oversight

Third Semiannual Report to the Congress

Published by the Federal Housing Finance Agency, Office of Inspector General on 2012-03-31.

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

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Federal Housing Finance Agency
  Office of Inspector General

  Se m iann ual R ep ort to t he Cong r e ss
           October 1, 2011, through March 31, 2012
Federal Housing Finance Agency
  Office of Inspector General



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  Semiann ual Rep ort to t h e C ong r e ss
            October 1, 2011, through March 31, 2012
Table of Contents
  OIG’s Mission. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . i
  A Message from the Inspector General. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 1
  Executive Summary. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 3
      Overview	                                                                                                                        4
      OIG Operations	                                                                                                                  5
      Report Organization	                                                                                                             7
      OIG Reporting Requirements	                                                                                                      8

  Section 1: OIG Description. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 9
      Leadership and Organization	                                                                                                   10
      OIG’s Strategic Plan	                                                                                                          12
      Organizational Guidance	                                                                                                       13

  Section 2: FHFA and GSE Operations .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 15
      FHFA	                                                                                                                          16
      FHFA Authority	                                                                                                                16
      Fannie Mae and Freddie Mac	                                                                                                    17
      FHLBanks	                                                                                                                      23
      Selected FHFA, GSE, and Other Activities	                                                                                      24

  Section 3: OIG’s Accomplishments and Strategy. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 33
      OIG Audits and Evaluations	                                                                                                    34
      OIG Audit, Evaluation, and Survey Plan	                                                                                        43
      OIG Investigations	                                                                                                            43
      OIG Investigations Strategy	                                                                                                   46
      OIG Regulatory Activities	                                                                                                     46
      OIG Communications and Outreach Efforts	                                                                                       49

  Section 4: OIG’s Recommendations.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 55
  Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went .  .  . 65
      Background	                                                                                                                    66
      Enterprise Gains, Losses, and Use of Funds for the Period 2008 Through the Third Quarter 2011	                                 72
      Putting the Losses in Perspective: Winners and Losers	                                                                         78
      Outlook	                                                                                                                       79
Appendices. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 81
     Appendix A: Glossary and Acronyms	                                                                                             82
     Appendix B: Information Required by the Inspector General Act	                                                                 97
     Appendix C: OIG Reports	                                                                                                      101
     Appendix D: Trends Identified by OIG Reports	                                                                                 102
     Appendix E: OIG Organizational Chart	                                                                                         107
     Appendix F: Enterprises’ Performance Metrics	                                                                                 108
     Appendix G: Endnotes	                                                                                                         109
        OIG’s Mission
        The mission of the Federal Housing Finance Agency Office of Inspector
        General (OIG) is to: promote the economy, efficiency, and effectiveness
        of Federal Housing Finance Agency (FHFA or Agency) programs and
        operations; prevent and detect fraud, waste, or abuse in FHFA’s programs and
        operations; review and, if appropriate, comment on pending legislation and
        regulations; and seek administrative sanctions, civil recoveries, and criminal
        prosecutions of those responsible for fraud, waste, or abuse in connection with
        the programs and operations of FHFA.

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




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




i |   OIG’s Mission
                                                                 SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




A Message from the Inspector General
This is OIG’s third Semiannual Report to the Congress. It discusses
OIG’s oversight of FHFA’s programs and operations from October 1, 2011,
through March 31, 2012.

FHFA is the safety, soundness, and mission regulator of the housing
government-sponsored enterprises (GSEs) – the Federal National
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac), and the Federal Home Loan Bank System
(FHLBank System). And, since September 2008, the Agency has also
served as the conservator of Fannie Mae and Freddie Mac (collectively, the
Enterprises). In this capacity, FHFA oversees the Enterprises with the goal
of preserving and conserving their assets. Further, since the inception of the
conservatorships over three and one-half years ago, the federal government
has provided $187.5 billion in financial support to ensure the Enterprises’
solvency.

The Enterprises own or guarantee about 70% of all newly originated
residential mortgages in the United States. As a result, FHFA’s activities have
potentially far reaching ramifications, affecting all aspects of housing policy
                                                                                    Steve A. Linick
and the welfare of millions of Americans. Given this reality, the need for          Inspector General of the Federal
vigilant oversight remains a high priority.                                         Housing Finance Agency


In this report, OIG summarizes the reports it issued during the reporting
period. They include OIG’s current assessment of FHFA’s conservatorships
of Fannie Mae and Freddie Mac and OIG’s reviews of FHFA’s oversight of:
Freddie Mac’s controls over mortgage servicing; Fannie Mae’s single-family
underwriting standards; troubled Federal Home Loan Banks (FHLBanks);
legal fees for Enterprise executives; the Enterprises’ charitable activities; and
the Enterprise’s participation in a convention. The report also describes a
number of OIG investigations aimed at combating fraud in the housing
market, such as the recent indictments of individuals who allegedly operated
fraudulent loan modification and refinancing programs. Finally, the report
also includes Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went,
which discusses how the federal support of the Enterprises has been spent,
and Appendix D, which discusses certain trends that OIG has noted.

We hope you find this report useful.

Steve A. Linick
Inspector General
April 30, 2012




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




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




                                                              Executive Summary
                                                              OVERVIEW
                                                              This Semiannual Report discusses FHFA developments and the operations of
                                                              OIG from October 1, 2011, through March 31, 2012.a

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

                                                                   • taking over the assets of and operating the Enterprises with all the
                                                                      powers of their shareholders, directors, and officers; and
                                                                   • preserving and conserving the assets and property of the Enterprises.
                                                              During the semiannual period, FHFA has exercised those powers by, among
                                                              other things, releasing the results of its comparative analysis of principal
                                                              reduction as a loss mitigation option; amending the Home Affordable
                                                              Refinance Program (HARP) to attract more eligible borrowers; and initiating
                                                              civil litigation against the City of Chicago. In its comparative analysis,
                                                              FHFA argued that principal reduction results in a lower net present value to
                                                              taxpayers than principal forbearance (which is currently offered to underwater
                                                              borrowers). Therefore, the Agency decided to exclude principal reduction
                                                              from the Enterprises’ loss mitigation options.b

                                                              Additionally, FHFA and the Enterprises announced a number of changes to
                                                              HARP, including removing the 125% loan-to-value (LTV) ceiling for fixed-
                                                              rate mortgages; waiving certain representations and warranties that lenders
                                                              make; and extending the end date for HARP until December 31, 2013.1

                                                              FHFA also filed a lawsuit against the City of Chicago, contesting its “Vacant
                                                              Buildings Ordinance” as enforced against the Enterprises. The ordinance
                                                              requires mortgage owners to conduct monthly inspections of mortgaged
                                                              properties in order to determine if they are vacant, in which case the mortgage
                                                              owners are required to pay a $500 fee to register the property. As mortgage
                                                              owners, the Enterprises are required to comply with the ordinance, even if
                                                              they have not foreclosed on a property or do not otherwise own it, and are
a
  The Inspector General Act of 1978, 5 U.S.C. App. 3
§ 5, requires that each inspector general compile a report
                                                              subject to penalties up to $1,000 per day per property for noncompliance
of his or her office’s operations for each six-month period   with any provision. FHFA alleges, among other things, that the ordinance
ending Mar. 31 and Sept. 30.                                  impermissibly encroaches on its role as sole regulator and supervisor of the
b
   On the basis of new incentives offered by the              Enterprises.
Department of the Treasury, FHFA is reconsidering its
analysis. As of Mar. 31, 2012, FHFA had not completed
its reconsideration.



    4 |    Executive Summary
                                                                SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




FHFA also issued a strategic plan for the next stage of the conservatorships
and an initiative to dispose of real estate owned (REO). These and other
FHFA developments are discussed in detail in this Semiannual Report.

OIG OPERATIONS
OIG published eight reports relating to FHFA’s oversight of significant
Enterprise and FHLBank issues.c

Enterprise Issues
During the reporting period, OIG published six reports addressing a variety
of Enterprise issues. One report, FHFA-OIG’s Current Assessment of FHFA’s
Conservatorships of Fannie Mae and Freddie Mac (WPR-2012-001, March
28, 2012),d provides background concerning the conservatorships of the
Enterprises and assesses the conservatorships on their third anniversary.
OIG found that, although FHFA has considerable discretion in defining
its role, in certain circumstances it has opted to avoid active participation in
or management of the Enterprises. OIG’s reports have revealed instances
in which the Agency, in its capacity as conservator, unduly deferred to the
Enterprises’ decisions. Similarly, OIG reports have found instances in
which FHFA, in its capacity as regulator, was not proactive in its oversight
and enforcement. These trends are discussed in detail in Appendix D of
this Semiannual Report. Additionally, FHFA faces significant challenges
in managing the conservatorships, including: (1) attempting to advance the
Enterprises’ business interests while assisting distressed homeowners; (2)
serving simultaneously as both the Enterprises’ conservator and regulator; and
(3) balancing the uncertain future of the Enterprises.

Two other reports analyze FHFA’s oversight of major functions of the
Enterprises. The first report, FHFA’s Supervision of Freddie Mac’s Controls over
Mortgage Servicing Contractors (AUD-2012-001, March 7, 2012),e showed
that although FHFA and Freddie Mac have taken action to improve oversight
of mortgage servicing, FHFA can enhance its supervision of the Enterprises’
controls over mortgage servicing contractors. FHFA has not clearly defined
its role regarding the oversight of servicers, has not sufficiently coordinated
with other federal banking agencies about risks and supervisory concerns with
individual servicers, and has not timely addressed emerging risks presented
by mortgage servicing contractors. Moreover, FHFA has not established              c
                                                                                     Seven of the reports are summarized in this Executive
comprehensive regulations and guidance that provide for servicer management        Summary. The eighth report pertains to FHFA’s
                                                                                   compliance with the Improper Payments Act and – with
and oversight and does not adequately monitor servicing performance.               the other seven reports – is discussed in detail in Section 3.

In the second report, FHFA’s Oversight of Fannie Mae’s Single-Family               d
                                                                                    The full report is available at www.fhfaoig.gov/Content/
Underwriting Standards (AUD-2012-003, March 22, 2012),f OIG found                  Files/WPR-2012-001.pdf.

that although FHFA has taken steps to ensure that mortgages purchased by           e
                                                                                    The full report is available at www.fhfaoig.gov/Content/
the Enterprises conform to underwriting standards, the Agency’s oversight          Files/AUD%202012-001.pdf.
of underwriting is limited and it relies largely on the Enterprises to oversee     f
                                                                                    The full report is available at www.fhfaoig.gov/Content/
and establish underwriting standards. OIG concluded that the Agency can            Files/AUD-2012-003.pdf.



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




                                                            strengthen its oversight by creating formal processes for reviewing both the
                                                            Enterprises’ underwriting standards and variances from them. FHFA can
                                                            also enhance its guidance for planning and conducting its examinations of the
                                                            Enterprises’ underwriting quality control.

                                                            OIG published three additional reports that evaluate various Enterprise
                                                            expenses. The first report, Evaluation of FHFA’s Management of Legal Fees
                                                            for Indemnified Executives (EVL-2012-002, February 22, 2012),g provided
                                                            background concerning tens of millions of dollars the Enterprises have spent
                                                            defending themselves and former senior executives in class action lawsuits
                                                            and other legal matters. OIG determined that these fees present FHFA with
                                                            a difficult balance of interests. On the one hand, the Agency is interested
                                                            in avoiding potential losses by effectively defending ongoing lawsuits against
                                                            the Enterprises. On the other hand, FHFA has an interest in controlling
                                                            significant costs, particularly the millions of dollars of payments made to
                                                            attorneys and others involved in representing former senior executives.

                                                            OIG also concluded that FHFA had not independently validated the
                                                            Enterprises’ processes for determining the reasonableness or validity of legal
                                                            services provided on behalf of their executives or the bills presented for such
                                                            services.

                                                            In the complementary two reports, FHFA’s Oversight of the Enterprises’
                                                            Charitable Activities (ESR-2012-003, March 22, 2012)h and Fannie Mae’s
                                                            and Freddie Mac’s Participation in the 2011 Mortgage Bankers Association
                                                            Annual Convention and Exposition (ESR-2012-004, March 22, 2012),i
                                                            OIG respectively addressed FHFA’s oversight of the Enterprises’ charitable
                                                            activities and their travel-related and sponsorship expenses associated with a
                                                            Mortgage Bankers Association convention.

                                                            FHLBank Issues
                                                            Additionally, OIG published a report concerning FHLBank issues, FHFA’s
                                                            Oversight of Troubled Federal Home Loan Banks (EVL-2012-001, January 11,
                                                            2012).j Although OIG identified several positive actions FHFA has taken as
                                                            part of its oversight of the FHLBanks, OIG found that FHFA can strengthen
                                                            its oversight by improving policies, systems, and documentation standards.
                                                            For example, FHFA does not have or does not implement formal written
                                                            enforcement standards; instead, FHFA officials have broad discretion in
                                                            determining the circumstances under which formal actions against troubled
g
 The full report is available at www.fhfaoig.gov/Content/   FHLBanks will be initiated. OIG determined that the absence of a consistent
Files/EVL-2012-002.pdf.
                                                            and transparent written FHFA enforcement policy, among other things,
h
 The full report is available at www.fhfaoig.gov/Content/   contributes to instances in which FHFA has not acted proactively to hold
Files/ESR-2012-003.pdf.
                                                            troubled FHLBanks and their officers sufficiently accountable for failing to
i
 The full report is available at www.fhfaoig.gov/Content/   correct identified risks or for engaging in questionable risk taking.
Files/ESR-2012-004.pdf.
j
 The full report is available at www.fhfaoig.gov/Content/
Files/Troubled%20Banks%20EVL-2012-001.pdf.



    6 |    Executive Summary
                                                                 SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




Other Activities
OIG also engaged in investigative and outreach efforts during the reporting
period. For example, OIG’s investigations resulted in:

     •	a seventh conviction in the Taylor, Bean & Whitaker case, which
        involved a $2.9 billion fraud that included the submission of false
        financial statements to Freddie Mac and a government agency; and
     •	five indictments in the Horizon Property Holdings advance fee
        scheme case, which involved defrauding struggling homeowners
        out of approximately $5 million in exchange for false promises of
        assistance with mortgage modifications.
Further, OIG’s outreach efforts include participation in the newly formed
Residential Mortgage-Backed Securities (RMBS) Working Group. The                         Mortgage-Backed Securities (MBS):
RMBS Working Group operates as part of the Financial Fraud Enforcement                   MBS are debt securities that represent
Task Force (FFETF) and is intended to investigate misconduct in the residential          interests in the cash flows – anticipated
mortgage-backed securities (MBS) market that contributed to the recent                   principal and interest payments – from
financial crisis. Other participants in the RMBS Working Group include                   pools of mortgage loans, most commonly on
the Department of Housing and Urban Development (HUD), the Securities                    residential property.
and Exchange Commission (SEC), the Department of Justice (DOJ), the
Federal Bureau of Investigation (FBI), the Internal Revenue Service (IRS),
the Consumer Financial Protection Bureau (CFPB), the Financial Crimes
Enforcement Network (FinCEN), and several state attorneys general.

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

REPORT ORGANIZATION
This Semiannual Report is organized as follows:

     •	 Section 1, OIG Description, provides a brief overview of the organization.
     •	Section 2, FHFA and GSE Operations, describes the organization and
        operation of FHFA, Fannie Mae, Freddie Mac, and the FHLBanks.
        It also discusses notable developments that affect them.
     •	Section 3, OIG’s Accomplishments and Strategy, describes OIG’s
        oversight activities, including audits, evaluations, and investigations.
        It also discusses OIG’s current priorities and future goals.
     •	Section 4, OIG’s Recommendations, discusses OIG recommendations to
        improve FHFA and GSE operations and transparency and reports the             a
        implementation status for outstanding recommendations.
     •	Section 5, Fannie Mae and Freddie Mac – Where the Taxpayers’ Money
        Went, discusses why the Department of the Treasury (Treasury)
        invested $185 billion – as of the end of 2011 – in the Enterprises;
        describes how Treasury’s investment has been used; and examines


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




                                                                      the prospects for Fannie Mae and Freddie Mac repaying Treasury’s
                                                                      investment and emerging from conservatorships.
                                                              Additionally, the Semiannual Report includes Appendix D, Trends Identified
                                                              by OIG Reports.

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




k
    The Inspector General Act of 1978, 5 U.S.C. App. 3 § 5.



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




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

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

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

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

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

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


 10 |   Section 1: OIG Description
                                                                 SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




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

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

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

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

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

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

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




                                                                                              Section 1: OIG Description   | 11
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




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

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

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

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

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

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

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




  12 |     Section 1: OIG Description
                                                                SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




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

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




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




 14 |   Section 1: OIG Description
                          SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




section 2
FHFA AND GSE OPERATIONS




                                              Section 2: FHFA and GSE Operations   | 15
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                         Section 2: FHFA and GSE Operations
                                                         FHFA
                                                         HERA – enacted on July 30, 2008, during the financial crisis – created FHFA
                                                         as the successor to the Office of Federal Housing Enterprise Oversight
Preferred Stock:                                         (OFHEO) and the Federal Housing Finance Board. The Agency now
A security that usually pays a fixed dividend            supervises the Enterprises and the FHLBanks, which previously had been
and gives the holder a claim on corporate                respectively regulated by the two predecessor entities. HERA also expanded
earnings and assets superior to that of
                                                         Treasury’s authority to financially support the GSEs.2
holders of common stock, but inferior to
that of investors in the corporation’s debt              On September 6, 2008, due to their deteriorating financial conditions, the
securities.                                              Enterprises entered conservatorships overseen by FHFA. At the time of
                                                         the conservatorships, Treasury exercised its authority to financially support
Senior Preferred Stock Purchase                          the Enterprises by making preferred stock investments in them pursuant to
Agreements (PSPAs):                                      Senior Preferred Stock Purchase Agreements (PSPAs).
Entered into at the time the
conservatorships were created, the PSPAs
authorize the Enterprises to request                     FHFA AUTHORITY
and obtain funds from Treasury. Under                    FHFA serves as the regulator of the GSEs and conservator of the Enterprises.
the PSPAs, the Enterprises agreed to                     As regulator, the Agency’s mission is to ensure that the GSEs operate in a safe
consult Treasury concerning a variety of                 and sound manner. As conservator, the Agency seeks to conserve and preserve
significant business activities, capital stock           Enterprise assets. FHFA also has property management responsibilities
issuance, dividend payments, ending the                  under the Emergency Economic Stabilization Act (EESA).
conservatorships, transferring assets, and
awarding executive compensation.
                                                         FHFA’s Duties as Regulator Under HERA
                                                         The principal duties of the Director of FHFA, as a regulator, are to oversee the
                                                         prudential operations of each regulated entity and to ensure that:

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


    16 |   Section 2: FHFA and GSE Operations
                                                                SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




executive compensation; requires FHFA to establish prudential management
and operational standards for the regulated entities; and forbids high ranking
FHFA officials from receiving compensation from the Enterprises within two
years of their departure from FHFA.

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

     •	succeed to all rights, titles, powers, and privileges of the Enterprises
        and any shareholders, officers, or directors of such Enterprises;
     •	operate the Enterprises; and
     •	 take such action as may be:
           o	
             necessary to put the Enterprises in sound and solvent
             conditions; and
           o	appropriate to carry on the businesses of the Enterprises and
              preserve and conserve their assets and property.m
In addition to those powers enumerated by HERA, FHFA has “such incidental
powers as shall be necessary to carry out” its enumerated powers.3 In 2009,
FHFA interpreted its authorization to conserve and preserve the Enterprises’
assets as its “top goal” for its conservatorships,4 and often cites this goal.n

FHFA’s Duties Under EESA
EESA requires that FHFA:

     •	implement a plan to maximize assistance to homeowners;
     •	use its authority to encourage the servicers of Fannie Mae and Freddie
        Mac mortgages, considering net present value, to take advantage of
        federal programs to minimize foreclosures;
                                                                                   m
                                                                                     HERA at § 1145. For example, under HERA, FHFA can:
     •	coordinate within the federal government concerning homeowner              (1) promulgate regulations regarding the conduct of the
        assistance plans; and                                                      conservatorship; (2) take title to all books, records, or
                                                                                   assets of the Enterprises; (3) take over the assets of the
     •	submit monthly reports to Congress detailing the progress of its           Enterprises; (4) collect all obligations and money due to
                                                                                   the Enterprises; (5) act in the name of the Enterprises;
        efforts.5                                                                  and (6) create contracts to aid in its role.
                                                                                   n
                                                                                     See Statement of Edward DeMarco Before the House
FANNIE MAE AND FREDDIE MAC                                                         Financial Services Committee, Subcommittee on
                                                                                   Oversight and Investigations (Dec. 1, 2011) p. 3; see also
In 1938, Congress chartered Fannie Mae to help create stable funding for the       A Strategic Plan for Enterprise Conservatorships: The
U.S. housing and mortgage markets. Freddie Mac’s charter followed in 1970          Next Chapter in a Story that Needs an Ending (Feb. 21,
with a similar mission of supporting residential mortgage markets in addition      2012) p. 10 (“FHFA has reported on numerous occasions
                                                                                   that, with taxpayers providing the capital supporting
to expanding opportunities for homeownership and affordable rentals.               Enterprise operations, this ‘preserve and conserve’
                                                                                   mandate directs FHFA to minimize losses on behalf of
                                                                                   taxpayers”).




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




                                                As Figure 1 (see below) illustrates, the Enterprises support the nation’s
                                                housing finance system through the secondary mortgage market, but neither
Primary Mortgage Market:                        makes home loans directly. Instead, banks, credit unions, and other retail
The market for newly originated mortgages.      financial institutions originate home loans. Generally, lenders do not keep
                                                the mortgages they originate, but instead sell conventional conforming
Secondary Mortgage Market:                      mortgage loans to the Enterprises.
The market for buying and selling existing
mortgages; this could be in the form of         The Enterprises typically securitize the loans they purchase by pooling them
whole mortgage or MBS sales.                    into MBS, which are then sold to investors. As part of this process, for a fee,
                                                the Enterprises guarantee payment of principal and interest on the MBS they
Both the primary and secondary mortgage         sell. Alternatively, the Enterprises may hold these loans or buy MBS for their
markets are over-the-counter markets –          own investment portfolios, which are funded by issuing debt obligations.
there is no central exchange. Rather, loans
                                                Historically, the Enterprises have benefited from an implied guarantee that
are bought and sold through personal and
                                                the federal government would prevent default on their financial obligations.
institutional networks.
                                                As a result, over time, the Enterprises’ borrowing costs have been lower than
                                                those of other for-profit companies,6 and the Enterprises assumed dominant
Conventional Conforming
                                                positions in the residential housing finance market. (After the Enterprises
Mortgage Loans:
                                                were placed into conservatorships, the implied guarantee effectively became
Mortgages that are not insured or
                                                explicit.)7
guaranteed by the Federal Housing
Administration, the Department of Veterans
Affairs, or the Department of Agriculture,                                  Figure 1. Overview of Enterprises and FHFA’s Role
and that meet the Enterprises’ underwriting
standards. Conforming mortgage loans
                                                     Primary                                                                                 Applies for
have original balances below a specific              Mortgage Market                                                                          Mortgage
                                                                                                                                                                BORROWER
                                                     Market in which financial
threshold, set by law and published by               institutions provide                                     LENDER
FHFA, known as the “conforming loan limit.”          mortgage loans to
                                                                                                                                              Provides
                                                     homebuyers                                                                                 Loan
For 2012, the conforming loan limit is                                                     Sells Loans that
                                                                                          Meet Underwriting
$417,000 for most areas of the contiguous                                                   and Product
                                                                                             Standards

United States, although generally it can                                                                                   Buys
                                                                                                                         Mortgages
increase to a maximum of $625,500 in                 Seconday
                                                                                                                                                                          A L HOU
specific higher cost areas.                          Mortgage Market                                   FANNIE MAE and                           Conservator
                                                                                                                                                                     ER           SI
                                                     Market in which
                                                                                                                                                              FED




                                                                                                       FREDDIE MAC                                                                    NG
                                                     existing mortgages and
                                                     MBS are traded
Guarantee:
                                                                                                    Credit             Portfolio                                          FHFA
A pledge to investors that the guarantor will                                                      Guarantee         Investment
                                                                                                                                                                                    CY
                                                                                                                                                                FI




                                                                                                   Business           Business              Ensures Financial
bear the default risk on a collateral pool of                                                                                                                     A
                                                                                                                                                                N




                                                                                                                                               Safety and
                                                                                                                                                                      NC
                                                                                                                                                                                 N



                                                                                                                                                                                  E
                                                                                                                                               Soundness
                                                                                                                                                                           E AG
loans.                                                                                    Issues                Issues
                                                                                           MBS                   Debt



Implied Guarantee:
The assumption, prevalent in the financial                                                                    Buys
                                                                                                              MBS
                                                                                                                                     Buys
                                                                                                                                     Debt

markets, that the federal government will                INVESTORS
                                                                                   Sells
                                                                                 MBS & Debt

cover Enterprise debt obligations.                        • Individual
                                                                                                               WALL
                                                                                                              STREET
                                                          • Institutional
                                                          • Foreign                Buys
                                                                                 MBS & Debt




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




  18 |    Section 2: FHFA and GSE Operations
                                                                                                            SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




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


$3.0



$2.5
                                          0.6


$2.0


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

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




                                      Ginnie Mae MBS            Enterprise MBS           Non-Agency MBS


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


As Figure 2 (see above) illustrates, after losing market share to non-agency
competitors from 2004 through 2007, the Enterprises added to their
dominant position in the residential housing finance market (with the federal
government’s financial support) as the financial crisis continued and private-
sector financing for the secondary market nearly disappeared. (For a detailed
discussion of the Enterprises’ role in the secondary market, the recent housing
crisis, and the Enterprises’ response to the crisis, see Section 5, Fannie Mae
and Freddie Mac – Where the Taxpayers’ Money Went.)

Enterprise Financial Performance and Government Support
As shown in Figure 3 (see page 20), the Enterprises securitized more lower
quality mortgages in 2006 and 2007 than in subsequent years. The two years’
                                                                                                                                Alternative A (Alt-A):
higher default and delinquency rates stemmed from a greater percentage of
                                                                                                                                A classification of mortgages in which
Alternative A (Alt-A) loans, interest only loans, and loans made to borrowers
                                                                                                                                the risk profile falls between prime and
with below average credit scores. These mortgages have caused the largest
                                                                                                                                subprime. Alt-A mortgages are generally
share of credit-related losses over the last several years.
                                                                                                                                considered higher risk than prime due
Due to continued delinquencies and defaults, losses escalated and contributed                                                   to factors that may include higher LTV
to the Enterprises’ rapid financial deterioration. In 2008, the year the                                                        and debt-to-income ratios or limited
Enterprises entered conservatorship, they reported combined losses of $109                                                      documentation of the borrower’s income.
billion, exceeding their total earnings for the preceding 21 years (see Figure 4,
page 21). The Enterprises have continued to lose money since.



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




                                                                          Figure 3. Mortgage Credit Quality by Origination Year

                                                                                                Fannie Mae                                      Freddie Mac
                                                                                      Serious                                         Serious
                                                                                                            Cumulative                                      Cumulative
                                                   Year Originated                  Delinquency                                     Delinquency
                                                                                                            Default Rate                                    Default Rate
                                                                                       Ratea                                           Rateb
                                                          2006                            11.81%                    8.60%                  10.82%                    6.95%
                                                          2007                            12.62%                    9.03%                  11.58%                    7.49%
                                                          2008                              5.64%                   2.52%                    5.65%                   2.23%
                                                          2009                              0.55%                   0.17%                    0.52%                   0.17%
                                                          2010                              0.24%                   0.06%                    0.25%                   0.05%
                                                          2011                              0.04%                   0.00%                    0.06%                   0.00%

                                             Sources: Fannie Mae, 2011 Credit Supplement, at 7 (Feb. 29, 2012) (online at http://fanniemae.com/resources/file/ir/pdf/quarterly-
                                             annual-results/2011/q42011_credit_summary.pdf); Freddie Mac, Fourth Quarter 2011 Financial Results Supplement, at 26 (online at
                                             www.freddiemac.com/investors/er/pdf/supplement_4q11.pdf) (accessed Mar. 9, 2012); Freddie Mac, 2011 10-K Report, at 163 (online
                                             at www.freddiemac.com/investors/er/pdf/10k_030912.pdf) (accessed Apr. 16, 2012).

                                             Notes:
                                             a
                                               Serious delinquencies include loans past due 90 days or more and those where Fannie Mae or the mortgage holder has started the
                                             process to foreclose on the loan.
                                             b
                                               Based on the number of loans that are three monthly payments or more past due or in the process of foreclosure.


                                             For 2011, Fannie Mae reported a net loss of $16.9 billion. During the same
                                             period, Freddie Mac reported a net loss of $5.3 billion. The Enterprises’
                                             net losses from operations in 2011 were caused primarily by credit-related
                                             losses, losses on derivative agreements, and the impairment of securities
                                             considered other than temporary (see Figure 5, page 21).




                                                  Losses on Derivative Agreements:
                                                  The Enterprises acquire and guarantee primarily longer-term mortgages and securities that
                                                  are funded with debt instruments. The companies manage the interest-rate risk associated
                                                  with these investments and funding activities using derivative agreements. In contrast with
                                                  the Generally Accepted Accounting Principles treatment for many conventional instruments,
                                                  such as loans, the Enterprises’ derivative investments may sustain reported losses from
                                                  interest rate driven variations in their current fair value.

                                                  Impairment of Securities Considered Other than Temporary:
                                                  Impairment of a security occurs when the fair value of the security is less than the amortized
                                                  cost basis (i.e., whenever a security has an unrealized loss). If the impairment is judged to be
                                                  other than temporary, the individual security must be written down to fair value. As currently
                                                  defined under Generally Accepted Accounting Principles, the fair value of an asset is the
                                                  amount at which that asset could be bought or sold in an orderly transaction between willing
                                                  parties.




 20 |   Section 2: FHFA and GSE Operations
                                                                                                          SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




                                                           Figure 4. Enterprises’ Annual Net Income (Loss) 1986-2011
                                                                                   ($ billions)

  $20



    $0



 $(20)



 $(40)



 $(60)



 $(80)



$(100)



$(120)


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

                                                                                    Freddie Mac                    Fannie Mae

Sources: Federal Housing Finance Agency, 2010 FHFA Annual Report to Congress, at 114, 131 (online at
www.fhfa.gov/webfiles/21570/FHFA2010RepToCongress61311.pdf) (accessed Mar. 6, 2012); Fannie Mae, 2011 10-K Report, at F-4 (online at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-
results/2011/10k_2011.pdf) (accessed Mar. 6, 2012); Freddie Mac, 2011 10-K Report, at 85 (online at www.freddiemac.com/investors/er/pdf/10k_030912.pdf) (accessed Apr. 21, 2012).


                                                          Figure 5. Enterprises’ Summary of Net Loss from Operations
                                                               for the Year Ended December 31, 2011 ($ billions)

                                                                                                                   Fannie Mae                  Freddie Mac
                                    Net Interest Income                                                        $            19.28         $           18.40
                                    Credit-related Expenses                                                                 (27.50)                   (11.29)
                                    Loss on Derivative Agreements                                                            (6.56) a
                                                                                                                                                       (9.75)
                                    Impairment of Securities Considered
                                      Other than Temporary                                                                   (0.31)                    (2.30)
                                    Other Income (Expense)                                                                   (1.77)                    (0.32)
                                    Net Loss from Operations                                                   $            (16.86)        $           (5.26)

                                  Sources: Fannie Mae, 2011 10-K Report, at 92 (online at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-
                                  results/2011/10k_2011.pdf) (accessed Mar. 5, 2012); Freddie Mac, 2011 10-K Report, at 85 (online at
                                  www.freddiemac.com/investors/er/pdf/10k_030912.pdf) (accessed Apr. 21, 2012).

                                  Note:
                                  a
                                    Loss on Derivatives referenced to Table 10, p. 96 in the Fannie Mae 2011 10-K Report.




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




                                                                            To offset the losses shown above, government support of the Enterprises since
                                                                            2008 has totaled $187.5 billion pursuant to the PSPAs. Figure 6 (see below)
                                                                            breaks down, by quarter, Treasury’s investment in the Enterprises through
                                                                            March 31, 2012. In accordance with the PSPAs’ terms, the Enterprises must
                                                                            make quarterly dividend payments to Treasury at an annual rate equal to 10%
                                                                            of the outstanding investment. The rate shall increase to 12% if, in any quarter,
                                                                            the dividends are not paid in cash, until all accrued dividends have been paid
                                                                            in cash. To date, Treasury generally has had to increase its investment in
                                                                            the Enterprises to finance these dividend payments to itself. As of March
                                                                            31, 2012, the Enterprises have used $41 billion of Treasury’s investment to
                                                                            pay dividends due to Treasury under the PSPAs. Based on the Enterprises’
                                                                            projected losses, FHFA estimates that Treasury’s investment through 2014
                                                                            could range from $220 billion to $311 billion.8



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

                                                      Freddie Mac                                                     Fannie Mae                                                     Combined

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

 Third Quarter 2008                       $13.8                 $-                $13.8                   $-                   $-                  $-                   $13.8                 $-               $13.8
 Fourth Quarter 2008                       30.8                   0.2               30.6                  15.2                   -                  15.2                  46.0                  0.2                45.8
 First Quarter 2009                          6.1                  0.4                 5.7                 19.0                   -                  19.0                  25.1                  0.4                24.7
 Second Quarter 2009                         -                    1.1                (1.1)                10.7                   0.4                10.3                  10.7                  1.5                 9.2
 Third Quarter 2009                          -                    1.3                (1.3)                15.0                   0.9                14.1                  15.0                  2.2                12.8
 Fourth Quarter 2009                         -                    1.3                (1.3)                15.3                   1.2                14.1                  15.3                  2.5                12.8
 First Quarter 2010                        10.6                   1.3                 9.3                   8.4                  1.5                 6.9                  19.0                  2.8                16.2
 Second Quarter 2010                         1.8                  1.3                 0.5                   1.5                  1.9                (0.4)                  3.3                  3.2                 0.1
 Third Quarter 2010                          0.1                  1.6                (1.5)                  2.5                  2.1                 0.4                   2.6                  3.7                (1.1)
 Fourth Quarter 2010                         0.5                  1.6                (1.1)                  2.6                  2.2                 0.4                   3.1                  3.8                (0.7)
 First Quarter 2011                          -                    1.6                (1.6)                  8.5                  2.2                 6.3                   8.5                  3.8                 4.7
 Second Quarter 2011                         1.5                  1.6                (0.1)                  5.1                  2.3                 2.8                   6.6                  3.9                 2.7
 Third Quarter 2011                          6.0                  1.6                 4.4                   7.8                  2.5                 5.3                  13.8                  4.1                 9.7
 Fourth Quarter 2011                         0.1                  1.7                (1.6)                  4.6                  2.6                 2.0                   4.7                  4.3                 0.4
 First Quarter 2012                          -                    1.8                (1.8)                   -                   2.8                (2.8)                  -                    4.6                (4.6)
 Total as of
                                          $71.3                $18.4               $52.9               $116.2                 $22.6               $93.6               $187.5                 $41.0            $146.5
 March 31, 2012

Source: Federal Housing Finance Agency, Data as of April 4, 2012 on Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-Related Securities, at Tables 1-2 (online at www.fhfa.gov/
webfiles/23873/TSYSupport%202012-04-04.pdf) (accessed Apr. 19, 2012).

Notes: Nonzero numbers may display as zero due to rounding.
a
  Excludes $1 billion in liquidation preference on the senior preferred stock position obtained by Treasury from each Enterprise upon initiation of the PSPA. The initial $1 billion is not a draw on Treasury’s
commitment under the agreement.




   22 |       Section 2: FHFA and GSE Operations
                                                                                                     SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




Additional Government Support
The Enterprises also benefited from extraordinary government measures
to support the housing market overall. Since September 2008, the Federal                                                 Capitalization:
Reserve and Treasury have purchased more than $1.3 trillion in Enterprise                                                In the context of bank supervision,
MBS, and the Federal Reserve has purchased an additional $135 billion of                                                 capitalization refers to the funds a bank
bonds issued by the Enterprises.9                                                                                        holds as a buffer against unexpected
                                                                                                                         losses. It includes shareholders’ equity,
                                                                                                                         loss reserves, and retained earnings. Bank
FHLBANKS
                                                                                                                         capitalization plays a critical role in the
In 1932, Congress chartered the FHLBank System to make additional funding                                                safety and soundness of individual banks
available for residential mortgage lending. The FHLBank System is currently                                              and the banking system. In most cases,
comprised of 12 regional FHLBanks and the Office of Finance, which issues                                                federal regulators set requirements for
debt on the FHLBanks’ behalf.10 Each FHLBank is a separate legal entity                                                  adequate bank capitalization.
that must adhere to specific management and capitalization criteria.11 Figure
7 (see below) shows the FHLBanks’ geographic areas.
                                           Figure 7. Regional FHLBanks




Source: Federal Home Loan Bank of Boston, The Federal Home Loan Bank System (online at www.fhlbboston.com/aboutus/
thebank/06_01_04_fhlb_system.jsp) (accessed Mar. 1, 2012).



FHLBanks are privately capitalized and each is cooperatively owned by the
members it serves, which include financial institutions such as commercial banks,
thrifts, insurance companies, and credit unions. Eligible financial institutions
invest in FHLBank stock, which is not publicly traded, to become members.12

The primary business of the FHLBanks is to provide their members with low-
cost funding for mortgage lending and other purposes. To do so, each FHLBank
makes advances (i.e., loans) in a variety of maturities and structures to its members.


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




                                                Such advances are collateralized by single-family mortgage assets, investment-
Collateral:                                     grade securities, or, in some cases, agricultural and small business loans. Interest
Assets used as security for a loan that can     earned on advances is a primary revenue source for the FHLBanks.
be seized by the lender if the borrower fails
to repay the loan.                              The FHLBanks also maintain investment portfolios containing mortgage-
                                                related assets and some face heightened credit risks due to their larger holdings
Private-Label MBS:                              of private-label MBS.
MBS derived from mortgage loan pools
assembled by entities other than GSEs or        To fund member advances, the FHLBanks issue debt through their Office of
federal government agencies. They do not        Finance.13 In the event of a default on a debt obligation, each FHLBank is
carry an explicit or implicit government        jointly and severally liable for losses incurred by other FHLBanks. Like Fannie
guarantee, and the private-label MBS            Mae and Freddie Mac, the FHLBank System has also historically enjoyed cost
investor bears the risk of losses on its        benefits stemming from the implicit government guarantee of its debt obligations.
investment.                                                          Figure 8. FHLBanks’ Annual Net Income 2000-2011 ($ billions)

Joint and Several Liability:
                                                $3.0
The concept of joint and several liability
provides that each obligor in a group is
responsible for the debts of all in that        $2.5

group. In the case of the FHLBanks, if any
individual FHLBank were unable to pay a         $2.0
creditor, the other 11 – or any one or more
of them – would be required to step in and
                                                $1.5
cover that debt.

                                                $1.0



                                                $0.5



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


                                                Sources: Federal Housing Finance Agency, 2010 FHFA Annual Report to Congress, at 143 (online at
                                                www.fhfa.gov/webfiles/21570/FHFA2010RepToCongress61311.pdf) (accessed Mar. 6, 2012); Federal Home Loan Banks,
                                                2011 Federal Home Loan Banks Combined Financial Report, at F-5 (online at www.fhlb-of.com/ofweb_userWeb/resources/11yrend.pdf)
                                                (accessed Mar. 29, 2012).




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

                                                FHFA Announces New Conservatorship Scorecard for the Enterprises
                                                and Reduces Executive Compensation
                                                On March 9, 2012, FHFA released a Conservatorship Scorecard providing
                                                implementation guidelines for the goals that were set forth in the FHFA



  24 |     Section 2: FHFA and GSE Operations
                                                                SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




strategic plan. The scorecard contains objectives, measures, and a timeline for
the Enterprises in carrying out the strategic plan.

The Agency also announced a new 2012 executive compensation program
for the Enterprises, which reduces compensation for top executives by
roughly 75% since the advent of the conservatorships, eliminates bonuses, and
establishes a compensation target for new Chief Executive Officers (CEOs)
at $500,000 per year. The program was established by FHFA in conjunction
with Treasury and the boards of directors for the Enterprises and is detailed
in the Enterprises’ SEC filings.14 Similarly, on April 4, 2012, Public Law No.
112-105 was enacted. Among other things, the law prohibits the Enterprises’
senior executives from receiving bonuses while the Enterprises remain in
conservatorship.

Pilot REO Property Sales in Hardest-Hit Areas
In August 2011, FHFA, Treasury, and HUD issued a Request for Information,
soliciting input from the private sector on new and advantageous ways to
sell single-family REO properties held in the portfolios of the Enterprises
and the Federal Housing Administration (FHA). There were approximately
4,000 responses to the solicitation.

On February 27, 2012, FHFA announced a pilot REO Initiative that targets
some of the nation’s hardest-hit housing areas: Atlanta, Chicago, Las Vegas,
Los Angeles, Phoenix, and parts of Florida.15

In its pilot phase, the REO Initiative allows qualified investors to purchase
pools of foreclosed properties but requires them to rent the properties. This
rental requirement is intended to provide relief for housing markets depressed
by a high number of foreclosures, and increase rental options in these areas.
Interested investors may now prequalify to bid on transactions in both the
pilot and subsequent phases if they meet certain criteria. These criteria
include: (1) financial capacity to acquire the assets; (2) sufficient knowledge
of and expertise in financial and business matters to analyze and bear the
investment risks; and (3) agreement to keep information about the REO
Initiative confidential.

FHFA indicates the pilot phase’s purpose is to examine investor interest in
proposed activities to acquire various types of assets, and will consider:

     •	the location, size, and composition of asset pools;
     •	the types of structures and/or financing that improve seller returns
        and home values in markets hit by the recession;
     •	how investors bring in experienced local organizations to help
        stabilize communities; and
     •	 how investors qualify for and participate in sales transactions.16



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




                                             FHFA’s Strategic Plan for the Enterprises
                                             On February 21, 2012, FHFA released to Congress a strategic plan for the
                                             next phase of the conservatorships of the Enterprises. In the plan, FHFA
                                             outlines objectives and steps the Agency will undertake to fulfill its obligations
                                             as conservator. Specifically, the new strategic plan outlines three main goals
                                             for the next phase of the conservatorships:

                                                  •	 Build a new infrastructure for the secondary mortgage market.
                                                  •	Gradually contract the Enterprises’ dominant presence in the
                                                     marketplace while simplifying and shrinking their operations.
                                                  •	Maintain foreclosure prevention activities and credit availability for
                                                     new and refinanced mortgages.
                                             FHFA states that the first goal of building a new infrastructure recognizes
                                             that without the Enterprises the country would be without a secondary
                                             market for non-government insured mortgages. Currently, there is no private
                                             sector infrastructure capable of securitizing the approximately $105 billion
                                             per month in newly originated mortgages handled by the Enterprises. If they
                                             were no longer operating, mortgage interest rates likely would go up and loan
                                             availability would be limited. The strategic plan establishes the steps FHFA
                                             and the Enterprises will take to create the needed infrastructure, including a
                                             securitization platform, and national standards for mortgage securitization
                                             that Congress and market participants may use to develop the mortgage
                                             market of the future.

                                             The second goal, contracting Enterprise operations, involves gradually shifting
                                             mortgage credit risk from the Enterprises to private investors and eliminating
                                             the direct funding of mortgages by the Enterprises.

                                             The third goal, maintaining foreclosure prevention efforts and credit availability,
                                             recognizes that the work begun by the conservatorships over three years ago is not
                                             complete. Programs and strategies to ensure ongoing mortgage credit availability,
                                             assist troubled homeowners, and minimize taxpayer losses while restoring stability
                                             to housing markets continue to require energy, focus, and resources.

                                             FHFA notes that the next chapter for the Enterprises will involve gradually
                                             reducing their dominant positions in the housing finance market and
                                             encouraging private capital to fulfill that role. FHFA further notes that the
                                             final chapter for the Enterprises ultimately must be determined by lawmakers;
                                             only Congress can abolish or modify the Enterprises’ charters and create a
                                             new structure for housing finance. According to the Agency, its strategic
                                             plan envisions actions that will help establish a new secondary mortgage
                                             market, while leaving open all options for Congress and the Administration
                                             regarding the resolution of the conservatorships and the degree of government
                                             involvement in supporting the secondary mortgage market in the future.17




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Residential Mortgage Servicing Settlement
On February 9, 2012, the federal government and 49 state attorneys general
announced a $25 billion agreement with the nation’s five largest mortgage                Servicer:
servicers to address mortgage loan servicing and foreclosure abuses.o The                Servicers act as intermediaries between
agreement resulted from investigations by several federal agencies, including            mortgage borrowers and owners of the
OIG, state attorneys general, and state banking regulators nationwide.                   loans, such as the Enterprises or MBS
                                                                                         investors. They collect the homeowners’
The joint federal-state agreement requires the servicers to implement                    mortgage payments, remit them to the
comprehensive new mortgage loan servicing standards and commit $25 billion               owners of the loans, maintain appropriate
to resolve violations of state and federal law. These violations include servicers       records, and address delinquencies or
using “robo-signed” affidavits in foreclosure proceedings, deceptive practices in        defaults on behalf of the owners of the
offering loan modifications, failing to offer alternatives before foreclosing on         loans. For their services, they typically
borrowers with federally insured mortgages, and filing improper documents                receive a percentage of the unpaid principal
in federal bankruptcy court.                                                             balance of the mortgage loans they service.

Under the terms of the agreement, the servicers agreed collectively to dedicate
                                                                                         The recent financial crisis has put more
$20 billion toward various forms of financial relief for borrowers, including
                                                                                         emphasis on servicers’ handling of defaults,
principal reductions and refinancings for those with negative equity, principal
                                                                                         modifications, short sales, and foreclosures,
forbearance for unemployed borrowers, anti-blight programs, short sales,
                                                                                         in addition to their more traditional duty
transitional assistance, and other programs.
                                                                                         of collecting and distributing monthly
Mortgage servicers are required to fulfill their obligations within three years,         mortgage payments.
and will receive incentives if they provide relief within the first 12 months. The
agreement also requires servicers to pay $5 billion in cash to the federal and
state governments. This includes $1.5 billion for a borrower payment fund to
provide cash payments for qualifying homeowners foreclosed upon between
January 1, 2008, and December 31, 2011, and $3.5 billion to repay public
funds lost through servicer misconduct and to pay for housing counselors,
legal aid, and other similar programs.18

Home Affordable Modification Program Changes
On January 27, 2012, the Administration announced changes to the Home
Affordable Modification Program (HAMP), which is a Treasury initiative
that involves servicers agreeing to modify mortgages for borrowers facing
default or foreclosure. The Administration extended the program by one year
to December 31, 2013, and expanded program eligibility in order to reach a
wider pool of distressed borrowers. These expanded requirements include:

     •	Ensuring that borrowers with debt beyond their mortgage can participate.
        Previously, if a borrower’s first lien mortgage debt-to-income ratio
        was below 31% he or she was ineligible for a HAMP modification.
        However, many such homeowners struggle with other debt such as
        second liens and medical bills. The program now includes homeowners
        struggling with this secondary debt by offering an alternative evaluation    o
                                                                                       The servicers were: Bank of America Corporation,
        opportunity with more flexible debt-to-income criteria;                      JPMorgan Chase & Co., Wells Fargo & Company,
                                                                                     Citigroup Inc., and Ally Financial, Inc., see: www.justice.
                                                                                     gov/opa/pr/2012/February/12-ag-186.html.




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




                                                     •	Preventing additional foreclosures to support renters and stabilize
                                                        communities. Eligibility will be expanded from owner-occupied
                                                        residences only to occupied properties (i.e., properties occupied by owners
                                                        or others). This is intended to provide critical relief to both renters and
                                                        landlords, while further stabilizing affected communities; and
                                                     •	Increasing incentives for modifications that help borrowers rebuild
                                                        equity. Currently, HAMP includes an option for servicers to provide
HAMP Tier 1:
                                                        homeowners with a modification that includes a write down of the
HAMP was designed to help financially
                                                        principal balance if borrowers are underwater (i.e., they owe more on
struggling homeowners avoid foreclosure by
                                                        their mortgages than their homes are worth). To further encourage
modifying loans to a level that is affordable
                                                        investors to use principal reduction modifications, the Administration
for borrowers now and sustainable over
                                                        will:
the long term. The initial modification
under HAMP is referred to as Tier 1. This                  o	
                                                             Triple the incentives to encourage reducing principal for
modification option is for a loan secured by                 underwater borrowers. To date, the owner of a loan that
a property that is the borrower’s principal                  qualifies for HAMP receives between 6 and 21 cents on the
residence (owner-occupied). A borrower                       dollar to write down principal on that loan (depending on
may receive only one modification under                      how much the LTV ratio changes). To increase the amount
HAMP Tier 1. No mortgage loan may be                         of principal that is written down, Treasury will triple the
modified more than once in either Tier 1 or                  incentives, paying from 18 to 63 cents on the dollar; and
Tier 2. If a borrower is not eligible under
Tier 1, he or she can be evaluated under the               o	
                                                             Offer principal reduction incentives for loans insured or owned
HAMP extension referred to as Tier 2.                        by the Enterprises. HAMP borrowers who have loans owned
                                                             or guaranteed by the Enterprises do not currently benefit
HAMP Tier 2:                                                 from principal reduction loan modifications. To encourage
HAMP Tier 2 is an extension of HAMP                          the Enterprises to offer this assistance to their underwater
Tier 1; both have been extended to the                       borrowers, Treasury has notified FHFA that it will pay
end of 2013. HAMP Tier 2 expands                             principal reduction incentives to Fannie Mae or Freddie Mac
the population of eligible homeowners,                       if they allow servicers to forgive principal in conjunction with
utilizing additional evaluation criteria                     a HAMP modification.19
and extra incentives to servicers. Tier 2       In response to the HAMP modifications mentioned above, FHFA announced
includes owners who may have defaulted
                                                that the Enterprises will:
under Tier 1, borrowers for mortgages
secured by a rental property (not                    •	continue to serve as Treasury’s financial agents in implementing the
occupied by the owner), and an array of                 announced changes;
other struggling homeowners. A borrower
is eligible to receive up to a total of three
                                                     •	extend their use of HAMP Tier 1 as the first modification option
modifications of three different mortgages
                                                        through 2013, in line with Treasury’s HAMP extension; and
under Tier 2, and servicers are eligible for         •	not need to adopt further changes to implement the HAMP Tier 2
payment reduction cost share incentives.                option since it is based on the Enterprises’ standard modification that
                                                        FHFA announced and the Enterprises implemented in 2011 under
Principal Reduction:                                    the Servicing Alignment Initiative.20
A write down or forgiveness of a borrower’s
principal balance, in part or whole.            FHFA has been asked to consider newly available HAMP incentives for
                                                principal reduction. The Agency previously released an analysis, as discussed
                                                below, concluding that principal reduction is not a cost-effective alternative




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                                                                 SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




to principal forbearance in mitigating losses. FHFA is now re-assessing its
analysis in light of these enhanced incentives.
                                                                                     Principal Forbearance:
                                                                                     A period of time during which the borrower
FHFA Analysis of Principal Reductions                                                pays interest, but does not make payments
On January 31, 2012, FHFA informed Treasury and HUD that principal                   towards his or her mortgage’s principal
reduction programs supported by both agencies did not meet FHFA’s primary            balance.
goal of conserving and preserving the assets of the Enterprises and that
neither Fannie Mae nor Freddie Mac would be permitted to participate in              Securities Act of 1933:
such programs. Earlier in the month, in response to congressional inquiries,         Often referred to as the “truth in securities”
FHFA released its analysis supporting its position. In a letter dated January        law, it has two basic objectives: (1) require
20, 2012, to Congressman Elijah E. Cummings, Ranking Member for the                  that investors receive financial and other
House Committee on Oversight and Government Reform, FHFA described                   significant information concerning securities
the results of a comparative analysis of taxpayer losses from principal reduction    being offered for public sale and (2) prohibit
versus principal forbearance.21                                                      deceit, misrepresentation, and other
                                                                                     security sales fraud.

Enterprise Chief Executives Exit Announcements
                                                                                     Securities Exchange Act of 1934:
On January 10, 2012, Fannie Mae announced Michael J. Williams will be                With this law, Congress created the SEC
stepping down as its CEO and Director. He will continue in his current               with broad authority over all aspects of the
position until the Board of Directors appoints his successor.22                      securities industry, including the power to
                                                                                     register, regulate, and oversee brokerage
On October 26, 2011, FHFA announced that the current CEO of Freddie
                                                                                     firms, transfer agents, and clearing
Mac, Charles E. Haldeman Jr., will be stepping down in the next year. He
                                                                                     agencies as well as the nation’s securities
will remain in the position until a replacement is found and the transition is
                                                                                     self-regulatory organizations (e.g., the stock
completed.23
                                                                                     exchanges and the National Association
                                                                                     of Securities Dealers). The law also
SEC Charges Against Former Fannie Mae and Freddie Mac                                prohibits certain types of market conduct
Executives                                                                           such as material misrepresentations and
                                                                                     insider trading, and provides the SEC with
On December 16, 2011, the SEC filed two civil enforcement complaints
                                                                                     disciplinary powers over regulated entities
in the U.S. District Court for the Southern District of New York, charging
                                                                                     and associated persons. The law also
six former Enterprise executives – but not the Enterprises – with securities
                                                                                     empowers the SEC to require periodic
fraud. The suits claim that the six executives violated various sections of and
                                                                                     reporting of information by companies with
rules under the Securities Act of 1933 and the Securities Exchange Act of
                                                                                     publicly traded securities.
1934. The complaints allege the executives made material misstatements
to investors and the public regarding the Enterprises’ holdings of high-risk
                                                                                     Expanded Approval:
mortgage loans by claiming their risk was minimal and that their exposure to
                                                                                     A mortgage option that gives borrowers
subprime loans was substantially less than was actually the case.
                                                                                     with blemished credit access to high-
Specifically, in one complaint the SEC alleges that between December 2006            quality, low-cost, non-predatory loans.
and August 2008, Fannie Mae executives made misleading statements about              Expanded approval provides different levels
subprime mortgage loans and Alt-A mortgage loan holdings. For example,               of approval recommendations for loans and
the complaint claims that in calculating its exposure to subprime loans, Fannie      is only available to lenders that have been
Mae did not include loan products specifically targeted to borrowers with            specifically approved to deliver and service
weaker credit histories, including more than $43 billion of expanded approval        such mortgage loans.
loans. Similarly, in the other complaint the SEC alleges that between March
2007 and August 2008, Freddie Mac and its former executives made, or aided


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




                                             and abetted, misleading statements regarding the Enterprise’s single-family
                                             subprime loan exposure.

                                             The Fannie Mae executives charged in the first suit are former CEO Daniel H.
                                             Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive
                                             Vice President of Fannie Mae’s Single-Family Mortgage business Thomas
                                             A. Lund. The Freddie Mac executives named in the second suit are former
                                             Chairman of the Board and CEO Richard F. Syron, former Executive Vice
                                             President and Chief Business Officer Patricia L. Cook, and former Executive
                                             Vice President for the Single-Family Guarantee business Donald J. Bisenius.

                                             The SEC seeks financial penalties, disgorgement of ill-gotten gains with
                                             interest, permanent injunctive relief, and permanent bars against the named
                                             executives from being officers and directors.

                                             Fannie Mae and Freddie Mac entered into a non-prosecution agreement
                                             with the SEC whereby each Enterprise agreed to accept responsibility for its
                                             conduct and not to dispute, contest, or contradict the contents of an agreed-
                                             upon statement of facts. But, the Enterprises did not admit or deny liability.24

                                             Fannie Mae and Freddie Mac Mortgage Data Implementation
                                             Timeline
                                             In May 2010, FHFA announced a new Enterprise initiative to improve the
                                             data used for appraisals and other loan information. The Uniform Mortgage
                                             Data Program (UMDP) was developed to provide consistent standards
                                             for data and its collection. Under UMDP, FHFA seeks to make loan data
                                             submitted to the Enterprises more complete and uniform with regard to loan
                                             characteristics, borrower information, the property securing the loans, and the
                                             identity of the parties creating the transaction.25

                                             On December 14, 2011, FHFA announced extended implementation dates
                                             for a key component of UMDP called the Uniform Loan Delivery Dataset
                                             (ULDD). The purpose of ULDD is to implement uniform loan delivery data
                                             standards and define the data that the Enterprises will require at loan delivery
                                             based on loan type, loan feature, or other requirements. ULDD’s goal is to
                                             improve data accuracy, simplify the exchange of data, and increase confidence
                                             that loan data is accurate and complete.26 The Enterprises have delayed the
                                             implementation date for ULDD to July 23, 2012, instead of March 2012.27

                                             FHFA Vacant Building Ordinance Lawsuit
                                             On December 12, 2011, FHFA filed a lawsuit in the U.S. District Court
                                             for the Northern District of Illinois against the City of Chicago contesting
                                             the city’s amended “Vacant Buildings Ordinance” as enforced against the
                                             Enterprises. The ordinance seeks to address the problem of vacant properties
                                             by requiring mortgage owners to inspect mortgaged properties monthly in
                                             order to determine if they are vacant, in which case the mortgage owners must



 30 |   Section 2: FHFA and GSE Operations
                                                               SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




pay a $500 fee to register it as such. As mortgage owners, the Enterprises
are required to comply with the ordinance even if they neither own nor have
foreclosed on a property securing a mortgage. According to the ordinance, the
city can levy up to $1,000 per day in fines and penalties for noncompliance.

FHFA contends that the ordinance subjects the Enterprises to regulation and
supervision by the Chicago Department of Buildings instead of the Agency.
In the lawsuit, FHFA indicates that it seeks to ensure that Chicago’s proposed
registration and licensing system will not interfere with Congress’ intent for
FHFA to serve as the Enterprises’ sole supervisor and regulator. The Agency
also claims the registration fee represents a tax on the Enterprises and FHFA
as the conservator that is expressly precluded by long-standing congressional
directive.28

Revisions to HARP Guidelines
On October 24, 2011, FHFA and the Enterprises announced a number
of changes to HARP. These changes are intended to attract more eligible
borrowers capable of benefiting from refinancing their home mortgages.
Through HARP, underwater borrowers can refinance and take advantage of
low interest rates and other benefits. HARP is available to borrowers with
loans that were sold to the Enterprises on or before May 31, 2009, and have
current LTV ratios greater than 80%.

Key elements of the new HARP provisions include:

     •	eliminating certain risk-based fees for borrowers who refinance into
        shorter-term mortgages and lowering fees for other borrowers;
     •	removing the current 125% LTV ceiling for fixed-rate mortgages
        backed by the Enterprises;
     •	waiving certain representations and warranties to which lenders
        commit when making loans owned or guaranteed by the Enterprises;
     •	eliminating the need for a new property appraisal where the
        Enterprises provide a reliable automated valuation model estimate;
        and
     •	extending the end date for HARP to December 31, 2013, for loans
        originally sold to the Enterprises on or before May 31, 2009.29




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




 32 |   Section 2: FHFA and GSE Operations
                         SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




section 3
OIG’S ACCOMPLISHMENTS AND STRATEGY




                                         Section 3: OIG’s Accomplishments and Strategy   | 33
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                          Section 3: OIG’s Accomplishments and
                                                          Strategy
                                                          From October 1, 2011, through March 31, 2012, OIG achieved several
                                                          significant accomplishments, including: (1) issuing eight audit, evaluation,
                                                          survey, and white paper reports; (2) participating in a number of criminal and
                                                          civil investigations; and (3) reviewing and commenting on proposed FHFA
                                                          rules.

                                                          OIG AUDITS AND EVALUATIONS
The title of each audit and evaluation report             During this semiannual period, OIG released eight reports, which are briefly
in this section is linked to the report on OIG’s          summarized below.
website.
                                                          Evaluations, Surveys, and White Papers

                                                          FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of
                                                          Fannie Mae and Freddie Mac (WPR-2012-001, March 28, 2012)
                                                          Although they were expected to be temporary, the conservatorships have
                                                          been in place for over three years and there is no end in sight. Accordingly,
                                                          OIG provided background on the history of the Enterprises leading up to
                                                          the creation of the conservatorships and described FHFA’s oversight of their
                                                          operations since the commencement of the conservatorships. OIG also
                                                          summarized pertinent issues raised in its reports, as follows.

                                                          As the Enterprises’ regulator and conservator, FHFA has considerable
                                                          discretion in defining its role and choosing its actions; therefore, its role as
                                                          conservator has evolved over time. At the outset of the conservatorships,
                                                          FHFA forbade the Enterprises from engaging in certain activities and retained
                                                          approval authority over others. Soon thereafter, FHFA delegated day-to-
                                                          day operational decision making to the Enterprises’ directors and managers.
                                                          Debate as to the proper parameters of the Agency’s role as a conservator arose
                                                          and continues. OIG believes that FHFA needs to assume a more active role.
                                                          Thus, OIG’s reports consistently have revealed two trends: (1) the Agency, in
                                                          its role as a conservator, does not independently test and validate Enterprise
                                                          decision making and (2) the Agency, in its role as a regulator, is not proactive
                                                          in its oversight and enforcement. In addition, FHFA may not have enough
                                                          examiners to meet its oversight responsibilities.

                                                          Further, FHFA faces significant challenges in managing the conservatorships
                                                          of the Enterprises. These challenges include: (1) attempting to advance the
                                                          Enterprises’ business interests while assisting distressed homeowners and (2)
                                                          simultaneously serving as both the Enterprises’ conservator and regulator.

                                                          As if these challenges were not daunting enough, the uncertain future of the
                                                          Enterprises overshadows all aspects of FHFA’s regulatory and conservatorship


  34 |    Section 3: OIG’s Accomplishments and Strategy
                                                               SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




efforts. Although FHFA recently published a strategic plan for the next phase
of the conservatorships (which focuses on building infrastructure for a private
secondary mortgage market), the best method for resolving the Enterprises
is dependent on many variables that are outside of FHFA’s control. These
variables include the health of housing finance markets and debate about
what the nation’s mortgage finance system should look like. These variables
are important to the American taxpayer, who has been financially supporting
– and likely will continue to support – the Enterprises. Meanwhile, the
practical issues of how FHFA should best manage the conservatorships need
careful attention and oversight.

Fannie Mae’s and Freddie Mac’s Participation in the 2011 Mortgage
Bankers Association Annual Convention and Exposition (ESR-2012-
004, March 22, 2012)
Fannie Mae and Freddie Mac spent over $600,000 in order to participate
in the 2011 Mortgage Bankers Association Convention and Exposition
(the Convention). Although this sum represents a modest portion of the
Enterprises’ annual expenditures, the topic has attracted considerable
attention and OIG initiated a survey to review the Agency’s oversight of the
Enterprises’ travel-related expenses.

OIG found that FHFA did not approve or review (prior to the event) the
Enterprises’ participation in the Convention or their decisions to sponsor it.
Both FHFA and the Enterprises viewed the matter as entirely within the
authorities delegated by FHFA to Fannie Mae and Freddie Mac. Freddie
Mac claimed that the Convention presented “a cost-effective opportunity to
educate, inform, and engage with hundreds of mortgage market executives on
key issues affecting the housing industry.” Fannie Mae expressed a similar
view in its correspondence to FHFA.

Regarding the Enterprises’ expenditures associated with their participation
in the Convention, OIG found that the Enterprises’ registration and travel-
related expenses (e.g., airfare, hotel, and per diem) of $256,458, when
viewed on a per capita basis, were comparable to those that would have been
allowable for federal employees. However, other expenses accrued by the
Enterprises were questionable and – in some cases – would not have been
allowed for federal personnel. Specifically, the Enterprises paid $140,000 for
sponsorships of the Convention and $140,415 for business meals and hosted
dinners. OIG determined that, although business custom may often justify
these kinds of expenditures, neither Enterprise articulated tangible benefits
accruing from its sponsorships, hosted dinners, and other business meals that
would have warranted the expenditures. Specifically, there is no indication
that any business conducted by the Enterprises with their clientele at the
Convention could not have been conducted as well without the largesse.




                                                                                  Section 3: OIG’s Accomplishments and Strategy   | 35
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        Prior to OIG’s completion of the field work for this survey, FHFA’s Acting
                                                        Director issued a letter directing the Enterprises to no longer allow payments
                                                        for conference sponsorships and to end expenditures on food at business
                                                        meetings. In light of the new directive, OIG recommended that FHFA
                                                        should: (1) ensure that the Enterprises conduct a comprehensive review of
                                                        their travel and entertainment policies and revise them in a manner consistent
                                                        with the new directive and (2) review the Enterprises’ proposed policy
                                                        revisions to ensure that they are consistent with the new directive and that
                                                        the Enterprises have established appropriate controls to monitor compliance.
                                                        FHFA agreed with these recommendations.

                                                        FHFA’s Oversight of the Enterprises’ Charitable Activities (ESR-
                                                        2012-003, March 22, 2012)
                                                        At the time the conservatorships were established, both Fannie Mae
                                                        and Freddie Mac were making substantial contributions to charitable
                                                        organizations. In 2008, the Enterprises’ total charitable giving and related
                                                        expenses amounted to $73 million. Although funding charitable activities
                                                        may have been appropriate for the Enterprises acting as private businesses,
                                                        questions arose concerning whether it is still appropriate now that they rely on
                                                        taxpayer funds to cover their annual losses. Therefore, OIG reviewed FHFA’s
                                                        oversight of the Enterprises’ charitable programs.

                                                        The Enterprises’ charitable giving has continued since the conservatorships
                                                        were established, totaling $147 million from 2009 through 2011. However,
                                                        OIG found that in December 2008, FHFA established controls to ensure
                                                        that charitable giving is consistent with the Enterprises’ housing missions,
                                                        well managed and monitored, and not politically motivated. Additionally,
                                                        in early 2010, FHFA issued a series of directives to phase out all of the
                                                        Enterprises’ charitable giving and established various target dates for doing
                                                        so. The Enterprises’ combined annual donations had leveled off at $50 million
                                                        by the end of 2011; corporate donations are scheduled to end in 2013; and
                                                        payments from the Freddie Mac Foundation, which was funded prior to the
                                                        commencement of the conservatorships, are targeted to end in early 2015.
                                                        In light of FHFA’s controls over and planned phase out of the Enterprises’
                                                        charitable activities, OIG recommended that FHFA: (1) continue to monitor
                                                        the Enterprises’ progress and (2) continue to require the Enterprises to issue
                                                        timely, quarterly reports on their charitable activities via their websites. FHFA
                                                        agreed with these recommendations.

                                                        Evaluation of FHFA’s Management of Legal Fees for Indemnified
                                                        Executives (EVL-2012-002, February 22, 2012)
                                                        The Enterprises have spent considerable sums to defend themselves and
                                                        former senior executives in class action lawsuits and other legal matters.
                                                        Notably, in the case of three former Fannie Mae senior executives, between
                                                        2004 and October 31, 2011, Fannie Mae paid $99.4 million in advances for


 36 |   Section 3: OIG’s Accomplishments and Strategy
                                                                  SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




legal expenses associated with their defense in lawsuits, investigations, and
administrative actions. The lawsuits, now consolidated in a single securities
fraud case pending in the District of Columbia, allege that the three executives
supported questionable accounting practices that produced inflated prices
of Fannie Mae stock, ultimately resulting in substantial shareholder losses.
Discovery has been completed and the case awaits trial. Of the $99.4 million
in advances, Fannie Mae has paid $37 million in advances since September
2008, when it entered into conservatorship overseen by FHFA. Freddie Mac
has paid $10.2 million in advances for legal defense costs for former senior
executives since its conservatorship commenced. FHFA, as the Enterprises’
conservator, has approved these payments.

On December 16, 2011, the SEC filed suits in New York against six
additional former Fannie Mae and Freddie Mac senior executives. To date,
the Enterprises have advanced and continue to advance the executives’ legal
expenses. Members of Congress and others have questioned the amount
and propriety of the legal expense payments, especially in light of the very
large federal government investment in the Enterprises. FHFA and the
Enterprises believe that, based on applicable law, the Enterprises are obliged
to advance legal expenses of former and current executives, unless there is a
final adjudication that they acted in bad faith.

OIG assessed FHFA’s oversight of the Enterprises’ payments of legal expenses
incurred by former senior executives and found that FHFA confronts a
challenging balance of interests. On the one hand, FHFA is interested in
avoiding potential losses and is thus motivated to defend vigorously ongoing
lawsuits against the Enterprises. On the other hand, FHFA has an interest
in controlling significant costs, particularly the tens of millions of dollars of
payments made to attorneys and others involved in representing former senior
executives. Compounding these policy challenges, FHFA has some, albeit
limited, tools available to curtail litigation. For example, FHFA recently
issued a regulation that makes shareholder claims arising out of successful
class action litigation the lowest priority in any reorganization of FHFA’s
regulated entities and that gives FHFA, the Enterprises’ conservator, the
discretion not to pay securities litigation claims during their conservatorships.

Based on the new regulation, Treasury’s investment in the Enterprises will
be accorded repayment priority ahead of litigation claims. The repayment
priority, and the view that the Enterprises will not be able to earn enough
to repay Treasury’s investment and emerge from conservatorships means
that, for all practical purposes, it is unlikely that the Enterprises will ever be
in a position to pay litigation claims. FHFA recently made this argument
in an effort to stay the pending District of Columbia securities fraud case.
However, the effort was unsuccessful and the regulation is now the subject of
legal challenge.

OIG believes that, given the significant amounts of taxpayer money involved
and the issue’s high visibility, FHFA must continue to scrutinize the Enterprises’


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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        legal fee advances in order to limit costs. Therefore, it recommended that
                                                        FHFA: (1) work to limit legal expenses to the extent possible and reasonable
                                                        and (2) continue to control costs of legal expenses. FHFA agreed with these
                                                        recommendations.

                                                        FHFA’s Oversight of Troubled Federal Home Loan Banks (EVL-
                                                        2012-001, January 11, 2012)
                                                        As described in Section 2, the FHLBank System is a GSE consisting of 12
                                                        FHLBanks whose primary mission is to support housing finance. To carry
                                                        out this mission, the FHLBank System’s central Office of Finance issues debt
                                                        at the relatively favorable rates available to GSEs. The FHLBanks then use
                                                        the proceeds to make secured loans, known as advances, to their member
                                                        financial institutions. These member financial institutions can then use the
                                                        advances to originate mortgages.

                                                        FHLBanks may also invest in mortgage-related securities. Since 2008,
                                                        four FHLBanks have faced significant financial and operational difficulties,
                                                        primarily due to their investments in certain high-risk MBS.

                                                        FHFA has oversight responsibility for the FHLBanks and recognizes the
                                                        need to ensure they do not abuse their GSE status and engage in imprudent
                                                        activities. To this end, FHFA examination guidance states that the Agency
                                                        generally will initiate a formal enforcement action, such as a cease and
                                                        desist order, when it classifies an FHLBank as having the most significant
                                                        “supervisory concerns” within the FHLBank System. Nonetheless, with
                                                        respect to four FHLBanks that were classified as having supervisory concerns,
                                                        OIG found that formal enforcement actions were not taken on two of them.

                                                        Further, although OIG identified several positive actions FHFA has taken
                                                        as part of its oversight of the troubled FHLBanks (e.g., encouraging fiscally
                                                        conservative dividend and investment practices, and closely monitoring the
                                                        FHLBanks through examinations and ongoing communications), OIG also
                                                        found that FHFA has not established policies, systems, and documentation
                                                        standards that could strengthen its oversight. Specifically:

                                                             •	FHFA has not established a written enforcement policy for troubled
                                                                FHLBanks. Although FHFA examination guidance states that
                                                                FHFA will take formal enforcement actions against FHLBanks with
                                                                supervisory concerns, officials said the guidance does not constitute a
                                                                specific Agency policy. Instead, FHFA officials have broad discretion
                                                                in determining the circumstances under which formal actions against
                                                                troubled FHLBanks will be initiated. OIG believes that the absence
                                                                of a consistent and transparent written FHFA enforcement policy
                                                                for troubled FHLBanks: (1) results in a lack of clarity regarding the
                                                                circumstances under which the Agency will initiate formal actions;
                                                                (2) contributes to instances in which FHFA has not acted proactively
                                                                to hold troubled FHLBanks and their officers sufficiently accountable


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         for failing to correct identified risks or for engaging in questionable
         risk taking; and (3) impedes outside reviews of its oversight activities.
     •	FHFA does not have an automated management information
        system that provides ready access to current information about the
        deficiencies identified in its examinations and the status of efforts
        to address them. Instead, FHFA uses manual reporting processes
        that limit the Agency’s capacity to identify trends in examination
        findings and the progress made by particular FHLBanks in correcting
        identified deficiencies.
     •	FHFA does not consistently document substantive interactions with
        FHLBanks, including instances in which the Agency has suggested
        that an FHLBank remove senior officers. The absence of a record is
        inconsistent with Agency policy and impedes oversight.
In light of these findings, OIG recommended that FHFA: (1) develop and
implement a written enforcement policy for troubled FHLBanks that ensures
they correct significant deficiencies within specified periods and establishes
consequences for not doing so; (2) develop and implement an automated
management reporting system for FHLBank examination findings; and (3)
consistently document key interactions with FHLBanks. FHFA agreed with
these recommendations.

Audits

FHFA’s Oversight of Fannie Mae’s Single-Family Underwriting
Standards (AUD-2012-003, March 22, 2012)
The Enterprises purchase mortgages from lenders and either keep them as
investments or package and sell them to other investors. During the first
10 months of 2011, Fannie Mae purchased nearly 2.1 million loans valued
at $427 billion. To be eligible for purchase, a mortgage must satisfy the
Enterprises’ underwriting standards or have the Enterprises’ approval to vary
from them. During the housing boom, these variances from the underwriting
standards effectively relaxed underwriting standards and thus contributed to
Fannie Mae’s credit losses and credit-related expenses. OIG assessed FHFA’s
oversight of Fannie Mae’s single-family mortgage underwriting standards
and the internal controls over them.

Although FHFA has taken steps to ensure that mortgages purchased by the
Enterprises conform to underwriting standards (e.g., informally reviewing
Fannie Mae’s proposed credit policy changes, which may or may not affect
underwriting standards and variances from them), the Agency’s oversight of
underwriting is limited.

OIG concluded that the Agency can strengthen its oversight by creating
formal processes for reviewing both the Enterprises’ underwriting standards
and variances from them. FHFA can also enhance its guidance for planning


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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        and conducting its examinations of the Enterprises’ underwriting quality
                                                        control.

                                                        FHFA relies on the Enterprises to oversee and establish underwriting
                                                        standards and to grant variances. OIG found that the number of Fannie
                                                        Mae variances – and in effect its underwriting standards – have fluctuated
                                                        substantially over time. For example, in 2005 when standards were loose,
                                                        Fannie Mae authorized over 11,000 variances. Between January 2005 and
                                                        August 2007, Fannie Mae began rescinding variances, which tightened
                                                        underwriting standards. Fannie Mae had over 600 variances as of September
                                                        2011. Given the correlation of variances to underwriting standards, FHFA
                                                        should establish formal guidance and procedures for its review of underwriting
                                                        standards and variances from them.

                                                        In 2011, FHFA conducted a targeted examination that included Fannie
                                                        Mae’s quality control of compliance with underwriting standards. This was
                                                        a positive step, but additional examination guidance is needed to ensure that
                                                        Agency examinations are thoroughly and consistently performed. In addition,
                                                        the examinations should consider the impact of variances that Fannie Mae
                                                        has already approved.

                                                        By taking added measures to strengthen its oversight of underwriting
                                                        standards and related examinations, FHFA can increase its assurance that the
                                                        Enterprises are operating in a safe and sound manner and that, as conservator,
                                                        its goal of preserving and conserving Enterprise assets is achieved.

                                                        OIG recommended that FHFA’s: (1) Division of Housing Mission and Goals
                                                        formally establish a policy for its review process of underwriting standards
                                                        and variances, including escalation of unresolved issues reflecting potential
                                                        lack of agreement and (2) Division of Examination Program and Support
                                                        enhance existing guidance for assessing adherence to underwriting standards
                                                        and variances from them. The Agency agreed with these recommendations.

                                                        FHFA’s Controls to Detect and Prevent Improper Payments (AUD-
                                                        2012-002, March 9, 2012)
                                                        Federal agencies regularly make payments to program beneficiaries, grantees,
                                                        vendors, and contractors. Some of these payments are considered “improper”
                                                        as they may be made to the incorrect recipients, for the wrong amounts, at
                                                        the wrong times, or for other improper reasons. Therefore, as required by
                                                        the Improper Payments Information Act of 2002 (IPIA) (as amended by
                                                        the Improper Payments Elimination and Recovery Act of 2010 (IPERA)),
                                                        federal agencies should reduce and recapture erroneous payments, and
                                                        intensify efforts to eliminate payment error, waste, fraud, and abuse. And,
                                                        in accordance with Office of Management and Budget (OMB) directives,
                                                        the head of each agency must periodically review all programs and activities
                                                        that the relevant agency head administers and identify, estimate, report, and
                                                        publish all programs and activities that may be susceptible to significant


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improper payments. Additionally, for improper payments estimated to be in
excess of $10 million, the agency must report the potential actions it is taking
to reduce and recapture them.

Additionally, IPIA requires an inspector general to determine, each fiscal year,
whether his or her agency is in compliance with IPIA by reviewing the agency’s
improper payment reporting in its annual Performance and Accountability
Report or Annual Financial Report and accompanying materials. An
inspector general is expected to complete his or her review and determination
within 120 days of the agency’s publication of its reports.

On February 15, 2012, FHFA determined that the law and implementing
guidance relating to program-specific risk assessments for each program or
activity under IPIA are not applicable to FHFA. These provisions apply only
to “payments” made with federal government funds, and FHFA’s funds by
law are not to be construed as government or public funds. Also, because
FHFA does not make “payments” with federal funds, FHFA is not required
to conduct program-specific risk assessments even if the payments FHFA
makes were to fall within the specified dollar thresholds that trigger program
assessments.

Although the IPIA’s applicable provisions were limited by the definition of
“payment,” OIG concluded that FHFA complied with IPIA, as amended by
IPERA, and the criteria established in the relevant OMB policy. OIG further
determined that, although FHFA is not required to do so, the Agency is abiding
by the intent of IPIA, IPERA, and the related OMB directives. Specifically,
FHFA established controls to detect and prevent improper payments. These
findings are consistent with GAO’s opinion, issued in connection with FHFA’s
fiscal year 2011 financial statements audit, indicating that FHFA had effective
internal controls over financial reporting as of September 30, 2011.

FHFA’s Supervision of Freddie Mac’s Controls over Mortgage
Servicing Contractors (AUD-2012-001, March 7, 2012)
The Enterprises routinely purchase mortgages from mortgage originators in
order to provide liquidity for continued lending in support of the nation’s
housing finance system. With respect to the mortgages that they purchase, the
Enterprises enter into contracts with mortgage servicers to collect mortgage
payments, set aside taxes and insurance premiums in escrow, forward interest
and principal payments to the contractually designated party, and respond to
payment defaults. As of June 30, 2011, Freddie Mac had a mortgage servicing
portfolio containing approximately 12 million mortgages with an unpaid
principal balance of nearly $1.8 trillion.

Troubled loans have increased substantially since 2008, and mortgage
servicers have had to respond to increased defaults by expending extra
effort (e.g., modifying and foreclosing mortgages). In late 2010, the federal
agencies that regulate and supervise banks conducted an interagency review


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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        of foreclosure processing at 14 large mortgage servicers. The agencies found
                                                        critical weaknesses in the mortgage servicers’ foreclosure governance processes,
                                                        foreclosure document preparation procedures, and oversight and monitoring
                                                        of third-party vendors, including foreclosure attorneys.

                                                        In light of these findings, OIG initiated a performance audit to assess whether
                                                        FHFA has an effective supervisory control structure and sufficient examination
                                                        coverage and oversight activities to adequately and timely identify and mitigate
                                                        risks involving mortgage servicing contractors. The audit covered FHFA’s
                                                        supervision of Freddie Mac.

                                                        OIG found that FHFA and Freddie Mac have taken action to improve their
                                                        oversight of mortgage servicing, but noted some areas in which FHFA could
                                                        enhance its supervision of the Enterprises’ controls over mortgage servicing
                                                        contractors.

                                                        FHFA has not clearly defined its role regarding oversight of servicers, has not
                                                        sufficiently coordinated with other federal banking agencies about risks and
                                                        supervisory concerns with individual servicers, and has not timely addressed
                                                        emerging risks presented by mortgage servicing contractors. Moreover, FHFA
                                                        has not established comprehensive regulations and guidance that provide for
                                                        servicer management and oversight and does not adequately monitor servicing
                                                        performance.

                                                        As early as 2008, FHFA had information indicating that mortgage servicing
                                                        represented a heightened risk to the Enterprises, but FHFA did not devote
                                                        added attention to servicing issues until August 2010. These emerging risk
                                                        indicators included the increasing number and dollar value of mortgage
                                                        payment defaults, the concentration of servicing risk among a limited number
                                                        of large servicers, the surge in bank failures, and the escalation of enforcement
                                                        actions against problem banks, many of which performed mortgage servicing
                                                        for Freddie Mac. Further, when FHFA commenced its examination coverage
                                                        beginning in 2010, it did not adequately assess the operational risks posed by
                                                        Freddie Mac’s servicing contractors, consider the primary federal regulators’
                                                        reports of examination and enforcement actions, or analyze servicer reviews
                                                        conducted by other federal agencies.

                                                        In light of these control deficiencies, FHFA is not assured that the risk
                                                        associated with Freddie Mac’s servicing operations is being sufficiently
                                                        managed. In addition, Freddie Mac has developed a more robust servicer
                                                        performance management program that it estimates could yield significant
                                                        credit loss savings. However, Freddie Mac currently does not plan to
                                                        implement its program for all servicers. OIG accordingly believes that FHFA
                                                        may be able to generate additional funds to be put to better use, beyond what
                                                        Freddie Mac is currently targeting, by directing the Enterprise to implement
                                                        its servicer performance management program across a larger cross section of
                                                        its servicers.



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OIG therefore recommended that the Agency: (1) establish and implement
regulations or guidance concerning mortgage servicing oversight and risk
management; (2) direct Freddie Mac to take the necessary steps to implement
servicer performance metrics for a larger cross section of servicers to achieve
additional credit loss savings; and (3) improve existing procedures for
coordination with other federal agencies that oversee mortgage servicers.

FHFA agreed with the second and third recommendations and disagreed
with an aspect of the first. However, FHFA provided additional comments
that resolved the disagreement.

OIG AUDIT, EVALUATION, AND SURVEY PLAN
OIG maintains an Audit, Evaluation, and Survey Plan that focuses strategically            The Audit, Evaluation, and Survey Plan
on the areas of FHFA’s operations posing the greatest risks and providing the             FY 2012 is available at www.fhfaoig.gov/
greatest benefits to the Agency, Congress, and the public. Developed with                 Content/Files/Audit%20Evaluation%20
input from an independent third party, the plan responds to current events                and%20Survey%20Plan%202012.pdf.
and feedback from FHFA officials, members of Congress, and others.

Broadly, OIG’s audits, evaluations, and surveys cover the following FHFA
activities:

     •	Regulating the Enterprises and managing their conservatorships.
        This includes efforts to prevent foreclosures, mitigate losses, service
        mortgage loans, and manage and sell foreclosed properties. These
        are particularly high-risk areas because Treasury has invested $187.5
        billion of taxpayer dollars in the Enterprises and minimizing future
        costs depends on efficient, effective, and transparent FHFA supervision
        to conserve Enterprise resources and meet statutory mandates.
     •	Overseeing FHLBanks and their associated risks. These activities
        include unsecured lending and advance and collateral management.
     •	Reviewing internal operations, such as privacy and allegations of
        fraud, waste, or abuse.
The Audit, Evaluation, and Survey Plan identifies a number of other ongoing
and planned reviews of specific FHFA programs.p

OIG INVESTIGATIONS
OI has made significant contributions to a range of mortgage-related
investigations. As of March 31, 2012, OI had numerous open investigations.
In many of these investigations, OIG is working in conjunction with one or
more other law enforcement agencies, such as DOJ, the Office of the Special
Inspector General for the Troubled Asset Relief Program (SIGTARP), the
FBI, the Department of Housing and Urban Development Office of Inspector
General (HUD-OIG), the Federal Deposit Insurance Corporation Office
of Inspector General (FDIC-OIG), or state and local entities nationwide.
                                                                                    p
                                                                                        OIG’s plan is dynamic and will be revised as necessary.



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




                                                        Although most of these investigations remain confidential, details about
                                                        several matters have been publicly disclosed, as described below.

                                                        Taylor, Bean & Whitaker
                                                        On March 20, 2012, Delton DeArmas, the former chief financial officer of
                                                        Taylor, Bean & Whitaker Mortgage Corporation (TBW), pled guilty to
                                                        federal charges that include making false statements and conspiring to commit
                                                        bank and wire fraud for his role in a more than $2.9 billion fraud scheme that
                                                        contributed to the failures of TBW and Colonial Bank. From 2005 through
                                                        August 2009, he and other co-conspirators engaged in a scheme to defraud
                                                        financial institutions that had invested in a TBW-owned lending facility called
                                                        Ocala Funding LLC (Ocala). Ocala obtained funds for mortgage lending for
                                                        TBW from the sale of asset-backed commercial paper. Deutsche Bank and
                                                        BNP Paribas, among others, purchased commercial paper from Ocala.

                                                        Shortly after Ocala was established, DeArmas learned there were inadequate
                                                        assets backing its commercial paper, a deficiency referred to internally at TBW
                                                        as a “hole” in Ocala. DeArmas knew that the hole grew over time to more
                                                        than $700 million, and he learned from the CEO that the hole was more than
                                                        $1.5 billion at the time of TBW’s collapse. DeArmas admitted he was aware
                                                        that, in an effort to cover up the hole and mislead investors, a subordinate who
                                                        reported to him had falsified Ocala collateral reports and periodically sent the
                                                        falsified reports to Ocala’s investors and to other third parties. DeArmas also
                                                        acknowledged that he and the CEO deceived investors by providing them
                                                        with a false explanation for the hole in Ocala.

                                                        DeArmas also admitted that he directed a subordinate to inflate an account
                                                        receivable balance for loan participations in TBW’s financial statements.
                                                        DeArmas acknowledged that he knew the falsified financial statements
                                                        were subsequently provided to Freddie Mac and the Government National
                                                        Mortgage Association (Ginnie Mae) to support the renewal of TBW’s
                                                        authority to sell and service securities issued by them. When TBW closed
                                                        and filed bankruptcy, Freddie Mac suffered significant losses.

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


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                                                                SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




prison; and Sean Ragland, a former senior financial analyst at TBW, who was
sentenced to 3 months in prison.

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

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

Flahive Law Corporation
On March 8, 2012, Gregory Thomas Flahive, Cynthia Renee Flahive, and
Michael Kent Johnson, all attorneys with the Flahive Law Corporation, were
charged in California State Court with grand theft and conspiracy for their
role in a fraudulent loan modification scheme.

This investigation was initiated after many clients of the Flahive Law
Corporation complained to the California State Bar, the Better Business
Bureau, and/or the State of California Department of Justice about loan
modification services offered by them. The Flahive Law Corporation
advertised their loan modification services by flyers and radio and television
infomercials, and charged up-front fees of up to $2,500 from homeowners for
loan modification services that were not performed.

A majority of the clients had conventional loans. Some of the loans became
delinquent, resulting in foreclosure and losses to the Enterprises. OIG assisted
the California Attorney General’s Office and SIGTARP in this investigation.

Horizon Property Holdings/Cydney Sanchez
On December 1, 2011, Horizon Property Holdings employees Jewel Hinkles
(aka Cydney Sanchez), Bernadette Guidry, Jesse Wheeler, Cynthia Corn,
and Brent Medearis were indicted on mail and bankruptcy fraud charges in
the Eastern District of California. According to the indictment, from 2008
through at least February 2010, Horizon received approximately $5 million in
fees from people who were facing foreclosure, in exchange for false promises
that Horizon would assist them to secure mortgage modifications.

Hinkles and her conspirators allegedly told homeowners that for a substantial
up-front payment and a monthly fee they would save the homeowners’
residences from foreclosure. The indictment further alleges that contrary to
these representations, the conspirators failed to arrange for the modification
of the homeowners’ mortgages.




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




                                                           This is a joint investigation with the U.S. Postal Inspection Service, the FBI,
                                                           and the Stanislaus County District Attorney’s Office.

                                                           OIG INVESTIGATIONS STRATEGY
                                                           OIG and its law enforcement partners are engaged in a number of investigations
                                                           that, by their nature, cannot be made public at this time. OIG intends to
                                                           further develop close working relationships with other law enforcement
                                                           agencies, including DOJ and the U.S. Attorneys’ Offices; state attorneys
                                                           general; mortgage fraud working groups; the Secret Service; the FBI; HUD-
                                                           OIG; FDIC-OIG; IRS-Criminal Investigations; SIGTARP; FinCEN; and
                                                           other federal, state, and local agencies. During this reporting period, as in the
                                                           past, OI has continued to work closely with FinCEN to review allegations of
                                                           mortgage fraud for follow-up investigations and to determine where OIG
                                                           can best assign special agents to investigate fraud against the GSEs. OIG
                                                           also pursues innovative approaches to ensure its investigations are prosecuted
                                                           timely. For example, OIG has provided dedicated OIG investigative counsels
                                                           with substantial criminal prosecution experience to U.S. Attorneys’ Offices to
                                                           help prosecute OIG’s investigations. In addition, OIG has partnered with a
                                                           number of state attorneys general to pursue shared law enforcement goals.

                                                           OIG REGULATORY ACTIVITIES
                                                           Consistent with the Inspector General Act, OIG considers whether proposed
                                                           legislation, regulations, and policies related to FHFA are efficient, economical,
                                                           legal, and susceptible to fraud and abuse. From October 1, 2011, through
                                                           March 31, 2012, OIG reviewed eight proposed regulations and policies. OIG
                                                           provided substantive comments on several, which are discussed below.q

                                                           1.	FHFA Revised Conservatorship Delegations/Operating Protocol
                                                               for Delegations (OIG Comments Submitted on May 10, 2011,
                                                               and March 23, 2012)
                                                              As OIG noted in its second Semiannual Report (September 30, 2011),
                                                              FHFA proposed Revised Conservatorship Delegations/Operating
                                                              Protocol for Delegations (Revised Delegations) to replace delegations
                                                              made to the Enterprises in November 2008. The proposed Revised
                                                              Delegations advise the Enterprises of the actions they may take in the
                                                              ordinary course of their business and those actions they must submit to
                                                              FHFA for approval. OIG commented upon FHFA’s proposal in May
                                                              of 2011. On March 20, 2012, FHFA circulated for comment amended
                                                              Revised Delegations, and OIG reiterated its earlier position. FHFA
                                                              has not issued the final Revised Delegations. The substance of OIG’s
q
  As a matter of policy, OIG notes that it has commented      comments and their resolution will be published at a later date.
on a draft rule in the semiannual period when a comment
is made, and then OIG substantively discusses the rule
and its comments in a later semiannual report once the
rule is finalized and published.




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2.	
   FHFA Draft Proposed Rule: Federal Home Loan Bank
   Community Support Requirements (RIN 2590-AA38, OIG
   Comments Submitted on August 29, 2011)
  As OIG noted in its second Semiannual Report, FHFA is statutorily
  required to establish a community support standard that takes lending to
  first-time homebuyers into account.r FHFA drafted a proposed rule to
  transfer this responsibility, along with the task of monitoring FHLBank
  member compliance with the standard and with the Community
  Reinvestment Act of 1977, from FHFA to the FHLBanks themselves.
  OIG acknowledged that the applicable legislation does not require FHFA
  itself to monitor FHLBank member compliance, but noted that the
  duty to establish a community support standard is FHFA’s alone. OIG
  recommended that FHFA either review and approve community support
  programs proposed by each FHLBank, or provide the FHLBanks with a
  list of eligible community support programs from which they could select
  programs. On November 10, 2011, FHFA released a revised proposed
  rule that continues to shift compliance monitoring responsibilities from
  FHFA to the FHLBanks, but which – instead of tasking the FHLBanks
  with developing the community support standard – includes a list of
  activities eligible for consideration as providing support for first-time
  homebuyers.

3.	FHFA Draft Proposed Rule: Production of FHFA Records,
   Information and Employee Testimony in Legal Proceedings (No
   RIN Number Specified, OIG Comments Submitted on December
   20, 2011)
  FHFA forwarded OIG a draft proposed rule to establish controls over
  whether, when, and how its current or former employees may testify
  regarding official matters or produce official records or information in
  connection with legal proceedings to which FHFA is not a party. The
  draft proposed rule covers both FHFA and OIG personnel. Due to
  ongoing discussions between FHFA and OIG on this draft, the substance
  of OIG’s comments and their resolution will be published at a later date.

4.	FinCEN Draft Proposed Rule: Suspicious Activity Reporting
   and Anti-Money Laundering Program Requirements (RIN 1506-
   AB14, OIG Comments Submitted on January 9, 2012)
  On January 9, 2012, OIG formally commented on a rule proposed by
  FinCEN to extend the Bank Secrecy Act’s suspicious activity reporting
  and anti-money laundering program requirements to the Enterprises.
  Because the Enterprises already are subject to reporting requirements
  under HERA, the proposed rule has the potential to create duplicative
  reporting systems for them. Consequently, FinCEN and FHFA advise that        r
                                                                                   See 12 U.S.C. § 1430(g).




                                                                              Section 3: OIG’s Accomplishments and Strategy   | 47
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                             they ultimately plan to supplant HERA’s requirement for the Enterprises
                                                             to report to FHFA (when they have purchased or sold a fraudulent
                                                             loan or financial instrument or suspect a possible fraud relating to the
                                                             purchase or sale of any loan or financial instrument), and replace it with
                                                             the reporting requirements set forth in FinCEN’s proposed rule. OIG’s
                                                             comment supported the basic premise of FinCEN’s proposed rule, which
                                                             is to streamline the reporting requirements, but took issue with some of
                                                             the technical aspects of the rule insofar as they appear to conflict with
                                                             HERA’s mandates and are intended to replace them through regulation.
                                                             To ensure that the Enterprises are in compliance with HERA, OIG also
                                                             suggested that FinCEN modify the provisions concerning safe harbors,
                                                             the universe of covered entities, and the categories of transactions that
                                                             require reporting.

                                                           5.	FHFA Draft Final Rule: Prudential Management and Operations
                                                               Standards (RIN 2590-AA13, OIG Comments Submitted on
                                                               January 20, 2012)
                                                             HERA requires FHFA to establish prudential standards relating to
                                                             the management and operations of Fannie Mae, Freddie Mac, and the
                                                             FHLBanks.s FHFA must hold the entities accountable to these standards,
                                                             which shall address certain topics specified by HERA, including but not
                                                             limited to the entities’ internal controls, information systems, internal audit
                                                             systems, management of risk, liquidity, asset and investment portfolio
                                                             growth, and various other items. The Agency drafted a proposed final rule
                                                             to establish those standards. OIG has commented on the draft. FHFA
                                                             has not yet published the proposed final rule, so the substance of OIG’s
                                                             comments and their resolution will be published at a later date.

                                                           6.	FHFA Draft Proposed Rule: Housing Goals (RIN 2590-AA12,
                                                               OIG Comments Submitted on January 26, 2012)
                                                             Pursuant to Section 1128 of HERA, FHFA drafted a proposed rule to
                                                             establish annual housing goals. To satisfy the law, the rule establishes
                                                             annually adjustable benchmarks governing mortgage purchases by the
                                                             Enterprises from 2012 through 2014. Due to ongoing discussion between
                                                             FHFA and OIG on this proposed rule, the substance of the comments
                                                             and their resolution will be published at a later date.

                                                           7.	FHFA Final Rule: Freedom of Information Act Implementation
                                                               (RIN 2590-AA44, OIG Comments Submitted Throughout
                                                               Drafting Process)
                                                             On January 31, 2012, FHFA issued a final rule changing its procedures
                                                             for handling FOIA requests. Among other changes, the rule establishes a
s
 Housing and Economic Recovery Act of 2008 (HERA),
Pub. L. No. 110-289, § 1108.



    48 |   Section 3: OIG’s Accomplishments and Strategy
                                                               SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




   protocol for handling FOIA requests directed to or involving OIG. The
   Agency and OIG worked closely to produce the final rule.

8.	FHFA Final Rule: Privacy Act Implementation (RIN 2590-AA46,
    OIG Comments Submitted Throughout Drafting Process)
   On January 31, 2012, FHFA issued a final rule revising its existing Privacy
   Act regulation. Among other changes, the rule establishes a protocol for
   handling Privacy Act requests directed to or involving OIG. The Agency
   and OIG worked closely to produce the final rule.

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

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




                                                                                  Section 3: OIG’s Accomplishments and Strategy   | 49
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                                   David Z. Seide, Director of Special Projects, speaks at the opening
                                                                   meeting of the RMBS Working Group.



                                                        Coordinating with Other Oversight Organizations
                                                        OIG shares oversight of federal housing program administration with several
                                                        other federal agencies including HUD, the Department of Veterans Affairs
                                                        (VA), the Department of Agriculture (USDA), Treasury’s Office of Financial
                                                        Stability (which manages the Troubled Asset Relief Program); and their
                                                        inspectors general; and other law enforcement organizations. To further its
                                                        mission, OIG coordinates with these agencies to exchange best practices,
                                                        case information, and professional expertise. During the semiannual period
                                                        ended March 31, 2012, representatives of OIG participated in the following
                                                        cooperative activities:

                                                             •	RMBS Working Group. On January 27, 2012, the Attorney General
                                                                issued a memorandum announcing the formation of the RMBS
                                                                Working Group as a part of FFETF. The RMBS Working Group
                                                                is led by five co-chairs: the Assistant Attorney General of the DOJ
                                                                Criminal Division; SEC’s Director of Enforcement; the Attorney
                                                                General of the State of New York; the U.S. Attorney for the District
                                                                of Colorado; and the Assistant Attorney General of the DOJ Civil
                                                                Division. The working group is designed to investigate misconduct in
                                                                the market for MBS. Specifically, the RMBS Working Group seeks
                                                                to streamline and strengthen current and future efforts to identify,
                                                                investigate, and prosecute instances of wrongdoing in packaging,
                                                                selling, and valuing RMBS. The RMBS Working Group consists
                                                                of federal, state, and local partners including OIG, HUD, DOJ,
                                                                FinCEN, the SEC, the FBI, the IRS-CI, and the CFPB.
                                                             •	Federal Housing Inspectors General. As noted in the second Semiannual
                                                                Report, OIG spearheaded the creation of a new interagency working
                                                                group, the Federal Housing Inspectors General. In addition to OIG,
                                                                this group includes the Offices of Inspector General for other federal


 50 |   Section 3: OIG’s Accomplishments and Strategy
                                                                           SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




   agencies with primary responsibility for federal housing, including
   HUD, VA, and USDA. In November 2011, the Federal Housing
   Inspectors General published the Compendium of Federal Single                            The Compendium of Federal Single Family
   Family Mortgage Programs and Related Activities, which guides readers                    Mortgage Programs and Related Activities is
   through its members’ roles and missions and describes single-family                      available at www.fhfaoig.gov/Content/Files/
   mortgage programs at members’ agencies. The Federal Housing                              compendium.pdf.
   Inspectors General members continue to collaborate on multiple
   joint initiatives, including criminal investigations and audits in areas
   of common interest.
•	 CIGIE. OIG is an active participant of CIGIE.
      o	The Inspector General serves on the CIGIE Inspection
         and Evaluation Committee, which provides leadership for
         improving agency effectiveness by maintaining professional
         standards; develops protocols for reviewing management
         issues that cut across departments and agencies; promotes
         advanced program evaluation techniques; and fosters
         awareness of evaluation and inspection practices in the
         inspector general community. The Committee also provides
         input to CIGIE’s Professional Development Committee
         with regard to inspectors’ training and development needs.
      o	The Inspector General also serves as vice chairman of the
         CIGIE Suspension and Debarment Working Group,
         which is charged with improving the effectiveness of federal
         suspension and debarment practices.




 Brian D. Miller, the Inspector General of the General Services Administration, and
 Steve A. Linick, Inspector General of the Federal Housing Finance Agency, made
 presentations at the Association of Government Accountants National Leadership
 Conference on February 17, 2012.



                                                                                           Section 3: OIG’s Accomplishments and Strategy   | 51
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                             •	 C
                                                                 ouncil of Inspectors General on Financial Oversight. The Inspector
                                                                General is an active member of the Council of Inspectors General on
                                                                Financial Oversight, which was established by the Dodd-Frank Wall
                                                                Street Reform and Consumer Protection Act of 2010 to facilitate
                                                                information sharing among member agencies responsible for financial
                                                                oversight.
                                                             •	FFETF. OIG actively participates in FFETF, a broad coalition of
                                                                state and federal law enforcement agencies, prosecutors, and other
                                                                entities. The President established FFETF in November 2009 to
                                                                investigate and prosecute significant financial crimes, ensure just and
                                                                effective punishment for those who perpetrate them, recover proceeds
                                                                for victims, and address discrimination in the lending and financial
                                                                markets. Within the FFETF, OIG has begun working with its task
                                                                force partners to combat mission relevant financial crimes. OIG also
                                                                participates in several FFETF working groups such as:
                                                                   o	    the Mortgage Fraud Working Group;
                                                                   o	the Recovery Act, Procurement, and Grant Fraud Working
                                                                      Group; and
                                                                   o	    the Securities and Commodities Fraud Working Group.
                                                             •	Other Partnerships. OIG has established partnerships with several
                                                                federal agencies to share data, analyze internal complaints, and identify
                                                                trends. These agencies include FinCEN, SIGTARP, HUD-OIG,
                                                                the FBI, and the Secret Service. Each of OIG’s partnerships with
                                                                these agencies is designed to enhance interagency cooperation. These
                                                                partnerships focus the participating agencies’ combined investigative
                                                                resources on identifying, investigating, and prosecuting those involved
                                                                in fraud related to the entities regulated by the participants.

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

                                                        During the six-month period ended March 31, 2012, the Inspector General
                                                        provided two formal statements to Congress:

                                                             •	On December 1, 2011, the Inspector General submitted a Statement
                                                                for the Record for the House Subcommittee on Oversight and
                                                                Investigations hearing on “Oversight of the Federal Housing Finance
                                                                Agency.”




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                                                              SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




     •	On December 13, 2011, the Inspector General testified before the
        Senate Committee on Banking, Housing and Urban Affairs hearing
        on “Oversight of the Federal Housing Finance Agency Part II.”
Copies of the Inspector General’s written testimony to Congress are available
at www.fhfaoig.gov/testimony.




                                                                                Section 3: OIG’s Accomplishments and Strategy   | 53
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 54 |   Section 3: OIG’s Accomplishments and Strategy
                        SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




section 4
OIG’S RECOMMENDATIONS




                                               Section 4: OIG’s Recommendations   | 55
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




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




 56 |   Section 4: OIG’s Recommendations
                                                                                       SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




                                                     Figure 9. Summary of OIG’s Recommendations
       No.                                     Recommendation                                                    Report                               Status
ESR-2012-004-1   FHFA should ensure that the Enterprises conduct a comprehensive review            Fannie Mae’s and Freddie Mac’s         Recommendation agreed to
                 of their travel and entertainment policies, and revise them in a manner           Participation in the 2011 Mortgage     by FHFA; implementation of
                 consistent with the January 25, 2012, guidance.                                   Bankers Association Annual             recommendation pending.
                                                                                                   Convention and Exposition
ESR-2012-004-2   FHFA should review the Enterprises’ proposed revisions to ensure that they        Fannie Mae’s and Freddie Mac’s         Recommendation agreed to
                 are drafted in a manner consistent with the guidance provided by FHFA             Participation in the 2011 Mortgage     by FHFA; implementation of
                 and that the Enterprises have established appropriate controls to monitor         Bankers Association Annual             recommendation pending.
                 compliance.                                                                       Convention and Exposition
ESR-2012-003-1   FHFA should continue to monitor the Enterprises’ progress in phasing out          FHFA’s Oversight of the                Recommendation agreed to
                 their charitable activities.                                                      Enterprises’ Charitable Activities     by FHFA; implementation of
                                                                                                                                          recommendation pending.
ESR-2012-003-2   FHFA should continue to require the Enterprises to issue timely, quarterly        FHFA’s Oversight of the                Recommendation agreed to
                 reports on their charitable activities via their websites.                        Enterprises’ Charitable Activities     by FHFA; implementation of
                                                                                                                                          recommendation pending.
EVL-2012-002-1   FHFA should work to limit legal expenses to the extent possible and               Evaluation of FHFA’s Management        Recommendation agreed to
                 reasonable by:                                                                    of Legal Fees for Indemnified          by FHFA; implementation of
                 •• narrowing the reach of future indemnification agreements;                      Executives                             recommendation pending.
                 •• considering making greater use of Directors & Officers insurance; and
                 •• c ontinuing to invoke the new FHFA regulation establishing the primacy of
                     claims in a receivership, in an effort to curtail costly litigation.

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

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

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

EVL-2012-001-3   FHFA should document consistently key activities, including                       FHFA’s Oversight of Troubled           Recommendation agreed to
                 recommendations to remove and replace senior officers and other                   Federal Home Loan Banks                by FHFA; implementation of
                 personnel actions involving FHLBanks.                                                                                    recommendation pending.
EVL-2011-006-1   FHFA should promptly act on the specific significant concerns raised by           Evaluation of the Federal Housing      Recommendation
                 FHFA staff and Freddie Mac internal auditors about its loan review process.       Finance Agency’s Oversight             partially agreed to by
                                                                                                   of Freddie Mac’s Repurchase            FHFA; implementation of
                                                                                                   Settlement with Bank of America        recommendation pending.

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

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




                                                                                                                                  Section 4: OIG’s Recommendations     | 57
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




        No.                                        Recommendation                                                   Report                            Status
EVL-2011-005-2       FHFA should monitor the development and implementation of the examiner            Evaluation of Whether FHFA Has    Recommendation agreed to
                     accreditation program and take needed actions to address any shortfalls.          Sufficient Capacity to Examine    by FHFA; implementation of
                                                                                                       the GSEs                          recommendation pending.

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

EVL-2011-005-4       FHFA should report periodically to Congress and the public, which might           Evaluation of Whether FHFA Has    Recommendation agreed to
                     include the augmentation of existing reports, on the Agency’s examiner            Sufficient Capacity to Examine    by FHFA; implementation of
                     capacity shortfalls, such as the number of examiners needed to meet its           the GSEs                          recommendation pending.
                     responsibilities; the progress in addressing these shortfalls, including status
                     of examiner recruitment and retention efforts; and the development and
                     implementation of its examiner accreditation program.

EVL-2011-004-1       FHFA should closely monitor Fannie Mae’s implementation of its operational        Evaluation of FHFA’s Oversight    Recommendation agreed to
                     risk management program.                                                          of Fannie Mae’s Management of     by FHFA; implementation of
                                                                                                       Operational Risk                  recommendation pending.
EVL-2011-004-2       FHFA should take decisive and timely actions to ensure the implementation         Evaluation of FHFA’s Oversight    Recommendation agreed to
                     of the program if Fannie Mae fails to establish an acceptable and effective       of Fannie Mae’s Management of     by FHFA; implementation of
                     operational risk program by the end of the first quarter of 2012.                 Operational Risk                  recommendation pending.


EVL-2011-004-3       FHFA should ensure that Fannie Mae has qualified personnel to implement           Evaluation of FHFA’s Oversight    Recommendation agreed to
                     its operational risk management program.                                          of Fannie Mae’s Management of     by FHFA; implementation of
                                                                                                       Operational Risk                  recommendation pending.
EVL-2011-003-1       FHFA should engage in negotiations with Treasury and the Enterprises to           Evaluation of FHFA’s Role in      Closed – Final action taken by
                     amend the Financial Agency Agreements, under which the Enterprises                Negotiating Fannie Mae’s and      FHFA.
                     administer and enforce HAMP, by incorporating specific dispute resolution         Freddie Mac’s Responsibilities
                     provisions so that the parties may discuss differences that arise in its          in Treasury’s Making Home
                     administration and establish strategies by which to resolve or mitigate them.     Affordable Program

EVL-2011-002-1.1     FHFA should review the disparity in compensation levels between the               Evaluation of Federal Housing     Closed – Final action taken by
                     Enterprises’ executives and the senior executives of housing-related federal      Finance Agency’s Oversight of     FHFA.
                     entities that are providing critical support to the housing finance system.       Fannie Mae’s and Freddie Mac’s
                                                                                                       Executive Compensation Programs

EVL-2011-002-1.2     FHFA should review the extent to which federal financial support for the          Evaluation of Federal Housing     Closed – Final action taken by
                     Enterprises may facilitate their capacity to meet certain performance targets     Finance Agency’s Oversight of     FHFA.
                     and, by extension, the capacity of their executives to achieve high levels of     Fannie Mae’s and Freddie Mac’s
                     compensation that may not be warranted.                                           Executive Compensation Programs

EVL-2011-002-1.3     FHFA should review the potential challenges the Enterprises might face            Evaluation of Federal Housing     Closed – Final action taken by
                     in recruiting and retaining technical expertise, which might include the          Finance Agency’s Oversight of     FHFA.
                     employment or objective metrics to assess these issues and the extent to          Fannie Mae’s and Freddie Mac’s
                     which existing compensation levels may need to be revised.                        Executive Compensation Programs

EVL-2011-002-2.1     FHFA should establish written criteria and procedures for reviewing annual        Evaluation of Federal Housing     Closed – Final action taken by
                     performance and assessment data, as well as their recommended executive           Finance Agency’s Oversight of     FHFA.
                     compensation levels.                                                              Fannie Mae’s and Freddie Mac’s
                                                                                                       Executive Compensation Programs

EVL-2011-002-2.2     FHFA should conduct independent testing and verification, perhaps on a            Evaluation of Federal Housing     Closed – Final action taken by
                     random basis, to gain assurance that the Enterprises’ bases for developing        Finance Agency’s Oversight of     FHFA.
                     recommended individual executive compensation levels is reasonable and            Fannie Mae’s and Freddie Mac’s
                     justified.                                                                        Executive Compensation Programs




 58 |   Section 4: OIG’s Recommendations
                                                                                       SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




       No.                                      Recommendation                                                  Report                               Status
EVL-2011-002-2.3   FHFA should create and implement policies to ensure that all key executive      Evaluation of Federal Housing        Closed – Final action taken by
                   compensation documents are stored consistently and remain readily               Finance Agency’s Oversight of        FHFA.
                   accessible to appropriate Agency officials and staff.                           Fannie Mae’s and Freddie Mac’s
                                                                                                   Executive Compensation Programs

EVL-2011-002-3.1   To improve transparency, FHFA should post on its website information about      Evaluation of Federal Housing        Closed – Final action taken by
                   executive compensation packages, the Enterprises’ corporate performance         Finance Agency’s Oversight of        FHFA.
                   goals and performance against those goals, and related trend data.              Fannie Mae’s and Freddie Mac’s
                                                                                                   Executive Compensation Programs

EVL-2011-002-3.2   To improve transparency, FHFA should post on its website links to the           Evaluation of Federal Housing        Closed – Final action taken by
                   Enterprises’ securities filings.                                                Finance Agency’s Oversight of        FHFA.
                                                                                                   Fannie Mae’s and Freddie Mac’s
                                                                                                   Executive Compensation Programs

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


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

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

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

AUD-2012-001-1     FHFA’s Division of Enterprise Regulation (DER) should establish and             FHFA's Supervision of Freddie        Recommendation
                   implement more robust regulations or guidance governing counterparty            Mac's Controls over Mortgage         partially agreed to by
                   oversight and risk management for mortgage servicing. The regulations or        Servicing Contractors                FHFA; implementation of
                   guidance should include requirements for: (1) contracting with servicers,                                            recommendation pending.
                   including a contractual provision authorizing FHFA’s access to relevant
                   servicer information; (2) promptly reporting on material poor performance
                   and non-compliance by servicers; and (3) minimum, uniform standards for
                   servicing mortgages owned or guaranteed by the Enterprises.

AUD-2012-001-2     FHFA’s DER should direct Freddie Mac to take the necessary steps to             FHFA's Supervision of Freddie        Recommendation agreed to
                   monitor and track the performance of its servicers to reasonably assure         Mac's Controls over Mortgage         by FHFA; implementation of
                   achievement of credit loss savings by: (1) implementing servicer account        Servicing Contractors                recommendation pending.
                   plans for the servicers without account plans that are under consideration to
                   receive a plan and (2) taking action to maximize credit loss savings among
                   the remaining servicers that are not under consideration for account plans.

AUD-2012-001-3     FHFA’s DER should improve its existing procedures and controls governing        FHFA's Supervision of Freddie        Recommendation agreed to
                   coordination with other federal agencies that have oversight jurisdiction       Mac's Controls over Mortgage         by FHFA; implementation of
                   with respect to the Enterprises’ mortgage servicers.                            Servicing Contractors                recommendation pending.

AUD-2011-004-1     FHFA should review the circumstances surrounding its not identifying the        FHFA’s Oversight of Fannie Mae’s     Recommendation agreed to
                   foreclosure abuses at an earlier stage and develop potential enhancements       Default-Related Legal Services       by FHFA; implementation of
                   to its capacity to identify new and emerging risks.                                                                  recommendation pending.




                                                                                                                              Section 4: OIG’s Recommendations       | 59
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




        No.                                       Recommendation                                                   Report                             Status
AUD-2011-004-2       FHFA should develop and implement comprehensive examination guidance             FHFA’s Oversight of Fannie Mae’s   Recommendation agreed to
                     and procedures, together with supervisory plans, for default-related legal       Default-Related Legal Services     by FHFA; implementation of
                     services.                                                                                                           recommendation pending.

AUD-2011-004-3       FHFA should develop and implement policies and procedures to address             FHFA’s Oversight of Fannie Mae’s   Recommendation agreed to
                     poor performance by default-related legal services vendors that have             Default-Related Legal Services     by FHFA; implementation of
                     contractual relationships with both of the Enterprises.                                                             recommendation pending.

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

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

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

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

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

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

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

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




 60 |   Section 4: OIG’s Recommendations
                                                                                    SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




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

AUD-2011-002-1   FHFA should finalize, disseminate, and implement an Agency-wide                Clifton Gunderson LLP’s             Closed – Final action taken by
                 information security program plan in accordance with NIST SP 800-53            Independent Audit of the Federal    FHFA.
                 Rev.3.                                                                         Housing Finance Agency’s
                                                                                                Information Security Program –
                                                                                                2011
AUD-2011-002-2   FHFA should update its information security policies and procedures to         Clifton Gunderson LLP’s             Closed – Final action taken by
                 address all applicable NIST SP 800-53 Rev.3 components.                        Independent Audit of the Federal    FHFA.
                                                                                                Housing Finance Agency’s
                                                                                                Information Security Program –
                                                                                                2011
AUD-2011-002-3   FHFA should develop, disseminate, and implement an Agency-wide                 Clifton Gunderson LLP’s             Recommendation agreed to
                 information categorization policy and methodology.                             Independent Audit of the Federal    by FHFA; implementation of
                                                                                                Housing Finance Agency’s            recommendation pending.
                                                                                                Information Security Program –
                                                                                                2011
AUD-2011-002-4   FHFA should develop, disseminate, and implement a process to monitor           Clifton Gunderson LLP’s             Closed – Final action taken by
                 compliance with Plans of Action and Milestones.                                Independent Audit of the Federal    FHFA.
                                                                                                Housing Finance Agency’s
                                                                                                Information Security Program –
                                                                                                2011
AUD-2011-002-5   FHFA should establish controls for tracking, monitoring, and remediating       Clifton Gunderson LLP’s             Closed – Final action taken by
                 weaknesses noted in vulnerability scans.                                       Independent Audit of the Federal    FHFA.
                                                                                                Housing Finance Agency’s
                                                                                                Information Security Program –
                                                                                                2011




                                                                                                                            Section 4: OIG’s Recommendations     | 61
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




        No.                                       Recommendation                                                   Report                         Status
AUD-2011-001-1A      FHFA should design and implement written policies, procedures, and          Audit of the Federal Housing        Recommendation agreed to
                     controls governing the receipt, processing, and disposition of consumer     Finance Agency’s Consumer           by FHFA; implementation of
                     complaints that:                                                            Complaints Process                  recommendation pending.
                     •• define FHFA’s and the Enterprises’ roles and responsibilities regarding
                         consumer complaints;
                     •• r equire the retention of supporting documentation for all processing and
                         disposition actions;
                     •• r equire a consolidated management reporting system, including standard
                         record formats and data elements, and procedures for categorizing and
                         prioritizing consumer complaints;
                     •• ensure timely and accurate responses to complaints;
                     •• f acilitate the analysis of trends in consumer complaints received and use
                         the resulting analyses to mitigate areas of risk to the Agency;
                     •• safeguard PII; and
                     •• ensure coordination with OIG regarding allegations involving fraud,
                         waste, or abuse.

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

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




 62 |   Section 4: OIG’s Recommendations
SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




                       Section 4: OIG’s Recommendations   | 63
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 64 |   Section 4: OIG’s Recommendations
section 5
FANNIE MAE AND FREDDIE MAC – WHERE THE
TAXPAYERS’ MONEY WENT
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                      Section 5: Fannie Mae and Freddie Mac –
                                                      Where the Taxpayers’ Money Went
                                                      Following an unprecedented rise in housing prices, the housing market
                                                      began collapsing in late 2006. This had widespread, adverse impacts on those
                                                      financial institutions heavily concentrated in mortgage financing, such as
                                                      Fannie Mae and Freddie Mac. To prevent the Enterprises’ insolvency, from
                                                      September 6, 2008, through the end of 2011, Treasury invested approximately
                                                      $185 billion in them. Treasury’s actions have resulted in controversy
                                                      and questions have arisen concerning why Fannie Mae and Freddie Mac
                                                      required such federal intervention, how the Enterprises have used Treasury’s
                                                      extraordinary investment, and who may have benefited from it. In a nutshell,
                                                      it is believed that the investment permitted Fannie Mae and Freddie Mac to
                                                      avoid insolvency, which – given their dominant positions in housing finance
                                                      and the trillions of dollars of securities issued – could have caused the collapse
                                                      of the U.S. housing finance system. Additional consequences of Treasury’s
                                                      intervention include that the Enterprises’ shareholders lost almost all their
                                                      investments, but the Enterprises’ bond holders and investors in guaranteed
                                                      MBS were protected. More importantly, homeowners and other participants
                                                      in the housing market indirectly benefited from Treasury’s buttressing of the
                                                      market.

                                                      BACKGROUND
                                                      About the Enterprises
                                                      Fannie Mae and Freddie Mac fulfill their obligations to provide liquidity to
                                                      the housing finance system by supporting the secondary mortgage market.
                                                      The Enterprises purchase residential mortgages that meet their underwriting
                                                      criteria from loan sellers. The loan sellers can then use the sales proceeds
                                                      to originate additional mortgages. The Enterprises can hold the mortgages
                                                      in their own investment portfolios or package them into MBS that are, in
                                                      turn, sold to investors. For a fee, the Enterprises guarantee the payment of
                                                      mortgage principal and interest on the MBS they sell.

                                                      As depicted in Figure 10 (see page 67), to finance their purchase of billions
                                                      of dollars of mortgage loans, the Enterprises: (1) borrow funds from large
                                                      individual, institutional, and foreign investors and (2) create and sell MBS.




 66 |   Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went
                                                                                                                             SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




                               Figure 10. Overview of Enterprises and FHFA’s Role

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


                                                                              Buys
                                                                            Mortgages
       Seconday
                                                                                                                             A L HOU
       Mortgage Market                                    FANNIE MAE and                           Conservator
                                                                                                                        ER




                                                                                                                                     SI
       Market in which




                                                                                                                 FED
                                                          FREDDIE MAC




                                                                                                                                         NG
       existing mortgages and
       MBS are traded
                                                       Credit             Portfolio                                          FHFA
                                                      Guarantee         Investment




                                                                                                                                       CY
                                                                                                                   FI
                                                      Business           Business              Ensures Financial
                                                                                                                     A

                                                                                                                   N
                                                                                                  Safety and
                                                                                                                         NC




                                                                                                                                    N
                                                                                                                                     E
                                                                                                  Soundness
                                                                                                                              E AG
                                             Issues                Issues
                                              MBS                   Debt




                                                                 Buys                   Buys
                                                                 MBS                    Debt
                                      Sells
            INVESTORS               MBS & Debt

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




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


Provisions for Loan Losses in the Enterprises’ Portfolios
Inevitably, some homeowners will encounter difficulty making their mortgage                                                                               Provision for Loan and
payments. If a homeowner stops making payments, the Enterprise has to                                                                                     Guarantee Losses:
account for the revenue shortfall related to an owned or guaranteed mortgage.                                                                             An accounting concept that refers to the
The Enterprises have established special accounts or reserves to cover losses                                                                             reduction of current income to establish a
incurred on loans they own in their investment portfolios. They typically                                                                                 reserve fund for mortgage losses.
contribute to these accounts every quarter. These quarterly contributions
to reserves are called provisions for loan losses in that they provide against                                                                            Default:
future losses. Provisions for loan losses – and the reserves they fund – can be                                                                           Occurs when a mortgagor misses one or
attributable to a specific loan or can be based on the general expectation that                                                                           more payments.
a portion of the loans in the portfolio as a whole will default.
                                                                                                                                                          Mortgage Guarantees:
                                                                                                                                                          Historically, the Enterprises purchased
MBS Guarantees                                                                                                                                            mortgages and securitized them while
With respect to mortgage guarantees associated with the MBS that Fannie                                                                                   providing a guarantee to investors that if
Mae and Freddie Mac sell, they collect a monthly fee to ensure the payment of                                                                             the mortgagor defaulted, the Enterprise
principal and interest to MBS investors. This fee ‒ spread over the life of the                                                                           would make timely principal and interest
pool of loans that comprise a particular MBS ‒ is intended to cover that small                                                                            payments to the securitization trust, which
portion of loans that are expected to default. And, similar to the practice for                                                                           in turn would make payments to the
                                                                                                                                                          security holder.




                                                                                                                         Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went   | 67
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                             the loans they retain in their own portfolios, the Enterprises establish reserves
                                                             for losses on the MBS portfolios they guarantee.t

                                                             Defaults and Foreclosures
                                                             After a homeowner defaults on a loan that the Enterprises own or guarantee,
                                                             a loan servicer – typically, a vendor hired to collect mortgage payments, set
                                                             aside taxes and insurance premiums, forward principal and interest obligations
Foreclosure:                                                 to mortgage owners, and respond to payment defaults – may commence
The legal process used by a lender to obtain                 foreclosure on behalf of the Enterprises. Foreclosure is designed to recover
possession of a mortgaged property.                          the proceeds of a defaulted loan through the sale of the mortgaged property.
                                                             Once the servicer has foreclosed on a loan and taken the title on the property,
Charge Off:                                                  the Enterprise essentially erases ‒ or charges off ‒ the unpaid mortgage
An accounting term describing the                            balance from its accounting records. Following charge off, if the Enterprise
elimination of an asset, such as a mortgage                  sells the property to a third party, the sales price will offset losses.
loan, from a company’s books. It does
not necessarily imply a reduction in the                     The Enterprises aim to sufficiently contribute to their loan loss and guarantee
company’s assets, depending on the                           portfolio reserves to cover these losses. However, with the collapse of the
allowance established for loan losses.                       housing market and the ensuing financial crisis, losses on loans and payment
                                                             on guarantee obligations vastly exceeded the Enterprises’ abilities to cover
                                                             their losses.

                                                             The Financial Crisis and Its Effect on the Enterprises

                                                             The Crisis

                                                             The Bubble Inflated
                                                             From 2001 until it reached its peak in 2006, the U.S. housing market
                                                             experienced a rapid increase in real estate values.u During this time, prices
                                                             of single-family homes increased by an average of more than 12% annually.
                                                             Home price appreciation was accompanied by a rapid increase in mortgage
                                                             indebtedness. Total mortgage debt outstanding in the U.S. more than doubled,
                                                             from $5.1 trillion in 2000 to $11.2 trillion in the second quarter of 2008. This
                                                             swift escalation of home prices and mortgage indebtedness is often referred
                                                             to as the “housing bubble.”

                                                             During the housing bubble, Fannie Mae’s mortgage-related assets and
                                                             guarantees increased from $1.3 trillion in 2000 to $3.1 trillion in 2008, or
                                                             approximately 11% annually. Likewise, Freddie Mac’s mortgage-related assets
                                                             and guarantees similarly increased from $1 trillion in 2000 to $2.2 trillion in
                                                             2008, or 11% annually.

t
 Fannie Mae uses the term “guaranty fee,” whereas
Freddie Mac uses the term “management and guarantee
fee.” This report refers to them both as “guarantee fees.”
u
 Over a longer period, between 1997 and 2006, home
values increased 124%.



    68 |   Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went
                                                                                                            SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




 The Bubble Burst
 In 2007, housing prices began to plummet and loan delinquencies and defaults
 significantly increased. As reflected in Figure 11 (see below), after more than
 doubling over six years, home prices fell by 27% between 2006 and 2008.

                               Figure 11. Average Single-Family Residence Prices, 2000-2011

                220



                200



                180
Housing Index




                160



                140



                120



                100
                                  Dec-01




                                                                                                                               Dec-11
                      Dec-00




                                           Dec-02




                                                    Dec-03




                                                             Dec-04




                                                                      Dec-05




                                                                               Dec-06




                                                                                        Dec-07




                                                                                                 Dec-08




                                                                                                             Dec-09




                                                                                                                      Dec-10




 Source: Standard & Poor’s, S&P/Case-Shiller Home Price Indices: Home Price Index Levels, (December 2011)
 (20-City Composite Seasonally Adjusted) (online at www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/
 us/?indexId=spusa-cashpidff--p-us----) (accessed Apr. 10, 2012).




 The Impact                                                                                                                             v
                                                                                                                                         In 2007, Federal Reserve Board Chairman Ben S.
                                                                                                                                        Bernanke said:
 The collapse of housing prices had widespread, adverse impacts on many
 sectors of the U.S. economy, particularly for those financial institutions and                                                             Because of both regulatory requirements and
 investors that were heavily concentrated in mortgage financing, such as Fannie                                                             the force of market discipline, banks hold much
                                                                                                                                            more capital than GSEs [government-sponsored
 Mae and Freddie Mac. The Enterprises had grown rapidly with only a thin                                                                    enterprises] hold. The very largest bank holding
 capital cushion to provide protection against losses. The capital they were                                                                companies generally hold equity capital equal to 6
 required to hold to protect them from losses on their investment portfolio                                                                 percent or more of assets, and the largest regional
                                                                                                                                            banks generally have capital ratios of about 8
 and guarantee obligations met regulatory standards but fell well below capital                                                             percent. (As I am sure you are keenly aware,
 levels maintained by many large financial institutions.v Hence, the Enterprises                                                            community banks often have a capital-to-assets
                                                                                                                                            ratio exceeding 10 percent.) In comparison, the
 were not prepared for a sharp nationwide decline in housing prices. When                                                                   GSEs hold capital equal to roughly 3.5 percent of
 housing prices for the United States overall fell by an average of 9% in 2007,                                                             assets. The justification for the low capital holdings
 the Enterprises’ businesses began to come under increasing stress. By early                                                                of GSEs relative to banks is unclear. The largest
                                                                                                                                            banks are more diversified than the GSEs; and
 2008, both institutions were experiencing financial difficulties and, as more                                                              although banks likely assume greater credit risks,
 and more homeowners became delinquent on their mortgages, their rates of                                                                   they probably are less subject to interest-rate risk
 seriously delinquent (i.e., 90 or more days delinquent) owned or guaranteed                                                                than are GSEs. Moreover, the recent experience of
                                                                                                                                            the GSEs suggests that they are subject to at least as
 loans rapidly exceeded levels experienced during the preceding decade.                                                                     much operational risk as the large banks.

 The financial crisis has produced unprecedented losses for the Enterprises.                                                            Board of Governors of the Federal Reserve System,
                                                                                                                                        Statement of Chairman Ben S. Bernanke (Mar. 6, 2007)
 Fannie Mae lost $5 billion in the second half of 2007 and another $4.5 billion                                                         (online at www.federalreserve.gov/newsevents/speech/
 through the first half of 2008. Freddie Mac lost $3.7 billion in the second                                                            bernanke20070306a.htm).




                                                                                                          Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went           | 69
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                              half of 2007 and $1 billion during the first half of 2008. Subsequently, the
                                                              collapse in the market for MBS in the fall of 2008 resulted in even larger
                                                              losses for both entities. For the full year 2008, Fannie Mae and Freddie Mac
                                                              together recorded losses of more than $100 billion ($58.7 billion and $50.1
                                                              billion, respectively). To put these losses into perspective, over the 37-year
                                                              period from 1971 to mid 2008, Fannie Mae and Freddie Mac earned $95
                                                              billion, less than they lost in 2008 alone. And the losses continued; from
                                                              2008 through the end of the third quarter of 2011 the Enterprises lost $261
                                                              billion.30w In other words, the losses incurred during the conservatorships
                                                              are more than double the cumulative net income the Enterprises reported as
                                                              public companies.31

                                                              The Conservatorships
                                                              In July of 2008, HERA was enacted. Among other things, HERA
Generally Accepted Accounting
                                                              strengthened the regulator’s ability to place the Enterprises in conservatorships
Principles (GAAP):
                                                              and authorized it to place them into receiverships.x Additionally, HERA
A set of rules and conventions promulgated
                                                              empowered Treasury to provide financial assistance to Fannie Mae and
by national industry boards (in the United                    Freddie Mac through the end of 2009.
States, the Financial Accounting Standards
                                                              On September 6, 2008, Fannie Mae and Freddie Mac entered conservatorships
Board) as standard accounting practice for
                                                              overseen by FHFA.y Among the key reasons FHFA cited for taking this
that country.
                                                              action were concerns about: the Enterprises’ financial conditions, their
                                                              ability to raise capital and to continue funding themselves, and “the critical
                                                              importance each company has in supporting the residential mortgage market
                                                              in this country.”32

                                                              At the same time, and in coordination with FHFA, Treasury exercised its
                                                              authority under HERA to provide support to the Enterprises to ensure their
w
  As depicted in Figure 15, the Enterprises’ cumulative
                                                              solvency. In taking this action, former Treasury Secretary Henry Paulson stated
losses exceed the amount of Treasury’s investment by          that Treasury had concluded ‒ based on a thorough review of the financial
$78 billion. When the conservatorships commenced, the         condition of the Enterprises, their projected ability to withstand difficult
Enterprises had $78 billion in capital available, and this
capital partially offset losses and the need for additional   market conditions, and the need to provide stability to unsettled financial
Treasury investment.                                          markets – that it was necessary both to place them in conservatorships and to
x
 Under the previous statute governing federal oversight
                                                              set up a process for providing financial support to them, as needed.33
of the Enterprises, the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992, Pub. L.           Treasury’s financial support has been in the form of purchases of senior
No. 102-550, the Enterprises’ regulator, OFHEO, had the       preferred stock issued by the Enterprises in accordance with PSPAs. Under
authority to place an Enterprise in conservatorship, but
not receivership.
                                                              the terms of the PSPAs, whenever an Enterprise’s liabilities exceed its assets
                                                              (as determined using Generally Accepted Accounting Principles (GAAP)),
 For a more complete discussion of the impact of placing      Treasury provides cash sufficient to eliminate that deficit in exchange for an
y

the Enterprises in conservatorships, see FHFA-OIG’s
Current Assessment of FHFA’s Conservatorships of              increase in the value of the senior preferred stock.34 The PSPAs thus provide
Fannie Mae and Freddie Mac (WPR-2012-001, Mar. 28,            the Enterprises a financial backstop.35 Since establishing the conservatorships,
2012) (available at www.fhfaoig.gov/Content/Files/WPR-
2012-001.pdf).
                                                              Treasury has made equity investments in the Enterprises almost every quarter
                                                              and, by the end of 2011, the cumulative amount of such taxpayer investments
  This figure, $185 billion, includes the $2 billion          stood at $185 billion, as shown in Figure 12 (see page 71).z
z

initial commitment fee. Treasury was issued stock
representing this fee as payment for agreeing to invest
in the Enterprises as required.



    70 |   Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went
                                                                                                                       SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




                 Figure 12. Enterprise Quarterly Deficits Since Conservatorship
                                          ($ billions)
$200
                                                                                                                        $185 billion
$180

$160

$140

$120

$100

 $80

 $60

 $40

 $20

  $0
       Q3 2008




                 Q4 2008




                           Q1 2009




                                     Q2 2009




                                               Q3 2009




                                                         Q4 2009




                                                                      Q1 2010




                                                                                Q2 2010




                                                                                                 Q3 2010




                                                                                                           Q4 2010




                                                                                                                         Q1 2011




                                                                                                                                   Q2 2011




                                                                                                                                             Q3 2011
                                                               Fannie Mae                 Freddie Mac



Source: Federal Housing Finance Agency, Data as of December 14, 2011 on Treasury and Federal Reserve Purchase Programs for GSE
and Mortgage-Related Securities, at Table 1 (online at www.fhfa.gov/webfiles/22856/) (accessed Feb. 29, 2012).


Initially, the Enterprises were to receive no more than $200 billion from                                                                              The Enterprises’ PSPAs and amendments
Treasury. The PSPAs were subsequently revised to increase this amount                                                                                  are available at www.fhfa.gov/Default.
to $400 billion. The PSPAs were amended a second time to increase the                                                                                  aspx?Page=364.
investment ceiling to $400 billion over the amount actually drawn as of
December 31, 2012 (less any positive equity – which is unlikely – at that
date). To illustrate, given the investment of $185 billion at the end of 2011, if
no more cash were drawn before December 31, 2012 (and stockholder equity
is zero or less on that date), then the ceiling will be $585 billion ($185 billion
plus $400 billion).

As a condition of receiving financial support under the PSPAs, the Enterprises
agreed to pay Treasury quarterly dividends at an annual rate of 10% on
Treasury’s outstanding investment.

The Enterprises’ dividend obligations, which are exacerbated by the 10%
annual rate, are so large that they have yet to earn enough to pay them
annually. Consequently, Treasury has had to advance additional sums                                                                                    aa
                                                                                                                                                          The Acting FHFA Director noted in a Sept. 2011
to the Enterprises to pay dividends. As of the end of 2011, Treasury’s                                                                                 speech: “It ought to be clear to everyone at this point,
                                                                                                                                                       given the Enterprises’ losses since being placed into
investment in the Enterprises, excluding the amount needed to fund the                                                                                 conservatorship and the terms of the Treasury’s financial
dividend payments, is $151 billion.36 (Treasury’s investment of $185                                                                                   support agreements, that the Enterprises will not be able
billion also includes $32 billion in advances to pay dividends and $2 billion                                                                          to earn their way back to a condition that allows them to
                                                                                                                                                       emerge from conservatorship.” Federal Housing Finance
in fees assessed against the Enterprises at the inception of the PSPAs.)                                                                               Agency, Statement of Acting Director Edward J. DeMarco
According to FHFA and the Enterprises, the likelihood of the Enterprises                                                                               (Sept. 19, 2011) (online at www.fhfa.gov/webfiles/
                                                                                                                                                       22617/NCSpeech91911.pdf). Similarly, in their 2011
ever earning enough to repay the full amount invested is remote.aa                                                                                     annual public filings, both Enterprises independently
                                                                                                                                                       reported that, “there is significant uncertainty as to our
                                                                                                                                                       long-term financial sustainability.”



                                                                                                                     Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went               | 71
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                          This is illustrated in Figure 13 (see below), which compares the current
                                                          dividend amount to the Enterprises’ net annual income since 1988.

                                                             Figure 13. Combined Enterprise Net Income (Loss) vs. Current Treasury Dividend
                                                                                              ($ billions)
                                                                                                          Minimum Current Annual Dividend: $19.2 billion
                                                             $20



                                                              $0



                                                            $(20)



                                                            $(40)



                                                            $(60)



                                                            $(80)



                                                           $(100)



                                                           $(120)

                                                                    1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



                                                          Sources: Federal Housing Finance Agency, 2008 FHFA Annual Report to Congress, at 110, 127 (online at www.fhfa.gov/webfiles/2335/
                                                          FHFA_ReportToCongress2008508rev.pdf) (accessed Feb. 29, 2012); Fannie Mae, 2010 10-K Report, at F-4 (online at www.fanniemae.
                                                          com/ir/pdf/earnings/2010/10k_2010.pdf) (accessed Feb. 29, 2012); Freddie Mac, 2010 10-K Report, at 208 (online at www.
                                                          freddiemac.com/investors/er/pdf/10k_022411.pdf) (accessed Apr. 21, 2012); Fannie Mae, 2011 Third Quarter 10-Q Report, at 102
                                                          (online at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2011/q32011.pdf) (accessed Feb. 29, 2012); Freddie Mac,
                                                          2011 Third Quarter 10-Q Report, at 104 (online at www.freddiemac.com/investors/sec_filings/index.html) (accessed
                                                          Feb. 29, 2012).




                                                          On the basis of Treasury’s outstanding investment of $185 billion and the
                                                          annual dividend rate of 10% (paid quarterly at a rate of 2.5%), the Enterprises’
                                                          current annual dividend payment is $19.2 billion.bb As depicted in Figure 13,
                                                          even in their best year, 2002, when they earned $14 billion, the Enterprises
                                                          failed to earn the $19.2 billion that would be needed to pay an annual dividend
                                                          on Treasury’s $185 billion investment as of the end of 2011.

                                                          ENTERPRISE GAINS, LOSSES, AND USE OF FUNDS FOR THE PERIOD
                                                          2008 THROUGH THE THIRD QUARTER 2011
                                                          Summary of Gains, Losses, and Use of Funds
                                                          Large businesses like the Enterprises typically analyze financial performance
                                                          of all of their business lines to gain an understanding of the dynamics of
                                                          each particular segment of their operations. As discussed in more detail
                                                          below, and as summarized in Figure 14 (see page 73), with the exception of
                                                          their multifamily business lines, the Enterprises suffered losses in all of their
bb
  If the computation were made once a year, then the
10% rate would be assessed against the balance,           operations.
resulting in a smaller payment of $18.5 billion.



     72 |   Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went
                                                                                                           SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




         Figure 14. Sources of Gains, Losses, and Use of Funds for the Period 2008
                             Through the Third Quarter 2011cc
 Single Family                                                      Loss
 Multifamily                                                        Gain
 Investments                                                        Loss
 Other                                                              Loss
 Accounting Adjustments                                             Loss
 Dividends to Treasury                                              Dividend Payment

Source: Federal Housing Finance Agency, Conservator’s Report on the Enterprises’ Financial Performance Third Quarter 2011, at 9
(online at www.fhfa.gov/webfiles/22855/Conservator’sReport3Q2011F122111F.pdf) (accessed Apr. 5, 2012).




As discussed above, the Enterprises’ cumulative losses as of the end of
the third quarter of 2011 totaled $261 billion, but they had $78 billion in
unobligated capital at the beginning of 2008. (Additionally, $2 billion in
fees were assessed against the Enterprises at the inception of the PSPAs
and these fees are included in Treasury’s $185 billion investment.) This
unobligated capital partially mitigated the need for Treasury investment.
Figure 15 (see below) quantifies the relative losses, dividend obligations, and
gain on Enterprise operations, through the third quarter of 2011.


               Figure 15. Enterprise Gains, Losses, and Dividend Obligation 2008
                            Through Third Quarter 2011 ($ billions)
    $20
                                            $7
     $0
                                                             $(4)              $(16)
  $(20)                                                                                           $(8)
                                                                                                                    $(32)
  $(40)
  $(60)
  $(80)
$(100)
$(120)
$(140)                                                              Available Capital                    $ 78 Billion
$(160)                                                              Loss from Segments                   $ (261) Billion
                                                                    Initial Commitment Fees              $ (2 ) Billion
$(180)
                      $(208)                                        Total                                $ (185 ) Billion
$(200)
$(220)                                                                                                                              cc
                                                                                                                                      FHFA publishes a quarterly Conservator’s Report on
                                                                                                                                    Fannie Mae’s and Freddie Mac’s financial performance
                       mily




                                                                                ses



                                                                                               Adju unting
                                          mily




                                                             nts




                                                                                                                   Trea to




                                                                                                                                    and condition, to enhance public understanding of
                                                                                                        nts



                                                                                                                       sury
                                                                                                                     ends
                                                           stme




                                                                                                                                    their financial performance leading up to and during
                                                                             r Los
                      le Fa




                                           ifa




                                                                                                   stme




                                                                                                                                    conservatorship. The reports include the sources of
                                                                                                 Acco
                                      Mult




                                                                                                                 Divid
                                                         Inve



                                                                           Othe
                  Sing




                                                                                                                                    Enterprise losses and capital deficits and Enterprise loss
                                                                                                                                    mitigation activity. The reports are available at www.
                                                                                                                                    fhfa.gov/Default.aspx?Page=172. For purposes of this
 Source: Federal Housing Finance Agency, Conservator’s Report on the Enterprises’ Financial Performance Third Quarter 2011, at 9    discussion, OIG uses the categories of losses/gains that
 (online at www.fhfa.gov/webfiles/22855/Conservator’sReport3Q2011F122111F.pdf) (accessed Apr. 5, 2012).
                                                                                                                                    FHFA publishes in its Conservator’s reports.



                                                                                                       Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went          | 73
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                            Figure 15 (see page 73) clearly demonstrates that the bulk of the Enterprises’
                                                            losses were incurred in its single-family business: owning and guaranteeing
                                                            home mortgages. Moreover, the vast majority of the Enterprises’ losses in
                                                            their single-family business lines are attributable to single-family loans made
                                                            from 2004 through 2008.

                                                            Single Family
                                                            As discussed above, the Enterprises purchase single-family mortgages from
                                                            lenders. The Enterprises then either hold the mortgages in their investment
                                                            portfolios or package and sell them as MBS. The Enterprises typically
                                                            guarantee payment of principal and interest on the MBS they sell in exchange
                                                            for guarantee fees.

                                                            As shown in Figure 15 (see page 73), after accounting for revenues from new
                                                            and existing loans (e.g., guarantee fees), the Enterprises’ single-family business
                                                            line had a net loss (i.e., expenses exceeding income) of $208 billion since 2008.
                                                            As described below, and depicted in Figure 16 (see page 75), Fannie Mae’s and
                                                            Freddie Mac’s loss-related expenses totaled $218 billion and these expenses
                                                            were predominantly associated with MBS guarantees.dd

                                                            Retained Mortgage Loans
                                                            During the conservatorships, the Enterprises accrued $86 billion in expenses
                                                            (called provisions) related to mortgage loans held on their books, as shown in
                                                            Figure 16 (see page 75). However, this sum is affected by a recent accounting
Reserve for Guarantee Losses:                               change. Prior to 2010, these losses related solely to those loans the Enterprises
An accounting phrase meaning a reserve                      purchased from third parties and immediately placed into their portfolios
fund on the balance sheet that is created                   (without securitizing and selling them to investors). Beginning in 2010,
in anticipation of future losses on loans                   changes in accounting rules required the Enterprises to account for loans they
guaranteed by the Enterprises. It has the                   had guaranteed in the same way as loans they owned and held on their books.
effect of reducing income in the current                    Thus, the Enterprises reduced their reserve for MBS guarantee losses and
period.                                                     increased their reserves for retained mortgages losses.
Securitization:
A process whereby a financial institution                   MBS Guarantees
assembles pools of income-producing                         The Enterprises expanded their MBS business rapidly beginning in the mid
assets (such as loans) and then sells                       1990s. By 2008, the amount of the Enterprises’ guarantees on mortgages that
an interest in the assets’ cash flows as                    were securitized into MBS was nearly seven times the amount held in their
securities to investors.                                    investment portfolios.37 As the housing market collapsed and homeowners
                                                            failed to make interest and principal payments for securitized loans, the
                                                            Enterprises satisfied their guarantee obligations and made required periodic
                                                            payments to MBS investors. As shown in Figure 16 (see page 75), in spite
dd
  As discussed above under the heading “Provisions for      of the 2010 accounting change, the Enterprises’ provisions for losses related
Loan Losses in the Enterprises’ Portfolios” (see page       to their guarantee business totaled $132 billion during the conservatorships.
67), the Enterprises maintain reserve accounts to pay
losses on retained mortgages and MBS guarantees. The
periodic funding of these accounts, which has increased
as a consequence of the housing crisis, is an expense for
the Enterprises.



     74 |   Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went
                                                                                                        SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




                           Figure 16. Enterprise Provisions for Losses on
                         MBS Guarantees vs. Retained Mortgages ($ billions)
$140
                                              Total $218 billion

$120


$100
                                                                                                                      MBS
                                                                                                                      Guarantee
 $80
                                                                                                                      Provisions

 $60                                                                                                                  Retained
                                                                                                                      Mortgage
                                                                                                                      Provisions
 $40


 $20

                                         $132
                                         $132                      $86
                                                                   $86
  $0


                                   2008 through Q3 2011
Sources: Fannie Mae, 2011 10-K Report, at 101 (online at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-
results/2011/10k_2011.pdf) (accessed Apr. 10, 2012); Freddie Mac, 2011 10-K Report, at 170, 235 (online at www.freddiemac.com/
investors/er/pdf/10k_030912.pdf) (accessed Apr. 5, 2012); Freddie Mac, 2009 10-K Report, at 257 (online at www.freddiemac.com/
investors/er/pdf/10k_022410.pdf) (accessed Apr. 10, 2012); Freddie Mac, Form 10-Q: For The Quarterly Period Ended September 30,
2011, at 121 (online at www.freddiemac.com/investors/sec_filings/index.html) (accessed Apr. 16, 2012); Fannie Mae, Form 10-Q:
For The Quarterly Period Ended September 30, 2011, at 33 (online at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-
results/2011/q32011.pdf) (accessed Apr. 16, 2012).


Multifamily
Like their single-family business, the Enterprises participate in mortgages
secured by multifamily buildings, acquiring, holding, or securitizing them
into MBS. As shown in Figure 15 (see page 73), results from this business
segment contributed a gain of $7 billion from 2008 through the end of the
third quarter of 2011.

Investments
During the same timeframe, investments contributed $4 billion in overall
losses, as shown in Figure 15 (see page 73). Figure 17 (see page 76) shows,
however, that the Enterprises lost $83 billion on their investments in 2008,
and that since that time annual gains have partially offset the 2008 results.
Investment results are largely comprised of private-label MBS and derivative
performance.




                                                                                                    Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went   | 75
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                                   Figure 17. Investments Gains and (Losses) 2008 Through Third Quarter 2011
                                                                                                  ($ billions)ee
                                                                $40
                                                                                                                    $38
                                                                                                                                                 $31
                                                                $20

                                                                  $0                                                                                                           $10

                                                              $(20)

                                                              $(40)

                                                              $(60)
                                                                                                                                            Overall Results: $(4) billion
                                                              $(80)                  $(83)

                                                             $(100)
                                                                                     2008                          2009                         2010                         Q3 2011

                                                             Source: Federal Housing Finance Agency, Conservator’s Report on the Enterprises’ Financial Performance Third Quarter 2011, at 14
                                                             (online at www.fhfa.gov/webfiles/22855/Conservator’sReport3Q2011F122111F.pdf) (accessed Apr. 5, 2012).




                                                             Private-Label MBS
                                                             From 2004 through 2007, as reflected in Figure 18 (see page 77), the
Adjustable Rate Mortgages (ARMs):                            Enterprises bought substantial quantities of private-label MBS. Such
Mortgages whose interest rate changes                        securities typically offered higher yields than either their own such securities
periodically and usually in relation to the                  or the mortgages they held in their investment portfolios. Further, in part, the
change of another interest rate.                             mortgages backing these securities often were issued to low- and moderate-
                                                             income homebuyers, whom the Enterprises had a legislative mission to
Payment Option ARMs or Option ARMs:
                                                             serve.ff
A special type of ARM, which enables the
borrower to choose among various monthly                     With the downturn in the overall housing market, the value of private-label
payment levels.                                              MBS held by the Enterprises plummeted as well. Freddie Mac noted in its
                                                             financial statements for 2010, that the “decline has been particularly severe
                                                             for subprime, option [Adjustable Rate Mortgages (ARMs)], and Alt-A
                                                             and other loans” held in MBS.38 Freddie Mac cited high unemployment,
ee
  Results for “Investments” include derivatives and MBS      a large inventory of seriously delinquent mortgage loans and unsold homes,
performance.                                                 tight credit conditions, and weak consumer confidence as contributing
 Federal Reserve Board Chairman Ben S. Bernanke said,
ff                                                           to the poor performance of these securities. Further, subprime loans that
“By borrowing at this preferential rate and purchasing       back these securities have had significantly greater concentrations in states
assets (including MBS) that pay returns considerably         that have experienced the greatest distress during the economic downturn,
greater than the Treasury rate, the GSEs can enjoy profits
of an effectively unlimited scale.” Bernanke went on to      such as California, Florida, Arizona, and Nevada. Loans in these states
say, “the GSE portfolio purchases may create benefits for    have experienced among the highest delinquency rates, and the credit losses
home purchase mortgages extended to lower-income
households, to low- and moderate-income first-time
                                                             associated with such loans have been among the highest in the country.39
homebuyers, and to buyers of homes in lower-income           Nonetheless, steep declines in the value of the Enterprises’ private-label MBS
neighborhoods.” Board of Governors of the Federal            in 2008 have been offset by income from them and partial recovery of MBS
Reserve System, Statement of Chairman Ben S.
Bernanke (Mar. 6, 2007) (online at www.federalreserve.       prices since then.
gov/newsevents/speech/bernanke20070306a.htm).




     76 |   Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went
                                                                                                        SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




           Figure 18. New Acquisitions of Subprime and Other Private-Label MBS
                                        ($ billions)
         $60



         $50                                                  $51



         $40                                                                     $42




         $30

                                           $25
         $20

                        $16

         $10


                                                                                                      $0
           $0

                    2004 & Prior          2005                2006               2007               2008

Sources: Fannie Mae, 2010 10-K Report, at 124 (online at www.fanniemae.com/ir/pdf/earnings/2010/10k_2010.pdf) (accessed Apr.
10, 2012); Freddie Mac, 2010 10-K Report, at 218 (online at www.freddiemac.com/investors/er/pdf/10k_022411.pdf) (accessed Apr.
10, 2012).


Derivatives
As the Enterprises accumulated investments in mortgages and MBS, they
were exposed to significant risks affecting the value of their mortgage-related
                                                                                                                                     Derivatives:
assets. Like many sophisticated investors, they entered into derivatives
                                                                                                                                     Securities whose value depends on that
contracts. Such hedging activities are intended to manage or moderate the
                                                                                                                                     of another asset, such as a stock or bond.
possible financial impact from these risk factors. Derivatives can function as
                                                                                                                                     They may be used to hedge interest rate or
a form of risk management such that when the value of the underlying asset
                                                                                                                                     other risks related to holding a mortgage.
declines, the value of the derivative contract rises and vice versa. Changes
in the value of these derivatives holdings are generally expected to offset                                                          Hedging:
fluctuations in the value of the Enterprises’ portfolios of mortgages and MBS.                                                       The practice of taking an additional step,
Thus, as MBS values have increased – and moderated the Enterprises’ private-                                                         such as buying or selling a derivative, to
label MBS losses – the values of derivative contracts have declined.                                                                 offset certain risks of holding a particular
                                                                                                                                     investment, such as MBS.
Other Losses
Losses attributable to the write down of low-income housing tax credits during
the fourth quarter of 2009 are included in “Other Losses” shown in Figure
15. Because the Enterprises currently are not generating taxable income, the
credits, which they had previously acquired, have no practical present value
to them. Therefore, they sought Treasury’s approval to sell their credits to
entities that have net operating income and thus potential tax liability that
the credits can offset. Treasury denied their requests. The write down of these
credits for both Enterprises contributed $8 billion of the $16 billion loss.




                                                                                                    Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went    | 77
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                       Accounting Adjustments
                                                       The Enterprises make changes to their accounting policies when they are
                                                       required to do so. This is usually driven by changes in GAAP, which the
                                                       Enterprises observe. For example, in 2010 a change in GAAP required
                                                       the Enterprises to report on their balance sheets the amount of mortgages
                                                       outstanding that are included in MBS that they guaranteed. This resulted in
                                                       a one-time $8 billion loss for the Enterprises, as shown in Figure 15 (see page
                                                       73).

                                                       Dividends to Treasury
                                                       Through the third quarter of 2011, the Enterprises have paid Treasury $32
                                                       billion in dividends. Of course, as discussed above, Treasury advanced the
                                                       dividend payments to the Enterprises.

                                                       PUTTING THE LOSSES IN PERSPECTIVE: WINNERS AND LOSERS
                                                       As of the end of the last quarter prior to the conservatorships (i.e., June 30,
                                                       2008), the Enterprises had $1.6 trillion in short- and long-term outstanding
                                                       debt; $3.7 trillion worth of MBS guarantees; and stockholders’ equity of only
                                                       $54 billion. With mounting losses and without Treasury funding, it is likely
                                                       the Enterprises would have found themselves with insufficient funds to make
                                                       scheduled debt payments and satisfy MBS guarantee obligations.

                                                       Losers: Stockholders
                                                       According to the PSPAs, no dividends can be paid to the Enterprises’
                                                       preferred or common shareholders (with the exception of Treasury) without
Creditors vs. Shareholders:
                                                       Treasury’s approval or until Treasury is fully repaid. Additionally, Treasury
Creditors, also called lenders, expect to
                                                       received the right to purchase 80% of the Enterprises’ stock for a nominal
earn interest that will be paid according to
                                                       amount. Both of these measures rendered the Enterprises’ common shares
contractual terms.
                                                       virtually worthless. For example, Fannie Mae’s shares closed at $4.74 on the
Common shareholders are the owners of a                Friday before conservatorship. As recently as March 9, 2012, they traded for
company and can receive dividends if the               $0.32 per share on the Over-The-Counter Bulletin Board (Fannie Mae’s and
company declares them.                                 Freddie Mac’s shares are no longer traded on the New York Stock Exchange);
                                                       similarly, Freddie Mac’s shares, which closed at $5.10 on the Friday before
Preferred shareholders cannot vote on                  conservatorship, have fallen to $0.326 per share as of March 9, 2012. Other
shareholder matters, though they do receive            factors also have impaired the Enterprises’ share prices. Their share prices
preference over common shareholders if the             had deteriorated substantially before the conservatorships, and, had the
company becomes insolvent and its assets               Enterprises been forced to liquidate, common shareholders would not have
are distributed.                                       received a return on their investment until all creditors and senior classes of
                                                       shareholders had been paid in full.40

                                                       In short, the PSPAs give priority in repayment to Treasury ahead of any
                                                       other preferred or common shareholders. Thus, the preferred and common
                                                       shareholders of Fannie Mae and Freddie Mac did not benefit by Treasury’s
                                                       actions. They effectively lost their investments.



  78 |   Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went
                                                                  SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




Winners: Holders of Bonds and Guaranteed MBS
Treasury’s investment effectively made explicit the federal government’s
implicit guarantee of the Enterprises’ debt. Further, by placing the Enterprises
in conservatorship and committing to making capital investments in them,
FHFA and Treasury provided assurance that the Enterprises would, in turn,
be able to make contractually required payments to future creditors.

Neither Enterprise publishes a comprehensive list of creditors. However,
foreign central banks, commercial banks, fund managers, insurance companies,
state and local governments, corporate pensions, individuals, and nonprofit
foundations invested in the Enterprises’ debt and guaranteed MBS. For
example, in the year before the conservatorships, Fannie Mae sold bonds
to the following categories of investors: foreign central banks (44%), fund
managers (26%), commercial banks (17%), insurance companies (6%), state
and local governments (4%), retail (2%), and corporate pensions (1%).41

More importantly, allowing the Enterprises to meet their debt and guarantee
obligations enabled them to continue to support the secondary market. As
the Congressional Research Service has noted:

     A failure or default by Fannie [Mae] or Freddie [Mac] would have severely
     disrupted financial markets around the world. If the [Enterprises’]
     portfolios of mortgage loans and MBS had to be liquidated, prices would
     plunge, the secondary market for mortgages would be decimated, and
     the supply of new mortgage credit might be severely restricted. These
     market disruptions would have negative impacts on the economy as a
     whole.42

Further, since September 2008, the private sector has almost entirely
abandoned the secondary mortgage market, and the Enterprises and Ginnie
Mae have stepped up to fill the void. In 2010, Enterprise and Ginnie Mae
guaranteed MBS comprised 96% of newly issued MBS. Additionally,
Treasury’s intervention has provided assurance to future creditors and MBS
investors that they, too, will get their money back if they transact business with
the Enterprises.


OUTLOOK
From September 2008 through the end of 2011, Treasury invested $185 billion
in the Enterprises. FHFA projects three scenarios for the future capital draws
by both Fannie Mae and Freddie Mac through the end of calendar year 2014.43

Under these projections, the amount of the additional payments that Treasury
would make to each Enterprise depends on the outlook for home prices – e.g.,
whether prices continue to fall, if so, by how much and for how long – and
when and how strongly circumstances turn around so prices begin to increase.
According to the most recent projections, which FHFA released in October
2011, additional taxpayer financing for the Enterprises ranges from $37


                                                               Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went   | 79
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                              billion to as much as $128 billion through the end of 2014.gg In other words,
                                                              total Treasury support for the Enterprises is currently expected to range from
                                                              a low of $220 billion to a high of $311 billion.




gg
  However, the projections reported are not expected
outcomes. They are modeled projections in response
to “what if” scenarios involving assumptions about
Enterprise operations, loan performance, macroeconomic
and financial market conditions, and house prices. The
projections do not define the full range of possible
outcomes and actual outcomes may be very different.
This effort should be interpreted as an analysis of the
sensitivity of future Enterprise capital draws to possible
house price paths.

FHFA provided the Enterprises with key assumptions for
each scenario. The Enterprises used their respective
internal models to project their financial results based
on the assumptions provided by FHFA. While this
effort achieves a degree of comparability between
the Enterprises, it does not allow for actions that the
Enterprises might undertake in response to the economic
conditions specified in the scenarios. Those Enterprise-
specific business changes could lead to results that differ
from those presented in the projections.



     80 |   Section 5: Fannie Mae and Freddie Mac – Where the Taxpayers’ Money Went
appendices
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                            Appendix A: Glossary and Acronyms
                                            GLOSSARY OF TERMS
                                            Adjustable Rate Mortgages: Mortgages whose interest rate changes
                                            periodically and usually in relation to the change of another interest rate.

                                            Alt-A: A classification of mortgages in which the risk profile falls between
                                            prime and subprime. Alt-A mortgages are generally considered higher risk
                                            than prime due to factors that may include higher LTV and debt-to-income
                                            ratios or limited documentation of the borrower’s income.

                                            American Recovery and Reinvestment Act of 2009: Enacted in 2009, this
                                            legislation authorizes a series of measures intended to create jobs and promote
                                            investment and consumer spending.

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

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

                                            Charge Off: An accounting term describing the elimination of an asset, such
                                            as a mortgage loan, from a company’s books. It does not necessarily imply a
                                            reduction in the company’s assets, depending on the allowance established for
                                            loan losses.

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

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

                                            Conventional Conforming Mortgage Loans:         Mortgages that are
                                            not insured or guaranteed by the Federal Housing Administration, the



 82 |   Appendix A: Glossary and Acronyms
                                                                SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




Department of Veterans Affairs, or the Department of Agriculture, and that
meet the Enterprises’ underwriting standards. Conforming mortgage loans
have original balances below a specific threshold, set by law and published by
FHFA, known as the “conforming loan limit.” For 2012, the conforming loan
limit is $417,000 for most areas of the contiguous United States, although
generally it can increase to a maximum of $625,500 in specific higher cost
areas.

Creditors vs. Shareholders: Creditors, also called lenders, expect to
earn interest that will be paid according to contractual terms. Common
shareholders are the owners of a company and can receive dividends if the
company declares them. Preferred shareholders cannot vote on shareholder
matters, though they do receive preference over common shareholders if the
company becomes insolvent and its assets are distributed.

Debarment: Disqualification of a firm or an individual from contracting
with the government or participating in government non-procurement
transactions for a specific period of time. The grounds for debarment include
conviction for fraud or similar offenses.

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

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

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

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

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

Expanded Approval: A mortgage option that gives borrowers with blemished
credit access to high-quality, low-cost, non-predatory loans. Expanded
approval provides different levels of approval recommendations for loans and
is only available to lenders that have been specifically approved to deliver and
service such mortgage loans.




                                                                                      Appendix A: Glossary and Acronyms   | 83
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




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

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

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

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

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

                                            Generally Accepted Accounting Principles: A set of rules and conventions
                                            promulgated by national industry boards (in the United States, the Financial
                                            Accounting Standards Board) as standard accounting practice for that country.

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

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

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

                                            HAMP Tier 1: HAMP was designed to help financially struggling
                                            homeowners avoid foreclosure by modifying loans to a level that is affordable
                                            for borrowers now and sustainable over the long term. The initial modification
                                            under HAMP is referred to as Tier 1. This modification option is for a loan
                                            secured by a property that is the borrower’s principal residence (owner-
                                            occupied). A borrower may receive only one modification under HAMP Tier
                                            1. No mortgage loan may be modified more than once in either Tier 1 or Tier
                                            2. If a borrower is not eligible under Tier 1, he or she can be evaluated under
                                            the HAMP extension referred to as Tier 2.



 84 |   Appendix A: Glossary and Acronyms
                                                                 SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




HAMP Tier 2: HAMP Tier 2 is an extension of HAMP Tier 1; both have
been extended to the end of 2013. HAMP Tier 2 expands the population
of eligible homeowners, utilizing additional evaluation criteria and extra
incentives to servicers. Tier 2 includes owners who may have defaulted under
Tier 1, borrowers for mortgages secured by a rental property (not occupied
by the owner), and an array of other struggling homeowners. A borrower
is eligible to receive up to a total of three modifications of three different
mortgages under Tier 2, and servicers are eligible for payment reduction cost
share incentives.

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

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

Impairment of Securities Considered Other than Temporary: Impairment
of a security occurs when the fair value of the security is less than the
amortized cost basis (i.e., whenever a security has an unrealized loss). If the
impairment is judged to be other than temporary, the individual security must
be written down to fair value. As currently defined under Generally Accepted
Accounting Principles, the fair value of an asset is the amount at which that
asset could be bought or sold in an orderly transaction between willing parties.

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

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

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

Joint and Several Liability: The concept of joint and several liability provides
that each obligor in a group is responsible for the debts of all in that group.
In the case of the FHLBanks, if any individual FHLBank were unable to pay



                                                                                       Appendix A: Glossary and Acronyms   | 85
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                            a creditor, the other 11 – or any one or more of them – would be required to
                                            step in and cover that debt.

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

                                            Losses on Derivative Agreements: The Enterprises acquire and guarantee
                                            primarily longer-term mortgages and securities that are funded with debt
                                            instruments. The companies manage the interest-rate risk associated with
                                            these investments and funding activities using derivative agreements. In
                                            contrast with the Generally Accepted Accounting Principles treatment for
                                            many conventional instruments, such as loans, the Enterprises’ derivative
                                            investments may sustain reported losses from interest rate driven variations in
                                            their current fair value.

                                            Mortgage Guarantees: Historically, the Enterprises purchased mortgages
                                            and securitized them while providing a guarantee to investors that if the
                                            mortgagor defaulted, the Enterprise would make timely principal and interest
                                            payments to the securitization trust, which in turn would make payments to
                                            the security holder.

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

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

                                            Payment Option ARMs: A special type of ARM, which enables the borrower
                                            to choose among various monthly payment levels.

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

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

                                            Primary Mortgage Market: The market for newly originated mortgages.




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Principal Forbearance: A period of time during which the borrower pays
interest, but does not make payments towards his or her mortgage’s principal
balance.

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

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

Provision for Loan and Guarantee Losses: An accounting concept that
refers to the reduction of current income to establish a reserve fund for
mortgage losses.

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

Reserve for Guarantee Losses: An accounting phrase meaning a reserve
fund on the balance sheet that is created in anticipation of future losses on
loans guaranteed by the Enterprises. It has the effect of reducing income in
the current period.

Secondary Mortgage Market: The market for buying and selling existing
mortgages; this could be in the form of whole mortgage or MBS sales. Both
the primary and secondary mortgage markets are over-the-counter markets
– there is no central exchange. Rather, loans are bought and sold through
personal and institutional networks.

Securities Act of 1933: Often referred to as the “truth in securities” law, it
has two basic objectives: (1) require that investors receive financial and other
significant information concerning securities being offered for public sale and
(2) prohibit deceit, misrepresentation, and other security sales fraud.

Securities Exchange Act of 1934: With this law, Congress created the SEC
with broad authority over all aspects of the securities industry, including the
power to register, regulate, and oversee brokerage firms, transfer agents, and
clearing agencies as well as the nation’s securities self-regulatory organizations
(e.g., the stock exchanges and the National Association of Securities Dealers).
The law also prohibits certain types of market conduct such as material
misrepresentations and insider trading, and provides the SEC with disciplinary
powers over regulated entities and associated persons. The law also empowers
the SEC to require periodic reporting of information by companies with
publicly traded securities.




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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




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

                                            Senior Preferred Stock Purchase Agreements: Entered into at the time the
                                            conservatorships were created, the PSPAs authorize the Enterprises to request
                                            and obtain funds from Treasury. Under the PSPAs, the Enterprises agreed to
                                            consult Treasury concerning a variety of significant business activities, capital
                                            stock issuance, dividend payments, ending the conservatorships, transferring
                                            assets, and awarding executive compensation.

                                            Seriously Delinquent Loan: A loan that has been in default for at least 90
                                            days.

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

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

                                            Subprime Mortgages: Mortgages given to less than creditworthy borrowers,
                                            typically with a credit score of less than 620.

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

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




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REFERENCES
Department of Housing and Urban Development, Glossary (online at http://
portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/buying/
glossary) (accessed Mar. 8, 2012).

Federal Deposit Insurance Corporation, FDIC Outlook: Breaking New
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American Recovery and Reinvestment Act of 2009 (ARRA), Pub. L. No.
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Mar. 8, 2012).

Federal Reserve Bank of San Francisco, What is bank capital and what are
the levels or tiers of capital? (Sept. 2001) (online at www.frbsf.org/education/
activities/drecon/2001/0109.html).

Government Accountability Office, The Cooperative Model as a Potential
Component of Structural Reform Options for Fannie Mae and Freddie Mac
(Nov. 15, 2010) (GAO/11-33R) (online at www.gao.gov/new.items/d1133r.
pdf ).

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Glossary.html#C) (accessed Mar. 8, 2012).

Federal Housing Finance Agency, Office of Conservatorship Operations (online
at www.fhfa.gov/Default.aspx?Page=344) (accessed Mar. 8, 2012).

Federal Housing Finance Agency, FHFA Announces Suspension of Capital
Classifications During Conservatorship and Discloses Minimum and Risk-
Based Capital Classifications as Undercapitalized for the Second Quarter 2008
for Fannie Mae and Freddie Mac (Oct. 9, 2008) (online at www.fhfa.gov/
webfiles/775/FHFA_Suspension.PDF).

Federal Housing Finance Agency, Conforming Loan Limit (online at www.
fhfa.gov/Default.aspx?Page=185) (accessed Mar. 8, 2012).

Securities and Exchange Commission, What Every Investor Should Know…
(online at www.sec.gov/investor/pubs/bankrupt.htm) (accessed Mar. 8,
2012).

Department of Transportation, Suspension and Debarment- Frequently
Asked Questions (online at www.dot.gov/ost/m60/Financial_Assistance_
Management_Home/frequently_asked_questions.htm#q2) (accessed Mar. 8,
2012).




                                                                                        Appendix A: Glossary and Acronyms   | 89
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                            Office of the Special Inspector General for the Troubled Asset Relief
                                            Program, SIGTARP: Initial Report to the Congress, at 111, 29, 114 (Feb. 6,
                                            2009) (online at www.sigtarp.gov/Quarterly%20Reports/SIGTARP_Initial_
                                            Report_to_the_Congress.pdf ).

                                            Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,
                                            Pub. L. No. 111-203.

                                            Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110-
                                            343.

                                            Fannie Mae, Announcement 07-04 (May 18, 2007) (online at www.
                                            efanniemae.com/sf/guides/ssg/annltrs/pdf/2007/0704.pdf ).

                                            The Federal Home Loan Banks, The Federal Home Loan Banks (online
                                            at www.fhlbanks.com/assets/pdfs/sidebar/FHLBanksWhitePaper.pdf )
                                            (accessed Mar. 8, 2012).

                                            Freddie Mac, About Freddie Mac (online at www.freddiemac.com/corporate/
                                            about_freddie.html) (accessed Mar. 8, 2012).

                                            Department of Housing and Urban Development, The Federal Housing
                                            Administration (FHA) (online at http://portal.hud.gov/hudportal/
                                            HUD?src=/program_offices/housing/fhahistory) (accessed Mar. 8, 2012).

                                            Federal Accounting Standards Advisory Board, Authoritative Source of
                                            Guidance (online at www.fasab.gov/accounting-standards/authoritative-
                                            source-of-gaap/) (accessed Mar. 7, 2012).

                                            Ginnie Mae, Ginnie Mae Frequently Asked Questions (online at www.
                                            ginniemae.gov/media/ginnieFAQ.asp?Section=Media) (accessed Mar. 8,
                                            2012).

                                            Ginnie Mae, About Ginnie Mae (online at www.ginniemae.gov/about/about.
                                            asp?Section=About) (accessed Mar. 8, 2012).

                                            W. Scott Frame & Lawrence J. White, Regulating Housing GSEs: Thoughts
                                            on Institutional Structure and Authorities, Federal Reserve Bank of Atlanta:
                                            Economic Review, at 87 (Q2 2004) (online at www.frbatlanta.org/
                                            filelegacydocs/er04_framewhite.pdf ) (accessed Apr. 22, 2012).

                                            Freddie Mac, Glossary of Finance and Economic Terms (online at www.
                                            freddiemac.com/smm/g_m.htm) (accessed Mar. 8, 2012).

                                            United States Department of the Treasury, Home Affordable Modification
                                            Program: Overview (online at www.hmpadmin.com/portal/programs/hamp.
                                            jsp) (accessed Apr. 2, 2012).




 90 |   Appendix A: Glossary and Acronyms
                                                              SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




United States Department of the Treasury, Supplemental Directive 12-02:
Making Home Affordable Program – MHA Extension and Expansion (Mar. 9,
2012) (online at www.hmpadmin.com/portal/programs/docs/hamp_servicer/
sd1202.pdf ).

Standard and Poors, Glossary (online at www.standardandpoors.com/funds/
glossary/en/eu) (accessed Mar. 8, 2012).

Government Accountability Office, Management Report: Opportunities for
Improvements in FHFA’s Internal Controls and Accounting Procedures ( June 3,
2010) (GAO/10-587R) (online at www.gao.gov/products/GAO-10-587R).

Federal Deposit Insurance Corporation, Accounting News: Other-Than-
Temporary Impairment of Investment Securities (online at www.fdic.gov/
regulations/examinations/supervisory/insights/sisum05/accounting_news.
html) (accessed Mar. 8, 2012).

Congressional Budget Office, Written Testimony of Douglas Holtz-
Eakin, Director of CBO, Regulation of the Housing Government-Sponsored
Enterprises (Oct. 23, 2003) (online at www.cbo.gov/sites/default/files/
cbofiles/ftpdocs/46xx/doc4642/10-23-gse.pdf ).

Inspector General Act of 1978, Pub. L. No. 95-452.

Inspector General Reform Act of 2008, Pub. L. No. 110-409.

Arizona State Legislature, Fiftieth Legislature – Second Regular Session
(online at www.azleg.gov/FormatDocument.asp?inDoc=/ars/44/00141.
htm&Title=44&DocType=ARS) (accessed Apr. 22, 2012).

Freddie Mac, 2011 10-K Report, at 90-91 (online at www.freddiemac.com/
investors/er/pdf/10k_030912.pdf ) (accessed Mar. 12, 2012).

Federal Housing Finance Agency, Fannie Mae and Freddie Mac Single-
Family Guarantee Fees in 2009 and 2010, at 9, 10 (Sept. 2011) (online at
www.fhfa.gov/webfiles/22642/2011GFeeReportFinal.pdf ).

The Federal Reserve Board, Interest-Only Mortgage Payments and
Payment-Option ARMs (online at www.federalreserve.gov/pubs/mortgage_
interestonly/#optionarm) (accessed Mar. 8, 2012).

Office of Management and Budget, M-10-23 Memorandum for the Heads of
Executive Departments and Agencies, Guidance for Agency Use of Third-Party
Websites and Applications ( June 25, 2010) (online at www.whitehouse.gov/
sites/default/files/omb/assets/memoranda_2010/m10-23.pdf ).

Federal Housing Finance Agency, Mortgage Markets and the
Enterprises in 2006 ( June 2007) (online at www.fhfa.gov/webfiles/682/
MortgageMarkets2006.pdf ).




                                                                                    Appendix A: Glossary and Acronyms   | 91
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                            Office of the Attorney General State of Idaho, Foreclosure Prevention and
                                            Foreclosure Scams: How to Tell the Difference, at 19 (Aug. 2011) (online at
                                            www.ag.idaho.gov/publications/consumer/ForeclosurePreventionandScams.
                                            pdf ).

                                            The White House, Fact Sheet: President Obama’s Plan to Help Responsible
                                            Homeowners and Heal the Housing Market, Expanding HAMP Eligibility to
                                            Reduce Additional Foreclosures and Help Stabilize Neighborhoods (Feb. 1, 2012)
                                            (online at www.whitehouse.gov/the-press-office/2012/02/01/fact-sheet-
                                            president-obama-s-plan-help-responsible-homeowners-and-heal-h).

                                            Securities and Exchange Commission, Mortgage-Backed Securities (online at
                                            www.sec.gov/answers/mortgagesecurities.htm) (accessed Mar. 8, 2012).

                                            Farm Credit Administration, Allowance for Loan Losses: EM-335 ( June
                                            2009) (online at www.fca.gov/examman.nsf/c63e1333b36d61fa852561ff004
                                            77356/503ed538c86d38ef852575e40076e628?OpenDocument).

                                            Office of the Special Inspector General for the Troubled Asset Relief
                                            Program, SIGTARP: Quarterly Report to Congress, at 150 (Oct. 26, 2010)
                                            (online at www.sigtarp.gov/Quarterly%20Reports/October2010_Quarterly_
                                            Report_to_Congress.pdf ).

                                            Federal Deposit Insurance Corporation, Glossary (online at www2.fdic.gov/
                                            qbp/Glossary.asp?menuitem=GLOSSARY#R) (accessed Mar. 8, 2012).

                                            Securities and Exchange Commission, The Laws That Govern the Securities
                                            Industry (online at www.sec.gov/about/laws.shtml#secact1933) (accessed
                                            Mar. 8, 2012).

                                            Securities and Exchange Commission, The Laws That Govern the Securities
                                            Industry (online at www.sec.gov/about/laws.shtml#secexact1934) (accessed
                                            Mar. 8, 2012).

                                            Freddie Mac, Single-Family Credit Guarantee Business (online at www.
                                            freddiemac.com/corporate/company_profile/our_business/index.html)
                                            (accessed Mar. 8, 2012).

                                            Federal Housing Finance Agency, Senior Preferred Stock Purchase Agreement
                                            (online at www.fhfa.gov/Default.aspx?Page=364) (accessed Mar. 8, 2012).

                                            Letter from David H. Stevens, Assistant Secretary of Housing, Department
                                            of Housing and Urban Development, to All Approved Mortgagees (Aug.
                                            6, 2010) (online at www.hud.gov/offices/adm/hudclips/letters/mortgagee/
                                            files/10-23ml.pdf ).




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                                                           SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




Board of Governors of the Federal Reserve System, Statement of Chairman
Ben S. Bernanke (May 17, 2007) (online at www.federalreserve.gov/
newsevents/speech/bernanke20070517a.htm).

Office of the Special Inspector General for the Troubled Asset Relief
Program, SIGTARP: Quarterly Report to Congress, at 65 ( Jan. 26, 2011)
(online at www.sigtarp.gov/Quarterly%20Reports/January2011_Quarterly_
Report_to_Congress.pdf ).




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FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                            ACRONYMS AND ABBREVIATIONS
                                            Agency- Federal Housing Finance       FHA- Federal Housing
                                            Agency                                Administration

                                            Alt-A- Alternative A                  FHFA- Federal Housing Finance
                                                                                  Agency
                                            ARM- Adjustable Rate Mortgages
                                                                                  FHLBanks- Federal Home Loan
                                            Blue Book- Quality Standards for      Banks
                                            Inspection and Evaluation
                                                                                  FHLBank System- Federal Home
                                            CEO- Chief Executive Officer          Loan Bank System
                                            CFPB- Consumer Financial              FinCEN- Financial Crimes
                                            Protection Bureau                     Enforcement Network
                                            CIGIE- Council of the Inspectors      FOIA- Freedom of Information Act
                                            General on Integrity and Efficiency
                                                                                  Freddie Mac- Federal Home Loan
                                            Convention- Mortgage Bankers          Mortgage Corporation
                                            Association Convention and
                                            Exposition                            GAAP- Generally Accepted
                                                                                  Accounting Principles
                                            DER- Division of Enterprise
                                            Regulation                            GAO- United States Government
                                                                                  Accountability Office
                                            DOJ- United States Department of
                                            Justice                               Ginnie Mae- Government National
                                                                                  Mortgage Association
                                            EESA- Emergency Economic
                                            Stabilization Act                     GSEs- Government-Sponsored
                                                                                  Enterprises
                                            Enterprises- Fannie Mae and
                                            Freddie Mac                           HAMP- Home Affordable
                                                                                  Modification Program
                                            EO- Executive Office
                                                                                  HARP- Home Affordable
                                            Fannie Mae- Federal National          Refinance Program
                                            Mortgage Association
                                                                                  HERA- Housing and Economic
                                            FBI- Federal Bureau of                Recovery Act of 2008
                                            Investigation
                                                                                  HUD- United States Department of
                                            FDIC-OIG- Federal Deposit             Housing and Urban Development
                                            Insurance Corporation Office of
                                            Inspector General                     HUD-OIG- United States
                                                                                  Department of Housing and Urban
                                            FFETF- Financial Fraud                Development Office of Inspector
                                            Enforcement Task Force                General



 94 |   Appendix A: Glossary and Acronyms
                                                          SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




IPERA- Improper Payments             RMBS- Residential Mortgage-
Elimination and Recovery Act of      Backed Securities
2010
                                     SEC- Securities and Exchange
IPIA- Improper Payments              Commission
Information Act of 2002
                                     SIGTARP- Office of the Special
IRS- Internal Revenue Service        Inspector General for the Troubled
                                     Asset Relief Program
LTV- Loan-to-Value
                                     SORN- System of Records Notice
MBS- Mortgage-Backed Securities
                                     TBW- Taylor, Bean & Whitaker
MWLD- Mortgage Warehouse             Mortgage Corporation
Lending Division
                                     Treasury- United States
OA- Office of Audits                 Department of the Treasury
OAd- Office of Administration        ULDD- Uniform Loan Delivery
OC- Office of Counsel                Dataset

Ocala- Ocala Funding LLC             UMDP- Uniform Mortgage Data
                                     Program
OE- Office of Evaluations
                                     USDA- United States Department
OFHEO- Office of Federal             of Agriculture
Housing Enterprise Oversight
                                     VA- United States Department of
OI- Office of Investigations         Veterans Affairs

OIG- Federal Housing Finance         Yellow Book- Government
Agency Office of Inspector General   Auditing Standards

OMB- Office of Management and
Budget

OPOR- Office of Policy, Oversight,
and Review

PII- Personally Identifiable
Information

PSPAs- Senior Preferred Stock
Purchase Agreements

REO- Real Estate Owned

Revised Delegations- Revised
Conservatorship Delegations/
Operating Protocol for Delegations




                                                                                Appendix A: Glossary and Acronyms   | 95
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




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                                                                                                 SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




Appendix B: Information Required by the
Inspector General Act
Section 5(a) of the Inspector General Act provides that OIG shall, not
later than April 30 and October 31 of each year, prepare semiannual reports
summarizing its activities during the immediately preceding six-month periods
ending March 31 and September 30. Further, Section 5(a) lists more than a
dozen categories of information that OIG must include in its semiannual
reports. These categories include, among other things, “a summary of each
audit report … issued before the commencement of the reporting period
for which no management decision has been” rendered (Section 5(a)(10)),
and “a description and explanation of the reasons for any significant revised
management decision made during the reporting period” (Section 5(a)(11)).

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

 Source/Requirement                                                                                  Pages

 Section 5(a)(1)- A description of significant problems, abuses, and deficiencies relating to          5-6
 the administration of programs and operations of FHFA.                                               34-43
                                                                                                     102-106

 Section 5(a)(2)- A description of the recommendations for corrective action made by OIG
 with respect to significant problems, abuses, or deficiencies.                                       34-43
                                                                                                      57-62

 Section 5(a)(3)- An identification of each significant recommendation described in previous
                                                                                                      57-62
 semiannual reports on which corrective action has not been completed.

 Section 5(a)(4)- A summary of matters referred to prosecutive authorities and the
                                                                                                      43-46
 prosecutions and convictions that have resulted.

 Section 5(a)(5)- A summary of each report made to the Director of FHFA.                              34-43

 Section 5(a)(6)- A listing, subdivided according to subject matter, of each audit and
 evaluation report issued by OIG during the reporting period and for each report, where
 applicable, the total dollar value of questioned costs (including a separate category for the        34-43
 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.                                  34-43

 Section 5(a)(8)- Statistical tables showing the total number of audit and evaluation reports
                                                                                                       98
 and the total dollar value of questioned and unsupported costs.

 Section 5(a)(9)- Statistical tables showing the total number of audit and evaluation reports
                                                                                                       98
 and the dollar value of recommendations that funds be put to better use by management.

 Section 5(a)(10)- A summary of each audit and evaluation report issued before the
 commencement of the reporting period for which no management decision has been made                   99
 by the end of the reporting period.

 Section 5(a)(11)- A description and explanation of the reasons for any significant revised
                                                                                                       99
 management decision made during the reporting period.




                                                                                                      Appendix B: Information Required by the Inspector General Act   | 97
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        Source/Requirement                                                                         Pages

                                                        Section 5(a)(12)- Information concerning any significant management decision with which
                                                                                                                                                    99
                                                        the Inspector General is in disagreement.

                                                        Section 5(a)(13)- The information described under section 05(b) of the Federal Financial
                                                                                                                                                    99
                                                        Management Improvement Act of 1996.



                                                      The paragraphs below address the status of OIG’s compliance with Sections
                                                      5(a)(8), (9), (10), (11), (12), and (13) of the Inspector General Act.

                                                      AUDIT AND EVALUATION REPORTS WITH QUESTIONED AND
                                                      UNSUPPORTED COSTS
                                                      During this semiannual period, OIG has released eight reports:

                                                              •	FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of
                                                                 Fannie Mae and Freddie Mac (WPR-2012-001, March 28, 2012)
                                                              •	Fannie Mae’s and Freddie Mac’s Participation in the 2011 Mortgage
                                                                 Bankers Association Annual Convention and Exposition (ESR-
                                                                 2012-004, March 22, 2012)
                                                              •	FHFA’s Oversight of the Enterprises’ Charitable Activities (ESR-
                                                                 2012-003, March 22, 2012)
                                                              •	Evaluation of FHFA’s Management of Legal Fees for Indemnified
                                                                 Executives (EVL-2012-002, February 22, 2012)
                                                              •	FHFA’s Oversight of Troubled Federal Home Loan Banks (EVL-
                                                                 2012-001, January 11, 2012)
                                                              •	FHFA’s Oversight of Fannie Mae’s Single-Family Underwriting
                                                                 Standards (AUD-2012-003, March 22, 2012)
                                                              •	FHFA’s Controls to Detect and Prevent Improper Payments (AUD-
                                                                 2012-002, March 9, 2012)
                                                              •	FHFA’s Supervision of Freddie Mac’s Controls over Mortgage
                                                                 Servicing Contractors (AUD-2012-001, March 7, 2012)
                                                      These reports evaluated and audited certain aspects of the Agency’s operations
                                                      and its compliance with certain federal requirements. These reports do not
                                                      include dollar values for questioned and unsupported costs.

                                                      AUDIT AND EVALUATION REPORTS WITH RECOMMENDATIONS THAT
                                                      FUNDS BE PUT TO BETTER USE BY MANAGEMENT
                                                      FHFA’s Supervision of Freddie Mac’s Controls over Mortgage Servicing
                                                      Contractors (AUD-2012-001, March 7, 2012) contains recommendations
                                                      that funds be put to better use by management. OIG is in the process of
                                                      calculating the precise amount of these funds.


 98 |   Appendix B: Information Required by the Inspector General Act
                                                               SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




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

SIGNIFICANTLY REVISED MANAGEMENT DECISIONS
Section 5(a)(11) of the Inspector General Act, as amended, requires that
OIG report information concerning the reasons for any significant revised
management decision made during the reporting period. During the six-
month reporting period ended March 31, 2012, there were no significant
revised management decisions on OIG’s audits and evaluations.

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

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

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

Several OIG reports published during the semiannual period identified
specific opportunities to strengthen FHFA’s internal controls. These reports
are summarized on pages 34 through 43.




                                                                     Appendix B: Information Required by the Inspector General Act   | 99
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 100 |   Appendix B: Information Required by the Inspector General Act
                                                                SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




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

EVALUATION REPORTS
Fannie Mae’s and Freddie Mac’s Participation in the 2011 Mortgage Bankers
Association Annual Convention and Exposition (ESR-2012-004, March 22,
2012).

FHFA’s Oversight of the Enterprises’ Charitable Activities (ESR-2012-003,
March 22, 2012).

Evaluation of FHFA’s Management of Legal Fees for Indemnified Executives
(EVL-2012-002, February 22, 2012).

FHFA’s Oversight of Troubled Federal Home Loan Banks (EVL-2012-001,
January 11, 2012).

AUDIT REPORTS
FHFA’s Oversight of Fannie Mae’s Single-Family Underwriting Standards (AUD-
2012-003, March 22, 2012).

FHFA’s Controls to Detect and Prevent Improper Payments (AUD-2012-002,
March 9, 2012).

FHFA’s Supervision of Freddie Mac’s Controls over Mortgage Servicing Contractors
(AUD-2012-001, March 7, 2012).

OTHER REPORTS
FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and
Freddie Mac (WPR-2012-001, March 28, 2012).




                                                                                           Appendix C: OIG Reports   | 101
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                            Appendix D: Trends Identified by OIG
                                                            Reportshh
                                                            OIG reports have identified a variety of deficiencies in FHFA’s operations
                                                            that reflect two significant and related themes. First, FHFA often relied on
                                                            the Enterprises’ determinations without independently testing and validating
                                                            them, thereby giving undue deference to Enterprise decision making. Second,
                                                            FHFA was not proactive in its oversight and enforcement efforts. As detailed
                                                            below, both themes have emerged in multiple reports. Further, FHFA may
                                                            not have enough examiners to meet its regulatory and conservatory oversight
                                                            responsibilities.

                                                            FHFA’S LACK OF INDEPENDENT TESTING AND VALIDATION OF
                                                            ENTERPRISE DECISION MAKING
                                                            Six OIG reports reflect that a side effect of FHFA’s delegation of most business
                                                            decisions to the Enterprises is that the Agency’s oversight is not proactive and
                                                            often relies on the Enterprises’ review and corporate governance processes.
                                                            However, OIG believes that some matters are sufficiently important to
                                                            warrant greater involvement and scrutiny by the Agency.

                                                            Deferral to Freddie Mac’s Analysis of Repurchase Claim Exposure
                                                            At the end of 2010, FHFA approved a $1.35 billion settlement of mortgage
                                                            repurchase claims that Freddie Mac asserted against Bank of America. In
                                                            approving the settlement, FHFA relied on Freddie Mac’s analysis of the
                                                            settlement without testing the assumptions underlying the Enterprise’s
                                                            existing loan review process. An OIG report found that FHFA did not act
                                                            timely or test concerns about limitations in Freddie Mac’s existing loan review
                                                            process for mortgage repurchase claims raised by an FHFA senior examiner
                                                            months prior to the settlement.ii The senior examiner was concerned the
                                                            loan review process Freddie Mac used for repurchase claims failed to account
                                                            adequately for changes in foreclosure patterns among loans originated during
                                                            the housing boom. According to the senior examiner, this could potentially
                                                            cost the Enterprise a considerable amount of money. Freddie Mac’s internal
                                                            auditors independently identified concerns about the process and, in June
                                                            2011, recommended that the issue be studied further. Following the release
                                                            of OIG’s report, FHFA suspended future Enterprise mortgage repurchase
                                                            settlements premised on the Freddie Mac loan review process and set in
hh
  Appendix D is derived from FHFA-OIG’s Current             motion activities to test the assumptions underlying the loan review process.
Assessment of FHFA’s Conservatorships of Fannie Mae
and Freddie Mac, please see www.fhfaoig.gov/Content/
Files/WPR-2012-001.pdf.                                     Limited Oversight of the Enterprises’ Administration of HAMP
 For OIG’s Evaluation of the Federal Housing Finance
ii                                                          In early 2009, the Enterprises began participating in HAMP, which involves
Agency’s Oversight of Freddie Mac’s Repurchase              servicers agreeing to modify mortgages for borrowers facing default or
Settlement with Bank of America, please see www.
fhfaoig.gov/Content/Files/EVL-2011-006.pdf.
                                                            foreclosure. The Enterprises entered into five-year agreements with Treasury



     102 |   Appendix D: Trends Identified by OIG Reports
                                                                 SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




to manage the program and oversee participants’ compliance with program
requirements. An OIG report found that FHFA largely removed itself
from overseeing the negotiations of the agreements and did not engage
in any substantive review to evaluate the agreements’ feasibility and risks
or the Enterprises’ suitability to serve as Treasury’s financial agents. This
lack of engagement may have contributed to the agreements’ omission of
significant details concerning payments to the Enterprises, the scope of their
responsibilities, and processes to resolve differences. As a consequence of
the omissions, significant problems developed in these areas almost from the
beginning, requiring FHFA and the Enterprises to devote substantial time
and resources to resolve ambiguities.jj

Incomplete Analysis of Executive Compensation at Fannie Mae and
Freddie Mac
For 2009 and 2010, the Enterprises awarded their top six officers over $35
million in compensation. FHFA reviewed and approved these compensation
awards based on the Enterprises’ determinations and recommendations.
However, an OIG report found that FHFA did not test or validate the means
by which the Enterprises calculated their recommended compensation levels
and did not consider factors that might have resulted in reduced executive
compensation costs.kk

Insufficient Transaction Testing
Transaction testing is the method employed by financial institution examiners
to arrive at independent impressions about the financial and operational
conditions of an institution (e.g., mortgage company, bank, etc.) as well as its
compliance with applicable laws and regulations. An example of transaction
testing would be reviewing a regulated entity’s loan files to test the veracity
of statements concerning loan underwriting and performance. During an
evaluation of FHFA’s capacity to examine the GSEs, a senior FHFA manager
acknowledged to OIG that examiners too often accept assertions made by
Enterprise managers rather than validate such assertions through appropriate
transaction testing.ll This may be related to FHFA having too few examiners
to ensure the efficiency and effectiveness of its examination program. As
illustrated below, this is also indicative of the second emerging trend: that the
                                                                                         For OIG’s Evaluation of FHFA’s Role in Negotiating
                                                                                        jj
Agency was not proactive in its oversight and enforcement efforts.                      Fannie Mae’s and Freddie Mac’s Responsibilities in
                                                                                        Treasury’s Making Home Affordable Program, please
                                                                                        see www.fhfaoig.gov/Content/Files/EVL-2011-003.pdf.
Limited Oversight of Legal Expenditures
Between 2004 and October 31, 2011, Fannie Mae paid out $99.4 million in                   For OIG’s Evaluation of Federal Housing Finance
                                                                                        kk

                                                                                        Agency’s Oversight of Fannie Mae’s and Freddie Mac’s
legal expenses for the defense of lawsuits, investigations, and administrative          Executive Compensation Programs, please see www.
actions against three former senior executives. The Enterprise also paid                fhfaoig.gov/Content/Files/Exec%20Comp%20DrRpt%20
                                                                                        03302011%20final,%20signed.pdf.
considerable addition sums for other executives. Additionally, Freddie Mac
has paid $10.2 million in legal defense costs for former senior executives               For OIG’s Evaluation of Whether FHFA has Sufficient
                                                                                        ll


since its conservatorship began. To their credit, Fannie Mae and Freddie                Capacity to Examine the GSEs, please see www.fhfaoig.
                                                                                        gov/Content/Files/EVL-2011-005.pdf.



                                                                                    Appendix D: Trends Identified by OIG Reports       | 103
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                            Mac have taken steps to manage costs associated with lawsuits against their
                                                            indemnification-eligible directors and officers. However, an OIG report found
                                                            that – despite the Enterprises’ large outlays for legal expenses – the Agency
                                                            has never independently validated the Enterprises’ processes for determining
                                                            the reasonableness or the validity of the legal services provided on behalf of
                                                            their executives or the bills presented for such services.mm

                                                            Insufficient Allocation of Resources to Processing Consumer
                                                            Complaints
                                                            In 2011, OIG conducted an audit of the Agency’s consumer complaints
                                                            process and concluded that FHFA’s oversight of the receipt, processing, and
                                                            disposition of consumer complaints of fraud, waste, and abuse (including
                                                            foreclosure abuses) was inadequate.nn The Agency had failed to prioritize
                                                            consumer complaints, and this had consequences. For example, FHFA did
                                                            not identify complaints requiring resolution in advance of time-sensitive
                                                            events like foreclosure or other legal proceedings. Consequently, borrowers
                                                            might not have received help in time. The lack of prioritization and process
                                                            also cost FHFA the opportunity to perform routine substantive analyses to
                                                            identify trends and potential risk areas. Such information could have served
                                                            as an early warning system for emerging problems, such as the foreclosure
                                                            document controversy. Finally, the failure to focus on consumer complaints
                                                            meant the Agency missed important fraud allegations. For example, in June
                                                            2008, serious allegations of fraud involving TBW were reported to OFHEO;
                                                            yet, OFHEO, and subsequently FHFA, did not provide adequate follow up
                                                            on the allegations. TBW turned out to be a $2.9 billion mortgage fraud
                                                            case, one of the largest in history, and involved significant losses to Freddie
                                                            Mac. Freddie Mac’s losses may have been less had the 2008 fraud allegation
                                                            received prompt attention.

                                                            FHFA WAS NOT PROACTIVE IN OVERSIGHT AND ENFORCEMENT
                                                            As illustrated by multiple reports described below, OIG has identified
                                                            instances in which FHFA was not proactive in its oversight and enforcement.
                                                            Accordingly, within its regulatory functions, the Agency faces challenges in
                                                            its ability to identify new and emerging risks potentially impacting the GSEs;
                                                            establish guidelines and policies governing Enterprise oversight; and provide
                                                            strong, consistent enforcement for violations of policy.

                                                            FHFA Did Not Identify Emerging Risks that Could Impact the GSEs
                                                            OIG’s work has raised concerns about the Agency’s ability to identify and act
mm
   For OIG’s Evaluation of FHFA’s Management of Legal       on early indicators of risk.
Fees for Indemnified Executives, please see www.
fhfaoig.gov/Content/Files/EVL-2012-002.pdf.                 For example, there were indicators as early as 2006 that could have led
 For OIG’s Audit of the Federal Housing Finance
nn                                                          FHFA (and its predecessor) to appreciate the heightened risk posed by
Agency’s Consumer Complaints Process, please see
www.fhfaoig.gov/Content/Files/AUD-2011-001.pdf.



     104 |   Appendix D: Trends Identified by OIG Reports
                                                                 SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




foreclosure processing abuses within Fannie Mae’s default-related legal services
network.oo Indicators such as a significant increase in foreclosures accompanying
the deterioration of the housing market, consumer complaints alleging improper
foreclosures, contemporaneous media reports of foreclosure abuses, and public
court filings in Florida and elsewhere highlighting such abuses should have
triggered careful assessment and action by FHFA. Notwithstanding these
indicators, FHFA did not devote added attention to this issue until August 2010.

A recent OIG report on mortgage servicing identified another instance in
which the Agency missed opportunities to identify risks.pp As of June 30, 2011,
Freddie Mac had a mortgage servicing portfolio containing approximately
12 million mortgages with an unpaid principal balance of nearly $1.8
trillion. When the Enterprises purchase mortgages, they enter into contracts
with mortgage servicers to collect mortgage payments, set aside taxes and
insurance premiums in escrow, forward interest and principal payments to
the contractually designated party, and respond to payment defaults. As
early as 2008, FHFA had information indicating that mortgage servicing
represented a heightened risk to the Enterprises. Specifically, through its off-
site monitoring activities, FHFA noted a substantial increase in the number
of the Enterprises’ delinquent loans starting in 2008. In early 2009, FHFA
became aware of servicers’ poor performance and weaknesses in Freddie Mac’s
oversight of its servicers. Yet, FHFA did not take timely or appropriate action
to address these indicators. Even now, FHFA has not clearly defined its role
regarding servicers or sufficiently coordinated with federal banking regulators
about risks and supervisory concerns with individual servicers.

FHFA Has Not Always Established Guidelines and Policies
Governing Enterprise Oversight
Even when FHFA has identified risks, the Agency has not always managed those
risks by establishing sufficient regulations or guidance. For example, the recent
servicing report found that FHFA has not developed sufficient regulations
or guidance governing the Enterprises’ oversight and risk management of
servicers.qq Specifically, FHFA has not established and implemented effective
Enterprise regulations or guidance controlling the reporting of critical servicer
                                                                                         For OIG’s audit of FHFA’s Oversight of Fannie Mae’s
                                                                                        oo
information and establishing baseline requirements for mortgage servicing.              Default-Related Legal Services, please see www.fhfaoig.
Instead, FHFA relies on the Enterprises to individually monitor counterparty            gov/Content/Files/AUD-2011-004.pdf.
risk as part of their ongoing risk management activities.                               pp
                                                                                          For OIG’s audit of FHFA’s Supervision of Freddie Mac’s
                                                                                        Controls over Mortgage Servicing Contractors, please
Similarly, as described in OIG’s recent report on default-related legal services,       see www.fhfaoig.gov/Content/Files/AUD%202012-001.
FHFA has not developed sufficient regulations or guidance governing the                 pdf.
Enterprises’ oversight and risk management of default-related legal services.           qq
                                                                                          For OIG’s audit of FHFA’s Supervision of Freddie Mac’s
In its report, OIG found that FHFA has neither an ongoing risk-based                    Controls over Mortgage Servicing Contractors, please
supervisory plan detailing examination and continuous supervision of default-           see www.fhfaoig.gov/Content/Files/AUD%202012-001.
                                                                                        pdf.
related legal services, nor finalized examination guidance and procedures
for use in performing targeted examinations and monitoring of such                       For OIG’s audit of FHFA’s Oversight of Fannie Mae’s
                                                                                        rr


services.rr Moreover, FHFA does not have a formal process to address                    Default-Related Legal Services, please see www.fhfaoig.
                                                                                        gov/Content/Files/AUD-2011-004.pdf.



                                                                                    Appendix D: Trends Identified by OIG Reports          | 105
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                            performance problems associated with law firms that have relationships –
                                                            either through direct contract or through its loan servicers – with both of the
                                                            Enterprises.

                                                            FHFA Has Not Consistently Enforced Directives for Violations of
                                                            Policy
                                                            Even in instances in which FHFA has identified risks and taken steps to
                                                            manage those risks, the Agency has not been consistent in enforcing its
                                                            directives to ensure that the risks are, in fact, adequately addressed. As Fannie
                                                            Mae’s conservator and regulator, FHFA’s authority over the Enterprise is
                                                            broad and includes the ability to discipline or remove Enterprise personnel to
                                                            ensure compliance with Agency mandates. However, an OIG report found
                                                            that FHFA has not exercised this or other authorities to compel Fannie
                                                            Mae’s compliance with the requirement to have an effective operational
                                                            risk management program.ss Fannie Mae’s lack of an acceptable and
                                                            effective operational risk management program may have resulted in missed
                                                            opportunities to strengthen oversight of law firms with which it contracts to
                                                            process foreclosures.

                                                            Further, FHFA’s insufficient enforcement is not limited to the Enterprises.
                                                            Since at least 2008, four FHLBanks have faced significant financial and
                                                            operational difficulties, primarily due to their investments in certain high-risk
                                                            mortgage securities. FHFA has oversight responsibility for the FHLBanks
                                                            and recognizes the need to ensure that they do not abuse their GSE status
                                                            and engage in imprudent activities. Yet, an OIG report found that FHFA has
                                                            not established a consistent and transparent written enforcement policy for
                                                            the FHLBanks classified as having the most “supervisory concerns” within the
                                                            FHLBank system.tt This has contributed to instances in which FHFA has not
                                                            acted to proactively hold FHLBanks classified as “supervisory concerns” and
                                                            their officers sufficiently accountable for engaging in questionable risk taking.

                                                            FHFA MAY NOT HAVE ENOUGH EXAMINERS TO MEET ITS OVERSIGHT
                                                            RESPONSIBILITIES
                                                            FHFA has critical regulatory responsibilities with respect to the GSEs
                                                            and conservator responsibilities regarding the Enterprises. To satisfy these
                                                            responsibilities, Congress provided FHFA significant budget and hiring
 For OIG’s Evaluation of FHFA’s Oversight of Fannie
ss                                                          authority. Nonetheless, an OIG report noted that the Agency has too few
Mae’s Management of Operational Risk, please see            examiners to ensure the efficiency and effectiveness of its GSE oversight
www.fhfaoig.gov/Content/Files/EVL-2011-004.pdf.
                                                            program; due to examiner shortages, FHFA has scaled back planned work
 For OIG’s evaluation of FHFA’s Oversight of Troubled
tt
                                                            during examinations, and examinations have often taken much longer than
Federal Home Loan Banks, please see www.fhfaoig.gov/        expected to complete.uu Additionally, OIG has identified shortfalls in the
Content/Files/Troubled%20Banks%20EVL-2012-001.
pdf.                                                        Agency’s examination coverage, particularly in the crucial area of REO. These
                                                            limitations stem from insufficient examination capacity and make FHFA’s
uu
  For OIG’s Evaluation of Whether FHFA Has Sufficient
Capacity to Examine the GSEs, please see www.fhfaoig.
                                                            early identification of possible risks more challenging.
gov/Content/Files/EVL-2011-005.pdf.



     106 |   Appendix D: Trends Identified by OIG Reports
                                                                     SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




Appendix E: OIG Organizational Chart


                                                Inspector General
                                                   Steve Linick

                                                  Principal Deputy
                                                 Inspector General

                     Chief of                                                                                    Director of
                                                                                       Chief Counsel
                      Staff                                                                                    Special Projects




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




      Deputy                             Deputy                               Deputy                             Deputy
 Inspector General                  Inspector General                    Inspector General                  Inspector General
   Administration                        Audits                             Evaluations                       Investigations




                                                                                         Appendix E: OIG Organizational Chart   | 107
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                                        Appendix F: Enterprises’ Performance Metrics
                                                                        Figure 19. The Enterprises’ Earnings and Profitability for the Year Ended
                                                                                            December 31, 2011 ($ millions)

                                                                        Earnings and Profitability                                  Fannie Mae                    Freddie Mac
                                                          Mortgage Loans                                                            $        138,462               $            86,282
                                                          Investment Securities                                                                   4,247                         12,791
                                                          Other Interest Earning Assets                                                             234                             67
                                                          Interest Expense on Debt Obligations                                               (123,662)                          (80,743)
                                                          Net Interest Income                                                                     19,281                        18,397
                                                          Provision for Credit Losses                                                         (27,498)                          (11,287)
                                                          Derivative Gains (Losses)                                                               (6,562)a                       (9,752)
                                                          Losses on the other than Temporary
                                                             Impairment of Securities                                                               (308)                        (2,301)
                                                          Administrative Expenses                                                                 (2,370)                        (1,506)
                                                          Other, Net                                                                                602                          1,183
                                                          Net Loss from Operations                                                  $         (16,855)            $             (5,266)


                                                        Sources: Fannie Mae, 2011 10-K Report, at 92, 93 (online at www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-
                                                        results/2011/10k_2011.pdf) (accessed Mar. 5, 2012); Freddie Mac, 2011 10-K Report, at 85, 86 (online at
                                                        www.freddiemac.com/investors/er/pdf/10k_030912.pdf) (accessed Apr. 21, 2012).

                                                        Note:
                                                        a
                                                          Loss on Derivatives referenced to Table 10, p. 96 in the Fannie Mae 2011 10-K Report.


                                                                    Figure 20. The Enterprises’ Single-Family REO Activity Summary for the Year
                                                                                 Ended December 31, 2011 (number of properties)

                                                                                   REO Activity                        Fannie Mae                     Freddie Mac
                                                                          Beginning Balance                                      162,489                       72,093
                                                                          Total Acquisitions                                     199,696                       98,656
                                                                          Total Dispositions                                    (243,657)                    (110,194)
                                                                          Ending Inventory                                       118,528                       60,555


                                                                        Sources: Fannie Mae, 2011 10-K Report, at 168 (online at www.fanniemae.com/resources/file/ir/
                                                                        pdf/quarterly-annual-results/2011/10k_2011.pdf) (accessed Mar. 5, 2012); Freddie Mac, 2011 10-K
                                                                        Report, at 167 (online at www.freddiemac.com/investors/er/pdf/10k_030912.pdf) (accessed Apr. 21,
                                                                        2012).




 108 |   Appendix F: Enterprises’ Performance Metrics
                                                                   SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




Appendix G: Endnotes
1.	     ederal Housing Finance Agency, FHFA, Fannie Mae and Freddie Mac
       F
       Announce HARP Changes to Reach More Borrowers (Oct. 24, 2011) (online
       at www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf ).

2.	     ousing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-
       H
       289, § 1117.

3.	    HERA at § 1145.

4.	     ederal Housing Finance Agency, Statement of Director James B.
       F
       Lockhart, at 12 ( July 30, 2009) (online at www.fhfa.gov/webfiles/14715/
       FHFA1stAnnSpeechandPPT73009.pdf ).

5.	     mergency Economic Stabilization Act of 2008 (EESA), Pub. L. No.
       E
       110-343, § 110.

6.	     overnment Accountability Office, Fannie Mae and Freddie Mac: Analysis
       G
       of Options for Revising the Housing Enterprises’ Long-term Structures, at 3
       (Sept. 2009) (GAO/09-782) (online at www.gao.gov/new.items/d09782.
       pdf ).

7.	     nited States Department of the Treasury, Written Testimony by Secretary
       U
       of the Treasury Timothy F. Geithner Before the Senate Committee on
       Banking, Housing & Urban Affairs (Mar. 15, 2011) (online at www.
       treasury.gov/press-center/press-releases/Pages/tg1103.aspx).

8.	     ederal Housing Finance Agency, FHFA Updates Projections of Potential
       F
       Draws for Fannie Mae and Freddie Mac (Oct. 27, 2011) (online at www.
       fhfa.gov/webfiles/22737/GSEProjf.pdf ).

9.	    Federal
       
               Housing Finance Agency, Data as of April 4, 2012 on Treasury and
       Federal Reserve Purchase Programs for GSE and Mortgage-Related Securities,
       at Tables 3-5 (online at www.fhfa.gov/webfiles/23873/TSYSupport%20
       2012-04-04.pdf ) (accessed Apr. 16, 2012).

10.	    ederal Housing Finance Agency, The FHLBank System (online at www.
       F
       fhfa.gov/Default.aspx?Page=22) (accessed Apr. 21, 2012).

11.	    HLBanks Office of Finance, History of Service (online at www.fhlb-of.
       F
       com/ofweb_userWeb/pageBuilder/mission--history-29) (accessed Apr.
       21, 2012).

12.	   I d.; FHLBanks, Frequently Asked Questions: Federal Home Loan Bank
        Advances (online at www.fhlbanks.com/overview_faqs_advances.htm)
        (accessed Apr. 21, 2012).

13.	    HLBanks Office of Finance, Funding (online at www.fhlb-of.com//
       F
       ofweb_userWeb/pageBuilder/funding-30) (accessed Apr. 21, 2012);


                                                                                                 Appendix G: Endnotes   | 109
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                          FHLBanks, Frequently Asked Questions: Federal Home Loan Bank Advances
                                          (online at www.fhlbanks.com/overview_faqs_advances.htm) (accessed
                                          Apr. 21, 2012).

                                   14.	    ederal Housing Finance Agency, FHFA Announces New Conservatorship
                                          F
                                          Scorecard for Fannie Mae and Freddie Mac; Reduces Executive Compensation
                                          (Mar. 9, 2012) (online at www.fhfa.gov/webfiles/23438/ExecComp3912F.
                                          pdf ).

                                   15.	    ederal Housing Finance Agency, FHFA Announces Pilot REO Property
                                          F
                                          Sales in Hardest-Hit Areas (Feb. 27, 2012) (online at www.fhfa.gov/
                                          webfiles/23403/REOPR22712F.pdf ).

                                   16.	    ederal Housing Finance Agency, FHFA Announces Interested Investors
                                          F
                                          May Pre-Qualify For REO Initiative (Feb. 1, 2012) (online at www.fhfa.
                                          gov/webfiles/23196/REO2112F.pdf ).

                                   17.	    ederal Housing Finance Agency, FHFA Sends Congress Strategic Plan
                                          F
                                          for Fannie Mae and Freddie Mac Conservatorships (Feb. 21, 2012) (online
                                          at www.fhfa.gov/webfiles/23344/StrategicPlanConservatorshipsFINAL.
                                          pdf ); Federal Housing Finance Agency, A Strategic Plan for
                                          Enterprise Conservatorships: The Next Chapter in a Story that Needs
                                          an Ending (Feb. 21, 2012) (online at www.fhfa.gov/webfiles/23344/
                                          StrategicPlanConservatorshipsFINAL.pdf ).

                                   18.	    epartment of Justice, Federal Government and State Attorneys General
                                          D
                                          Reach $25 Billion Agreement with Five Largest Mortgage Servicers to Address
                                          Mortgage Loan Servicing and Foreclosure Abuses (Feb. 9, 2012) (online at
                                          www.justice.gov/opa/pr/2012/February/12-ag-186.html).

                                   19.	   Th e White House, Fact Sheet: President Obama’s Plan to Help Responsible
                                          Homeowners and Heal the Housing Market, Expanding HAMP Eligibility
                                          to Reduce Additional Foreclosures and Help Stabilize Neighborhoods (Feb.
                                          1, 2012) (online at www.whitehouse.gov/the-press-office/2012/02/01/
                                          fact-sheet-president-obama-s-plan-help-responsible-homeowners-and-
                                          heal-h).

                                   20.	    ederal Housing Finance Agency,Statement of FHFA Acting Director Edward
                                          F
                                          J. DeMarco on the Announced Changes to HAMP ( Jan. 27, 2012) (online at
                                          www.fhfa.gov/webfiles/23110/FHFAStmtHampChanges12712F.pdf ).

                                   21.	    etter from Edward J. DeMarco, Acting Director, FHFA, to Elijah
                                          L
                                          E. Cummings, Ranking Member, Committee on Oversight and
                                          Government Reform ( Jan. 20, 2012) (online at www.fhfa.gov/
                                          webfiles/23056/PrincipalForgivenessltr12312.pdf ); Federal Housing
                                          Finance Agency, FHFA Releases Analysis on Principal Forgiveness As Loss
                                          Mitigation Tool ( Jan. 23, 2012) (online at www.fhfa.gov/webfiles/23057/
                                          FHFAltrPrincipalForgiveness12312F.pdf ).



 110 |   Appendix G: Endnotes
                                                                   SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




22.	    annie Mae, Fannie Mae Chief Executive Will Step Down Pending
       F
       Appointment of a Successor ( Jan. 10, 2012) (online at www.fanniemae.com/
       portal/about-us/media/corporate-news/2012/5607.html).

23.	    ederal Housing Finance Agency, FHFA Announces Freddie Mac Board
       F
       and Management Changes (Oct. 26, 2011) (online at www.fhfa.gov/
       webfiles/22735/FRECH102611.pdf ).

24.	    .S. Securities and Exchange Commission, SEC Charges Former Fannie
       U
       Mae and Freddie Mac Executives With Securities Fraud (Dec. 16, 2011)
       (online at www.sec.gov/news/press/2011/2011-267.htm).

25.	    ederal Housing Finance Agency, Fannie Mae and Freddie Mac Launch
       F
       Joint Effort to Improve Loan and Appraisal Data Collection New Program to
       Boost Risk Management Capabilities (May 24, 2010) (online at www.fhfa.
       gov/webfiles/15748/Uniform_Mortgage_Data_Program.pdf ).

26.	    reddie Mac, Uniform Loan Delivery Dataset (Dec. 14, 2011) (online at
       F
       www.freddiemac.com/sell/secmktg/uniform_delivery.html).

27.	    ederal Housing Finance Agency, FHFA Announces New Timeline for
       F
       Fannie Mae and Freddie Mac Mortgage Data Implementation (Dec. 14,
       2011) (online at www.fhfa.gov/webfiles/22833/MortData121411F.pdf ).

28.	    ederal Housing Finance Agency, FHFA Sues the City of Chicago Over
       F
       Vacant Buildings Ordinance (Dec. 12, 2011) (online at www.fhfa.gov/
       webfiles/22832/Chicago_Lawsuit_121211.pdf ).

29.	   Federal Housing Finance Agency, FHFA, Fannie Mae and Freddie Mac
       Announce HARP Changes to Reach More Borrowers (Oct. 24, 2011) (online
       at www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf ).

30.	   F
        ederal Housing Finance Agency, Conservator’s Report on the Enterprises’
       Financial Performance Third Quarter 2011, at 9 (online at www.fhfa.gov/
       webfiles/22855/Conservator’sReport3Q2011F122111F.pdf ) (accessed
       Apr. 16, 2012). This is a comprehensive income figure (upon which
       Treasury investments are calculated); net income figures reported by the
       Enterprises may differ.

31.	   F
        ederal Housing Finance Agency, FHFA Report to Congress
       2010, at 114, 131 (online at www.fhfa.gov/webfiles/21570/
       FHFA2010RepToCongress61311.pdf ) (accessed Feb. 29, 2012).

32.	    ederal Housing Finance Agency, Statement of FHFA Director James B.
       F
       Lockhart (Sept. 7, 2008) (online at www.treasury.gov/press-center/press-
       releases/Documents/fhfa_statement_090708hp1128.pdf ).

33.	    .S. Department of the Treasury, Statement by Secretary Henry M. Paulson,
       U
       Jr. (Sept. 7, 2008) (online at www.treasury.gov/press-center/press-releases/
       Pages/hp1129.aspx).


                                                                                                 Appendix G: Endnotes   | 111
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




                                   34.	    ederal Housing Finance Agency, Mortgage Market Note U.S. Treasury
                                          F
                                          Support for Fannie Mae and Freddie Mac, at 3 ( Jan. 20, 2010) (online at
                                          www.fhfa.gov/webfiles/15362/MMNote_10-1_revision_of_MMN_09-
                                          1A_01192010.pdf ).

                                   35.	   Id.

                                   36.	    ederal Housing Finance Agency, Data as of January 2, 2012 on
                                          F
                                          Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-
                                          Related Securities, at Table 2 (online at www.fhfa.gov/webfiles/23193/
                                          TSYSupport1312012.pdf ) (accessed Apr. 11, 2012); Freddie Mac,
                                          2011 10-K Report, at 127 (online at www.freddiemac.com/investors/
                                          er/pdf/10k_030912.pdf ) (accessed Apr. 11, 2012); Fannie Mae, 2011
                                          10-K Report, at 9 (online at www.fanniemae.com/resources/file/ir/pdf/
                                          quarterly-annual-results/2011/10k_2011.pdf ) (accessed Apr. 11, 2012).

                                   37.	    annie Mae, 2008 10-K Report, at 170 (online at www.fanniemae.com/
                                          F
                                          ir/pdf/earnings/2008/form10k_022609.pdf ) (accessed Mar. 12, 2012);
                                          Freddie Mac, 2008 10-K Report, at 127 (online at www.freddiemac.com/
                                          investors/er/pdf/10k_031109.pdf ) (accessed Mar. 29, 2012).

                                   38.	   F
                                           reddie Mac, 2010 10-K Report, at 96 (online at www.freddiemac.com/
                                          investors/er/pdf/10k_022411.pdf ) (accessed Feb. 29, 2012).

                                   39.	   Id.

                                   40.	   12 U.S.C. § 4617(c).

                                   41.	    annie Mae, Review of Funding Activities for 2009, at 2 (Dec. 2009)
                                          F
                                          (online at www.fanniemae.com/resources/file/debt/pdf/fundingnotes/
                                          fundingnotes_12_09.pdf ).

                                   42.	   Congressional Research Service, Fannie Mae and Freddie Mac in
                                          Conservatorship, at 4 (Sept. 15, 2008) (online at http://fpc.state.gov/
                                          documents/organization/110097.pdf ).

                                   43.	   F
                                           ederal Housing Finance Agency, FHFA Releases Projections Showing
                                          Range of Potential Draws for Fannie Mae and Freddie Mac (Oct. 21, 2010)
                                          (online at www.fhfa.gov/webfiles/19409/Projections_102110.pdf ). For
                                          this purpose, FHFA used three house price path projections with a
                                          “current baseline” in which the decline in house prices hits bottom in the
                                          first quarter of 2012 and then prices rise by 15% through the end of 2014;
                                          a second scenario in which near-term growth is stronger but prices end up
                                          at the same level as the baseline by the end of 2014; and a “deeper second
                                          recession” projection in which house prices bottom out in mid-2012 and
                                          then rise by 23% by mid-2015 (dates and figures are approximate).




 112 |   Appendix G: Endnotes
SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




                              Appendix G: Endnotes   | 113
FEDERAL HOUSING FINANCE AGENCY OFFICE OF INSPECTOR GENERAL




 114 |   Appendix G: Endnotes
SEMIANNUAL REPORT TO THE CONGRESS | MARCH 31, 2012




                             Appendix G: Endnotes   | 115
Federal Housing Finance Agency
Office of Inspector General

Se m iann ual R e p ort
to t h e Cong r e ss
October 1, 2011, through March 31, 2012




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