Federal Housing Finance Agency Office of Inspector General USING FINAN CE HO L AG RA EN FEDE CY FHFA OIG AL OF ER FI E C N OF E INS G PEC TO R Semiannual Report to the Congress 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 20 e2 e2 e2 e2 ber ber rch ber ber rch ber ber rch ber ber rch Jun Jun Jun Jun Ma Ma Ma Ma tem cem tem cem tem cem tem cem Sep Sep Sep Sep De De De 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 20 y2 2 y2 y2 2 y ust y y ber uar uar uar uar uar uar Aug tem Jan Jan Jan Jan Jan Jan Sep 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 References Federal Home Loan Bank of Dallas, Glossary of Common Terms. Accessed: September 3, 2013, at Federal Deposit Insurance Corporation, FDIC www.fhlb.com/Glossary.html#C. Outlook: Breaking New Ground in U.S. Mortgage Census Bureau, 52211 Commercial Banking. Lending. Accessed: September 3, 2013, at www.fdic. Accessed: September 3, 2013, at www.census.gov/ gov/bank/analytical/regional/ro20062q/na/2006_ econ/census02/naics/sector52/52211.htm. summer04.html. 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Internal Revenue Service, Topic 409 - Capital Gains Federal Housing Finance Agency, Office of and Losses. Accessed: September 5, 2013, at www.irs. Conservatorship Operations. Accessed: September 3, gov/taxtopics/tc409.html. 2013, at www.fhfa.gov/Default.aspx?Page=344. Federal Reserve Bank of San Francisco, What is Federal Housing Finance Agency, FHFA Announces bank capital and what are the levels or tiers of capital? Suspension of Capital Classifications During (September 2001). Accessed: September 3, 2013, at Conservatorship and Discloses Minimum and Risk- www.frbsf.org/education/activities/drecon/2001/0109. Based Capital Classifications as Undercapitalized for the html. Second Quarter 2008 for Fannie Mae and Freddie Mac Government Accountability Office, The Cooperative (October 9, 2008). Accessed: September 3, 2013, at Model as a Potential Component of Structural Reform www.fhfa.gov/webfiles/775/FHFA_Suspension.PDF. 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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). 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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§ion=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§ion=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§ion=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§ion=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§ion=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§ion=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§ion=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§ion=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§ion=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§ion=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§ion=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
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)