grow more               increased from $1 trillion to $2.2 trillion during the
detailed as they progress since specific issues, such as   same period.122
establishing underwriting standards and managing
                                                           As mortgage volume grew, the enterprises agreed to
risk, will need to be resolved. The following is
                                                           buy and guarantee higher-risk loans.123
intended to serve as a backdrop to deliberations about
these more granular issues.                                Traditionally, the enterprises confined their businesses
                                                           to lower-risk, prime loans.124 But, during the
Soundness: Lessons from the Past                           housing boom, Fannie Mae, for instance, issued
                                                           large numbers of variances, or exceptions, from its
                                                           underwriting guidelines that permitted it to buy
Our work has corroborated several lessons learned
                                                           higher-risk products, such as zero down payment
from the housing crisis: a sound housing finance
                                                           mortgages made to buyers with low credit scores and
market should include quality underwriting, robust
                                                           unverified income.125
risk management, and servicers who have incentives
to align their interests with those of other market        In 2006, home prices leveled off, and the housing boom
participants. Below, we review the historical basis for    turned into a bust.126 In 2007 and 2008, the enterprises
recognizing these lessons when reforming housing           began losing billions of dollars on their multi-trillion-
finance and then discuss some of our work that             dollar MBS guarantees and investments.127
supports their importance.
                                                           In the aftermath, many serious questions have
U.S. property values spiked from 2001 to 2006—an           arisen regarding the origination and securitization
average of 12% each year.118 As the boom proceeded,        process.128 Notably, during the summer of 2011,
underwriting standards loosened and lenders                FHFA filed lawsuits against 18 large financial
increasingly approved higher mortgages for higher-         institutions, alleging violations of federal and state
risk borrowers who had little to no down payments,         securities laws in connection with sales of private-
unverified incomes, and high debt. Associated credit       label MBS to the enterprises. FHFA is pursuing fraud
risks spread throughout the financial system as            and other claims, alleging misleading disclosures
these mortgages were bundled into publicly traded          about the quality of the mortgages that were used to
enterprise and private-label MBS.119                       securitize the MBS. FHFA’s complaints allege that the
                                                           mortgage collateral securing the private-label MBS
The dominant players in the secondary mortgage
                                                           had materially different and higher-risk characteristics
market before the boom, Fannie Mae and Freddie
                                                           than described.129
Mac took steps to maintain their market share during
it. In 2001, the enterprises began buying—for their        Although there are different perspectives on which
own investment portfolios—private-label MBS,               factors were most to blame for the housing crisis,
many of which were collateralized by subprime              it is generally agreed that contributing causes



54    Federal Housing Finance Agency Office of Inspector General
Figure 20. Reform Models and Reformers and Their Proposals


                                                          Reform Models




                                 Private Model                   Hybrid Model                 Government Model

                     • Private companies purchase        • Blended—private entity or          • Government-owned corporation
                       and securitize mortgages and        entities purchase and securitize     replaces the enterprises
                       guarantee the principal and         mortgages with some government
                       interest payment                    guarantee                          • Federal government backs all
                                                                                                obligations or at least guarantees
                     • No explicit guarantee by the      • Some models advocate full            the principal and interest payments
                       federal government                  replacement of the enterprises
                                                                                              • Approved mortgage originators
                     • Key to most options is the        • Governmental intervention            pay a guarantee fee to the
                       wind down of the enterprises        mechanisms in times of economic      corporation to secure payment
                       over 10 or 15 years                 hardship                             of interest and principal

                     • One proposal suggests a           • Private sector to absorb losses
                       temporary governmental agency       before the federal guarantee
                       to guarantee the principal and      is tapped
                       interest payment




                                              Reformers and their Proposals
                   The Administration                       Legislative Proposals               Academics, Industry Experts,
                                                                                                    and Interest Groups




                • Make the private market the           • Modify the enterprises or               • Generally envision a private
                  primary source of mortgage              create a new private or                   mortgage market backed by
                  credit                                  government-owned company                  some type of governmental
                                                          to replace them                           guarantee

                • Phase out the enterprises
                                                        • Focus on improving                      • Argue for less volatility in
                                                          accountability, lowering the              housing credit and more
                • Government should provide               government’s costs, and reducing          protection in times of financial
                  oversight, protection, targeted         the enterprises’ competitive              crisis by having a buyer “of
                  assistance, and support for             advantage                                 last resort” providing additional
                  market stability and crisis                                                       liquidity
                  response

                                                                                                  • Suggest splitting the
                                                                                                    enterprises into entities that
                                                                                                    respectively hold their
                                                                                                    collective good and bad
                                                                                                    assets




                                        Semiannual Report to the Congress • April 1, 2013–September 30, 2013                            55
included loosened underwriting standards, poor risk                                      Figure 21. Fannie Mae’s Underwriting Standards
management, and servicers with little incentive to                                       for 2006 and 2011
prevent foreclosures.                                                                                                               2006                                       2011
                                                                                             Collateral (LTV)                        95                                         95
Loosened Underwriting Standards                                                              Capacity (Debt-to-Income)              36%                                        36%a
                                                                                             Creditworthiness (Credit Score)         N/A                                       660b
Single-Family                                                                            a
                                                                                           The benchmark is 36% but can go up to 45% if there are
As discussed in one of our reports, Fannie Mae’s basic                                   strong compensating factors.
                                                                                         b
                                                                                           Minimum FICO score is 660 if LTV is greater than 75%. If
underwriting standards for mortgage loans secured                                        LTV is less than or equal to 75%, then minimum FICO score
by single-family homes have not changed much. On                                         is 620.

the other hand, the enterprise has granted variances
that have had the effect of modifying its underwriting                                   example, in 2005 when standards were loosened,
standards over time. Essentially, variances allow                                        Fannie Mae authorized over 11,000 variances.
lenders to deviate from underwriting standards                                           Thereafter, Fannie Mae began rescinding variances,
for mortgage loans they sell to the enterprises; for                                     which tightened underwriting standards. Some of
instance, the enterprises may allow no down payment                                      these canceled variances related to risky features, such
instead of the minimum 5% they typically require.130                                     as loans made with unverified income.131
As shown in Figure 21 (see above), Fannie Mae’s basic                                    FHFA recognizes the critical role played by variances
underwriting standards did not change significantly                                      in setting underwriting standards and agreed with
before 2006 or after 2011.
                                                                                         our recommendations to establish formal procedures
However, as shown in Figure 22 (see below), the                                          for reviewing proposed changes to the enterprises’
number of variances that Fannie Mae allowed                                              single-family underwriting standards and variances
declined substantially from 2006 to 2011. For                                            from them.132



Figure 22. Fannie Mae Variances Granted from 2005 to 2011
                                                                                                                                            Number of Lenders with Variances
                           14,000                                                                                                   1,000
                                                                                   January 2005:                                    900
                           12,000
     Number of Variances




                                                                                  11,718 Variances                                  800
                           10,000                                                   857 Lenders                                     700
                                                                                                   September 2011:
                            8,000                                                                   638 Variances                   600
                                                                                                     188 Lenders                    500
                            6,000                                                                                                   400
                            4,000                                                                                                   300
                                                                                                                                    200
                            2,000
                                                                                                                                    100
                               0                                                                                                    0
                                          05



                                                      6



                                                                7



                                                                              8


                                                                                         09



                                                                                                         0


                                                                                                                   11



                                                                                                                               1
                                                     00



                                                                00



                                                                         00




                                                                                                     01




                                                                                                                               01
                                       20




                                                                                      20




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                                                 y2



                                                               2


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                                                                                                   y2




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                                         y




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                                                                                                                  y


                                                                                                                         ber
                                     uar



                                                uar




                                                                        uar



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                                                                                                   uar



                                                                                                              uar
                                                          Aug




                                                                                                                         tem
                                    Jan



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56    Federal Housing Finance Agency Office of Inspector General
Multifamily                                                Figure 23. Multifamily Mortgage Debt
                                                           Outstanding for 2012
We have also found indications that the enterprises
have relaxed underwriting standards for the
multifamily mortgage loans they buy.133                                                     Individuals
                                                                   Life Insurance           and Others
                                                                     Companies                 12%           Fannie Mae
During the housing crisis, private-sector financing for                   6%
                                                                                                                22%
multifamily residences largely vanished even though        Savings Institutions
                                                                   6%
demand for multifamily rental housing increased.
The enterprises stepped into the financing gap by                                                                   Freddie Mac
                                                                                                                        14%
purchasing 85% of all multifamily loans in 2009.134                                 Commercial Banks
                                                                                         23%
By the end of 2012, the enterprises’ market share                                                                 Ginnie
                                                                                                        Private
had declined, but they were still dominant players; as                                                 Mortgage
                                                                                                                   Mae
                                                                                                                   8%
                                                                                                       Conduits
shown in Figure 23 (see right), they collectively held                                                    9%
36% (or $305 billion) of the total outstanding debt
from multifamily mortgage loans.135

Ultimately, the value of the enterprises’ considerable     Freddie Mac were partial interest or interest only.138
multifamily mortgage holdings depends on the               In 2011, these loan purchase rates rose to:
underlying quality of the loans. As the financial crisis
                                                           •	 43% of Fannie Mae’s multifamily loans, valued at
demonstrated, if loans are not well underwritten,
                                                              $10 billion; and
made to eligible borrowers, and supported by
adequate collateral, then the enterprises’ investments     •	 62% of Freddie Mac’s multifamily loans, valued
in them may be exposed to undue risk. Thus, the               at $11 billion. 13923. Multifamily Mortgage Debt Outstanding
                                                                         Figure
enterprises’ respective multifamily underwriting
standards can significantly influence the quality of the   Fannie Mae has made other changes to its
loans that they buy.136                                    multifamily underwriting standards that potentially
                                                           will increase credit risk (e.g., allowing borrowers with
However, we found indications                                                   less operating income to finance
that the enterprises recently                                                   larger loans).140 Fannie Mae also
have relaxed their multifamily              The enterprises                     allows lenders to approve loans in
underwriting standards, which                                                   which the borrower’s net operating
may translate to rising risk in             purchased 85%                       income is less than the minimum
their multifamily portfolios.                                                   allowable. Previously, such loans
For example, we found a steady              of all multifamily                  had been subject to the enterprise’s
increase in their partial or interest-                                          review and preapproval.141
only loans. Initially, borrowers            loans in 2009.
pay little to no principal for these                                          Freddie Mac also initiated plans
loans, but payments can soar as                                               to relax aspects of its underwriting
the partial or interest-only options expire.137            standards. In April 2012, for example, the enterprise
                                                           notified FHFA of its intent to revise underwriting
In 2009, 34% and 40%, respectively, of the                 standards for cash-out loans. These loans allow
multifamily loans purchased by Fannie Mae and              borrowers to trade mortgage equity for cash and



                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013                      57
Figure 24. Typical Loan Characteristics
               Characteristics                          Multifamily Loans                 Single-Family Loans
Enterprises’ Outstanding Unpaid Principal
                                                          ~$332 billion                       ~$4.4 trillion
  Balance as of December 31, 2012
                                                 apartment complexes, senior
Types of Properties                               housing, cooperatives, and              houses and condos
                                                         student housing
Size of Property                                             5+ units                            1-4 units
Owners’ Use of Property                                       income                            residence
Borrowers                                                  legal entities                      individuals
Average Loan Amount                                       $5-13 million                        ~$200,000
                                                 5, 7, or 10 years, with balloon
Typical Loan Terms                                                                              30 years
                                                   payments due at maturity



are higher risk because they simultaneously increase       A typical multifamily loan is several million dollars;
borrowers’ debt, while decreasing their equity in the      the average Fannie Mae multifamily loan is about
properties. In 2011, Freddie Mac                                               $5 million, while Freddie Mac’s
financed 207 loans with over                                                   average loan is $13 million.144
$743 million of cash out, on           Tightening                              Yet, the enterprises can hold
average about $3.6 million per                                                 multifamily loans that are over
loan.142                               underwriting                            $500 million per property.145
                                                                               Lastly, the terms of multifamily
In general, most discussions of        standards can lead                      loans are 5, 7, or 10 years,
mortgage market reform center
                                                                               with a balloon payment due at
around single-family loans,            to a portfolio with                     maturity.146 Balloon payments
but a reformed market will
                                                                               can either be paid off or
also need to be structured to          less risky loans but                    refinanced.
address characteristics specific to
multifamily loans. (See Figure         may also lower                              With the specific nature of
24, above, for a summary                                                           each type of loan in mind,
of multifamily and single-
                                       profits. On the other                       business decisions to tighten or
                                                                                   relax underwriting standards
family loan characteristics.)
Multifamily properties have
                                       hand, relaxing                              necessarily balance profit and
five or more units and vary            underwriting                                risk. Tightening underwriting
in type from apartment                                                             standards can lead to a portfolio
complexes to senior housing.           standards may                               with less risky loans but may
Because multifamily properties                                                     also lower profits. On the
produce income, they operate           increase risk, which                        other hand, as the housing
like businesses. Borrowers of                                                      crisis demonstrated, relaxing
multifamily loans are usually          ultimately leads to                         underwriting standards may
legal entities such as companies                                                   produce increased profits along
or corporations.143                    heavier losses.                             with increased risk, which
                                                                                   ultimately leads to heavier losses.

58    Federal Housing Finance Agency Office of Inspector General
Based on recent history, a reformed housing market         Figure 25. Enterprises’ REO Properties and
should include a commitment to aggressively manage         Shadow Inventory Through 2012
risks associated with underwriting both single-family       800,000
and multifamily loans.                                      700,000
                                                            600,000
Robust Risk Management: Assessing and                       500,000
Mitigating Housing Market Risk                              400,000
                                                            300,000
Managing risk is at the heart of what regulators
                                                            200,000
do. Through our work, we have found instances
                                                            100,000
where proactive risk management would have
                                                                   0
increased FHFA’s awareness of and confidence in the                       REO Inventory   Shadow Inventory
enterprises’ business practices.
                                                                       REO Properties (154,737)
For example, in one report we found that there were                    Loans 180-364 Days Delinquent (213,176)
indicators as early as 2006 that could have led FHFA’s                 Loans 365+ Days Delinquent (504,665)
predecessor agency to identify the heightened risk
posed by processing abuses within Fannie Mae’s
default-related legal services network, which handles
foreclosures for the enterprise. These indicators          times more than the enterprises’ REO inventory for
included rising foreclosures, deteriorating housing        2012.149
market conditions, consumer complaints, and media
                                                           FHFA oversees the enterprises’ REO risk
reports of foreclosure abuses. Despite such warning
                                                           management. At stake are both additional credit risk
signs, the agency did not schedule comprehensive
                                                           that may accrue to the enterprises as well as negative
examination coverage of foreclosure issues until the
                                                           impacts on local communities, such as increased
middle of 2010.147
                                                           blight and crime, that may result where large
We have also reviewed FHFA’s oversight of how the          numbers of foreclosures occur.150
enterprises manage their REO properties (i.e., how
                                                  Figure
they secure, repair, and sell foreclosed properties).148 25. Until recently,REO
                                                              Enterprises’   FHFA   was not proactive
                                                                                Properties   and Shadowin overseeing
                                                                                                           Inventory Through 20
                                                             how the enterprises manage their REO risk. In
The enterprises have faced surging foreclosure               one report, for example, we found that since 2008,
rates—for example, through 2011, they had an REO             FHFA has consistently listed the enterprises’ large
inventory of 180,000 units with related expenses             inventories of REO as a “critical concern,” its most
of $8.5 billion; and as shown in Figure 25 (see              negative rating. But, despite identifying REO as a
above), there were over 717,000 mortgages as of              prominent and increasing risk, it did not conduct
December 31, 2012, on which payments had not                 targeted examinations or other focused reviews
been made for more than six months—over 4.5                  regarding REO until 2011.151




                                  Semiannual Report to the Congress • April 1, 2013–September 30, 2013           59
Were the housing market to weaken again, the              sufficient provided a mortgage remains current
enterprises could be exposed to large losses from         and the servicer’s duties involve easily automated
their REO inventory. For example, 2012 ended              functions, such as receiving and passing along
with the enterprises estimating that a 5% decline in      mortgage payments.155 (See Figure 26, page 61, for a
nationwide home prices could increase their losses by     description of the mortgage servicing process.)
over $17 billion.152
                                                          However, servicing troubled mortgages requires
This REO risk of loss may have lately diminished due      more individualized attention and results in higher
to improvement in the housing market. However,            costs. For example, in the case of delinquent loans,
history has shown that the housing                                           the servicer may need to contact
market can unexpectedly rise or                                              borrowers to understand their
fall. It is, therefore, critical for                                         financial situation, educate them
current and future regulators             The enterprises                    about the impact of not paying
to manage risks robustly and                                                 a mortgage, explain options
proactively in order to provide           could be exposed                   for avoiding foreclosure, and
for a continuing stable, liquid,                                             ultimately initiate foreclosure
and accessible mortgage market.
                                          to large losses                    proceedings.156 Interests between
Similarly, it is important for other                                         the enterprises and servicers may
market participants to be prepared
                                          from their REO                     misalign when the enterprises have
                                                                             $100,000 at stake for every $250
to operate during good times and          inventory; they                    the servicer stands to earn.157
bad and to strive to align their
interests.                                estimated that                     Fannie Mae determined that
                                                                             specialty servicers—which operate
Market-Aligned Mortgage                   a 5% decline in                    pursuant to an alternative payment
Servicing: Congruent
                                                                             structure—might be able to
Incentives for Market                     home prices could                  improve outcomes for mortgages
Participants
The foreclosure crisis highlighted
                                          increase their                     at risk of default. These servicers
                                                                             intensively contact borrowers,
that it is important for the              losses by over                     educate them on the impact of
mortgage servicing industry to                                               not paying, and explain options
be prepared to operate efficiently        $17 billion.                       to avoid foreclosure. In general,
under different market conditions.                                           we found the program to be
As our recent report showed,                                                 sound but in need of closer FHFA
servicers generally do not have                                              oversight.158
much incentive to help prevent foreclosures in bad
                                                          In summary, our reports have repeatedly identified
times, which can cost homeowners and mortgage
                                                          this need for closer, hands-on supervision and
owners who do.153
                                                          oversight by FHFA. In our experience, proactive
For example, consider what servicers are paid. They       oversight of each element of the housing finance
receive relatively small fees for their work—e.g.,        system (e.g., originating, securing, and servicing loans
$250 annually for every $100,000 in mortgage debt         and handling REO) is needed to ensure the system
serviced, or 25 basis points.154 That fee is typically    functions soundly.

60    Federal Housing Finance Agency Office of Inspector General
Figure 26. 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

                                              • Performs loss mitigation or
                                                foreclosure, if required


Oversight: Lessons of the Present                            This is particularly true with FHFA, which has
                                                             critical responsibilities as the regulator of the GSEs
OIG’s work reveals recurring oversight issues that           and the conservator of the enterprises. However,
policymakers may want to consider as part of                 senior agency officials and internal agency reviews
reforming the secondary mortgage market. Specifically,       have acknowledged that it has too few examiners
our work has found that it is important to:                  to ensure efficient and effective GSE oversight.159
                                                             Our reports have supported their assessment by
•	 Equip: oversight bodies need the resources to do          demonstrating shortfalls in the agency’s examination
   their jobs;                                               coverage.
•	 Verify: regulated entities’ decision making should      For example, OIG has raised concerns about FHFA’s
   be independently tested and validated; and              resources and capacity to carry out its multiple
                                     Figure 26. The Mortgage  Servicing Process
                                                           responsibilities, particularly given its task of unifying
•	 Enforce: when rules are established, they must
   be enforced.                                            a fragmented regulatory structure.160 We followed
                                                           up in a later review and confirmed that FHFA’s
These oversight issues are discussed in detail below.      limited capacity affected its ability to examine the
                                                           GSEs. Due to examiner shortages, FHFA scaled
Equip: Providing Sufficient Supervisory                    back planned work during examinations, which
Capacity                                                   often took longer than expected. We also identified
Ensuring that housing finance oversight bodies are         shortfalls in the agency’s examination coverage,
equipped with sufficient resources to accomplish their     particularly in the crucial area of REO. In general,
missions is critical. If they do not have the resources    FHFA agreed that it should better assess the relation
to cover major risk areas timely, they will not be well    between its examination capacity and the quality of
positioned to identify and mitigate such risks.            its examinations.161

                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013          61
 Figure 27. Freddie Mac Loans Originated in 2001                                       require conservatorship approval for various major
 and 2006 Entering Foreclosure                                                         business decisions, such as a servicing program,
                     60,000                                                            which involved multiple transfers of MSR for over
                                                                                                               Originated in 2006

                     50,000                                                            700,000 loans with an unpaid principal balance over
Foreclosure Starts




                                                                                                               Originated in 2001

                     40,000
                                                                                       $130 billion.163 The same report also showed that
                     30,000
                                                                                       FHFA unduly relied on information provided by
                     20,000

                     10,000
                                                                                       Fannie Mae when it issued a “no objection” response
                         0                                                             to the enterprise’s request to make an investment of
                               1          2               3              4         5
                                                Foreclosure Year                       between $55 million and $70 million in order to
                                     Originated in 2001       Originated in 2006
                                                                                       protect an existing $40 million investment. On the
                                                                                       same day as the request for approval was submitted,
 As our work has shown, it is incumbent upon FHFA                                      FHFA stated that given the complex nature of the
 to ensure that adequate supervisory resources are in                                  transaction and the short decision time frame, the
 place, and housing finance oversight agencies must                                    agency could not assess the reasonableness of the
 actively verify the mortgage market decision making                                   proposal. Yet, FHFA still made “no objection” to the
 under their purview.                                                                  transaction.164

                                                                                       Another report documented how FHFA approved
 Verify: Independently Testing and
                                                                             a $1.35 billion settlement of mortgage repurchase
 Validating        Decision Making
  Figure 27. Freddie Mac Loans Originated in 2001 and 2006 Entering Foreclosure
                                                                                       claims that Freddie Mac asserted against Bank of
 We have repeatedly identified significant instances                                   America without testing the enterprise’s underlying
 in which FHFA has displayed undue deference                                           assumptions. Essentially, the settlement assumed
 to enterprise decision making in its capacity as                                      that loans originated during the housing boom
 conservator. Without adequately testing or validating,                                and purchased by Freddie Mac would behave no
 the agency has deferred to the enterprises on key                                     differently than loans bought before the boom.165
 issues. The agency’s actions in each case reflect its                                 However, an FHFA senior examiner—and Freddie
 approach as conservator to delegate most business                                     Mac’s internal auditors—observed a different
 decisions to the enterprises.                                                         foreclosure pattern associated with the housing boom
                                                                                       era loans (i.e., loans originated around 2006). As
 However, our reports have shown that some matters
                                                                                       shown in Figure 27 (see above), for these loans—
 are sufficiently important to warrant greater agency
                                                                                       many of which are higher risk—foreclosures peaked
 involvement, such as issues that touch on the causes
                                                                                       three to five years after origination, instead of two to
 of the housing crisis, the conservatorships, and the
                                                                                       three years for pre-boom loans originated in 2001.166
 taxpayers’ investment in the enterprises.
                                                                                       This difference was important because Freddie
 For example, our work demonstrated how FHFA relies
                                                                                       Mac did not review defaulted loans for repurchase
 on the enterprises to oversee and establish underwriting
                                                                                       claims if the defaults occurred more than three years
 standards and to grant variances from them.162
                                                                                       after origination. That meant Freddie Mac had
 Another report showed a similar pattern of                                            not reviewed for repurchase claims over 300,000
 accepting the enterprises’ decision making without                                    foreclosed loans originated between 2004 and
 testing or validating their logic and conclusions.                                    2007. These loans had an unpaid principal balance
 In general, we determined that FHFA did not                                           exceeding $50 billion.167


 62                      Federal Housing Finance Agency Office of Inspector General
Even though the FHFA senior examiner raised                      Enforce: Ensuring Regulatory Compliance
concerns about Freddie Mac’s loan review
                                                                 Even when FHFA has identified risks and
process more than six months before the agency
                                                                 taken steps to manage them, the agency has not
approved the Bank of America settlement, FHFA
                                                                 consistently enforced its directives to ensure that
did not timely act on or test the ramifications
                                                                 identified risks are, in fact, adequately addressed.
of the examiner’s concerns before approving the
                                                                 As conservator and regulator, the agency’s authority
settlement. Instead, the agency relied on the
                                                                 over the enterprises is broad and includes the ability
enterprise’s analysis of the settlement without testing
                                                                 to enforce compliance with agency mandates.
its underlying assumptions.168
                                                                 We have reported that FHFA’s supervision and
After we issued our report, Freddie Mac changed                  regulation of the GSEs could be strengthened by
its loan review process for repurchase claims. The               better exercising this authority when warranted.
enterprise now reviews all nonperforming loans
originated between 2004 and 2007 for repurchase                  For example, we determined that FHFA had
claims without regard to when they defaulted. We                 not compelled Fannie Mae to comply with the
found in a follow-up report that such an expanded                requirement to have an effective program to manage
review may generate as much as $3.4 billion in                   operational risk—i.e., the risk of loss resulting from
additional revenue for Freddie Mac.169                           failed people, processes, systems, or external events.
                                                                 Effective operational risk management can help
Going forward, FHFA has generally agreed with our                agency examiners to identify trends in such risks and
recommendations to take a more proactive oversight               focus their examinations accordingly.170
stance in response to the issues our work has raised.
We believe these positive steps will help the agency             Between 2006 and early 2011, FHFA and its
identify and manage risks, but we have also found                predecessor agency repeatedly identified Fannie
that this must be accompanied by a steadfast will to             Mae’s lack of an acceptable operational risk
enforce compliance.                                              management program. But, as Figure 28 (see below)


Figure 28. Supervisory Identification of Fannie Mae’s Operational Risk Management Deficiencies
     May 2006                             March 2009                May 2009               March 2010              April 2011
  FHFA's predecessor                   FHFA’s examination         FHFA’s review of         FHFA’s report of      FHFA’s Fannie Mae
   agency's consent                      of Fannie Mae:         Fannie Mae results     examination identifies    examination finds
   order: implement                        operational           in three MRAs for       ongoing operational    noncompliance with
  operational risk plan                   management              operational risk     risk and management      2006 consent order
     in three years                   oversight an area of                                   deficiencies       re: operational risk
                                      “significant concern”




  2006 2007 2008 2009 2010 2011
                                       September 2008            December 2009          September 2010
                                      FHFA’s letter to Fannie   FHFA issues analysis   FHFA’s noncompliance
                                       Mae re: deficiencies       of deficiencies in      letter re: three
                                        in operational risk         Fannie Mae’s       operational risk MRAs
                                           management              operational risk
                                             program             oversight program




                                  Semiannual Report to the Congress • April 1, 2013–September 30, 2013                            63
illustrates, FHFA and its predecessor did not compel      Balance: Lessons for the Future
Fannie Mae to create such a program, preferring
less forceful supervisory means, such as years of         Achieving housing finance reform will require
repeated examinations and letters of concern and          balancing between complementary and sometimes
noncompliance.171                                         competing factors in housing finance. Below, we
                                                          summarize some of our work, which illustrates the
The benefit of stronger FHFA enforcement also
                                                          tensions inherent in current housing finance oversight.
extends to the FHLBanks. For example, we found
that four FHLBanks have faced significant financial
                                                          Overlapping Laws: HERA and EESA
and operational difficulties since 2008, primarily
because of their investments in high-risk mortgage        FHFA’s powers and responsibilities mainly come
securities. The agency has oversight responsibility       from two laws with different emphases: HERA,
over the FHLBanks and recognizes the need to ensure       which focuses on the GSEs’ financial soundness,
that they do not abuse their GSE status and engage in     and the subsequently enacted Emergency
imprudent activities.172                                  Economic Stabilization Act (EESA), which, as
                                                          relevant to FHFA, focuses on the welfare of existing
One of our reports revealed, though, that FHFA had        homeowners.174
not established a consistent and transparent written
enforcement policy for troubled FHLBanks classified       In July 2008, in the face of a turbulent market,
as having “supervisory concerns.” Specifically, of the    HERA created FHFA to oversee the enterprises and
four FHLBanks receiving this classification, FHFA         the FHLBanks—vital components of the secondary
took formal enforcement actions against only two.         mortgage market. Under HERA, the agency’s mission
This has contributed to instances in which the agency     is to provide supervision, regulation, and oversight
may not have held these banks and their officers          of the GSEs in order to promote their safety and
sufficiently accountable for engaging in questionable     soundness, support housing finance and affordable
risk taking.173                                           housing, and facilitate a stable and liquid mortgage
                                                          market.175
Overall, our work has led us to conclude that sound
                                                          HERA also vested FHFA with the power to place the
supervision in the secondary mortgage market
                                                          GSEs into conservatorship, if warranted. That power
requires resources equal to the oversight mission.
                                                          was invoked in September 2008, when due to their
Further, some of these resources should be allocated
                                                          deteriorating financial conditions, the enterprises
to test and validate compliance and decision making
                                                          entered conservatorships overseen by FHFA. As
by market participants. And, rules need to be
                                                          conservator, FHFA’s goal is to conserve and preserve
enforced.
                                                          the enterprises’ assets.176
Not everything, though, can be fixed by better
                                                          In contrast, EESA was enacted in October 2008, as
oversight. As we discuss below, any reform proposal
                                                          the housing crisis deepened, to protect home values
will have to wrestle with inherent tensions between
                                                          and investments, preserve homeownership and
intersecting housing finance elements.
                                                          promote economic growth, and maximize returns
                                                          to taxpayers. To preserve homeownership, EESA
                                                          requires FHFA to implement a plan to maximize



64    Federal Housing Finance Agency Office of Inspector General
assistance to homeowners and                                                 proprietary modifications outside
to use its authority to encourage                                            of HAMP during the same
mortgage servicers that work with
                                          Through March                      period.180
the enterprises to take advantage         2013, 2.4 million                  FHFA sees its support of mortgage
of federal programs to minimize
                                                                             modification and forbearance
foreclosures.177                          homeowners                         as consistent with both EESA’s
In partly fulfilling its                                                     mandate to help homeowners and
EESA mandate to preserve
                                          have refinanced                    HERA’s requirement to safeguard
homeownership, FHFA worked
with Treasury to set up HARP
                                          through HARP,                      the enterprises’ assets.181 However,
                                                                             questions have arisen concerning
in 2009. This program allows              the enterprises                    the enterprises’ participation in
borrowers (who might otherwise                                               programs, such as HAMP, within
not qualify for refinancing)              completed                          Treasury’s wider Making Home
to take advantage of currently                                               Affordable (MHA) program.
low mortgage interest rates and           approximately                      Some critics argue that Treasury
refinance their loans. In general,                                           has employed the enterprises
the program is geared toward              434,000 HAMP                       to manage MHA in ways
borrowers who are current on their                                           that jeopardize their financial
mortgage payments and includes            modifications,                     interests and has done so without
underwater borrowers who owe                                                 adequately working with FHFA,
more than their homes are worth.          and the                            thus potentially compromising
Through March 2013, 2.4 million                                              its discretion as conservator and
homeowners have refinanced
                                          enterprises                        regulator.182
through HARP.178
                                          made more                           In responding to a congressional
Since early 2009, FHFA has                                                    request to examine the
also supported the enterprises’           than 1.4 million                    controversy, we determined that
participation in HAMP. HAMP                                                   FHFA has supported HAMP as
is intended to help struggling
                                          proprietary                         a means to limit the enterprises’
homeowners stay in their homes                                                losses by minimizing costly
by reducing their monthly
                                          modifications                       foreclosures. At the same time, the
mortgage payments. To reduce              outside of HAMP.                    agency has shown independence
payments, servicers may modify                                                by prohibiting the enterprises
their loans by lowering interest                                              from participating in other MHA
rates, extending the payback periods (e.g., from 30       programs that it viewed as being inconsistent with
to 40 years), or forbearing principal (i.e., postponing   their financial soundness.183
collecting a portion of what they are owed).179
Through March 2013, the enterprises had completed           The following minitutorial (see pages 66-67)
approximately 434,000 HAMP modifications. In                highlights loan modification options under
addition, the enterprises made more than 1.4 million        HAMP, HAMP Principal Reduction Alternative
                                                            (PRA), and HARP.


                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013     65
                           Loan Modification and Principal Reduction

     Following the financial crisis of 2008, a number of programs were established to help
     homeowners, who had difficulty making their mortgage payments, to avoid foreclosure on
     their houses. These programs included a range of possible options to lower a borrower’s
     monthly mortgage payment, including a lower interest rate, extension of the loan term, and two
     measures involving the outstanding principal of the loan, principal forbearance and principal
     forgiveness.

     In principal forbearance, a portion of the principal due is set aside and no interest is charged
     on that part of the loan for the remainder of the loan term.184 The portion of the principal that
     is set aside is also not amortized; but the debt is not forgiven. Instead, it becomes a balloon
     payment that falls due when the owner sells the property, pays off the interest-bearing unpaid
     principal balance, or at the maturity of the original mortgage loan.185

     In contrast, principal forgiveness results in a reduction in the amount the borrower owes. In
     addition to lowering the monthly payment, principal forgiveness usually results in the borrower
     having an improved equity position in the home as a consequence of having a lower loan
     balance. Equity is the difference between the actual value of the home and the amount the
     borrower still owes. Having increased equity can make it easier to refinance or sell the home.186

     HAMP, one of the aforementioned foreclosure avoidance programs, was authorized by Congress
     under EESA in an effort to help struggling homeowners. In May 2013, the program was
     extended to December 31, 2015.187

     HAMP provides for Treasury, through the GSEs, to offer financial incentives to mortgage
     servicers and borrowers to reach agreements on loan modifications.188 The program is available
     to owner-occupants who owe up to $729,750 on their primary residence or one-unit property;
     $934,200 on a two-unit property; $1,129,250 on a three-unit property; or $1,403,400 on a
     four-unit property. The borrower has to be delinquent on the mortgage or default has to be
     “reasonably foreseeable.”189

     Under HAMP, payments on the mortgage are reduced to 31% of the borrower’s gross monthly
     income by first reducing the interest rate on the mortgage, going down to a possible floor of
     2%. If that is not sufficient to reach the 31% goal, the loan term can be extended up to 480
     months. Finally, the servicer can offer principal forbearance, which delays repayment of part of
     the principal without requiring interest payments on that part.190

     The mortgage servicer applies a mathematical formula to compare the net present value
     (NPV) of the house with loan modification with the NPV without modification of the loan. The
     NPV calculation, which was designed by Treasury, FHFA, FDIC, and other experts, is designed
     to determine if it will be more profitable for the servicer to modify the mortgage or foreclose.
     Under the rules, if a servicer will make more money by modifying the loan, resulting in a



66   Federal Housing Finance Agency Office of Inspector General
positive NPV, then the servicer is required to offer the borrower a modification and cease
foreclosure efforts.191

In June 2010, Treasury expanded HAMP to include principal reduction for those borrowers
whose homes were underwater, meaning they had a loan greater than 115% of what the house
was currently worth.192 Under HAMP PRA, incentives were offered to mortgage servicers as a
percentage of each dollar of principal reduction.193

HAMP PRA has the same goal of reducing the monthly payment to 31% of gross income but
begins with the principal reduction first before rate modification.194 The program vests over
three years. On the first, second, and third anniversaries of the loan modification agreement,
if the borrower is current on his loan payments, the servicer reduces the unpaid loan principal
by one-third of the predetermined PRA Forbearance Amount. At the end of three years of timely
payments, the full PRA Forbearance Amount is forgiven.195

In addition to HAMP and HAMP PRA, FHFA and Treasury introduced a program in 2009 called
HARP for borrowers whose loans are owned or guaranteed by the enterprises. It helps
borrowers refinance their mortgage provided they have a good payment history for the past 12
months.196

HARP is the only refinance program that allows borrowers with little to no home equity to take
advantage of low interest rates and take out a new mortgage. For those with an adjustable-
rate mortgage, it allows them to obtain a fixed-rate mortgage that may lower their monthly
payments. On average, homeowners are saving over $250 a month with HARP refinancing.197

Since the MHA program was launched in 2009, a total of 2,033,329 HAMP trials have begun,
with 1,190,605 permanent modifications started. By the end of April 2013, there were
870,038 active permanent modifications.198

Under HAMP PRA, over 169,812 borrowers have started trial modifications, and by the end of
April 2013, there were 117,711 active permanent modifications involving principal reduction.199




                           Semiannual Report to the Congress • April 1, 2013–September 30, 2013   67
For example, although FHFA has supported                    conservatorships found that FHFA faces challenges in
modifying loans to help homeowners, it has decided          ensuring its independence as a regulator. Specifically,
against allowing the enterprises to forgive debt            FHFA’s role as conservator is to direct the enterprises’
on mortgage loans. Thus, the enterprises do not             business activities and operations. Meanwhile, its role
participate in programs such as Treasury’s HAMP             as regulator is to independently review and critique
PRA, which reduces the amount of mortgage debt              the outcomes of those directives. So, the agency
in order to lower monthly payments for those whose          could find that, as regulator, it needs to critique its
homes are underwater.200                                    performance as conservator.203

Additionally, our report assessing the conservatorships     In one instance of this potential conflict from early
describes the mission tension arising between FHFA’s        in the conservatorships, FHFA used examination
mandated responsibilities to advance the enterprises’       staff—who review regulatory compliance, risk
business interests and to help homeowners. For              management, and other business performance—to
example, stricter underwriting standards, which             help with conservator issues. In 2010 and 2011, the
can reduce risk for the enterprises, may also make          agency reorganized to separate its responsibilities as
mortgages harder to obtain. Home affordability              conservator and regulator, including returning the
programs, in essence, can have the opposite effect.201      examination staff to their original duties.204
Minimizing conflicting legal objectives and                 In general, senior FHFA employees have stated that
clarifying how participants should resolve potential        the agency’s roles as the enterprises’ conservator
tensions should be a goal for a reformed secondary          and safety and soundness regulator are generally
mortgage market.                                            aligned. Specifically, the agency believes that,
                                                            both as a conservator and as a regulator, it has an
Blended Roles: FHFA as Regulator and                        interest in ensuring that the enterprises conduct
Conservator                                                 their businesses in a manner that limits risk taking.
In a reformed housing finance market, an oversight          Overall, the agency’s actions since becoming
body with a stake in business performance may               conservator have backed this up. In particular,
find itself subject to tensions between promoting           FHFA has taken steps to reduce the risk associated
performance and ensuring that regulated entities            with business practices that generated billions
act in a safe and sound manner. If such dual roles          of dollars of credit losses.205 Nonetheless, under
continue to exist in the future, we believe there is a      different leadership the alignment of roles could
need to clarify how those differing responsibilities        diverge or one of the roles could become superior.
should be balanced.
                                                            Further, FHFA has attempted to avoid conflicts
When assessing the conservatorships, we recognized          between its conservator and regulator roles by
the potential for conflict between FHFA’s dual              delegating much of the management of the
missions to both conserve and preserve the                  enterprises to their boards of directors and managers.
enterprises’ assets as conservator and to examine           However, such delegation of responsibility presents its
their business practices for safety and soundness as        own inherent risks, and if the agency were to become
regulator.202 These dual roles can give rise to potential   a more active conservator, that could increase the
conflicts. For example, our assessment of the               potential for tension between its dual roles.206



68    Federal Housing Finance Agency Office of Inspector General
Siloed Practices: Harmonizing Business                         best solution available for homeowners, given their
and Sharing Information                                        individual circumstances.”210
As part of its larger effort to prepare the housing            As part of these solutions, the initiative requires
finance market for reform, FHFA has undertaken                 servicers to focus on remediating delinquencies. For
several strategic initiatives to standardize and               example, foreclosure cannot start while borrowers and
harmonize various aspects of the secondary mortgage            servicers are engaged in good-faith efforts to resolve
market.                                                        delinquencies. Further, servicers must conduct formal
                                                               reviews to ensure they have considered alternatives
For example, in May 2010, FHFA announced the
                                                               to foreclosure before starting the process. Even after
Uniform Mortgage Data Program, a long-term joint
                                                               foreclosure begins, servicers have financial incentives
effort with the enterprises to create uniform data
                                                               to keep helping borrowers pursue an alternative.211
standards and collection processes. FHFA believes
that a common framework will result in better lender           In addition to harmonizing operations, the
efficiency and enterprise risk management. Likewise,           enterprises can benefit from sharing information
common data standards are expected to lead to                  and consistent application of servicing rules. For
appraisers, lenders, servicers, etc., submitting more          example, during our review of reported abuse by law
consistent data. The enterprises will deploy the data          firms processing enterprise foreclosures, we identified
standards program in phases through a common                   instances where Freddie Mac terminated problematic
platform that will include stakeholder input.207               law firms while Fannie Mae continued to do business
                                                               with some of them.212 Similarly, another report
Also, in September 2012, FHFA announced that                   disclosed that FHFA does not facilitate information
the enterprises will launch a new representation               sharing regarding high-risk counterparties even
and warranty framework for conventional loans                  though the enterprises may use the same ones. As of
sold or delivered after 2012. The framework aims               September 2011, the two enterprises had separately
to limit and clarify lenders’ repurchase exposure              identified over 300 servicers as high risk with a
and liability on mortgages originated in 2013 and              total risk exposure of $7.2 billion.213 Although the
thereafter. It is also part of a broader series of strategic   enterprises separately monitor high-risk servicers,
initiatives directed toward seller/servicer contract           they do not communicate with each other about
harmonization, as outlined in FHFA’s A Strategic Plan          them, which can leave each vulnerable to the risks
for Enterprise Conservatorships.208                            the other has identified. Indeed, in January 2000, a
                                                               Fannie Mae executive discovered that a counterparty
For example, FHFA has instructed the enterprises
                                                               that worked with both enterprises had sold the same
to establish a single, consistent set of procedures
                                                               loans to more than one entity including Fannie Mae.
for servicing mortgages they own or guarantee.
                                                               In April 2002, Fannie Mae ended its relationship
Key elements of this Servicing Alignment Initiative
                                                               with the company due to possible fraud, but it did
include streamlined requirements, simplified loan
                                                               not report the termination to law enforcement or
modifications, and performance-based incentives
                                                               outside the enterprise. FHFA’s predecessor agency was
for servicers to focus them on reviewing foreclosure
                                                               aware of the termination but not its basis.214
alternatives in a timely manner.209 According to
the FHFA Acting Director, this alignment “should               Consequently, Freddie Mac continued to conduct
result in earlier servicer engagement to identify the          business with the company without intervention.



                                      Semiannual Report to the Congress • April 1, 2013–September 30, 2013        69
Over time, the enterprise increased its volume             risk from buying mortgages that were originated
of business with the company, which ultimately             in violation of such federal laws.217 In cases of
collapsed, leaving the enterprise to file a $1.8 billion   overlapping regulatory oversight, FHFA and other
bankruptcy claim against the company.215                   affected regulatory bodies in a reformed market will
                                                           benefit from clear jurisdictional boundaries.
As the enterprises can benefit from sharing
information, so can government agencies involved           Housing finance regulators may also benefit from
in housing finance. Although much of the focus on          information sharing. For instance, we have worked
housing finance reform has been on clarifying the role     closely with other inspectors general who have an
of private entities such as the enterprises, overlapping   interest in housing issues. This collaborative effort led
government agencies also need clear missions with          to a compendium of federal single-family mortgage
respect to the housing market. For instance, multiple      programs.218 We have also worked with HUD-OIG
federal consumer protection laws apply to residential      to report on recent initiatives by HUD and the GSEs
mortgages. Historically, federal banking regulators        to shrink their respective REO inventories and the
such as the Office of the Comptroller of the Currency      steps our offices have taken to assess HUD’s and the
and FDIC enforced these laws. Recently, the new            enterprises’ REO activities.219
Consumer Financial Protection Bureau has taken on          Whichever way policymakers shape the future
much of this responsibility.216                            housing finance market, we believe participants
As one of our reports demonstrated, however, this          can benefit from avoiding or clarifying some of the
crowded field can leave oversight gaps. For example,       inherent tensions outlined above. Clear guidance will
we found that FHFA does not review how the                 help ease the transition into a reformed mortgage
enterprises monitor contractual requirements related       market and provide for its enduring stability.
to federal consumer protection laws. Instead, like the
enterprises, the agency relies on the work of other        Conclusion
regulators. Consequently, FHFA was vulnerable
to questions about why it does not monitor the             We have presented here a more granular analysis of
enterprises’ activities to ensure they are aligned with    the soundness, oversight, and balance issues that will
the public’s interest (e.g., enforcement of consumer       likely be important in any future housing finance
protection laws with respect to loans the enterprises      market. Our observations are intended to inform
purchase). In addition, we found that the enterprises      the ongoing policy debate, and we look forward to
were potentially subject to an increased economic          continuing our work.




70    Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • April 1, 2013–September 30, 2013   71
Appendices

Appendix A:                                                shareholders’ equity, loss reserves, and retained
                                                           earnings. Bank capitalization plays a critical role in
Glossary and Acronyms                                      the safety and soundness of individual banks and the
                                                           banking system. In most cases, federal regulators set
                                                           requirements for adequate bank capitalization.
Glossary of Terms
                                                           Carryforwards: A provision of tax law that allows
Alternative A: A classification of mortgages in which
                                                           current losses or certain tax credits to be utilized in
the risk profile falls between prime and subprime.         future tax returns.
Alternative A (also known as Alt-A) mortgages are          Collateral: Assets used as security for a loan that can
generally considered higher risk than prime due to         be seized by the lender if the borrower fails to repay
factors that may include higher loan-to-value and          the loan.
debt-to-income ratios or limited documentation of
the borrower’s income.                                     Commercial Banks: Commercial banks are
                                                           establishments primarily engaged in accepting
Bankruptcy: A legal procedure for resolving debt           demand and other deposits and making commercial,
problems of individuals and businesses; specifically, a    industrial, and consumer loans. Commercial banks
case filed under one of the chapters of Title 11 of the    provide significant services in originating, servicing,
U.S. Code.                                                 and enhancing the liquidity and quality of credit that
Basis Points: Refers to hundredths of 1 percentage
                                                           is ultimately funded elsewhere.
point. For example, 1 basis point is equivalent to         Conforming Loan: A conforming loan is a
1/100 of 1 percentage point.                               conventional loan with an origination balance that
Bonds: Obligations by a borrower to eventually
                                                           does not exceed a specified amount (i.e., conforming
repay money obtained from a lender. The bondholder         loan limit). The enterprises are restricted by law to
buying the investment is entitled to receive both          purchasing conforming loans, with the loan limits
principal and interest payments from the borrower.         varying by unit size and region, e.g., high-cost areas.
                                                           For 2013, the maximum general loan limit for a
Capital Gain (Loss): When a capital asset (e.g.,           single-family one-unit dwelling is $417,000, while
stocks or bonds held as investments) is sold, the          the maximum high-cost area loan limit for a single-
difference between the amount paid for the asset           family one-unit dwelling is $625,500.
and the amount it is sold for is a capital gain or loss.
                                                           Conservatorship: Conservatorship is a legal
Capital gains occur when the asset sells for more than
paid, while capital losses occur when the asset is sold    procedure for the management of financial
for less than the purchase price.                          institutions for an interim period during which the
                                                           institution’s conservator assumes responsibility for
Capitalization: In the context of bank supervision,        operating the institution and conserving its assets.
capitalization refers to the funds a bank holds            Under the Housing and Economic Recovery Act of
as a buffer against unexpected losses. It includes         2008, the enterprises entered into conservatorships


72    Federal Housing Finance Agency Office of Inspector General
overseen by FHFA. As conservator, FHFA has                 agreements are caused by changes in interest rates
undertaken to preserve and conserve the assets of the      that, in turn, cause a net increase (decrease) in the fair
enterprises and restore them to safety and soundness.      value of these agreements.
FHFA also has assumed the powers of the boards of
                                                           Dodd-Frank Wall Street Reform and Consumer
directors, officers, and shareholders; however, the day-
                                                           Protection Act of 2010: Legislation that intends to
to-day operational decision making of each company
                                                           promote the financial stability of the United States
is still with the enterprises’ existing management.
                                                           by improving accountability and transparency in the
Credit Unions: Member-owned, not-for-profit                financial system, ending “too big to fail,” protecting the
financial cooperatives that provide savings, credit,       American taxpayer by ending bailouts, and protecting
and other financial services to their members. Credit      consumers from abusive financial services practices.
unions pool their members’ savings deposits and
                                                           Emergency Economic Stabilization Act: A 2008
shares to finance their own loan portfolios rather than
                                                           statute that authorizes Treasury to undertake specific
rely on outside capital. Members benefit from higher
                                                           measures to provide stability and prevent disruption
returns on savings, lower rates on loans, and fewer
                                                           in the financial system and the economy. It also
fees on average.
                                                           provides funds to preserve homeownership.
Default: Occurs when a mortgagor misses one or
                                                           Equity: In the context of residential mortgage
more payments.
                                                           finance, equity is the difference between the fair
Deferred Tax Assets: Deferred tax assets are               market value of the borrower’s home and the
recognized for temporary differences that will result      outstanding balance on the mortgage and any other
in deductible amounts and for carryforwards. For           debt secured by the home.
example, a temporary difference is created between
                                                           Fannie Mae: A federally chartered corporation that
the reported amount and the tax basis of a liability
                                                           purchases residential mortgages and converts them
for estimated expenses if, for tax purposes, those
                                                           into securities for sale to investors; by purchasing
estimated expenses are not deductible until a future
                                                           mortgages, Fannie Mae supplies funds to lenders so
year.
                                                           they may make loans to homebuyers.
Derivatives: Securities whose value depends on that
                                                           Federal Home Loan Banks: The FHLBanks are
of another asset, such as a stock or bond. They may
                                                           12 regional cooperative banks that U.S. lending
be used to hedge interest rate or other risks related to
                                                           institutions use to finance housing and economic
holding a mortgage.
                                                           development in their communities. Created by
Derivative Gains (Losses): The enterprises acquire         Congress, the FHLBanks have been the largest source
and guarantee primarily longer-term mortgages and          of funding for community lending for eight decades.
securities that are funded with debt instruments. The      The FHLBanks provide funding to other banks but
companies manage the interest rate risk associated         not directly to individual borrowers.
with these investments and funding activities with
                                                           Federal Housing Administration: Part of HUD,
derivative agreements. The gains (losses) on derivative
                                                           FHA insures residential mortgages made by approved

                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013         73
lenders against payment losses. It is the largest insurer   Held-to-Maturity Security: A debt security
of mortgages in the world, insuring over 34 million         (obligation or liability) that management intends to
properties since its inception in 1934.                     hold to its maturity or payment date and whose cash
                                                            value is not needed until that date.
Foreclosure: A legal process used by a lender to
obtain possession of a mortgaged property.                  Housing and Economic Recovery Act: HERA,
                                                            enacted in 2008, establishes OIG and FHFA, which
Freddie Mac: A federally chartered corporation that
                                                            oversee the GSEs’ operations. HERA also expanded
purchases residential mortgages, securitizes them, and
                                                            Treasury’s authority to provide financial support to
sells them to investors; thus, Freddie Mac provides
                                                            the GSEs.
lenders with funds that can be used to make loans to
homebuyers.                                                 Implied Guarantee: The assumption, prevalent in
                                                            the financial markets, that the federal government
Ginnie Mae: A government-owned corporation
                                                            will cover enterprise debt obligations.
within HUD. Ginnie Mae guarantees investors the
timely payment of principal and interest on privately       Inspector General Act: Enacted in 1978, this
issued MBS backed by pools of government-insured            statute authorizes establishment of offices of
and -guaranteed mortgages.                                  inspectors general, “independent and objective
                                                            units” within federal agencies, that: (1) conduct
Government-Sponsored Enterprises: Business
                                                            and supervise audits and investigations relating
organizations chartered and sponsored by the federal
                                                            to the programs and operations of their agencies;
government.
                                                            (2) provide leadership and coordination and
Government-Sponsored Enterprise Mortgage-                   recommend policies for activities designed to
Backed Securities Purchase Facility: The                    promote economy, efficiency, and effectiveness in the
function of the GSE MBS Purchase Facility was               administration of agency programs and to prevent
to help improve the availability of mortgage credit         and detect fraud, waste, or abuse in such programs
to American homebuyers and mitigate pressures               and operations; and (3) provide a means for keeping
on mortgage rates. To promote the stability of              the head of the agency and Congress fully and
the mortgage market, Treasury purchased GSE                 currently informed about problems and deficiencies
MBS in the secondary market. By purchasing                  relating to the administration of such programs and
these guaranteed securities, Treasury sought to             operations and the necessity for and progress of
broaden access to mortgage funding for current              corrective action.
and prospective homeowners, as well as to promote
                                                            Inspector General Reform Act: Enacted in 2008,
market stability.
                                                            this statute amends the Inspector General Act to
Guarantee: A pledge to investors that the guarantor         enhance the independence of inspectors general and
will bear the default risk on a pool of loans or other      to create the Council of the Inspectors General on
collateral.                                                 Integrity and Efficiency.

Hedging: The practice of taking an additional step,         Insurance Company: A company whose primary
such as buying or selling a derivative, to offset certain   and predominant business activity is the writing
risks associated with holding a particular investment,      of insurance and issuing or underwriting “covered
such as MBS.                                                products.”



74    Federal Housing Finance Agency Office of Inspector General
Interest Rate Swap: An interest rate swap is               pools of mortgage loans, most commonly on
an agreement in which two parties make interest            residential property.
payments to each other for a set period based upon
                                                           Noncontrolling Interest: A noncontrolling interest
a notional principal (amount of principal of the
                                                           is the portion of equity (net assets) in a subsidiary
underlying debt security). The notional principal is
                                                           not attributable directly or indirectly to a parent
only used to calculate the interest payments; no risk is
                                                           company. A noncontrolling interest is sometimes
attached to it. Interest rate swaps commonly involve
                                                           called minority interest and is reported in the
exchanging payments based on a fixed interest rate
                                                           consolidated statements of financial position. It is
for payments based on a floating rate (e.g., London
                                                           to be placed within the equity section but shown
Interbank Offered Rate). The fixed rate is known as
                                                           separately from the parent company’s equity.
the swap rate.
                                                           Operational Risk: Exposure to loss resulting from
Internal Controls: Internal controls are an integral
                                                           inadequate or failed internal processes, people, and
component of an organization’s management that
                                                           systems or from external events (including legal
provide reasonable assurance that the following
                                                           events).
objectives are achieved: (1) effectiveness and
efficiency of operations, (2) reliability of financial     Options: Contracts that give the buyer the right, but
reports, and (3) compliance with applicable                not the obligation, to buy or sell a specified quantity
laws and regulations. Internal controls relate to          of a commodity or other instrument at a specific
management’s plans, methods, and procedures                price within a specified period of time, regardless of
used to meet its mission, goals, and objectives and        the market price of that instrument.
include the processes and procedures for planning,
organizing, directing, and controlling program             Preferred Stock: A security that usually pays a fixed
operations as well as the systems for measuring,           dividend and gives the holder a claim on corporate
reporting, and monitoring program performance.             earnings and assets superior to that of holders of
                                                           common stock but inferior to that of investors in the
Joint and Several Liability: The concept of joint          corporation’s debt securities.
and several liability provides that each obligor in
a group is responsible for the debts of all in that        Private-Label Mortgage-Backed Securities:
group. In the case of the FHLBanks, if any individual      MBS derived from mortgage loan pools assembled
FHLBank were unable to pay a creditor, the other           by entities other than GSEs or federal government
11—or any 1 or more of them—would be required              agencies. They do not carry an explicit or implicit
to step in and cover that debt.                            government guarantee, and the private-label MBS
                                                           investor bears the risk of losses on its investment.
Loan-to-Value: A percentage calculated by dividing
the amount borrowed by the price or appraised value        Real Estate Owned: Foreclosed homes owned by
of the home to be purchased; the higher the loan-to-       government agencies or financial institutions, such as
value (also known as LTV), the less cash a borrower is     the enterprises or real estate investors. REO homes
required to pay as down payment.                           represent collateral seized to satisfy unpaid mortgage
                                                           loans. The investor or its representative then must sell
Mortgage-Backed Securities: MBS are debt                   the property on its own.
securities that represent interests in the cash flows—
anticipated principal and interest payments—from           Securitization: A process whereby a financial
                                                           institution assembles pools of income-producing

                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013            75
assets (such as loans) and then sells an interest in the     Swaption: An option on a swap that gives the
assets’ cash flows as securities to investors.               holder the right, but not the obligation, to enter, for
                                                             example, into an interest rate swap as either the payer
Securitization Platform: A mechanism that
                                                             or the receiver of the fixed side of the swap.
connects capital market investors to borrowers by
bundling mortgages into securities and tracking loan         Thrift: A financial institution that ordinarily possesses
payments.                                                    the same depository, credit, financial intermediary,
                                                             and account transactional functions as a bank but
Senior Preferred Stock Purchase Agreements:
                                                             that is chiefly organized and primarily operates to
Entered into at the time the conservatorships were
                                                             promote savings and home mortgage lending rather
created, the PSPAs authorize the enterprises to
                                                             than commercial lending.
request and obtain funds from Treasury. Under
the PSPAs, the enterprises agreed to consult with            Underwater: Term used to describe situations in
Treasury concerning a variety of significant business        which the homeowner’s equity is below zero (i.e., the
activities, capital stock issuance, dividend payments,       home is worth less than the balance of the loan(s) it
ending the conservatorships, transferring assets, and        secures).
awarding executive compensation.
                                                             Underwriting: The process of analyzing a loan
Servicers: Servicers act as intermediaries between           application to determine the amount of risk involved
mortgage borrowers and owners of the loans, such             in making the loan; it includes a review of the
as the enterprises or MBS investors. They collect the        potential borrower’s credit history and an assessment
homeowners’ mortgage payments, remit them to the             of the property value.
owners of the loans, maintain appropriate records,
                                                             Valuation Allowance: Method of lowering or raising
and address delinquencies or defaults on behalf
                                                             an object’s current value by adjusting its acquisition
of the owners of the loans. For their services, they
                                                             cost to reflect its market value by offsetting another
typically receive a percentage of the unpaid principal
                                                             account. A valuation allowance is recognized if, based
balance of the mortgage loans they service. The recent
                                                             on the weight of available evidence, it is more likely
financial crisis has put more emphasis on servicers’
                                                             than not that some portion or all of a deferred tax
handling of defaults, modifications, short sales, and
                                                             asset will not be realized.
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.

Straw Buyer: A straw buyer is a person whose credit
profile is used to serve as a cover in a loan transaction.
Straw buyers are chosen for their ability to qualify for
a mortgage loan, causing loans that would ordinarily
be declined to be approved. Straw buyers may be paid
a fee for their involvement in purchasing a property
and usually never intend to own or occupy the
property.

76    Federal Housing Finance Agency Office of Inspector General
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78    Federal Housing Finance Agency Office of Inspector General
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                                                          Office of the Special Inspector General for
Accessed: September 3, 2013, at www.fincen.gov/
                                                          the Troubled Asset Relief Program, “Recent
statutes_regs/guidance/pdf/fin-2008-g004.pdf.
                                                          Developments,” SIGTARP: Quarterly Report to
Reuters, Financial Glossary: Interest Rate Swap.          Congress, at 150 (October 26, 2010). Accessed:
Accessed: September 5, 2013, at http://glossary.          September 3, 2013, at www.sigtarp.gov/
reuters.com/index.php?title=Interest_Rate_Swap.           Quarterly%20Reports/October2010_Quarterly_
                                                          Report_to_Congress.pdf.
Government Accountability Office, “Introduction,”
“Internal Control Standards,” Internal Control:           Freddie Mac, Our Business: Single-Family Credit
Standards for Internal Control in the Federal             Guarantee Business. Accessed: September 3, 2013, at
Government, GAO/AIMD-00-21.3.1, at 4, 6, 8                www.freddiemac.com/corporate/company_profile/
(November 1999). Accessed: September 3, 2013, at          our_business/index.html.
www.gao.gov/special.pubs/ai00021p.pdf.
                                                          Federal Housing Finance Agency, “Introduction,”
Arizona State Legislature, 44-141. Joint and              Building a New Infrastructure for the Secondary
several liability of parties to joint obligations.        Mortgage Market, at 4 (October 4, 2012). Accessed:
Accessed: September 3, 2013, at www.azleg.gov/            September 3, 2013, at www.fhfa.gov/webfiles/24572/
FormatDocument.asp?inDoc=/ars/44/00141.                   fhfasecuritizationwhitepaper100412final.pdf.
htm&Title=44&DocType=ARS.
                                                          Federal Housing Finance Agency, Senior Preferred
Securities and Exchange Commission, Mortgage-             Stock Purchase Agreement. Accessed: September 3,
Backed Securities. Accessed: September 3, 2013, at        2013, at www.fhfa.gov/Default.aspx?Page=364.
www.sec.gov/answers/mortgagesecurities.htm.
                                                          Letter from David H. Stevens, Assistant Secretary
Robert G. Morgan, Martha M. Pointer, Katherine            of Housing, Department of Housing and Urban
N. Morgan, and William D. Cooper, Tennessee               Development, to All Approved Mortgagees, FHA
Society of Certified Public Accountants, “Nature          Refinance of Borrowers in Negative Equity Positions
and Classification of the Noncontrolling Interest         (August 6, 2010). Accessed: September 3, 2013,
in a Consolidated Statement of Financial Position,”       at www.hud.gov/offices/adm/hudclips/letters/
Accounting for Noncontrolling Interests in Consolidated   mortgagee/files/10-23ml.pdf.
Financial Statements: An Explanation of FASB
                                                          Freddie Mac, Glossary of Finance and Economic Terms.
Statement No. 160, at 20. Accessed: September 5,
                                                          Accessed: September 3, 2013, at www.freddiemac.
2013, at www.tscpa.com/content/files/tscpa/Journal/
                                                          com/smm/s_z.htm#S.
articles/fasb_160.pdf.
                                                          Freddie Mac, “Straw Buyers,” Shut the Door on
Freddie Mac, Glossary of Finance and Economic Terms.
                                                          Mortgage Fraud: Information on How to Avoid
Accessed: September 3, 2013, at www.freddiemac.
                                                          Mortgage Fraud, at 13, 15. Accessed: September
com/smm/n_r.htm#O.
                                                          13, 2013, at www.freddiemac.com/singlefamily/
                                                          preventfraud/toolkit.html (scroll to “Shut the Door

                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013         79
on Mortgage Fraud,” then click “English [PPT]”            Office of the Special Inspector General for the
under “Educational Presentation: Avoid Mortgage           Troubled Asset Relief Program, “Homeowner
Fraud,” then download the Power Point file).              Support Programs,” SIGTARP: Quarterly Report
                                                          to Congress, at 65 (January 26, 2011). Accessed:
Reuters, Financial Glossary: Swaption. Accessed:
                                                          September 3, 2013, at www.sigtarp.gov/
September 5, 2013, at http://glossary.reuters.com/
                                                          Quarterly%20Reports/January2011_Quarterly_
index.php?title=Swaption.
                                                          Report_to_Congress.pdf.
Federal Deposit Insurance Corporation, Resolutions
                                                          New York State Society of Certified Public
Handbook: Glossary, at 98. Accessed: September 3,
                                                          Accountants, Glossary: Valuation Allowance. Accessed:
2013, at www.fdic.gov/bank/historical/reshandbook/
                                                          September 5, 2013, at www.nysscpa.org/glossary/
glossary.pdf.
                                                          term/645.




80    Federal Housing Finance Agency Office of Inspector General
Acronyms and Abbreviations                              FinCEN	
                                                         Financial Crimes Enforcement 		
                                                        	Network
Agency	      Federal Housing Finance Agency             FIRREA	      Financial Institutions Reform, 		
                                                        	            Recovery and Enforcement Act
AHP	         Affordable Housing Program
                                                        	            of 1989
APA	         Administrative Procedures Act
                                                        FMIC	
                                                         Federal Mortgage Insurance 		
ATSC	        Advanced Technology Systems, Inc.          	Corporation

Blue Book	 Quality Standards for Inspection and 	       FSOC	        Financial Stability Oversight Council
	Evaluation
                                                        GAO	         Government Accountability Office
BNC	         BNC National Bank
                                                        GSEs	        Government-Sponsored Enterprises
CIGFO	       Council of Inspectors General on 		
                                                        HAMP	
                                                         Home Affordable Modification 		
	            Financial Oversight
                                                        	Program
CIGIE	       Council of the Inspectors General on 	
                                                        HARP	        Home Affordable Refinance Program
	            Integrity and Efficiency
                                                        HERA	        Housing and Economic Recovery Act 	
CRS	         Call Report System
                                                        	            of 2008
DER	         Division of Enterprise Regulation
                                                        HUD	
                                                         Department of Housing and Urban 	
Dodd-Frank	 Dodd-Frank Wall Street Reform and 	         	Development
	            Consumer Protection Act of 2010
                                                        HUD-OIG	
                                                          Department of Housing and Urban 	
DOJ	         Department of Justice                      	 Development Office of Inspector 		
                                                        	General
EESA	        Emergency Economic Stabilization 	
	            Act of 2008                                IRS-CI	      IRS-Criminal Investigation

Enterprises	 Fannie Mae and Freddie Mac                 LTV	Loan-to-Value

EO	          Executive Office                           MBS	         Mortgage-Backed Securities

FDIC	
 Federal Deposit Insurance 		                           MHA	         Making Home Affordable
	Corporation
                                                        MRA	         Matter Requiring Attention
FDIC-OIG	
  Federal Deposit Insurance 		
                                                        MSR	         Mortgage Servicing Rights
	 Corporation Office of Inspector 		
	General                                                NPV	         Net Present Value
FHA	         Federal Housing Administration             OA	          Office of Audits
FHFA	        Federal Housing Finance Agency             OAd	         Office of Administration
FHLBanks	 Federal Home Loan Banks                       OC	          Office of Counsel
FHLBank	     Federal Home Loan Bank System              OE	          Office of Evaluations
System	




                                  Semiannual Report to the Congress • April 1, 2013–September 30, 2013   81
OI	           Office of Investigations                     REO	        Real Estate Owned
OIG	          Federal Housing Finance Agency 		            RMBS	
                                                            Residential Mortgage-Backed 		
	             Office of Inspector General                  	Securities
OPOR	
 Office of Policy, Oversight, and 		                       SEC 	       Securities and Exchange Commission
	Review
                                                           SIGTARP	
                                                             Office of the Special Inspector 		
OQA	          Office of Quality Assurance                  	 General for the Troubled Asset Relief 	
                                                           	Program
PPI	          Personal Protected Information
                                                           Treasury	   Department of the Treasury
PRA	          Principal Reduction Alternative
                                                           USPIS	      Postal Inspection Service
PSPAs	
 Senior Preferred Stock Purchase 		
	Agreements                                                Yellow	     Government Auditing Standards
                                                           Book




82     Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • April 1, 2013–September 30, 2013   83
Appendix B:                                               agency’s operations and aid in the prevention and
                                                          detection of fraud, waste, or abuse. Figure 29 (see
OIG Recommendations                                       page 85) summarizes OIG’s formal recommendations
                                                          that were made, pending, or closed during the
In accordance with the provisions of the Inspector        reporting period. Figure 30 (see page 104) lists OIG’s
General Act, one of the key duties of OIG is to           audit and evaluation reports for which all of the
provide to FHFA recommendations that promote              recommendations were closed in prior semiannual
the transparency, efficiency, and effectiveness of the    periods.




84    Federal Housing Finance Agency Office of Inspector General
Figure 29. Summary of OIG Recommendations
       No.                    Recommendation                        Report                    Status
  AUD-2013-013-1   FHFA should update OQA’s policy to      FHFA Can Strengthen        Recommendation
                   require management to provide written   Controls over Its Office   agreed to by FHFA;
                   responses and corrective action         of Quality Assurance       implementation of
                   timelines to OQA findings.                                         recommendation
                                                                                      pending.

  AUD-2013-013-2   FHFA should track the corrective action FHFA Can Strengthen        Recommendation
                   timelines provided by management and Controls over Its Office      agreed to by FHFA;
                   follow up on corrective actions based   of Quality Assurance       implementation of
                   on those timelines.                                                recommendation
                                                                                      pending.

  AUD-2013-013-3   FHFA should implement a policy to       FHFA Can Strengthen        Recommendation
                   escalate to the appropriate level of    Controls over Its Office   agreed to by FHFA;
                   management when corrective action       of Quality Assurance       implementation of
                   is not implemented by the reported                                 recommendation
                   deadline.                                                          pending.

  AUD-2013-013-4   FHFA should evaluate management         FHFA Can Strengthen        Recommendation
                   corrective actions and document         Controls over Its Office   agreed to by FHFA;
                   evidence supporting closure of its      of Quality Assurance       implementation of
                   recommendations.                                                   recommendation
                                                                                      pending.

  AUD-2013-013-5   FHFA should evaluate the roles and      FHFA Can Strengthen        Recommendation
                   responsibilities of OQA across the      Controls over Its Office   agreed to by FHFA;
                   agency and revise OQA’s charter         of Quality Assurance       implementation of
                   accordingly.                                                       recommendation
                                                                                      pending.

  AUD-2013-013-6   FHFA should assess risks across all     FHFA Can Strengthen        Recommendation
                   agency operations for purposes of       Controls over Its Office   agreed to by FHFA;
                   planning OQA review coverage.           of Quality Assurance       implementation of
                                                                                      recommendation
                                                                                      pending.

  AUD-2013-013-7   FHFA should direct performance of       FHFA Can Strengthen        Recommendation
                   reviews of those areas that pose the    Controls over Its Office   agreed to by FHFA;
                   most significant risk to FHFA.          of Quality Assurance       implementation of
                                                                                      recommendation
                                                                                      pending.




                            Semiannual Report to the Congress • April 1, 2013–September 30, 2013           85
      No.                          Recommendation                           Report                  Status
 AUD-2013-012-1        FHFA should establish verification          Additional FHFA          Closed—Final action
                       controls to ensure enterprise               Oversight Can Improve    taken by FHFA.
                       contractors are performing in               the Real Estate Owned
                       accordance with agreed criteria and         Pilot Program
                       that any proposed waivers to the
                       criteria are documented and submitted
                       for FHFA review and approval.

 AUD-2013-012-2        FHFA should clarify guidance regarding      Additional FHFA          Closed—Final action
                       submission of financial statements          Oversight Can Improve    taken by FHFA.
                       and explanation of adverse financial        the Real Estate Owned
                       events as part of the bidder                Pilot Program
                       qualification process.

 AUD-2013-012-3        FHFA should issue formal guidance for       Additional FHFA          Recommendation
                       the REO disposition program, including      Oversight Can Improve    agreed to by FHFA;
                       the REO Pilot Program, requiring a          the Real Estate Owned    implementation of
                       program plan with clearly defined goals     Pilot Program            recommendation
                       and objectives, a program monitoring                                 pending.
                       and oversight mechanism, criteria
                       to measure and evaluate program
                       success, and the means to assess
                       alternative REO disposition strategies.

 AUD-2013-011-1        FHFA should direct Fannie Mae to            FHFA Can Improve Its     Recommendation
                       strengthen controls over deficiency         Oversight of Fannie      agreed to by FHFA;
                       collections by more fully considering       Mae’s Recoveries         implementation of
                       time frames provided by states’             from Borrowers Who       recommendation
                       statutes of limitation in prioritizing,     Possess the Ability to   pending.
                       coordinating, and monitoring collection     Repay Deficiencies
                       of deficiencies from borrowers with the
                       ability to repay.

 AUD-2013-010-1        FHFA should evaluate periodically the       FHFA Can Improve Its     Recommendation
                       efficiency and effectiveness of Freddie     Oversight of Freddie     agreed to by FHFA;
                       Mac’s deficiency recovery strategies for    Mac’s Recoveries         implementation of
                       the pursuit of borrowers with the ability   from Borrowers Who       recommendation
                       to repay.                                   Possess the Ability to   pending.
                                                                   Repay Deficiencies

 AUD-2013-010-2        FHFA should review Freddie Mac’s            FHFA Can Improve Its     Recommendation
                       monitoring controls over its servicers,     Oversight of Freddie     agreed to by FHFA;
                       foreclosure attorneys, and collection       Mac’s Recoveries         implementation of
                       vendors involved in deficiency recovery     from Borrowers Who       recommendation
                       activities to ensure that oversight         Possess the Ability to   pending.
                       across these counterparties is              Repay Deficiencies
                       maintained.




86   Federal Housing Finance Agency Office of Inspector General
     No.                     Recommendation                          Report                    Status
AUD-2013-010-3   FHFA should direct Freddie Mac to           FHFA Can Improve Its      Recommendation
                 enforce controls for its counterparties     Oversight of Freddie      agreed to by FHFA;
                 to deliver timely documents to              Mac’s Recoveries          implementation of
                 deficiency recovery vendors necessary       from Borrowers Who        recommendation
                 to calculate and pursue deficiencies,       Possess the Ability to    pending.
                 and provide for financial consequences      Repay Deficiencies
                 for counterparties that fail to meet
                 delivery deadlines.

AUD-2013-010-4   FHFA should direct Freddie Mac to           FHFA Can Improve Its      Recommendation
                 implement a control to consider time        Oversight of Freddie      agreed to by FHFA;
                 frames in state statutes of limitations     Mac’s Recoveries          implementation of
                 when prioritizing, coordinating, and        from Borrowers Who        recommendation
                 monitoring deficiency collection activity   Possess the Ability to    pending.
                 for borrowers with the ability to repay.    Repay Deficiencies

AUD-2013-009-1   To strengthen its enterprise                Action Needed to          Recommendation
                 information security and privacy            Strengthen FHFA           agreed to by FHFA;
                 programs, FHFA should define and            Oversight of Enterprise   implementation of
                 issue enterprise information security       Information Security      recommendation
                 and privacy program requirements.           and Privacy Programs      pending.

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

AUD-2013-009-3   To strengthen its enterprise                Action Needed to          Recommendation
                 information security and privacy            Strengthen FHFA           agreed to by FHFA;
                 programs, FHFA should ensure                Oversight of Enterprise   implementation of
                 that planning for future information        Information Security      recommendation
                 technology examinations is based on         and Privacy Programs      pending.
                 fully executed risk assessments, as
                 required by FHFA policy.




                           Semiannual Report to the Congress • April 1, 2013–September 30, 2013             87
      No.                          Recommendation                         Report                     Status
 AUD-2013-009-4        To strengthen its enterprise               Action Needed to           Recommendation
                       information security and privacy           Strengthen FHFA            agreed to by FHFA;
                       programs, FHFA should consistently         Oversight of Enterprise    implementation of
                       deploy the automated tools needed          Information Security       recommendation
                       for ongoing monitoring and tracking        and Privacy Programs       pending.
                       of previously identified security and
                       privacy issues in order to enhance
                       the efficiency and effectiveness of the
                       examination process.

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

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

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

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




88   Federal Housing Finance Agency Office of Inspector General
     No.                     Recommendation                         Report               Status
AUD-2013-007-3   To improve servicer compliance with        Enhanced FHFA        Recommendation
                 escalated case requirements, FHFA          Oversight Is         agreed to by FHFA;
                 should perform supervisory review and      Needed to Improve    implementation of
                 follow up to ensure that Freddie Mac       Mortgage Servicer    recommendation
                 requires its servicers to categorize       Compliance with      pending.
                 resolved escalated consumer                Consumer Complaint
                 complaint information in accordance        Requirements
                 with resolution categories defined in
                 the servicing guide.

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

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

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

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




                           Semiannual Report to the Congress • April 1, 2013–September 30, 2013       89
      No.                          Recommendation                         Report                Status
 AUD-2013-007-8        To enhance Freddie Mac’s oversight         Enhanced FHFA         Recommendation
                       of its servicers, FHFA should perform      Oversight Is          agreed to by FHFA;
                       supervisory review and follow up to        Needed to Improve     implementation of
                       ensure that Freddie Mac provides           Mortgage Servicer     recommendation
                       information on escalated cases             Compliance with       pending.
                       received from servicers to internal        Consumer Complaint
                       staff (the counterparty operational        Requirements
                       risk evaluation team) responsible for
                       testing servicer performance.

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

 AUD-2013-006-1        To enhance its oversight of FHLBank        FHFA Can Enhance      Recommendation
                       advances to insurance companies,           Its Oversight of      agreed to by FHFA;
                       FHFA should pursue memoranda               FHLBank Advances to   implementation of
                       of understanding allowing FHFA to          Insurance Companies   recommendation
                       obtain confidential supervisory and        by Improving          pending.
                       other regulatory information from the      Communication with
                       insurance regulators of states in the      State Insurance
                       districts of those FHLBanks with the       Regulators and
                       highest concentrations of insurance        Standard-Setting
                       company lending—the FHLBanks of            Groups
                       Des Moines, Indianapolis, Topeka,
                       New York, and Cincinnati—to improve
                       FHFA’s ability to evaluate whether the
                       FHLBanks are adequately assessing
                       the condition and operations of their
                       insurance company members.

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




90   Federal Housing Finance Agency Office of Inspector General
     No.                     Recommendation                         Report                 Status
AUD-2013-004-1   FHFA should update its examination         FHFA’s Oversight of    Recommendation
                 guide (Supervision Reference and           the Asset Quality of   agreed to by FHFA;
                 Procedures Manual, Credit Risk-            Multifamily Housing    implementation of
                 Multifamily), in consideration of          Loans Financed by      recommendation
                 industry standards, to include             Fannie Mae and         pending.
                 qualitative guidance for examiners to      Freddie Mac
                 follow when determining the sampling
                 size and testing coverage of loan files.

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

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

AUD-2013-002-2   The FHFA contracting officer should        FHFA’s Oversight of    Recommendation
                 determine whether additional               Contract No. FHF-      agreed to by FHFA;
                 corrective actions are warranted to        10-F-0007 with         implementation of
                 recapture additional unreasonable          Advanced Technology    recommendation
                 costs billed by ATSC to FHFA after         Systems, Inc.          pending.
                 November 2011. (OIG did not review
                 charges submitted after November 30,
                 2011.)

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




                           Semiannual Report to the Congress • April 1, 2013–September 30, 2013         91
      No.                           Recommendation                        Report                Status
 AUD-2013-002-4        The Director of the Office of Budget       FHFA’s Oversight of   Recommendation
                       and Financial Management should            Contract No. FHF-     agreed to by FHFA;
                       issue guidance to all acquisition staff    10-F-0007 with        implementation of
                       and approving officials, including         Advanced Technology   recommendation
                       contracting officers and contracting       Systems, Inc.         pending.
                       officer’s representatives, on:
                       •	 cost allocation and proper
                           procedures for assigning costs
                           to contracts in accordance with
                           benefits received and based on the
                           appropriate cost objective;
                       •	 proper procedures for ensuring that
                           contract employees meet labor
                           category qualifications specified
                           in time and material/labor hour
                           contracts;
                       •	 proper procedures for obtaining
                           sufficient justification prior to
                           increasing funds, adjusting fixed
                           labor rates, and approving payments
                           on time and material contracts;
                       •	 appropriate procedures for
                           evaluating contractor price
                           proposals and documenting
                           the agency’s pre-negotiation
                           position prior to awarding contract
                           modifications; and
                       •	 appropriate use of contractor
                           employees to substitute for internal
                           agency positions and approving
                           invoices based on contractual terms
                           and provisions.

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




92   Federal Housing Finance Agency Office of Inspector General
     No.                      Recommendation                         Report                 Status
AUD-2012-008-1    FHFA should reassess the                   FHFA’s Conservator     Closed—Final action
                  nondelegated authorities to ensure         Approval Process       taken by FHFA.
                  sufficient FHFA involvement with major     for Fannie Mae and
                  business decisions.                        Freddie Mac Business
                                                             Decisions

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

AUD-2012-008-3A   FHFA should evaluate Fannie Mae’s          FHFA’s Conservator     Closed—Final action
                  mortgage pool policy commutations          Approval Process       taken by FHFA.
                  to determine whether these                 for Fannie Mae and
                  transactions were appropriate and          Freddie Mac Business
                  in the best interest of the enterprise     Decisions
                  and taxpayers. This evaluation should
                  include an assessment of Fannie
                  Mae’s methodology used to determine
                  the economic value of the seven
                  mortgage pool policy commutations.
                  This assessment should include a
                  documented review of Fannie Mae’s
                  analysis, the adequacy of the model(s)
                  and assumptions used by Fannie Mae
                  to determine the amount of insurance
                  in force, fair value of the mortgage
                  pool policies, premiums forgone, any
                  other factors incorporated into Fannie
                  Mae’s analysis, and the accuracy of
                  the information supplied to FHFA.

AUD-2012-008-3B   FHFA should evaluate Fannie Mae’s          FHFA’s Conservator     Closed—Final action
                  mortgage pool policy commutations          Approval Process       taken by FHFA.
                  to determine whether these                 for Fannie Mae and
                  transactions were appropriate and          Freddie Mac Business
                  in the best interest of the enterprise     Decisions
                  and taxpayers. This evaluation should
                  include a full accounting and validation
                  of all of the cost components that
                  comprise each settlement discount
                  (risk in force minus fee charged), such
                  as insurance premiums and time value
                  of money applicable to each listed cost
                  component.




                            Semiannual Report to the Congress • April 1, 2013–September 30, 2013         93
      No.                        Recommendation                           Report                 Status
 AUD-2012-008-4        FHFA should develop a methodology          FHFA’s Conservator     Closed—Final action
                       and process for conservator review         Approval Process       taken by FHFA.
                       of proposed mortgage pool policy           for Fannie Mae and
                       commutations to ensure that there is a     Freddie Mac Business
                       documented, sound basis for any pool       Decisions
                       policy commutations executed in the
                       future.

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

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

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

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

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

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




94   Federal Housing Finance Agency Office of Inspector General
     No.                     Recommendation                          Report                 Status
AUD-2012-006-2   FHFA’s Deputy Director of DER and           FHFA’s Call Report     Recommendation
                 Office of Financial Analysis’ Senior        System                 agreed to by FHFA;
                 Associate Director should ensure                                   implementation of
                 that the agency supports identified                                recommendation
                 opportunities for using CRS in its                                 pending.
                 oversight planning and monitoring
                 with detailed supervisory and support
                 division requirements.

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

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

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

EVL-2013-012-3   FHFA should publish Fannie Mae’s            Evaluation of Fannie   Recommendation not
                 reduction targets and overpayment           Mae’s Servicer         accepted by FHFA;
                 findings.                                   Reimbursement          recommendation
                                                             Operations for         remains open and
                                                             Delinquency Expenses   will continue to be
                                                                                    monitored.




                           Semiannual Report to the Congress • April 1, 2013–September 30, 2013          95
           No.                     Recommendation                          Report                    Status
     EVL-2013-009-1     FHFA should establish a formal             FHFA’s Oversight of       Recommendation
                        review process for compensatory            Fannie Mae’s 2013         agreed to by FHFA;
                        fee settlements and significant MSR        Settlement with Bank      implementation of
                        transfers.                                 of America                recommendation
                                                                                             pending.

     EVL-2013-008-1     FHFA’s Deputy Director, Division of        FHFA’s Oversight of the   Recommendation
                        Home Loan Bank Regulation, should          Federal Home Loan         agreed to by FHFA;
                        ensure that agency examiners               Banks’ Compliance         implementation of
                        thoroughly assess FHLBank                  with Regulatory Limits    recommendation
                        compliance with MRAs and other             on Extensions of          pending.
                        supervisory requirements to remediate      Unsecured Credit
                        unsecured credit violations and risk
                        management deficiencies during the
                        2013 and 2014 examination cycles.

     EVL-2013-008-2     FHFA’s Deputy Director, in consultation    FHFA’s Oversight of the   Recommendation
                        with the General Counsel and others,       Federal Home Loan         agreed to by FHFA;
                        should consider the use of informal        Banks’ Compliance         implementation of
                        or formal enforcement actions as           with Regulatory Limits    recommendation
                        appropriate to ensure the remediation      on Extensions of          pending.
                        of any further regulatory violations       Unsecured Credit
                        or failures to adhere to supervisory
                        requirements.

     EVL-2013-005-1     FHFA should, preferably in consultation    FHFA’s Initiative         Recommendation not
                        with FHA, develop definitions and          to Reduce the             accepted by FHFA;
                        performance measures that would            Enterprises’ Dominant     recommendation
                        permit Congress, financial market          Position in the Housing   remains open and
                        participants, and the public to assess     Finance System by         will continue to be
                        the progress and the effectiveness of      Raising Gradually Their   monitored.
                        its initiative.                            Guarantee Fees

     EVL-2013-005-2     FHFA should assess the feasibility         FHFA’s Initiative         Recommendation not
                        of establishing a formal working           to Reduce the             accepted by FHFA;
                        arrangement with FHA to assess such        Enterprises’ Dominant     recommendation
                        critical issues as:                        Position in the Housing   remains open and
                        •	 (1) the implementation of their        Finance System by         will continue to be
                            pricing initiatives and prospects      Raising Gradually Their   monitored.
                            for success in achieving their         Guarantee Fees
                            objectives, and (2) the potential
                            for shifts of mortgage business
                            and risks between government-
                            supported or -guaranteed markets;
                        •	 briefing the Federal Housing Finance
                            Oversight Board and/or FSOC on the
                            findings of the assessment; and
                        •	 disclosing the assessment publicly
                            in an appropriate format.




96    Federal Housing Finance Agency Office of Inspector General
     No.                   Recommendation                           Report                   Status
EVL-2013-04-1   FHFA should develop a policy for            FHFA’s Oversight of      Recommendation
                FHLBank site visits of AHP projects         the Federal Home         agreed to by FHFA;
                that includes guidance on their             Loan Banks’ Affordable   implementation of
                frequency, scope, and administration.       Housing Programs         recommendation
                                                                                     pending.

EVL-2013-04-2   FHFA should conduct and report cross-       FHFA’s Oversight of      Recommendation
                cutting analyses of common issues           the Federal Home         agreed to by FHFA;
                and themes across the FHLBanks,             Loan Banks’ Affordable   implementation of
                using appropriate and analytically          Housing Programs         recommendation
                rigorous methods.                                                    pending.

EVL-2013-04-3   FHFA should analyze staffing levels         FHFA’s Oversight of      Recommendation
                needed to perform additional cross-         the Federal Home         agreed to by FHFA;
                cutting analyses and oversee FHLBank        Loan Banks’ Affordable   implementation of
                site visits of AHP projects, and take       Housing Programs         recommendation
                appropriate actions to meet those                                    pending.
                staffing targets.

EVL-2013-03-1   FHFA should continue to monitor             Case Study: Freddie      Recommendation
                Freddie Mac’s implementation of its         Mac’s Unsecured          agreed to by FHFA;
                counterparty risk management policies       Lending to Lehman        implementation of
                and procedures by:                          Brothers Prior to        recommendation
                •	 ensuring that the independence          Lehman Brothers’         pending.
                    and decisions of the enterprise’s       Bankruptcy
                    risk management staff are
                    not overridden by business
                    management staff; and
                •	 directing Freddie Mac Internal Audit
                    to audit the counterparty credit risk
                    management function annually.

EVL-2013-03-2   FHFA should continue to pursue all          Case Study: Freddie      Recommendation
                possible avenues to recover the             Mac’s Unsecured          agreed to by FHFA;
                $1.2 billion in the Lehman bankruptcy       Lending to Lehman        implementation of
                proceedings.                                Brothers Prior to        recommendation
                                                            Lehman Brothers’         pending.
                                                            Bankruptcy

EVL-2013-03-3   FHFA should continue to develop an          Case Study: Freddie      Recommendation
                examination program and procedures          Mac’s Unsecured          agreed to by FHFA;
                encompassing enterprise-wide risk           Lending to Lehman        implementation of
                exposure to all of Freddie Mac’s            Brothers Prior to        recommendation
                counterparties.                             Lehman Brothers’         pending.
                                                            Bankruptcy




                          Semiannual Report to the Congress • April 1, 2013–September 30, 2013            97
           No.                      Recommendation                         Report                  Status
     EVL-2013-001-1     FHFA should develop a long-term            FHFA’s Oversight        Recommendation
                        plan to strengthen its oversight           of the Enterprises’     agreed to by FHFA;
                        of the enterprises’ non-executive          Compensation of Their   implementation of
                        compensation through reviews or            Executives and Senior   recommendation
                        examinations, focusing on senior           Professionals           pending.
                        professional compensation. The
                        plan should set priorities, ensure
                        that available staffing resources
                        are commensurate with them, and
                        establish an appropriate time frame
                        for its implementation. With respect
                        to the reviews and examinations
                        contemplated by its plan, the agency
                        should consider including the following
                        items as priorities:
                        •	 the enterprises’ general structures,
                            processes, and cost controls for
                            senior professional compensation;
                        •	 the enterprises’ controls over
                            compensation offers to new hires;
                            and
                        •	 the enterprises’ compliance with
                            the pay freeze with respect to the
                            use of promotions and changes in
                            responsibility.

     EVL-2012-009-1     FHFA should continue to monitor            FHFA’s Oversight        Recommendation
                        Freddie Mac’s hedges and models to         of Freddie Mac’s        agreed to by FHFA;
                        ensure the enterprise’s portfolio is       Investment in Inverse   implementation of
                        hedged within its approved interest        Floaters                recommendation
                        rate limits.                                                       pending.

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




98    Federal Housing Finance Agency Office of Inspector General
      No.                    Recommendation                         Report                  Status
EVL-2012-009-3   FHFA should ensure that supervisory       FHFA’s Oversight        Recommendation
                 policies are well-founded and             of Freddie Mac’s        partially agreed to by
                 coordinated and that the agency           Investment in Inverse   FHFA; implementation
                 speaks with one voice by:                 Floaters                of recommendation
                 •	 confirming its position or the                                pending.
                     agreement in writing as soon as
                     practical if FHFA is going to take
                     a position or believes it has come
                     to an agreement with Freddie Mac
                     regarding a particular investment
                     product; and
                 •	 ensuring that supervisory policies
                     are based on the robust work of
                     agency personnel and not reactions
                     to media or other public scrutiny.

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

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

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




                           Semiannual Report to the Congress • April 1, 2013–September 30, 2013         99
        No.                       Recommendation                           Report                 Status
  EVL-2012-008-3      Consistent with the control issues          Evaluation of FHFA’s    Recommendation
                      found in Fannie Mae’s internal audit        Oversight of Fannie     agreed to by FHFA;
                      report on the High Touch Servicing          Mae’s Transfer of       implementation of
                      Program, FHFA should ensure that            Mortgage Servicing      recommendation
                      Fannie Mae applies additional scrutiny      Rights from Bank of     pending.
                      and rigor to pricing significant MSR        America to High Touch
                      transactions. Specifically, FHFA should:    Servicers
                      •	 consider requiring Fannie Mae to
                          assess the valuation methods of
                          multiple MSR valuators in order to
                          discern best practices; and
                      •	 consider requiring two independent
                          valuations in the case of larger MSR
                          transactions (at a threshold to be
                          determined by FHFA).

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

  EVL-2012-007-1      FHFA and Freddie Mac should continue Follow-up on                   Recommendation
                      to carry out the loan review and related Freddie Mac’s Loan         agreed to by FHFA;
                      reforms they have initiated since OIG’s Repurchase Process          implementation of
                      original report on the Bank of America                              recommendation
                      settlement with Freddie Mac was                                     pending.
                      issued.

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




100   Federal Housing Finance Agency Office of Inspector General
      No.                    Recommendation                         Report                 Status
EVL-2012-005-2   FHFA should strengthen the regulatory     FHFA’s Oversight        Recommendation
                 framework around the FHLBanks’            of the Federal          agreed to by FHFA;
                 extension of unsecured credit by          Home Loan Banks’        implementation of
                 considering the utility of:               Unsecured Credit Risk   recommendation
                 •	 establishing maximum overall          Management Practices    pending.
                     exposure limits;
                 •	 lowering the existing individual
                     counterparty limits; and
                 •	 ensuring that the unsecured
                     exposure limits are consistent with
                     the FHLBank System’s housing
                     mission.

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

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

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

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




                         Semiannual Report to the Congress • April 1, 2013–September 30, 2013        101
        No.                      Recommendation                          Report                 Status
  EVL-2011-006-2      FHFA should promptly initiate              Evaluation of the      Closed—Final action
                      management reforms to ensure that          Federal Housing        taken by FHFA.
                      senior managers are apprised of and        Finance Agency’s
                      timely act on significant concerns         Oversight of Freddie
                      brought to their attention, particularly   Mac’s Repurchase
                      when they receive reports that the         Settlement with Bank
                      normal reporting and supervisory           of America
                      process is not working properly.




102   Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • April 1, 2013–September 30, 2013   103
Figure 30. Summary of OIG Reports Where All Recommendations Are Closed
                                       Report                                           No. of Recommendations
FHFA’s Oversight of the Enterprises’ Efforts to Recover Losses from Foreclosure Sales             3
(AUD-2013-001)
FHFA’s Oversight of the Enterprises’ Management of High-Risk Seller/Servicers (AUD-               2
2012-007)
FHFA’s Supervisory Risk Assessment for Single-Family Real Estate Owned (AUD-2012-                 1
005)
FHFA’s Supervisory Framework for Federal Home Loan Banks’ Advances and                            7
Collateral Risk Management (AUD-2012-004)
FHFA’s Oversight of Fannie Mae’s Single-Family Underwriting Standards (AUD-2012-                  2
003)
FHFA’s Supervision of Freddie Mac’s Controls over Mortgage Servicing Contractors                  5
(AUD-2012-001)
FHFA’s Oversight of Fannie Mae’s Default-Related Legal Services (AUD-2011-004)                    3


Clifton Gunderson LLP’s Independent Audit of the Federal Housing Finance Agency’s                 9
Privacy Program and Implementation - 2011 (AUD-2011-003)
Clifton Gunderson LLP’s Independent Audit of the Federal Housing Finance Agency’s                 5
Information Security Program - 2011 (AUD-2011-002)
Audit of the Federal Housing Finance Agency’s Consumer Complaints Process (AUD-                   3
2011-001)
FHFA’s Certifications for the Preferred Stock Purchase Agreements (EVL-2012-006)                  2


Fannie Mae’s and Freddie Mac’s Participation in the 2011 Mortgage Bankers                         2
Association Convention and Exposition (ESR-2012-004)
FHFA’s Oversight of the Enterprises’ Charitable Activities (ESR-2012-003)                         2


Evaluation of FHFA’s Management of Legal Fees for Indemnified Executives (EVL-                    2
2012-002)
Evaluation of Whether FHFA Has Sufficient Capacity to Examine the GSEs (EVL-2011-                 4
005)
Evaluation of FHFA’s Oversight of Fannie Mae’s Management of Operational Risk                     3
(EVL-2011-004)
Evaluation of FHFA’s Role in Negotiating Fannie Mae’s and Freddie Mac’s                           1
Responsibilities in Treasury’s Making Home Affordable Program (EVL-2011-003)
Evaluation of Federal Housing Finance Agency’s Oversight of Fannie Mae’s and                      8
Freddie Mac’s Executive Compensation Programs (EVL-2011-002)
Federal Housing Finance Agency’s Exit Strategy and Planning Process for the                       2
Enterprises’ Structural Reform (EVL-2011-001)




104    Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • April 1, 2013–September 30, 2013   105
Appendix C:                                                 September 30. Further, Section 5(a) lists more than a
                                                            dozen categories of information that we must include
Information Required                                        in our semiannual reports.
by the Inspector                                            Below, OIG presents a table that directs the reader
General Act and                                             to the pages of this report where the information
                                                            required by the Inspector General Act may be found.
Subpoenas Issued
                                                            The text that follows further addresses the status of
Section 5(a) of the Inspector General Act provides          OIG’s compliance with Sections 5(a)(6), (8), (9),
that OIG shall, not later than April 30 and                 (10), (11), (12), and (13) of the Inspector General
October 31 of each year, prepare semiannual reports         Act. Finally, OIG provides information concerning
summarizing our activities during the immediately           administrative subpoenas that it issued during the
preceding six-month periods ending March 31 and             semiannual period.


                                           Source/Requirement                                              Pages
Section 5(a)(1)- A description of significant problems, abuses, and deficiencies relating to the            7-18
administration of programs and operations of FHFA.
Section 5(a)(2)- A description of the recommendations for corrective action made by OIG with respect       7-18
to significant problems, abuses, or deficiencies.                                                         85-102
Section 5(a)(3)- An identification of each significant recommendation described in previous               88-95
semiannual reports on which corrective action has not been completed.                                     97-101
Section 5(a)(4)- A summary of matters referred to prosecutive authorities and the prosecutions and         19-32
convictions that have resulted.
Section 5(a)(5)- A summary of each report made to the Director of FHFA.                                    7-18
Section 5(a)(6)- A listing, subdivided according to subject matter, of each audit and evaluation report    7-18
issued by OIG during the reporting period and for each report, where applicable, the total dollar value    107
of questioned costs (including a separate category for the dollar value of unsupported costs) and the
dollar value of recommendations that funds be put to better use.
Section 5(a)(7)- A summary of each particularly significant report.                                        7-18
Section 5(a)(8)- Statistical tables showing the total number of audit and evaluation reports and the       7-18
total dollar value of questioned and unsupported costs.                                                    107
Section 5(a)(9)- Statistical tables showing the total number of audit and evaluation reports and the       7-18
dollar value of recommendations that funds be put to better use by management.                             107
Section 5(a)(10)- A summary of each audit and evaluation report issued before the commencement              107
of the reporting period for which no management decision has been made by the end of the reporting
period.
Section 5(a)(11)- A description and explanation of the reasons for any significant revised management       107
decision made during the reporting period.
Section 5(a)(12)- Information concerning any significant management decision with which the                 107
Inspector General is in disagreement.
Section 5(a)(13)- The information described under section 05(b) of the Federal Financial Management         107
Improvement Act of 1996.



106    Federal Housing Finance Agency Office of Inspector General
Audit and Evaluation Reports                              period. During the six-month reporting period
with Recommendations of                                   ended September 30, 2013, there were no
                                                          significant revised management decisions on OIG’s
Questioned Costs, Unsupported
                                                          audits and evaluations.
Costs, and Funds to Be Put to
Better Use by Management                                  Significant Management Decision
Section 5(a)(6) of the Inspector General Act, as
                                                          with Which the Inspector General
amended, requires that OIG list its reports during        Disagrees
the semiannual period that include questioned costs,
unsupported costs, and funds to be put to better          Section 5(a)(12) of the Inspector General Act, as
use. Section 5(a)(8) and section 5(a)(9), respectively,   amended, requires that OIG report information
require OIG to publish statistical tables showing the     concerning any significant management decision
dollar value of questioned and unsupported costs,         with which the Inspector General is in disagreement.
and of recommendations that funds be put to better        During the current reporting period, there were no
use by management. The audit, evaluation, and other       management decisions with which the Inspector
reports that OIG issued during the reporting period       General disagreed.
did not include recommendations with dollar values
of questioned costs, unsupported costs, or funds put
                                                          Federal Financial Management
to better use by management.
                                                          Improvement Act of 1996
Audit and Evaluation Reports                              The provisions of HERA require FHFA to implement
with No Management Decision                               and maintain financial management systems
                                                          that comply substantially with federal financial
Section 5(a)(10) of the Inspector General Act,            management systems requirements, applicable federal
as amended, requires that OIG report on each              accounting standards, and the U.S. Government
audit and evaluation report issued before the             Standard General Ledger at the transaction level.
commencement of the reporting period for which
no management decision has been made by the               For fiscal year 2012, FHFA received from GAO
end of the reporting period. There were no audit or       an unqualified (clean) audit opinion on its annual
evaluation reports issued before April 1, 2013, that      financial statements and internal control over
await a management decision.                              financial reporting. GAO also reported that it
                                                          identified no material weaknesses in internal controls
                                                          or reportable instances of noncompliance with laws
Significantly Revised
                                                          or regulations. GAO is required to perform this audit
Management Decisions                                      in accordance with HERA.

Section 5(a)(11) of the Inspector General Act, as         Several OIG reports published during the semiannual
amended, requires that OIG report information             period identified specific opportunities to strengthen
concerning the reasons for any significant revised        FHFA’s internal controls. These reports are
management decision made during the reporting             summarized on pages 7 through 18.


                                 Semiannual Report to the Congress • April 1, 2013–September 30, 2013     107
Subpoenas Issued

During the reporting period, OIG issued 92
subpoenas as summarized in Figure 31 (see below).

Figure 31. Subpoenas Issued for the Period
April 1, 2013–September 30, 2013
        Issuing Office        Number of Subpoenas
OA                                    12
OE                                     0
OI                                    80
Total                                 92




108      Federal Housing Finance Agency Office of Inspector General
Appendix D:                                                  Fannie Mae’s Compliance with FHFA Email Retention
                                                             Requirements (EVL-2013-011, August 16, 2013).
OIG Reports                                                  FHFA’s Oversight of the Federal Home Loan Banks’
                                                             Compliance with Regulatory Limits on Extensions of
See www.fhfaoig.gov for OIG’s reports.
                                                             Unsecured Credit (EVL-2013-008, August 6, 2013).

Audit Reports                                                FHFA’s Oversight of Capital Markets Human Capital
                                                             (ESR-2013-007, August 2, 2013).
FHFA Can Strengthen Controls over Its Office of Quality      Home Affordable Refinance Program: A Mid-Program
Assurance (AUD-2013-013, September 30, 2013).                Assessment (EVL-2013-006, August 1, 2013).
Additional FHFA Oversight Can Improve the Real               FHFA’s Initiative to Reduce the Enterprises’ Dominant
Estate Owned Pilot Program (AUD-2013-012,                    Position in the Housing Finance System by Raising
September 27, 2013).                                         Gradually Their Guarantee Fees (EVL-2013-005,
FHFA Can Improve Its Oversight of Fannie Mae’s               July 16, 2013).
Recoveries from Borrowers Who Possess the Ability to Repay   FHFA’s Oversight of the Federal Home Loan Banks’
Deficiencies (AUD-2013-011, September 24, 2013).             Affordable Housing Programs (EVL-2013-04,
FHFA Can Improve Its Oversight of Freddie Mac’s              April 30, 2013).
Recoveries from Borrowers Who Possess the Ability to Repay
Deficiencies (AUD-2013-010, September 24, 2013).             Other Reports
Action Needed to Strengthen FHFA Oversight of
                                                             Management Alert: Delay Implementing Advisory
Enterprise Information Security and Privacy Programs
                                                             Bulletin No. 2012-02 (August 5, 2013).
(AUD-2013-009, August 30, 2013).
                                                             Servicer Mortgage Payment Remittance (SIR-2013-5,
Evaluation Reports                                           June 17, 2013).

                                                             Federal Home Loan Bank Collateral Verification
Evaluation of Fannie Mae’s Servicer Reimbursement            Reviews (SIR-2013-4, June 17, 2013).
Operations for Delinquency Expenses (EVL-2013-012,
September 18, 2013).                                         Public Company Accounting Oversight Board Criticisms
                                                             of Public Accounting Firms that Do Business with the
Reducing Risk and Preventing Fraud in the New                GSEs (May 3, 2013).
Securitization Infrastructure (EVL-2013-010,
August 22, 2013).                                            Joint Report on Federally Owned or Overseen Real
                                                             Estate Owned Properties (May 2013).
FHFA’s Oversight of Fannie Mae’s 2013 Settlement with
Bank of America (EVL-2013-009, August 22, 2013).




                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013         109
Appendix E: OIG Organizational Chart



                                                   Acting Inspector General
                                                     Michael P. Stephens



                     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




110    Federal Housing Finance Agency Office of Inspector General
Appendix F:                                              on Integrity and Efficiency (CIGIE). OE performs its
                                                         evaluations in accordance with the Blue Book.
Description of OIG
Offices and Strategic                                    Office of Investigations

Plan                                                     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.
OIG Offices
                                                         OI’s investigations may address administrative, civil,
                                                         and criminal violations of laws and regulations.
Office of Audits
                                                         Investigations may relate to FHFA or GSE
OA provides a full range of professional audit           employees, contractors, consultants, and any
and attestation services for FHFA’s programs             alleged wrongdoing involving FHFA’s or the GSEs’
and operations. Through its performance audits           programs and operations. Offenses investigated may
and attestation engagements, OA helps FHFA:              include mail, wire, bank, accounting, securities, or
(1) promote economy, efficiency, and effectiveness;      mortgage fraud, as well as violations of the tax code,
(2) detect and deter fraud, waste, and abuse; and        obstruction of justice, and money laundering.
(3) ensure compliance with applicable laws and
regulations. Under the Inspector General Act,         To date, OI has opened over 300 criminal and
inspectors general are required to comply with GAO’s  civil investigations, but by their nature, these
Government Auditing Standards,                                           investigations and their resulting
commonly referred to as the                                              reports are not generally made
“Yellow Book.” OA performs its                                           public. However, if an investigation
                                           Report fraud,                 reveals criminal activity, OI refers
audits and attestation engagements
                                                                         the matter to DOJ for possible
in accordance with the Yellow              waste, or abuse               prosecution or recovery of
Book.
                                           related to FHFA’s monetary damages and penalties.
Office of Evaluations                                                    OI reports administrative

OE provides independent and                programs and                  misconduct to management
                                                                         officials for consideration of
objective reviews, studies, survey
reports, and analyses of FHFA’s
                                           operations by                 disciplinary or remedial action.

programs and operations. OE’s                                            OI also manages OIG’s hotline
evaluations are generally limited
                                           visiting  www.
                                                                         that receives tips and complaints
in scope. The Inspector General            fhfaoig.gov/                  of fraud, waste, or abuse in FHFA’s
Reform Act of 2008 requires that                                         programs and operations. The
inspectors general adhere to the           ReportFraud                   hotline allows concerned parties
Quality Standards for Inspection and                                     to report their allegations to OIG
Evaluation, commonly referred to           or calling (800)              directly and confidentially. OI
as the “Blue Book,” issued by the                                        honors all applicable whistleblower
Council of the Inspectors General          793-7724.                     protections. As part of its effort to


                               Semiannual Report to the Congress • April 1, 2013–September 30, 2013        111
raise awareness of fraud, OI actively promotes the         budget, human resources, safety, facilities, financial
hotline through OIG’s website, posters, emails to          management, information technology, and continuity
FHFA and GSE employees, and OIG’s semiannual               of operations. For human resources, OAd develops
reports.                                                   policies to attract, develop, and retain exceptional
                                                           people, with an emphasis on linking performance
Executive Office                                           planning and evaluation to organizational and
The Executive Office (EO) provides leadership              individual accomplishment of goals and objectives.
and programmatic direction for OIG’s offices and           Regarding OIG’s budget and financial management,
activities.                                                OAd coordinates budget planning and execution and
                                                           oversees all of OIG’s procedural guidance for financial
EO includes OC, which serves as the chief legal            management and procurement integrity.
advisor to the Acting Inspector General and provides
independent legal advice, counseling, and opinions         OAd also administratively supports the Chief of Staff
to OIG about its programs and operations. OC               and the Deputy Inspector General for Audits as they
also reviews audit and evaluation reports for legal        implement OIG’s Internal Management Assessment
sufficiency and compliance with OIG’s policies and         Program, which requires the routine inspection of
priorities. Additionally, it reviews drafts of FHFA        each OIG office to ensure that it complies with
regulations and policies and prepares comments as          applicable requirements. OAd also administers OIG’s
appropriate. OC also coordinates with FHFA’s Office        Equal Employment Opportunity Program.
of General Counsel and manages OIG’s responses
to requests and appeals made under the Freedom of          OIG’s Strategic Plan
Information Act and the Privacy Act.
                                                           On September 7, 2011, OIG published a Strategic
EO also includes the Office of Policy, Oversight,
                                                           Plan to define its goals and objectives, guide
and Review (OPOR), which provides advice,
                                                           development of its performance criteria, establish
consultation, and assistance regarding OIG’s priorities
                                                           measures to assess accomplishments, create budgets,
and the scope of its evaluations, audits, and all other
                                                           and report on progress. OIG will continue to
published reports. In addition, OPOR manages
                                                           monitor events; make changes to its Strategic Plan as
OIG’s audit and evaluation report production
                                                           circumstances warrant; and strive to remain relevant
process and produces special reports and white papers
                                                           regarding areas of concern to FHFA, the GSEs,
addressing complex housing finance issues.
                                                           Congress, and the American people.
The Office of External Affairs is also within EO, and
                                                           Within the Strategic Plan, OIG has established
it responds to inquiries from the press and members
                                                           several goals that align with FHFA’s strategic goals.
of Congress.

The Office of Special Projects is also within EO, and it   Strategic Goal 1—Adding Value
supports other OIG offices on high-impact projects.        OIG will promote the economy, efficiency, and
                                                           effectiveness of FHFA’s programs and operations and
Office of Administration
                                                           assist FHFA and its stakeholders to solve problems
The Office of Administration (OAd) manages                 related to the conservatorships and the conditions
and oversees OIG administration, including                 that led to them.



112     Federal Housing Finance Agency Office of Inspector General
Strategic Goal 2—Operating with Integrity                Organizational Guidance
OIG will promote the integrity of FHFA’s programs
and operations through the identification and            OIG has developed and promulgated policies and
prevention of fraud, waste, or abuse.                    procedural manuals for each of its offices. These
                                                         manuals set forth uniform standards and guidelines
Strategic Goal 3—Promoting Productivity                  for the performance of each office’s essential
OIG will deliver quality products and services to its    responsibilities and are intended to help ensure the
stakeholders by maintaining an effective and efficient   consistency and integrity of OIG’s operations.
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.




                                Semiannual Report to the Congress • April 1, 2013–September 30, 2013     113
Appendix G: Figure Sources
Figure 2.   Federal Housing Finance Agency Office of Inspector General, “OQA Recommendations Remain Open for Extended
            Periods,” FHFA Can Strengthen Controls over Its Office of Quality Assurance, AUD-2013-013, at 11 (September 30,
            2013). Accessed: September 30, 2013, at www.fhfaoig.gov/Content/Files/AUD-2013-013.pdf.
Figure 3.   Federal Housing Finance Agency Office of Inspector General, “Prescribed Risk Scoring Process Not Followed in
            Some Cases,” Additional FHFA Oversight Can Improve the Real Estate Owned Pilot Program, AUD-2013-012, at 17
            (September 27, 2013). Accessed: September 30, 2013, at http://fhfaoig.gov/Content/Files/AUD-2013-012.pdf.
Figure 4.   Federal Housing Finance Agency Office of Inspector General, “Fannie Mae’s Servicer Reimbursement Operations,”
            Evaluation of Fannie Mae’s Servicer Reimbursement Operations for Delinquency Expenses, EVL-2013-012, at 10
            (September 18, 2013). Accessed: September 18, 2013, at www.fhfaoig.gov/Content/Files/EVL-2013-012.pdf.
Figure 5.   Federal Housing Finance Agency Office of Inspector General, “Overview of Settlement,” FHFA’s Oversight of Fannie
            Mae’s 2013 Settlement with Bank of America, EVL-2013-009, at 9 (August 22, 2013). Accessed: September 13,
            2013, at http://fhfaoig.gov/Content/Files/EVL-2013-009.pdf.
Figure 6.   Federal Housing Finance Agency Office of Inspector General, “FHFA Has Required the FHLBanks That Committed
            Violations to Take Corrective Actions Within Specified Timeframes,” FHFA’s Oversight of the Federal Home Loan
            Banks’ Compliance with Regulatory Limits on Extensions of Unsecured Credit, EVL-2013-008, at 19 (August 6, 2013).
            Accessed: September 13, 2013, at http://fhfaoig.gov/Content/Files/EVL-2013-008.pdf.
Figure 7.   Federal Housing Finance Agency Office of Inspector General, “FHFA,” Home Affordable Refinance Program: A Mid-
            Program Assessment, EVL-2013-006, at 18 (August 1, 2013). Accessed: September 13, 2013, at http://fhfaoig.
            gov/Content/Files/EVL-2013-006.pdf.
Figure 8.   Federal Housing Finance Agency Office of Inspector General, “The Amount by Which Guarantee Fees Must Rise
            in Order to Increase Private Sector Investment Is Unclear,” FHFA’s Initiative to Reduce the Enterprises’ Dominant
            Position in the Housing Finance System by Raising Gradually Their Guarantee Fees, EVL-2013-005, at 26 (July 16,
            2013). Accessed: September 13, 2013, at http://fhfaoig.gov/Content/Files/EVL-2013-005_4.pdf.
Figure 10. Federal Housing Finance Agency, “The Housing Government-Sponsored Enterprises,” 2011 Performance and
           Accountability Report, at 14. Accessed: August 20, 2013, at www.fhfa.gov/webfiles/22756/FHFAPAR_2011.pdf.
Figure 11. Inside Mortgage Finance, “Mortgage & Asset Securities Issuance,” Mortgage Market Statistical Annual: Volume II:
           Secondary Market, at 4 (2013).
Figure 12. Federal Housing Finance Agency, “Table 3. Fannie Mae Earnings,” “Table 12. Freddie Mac Earnings,” 2012 Report
           to Congress, at 80, 97 (June 13, 2013). Accessed: August 20, 2013, at www.fhfa.gov/webfiles/25320/FHFA2012_
           AnnualReport-508.pdf. Fannie Mae, “Table 4: Summary of Condensed Consolidated Results of Operations,” Form
           10-Q for the Quarterly Period Ended June 30, 2013, at 16. Accessed: August 20, 2013, at www.fanniemae.com/
           resources/file/ir/pdf/quarterly-annual-results/2013/q22013.pdf. Freddie Mac, “Table 5 — Summary Consolidated
           Statements of Comprehensive Income,” Form 10-Q for the Quarterly Period Ended June 30, 2013, at 14. Accessed:
           August 20, 2013, at http://api40.10kwizard.com/cgi/convert/pdf/FMCC-20130807-10Q-20130630.pdf?ipage=90
           66647&xml=1&quest=1&rid=23&section=1&sequence=-1&pdf=1&dn=1.
Figure 13. Fannie Mae, “Table 4: Summary of Condensed Consolidated Results of Operations,” “Table 8: Fair Value Gains
           (Losses), Net,” Form 10-Q for the Quarterly Period Ended June 30, 2013, at 16, 21. Accessed: August 20, 2013,
           at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2013/q22013.pdf. Freddie Mac, “Table 5
           — Summary Consolidated Statements of Comprehensive Income,” Form 10-Q for the Quarterly Period Ended June
           30, 2013, at 14. Accessed: August 20, 2013, at http://api40.10kwizard.com/cgi/convert/pdf/FMCC-20130807-
           10Q-20130630.pdf?ipage=9066647&xml=1&quest=1&rid=23&section=1&sequence=-1&pdf=1&dn=1.
Figure 14. Standard & Poor’s Dow Jones Indices, S&P/Case-Shiller 20-City Composite Home Price Index (August 27, 2013).
           Accessed: August 27, 2013, at http://us.spindices.com/indices/real-estate/sp-case-shiller-20-city-composite-
           home-price-index (click on “Additional Info,” then click “Seasonally Adjusted Home Price Index Levels,” then
           download the Excel file).
Figure 15. Federal Housing Finance Agency, “Table 1: Quarterly Draws on Treasury Commitments to Fannie Mae and Freddie
           Mac per the Senior Preferred Stock Purchase Agreements,” “Table 2: Dividends on Enterprise Draws from Treasury,”
           Data as of August 8, 2013 on Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-Related
           Securities, at 2, 3. Accessed: August 20, 2013, at www.fhfa.gov/webfiles/25444/TSYSupport%202013-08-08.pdf.
Figure 16. Federal Home Loan Bank of Boston, FHLB System. Accessed: August 20, 2013, at www.fhlbboston.com/aboutus/
           thebank/06_01_04_fhlb_system.jsp.




114     Federal Housing Finance Agency Office of Inspector General
Figure 17. Federal Home Loan Banks Office of Finance, “Combined Statement of Income,” Combined Financial Report for the
           Quarterly Period Ended June 30, 2013, at F-2. Accessed: August 20, 2013, at www.fhlb-of.com/ofweb_userWeb/
           resources/13Q2end.pdf. Other-than-temporary impairment losses can be referenced to Table 20, p. 21, in the Federal
           Home Loan Banks Office of Finance’s Combined Financial Report for the Quarterly Period Ended June 30, 2013.
Figure 18. Federal Home Loan Banks Office of Finance, “Selected Financial Data,” Combined Financial Report for the
           Year Ended December 31, 2011, at 34. Accessed: August 20, 2013, at www.fhlb-of.com/ofweb_userWeb/
           resources/11yrend.pdf. Federal Home Loan Banks Office of Finance, “Combined Statement of Condition,” Combined
           Financial Report for the Quarterly Period Ended June 30, 2013, at F-1. Accessed: August 20, 2013, at www.fhlb-of.
           com/ofweb_userWeb/resources/13Q2end.pdf.
Figure 19. Federal Housing Finance Agency, “Safety and Soundness Ratings,” Division of Enterprise Regulation Supervision
           Handbook 2.1, at 14, 15 (June 16, 2009). Accessed: August 27, 2013, at www.fhfa.gov/webfiles/2921/
           DERHandbook21.pdf.
Figure 20. Sources for the Private Model: See, e.g., Residential Mortgage Market Privatization and Standardization Act of
           2011, S. 1834, 112th Congress. GSE Bailout Elimination and Taxpayer Protection Act of 2011, H.R. 1182, 112th
           Congress. Mortgage Finance Act of 2011, S. 1963, 112th Congress.
	          Sources for the Hybrid Model: See, e.g., N. Eric Weiss, Congressional Research Service, “Broadly Focused
           Proposed Legislation,” Proposals to Reform Fannie Mae and Freddie Mac in the 112th Congress, at 13 (July 25,
           2011). David Scharfstein and Adi Sunderam, Mossavar-Rahmani Center for Business and Government, Harvard
           Kennedy School, “Introduction,” The Economics of Housing Finance Reform, RPP-2011-07, at 3 (August 2011).
           Accessed: August 12, 2013, at www.hks.harvard.edu/m-rcbg/rpp/Working%20papers/RPP_2011_07_Scharfstein_
           Sunderam.pdf. Congressional Budget Office, “A Hybrid Public/Private Model,” Fannie Mae, Freddie Mac, and the
           Federal Role in the Secondary Mortgage Market, Pub. No. 4021, at 42 (December 2010). Accessed: August 12,
           2013, at www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12032/12-23-fanniefreddie.pdf.
	          Sources for the Government Model: See, e.g., Secondary Market Facility for Residential Mortgages Act of 2011,
           H.R. 2413, 112th Congress. N. Eric Weiss, Congressional Research Service, “Option: Privatization,” GSEs and the
           Government’s Role in Housing Finance: Issues for the 113th Congress, at 16 (February 11, 2013). Accessed: August
           12, 2013, at www.fas.org/sgp/crs/misc/R40800.pdf.
	          Sources for the Administration: Department of the Treasury, Department of Housing and Urban Development,
           “Introduction,” Reforming America’s Housing Finance Market, A Report to Congress, at 1, 2 (February 2011).
           Accessed: August 12, 2013, at www.treasury.gov/initiatives/Documents/Reforming%20America%27s%20
           Housing%20Finance%20Market.pdf.
	          Sources for the Legislative Proposals: N. Eric Weiss, Congressional Research Service, “Overview,” “Narrowly
           Focused Proposed Legislation,” “Broadly Focused Proposed Legislation,” Proposals to Reform Fannie Mae and
           Freddie Mac in the 112th Congress, at 1, 2, 5-11, 13, 14 (July 25, 2011).
	          Sources for the Academics, Industry Experts, and Interest Groups: Council on Ensuring Mortgage Liquidity,
           Mortgage Bankers Association, “Overview,” MBA’s Recommendations for the Future Government Role in the Core
           Secondary Mortgage Market, at 5 (August 2009). Accessed: August 12, 2013, at www.mbaa.org/files/News/
           InternalResource/70212_RecommendationsfortheFutureGovernmentRoleintheCoreSecondaryMortgageMarket.
           pdf. David Scharfstein and Adi Sunderam, Mossavar-Rahmani Center for Business and Government, Harvard
           Kennedy School, “Introduction,” The Economics of Housing Finance Reform, RPP-2011-07, at 1, 2, 3 (August 2011).
           Accessed: August 12, 2013, at www.hks.harvard.edu/m-rcbg/rpp/Working%20papers/RPP_2011_07_Scharfstein_
           Sunderam.pdf. Qumber Hassan and Mahesh Swaminathan, Credit Suisse, “Proposal for the Portfolio Business,”
           Mortgage Market Comment: GSEs – Still the Best Answer for Housing Finance, at 1, 9, 10 (October 6, 2009).
           Accessed: August 12, 2013, at www.zigasassociates.com/images/uploads/GSEs_-_Still_the_best_answer_for_
           housing_finance.pdf.
Figure 21. Federal Housing Finance Agency Office of Inspector General, “Underwriting Standards,” FHFA’s Oversight of Fannie
           Mae’s Single-Family Underwriting Standards, AUD-2012-003, at 3 (March 22, 2012). Accessed: August 12, 2013, at
           http://fhfaoig.gov/Content/Files/AUD-2012-003_1.pdf.
Figure 22. Federal Housing Finance Agency Office of Inspector General, “Variances from Underwriting Standards,” FHFA’s
           Oversight of Fannie Mae’s Single-Family Underwriting Standards, AUD-2012-003, at 7 (March 22, 2012). Accessed:
           August 12, 2013, at http://fhfaoig.gov/Content/Files/AUD-2012-003_1.pdf.
Figure 23. Board of Governors of the Federal Reserve System, Mortgage Debt Outstanding (March 2013). Accessed: September
           17, 2013, at www.federalreserve.gov/econresdata/releases/mortoutstand/mortoutstand20130331.htm.
Figure 24. Fannie Mae, “Multifamily Credit Profile by Loan Attributes,” “Credit Characteristics of Single-Family Conventional
           Guaranty Book of Business by Key Product Features,” Fannie Mae 2012 Credit Supplement, at 19, 7 (April 2,
           2013). Accessed: August 20, 2013, at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2012/
           q42012_credit_summary.pdf. Freddie Mac, “Multifamily Mortgage Portfolio by Attribute,” “Single-Family Credit


                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013                 115
           Guarantee Portfolio Characteristics,” Fourth Quarter 2012 Financial Results Supplement, at 33, 27 (February 28,
           2013). Accessed: August 20, 2013, at www.freddiemac.com/investors/er/pdf/supplement_4q12.pdf. Fannie Mae,
           “Comparison of Multifamily and Single-Family Financing Models,” Analysis of the Viability of Fannie Mae’s Multifamily
           Business Operating without a Government Guarantee - Response to FHFA Scorecard Directive, at 20 (December
           17, 2012). Accessed: August 19, 2013, at www.fhfa.gov/webfiles/25160/FNMMF2012ScorecardResponse.
           pdf. Fannie Mae, Multifamily. Accessed: August 19, 2013, at www.fanniemae.com/portal/funding-the-market/
           mbs/multifamily/. Federal Housing Finance Agency Office of Inspector General, “Enterprises’ Role in Primary and
           Secondary Residential Mortgage Markets,” “Sampling Methodology for the Asset Quality Examinations,” FHFA’s
           Oversight of the Asset Quality of Multifamily Housing Loans Financed by Fannie Mae and Freddie Mac, AUD-2013-004,
           at 6, 14 (February 21, 2013). Accessed: June 17, 2013, at www.fhfaoig.gov/Content/Files/AUD-2013-004_2.pdf.
           Fannie Mae, Single-Family. Accessed: August 19, 2013, at www.fanniemae.com/portal/funding-the-market/mbs/
           single-family/index.html. Freddie Mac, “Full Volume Dataset Origination Summary Statistics,” Single-Family Loan-
           Level Dataset: Summer Statistics, at 3 (August 2013). Accessed: August 19, 2013, at www.freddiemac.com/news/
           finance/pdf/summary_statistics.pdf.
Figure 25. Federal Housing Finance Agency, “Fannie Mae Single-Family Book Profile - As of December 31, 2012,” “Freddie
           Mac Single-Family Book Profile - As of December 31, 2012,” Foreclosure Prevention Report, Fourth Quarter
           2012: FHFA Federal Property Manager’s Report, at 42, 43. Accessed: June 18, 2013, at www.fhfa.gov/
           webfiles/25061/4q12fprfinal.pdf.
Figure 26. Federal Housing Finance Agency Office of Inspector General, “Mortgage Servicing,” 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, at
           9 (September 18, 2012). Accessed: June 17, 2013, at www.fhfaoig.gov/Content/Files/EVL-2012-008.pdf.
Figure 27. Freddie Mac, QC Disposition of Foreclosures by Funding Year and Foreclosure Year (January 1, 2011).
Figure 28. Federal Housing Finance Agency Office of Inspector General, “Findings,” Evaluation of FHFA’s Oversight of Fannie
           Mae’s Management of Operational Risk, EVL-2011-004, at 19 (September 23, 2011). Accessed: May 30, 2013, at
           www.fhfaoig.gov/Content/Files/EVL-2011-004.pdf.




116     Federal Housing Finance Agency Office of Inspector General
Semiannual Report to the Congress • April 1, 2013–September 30, 2013   117
Appendix H: Endnotes                                       6	     ouncil of Inspectors General on Financial
                                                                 C
                                                                 Oversight, Audit of the Financial Stability
                                                                 Oversight Council’s Designation of Financial
1	   The Inspector General Act of 1978, 5 U.S.C.
                                                                 Market Utilities: Report to the Financial Stability
      App. 3 § 5, requires that each inspector general
                                                                 Oversight Council and the Congress (July 12,
      compile a report of his or her office’s operations
                                                                 2013). Accessed: September 13, 2013, at www.
      for each six-month period ending March 31 and
                                                                 treasury.gov/about/organizational-structure/ig/
      September 30.
                                                                 OIG%20Sorter/CIGFO_AUDIT_71713.pdf.

2	   Federal Housing Finance Agency Office of
                                                           7	     ederal Housing Finance Agency, About FHFA.
                                                                 F
      Inspector General, Evaluation of the Federal
                                                                 Accessed: July 26, 2013, at www.fhfa.gov/Default.
      Housing Finance Agency’s Oversight of Freddie
                                                                 aspx?Page=4.
      Mac’s Repurchase Settlement with Bank of America,
      EVL-2011-006 (September 27, 2011). Accessed:
                                                           8	     ederal Housing Finance Agency,
                                                                 F
      September 13, 2013, at www.fhfaoig.gov/
                                                                 “Message from the Acting Director,” 2012
      Content/Files/EVL-2011-006.pdf.
                                                                 Performance and Accountability Report, at 4.
                                                                 Accessed: July 26, 2013, at www.fhfa.gov/
3	   Federal Housing Finance Agency Office of
                                                                 webfiles/24632/2012FHFAPARF.pdf.
      Inspector General, FHFA’s Oversight of the
      Federal Home Loan Banks’ Unsecured Credit Risk
                                                           9	    Id., “FHFA at a Glance,” at 10.
      Management Practices, EVL-2012-005 (June 28,
      2012). Accessed: September 13, 2013, at http://
      fhfaoig.gov/Content/Files/EVL-2012-005_1_0.          10	   Id., “FY 2012 Profile,” at 11.
      pdf.
                                                           11	   I d., “Fannie Mae and Freddie Mac (the
4	   As a matter of policy, OIG simply notes without             Enterprises),” at 15.
      discussion that it has remarked on a draft rule
      during the semiannual period in which the            12	   I d., “Regulator of the Enterprises and the
      remarks are made. When such a rule is finalized             FHLBanks,” at 10.
      and published, OIG discusses the substance of its
      remarks in the semiannual report.                    13	    epartment of the Treasury, Written Testimony
                                                                 D
                                                                 by Secretary of the Treasury Timothy F. Geithner
5	   Federal Housing Finance Agency Office of                   before the Senate Committee on Banking, Housing
      Inspector General, Department of Housing and               & Urban Affairs (March 15, 2011). Accessed: July
      Urban Development Office of Inspector General,             26, 2013, at www.treasury.gov/press-center/press-
      Joint Report on Federally Owned or Overseen Real           releases/Pages/tg1103.aspx.
      Estate Owned Properties (May 2013). Accessed:
      September 13, 2013, at http://fhfaoig.gov/           14	    ederal Housing Finance Agency, “Executive
                                                                 F
      Content/Files/May%202013%20Housing%20                      Summary,” Conservator’s Report on the Enterprises’
      IGs%20Report.revised.v2.pdf.                               Financial Performance, Second Quarter 2010, at
                                                                 3. Accessed: July 26, 2013, at www.fhfa.gov/
                                                                 webfiles/16591/ConservatorsRpt82610.pdf.

118      Federal Housing Finance Agency Office of Inspector General
15	   Federal Housing Finance Agency, “Strategic          19	    reddie Mac, “Table 5 — Summary Consolidated
                                                                 F
       Goal 2: Contracting Enterprise Operations,”               Statements of Comprehensive Income,” Form
       A Strategic Plan for Enterprise Conservatorships:         10-Q for the Quarterly Period Ended June 30,
       The Next Chapter in a Story that Needs an                 2013, at 14. Accessed: August 12, 2013, at http://
       Ending, at 14 (February 21, 2012). Accessed:              api40.10kwizard.com/cgi/convert/pdf/FMCC-
       July 26, 2013, at www.fhfa.gov/webfiles/23344/            20130807-10Q-20130630.pdf?ipage=9066647
       StrategicPlanConservatorshipsFINAL.pdf.                   &xml=1&quest=1&rid=23&section=1&sequen
                                                                 ce=-1&pdf=1&dn=1.
16	   Id.
                                                           20	    annie Mae, “Deferred Tax Asset Valuation
                                                                 F
17	   Fannie Mae, Fannie Mae Reports Pre-Tax Income             Allowance,” Fannie Mae Reports Pre-Tax Income
       of $8.1 Billion for First Quarter 2013, at 1 (May         of $8.1 Billion for First Quarter 2013, at 2 (May
       9, 2013). Accessed: July 26, 2013, at www.                9, 2013). Accessed: August 19, 2013, at www.
       fanniemae.com/resources/file/ir/pdf/quarterly-            fanniemae.com/resources/file/ir/pdf/quarterly-
       annual-results/2013/q12013_release.pdf. Freddie           annual-results/2013/q12013_release.pdf.
       Mac, “First Quarter 2013 Financial Results,”
       Freddie Mac Reports Net Income of $4.6 Billion;     21	   Id.
       Comprehensive Income of $7.0 Billion for First
       Quarter 2013, at 1 (May 8, 2013). Accessed: July    22	    reddie Mac, “Deferred Tax Assets and
                                                                 F
       26, 2013, at www.freddiemac.com/investors/                Liabilities,” Form 10-Q for the Quarterly Period
       er/pdf/2013er-1q13_release.pdf. Fannie Mae,               Ended June 30, 2013, at 47, 48. Accessed: August
       Fannie Mae Reports Net Income of $10.1 Billion            16, 2013, at http://api40.10kwizard.com/cgi/
       and Comprehensive Income of $10.3 Billion for             convert/pdf/FMCC-20130807-10Q-20130630.
       Second Quarter 2013, at 1 (August 8, 2013).               pdf?ipage=9066647&xml=1&quest=1&rid=23&
       Accessed: August 19, 2013, at www.fanniemae.              section=1&sequence=-1&pdf=1&dn=1.
       com/resources/file/ir/pdf/quarterly-annual-
       results/2013/q22013_release.pdf. Freddie Mac,       23	    annie Mae, “Table 4: Summary of Condensed
                                                                 F
       “Second Quarter 2013 Financial Results,” Freddie          Consolidated Results of Operations,” Form
       Mac Reports Net Income of $5.0 Billion for Second         10-Q for the Quarterly Period Ended June 30,
       Quarter 2013, Comprehensive Income of $4.4                2013, at 16. Accessed: August 12, 2013, at www.
       Billion, at 1 (August 7, 2013). Accessed: August          fanniemae.com/resources/file/ir/pdf/quarterly-
       19, 2013, at www.freddiemac.com/investors/er/             annual-results/2013/q22013.pdf.
       pdf/2013er-2q13_release.pdf.
                                                           24	    reddie Mac, “Table 5 — Summary Consolidated
                                                                 F
18	   Fannie Mae, “Table 4: Summary of Condensed                Statements of Comprehensive Income,” Form
       Consolidated Results of Operations,” Form                 10-Q for the Quarterly Period Ended June 30,
       10-Q for the Quarterly Period Ended June 30,              2013, at 14. Accessed: August 12, 2013, at http://
       2013, at 16. Accessed: August 12, 2013, at www.           api40.10kwizard.com/cgi/convert/pdf/FMCC-
       fanniemae.com/resources/file/ir/pdf/quarterly-            20130807-10Q-20130630.pdf?ipage=9066647
       annual-results/2013/q22013.pdf.                           &xml=1&quest=1&rid=23&section=1&sequen
                                                                 ce=-1&pdf=1&dn=1.


                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013       119
25	   Id., “Benefit (Provision) for Credit Losses,” at 16.          for the Quarterly Period Ended June 30, 2013,
       Fannie Mae, “Comprehensive Income,” Form                      at 4. Accessed: August 19, 2013, at http://
       10-Q for the Quarterly Period Ended June 30,                  api40.10kwizard.com/cgi/convert/pdf/FMCC-
       2013, at 3. Accessed: August 19, 2013, at www.                20130807-10Q-20130630.pdf?ipage=9066647
       fanniemae.com/resources/file/ir/pdf/quarterly-                &xml=1&quest=1&rid=23&section=1&sequen
       annual-results/2013/q22013.pdf.                               ce=-1&pdf=1&dn=1. Freddie Mac, “Table 2 —
                                                                     Single-Family Credit Guarantee Portfolio Data by
26	   Freddie Mac, “Maintaining Sound Credit Quality                Year of Origination,” Form 10-Q for the Quarterly
       on the Loans We Purchase or Guarantee,” Form                  Period Ended June 30, 2012, at 5. Accessed:
       10-Q for the Quarterly Period Ended June 30,                  August 19, 2013, at www.sec.gov/Archives/
       2013, at 4. Accessed: August 19, 2013, at http://             edgar/data/1026214/000119312512339405/
       api40.10kwizard.com/cgi/convert/pdf/FMCC-                     d378248d10q.htm.
       20130807-10Q-20130630.pdf?ipage=9066647
       &xml=1&quest=1&rid=23&section=1&sequen                  30	    annie Mae, “Table 14: Single-Family Business
                                                                     F
       ce=-1&pdf=1&dn=1.                                             Results,” “Multifamily Business Results,” Form
                                                                     10-Q for the Quarterly Period Ended June 30,
27	   Id.                                                           2013, at 29, 30. Accessed: August 19, 2013,
                                                                     at www.fanniemae.com/resources/file/ir/pdf/
28	   Fannie Mae, “Executive Summary,” Form 10-Q                    quarterly-annual-results/2013/q22013.pdf.
       for the Quarterly Period Ended June 30, 2013,
       at 2. Accessed: August 19, 2013, at www.                31	    reddie Mac, “Glossary,” Form 10-Q for the
                                                                     F
       fanniemae.com/resources/file/ir/pdf/quarterly-                Quarterly Period Ended June 30, 2013, at
       annual-results/2013/q22013.pdf. Freddie Mac,                  190. Accessed: August 19, 2013, at http://
       “Maintaining Sound Credit Quality on the                      api40.10kwizard.com/cgi/convert/pdf/FMCC-
       Loans We Purchase or Guarantee,” Form 10-Q                    20130807-10Q-20130630.pdf?ipage=9066
       for the Quarterly Period Ended June 30, 2013,                 647&xml=1&quest=1&rid=23&section=1
       at 4. Accessed: August 19, 2013, at http://                   &sequence=-1&pdf=1&dn=1. Fannie Mae,
       api40.10kwizard.com/cgi/convert/pdf/FMCC-                     “Table 14: Single-Family Business Results,”
       20130807-10Q-20130630.pdf?ipage=9066647                       “Multifamily Business Results,” Form 10-Q for the
       &xml=1&quest=1&rid=23&section=1&sequen                        Quarterly Period Ended June 30, 2013, at 29, 30.
       ce=-1&pdf=1&dn=1.                                             Accessed: August 19, 2013, at www.fanniemae.
                                                                     com/resources/file/ir/pdf/quarterly-annual-
29	   Fannie Mae, “Table 34: Single-Family                          results/2013/q22013.pdf.
       Conventional Serious Delinquency Rate
       Concentration Analysis,” Form 10-Q for the              32	    ederal Housing Finance Agency Office of
                                                                     F
       Quarterly Period Ended June 30, 2013, at 62.                  Inspector General, “Preface,” FHFA’s Initiative
       Accessed: August 19, 2013, at www.fanniemae.                  to Reduce the Enterprises’ Dominant Position in
       com/resources/file/ir/pdf/quarterly-annual-                   the Housing Finance System by Raising Gradually
       results/2013/q22013.pdf. Freddie Mac,                         Their Guarantee Fees, EVL-2013-005, at 9 (July
       “Maintaining Sound Credit Quality on the                      16, 2013). Accessed: August 19, 2013, at www.
       Loans We Purchase or Guarantee,” Form 10-Q                    fhfaoig.gov/Content/Files/EVL-2013-005.pdf.


120          Federal Housing Finance Agency Office of Inspector General
33	   Fannie Mae, “Multifamily Business Results,”         39	    annie Mae, “Table 8: Fair Value Gains (Losses),
                                                                 F
       Form 10-Q for the Quarterly Period Ended June             Net,” Form 10-Q for the Quarterly Period Ended
       30, 2013, at 31, 32. Accessed: August 19, 2013,           June 30, 2013, at 21. Accessed: August 19,
       at www.fanniemae.com/resources/file/ir/pdf/               2013, at www.fanniemae.com/resources/file/ir/
       quarterly-annual-results/2013/q22013.pdf.                 pdf/quarterly-annual-results/2013/q22013.pdf.
                                                                 Freddie Mac, “Table 5 — Summary Consolidated
34	   Id., “Segment Reporting,” at 123, 124. Freddie            Statements of Comprehensive Income,” Form
       Mac, “Table 13 — Segment Earnings and Key                 10-Q for the Quarterly Period Ended June 30,
       Metrics — Single-Family Guarantee,” “Table                2013, at 14. Accessed: August 19, 2013, at http://
       15 — Segment Earnings and Key Metrics —                   api40.10kwizard.com/cgi/convert/pdf/FMCC-
       Multifamily,” Form 10-Q for the Quarterly Period          20130807-10Q-20130630.pdf?ipage=9066647
       Ended June 30, 2013, at 27, 32. Accessed: August          &xml=1&quest=1&rid=23&section=1&sequen
       19, 2013, at http://api40.10kwizard.com/cgi/              ce=-1&pdf=1&dn=1.
       convert/pdf/FMCC-20130807-10Q-20130630.
       pdf?ipage=9066647&xml=1&quest=1&rid=23&             40	    annie Mae, “Table 8: Fair Value Gains (Losses),
                                                                 F
       section=1&sequence=-1&pdf=1&dn=1.                         Net,” Form 10-Q for the Quarterly Period Ended
                                                                 June 30, 2013, at 21. Accessed: August 19,
35	   Freddie Mac, “Full-Year Net Income and                    2013, at www.fanniemae.com/resources/file/ir/
       Comprehensive Income (Loss),” Fourth                      pdf/quarterly-annual-results/2013/q22013.pdf.
       Quarter 2012 Financial Results Supplement,                Freddie Mac, “Derivative Gains (Losses),” Form
       at 4 (February 28, 2013). Accessed: July 29,              10-Q for the Quarterly Period Ended June 30,
       2013, at www.freddiemac.com/investors/er/pdf/             2013, at 18. Accessed: August 19, 2013, at http://
       supplement_4q12.pdf.                                      api40.10kwizard.com/cgi/convert/pdf/FMCC-
                                                                 20130807-10Q-20130630.pdf?ipage=9066647
36	   Standard & Poor’s Dow Jones Indices, S&P/                 &xml=1&quest=1&rid=23&section=1&sequen
       Case-Shiller 20-City Composite Home Price Index           ce=-1&pdf=1&dn=1.
       (July 30, 2013). Accessed: August 19, 2013,
       at http://us.spindices.com/indices/real-estate/     41	    ederal Housing Finance Agency Office of
                                                                 F
       sp-case-shiller-20-city-composite-home-price-             Inspector General, “Amendments to the PSPAs,”
       index (click on “Additional Info,” then click             Analysis of the 2012 Amendments to the Senior
       “Seasonally Adjusted Home Price Index Levels,”            Preferred Stock Purchase Agreements, WPR-
       then download the Excel file).                            2013-002, at 10, 11, 12 (March 20, 2013).
                                                                 Accessed: August 19, 2013, at www.fhfaoig.gov/
37	   Freddie Mac, “Quantitative and Qualitative                Content/Files/WPR-2013-002_2.pdf. Federal
       Disclosures About Market Risk,” Form 10-K for             Housing Finance Agency, “Table 2: Dividends
       the Fiscal Year Ended December 31, 2012, at 195.          on Enterprise Draws from Treasury,” Data as of
       Accessed: July 29, 2013, at www.freddiemac.com/           August 8, 2013 on Treasury and Federal Reserve
       investors/er/pdf/10k_022813.pdf.                          Purchase Programs for GSE and Mortgage-Related
                                                                 Securities, at 3. Accessed: August 20, 2013, at
                                                                 www.fhfa.gov/webfiles/25444/TSYSupport%20
38	   Id., “Derivative Instruments,” at 263.
                                                                 2013-08-08.pdf.


                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013      121
42	   Fannie Mae, “Net Worth,” Form 10-Q for the                 Purchase Programs for GSE and Mortgage-Related
       Quarterly Period Ended June 30, 2013, at 4.                Securities, at 4, 5, 6, 7, 8. Accessed: August
       Accessed: August 19, 2013, at www.fanniemae.               20, 2013, at www.fhfa.gov/webfiles/25444/
       com/resources/file/ir/pdf/quarterly-annual-                TSYSupport%202013-08-08.pdf.
       results/2013/q22013.pdf.
                                                            48	    iana Hancock and Wayne Passmore, Board
                                                                  D
43	   Freddie Mac, “Table 29 — Changes in Total                  of Governors of the Federal Reserve System,
       Equity (Deficit),” Form 10-Q for the Quarterly             “The Structure of the U.S. Secondary Mortgage
       Period Ended June 30, 2013, at 51. Accessed:               Market: Late-2008 through Early 2010,” Did
       August 19, 2013, at http://api40.10kwizard.                the Federal Reserve’s MBS Purchase Program Lower
       com/cgi/convert/pdf/FMCC-20130807-                         Mortgage Rates? Accessed: August 20, 2013, at
       10Q-20130630.pdf?ipage=9066647&xml                         www.federalreserve.gov/pubs/feds/2011/201101/
       =1&quest=1&rid=23&section=1&sequen                         index.html.
       ce=-1&pdf=1&dn=1.
                                                            49	    ederal Housing Finance Agency, “GSE
                                                                  F
44	   Federal Housing Finance Agency, “Table 1:                  Mortgage-Backed Securities Purchase Facility,”
       Quarterly Draws on Treasury Commitments                    Mortgage Market Note 10-1 (Update of Mortgage
       to Fannie Mae and Freddie Mac per the Senior               Market Notes 09-1 and 09-1A), at 5 (January 20,
       Preferred Stock Purchase Agreements,” “Table 2:            2010). Accessed: August 27, 2013, at www.fhfa.
       Dividends on Enterprise Draws from Treasury,”              gov/webfiles/15362/MMNote_10-1_revision_of_
       Data as of August 8, 2013 on Treasury and Federal          MMN_09-1A_01192010.pdf. Federal Housing
       Reserve Purchase Programs for GSE and Mortgage-            Finance Agency, “Table 4: Federal Reserve GSE
       Related Securities, at 2, 3. Accessed: August              and Ginnie Mae MBS Purchase Program,” “Table
       20, 2013, at www.fhfa.gov/webfiles/25444/                  5: Federal Reserve Purchases of GSE Debt,”
       TSYSupport%202013-08-08.pdf.                               Data as of August 8, 2013 on Treasury and Federal
                                                                  Reserve Purchase Programs for GSE and Mortgage-
45	   Id., “Table 2: Dividends on Enterprise Draws               Related Securities, at 5, 6, 7, 8. Accessed: August
       from Treasury,” at 3.                                      27, 2013, at www.fhfa.gov/webfiles/25444/
                                                                  TSYSupport%202013-08-08.pdf.
46	   Federal Housing Finance Agency, “Enterprises,”
       2012 Report to Congress, at iii (June 13, 2013).     50	    ederal Home Loan Banks Office of Finance,
                                                                  F
       Accessed: August 19, 2013, at www.fhfa.gov/                “Overview,” Combined Financial Report for the
       webfiles/25320/FHFA2012_AnnualReport-508.                  Quarterly Period Ended June 30, 2013, at 3.
       pdf.                                                       Accessed: August 16, 2013, at www.fhlb-of.com/
                                                                  ofweb_userWeb/resources/13Q2end.pdf.
47	   Federal Housing Finance Agency, “Table 3:
       Treasury Purchases of Freddie Mac and Fannie         51	   Id., “Background Information,” at F-8.
       Mae MBS,” “Table 4: Federal Reserve GSE and
       Ginnie Mae MBS Purchase Program,” “Table 5:          52	    ederal Home Loan Banks, Overview: The Federal
                                                                  F
       Federal Reserve Purchases of GSE Debt,” Data as            Home Loan Banks. Accessed: July 29, 2013, at
       of August 8, 2013 on Treasury and Federal Reserve          www.fhlbanks.com/overview_whyfhlb.htm.


122       Federal Housing Finance Agency Office of Inspector General
      Federal Home Loan Banks Office of Finance,                  Accessed: July 29, 2013, at www.fhfaoig.gov/
      “Business,” Combined Financial Report for the Year          Content/Files/Troubled%20Banks%20EVL-
      Ended December 31, 2011, at 2, 3. Accessed: July            2012-001.pdf.
      29, 2013, at www.fhlb-of.com/ofweb_userWeb/
      resources/11yrend.pdf.                                60	    ederal Home Loan Banks Office of Finance,
                                                                  F
                                                                  “Economy and Financial Markets,” “Financial
53	   Federal Home Loan Banks Office of Finance,                 Condition,” “Lower Average Balances,” Combined
       “Business,” Combined Financial Report for the Year         Financial Report for the Quarterly Period Ended
       Ended December 31, 2011, at 2. Accessed: July              June 30, 2013, at 4, 5, 19. Accessed: October
       29, 2013, at www.fhlb-of.com/ofweb_userWeb/                16, 2013, at www.fhlb-of.com/ofweb_userWeb/
       resources/11yrend.pdf.                                     resources/13Q2end.pdf.

54	   Federal Home Loan Banks Office of Finance,           61	    ederal Home Loan Banks Office of Finance,
                                                                  F
       “Business,” Combined Financial Report for the Year         “Net Income,” Combined Financial Report for the
       Ended December 31, 2012, at 3. Accessed: July              Quarterly Period Ended March 31, 2013, at 15.
       29, 2013, at www.fhlb-of.com/ofweb_userWeb/                Accessed: August 1, 2013, at www.fhlb-of.com/
       resources/12yrend.pdf.                                     ofweb_userWeb/resources/13Q1end.pdf.

55	   I d., “Table 6 - Membership by Type of Member,”      62	    ederal Home Loan Banks Office of Finance,
                                                                  F
       at 31.                                                     “Interest Rate Levels and Volatility,” Combined
                                                                  Financial Report for the Quarterly Period Ended
56	   Federal Home Loan Banks Office of Finance,                 June 30, 2013, at 5. Accessed: August 16,
       “Overview,” Combined Financial Report for the              2013, at www.fhlb-of.com/ofweb_userWeb/
       Quarterly Period Ended September 30, 2012, at              resources/13Q2end.pdf.
       3. Accessed: July 29, 2013, at www.fhlb-of.com/
       ofweb_userWeb/resources/12Q3end.pdf.                 63	   I d., “Interest Rate Levels and Volatility,”
                                                                   “Operating Results,” at 5, 6.
57	   Id.
                                                            64	   I d., “Table 15 - Changes in Net Income,”
58	   Id., at cover page.                                         “Combined Statement of Income,” at 15, F-2.


59	   The FHLBank System can borrow at favorable           65	   I d., “Operating Results,” “Combined Statement
       rates due to the perception in financial markets            of Income,” at 6, F-2.
       that the federal government will guarantee
       repayment of its debt even though such               66	   I d., “Combined Statement of Income,”
       a guarantee has not been made explicitly.                   “Operating Results,” at F-2, 6.
       This phenomenon is known as the “implicit
       guarantee.” See Federal Housing Finance Agency       67	    ederal Home Loan Banks Office of Finance,
                                                                  F
       Office of Inspector General, “Preface,” FHFA’s             “Note 11 - Derivatives and Hedging Activities,”
       Oversight of Troubled Federal Home Loan Banks,             Combined Financial Report for the Year Ended
       EVL-2012-001, at 6 (January 11, 2012).                     December 31, 2012, at F-44, F-45. Accessed:

                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013           123
      August 16, 2013, at www.fhlb-of.com/ofweb_                  at 1, 4 (April 30, 2013). Accessed: August
      userWeb/resources/12yrend.pdf.                              5, 2013, at www.fhfa.gov/webfiles/25144/
                                                                  WhitePaperProgressReport43013.
68	   Federal Home Loan Banks Office of Finance,                 pdf. Federal Housing Finance Agency,
       “Non-Interest Income,” Combined Financial                  “Introduction,” Building a New Infrastructure
       Report for the Quarterly Period Ended June 30,             for the Secondary Mortgage Market, at 4
       2013, at 20. Accessed: August 16, 2013, at www.            (October 4, 2012). Accessed: August 8,
       fhlb-of.com/ofweb_userWeb/resources/13Q2end.               2013, at www.fhfa.gov/webfiles/24572/
       pdf.                                                       FHFASecuritizationWhitePaper100412FINAL.
                                                                  pdf.
69	   Federal Home Loan Banks Office of Finance,
       “Selected Financial Data,” Combined Financial        73	    ederal Housing Finance Agency, FHFA
                                                                  F
       Report for the Year Ended December 31, 2011, at            Issues Update on Development of a Common
       34. Accessed: August 14, 2013, at www.fhlb-of.             Securitization Infrastructure (April 30, 2013).
       com/ofweb_userWeb/resources/11yrend.pdf.                   Accessed: August 5, 2013, at www.fhfa.gov/
       Federal Home Loan Banks Office of Finance,                 webfiles/25145/Progressreportrelease043013.pdf.
       “Selected Financial Data,” Combined Financial
       Report for the Quarterly Period Ended June 30,       74	    ederal Housing Finance Agency, Agencies Issue
                                                                  F
       2013, at 1. Accessed: August 14, 2013, at www.             Proposed Rule to Exempt Subset of Higher-Priced
       fhlb-of.com/ofweb_userWeb/resources/13Q2end.               Mortgage Loans from Appraisal Requirements,
       pdf.                                                       at 1 (July 10, 2013). Accessed: August 5,
                                                                  2013, at www.fhfa.gov/webfiles/25355/
70	   Federal Home Loan Banks Office of Finance,                 HigherPricedMortgages071013Final.pdf. Federal
       FHLBanks Satisfy REFCORP Obligations;                      Housing Finance Agency, Agencies Issue Final
       Launch Joint Capital Enhancement Agreement,                Rule on Appraisals for Higher-Priced Mortgage
       at 1 (August 8, 2011). Accessed: July 29, 2013,            Loans, at 1 (January 18, 2013). Accessed: August
       at www.fhlb-of.com/ofweb_userWeb/resources/                5, 2013, at www.fhfa.gov/webfiles/24893/
       PR_20110808_FHLBank_System_Capital_                        HRMPressRelease011813FINAL.pdf.
       Initiative_Launch.pdf.
                                                            75	    ederal Housing Finance Agency, FHFA Releases
                                                                  F
71	   Federal Home Loan Bank of Dallas, “What                    Fannie and Freddie Reports on Viability of Their
       Are the Potential Benefits of the Agreement?,”             Multifamily Businesses Without Government
       Joint Capital Enhancement Agreement Questions              Guarantees (May 3, 2013). Accessed: August
       and Answers, at 1 (March 1, 2011). Accessed:               5, 2013, at www.fhfa.gov/webfiles/25162/
       August 27, 2013, at www.fhlb.com/data/                     PRMF050313final.pdf.
       REFCORP_QA.pdf.
                                                            76	    annie Mae, “Major Competitors,” “Fannie
                                                                  F
72	    ederal Housing Finance Agency,
      F                                                           Mae’s Existing Multifamily Business Model,”
      “Introduction,” “Feedback on the White                      “Conclusion,” Analysis of the Viability of
      Paper Regarding the CSP,” A Progress Report                 Fannie Mae’s Multifamily Business Operating
      on the Common Securitization Infrastructure,                without a Government Guarantee - Response


124       Federal Housing Finance Agency Office of Inspector General
      to FHFA Scorecard Directive, at 48, 21, 76             83	    “Federal Housing Finance Oversight Board
                                                                   Id.,
      (December 17, 2012). Accessed: August                        Assessment,” at iv.
      5, 2013, at www.fhfa.gov/webfiles/25160/
      FNMMF2012ScorecardResponse.pdf.                        84	    “Report of Examinations of the Federal
                                                                   Id.,
                                                                   Home Loan Banks,” at 37-48.
77	   Freddie Mac, Freddie Mac Prices Transaction to
       Sell Off Residential Mortgage Credit Risk (July       85	   Id., “Office of Finance,” at 49.
       24, 2013). Accessed: August 5, 2013, at http://
       freddiemac.mwnewsroom.com/press-releases/             86	    .S. Senator Bob Corker, Issues & Legislation:
                                                                   U
       freddie-mac-prices-transaction-to-sell-off-residen-         Housing Finance Reform and Taxpayer
       otcqb-fmcc-1037019.                                         Protection Act. Accessed: August 5, 2013, at
                                                                   www.corker.senate.gov/public/index.cfm/
78	   Id.                                                         housing-finance-reform.

79	   Federal Housing Finance Agency, Statement             87	    .S. Senator Bob Corker, “Title 5: Wind
                                                                   U
       of FHFA Acting Director Edward J. DeMarco                   Down of Fannie Mae and Freddie Mac,” “Title
       on Freddie Mac Risk-Sharing Transaction                     3: Transfer of Power to FMIC from FHFA,”
       (July 24, 2013). Accessed: August 5,                        “Title 1: Establishment of the Federal Mortgage
       2013, at www.fhfa.gov/webfiles/25374/                       Insurance Corporation (FMIC),” Housing
       FinalFRECRTstatement072413.pdf.                             Finance Reform and Taxpayer Protection Act, at 1.
                                                                   Accessed: August 5, 2013, at www.corker.senate.
80	   Federal Housing Finance Agency, “Contract                   gov/public/_cache/files/f6951d82-1a9c-40d2-
       the Enterprises Dominant Presence in the                    9291-dcdd5c153cbe/06-25-13%20GSE%20
       Marketplace While Simplifying and Shrinking                 reform%20Summary.pdf.
       Certain Operations,” Conservatorship Strategic
       Plan: Performance Goals for 2013, at 2.               88	    “Title 1: Establishment of the Federal
                                                                   Id.,
       Accessed: August 15, 2013, at www.fhfa.gov/                 Mortgage Insurance Corporation (FMIC),” “Title
       webfiles/25023/2013EnterpriseScorecard3413.                 2: Authorities and Duties of the FMIC,” at 1.
       pdf.
                                                             89	    ommittee on Financial Services, Committee
                                                                   C
81	   Federal Housing Finance Agency, FHFA Releases               Leaders Announce PATH Act to End Taxpayer
       Fifth Annual Report to Congress; Report Details             Bailout and Create Sustainable Housing Finance
       Examinations of Fannie Mae, Freddie Mac, and                System (July 11, 2013). Accessed: August 5,
       12 Federal Home Loan Banks (June 13, 2013).                 2013, at http://financialservices.house.gov/news/
       Accessed: August 5, 2013, at www.fhfa.gov/                  documentsingle.aspx?DocumentID=342165.
       webfiles/25321/ReporttoCongress061313.pdf.
                                                             90	    ommittee on Financial Services, “Title I:
                                                                   C
82	   Federal Housing Finance Agency, “Rating,” 2012              Wind-Down of Fannie Mae and Freddie Mac,”
       Report to Congress, at 17, 23 (June 13, 2013).              Protecting American Taxpayers and Homeowners
       Accessed: August 5, 2013, at www.fhfa.gov/                  (PATH) Act – Section by Section Summary,
       webfiles/25320/FHFA2012_AnnualReport.pdf.                   at 1. Accessed: August 5, 2013, at http://

                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013          125
      financialservices.house.gov/uploadedfiles/bills-            Freddie Mac, at 1 (September 2, 2011). Accessed:
      113hr-pih-pathdd-ss.pdf.                                    August 5, 2013, at www.fhfa.gov/webfiles/22599/
                                                                  PLSLitigation_final_090211.pdf.
91	   Id., “Title III: Building a New Market Structure,”
       at 9.                                                98	   I n our last semiannual report, OIG summarized
                                                                   the enterprises’ history, the causes of their
92	   W
       hite House, Remarks by the President                       liquidity problems during the recent housing
      on Responsible Homeownership (August 6,                      finance crisis, and FHFA’s strategies for restoring
      2013). Accessed: August 8, 2013, at www.                     the enterprises’ financial stability. Against this
      whitehouse.gov/the-press-office/2013/08/06/                  backdrop, we then discussed the major proposals
      remarks-president-responsible-homeownership.                 to reform the nation’s housing finance system.


93	   W
       hite House, Fact Sheet: A Better Bargain            99	   Th e factors discussed herein derive from OIG’s
      for the Middle Class: Housing (August 5,                    audit, evaluative, investigative, and other efforts,
      2013). Accessed: August 8, 2013, at www.                    and thus, there may be factors—or attributes
      whitehouse.gov/the-press-office/2013/08/05/                 of factors—that are not discussed but are
      fact-sheet-better-bargain-middle-class-housing.             nonetheless important to a safe, stable, and liquid
                                                                  mortgage market. For example, strong oversight
94	   W
       hite House, Remarks by the President                      of capitalization is critical to a vibrant secondary
      on Responsible Homeownership (August 6,                     mortgage market, but it has been reported that
      2013). Accessed: August 8, 2013, at www.                    prior to the conservatorships, the enterprises
      whitehouse.gov/the-press-office/2013/08/06/                 were required to hold very little capital to protect
      remarks-president-responsible-homeownership.                against losses (i.e., 0.45% to back their guarantees
                                                                  of MBS and 2.5% to back the mortgages in
                                                                  their portfolios; this compared to bank and
95	   Federal Housing Finance Agency, FHFA
                                                                  thrift capital requirements of at least 4% of
       Announces Settlement with UBS, at 1 (July 25,
                                                                  mortgage assets). Further, shortly before the
       2013). Accessed: August 5, 2013, at www.fhfa.
                                                                  commencement of the conservatorships, FHFA’s
       gov/webfiles/25377/UBSSettlement072513.pdf.
                                                                  predecessor determined that the enterprises
                                                                  were adequately capitalized. See Financial Crisis
96	   Federal Housing Finance Agency v. UBS Americas
                                                                  Inquiry Commission, “Fannie Mae and Freddie
       Inc., Civil Complaint (S.D.N.Y.), at 5, 1, 3 (July
                                                                  Mac: ‘The Whole Army of Lobbyists,’” “2006:
       27, 2011). Accessed: August 5, 2013, at www.
                                                                  ‘Increase Our Penetration Into Subprime,’” The
       fhfa.gov/webfiles/21841/FHFAvUBSstamped.
                                                                  Financial Crisis Inquiry Report: Final Report of
       pdf.
                                                                  the National Commission on the Causes of the
                                                                  Financial and Economic Crisis in the United States,
97	   Federal Housing Finance Agency, FHFA                       at 39, 181 (January 2011). Accessed: September
       Announces Settlement with UBS, at 1 (July 25,              30, 2013, at http://fcic-static.law.stanford.edu/
       2013). Accessed: August 5, 2013, at www.fhfa.              cdn_media/fcic-reports/fcic_final_report_full.pdf.
       gov/webfiles/25377/UBSSettlement072513.                    It is not OIG’s intention to discount these other
       pdf. Federal Housing Finance Agency, FHFA                  factors or attributes; rather, OIG determined that
       Sues 17 Firms to Recover Losses to Fannie Mae and

126       Federal Housing Finance Agency Office of Inspector General
       it is preferable to limit our discussion to our work          Reforming%20America%27s%20Housing%20
       products, and we have not engaged in backward-                Finance%20Market.pdf.
       looking analyses of issues that may have led to the
       conservatorships.                                      105	    hite House, Fact Sheet: A Better Bargain
                                                                     W
                                                                     for the Middle Class: Housing (August 5,
100	   Government Accountability Office, “Letter,”                  2013). Accessed: August 8, 2013, at www.
        Fannie Mae and Freddie Mac: Analysis of Options              whitehouse.gov/the-press-office/2013/08/05/
        for Revising the Housing Enterprises’ Long-term              fact-sheet-better-bargain-middle-class-housing.
        Structures, GAO-09-782, at 2 (September 2009).
        Accessed: August 13, 2013, at www.gao.gov/            106	    ousing Finance Reform and Taxpayer
                                                                     H
        assets/300/295025.pdf.                                       Protection Act of 2013, S. 1217, 113th Congress.

101	   Federal Housing Finance Agency, “Conclusion,”         107	    .S. Senator Bob Corker, Banking Committee
                                                                     U
        The Conservatorships of Fannie Mae and Freddie               Senators Introduce Legislation to Modernize and
        Mac, Statement of Edward J. DeMarco, Acting                  Reform America’s Broken Housing Finance System
        Director, National Association of Federal Credit             (June 25, 2013). Accessed: August 13, 2013, at
        Unions Congressional Caucus, at 6 (September 13,             www.corker.senate.gov/public/index.cfm/2013/6/
        2012). Accessed: August 13, 2013, at www.fhfa.               banking-committee-senators-introduce-
        gov/webfiles/24489/2012_FHFA_-_NAFCU_                        legislation-to-modernize-and-reform-america-s-
        Speech_final.pdf.                                            broken-housing-finance-system.

102	   Dodd-Frank Wall Street Reform and Consumer            108	    rotecting American Taxpayers and Homeowners
                                                                     P
        Protection Act of 2010, Pub. L. 111-203, § 1001-             Act of 2013, H.R. 2767, 113th Congress.
        1100H, 111th Congress.
                                                              109	    ommittee on Financial Services, “Title I: Wind-
                                                                     C
103	   Consumer Financial Protection Bureau,                        Down of Fannie Mae and Freddie Mac,” “Title
        “Qualified Residential Mortgage Rulemaking,”                 III: Building a New Market Structure,” “Title
        Ability-to-Repay and Qualified Mortgage Standards            II: FHA Reform,” Protecting American Taxpayers
        under the Truth in Lending Act (Regulation Z),               and Homeowners (PATH) Act – Section by Section
        RIN 3170-AA17, at 33 (January 30, 2013).                     Summary, at 2, 9. Accessed: August 13, 2013, at
        Accessed: August 13, 2013, at http://files.                  http://financialservices.house.gov/uploadedfiles/
        consumerfinance.gov/f/201301_cfpb_final-                     bills-113hr-pih-pathdd-ss.pdf
        rule_ability-to-repay.pdf.
                                                              110	    epartment of the Treasury, Department of
                                                                     D
104	    epartment of the Treasury, Department
       D                                                             Housing and Urban Development, “Options for
       of Housing and Urban Development,                             the Long-Term Structure of Housing Finance,”
       “Introduction,” Reforming America’s Housing                   Reforming America’s Housing Finance Market, A
       Finance Market, A Report to Congress, at 1                    Report to Congress, at 27-30 (February 2011).
       (February 2011). Accessed: August 13, 2013,                   Accessed: August 13, 2013, at www.treasury.
       at www.treasury.gov/initiatives/Documents/                    gov/initiatives/documents/reforming%20



                                    Semiannual Report to the Congress • April 1, 2013–September 30, 2013         127
       america’s%20housing%20finance%20market.                      13, 2013, at www.federalreserve.gov/pubs/
       pdf. John Griffith, Center for American Progress,            feds/2010/201046/201046pap.pdf. Karen Dynan
       The $5 Trillion Question: What Should We Do                  and Ted Gayer, Brookings Institution, “Pricing
       with Fannie Mae and Freddie Mac? (August                     the Credit Guarantee,” The Government’s Role
       2012). Accessed: August 13, 2013, at www.                    in the Housing Finance System: Where Do We Go
       americanprogress.org/wp-content/uploads/                     from Here?, at 19 (April 14, 2011). Accessed:
       issues/2012/08/pdf/gsereformmatrix.pdf.                      August 13, 2013, at www.brookings.edu/
                                                                    events/2011/02/~/media/Events/2011/2/11%20
111	   See, e.g., GSE Bailout Elimination and Taxpayer             mortgage%20market/0211_housing_finance_
        Protection Act of 2011, H.R. 1182, 112th                    dynan_gayer.PDF. David Scharfstein and Adi
        Congress.                                                   Sunderam, Mossavar-Rahmani Center for
                                                                    Business and Government, Harvard Kennedy
112	   See, e.g., Secondary Market Facility for                    School, “Introduction,” The Economics of Housing
        Residential Mortgages Act of 2011, H.R. 2413,               Finance Reform, RPP-2011-07, at 3 (August
        112th Congress.                                             2011). Accessed: August 13, 2013, at www.hks.
                                                                    harvard.edu/m-rcbg/rpp/Working%20papers/
                                                                    RPP_2011_07_Scharfstein_Sunderam.pdf.
113	   See, e.g., Housing Finance Reform Act of 2011,
        H.R. 1859, 112th Congress.
                                                             118	    ederal Housing Finance Agency Office of
                                                                    F
                                                                    Inspector General, “The Financial Crisis and
114	   See, e.g., Residential Mortgage Market
                                                                    Its Effect on the Enterprises,” Fannie Mae
        Privatization and Standardization Act of 2011, S.
                                                                    and Freddie Mac: Where the Taxpayers’ Money
        1834, 112th Congress. GSE Bailout Elimination
                                                                    Went, WPR-2012-02, at 10 (May 24, 2012).
        and Taxpayer Protection Act of 2011, H.R. 1182,
                                                                    Accessed: August 13, 2013, at http://fhfaoig.
        112th Congress. Mortgage Finance Act of 2011,
                                                                    gov/Content/Files/FannieMaeandFreddieMac-
        S. 1963, 112th Congress.
                                                                    WheretheTaxpayersMoneyWent.pdf.

115	   See, e.g., Secondary Market Facility for
                                                             119	    ederal Housing Finance Agency Office of
                                                                    F
        Residential Mortgages Act of 2011, H.R. 2413,
        112th Congress.                                             Inspector General, “Fannie Mae and Freddie
                                                                    Mac: 2000 ‒ 2008,” White Paper: FHFA-OIG’s
                                                                    Current Assessment of FHFA’s Conservatorships of
116	   See, e.g., N. Eric Weiss, Congressional Research
                                                                    Fannie Mae and Freddie Mac, WPR-2012-001, at
        Service, “Broadly Focused Proposed Legislation,”
                                                                    10 (March 28, 2012). Accessed: August 13, 2013,
        Proposals to Reform Fannie Mae and Freddie Mac
                                                                    at www.fhfaoig.gov/Content/Files/WPR-2012-
        in the 112th Congress, at 13 (July 25, 2011).
                                                                    001.pdf.

117	   See, e.g., Diana Hancock and Wayne Passmore,
                                                             120	    ederal Housing Finance Agency Office of
                                                                    F
        Board of Governors of the Federal Reserve
                                                                    Inspector General, “The Enterprises and Ginnie
        System, “Our Proposal,” An Analysis of
                                                                    Mae Have Dominated MBS Issuances Since
        Government Guarantees and the Functioning
                                                                    the Collapse of the PLMBS Market,” FHFA’s
        of Asset-Backed Securities Markets, 2010-46, at
                                                                    Initiative to Reduce the Enterprises’ Dominant
        21-24 (September 7, 2010). Accessed: August

128        Federal Housing Finance Agency Office of Inspector General
       Position in the Housing Finance System by Raising    124	   Id.
       Gradually Their Guarantee Fees, EVL-2013-
       005, at 15 (July 16, 2013). Accessed: August         125	    ederal Housing Finance Agency Office of
                                                                   F
       13, 2013, at http://fhfaoig.gov/Content/Files/              Inspector General, “Variances from Underwriting
       EVL-2013-005_2.pdf. Federal Housing Finance                 Standards,” FHFA’s Oversight of Fannie Mae’s
       Agency Office of Inspector General, “Fannie                 Single-Family Underwriting Standards, AUD-
       Mae and Freddie Mac: 2000 ‒ 2008,” White                    2012-003, at 4 (March 22, 2012). Accessed:
       Paper: FHFA-OIG’s Current Assessment of FHFA’s              August 13, 2013, at http://fhfaoig.gov/Content/
       Conservatorships of Fannie Mae and Freddie                  Files/AUD-2012-003_1.pdf.
       Mac, WPR-2012-001, at 10 (March 28, 2012).
       Accessed: August 13, 2013, at www.fhfaoig.gov/       126	    ederal Housing Finance Agency Office of
                                                                   F
       Content/Files/WPR-2012-001.pdf.                             Inspector General, “The Crisis,” Fannie Mae
                                                                   and Freddie Mac: Where the Taxpayers’ Money
121	   FHFA’s former Director told GAO that “the                  Went, WPR-2012-02, at 10 (May 24, 2012).
        enterprises’ primary motivation in purchasing              Accessed: September 20, 2013, at http://fhfaoig.
        such assets was to recapture their share of the            gov/Content/Files/FannieMaeandFreddieMac-
        mortgage market, which declined substantially              WheretheTaxpayersMoneyWent.pdf.
        from 2004 through 2007 as the ‘nontraditional’
        (for example, subprime) mortgage market rapidly     127	    ederal Housing Finance Agency Office of
                                                                   F
        increased in size.” Government Accountability              Inspector General, “Fannie Mae and Freddie
        Office, “The Enterprises Had a Mixed Record on             Mac: 2000 ‒ 2008,” White Paper: FHFA-OIG’s
        Achieving Housing Mission Objectives, and Risk-            Current Assessment of FHFA’s Conservatorships of
        Management Deficiencies Compromised Their                  Fannie Mae and Freddie Mac, WPR-2012-001, at
        Safety and Soundness,” Fannie Mae and Freddie              10 (March 28, 2012). Accessed: August 13, 2013,
        Mac: Analysis of Options for Revising the Housing          at www.fhfaoig.gov/Content/Files/WPR-2012-
        Enterprises’ Long-term Structures, GAO-09-782, at          001.pdf.
        27 (September 2009). Accessed: August 13, 2013,
        at www.gao.gov/assets/300/295025.pdf.               128	    ederal Housing Finance Agency, FHFA Sues 17
                                                                   F
                                                                   Firms to Recover Losses to Fannie Mae and Freddie
122	   Federal Housing Finance Agency Office of                   Mac (September 2, 2011). Accessed: August
        Inspector General, “Fannie Mae and Freddie                 13, 2013, at www.fhfa.gov/webfiles/22599/
        Mac: 2000 ‒ 2008,” White Paper: FHFA-OIG’s                 PLSLitigation_final_090211.pdf.
        Current Assessment of FHFA’s Conservatorships of
        Fannie Mae and Freddie Mac, WPR-2012-001, at        129	   I d. Federal Housing Finance Agency v. UBS
        9 (March 28, 2012). Accessed: August 13, 2013,              Americas Inc., Civil Complaint (S.D.N.Y.),
        at www.fhfaoig.gov/Content/Files/WPR-2012-                  at 3 (July 27, 2011). Accessed: August 13,
        001.pdf.                                                    2013, at www.fhfa.gov/webfiles/21841/
                                                                    FHFAvUBSstamped.pdf.
123	   Id., “Fannie Mae and Freddie Mac: 2000 ‒
        2008,” at 9, 10.                                    130	    ederal Housing Finance Agency Office of
                                                                   F
                                                                   Inspector General, “Underwriting Standards,”

                                   Semiannual Report to the Congress • April 1, 2013–September 30, 2013          129
       “Variances from Underwriting Standards,”              137	   I d., “Enterprises’ Relaxed Multifamily
       FHFA’s Oversight of Fannie Mae’s Single-Family                Underwriting Standards,” at 9, 10.
       Underwriting Standards, AUD-2012-003, at 3,
       4 (March 22, 2012). Accessed: June 17, 2013,          138	   Id.
       at www.fhfaoig.gov/Content/Files/AUD-2012-
       003_0.pdf.                                            139	   I d., “Enterprises’ Relaxed Multifamily
                                                                     Underwriting Standards,” at 10.
131	   Id., “Variances from Underwriting Standards,” at
        4, 6.                                                140	   Id.

132	   I d., “Appendix A: FHFA’s Comments on Findings       141	    overnment Accountability Office,
                                                                    G
        and Recommendations,” at 23.                                “Background,” “Enterprises’ Purchased
                                                                    Multifamily Loans Have Performed Relatively
133	   Federal Housing Finance Agency Office                       Well, but Regulators Identified Issues with Credit
        of Inspector General, “Enterprises’ Role in                 Risk Management,” Mortgage Financing: Fannie
        Primary and Secondary Residential Mortgage                  Mae and Freddie Mac’s Multifamily Housing
        Markets,” FHFA’s Oversight of the Asset Quality             Activities Have Increased, GAO-12-849, at 7, 65
        of Multifamily Housing Loans Financed by Fannie             (September 2012). Accessed: August 19, 2013, at
        Mae and Freddie Mac, AUD-2013-004, at 6                     www.gao.gov/assets/650/647800.pdf.
        (February 21, 2013). Accessed: June 17, 2013,
        at www.fhfaoig.gov/Content/Files/AUD-2013-           142	    ederal Housing Finance Agency Office of
                                                                    F
        004_2.pdf.                                                  Inspector General, “Enterprises’ Relaxed
                                                                    Multifamily Underwriting Standards,” FHFA’s
134	   I d., “Multifamily Housing Loan Market,”                    Oversight of the Asset Quality of Multifamily
        “Enterprises’ Presence in the Multifamily Loan              Housing Loans Financed by Fannie Mae and
        Market,” at 7.                                              Freddie Mac, AUD-2013-004, at 10, also see
                                                                    footnote 12 at 10 (February 21, 2013). Accessed:
135	   Board of Governors of the Federal Reserve                   June 17, 2013, at www.fhfaoig.gov/Content/Files/
        System, Mortgage Debt Outstanding (March                    AUD-2013-004_2.pdf.
        2013). Accessed: June 18, 2013, at www.
        federalreserve.gov/econresdata/releases/             143	    annie Mae, Multifamily. Accessed: August
                                                                    F
        mortoutstand/mortoutstand20130331.htm.                      19, 2013, at www.fanniemae.com/portal/
                                                                    funding-the-market/mbs/multifamily/. Fannie
136	   Federal Housing Finance Agency Office of                    Mae, “Comparison of Multifamily and Single-
        Inspector General, “Enterprises’ Presence in the            Family Financing Models,” Analysis of the
        Multifamily Loan Market,” FHFA’s Oversight of               Viability of Fannie Mae’s Multifamily Business
        the Asset Quality of Multifamily Housing Loans              Operating without a Government Guarantee
        Financed by Fannie Mae and Freddie Mac, AUD-                - Response to FHFA Scorecard Directive, at
        2013-004, at 9 (February 21, 2013). Accessed:               20 (December 17, 2012). Accessed: August
        June 17, 2013, at www.fhfaoig.gov/Content/Files/            19, 2013, at www.fhfa.gov/webfiles/25160/
        AUD-2013-004_2.pdf.                                         FNMMF2012ScorecardResponse.pdf.

130        Federal Housing Finance Agency Office of Inspector General
144	   Fannie Mae, “Comparison of Multifamily and                  FHFA-OIG Found,” FHFA’s Oversight of Fannie
        Single-Family Financing Models,” Analysis of                Mae’s Default-Related Legal Services, AUD-2011-
        the Viability of Fannie Mae’s Multifamily Business          004, at 13, 2 (September 30, 2011). Accessed:
        Operating without a Government Guarantee                    June 17, 2013, at www.fhfaoig.gov/Content/Files/
        - Response to FHFA Scorecard Directive, at                  AUD-2011-004.pdf.
        20 (December 17, 2012). Accessed: August
        19, 2013, at www.fhfa.gov/webfiles/25160/            148	    ederal Housing Finance Agency Office of
                                                                    F
        FNMMF2012ScorecardResponse.pdf. Federal                     Inspector General, Overview of the Risks and
        Housing Finance Agency Office of Inspector                  Challenges the Enterprises Face in Managing Their
        General, “Enterprises’ Role in Primary and                  Inventories of Foreclosed Properties, WPR-2012-
        Secondary Residential Mortgage Markets,”                    003 (June 14, 2012). Accessed: June 17, 2013, at
        “Sampling Methodology for the Asset Quality                 www.fhfaoig.gov/Content/Files/WPR-2012-003.
        Examinations,” FHFA’s Oversight of the Asset                pdf. Federal Housing Finance Agency Office
        Quality of Multifamily Housing Loans Financed by            of Inspector General, FHFA’s Supervisory Risk
        Fannie Mae and Freddie Mac, AUD-2013-004,                   Assessment for Single-Family Real Estate Owned,
        at 6, 14 (February 21, 2013). Accessed: June 17,            AUD-2012-005 (July 19, 2012). Accessed: June
        2013, at www.fhfaoig.gov/Content/Files/AUD-                 17, 2013, at www.fhfaoig.gov/Content/Files/
        2013-004_2.pdf.                                             AUD-2012-005_2.pdf.

145	   Freddie Mac, “The Underwriting and Credit            149	    ederal Housing Finance Agency Office of
                                                                    F
        Approval Process,” Freddie Mac Multifamily                  Inspector General, “Summary,” Overview of
        Securitization, at 15 (August 2013). Accessed:              the Risks and Challenges the Enterprises Face in
        August 27, 2013, at www.freddiemac.com/                     Managing Their Inventories of Foreclosed Properties,
        multifamily/pdf/mf_securitization_investor-                 WPR-2012-003, at 2 (June 14, 2012). Accessed:
        presentation.pdf.                                           June 17, 2013, at www.fhfaoig.gov/Content/
                                                                    Files/WPR-2012-003.pdf. Federal Housing
146	   Fannie Mae, “Comparison of Multifamily and                  Finance Agency, “Fannie Mae Single-Family Book
        Single-Family Financing Models,” Analysis of                Profile - As of December 31, 2012,” “Freddie
        the Viability of Fannie Mae’s Multifamily Business          Mac Single-Family Book Profile - As of December
        Operating without a Government Guarantee                    31, 2012,” Foreclosure Prevention Report, Fourth
        - Response to FHFA Scorecard Directive, at                  Quarter 2012: FHFA Federal Property Manager’s
        20 (December 17, 2012). Accessed: August                    Report, at 42, 43. Accessed: June 18, 2013, at
        19, 2013, at www.fhfa.gov/webfiles/25160/                   www.fhfa.gov/webfiles/25061/4q12fprfinal.pdf.
        FNMMF2012ScorecardResponse.pdf.
                                                                    Properties securing such severely delinquent
147	   FHFA’s predecessor agency was the Office of                 mortgages are known as the shadow inventory
        Federal Housing Enterprise Oversight.                       because, although they do not belong to the
                                                                    enterprises yet, they are likely to become REO
        ederal Housing Finance Agency Office of
       F                                                            as the enterprises’ servicers foreclose on them.
       Inspector General, “2006 Report to Fannie                    Further, counting only mortgages that have not
       Mae of Foreclosure Abuses in Florida,” “What                 been paid for over a year (over 504,000), the


                                     Semiannual Report to the Congress • April 1, 2013–September 30, 2013         131
       enterprises still face tripling their 2012 inventory          which the loan is a part) and Fannie Mae’s
       (nearly 155,000).                                             guarantee fee (which varies). Consider the case
                                                                     of a particular loan with a 6% interest rate, a
150	   Federal Housing Finance Agency Office of                     guarantee fee of 20 basis points, and an MBS
        Inspector General, “Enterprises’ REO Risks,”                 pass-through of 5.5%. To calculate the net
        FHFA’s Supervisory Risk Assessment for Single-               servicing fee, Fannie Mae would take the yield
        Family Real Estate Owned, AUD-2012-005, at                   of the loan (6%) and subtract: (1) the yield of
        3, 5, 6 (July 19, 2012). Accessed: June 17, 2013,            the security (5.5%), (2) the guarantee fee (20
        at www.fhfaoig.gov/Content/Files/AUD-2012-                   basis points), and (3) the minimum service fee
        005_2.pdf.                                                   (25 basis points). The remaining sum (5 basis
                                                                     points) would then be added to the 25 basis
151	   I d., “FHFA’s Supervision of Enterprises’ REO                points minimum net service fee. Thus, in this
        Risk,” at 9.                                                 case, the annual fee that a servicer would claim
                                                                     for this particular loan would be 30 basis points.
                                                                     Fannie Mae’s service fees are not negotiated
152	   Fannie Mae, “Table 20: Single-Family Credit
                                                                     but are calculated based on this fixed formula;
        Loss Sensitivity,” Form 10-K for the Fiscal Year
                                                                     a standard servicer’s ability to make a profit
        Ended December 31, 2012, at 88. Accessed:
                                                                     thus will vary with its ability to economize on
        August 14, 2013, at www.sec.gov/Archives/
                                                                     servicing activities. See Federal Housing Finance
        edgar/data/310522/000031052213000065/
                                                                     Agency Office of Inspector General, “Mortgage
        fanniemae201210k.htm. Freddie Mac,
                                                                     Servicing,” Evaluation of FHFA’s Oversight of
        “Table 62 – Single-Family Credit Loss
                                                                     Fannie Mae’s Transfer of Mortgage Servicing Rights
        Sensitivity,” Form 10-K for the Fiscal Year
                                                                     from Bank of America to High Touch Servicers,
        Ended December 31, 2012, at 164. Accessed:
                                                                     EVL-2012-008, at 9 (September 18, 2012).
        August 14, 2013, at www.sec.gov/Archives/
                                                                     Accessed: June 17, 2013, at www.fhfaoig.gov/
        edgar/data/1026214/000119312513084154/
                                                                     Content/Files/EVL-2012-008.pdf.
        d477952d10k.htm.

                                                              155	    ederal Housing Finance Agency Office of
                                                                     F
153	   Federal Housing Finance Agency Office of
        Inspector General, “Potential Limitations in the             Inspector General, “Potential Limitations in the
                                                                     Standard Servicing Arrangement,” Evaluation
        Standard Servicing Arrangement,” Evaluation
                                                                     of FHFA’s Oversight of Fannie Mae’s Transfer of
        of FHFA’s Oversight of Fannie Mae’s Transfer of
                                                                     Mortgage Servicing Rights from Bank of America
        Mortgage Servicing Rights from Bank of America
                                                                     to High Touch Servicers, EVL-2012-008, at 12
        to High Touch Servicers, EVL-2012-008, at 12
                                                                     (September 18, 2012). Accessed: June 17, 2013,
        (September 18, 2012). Accessed: June 17, 2013,
                                                                     at www.fhfaoig.gov/Content/Files/EVL-2012-
        at www.fhfaoig.gov/Content/Files/EVL-2012-
                                                                     008.pdf.
        008.pdf.

                                                              156	   I d., “The High Touch Servicing Advantage,”
154	   The net servicing fee for a loan may exceed 25
                                                                      “Potential Limitations in the Standard Servicing
        basis points (each = 1/100th of 1%), depending
                                                                      Arrangement,” at 12.
        on a number of factors, such as MBS pass-
        through (the yield on the particular MBS of


132        Federal Housing Finance Agency Office of Inspector General
157	   Id., “Mortgage Servicing,” at 9.                             Mae and Freddie Mac Business Decisions, AUD-
                                                                     2012-008, at At a Glance page (September 27,
158	   Id., “The High Touch Servicing Advantage,”                   2012). Accessed: May 30, 2013, at www.fhfaoig.
        “Findings,” at 12, 13, 27.                                   gov/Content/Files/AUD-2012-008_2.pdf.


159	   Federal Housing Finance Agency Office of              164	   I d., “FHFA Sometimes Relies upon Information
        Inspector General, “Preface,” Evaluation of                   Provided by the Enterprises Without
        Whether FHFA Has Sufficient Capacity to Examine               Independently Verifying It or Performing a
        the GSEs, EVL-2011-005, at 7 (September 23,                   Business Case Analysis,” at 21.
        2011). Accessed: August 15, 2013, at www.
        fhfaoig.gov/Content/Files/EVL-2011-005.pdf.           165	    ederal Housing Finance Agency Office of
                                                                     F
                                                                     Inspector General, “What FHFA-OIG Found,”
160	   Federal Housing Finance Agency Office of                     “Chronology of Key Events and Associated
        Inspector General, “Findings,” Federal Housing               Analysis,” Evaluation of the Federal Housing
        Finance Agency’s Exit Strategy and Planning Process          Finance Agency’s Oversight of Freddie Mac’s
        for the Enterprises’ Structural Reform, EVL-2011-            Repurchase Settlement with Bank of America, EVL-
        001, at 12 (March 31, 2011). Accessed: May                   2011-006, at 3, 18, 15 (September 27, 2011).
        29, 2013, at www.fhfaoig.gov/Content/Files/                  Accessed: August 15, 2013, at www.fhfaoig.gov/
        EVL%20Exit%20Strategy%20-%20DrRpt%20                         Content/Files/EVL-2011-006.pdf.
        03302011-final%2C%20signed.pdf.
                                                              166	   I d., “Chronology of Key Events and Associated
161	   Federal Housing Finance Agency Office of                      Analysis,” at 15, 25, 26, 16.
        Inspector General, “Preface,” “What FHFA-OIG
        Found,” “Appendix A: FHFA’s Comments on               167	   I d., “Chronology of Key Events and Associated
        Findings and Recommendations,” Evaluation of                  Analysis,” at 19, 20.
        Whether FHFA Has Sufficient Capacity to Examine
        the GSEs, EVL-2011-005, at 7, 2, 31 (September        168	   I d., “Chronology of Key Events and Associated
        23, 2011). Accessed: May 29, 2013, at www.                    Analysis,” “What FHFA-OIG Found,” at 22, 3.
        fhfaoig.gov/Content/Files/EVL-2011-005.pdf.
                                                              169	    ederal Housing Finance Agency Office of
                                                                     F
162	   Federal Housing Finance Agency Office of                     Inspector General, “What FHFA-OIG Found,”
        Inspector General, “What FHFA-OIG Found,”                    “Revised Loan Review Methodology,” Follow-
        FHFA’s Oversight of Fannie Mae’s Single-Family               up on Freddie Mac’s Loan Repurchase Process,
        Underwriting Standards, AUD-2012-003, at At                  EVL-2012-007, at 2, 13 (September 13, 2012).
        a Glance page (March 22, 2012). Accessed: May                Accessed: May 30, 2013, at www.fhfaoig.gov/
        30, 2013, at www.fhfaoig.gov/Content/Files/                  Content/Files/EVL-2012-007.pdf.
        AUD-2012-003_0.pdf.
                                                              170	    ederal Housing Finance Agency Office of
                                                                     F
163	   Federal Housing Finance Agency Office of                     Inspector General, “At a Glance,” Evaluation of
        Inspector General, “What FHFA-OIG Found,”                    FHFA’s Oversight of Fannie Mae’s Management of
        FHFA’s Conservator Approval Process for Fannie               Operational Risk, EVL-2011-004, at 2 (September

                                     Semiannual Report to the Congress • April 1, 2013–September 30, 2013        133
       23, 2011). Accessed: May 30, 2013, at www.            178	    ederal Housing Finance Agency, “Overview and
                                                                    F
       fhfaoig.gov/Content/Files/EVL-2011-004.pdf.                  Eligibility of the Home Affordable Refinance
                                                                    Program (HARP),” Refinance Report, March 2013,
171	   Id., “Findings,” at 19, 20.                                 at 1. Accessed: August 15, 2013, at www.fhfa.
                                                                    gov/webfiles/25318/March2013RefinanceReport.
172	   Federal Housing Finance Agency Office of                    pdf. Federal Housing Finance Agency,
        Inspector General, “Why FHFA-OIG Did                        Refinance Volume Remains High in March
        This Evaluation,” FHFA’s Oversight of Troubled              (June 12, 2013). Accessed: July 25,
        Federal Home Loan Banks, EVL-2012-001, at 2                 2013, at www.fhfa.gov/webfiles/25319/
        (January 11, 2012). Accessed: May 30, 2013, at              March2013Refinancerelease061213.pdf.
        www.fhfaoig.gov/Content/Files/Troubled%20
        Banks%20EVL-2012-001.pdf.                            179	   Federal Housing Finance Agency Office of
                                                                     Inspector General, “At a Glance,” “Overview of
173	   Id., “At a Glance,” at 2.                                    Treasury’s MHA Programs,” Evaluation of FHFA’s
                                                                     Role in Negotiating Fannie Mae’s and Freddie
                                                                     Mac’s Responsibilities in Treasury’s Making Home
174	   Housing and Economic Recovery Act of 2008,
                                                                     Affordable Program, EVL-2011-003, at 2, 10
        Pub. L. 110-289, 110th Congress. Emergency
                                                                     (August 12, 2011). Accessed: June 4, 2013, at
        Economic Stabilization Act of 2008, Pub. L. 110-
                                                                     www.fhfaoig.gov/Content/Files/EVL-2011-003.
        343, 110th Congress.
                                                                     pdf.

175	   Federal Housing Finance Agency, About FHFA.
                                                             180	   Federal Housing Finance Agency, “First Quarter
        Accessed: August 15, 2013, at www.fhfa.gov/
                                                                     2013 Highlights,” Foreclosure Prevention
        Default.aspx?Page=4.
                                                                     Report, First Quarter 2013: FHFA Federal
                                                                     Property Manager’s Report, at 3. Accessed: July
176	   Federal Housing Finance Agency Office
                                                                     25, 2013, at www.fhfa.gov/webfiles/25340/
        of Inspector General, “Conservatorships
                                                                     foreclosurePreventionReport1q2013FINAL.pdf.
        Established,” White Paper: FHFA-OIG’s Current
        Assessment of FHFA’s Conservatorships of Fannie
        Mae and Freddie Mac, WPR-2012-001, at 12             181	   Federal Housing Finance Agency Office of
                                                                     Inspector General, “At a Glance,” Evaluation
        (March 28, 2012). Accessed: August 13, 2013,
                                                                     of FHFA’s Role in Negotiating Fannie Mae’s and
        at www.fhfaoig.gov/Content/Files/WPR-2012-
                                                                     Freddie Mac’s Responsibilities in Treasury’s Making
        001.pdf. Federal Housing Finance Agency,
                                                                     Home Affordable Program, EVL-2011-003, at 2
        “Challenges Facing the Enterprises,” FHFA’s First
                                                                     (August 12, 2011). Accessed: June 4, 2013, at
        Anniversary and Challenges Ahead, Statement of
                                                                     www.fhfaoig.gov/Content/Files/EVL-2011-003.
        Director James B. Lockhart, National Press Club,
                                                                     pdf.
        at 12 (July 30, 2009). Accessed: August 15,
        2013, at www.fhfa.gov/webfiles/14715/%20
        FHFA1stAnnSpeechandPPT73009.pdf.                     182	   Id.


177	   Emergency Economic Stabilization Act of 2008,        183	   Id., “What FHFA-OIG Found,” at 2.
        Pub. L. 110-343, 110th Congress, § 110.

134        Federal Housing Finance Agency Office of Inspector General
184	   Federal Housing Finance Agency, “A Reduced             190	    epartment of the Treasury, Assistant Secretary
                                                                      D
        Ability but Continued Willingness to Pay,”                    for Financial Institutions Michael S. Barr Written
        Review of Options Available for Underwater                    Testimony before the House Financial Services
        Borrowers and Principal Forgiveness, at 6. Accessed:          Committee, Subcommittee on Housing and
        June 13, 2013, at www.fhfa.gov/webfiles/24108/                Community Opportunity on Stabilizing the Housing
        PF_FHFApaper73112.pdf.                                        Market (September 9, 2009). Accessed: June 14,
                                                                      2013, at www.treasury.gov/press-center/press-
185	   Making Home Affordable Program, “Step                         releases/Pages/tg280.aspx.
        4—Principal Forbearance,” Handbook for
        Servicers of Non-GSE Mortgages, Version 4.1, at        191	    aking Home Affordable Program, “Net Present
                                                                      M
        106 (December 13, 2012). Accessed: June 13,                   Value of Modification,” “The Base NPV Model,”
        2013, at www.makinghomeaffordable.gov/for-                    Home Affordable Modification Program Base Net
        partners/understanding-guidelines/Documents/                  Present Value (NPV) Model Specifications, at 2,
        mhahandbook_41.pdf.                                           3 (June 11, 2009). Accessed: June 14, 2013, at
                                                                      www.hmpadmin.com/portal/programs/docs/
186	   Mitchell Remy and Damien Moore,                               hamp_servicer/npvoverview.pdf.
        Congressional Budget Office, “Summary,”
        Options for Principal Forgiveness in Mortgages         192	    aking Home Affordable Program,
                                                                      M
        Involving Fannie Mae and Freddie Mac, Working                 “Background,” Home Affordable Modification
        Paper 2013-02, at 1 (May 2013). Accessed: June                Program – Modification of Loans with Principal
        13, 2013, at www.cbo.gov/sites/default/files/                 Reduction Alternative, Supplemental Directive
        cbofiles/attachments/44114_WorkingPaper-                      10-05, at 1 (June 3, 2010). Accessed: June 14,
        OptionsPrincipalForgivenesl.pdf.                              2013, at www.hmpadmin.com/portal/programs/
                                                                      docs/hamp_servicer/sd1005.pdf. Making
187	   Department of the Treasury, Obama                             Home Affordable Program, Home Affordable
        Administration Extends Application Deadline for               Modification Program Modification of Loans with
        the Making Home Affordable Program (May 30,                   Principal Reduction Alternative (PRA), SD 10-05,
        2013). Accessed: June 14, 2013, at www.treasury.              at 1 (June 3, 2010). Accessed: June 14, 2013,
        gov/press-center/press-releases/Pages/jl1959.aspx.            at www.hmpadmin.com/portal/programs/docs/
                                                                      hamp_servicer/praoverviewnongse.pdf.
188	   Making Home Affordable Program, “Foreword,”
        “Incentive Compensation,” Handbook for Servicers       193	    emorandum from Michael Stegman, Counselor
                                                                      M
        of Non-GSE Mortgages, Version 4.2, at 14, 135                 for Housing Finance Policy, Department of
        (May 1, 2013). Accessed: June 14, 2013, at                    the Treasury, to Ed DeMarco, Acting Director,
        www.hmpadmin.com/portal/programs/docs/                        Federal Housing Finance Agency, The Case
        hamp_servicer/mhahandbook_42.pdf.                             for Principal Reduction, at 1 (July 31, 2012).
                                                                      Accessed: June 13, 2013, at www.treasury.gov/
189	   Id., “Basic HAMP Eligibility Criteria,” “HAMP                 connect/blog/Documents/letter.to.demarco.pdf.
        Tier 1 Eligibility Criteria,” at 69, 70.




                                     Semiannual Report to the Congress • April 1, 2013–September 30, 2013         135
194	   Making Home Affordable Program, Home                 199	   Id., “HAMP Principal Reduction Activity,” at 5.
        Affordable Modification Program Modification of
        Loans with Principal Reduction Alternative (PRA),    200	    ederal Housing Finance Agency Office of
                                                                    F
        SD 10-05, at 2 (June 3, 2010). Accessed: June 14,           Inspector General, “Findings,” Evaluation of
        2013, at www.hmpadmin.com/portal/programs/                  FHFA’s Role in Negotiating Fannie Mae’s and
        docs/hamp_servicer/praoverviewnongse.pdf.                   Freddie Mac’s Responsibilities in Treasury’s Making
                                                                    Home Affordable Program, EVL-2011-003, at 17
195	   Internal Revenue Service, IRS Announces                     (August 12, 2011). Accessed: June 4, 2013, at
        Guidance on the Principal Reduction Alternative             www.fhfaoig.gov/Content/Files/EVL-2011-003.
        Offered in the Home Affordable Modification                 pdf.
        Program (HAMP), IR-2013-8 (January 24,
        2013). Accessed: June 13, 2013, at www.irs.          201	    ederal Housing Finance Agency Office of
                                                                    F
        gov/uac/Newsroom/Guidance-on-the-Principal-                 Inspector General, “Mission Tensions,” White
        Reduction-Alternative-for-the-Home-Affordable-              Paper: FHFA-OIG’s Current Assessment of FHFA’s
        Modification-Program.                                       Conservatorships of Fannie Mae and Freddie Mac,
                                                                    WPR-2012-001, at 28, 29 (March 28, 2012).
196	   Fannie Mae, “What is HARP?,” Home Affordable                Accessed: June 5, 2013, at www.fhfaoig.gov/
        Refinance Program: FAQs. Accessed: June 13,                 Content/Files/WPR-2012-001.pdf.
        2013, at http://knowyouroptions.com/harp.
        Fannie Mae, Home Affordable Refinance Program:       202	   I d., “Tension Between Roles as Regulator and as
        Overview. Accessed: June 13, 2013, at http://                Conservator,” at 30.
        knowyouroptions.com/harp.
                                                             203	   Id.
197	   Fannie Mae, Home Affordable Refinance Program:
        Overview. Accessed: June 13, 2013, at http://        204	   Id.
        knowyouroptions.com/harp. Fannie Mae, Home
        Affordable Refinance Program: Benefits. Accessed:    205	   Id.
        June 13, 2013, at http://knowyouroptions.com/
        harp. Fannie Mae, “What if I have an adjustable-
                                                             206	   Id.
        rate mortgage (ARM)?,” “Is it worth refinancing
        with HARP?,” Home Affordable Refinance
                                                             207	    ederal Housing Finance Agency, Fannie Mae
                                                                    F
        Program: FAQs. Accessed: June 13, 2013, at
                                                                    and Freddie Mac Launch Joint Effort to Improve
        http://knowyouroptions.com/harp.
                                                                    Loan and Appraisal Data Collection, New Program
                                                                    to Boost Risk Management Capabilities, at 1 (May
198	   Department of the Treasury, “HAMP (First Lien)
                                                                    24, 2010). Accessed: June 6, 2013, at www.fhfa.
        Modifications,” Making Home Affordable Program
                                                                    gov/webfiles/15748/Uniform_Mortgage_Data_
        Performance Report Through April 2013, at 3.
                                                                    Program.pdf.
        Accessed: June 13, 2013, at www.treasury.gov/
        initiatives/financial-stability/reports/Documents/
                                                             208	    ederal Housing Finance Agency, FHFA,
                                                                    F
        April%202013%20MHA%20Report%20Final.pdf.
                                                                    Fannie Mae and Freddie Mac Launch New
                                                                    Representation and Warranty Framework, Increased

136        Federal Housing Finance Agency Office of Inspector General
       Transparency and Certainty for Lenders, at 1                   Management of High-Risk Seller/Servicers, AUD-
       (September 11, 2012). Accessed: August 15,                     2012-007, at 2 (September 18, 2012). Accessed:
       2013, at www.fhfa.gov/webfiles/24366/Reps_                     June 6, 2013, at www.fhfaoig.gov/Content/Files/
       and_Warrants_Release_and_FAQs_091112.                          AUD-2012-007.pdf.
       pdf. Federal Housing Finance Agency, “Strategic
       Goal 3: Maintaining Foreclosure Prevention              214	   I d., “Enterprise Losses from Counterparty
       Efforts and Credit Availability,” A Strategic                   Failures,” at 12.
       Plan for Enterprise Conservatorships: The Next
       Chapter in a Story that Needs an Ending,                215	   I d., “Enterprise Losses from Counterparty
       at 18 (February 21, 2012). Accessed: June                       Failures,” at 12, 13.
       6, 2013, at www.fhfa.gov/webfiles/23344/
       StrategicPlanConservatorshipsFINAL.pdf.                 216	    ederal Housing Finance Agency Office of
                                                                      F
                                                                      Inspector General, “Consumer Protection Laws,”
209	   Federal Housing Finance Agency, “Strategic Goal               FHFA Should Develop and Implement a Risk-Based
        4—Means and Strategies,” Preparing a Foundation               Plan to Monitor the Enterprises’ Oversight of Their
        for a More Efficient and Effective Housing Finance            Counterparties’ Compliance with Contractual
        System: Strategic Plan, Federal Housing Finance               Requirements Including Consumer Protection
        Agency, Fiscal Years 2013-2017, at 22. Accessed:              Laws, AUD-2013-008, at 4 (March 26, 2013).
        July 9, 2013, at www.fhfa.gov/webfiles/23930/                 Accessed: June 6, 2013, at www.fhfaoig.gov/
        FHFA%20Draft%20Strategic%20Plan%20                            Content/Files/AUD-2013-008_0.pdf.
        2013-2017.pdf.
                                                               217	   I d., “Summary,” “Finding: FHFA Should Develop
210	   Federal Housing Finance Agency, Fannie Mae                     and Implement a Risk-Based Plan to Monitor the
        and Freddie Mac to Align Guidelines for Servicing              Enterprises’ Oversight of Their Counterparties’
        Delinquent Mortgages, Updated Framework to                     Compliance with Contractual Requirements
        Include Servicer Incentives and Penalties (April 28,           Including Consumer Protection Laws,” at 2, 6.
        2011). Accessed: July 9, 2013, at www.fhfa.gov/
        webfiles/21190/sai42811final.pdf.                      218	    ederal Housing Inspectors General,
                                                                      F
                                                                      Compendium of Federal Single Family Mortgage
211	   Id.                                                           Programs and Related Activities (November 2011).
                                                                      Accessed: June 6, 2013, at www.fhfaoig.gov//
212	   Federal Housing Finance Agency Office of                      Content/Files/compendium.pdf.
        Inspector General, “What FHFA-OIG Found,”
        FHFA’s Oversight of Fannie Mae’s Default-Related       219	    epartment of Housing and Urban Development
                                                                      D
        Legal Services, AUD-2011-004, at 2 (September                 Office of Inspector General, Federal Housing
        30, 2011). Accessed: June 6, 2013, at www.                    Finance Agency Office of Inspector General,
        fhfaoig.gov/Content/Files/AUD-2011-004.pdf.                   Joint Report on Federally Owned or Overseen Real
                                                                      Estate Owned Properties (May 2013). Accessed:
213	   Federal Housing Finance Agency Office of                      June 6, 2013, at www.fhfaoig.gov/Content/Files/
        Inspector General, “Why FHFA-OIG Did                          May%202013%20Housing%20IGs%20Report.
        This Audit,” FHFA’s Oversight of the Enterprises’             revised.v2.pdf.

                                     Semiannual Report to the Congress • April 1, 2013–September 30, 2013           137
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, 2013, through September 30, 2013




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