oversight

Inaugural Semiannual Report to the Congress

Published by the Federal Housing Finance Agency, Office of Inspector General on 2011-03-31.

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

I nau g u r a l S em i a n n ua l R ep o rt to t h e Co n g r e ss
                October 12, 2010, through March 31, 2011
Federal Housing Finance Agency
  Office of Inspector General



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    I nau g u r a l S em i a n n ua l R ep o rt
             to t h e Co n g r e ss
             October 12, 2010, through March 31, 2011
Table of Contents
  FHFA-OIG and its Mission.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . i
  A Message from the Inspector General.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 1
  Executive Summary.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 3
       Overview	                                                                                                                         4
       FHFA and the Housing GSEs	                                                                                                        4
       FHFA-OIG’s Initial Staffing and Organizational Development Efforts	                                                               6
       Key FHFA-OIG Accomplishments During the Inaugural Period	                                                                         6
       FHFA-OIG Plans and Strategy	                                                                                                      8
       Organization of this Report	                                                                                                      8
       FHFA-OIG Reporting Requirements	                                                                                                  9

  Section 1: Description of FHFA-OIG.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 11
       FHFA-OIG’s Vision, Mission, and Core Values	                                                                                    12
       Leadership and Organizational Structure	                                                                                        13
       Progress in Building FHFA-OIG Organization	                                                                                     14

  Section 2: Operations of FHFA and the GSEs.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 17
       Federal Housing Finance Agency	                                                                                                 18
       FHFA Authorities	                                                                                                               18
       Fannie Mae and Freddie Mac	                                                                                                     19
       Federal Home Loan Banks	                                                                                                        22
       Selected FHFA Programs and Activities	                                                                                          24

  Section 3: Accomplishments of FHFA-OIG .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 27
       FHFA-OIG Audit and Evaluation Activities	                                                                                       28
       FHFA-OIG Investigation Activities	                                                                                              30
       FHFA-OIG Regulatory Activities	                                                                                                 32
       FHFA-OIG Communications and Outreach Efforts	                                                                                   35

  Section 4: FHFA-OIG’s Oversight Strategy.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 39
       Independent Risk Assessment	                                                                                                    40
       FHFA-OIG Audit and Evaluation Plan	                                                                                             42
       FHFA-OIG Investigation Strategy	                                                                                                44
       FHFA-OIG Legal Reviews and Comments on Proposed FHFA Rules	                                                                     45

  A Brief History of the Housing Government-Sponsored Enterprises .  .  .  .  .  .  .  . 47
  Appendices.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 55
       Appendix A:      Glossary and Acronyms	                                                                                         56
       Appendix B:      Information Required by the Inspector General Act	                                                             68
       Appendix C:      FHFA-OIG Public Reports and Testimony	                                                                         70
       Appendix D:      FHFA-OIG Organizational Chart	                                                                                 71
       Appendix E:      Endnotes	                                                                                                      72
       FHFA-OIG and its Mission
       The mission of the Federal Housing Finance Agency Office of
       Inspector General (“FHFA-OIG”) is to: promote the economy,
       efficiency, and effectiveness of Federal Housing Finance Agency
       (“FHFA”) programs; prevent and detect fraud, waste, and abuse
       in FHFA programs; and seek sanctions and prosecutions against
       those responsible for such fraud, waste, and abuse.

       FHFA-OIG provides independent and objective reporting to
       the FHFA Director, Congress, and the American people through
       audits, evaluations, and investigations.




       Federal Housing Finance Agency
       Office of Inspector General
       1625 Eye Street, NW
       Washington, DC 20006-4001
       Main (202) 408-2544
       Hotline (800) 793-7724
       www.fhfaoig.gov




i |   FHFA-OIG and its Mission
                                                  Inaugural Semiannual Report to the Congress | March 31, 2011




A Message from the Inspector General
I am pleased to present the Inaugural Semiannual Report of the Federal
Housing Finance Agency Office of Inspector General (“FHFA-OIG”). It
describes FHFA-OIG’s initial achievements and explains our future plans
and strategies.

FHFA-OIG was established in the aftermath of the worst economic crisis
in generations. Congress assigned FHFA-OIG the mission of overseeing
FHFA, which serves as the regulator and conservator of the Federal National
Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage
Corporation (“Freddie Mac”), as well as the regulator of the Federal Home
Loan Banks (“FHLBanks”).

The need for effectiveness, integrity, and transparency in FHFA’s programs
and operations cannot be overstated. Fannie Mae and Freddie Mac have
received almost $154 billion in taxpayer funding to support the still-fragile
housing market. In addition, they own or guarantee about $5.4 trillion in
residential mortgage obligations. The FHLBanks have almost $900 billion in
assets, and several face financial difficulties.

I was sworn in as the first Inspector General for FHFA in October 2010.          Steve A. Linick
                                                                                 Inspector General of the Federal
Since that time, I have recruited seasoned professionals with backgrounds in     Housing Finance Agency
housing, securities, finance, investigations, and auditing. More importantly,
FHFA-OIG already has made significant oversight progress. For the semian-
nual period ending March 31, 2011, FHFA-OIG commenced multiple au-
dits, evaluations, surveys, and special reports; two have been completed and
are discussed in this Report. In addition, FHFA-OIG has initiated and par-
ticipated in criminal, civil, and administrative investigations.

An important objective of FHFA-OIG is the issuance of clear, informative,
and timely reports to FHFA, Congress, policymakers, and the public we serve.
FHFA-OIG will continue to review key aspects of FHFA’s operations in a
way that materially contributes to the Agency’s regulatory and conservatorship
activities. FHFA-OIG also seeks to promote public understanding and
informed debate about housing finance policy. This topic affects every
homeowner and taxpayer in the nation.

FHFA-OIG looks forward to helping ensure the effectiveness, integrity, and
transparency of FHFA’s programs and operations. We are grateful for the
support of Congress, FHFA, and others in this effort.




Steve A. Linick
Inspector General

April 29, 2011


                                                                                          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 (“Report”) is the inaugural Report of the Federal
                                                Housing Finance Agency Office of Inspector General (“FHFA-OIG”).
                                                Required under the Inspector General Act, this Report discusses FHFA-
                                                OIG’s activities through March 31, 2011. FHFA-OIG began operations in
                                                October 2010, when the Inspector General was sworn into office.

For a description of the GSEs, see Section 2:   FHFA-OIG oversees the Federal Housing Finance Agency (“FHFA” or the
“Operations of FHFA and the GSEs, Federal       “Agency”). FHFA, in turn, is the safety, soundness, and mission regulator
Housing Finance Agency.”                        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, comprised of 12 regional Federal Home Loan Banks (“FHLBanks”).
                                                FHFA also has been the conservator of Fannie Mae and Freddie Mac since
                                                September 2008.

                                                This Executive Summary provides an overview of FHFA and the housing
                                                GSEs, FHFA-OIG’s initial staffing and organizational development efforts,
                                                key FHFA-OIG accomplishments during the reporting period, and FHFA-
                                                OIG’s future plans and strategy. The Executive Summary also describes this
                                                Report’s structure and Inspector General Act reporting requirements.

                                                FHFA and the Housing GSEs
                                                FHFA was established by the Housing and Economic Recovery Act of
                                                2008 (“HERA”), which authorizes FHFA to conduct examinations, develop
                                                regulations, issue enforcement orders, and appoint itself conservator or
                                                receiver of the GSEs. Like other federal financial regulators, such as the
                                                Federal Deposit Insurance Corporation, FHFA finances its activities through
                                                assessments on its regulated entities, the housing GSEs, rather than through
                                                the Congressional appropriations process.
For further information on Fannie Mae’s and     Fannie Mae and Freddie Mac (collectively, “the Enterprises”) have charter
Freddie Mac’s business model, see Section 2:    and legislative obligations to provide liquidity and support to the residential
“Operations of FHFA and the GSEs, Fannie Mae    mortgage finance system and serve the mortgage credit needs of targeted
and Freddie Mac.”                               groups, such as low-income borrowers.1 To do so, the Enterprises have
                                                participated in the creation and development of the secondary mortgage
                                                market. They purchase residential mortgages from originators such as banks
                                                and thrifts, which can use the sales proceeds to originate additional mortgages.
                                                The Enterprises hold some of the mortgages they purchase in their retained
                                                investment portfolios and package the remainder into mortgage-backed
                                                securities (“MBS”), which they sell to investors. For a fee, the Enterprises
                                                also guarantee the timely payment of interest and principal on MBS that they
                                                issue. As of March 31, 2011, the Enterprises’ combined mortgage investment
                                                portfolios and outstanding guarantees stood at $5.4 trillion.2


  4 |    Executive Summary
                                                                             Inaugural Semiannual Report to the Congress | March 31, 2011




In 2007 and 2008, the U.S. housing finance system suffered its worst downturn
since the Great Depression, and the Enterprises lost billions of dollars. In
September 2008, as the Enterprises’ losses mounted, FHFA placed them
into conservatorships, and the U.S. Department of the Treasury (“Treasury”)
began providing them unprecedented financial support. As of March 31,
2011, Treasury had invested nearly $154 billion in the Enterprises, and FHFA
estimates that the total taxpayer commitment to the Enterprises could range
from $221 billion to $363 billion through 2013.3 The Federal Reserve also
has taken steps to support the Enterprises, such as committing to purchase
up to $1.25 trillion4 of their MBS. Aided by federal financial assistance, the
Enterprises added to their dominant position in the housing finance system as
the housing finance crisis continued and private-sector financing plummeted.
As illustrated in Figure 1 (below), during 2010, federal government-supported
entities accounted for 96% of MBS issuances: 70% by the Enterprises, and
26% by the Government National Mortgage Association (“Ginnie Mae”).

                                Figure 1. Mortgage Market Share, 2010




Source: Federal Housing Finance Agency. Conservator’s Report on the Enterprises’ Financial Performance: Fourth Quarter
2010. <http://www.fhfa.gov/webfiles/21169/Conservator’s_Report_4Q_4_20_11.pdf>, p. 5, accessed 4/27/2011.


The 12 FHLBanks support housing finance and community and economic
development. To carry out their missions, the FHLBanks make loans, also
known as advances, to member financial institutions. Some also hold mortgage
investment portfolios. As of December 31, 2010, the FHLBanks had $878
billion in assets.5 Although no FHLBank is in conservatorship, several face
financial challenges.

Congress is considering various proposals to reform the housing finance
system, including a plan offered by the Administration on February 11, 2011.
Many such proposals call for the wind down and ultimate elimination of the
Enterprises. But these same proposals recognize that such reforms will take
time to implement, especially in light of the dominant roles of the GSEs in the
housing markets. In the meantime, FHFA must manage the conservatorships
effectively in order to minimize taxpayer losses and to prepare for the future.


                                                                                                                         Executive Summary   | 5
Federal Housing Finance Agency Office of Inspector General




                                                 FHFA-OIG’s Initial Staffing and Organizational
                                                 Development Efforts
                                                 Since FHFA-OIG started operations in October 2010, it has moved
                                                 proactively to ensure that it has sufficient staffing and resources to assess
                                                 FHFA’s critical responsibilities as conservator and regulator. FHFA-OIG has
                                                 taken steps to ensure that it is well positioned to detect and prevent mortgage
                                                 fraud, which may directly threaten the financial soundness of the housing
                                                 GSEs. As of March 31, 2011, FHFA-OIG had hired more than 50 staff
                                                 members with a range of critical skills to carry out its responsibilities. This
                                                 team includes seasoned investigators, evaluators, auditors, attorneys, subject
                                                 matter experts, and administrative support staff. FHFA-OIG has established
                                                 an organizational structure that will enable it to carry out its responsibilities in
                                                 an efficient and effective manner. With FHFA’s assistance, FHFA-OIG has
                                                 also developed and obtained the infrastructure necessary to fulfill its mission,
                                                 including office space, information technology, and communications systems.

                                                 Key FHFA-OIG Accomplishments During the Inaugural Period
Both reports are available at www.fhfaoig.gov.   Reports: From a standing start, with no staff or resources, FHFA-OIG
                                                 commenced operations and completed two reports, briefly summarized here:

                                                      •F
                                                        annie Mae and Freddie Mac Executive Compensation: In an
                                                       evaluation report issued on March 31, 2011, FHFA-OIG noted that
                                                       FHFA did not have adequate processes in place to manage executive
                                                       compensation programs for the Enterprises’ senior officers. As
                                                       conservator, FHFA can appoint senior officers and has the authority
                                                       to review and approve their compensation packages. The top six senior
                                                       officers at the Enterprises received combined total compensation of
                                                       $34.4 million in 2009 and 2010 under FHFA-approved compensation
                                                       packages, and Agency officials believe such compensation is necessary
                                                       to recruit and retain senior officers. However, FHFA-OIG found
                                                       that FHFA had not considered factors that might have resulted in
                                                       reduced executive compensation costs, such as the impact that federal
                                                       financial support has on corporate executive performance and the
                                                       compensation paid to senior officials at federal entities that also play
                                                       a critical role in housing finance. Further, FHFA-OIG found that
                                                       FHFA had neither developed written criteria to assess the Enterprises’
                                                       executive compensation levels, nor required Agency staff to verify and
                                                       test the means by which the Enterprises calculated their recommended
                                                       compensation levels. FHFA-OIG made recommendations based on its
                                                       findings, and FHFA agreed to implement most but not all of them.
                                                      •F
                                                        HFA Conservatorship Exit Planning Strategy: In an evaluation also
                                                       issued on March 31, 2011, FHFA-OIG noted that FHFA would need
                                                       to develop a careful planning strategy to implement the recommended
                                                       actions in the Administration’s February 11, 2011, housing finance
                                                       system reform plan. The FHFA-OIG report identified the actions


  6 |    Executive Summary
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




       FHFA would be expected to take under the plan, such as requiring
       the Enterprises to raise their MBS guarantee fees or down-payment
       requirements for mortgages they purchase. The report noted that such
       steps involve potential risks to housing finance if not managed carefully.
       For example, raising the Enterprises’ guarantee fees and underwriting
       standards too quickly could unnecessarily restrict the availability
       of mortgage credit. Careful planning by FHFA would require it to,
       among other things, establish planning timelines and external reporting
       strategies to keep mortgage market participants, Congress, and others
       apprised of its activities and progress. The FHFA-OIG evaluation
       report also noted that FHFA faces challenges in hiring staff necessary
       to manage its role as conservator and regulator as well as additional
       responsibilities under the Administration’s proposal. FHFA agreed to
       implement the report’s recommendations.

Independent Third-Party Risk Assessment: To gain a deeper understanding
of the risk landscape, FHFA-OIG hired BDO USA LLP, a professional
services firm, to provide an independent assessment of the risks confronting
the GSEs and FHFA. FHFA-OIG intends to use that recently completed
assessment to inform its operations and goals.

Criminal and Civil Investigation: FHFA-OIG has initiated and participated
in numerous criminal, civil, and administrative investigations. FHFA-OIG
has made significant contributions to the investigation and prosecution of
individuals connected to Taylor, Bean & Whitaker Mortgage Corporation and
Colonial Bank who defrauded, among others, Freddie Mac. With total losses
now estimated at $2.9 billion, the case represents one of the largest mortgage
frauds in U.S. history. Six individuals have pled guilty to federal criminal
charges. On April 19, 2011, a seventh individual – the lead defendant – was
convicted on 14 counts following a jury trial. FHFA-OIG also continues
to develop working partnerships and information-sharing relationships with
federal and other law enforcement agencies.

Hotline: The FHFA-OIG Hotline allows concerned parties to report
directly and in confidence information regarding possible fraud, waste, or          The FHFA-OIG Hotline can be reached
abuse related to FHFA or the GSEs. FHFA-OIG honors all applicable                   at (800) 793-7724 or via email at
                                                                                    OIGHOTLINE@FHFA.GOV.
whistleblower protections. As part of its effort to raise awareness of fraud and
how to combat it, FHFA-OIG is actively promoting the Hotline through the
FHFA-OIG website, posters, targeted emails to FHFA and GSE employees,
and the Semiannual Report.

Regulatory Activity: FHFA-OIG has provided comments on proposed
FHFA policies and regulations. Those comments have led FHFA to revise or
withdraw a number of proposals.




                                                                                                     Executive Summary    | 7
    Federal Housing Finance Agency Office of Inspector General




                                                              FHFA-OIG Plans and Strategy
                                                              FHFA-OIG has prepared an Audit and Evaluation Plana and is following an
                                                              ongoing strategy of identifying vulnerabilities and risk areas in FHFA and
                                                              GSE programs. It is aided by: the independent risk assessment discussed
                                                              above; reviews of relevant reports and documents; interviews with FHFA
    The full Audit and Evaluation Plan is available at
                                                              officials; and consultations with Members of Congress and other government
    www.fhfaoig.gov.
                                                              officials.

                                                              Key aspects of the strategy include ongoing reviews of FHFA’s:

                                                                   • Regulatory efforts and its management of the Enterprise conserva-
                                                                      torships. Areas of focus include: FHFA staff capacity, Enterprise
                                                                      executive compensation, Enterprise mortgage buyback settlements,
                                                                      foreclosure prevention and loss mitigation efforts, mortgage loan
                                                                      servicing controls, foreclosed property management and sales process-
                                                                      es, and payment of legal fees. These are potentially high-risk areas,
                                                                      all the more so because Treasury has invested nearly $154 billion of
                                                                      taxpayer funds in the Enterprises. FHFA must regulate and oversee
                                                                      (as conservator) the GSEs in an efficient, effective, and transparent
                                                                      manner to minimize taxpayer costs, conserve Enterprise resources, and
                                                                      meet all statutory mandates;
                                                                   • O versight of the FHLBanks and their associated risks;
                                                                   • Internal operations, such as information security, privacy, and the
                                                                      handling of consumer complaints and allegations of fraud, waste, and
                                                                      abuse; and
                                                                   • O versight of the GSEs’ housing missions.

                                                              FHFA-OIG will continue its work with law enforcement partners,
                                                              whistleblowers, and other parties concerned with eliminating fraud, waste,
                                                              and abuse.

                                                              Finally, FHFA-OIG expects to continue to review and comment on proposed
                                                              FHFA rules as warranted.

                                                              Organization of this Report
                                                              This Report covers the inaugural period of FHFA-OIG’s operations, from
                                                              October 2010 through March 2011. It is organized as follows:

                                                                   •S
                                                                     ection 1, Description of FHFA-OIG, provides a brief overview of the
                                                                    organization.
                                                                   •S
                                                                     ection 2, Operations of FHFA and the GSEs, describes the organization
                                                                    and operation of FHFA, Fannie Mae, Freddie Mac, and the FHLBanks
a                                                                   and discusses notable developments related to FHFA-OIG’s oversight
    a
        F HFA-OIG’s plan is dynamic and will be revised as
         necessary.                                                 of these organizations.



         8 |      Executive Summary
                                                   Inaugural Semiannual Report to the Congress | March 31, 2011




     • Section 3, Accomplishments of FHFA-OIG, describes FHFA-OIG’s
        oversight activities, including audits, evaluations, and investigations.
     • Section 4, FHFA-OIG’s Oversight Strategy, describes FHFA-OIG’s
        strategy for the future.
     • Additionally, the Report includes, as background, A Brief History of the
        Housing Government-Sponsored Enterprises.

FHFA-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 the Offices of Inspectors General during the
immediately preceding six-month periods ending March 31 and September
30. The specific reporting requirements, as stipulated in the Inspector General
Act, are listed in Appendix B.




                                                                                              Executive Summary   | 9
Federal Housing Finance Agency Office of Inspector General




 10 |   Executive Summary
section 1
Description of FHFA-OIG
Federal Housing Finance Agency Office of Inspector General




                                             Section 1: Description of FHFA-OIG
                                             The Federal Housing Finance Agency Office of Inspector General (“FHFA-
                                             OIG”) began operations on October 12, 2010. Established by the Housing
                                             and Economic Recovery Act of 2008 (“HERA”), which amended the Inspector
                                             General Act, FHFA-OIG conducts, supervises, and coordinates audits,
                                             investigations, and other activities relating to the programs and operations of
                                             the Federal Housing Finance Agency (“FHFA” or the “Agency”).

                                             FHFA-OIG’s Vision, Mission, and Core Values
                                             FHFA-OIG’s vision is to be an efficient and effective organization that
                                             promotes excellence and trust through its service to FHFA, Congress, the
                                             Administration, and the American public.

                                             FHFA-OIG’s mission is to:

                                                  •P
                                                    romote the economy, efficiency, and effectiveness of FHFA’s programs
                                                   and operations;
                                                  •P
                                                    revent and detect fraud, waste, and abuse in the programs and
                                                   operations of FHFA; and
                                                  •S
                                                    eek administrative sanctions, civil recoveries, and/or criminal
                                                   prosecutions of those responsible for fraud, waste, and abuse in
                                                   connection with FHFA’s programs and operations.

                                             In carrying out its mission, FHFA-OIG:

                                                  •K
                                                    eeps the Director of FHFA, Congress, and the American people
                                                   fully and currently informed of problems and deficiencies relating to
                                                   FHFA’s programs and operations; and
                                                  • Works with FHFA staff and program participants to improve FHFA’s
                                                     programs and operations.

                                             FHFA-OIG adheres to a defined set of core values:

                                                  •M
                                                    ission Driven. FHFA-OIG is committed to excellence with the
                                                   aim of providing transparency and accountability in FHFA’s programs
                                                   and operations and improving its performance through measurable
                                                   results;
                                                  • I ntegrity. FHFA-OIG strives to maintain trust and integrity;
                                                  •P
                                                    rofessionalism. FHFA-OIG is committed to the highest standards
                                                   of professional conduct;
                                                  •E
                                                    qual Employment Opportunity. FHFA-OIG promotes equal
                                                   employment opportunity for all employees and job applicants; and




 12 |   Section 1: Description of FHFA-OIG
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




     • Confidentiality. FHFA-OIG is committed to maintaining the
        confidentiality of whistleblowers and others.

Leadership and Organizational Structure
The first FHFA Inspector General, Steve A. Linick, was nominated by President
Barack Obama on April 12, 2010, confirmed by the United States Senate on
September 29, 2010, and sworn into office on October 12, 2010. Prior to
commencing service as the FHFA Inspector General, Mr. Linick served from
2006 to 2010 in several leadership positions at the U.S. Department of Justice
(“DOJ”). Previously, Mr. Linick was an Assistant United States Attorney, first
in the Central District of California (1994-1999), and subsequently in the
Eastern District of Virginia (1999-2006).

FHFA-OIG is comprised of the Inspector General, his Senior Staff, and the
FHFA-OIG Offices. The Inspector General’s Senior Staff includes the Chief
of Staff, Chief Counsel, Director of External Affairs, and the Deputy Inspectors
General for Audits, Evaluations, Investigations, and Administration. FHFA-
OIG’s principal operating Offices are the Office of Audits (“OA”), the Office
of Evaluations (“OE”), and the Office of Investigations (“OI”). Offices with
OIG-wide responsibilities are the Office of Counsel (“OC”), the Office of
Policy, Oversight, and Review (“OP”), and the Office of Administration
(“OAd”). FHFA-OIG’s organizational chart can be found in Appendix D.

Office of Audits

OA provides audit and related services covering the programs and operations
of FHFA. Through its financial and performance audits and attestation
engagements, OA seeks to: (1) promote economy, efficiency, and effectiveness
in the administration of FHFA’s programs; (2) detect and deter fraud, waste,
and abuse in FHFA’s activities and operations; and (3) ensure compliance with
applicable laws and regulations. Under the Inspector General Act, federal
inspectors general are required to comply with standards established by the
Comptroller General of the United States for audits of federal establishments,
organizations, programs, activities, and functions. These standards, referred
to as Generally Accepted Government Auditing Standards, are prescribed
in the Government Auditing Standards, commonly referred to as the “Yellow
Book.” OA performs its audits and attestation engagements in accordance
with applicable Generally Accepted Government Auditing Standards.

Office of Evaluations

OE reviews, studies, and analyzes FHFA’s programmatic and operational
activities and provides independent and objective analyses to FHFA. OE’s
evaluations are generally limited in scope and completed more quickly
than traditional audits. When OE observes significant deficiencies in the
effectiveness or efficiency of FHFA’s programs and operations, it assists the
Inspector General in developing recommendations to resolve them.


                                                                                   Section 1: Description of FHFA-OIG   | 13
    Federal Housing Finance Agency Office of Inspector General




                                                                     The Inspector General Reform Act of 2008 requires that federal inspectors
                                                                     general adhere to professional standards developed by the Council of the
                                                                     Inspectors General on Integrity and Efficiency (“CIGIE”). Evaluation
                                                                     standards are prescribed by CIGIE in its Quality Standards for Inspection
                                                                     and Evaluation, commonly referred to as the “Blue Book.” OE performs its
                                                                     evaluations in accordance with these standards.

                                                                     Office of Investigations

                                                                     OI investigates allegations of misconduct or fraud involving the programs
                                                                     and operations of FHFA and the GSEs. OI Special Agents develop criminal
                                                                     and civil cases for referral to DOJ and other law enforcement agencies.b OI
                                                                     adheres to CIGIE’s Quality Standards for Investigations and fully complies
                                                                     with guidelines issued by the Attorney General.

                                                                     OI also generates administrative cases for presentation to FHFA and
                                                                     administers the FHFA-OIG Hotline.

                                                                     Office of Counsel

                                                                     OC supports FHFA-OIG by providing independent legal advice, counseling,
                                                                     and opinions concerning FHFA-OIG’s programs and operations. OC also
                                                                     reviews audit, investigation, and evaluation reports for legal sufficiency. It
                                                                     reviews drafts of FHFA regulations and policies and prepares comments as
                                                                     appropriate. OC also coordinates with the FHFA Office of General Counsel
                                                                     and manages FHFA-OIG’s responses to requests and appeals made under the
                                                                     Freedom of Information Act and the Privacy Act.

                                                                     Office of Policy, Oversight, and Review

                                                                     OP provides advice, consultation, and assistance regarding FHFA-OIG’s
                                                                     priorities, the scope of its evaluations and audits, and all reports published by
                                                                     FHFA-OIG. In addition, OP is responsible for conducting special studies
                                                                     and developing the Semiannual Report. Finally, OP plays an integral role in
                                                                     reviewing audits and evaluations and in identifying issues for review that are
                                                                     timely to FHFA, Congress, and the public.

                                                                     Office of Administration

                                                                     OAd is responsible for FHFA-OIG’s human resources, budget development
                                                                     and execution, financial management, information technology, facilities and
                                                                     property management, safety, and continuity of operations.

                                                                     Progress in Building FHFA-OIG Organization
                                                                     FHFA-OIG began operations in October 2010 with no staff or infrastructure.
                                                                     Since then, FHFA-OIG has made significant progress in building its
b   b
         n April 5, 2011, Attorney General Eric Holder authorized
        O
                                                                     organization and capabilities, as detailed below.
        FHFA-OIG to exercise statutory law enforcement powers
        pursuant to the Inspector General Act.



         14 |      Section 1: Description of FHFA-OIG
                                                  Inaugural Semiannual Report to the Congress | March 31, 2011




Personnel

FHFA-OIG had over 50 full-time personnel as of March 31, 2011. FHFA-
OIG has recruited seasoned investigators, evaluators, auditors, attorneys,
subject matter experts, and administrative support staff.

Infrastructure

FHFA-OIG occupies the seventh floor of 1625 Eye Street, NW, Washington,
DC. Many FHFA staff members occupy the third and fourth floors of the
same building, and additional FHFA offices are nearby. FHFA (including
FHFA-OIG) intends to consolidate in a new headquarters building in 2012.

FHFA-OIG’s website (www.fhfaoig.gov) is now fully operational. FHFA-
OIG posts all of its reports, testimony, and investigations (when permitted to
be made available to the public) on the website as soon as possible.

Contracting

FHFA-OIG has entered into a number of contracts, both with other federal
government agencies and private sector organizations, in order to obtain
essential equipment and services as quickly and efficiently as possible. Major
service providers under these contracts include:

     • U.S. Department of the Treasury, Bureau of the Public Debt, which
        provides administrative services;
     • U.S. Department of Commerce, National Technical Information
        Service, which provides computer network integration and hosting
        services;
     • U.S. Government Printing Office, which provides printing and website
        services;
     • BDO USA, LLP, which provided risk assessment services; and
     • Reznick Group, P.C., which provides research, writing, and editing
        services.

Budget

Unlike most other federal agencies, FHFA and FHFA-OIG are not funded
through Congressional appropriations. Rather, under HERA, FHFA and
FHFA-OIG are funded through the collection of annual assessments levied
on the GSEs. For fiscal year 2011, $29 million was assessed to fund the
operations of FHFA-OIG.




                                                                                 Section 1: Description of FHFA-OIG   | 15
Federal Housing Finance Agency Office of Inspector General




 16 |   Section 1: Description of FHFA-OIG
section 2
Operations of FHFA and the GSEs
Federal Housing Finance Agency Office of Inspector General




                                                       Section 2: Operations of FHFA and the GSEs
                                                       Federal Housing Finance Agency
                                                       In the midst of the financial crisis, the Housing and Economic Recovery
                                                       Act (“HERA”) was enacted on July 30, 2008. HERA created the Federal
                                                       Housing Finance Agency (“FHFA”) as the successor agency to the Office of
                                                       Federal Housing Enterprise Oversight (“OFHEO”) and the Federal Housing
                                                       Finance Board (“FHFB”). OFHEO had been established in 1992 to regulate
                                                       the Federal National Mortgage Association (“Fannie Mae”) and the Federal
                                                       Home Loan Mortgage Corporation (“Freddie Mac”). Prior to HERA’s
                                                       enactment, OFHEO had functioned as an independent agency within the
Government-Sponsored Enterprises (“GSEs”):             U.S. Department of Housing and Urban Development (“HUD”). FHFB had
Business organizations chartered and                   been established in 1989 as the regulator of the nation’s 12 Federal Home
sponsored by the federal government,                   Loan Banks (“FHLBanks”). FHFA now regulates and supervises Fannie Mae,
which include Fannie Mae, Freddie Mac,                 Freddie Mac, and the FHLBanks (collectively, the Government-Sponsored
and the FHLBanks.
                                                       Enterprises (“GSEs”)).

                                                       FHFA Authorities
                                                       Housing and Economic Recovery Act
                                                       Under HERA, FHFA oversees the GSEs’ operations. HERA authorizes
                                                       FHFA to:

                                                            •E
                                                              nsure that the GSEs operate “in a safe and sound manner, including
                                                             maintenance of adequate capital and internal controls;”
                                                            •E
                                                              stablish criteria for investments that the GSEs may hold in their
                                                             portfolios;
                                                            •E
                                                              stablish risk-based capital requirements for the GSEs;
                                                            •R
                                                              equire the GSEs to increase their capital;
                                                            •R
                                                              eview and approve GSE executive compensation;
                                                            •R
                                                              eview and approve any new products that Fannie Mae or Freddie
                                                             Mac propose to offer;
                                                            •E
                                                              stablish affordable housing goals for Fannie Mae and Freddie Mac
                                                             (together, the “Enterprises”);
                                                            •E
                                                              nforce compliance with housing goals; and
                                                            •A
                                                              ppoint FHFA as a conservator or receiver of the GSEs.

                                                       On September 6, 2008, weeks after HERA’s enactment, the Enterprises were
                                                       placed into conservatorships overseen by FHFA. As conservator, FHFA
                                                       assumed all the powers of the shareholders, directors, and officers, with the goal
                                                       of preserving and conserving the assets and property of the Enterprises.6



  18 |    Section 2: Operations of FHFA and the GSEs
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




HERA also expanded the authority of the U.S. Department of the Treasury
(“Treasury”) to provide financial support to the GSEs.7 Treasury exercised               Preferred Stock:
that authority when it began – at the time the conservatorships were created –           A security that usually pays a fixed dividend
                                                                                         and gives the holder a claim on corporate
to purchase preferred stock issued by Fannie Mae and Freddie Mac pursuant
                                                                                         earnings and assets that is superior to that
to Senior Preferred Stock Purchase Agreements (“PSPAs”).
                                                                                         of holders of common stock, but inferior to
The PSPAs require the Enterprises to pay Treasury a 10% annual dividend                  that of investors in the corporation’s debt
                                                                                         securities.
(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) on its outstanding             Senior Preferred Stock Purchase
investment. As of March 31, 2011, Treasury has invested a total of $153.9                Agreements (“PSPAs”):
billion in the Enterprises. Under the PSPAs, the Enterprises have been                   Entered into at the time the conservatorships
obligated to pay Treasury $24.1 billion in dividends. But the Enterprises                were created, the PSPAs authorize the
have been unable to make such payments on their own, and Treasury has                    Enterprises to request and obtain funds
had to increase its investment to cover these dividend payments and make up              from Treasury, which in turn owns preferred
                                                                                         stock in each Enterprise. Under the
additional capital deficiencies.
                                                                                         PSPAs, the Enterprises agreed to consult
                                                                                         Treasury concerning a variety of significant
Emergency Economic Stabilization Act                                                     business activities, capital stock issuance
Soon after the Enterprises were placed into conservatorships and as the financial        and dividend payments, ending the
crisis continued, the Emergency Economic Stabilization Act (“EESA”) was                  conservatorships, transferring assets, and
enacted on October 3, 2008. With respect to the housing market, EESA was                 awarding executive compensation.
intended to: protect home values and investments; preserve homeownership                 Primary Mortgage Market:
and promote economic growth; and maximize returns to the taxpayer.8                      The market for newly originated mortgages.

To preserve homeownership, EESA requires FHFA to implement a plan to                     Secondary Mortgage Market:
maximize assistance to homeowners and to use its authority to encourage                  The market for buying and selling existing
the servicers of Fannie Mae and Freddie Mac mortgages to take advantage                  mortgages; this could be in the form of
of federal programs to minimize foreclosures.9 In addition, EESA requires                whole mortgage or MBS sales.
FHFA to coordinate with Treasury on homeowner assistance plans and to
                                                                                         Both the primary and secondary
submit monthly reports to Congress detailing the progress of its efforts.                mortgage markets are over-the-counter
                                                                                         markets — there is no central exchange.
Fannie Mae and Freddie Mac                                                               Rather, loans are bought and sold through
                                                                                         personal and institutional networks.
Fannie Mae was chartered in 1938 to support the creation of stable funding in
the U.S. housing and mortgage markets. Freddie Mac was chartered in 1970                 Conventional Conforming Mortgage Loans:
with a similar mission to provide stability for the nation’s residential mortgage        Conventional mortgage loans are
markets and expand opportunities for home ownership and affordable rental                those mortgages that are not insured
                                                                                         or guaranteed by the Federal Housing
housing.
                                                                                         Administration, the U.S. Department of
As Figure 2 (see page 20) illustrates, Fannie Mae and Freddie Mac support                Veterans Affairs, or the U.S. Department
the nation’s housing finance system through the secondary mortgage market.               of Agriculture and meet the Enterprises’
                                                                                         underwriting standards. Conforming
Neither Enterprise makes home loans directly to borrowers; rather, banks,
                                                                                         mortgage loans have original balances
credit unions, and other retail financial institutions originate home loans.             below a specific threshold, set by law
Generally, lenders do not retain the mortgages they originate as assets on               and published by FHFA, known as the
their own books. Instead, they often sell conventional conforming mortgage               “conforming loan limit.” For 2011, the
loans soon after origination to Fannie Mae or Freddie Mac. The Enterprises               conforming loan limit is $417,000 for most
thus provide liquidity for mortgage lenders, which receive cash that can be              areas of the contiguous United States,
used for additional mortgages.                                                           although higher limits apply in specific areas.



                                                                                    Section 2: Operations of FHFA and the GSEs     | 19
Federal Housing Finance Agency Office of Inspector General




                                              Figure 2. Mortgage Origination and Securitization Process




                                                       The Enterprises typically securitize the loans they purchase by aggregating or
Mortgage-Backed Securities (“MBS”):                    pooling them into debt securities called mortgage-backed securities (“MBS”),
MBS are debt securities that represent                 which are sold to investors. As part of the securitization process, and to reduce
claims to the cash flows from pools of                 investors’ risk, the Enterprises guarantee payment of principal and interest on
mortgage loans, most commonly on
                                                       their MBS in exchange for a fee. Alternatively, the Enterprises also may hold
residential property. Mortgage loans
                                                       these loans or purchase MBS for their own investment portfolios, which are
are purchased from banks, mortgage
companies, and other originators and then
                                                       funded through issuance of debt obligations.
assembled into pools. The MBS represent
                                                       The Enterprises have historically benefited from an implied guarantee that
claims on the principal and interest
payments made by borrowers on the loans
                                                       the federal government would prevent default on their financial obligations.10
in the pool.                                           After the Enterprises were placed into conservatorships, this guarantee
                                                       effectively became explicit.11 As a result, over time the cost of borrowing for
                                                       the Enterprises has been lower than that for other for-profit companies.12 For
                                                       example, according to FHFA, for the first quarter of 2011, comparable high-
                                                       grade finance company debt paid an annual interest rate of 3.4%, versus 2.6%
                                                       for the Enterprises.



  20 |    Section 2: Operations of FHFA and the GSEs
                                                                      Inaugural Semiannual Report to the Congress | March 31, 2011




                                            Figure 3. Enterprises Annual Net Income (Loss) 1986 to 2010
                                                                     ($ billions)



                      $0




     Sources: Federal Housing Finance Agency. 2008 FHFA Annual Report to Congress. <http://www.fhfa.gov/webfiles/2335/FHFA_ReportToCongress2008508rev.pdf>,
     p. 110, 127, accessed 4/27/2011; Fannie Mae. 2009 and 2010 Fannie Mae 10-K Reports. <http://www.fanniemae.com/ir/sec/index.jhtml?s=SEC+Filings,p. F-4>,
     accessed 4/27/2011; Freddie Mac. 2009 and 2010 Freddie Mac 10-K Reports. <http://www.freddiemac.com/investors/sec_filings/index.html>, p.208, 174, accessed
     4/27/2011.


Enterprise Financial Performance and Government Support
                                                                                                                          Guarantee:
At the time they were placed into conservatorships, the Enterprises had                                                   A pledge to investors that the issuing
experienced unprecedented financial losses. For example, as shown in                                                      company will bear the default risk on the
Figure 3 (above), in a single year, 2008, the Enterprises reported combined                                               collateral pool of loans, thereby ensuring
losses of $109 billion, a figure which exceeded their cumulative earnings over                                            the timely payment of principal and interest
the preceding 21 years. The Enterprises have continued to lose money since,                                               owed to investors.
although the magnitude of losses has diminished somewhat more recently, to
                                                                                                                          Implied Guarantee:
$94 billion in 2009 and $28 billion in 2010.                                                                              The assumption, prevalent in the financial
                                                                                                                          markets, that the federal government will
To offset these losses, government support of the Enterprises since 2008
                                                                                                                          cover GSE debt obligations.
also has been unprecedented. Figure 4 (see page 22) breaks down, by quarter,
Treasury’s investment in the Enterprises through March 31, 2011. Treasury
has provided $153.9 billion pursuant to the PSPAs. In accordance with the
terms of the PSPAs, the Enterprises must make quarterly dividend payments
to Treasury at an annual rate equal to 10% (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) of the outstanding investment. To date, Treasury generally
has had to increase its investment in the Enterprises to cover these dividend
payments. As of March 31, 2011, $24.1 billion of Treasury’s investment had
been used to pay dividends back to Treasury. FHFA estimates, based on the
Enterprises’ projected losses, that Treasury’s investment in them could range
from $221 billion to $363 billion through 2013.13


                                                                                                                    Section 2: Operations of FHFA and the GSEs     | 21
Federal Housing Finance Agency Office of Inspector General




Figure 4. Treasury Capital and Dividends Due Under PSPA ($ billions)
                                             Fannie Mae                                        Freddie Mac                                          Combined
                                               Treasury                                           Treasury                                            Treasury
                             Treasury                        Net Capital        Treasury                        Net Capital         Treasury                        Net Capital
                                            Funding to Pay                                     Funding to Pay                                      Funding to Pay
                           Investment                        Provided to      Investment                        Provided to       Investment                        Provided to
    Period Covered                          Dividends Due                                      Dividends Due                                       Dividends Due
                          Under PSPAs                        Enterprises     Under PSPAs                        Enterprises      Under PSPAs                        Enterprises
                                               Treasury                                           Treasury                                            Treasury


 Third Quarter 2008              $13.8               $0.0          $13.8             $ 0.0              $0.0            $0.0            $13.8               $0.0          $13.8
 Fourth Quarter 2008              30.8                 0.2           30.6             15.2                0.0           15.2             46.0                 0.2           45.8
 First Quarter 2009                6.1                 0.4            5.7             19.0                0.0           19.0             25.1                 0.4           24.7
 Second Quarter 2009                    -              1.1           (1.1)            10.7                0.4           10.3             10.7                 1.6            9.1
 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                 2.4           12.9
 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)                 -              2.2           (2.2)                  -              3.8           (3.8)
 Total as of
                                 $63.7              $11.7          $52.0            $90.2              $12.4           $77.8          $153.9               $24.1         $129.8
 March 31, 2011

Source: Federal Housing Finance Agency. Data as of March 31, 2011 on Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-Related Securities <http://www.fhfa.gov/
webfiles/20758/TreasFED033120111.pdf>, accessed 4/27/2011. Nonzero numbers may display as zero due to rounding.



                                                              Additional Government Support
                                                              The Enterprises also benefited from exceptional government measures to
                                                              support the housing market overall. Since September 2008, the Federal
                                                              Reserve and Treasury have purchased over $1.3 trillion in Enterprise MBS,
                                                              and the Federal Reserve has purchased an additional $135 billion in direct
                                                              debt obligations of the Enterprises.14

                                                              Federal Home Loan Banks
                                                              The FHLBanks were created in 1932 to improve the availability of funds for
                                                              residential mortgage lending. The FHLBank System is currently comprised
                                                              of 12 regional FHLBanks and the Office of Finance, which issues debt on the
                                                              FHLBanks’ behalf.15 The 12 FHLBanks are each separate legal entities that
                                                              must adhere to specific management and capitalization criteria.16

                                                              Each FHLBank focuses on community credit needs throughout its
                                                              geographical area. The areas that comprise the FHLBank System are shown
                                                              in the map in Figure 5 (see page 23).

                                                              The 12 FHLBanks are privately capitalized. Each regional FHLBank 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 stock of the FHLBanks to
                                                              become members. FHLBank stock is not publicly traded.17


   22 |     Section 2: Operations of FHFA and the GSEs
                                                                         Inaugural Semiannual Report to the Congress | March 31, 2011




                              Figure 5. Map of the Regional FHLBanks




Source: FHLBBoston. The Federal Home Loan Bank System. <http://www.fhlbboston.com/aboutus/thebank/08_01_04_
fhlb_system.jsp>, accessed 4/27/2011.


The primary business of the FHLBanks is providing their members with                                                  Collateral:
low-cost funding for mortgage lending and other purposes. To do so, each                                              Assets used as security for a loan that can
FHLBank makes loans (referred to as advances) to its members. FHLBank                                                 be seized by the lender if the borrower fails
                                                                                                                      to repay the loan.
advances are available in a variety of maturities and structures. Such advances
are collateralized by single-family mortgage assets, investment-grade
securities, or in some cases, agricultural and small business loans.

                     Figure 6. FHLBanks Annual Net Income 2000 to 2010
                                         ($ billions)




Sources: Federal Home Loan Banks. 2010 Federal Home Loan Banks Combined Financial Report. <http://www.fhlb-of.
com/ofweb_userWeb/resources/10yrend.pdf>, p. F-5, accessed 4/27/2011; Federal Housing Finance Agency. 2008
FHFA Annual Report to Congress. <http://www.fhfa.gov/webfiles/2335/FHFA_ ReportToCongress2008508rev.pdf>, p.
141, accessed 4/27/2011.



                                                                                                                 Section 2: Operations of FHFA and the GSEs    | 23
Federal Housing Finance Agency Office of Inspector General




                                                       The FHLBanks also maintain investment portfolios that contain mortgage-
Private-Label MBS:                                     related assets, and some face heightened credit risks due to their relatively
MBS derived from mortgage loan pools                   larger holdings of private-label MBS.
assembled by entities other than GSEs
or federal government agencies, such as                To raise money to fund member advances, the FHLBanks issue debt securities
private-sector finance companies. They do              through their Office of Finance.18 In the event of a default on these debt
not carry an explicit or implicit government           obligations, each FHLBank is jointly and severally liable for losses incurred
guarantee, and the private-label MBS
                                                       by other FHLBanks. Like Fannie Mae and Freddie Mac, the FHLBank
investor bears the risk of losses on its
investment.
                                                       System has also historically enjoyed cost benefits stemming from the implicit
                                                       government guarantee of its debt obligations.

                                                       Selected FHFA Programs and Activities
                                                       FHFA-OIG continues to follow developments in programs that affect the
                                                       operations of FHFA and the GSEs. A number of them are discussed here,
                                                       including the Administration’s housing finance reform proposal, Enterprise
                                                       mortgage buyback settlements, FHFA’s reorganization, and the Seattle
                                                       FHLBank consent order.

                                                       Administration’s Housing Finance Reform Plan
FHFA-OIG recently released an evaluation               On February 11, 2011, Treasury and HUD jointly issued a report to Congress
discussing FHFA’s exit strategy and planning           on the future of housing finance, Reforming America’s Housing Finance Market
process for the Enterprises’ structural reform.        (the “Plan”), which outlines the Administration’s position on reforming the
The evaluation is available at www.fhfaoig.gov.        U.S. housing finance market.
FHFA-OIG plans to review the capacity of FHFA’s
examination staff.                                     The Administration’s Plan summarizes its view of the flaws underlying the
                                                       housing market crisis and calls for the eventual wind down of Fannie Mae
                                                       and Freddie Mac. According to the Plan, “The Administration will work
                                                       with [FHFA] to develop a plan to responsibly reduce the role of [Fannie
                                                       Mae] and [Freddie Mac] in the mortgage market and, ultimately, wind down
                                                       both institutions.” The Plan recommends that FHFA implement measures
                                                       to transition the housing market from taxpayer funding to private capitalization.
                                                       Relative to FHFA and the GSEs, specific policy prescriptions of the Plan
                                                       include:

                                                            • I ncreasing guarantee fees;
                                                            • I ncreasing the involvement of private capital in the mortgage market,
                                                              including privately funded credit-loss protection on mortgage portfolios
                                                              and larger down payment requirements for borrowers;
                                                            •R
                                                              educing conforming loan limits; and
                                                            • Winding down the Enterprises’ investment portfolios.

                                                       With respect to the FHLBanks, the Plan advocates limiting the level of
                                                       advances in order to focus FHLBank resources on small- and medium-sized
                                                       financial institutions. As with Fannie Mae and Freddie Mac, it proposes that
                                                       the FHLBanks wind down their investment portfolios and reorient themselves


  24 |    Section 2: Operations of FHFA and the GSEs
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




toward the core mission of providing readily available funding to FHLBank
member institutions.

The Plan also outlines three options for the structure of the future U.S. housing
finance system, ranging from less to more government involvement:

      ption 1: Privatized system of housing finance with the government
     O
     insurance role limited to FHA, USDA and Department of Veterans
     Affairs assistance for narrowly targeted groups of borrowers;

      ption 2: Privatized system of housing finance with assistance from
     O
     FHA, USDA and Department of Veterans Affairs for narrowly targeted
     groups of borrowers and a guarantee mechanism to scale up during times
     of crisis; and

     Option 3: Privatized system of housing finance with FHA, USDA
     and Department of Veterans Affairs assistance for low- and moderate-
     income borrowers and catastrophic reinsurance behind significant
     private capital.

Buyback Settlement Agreements
FHFA recently approved buyback settlements between the Enterprises                   FHFA-OIG is reviewing FHFA’s oversight of the
and two counterparties. On December 23, 2010, Fannie Mae concluded                   Enterprises’ buyback settlements.
an agreement with Ally Financial for approximately $462 million.19 On
December 31, 2010, Fannie Mae and Freddie Mac concluded agreements
with Bank of America totaling $2.8 billion.20 A buyback claim may arise
when an Enterprise purchases a mortgage loan. The loan seller represents
and warrants that the loan is free of defects by certifying that the information
in the loan paperwork is true and correct. If the Enterprise later discovers
that the purchased loan contains such a defect, it has the contractual right to
demand that the loan seller buy back the loan. The Enterprises have made
billions of dollars of buyback claims to these and other counterparties.

FHFA Reorganization
FHFA announced an organizational restructuring of the Agency on February             FHFA-OIG plans to review FHFA’s institutional
2, 2011. According to FHFA, the restructuring is intended to promote greater         capacity to fulfill its regulatory and
uniformity and consistency in the examinations of Fannie Mae, Freddie Mac,           conservatorship mandates.
and the FHLBanks. As part of the reorganization, a new housing mission
team will focus on policy matters involving the conservatorships, including
loss mitigation activities, public reporting on the activities of the GSEs,
affordable housing, the state of the secondary mortgage market, and activities
related to the Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010.




                                                                                    Section 2: Operations of FHFA and the GSEs   | 25
Federal Housing Finance Agency Office of Inspector General




FHFA-OIG plans to review FHFA’s oversight of           Consent Order for Seattle FHLBank
the FHLBanks.
                                                       FHFA currently classifies the Seattle FHLBank as undercapitalized. On
                                                       October 25, 2010, FHFA and the Board of Directors of the Seattle FHLBank
Capitalization:                                        (“Seattle Board”) agreed to the issuance of a Consent Order to address a
In the context of bank supervision,                    number of outstanding capital and supervisory matters. The Consent Order
capitalization refers to the funds a bank              sets forth requirements for capital management, asset composition, and other
holds as a buffer against unexpected                   operational and risk management improvements. Additionally, FHFA and
losses. It includes shareholders’ equity,              the Seattle Board agreed to a stabilization period that continues through
loss reserves, and retained earnings. Bank             the filing of the Seattle FHLBank’s June 30, 2011, financial statement. The
capitalization plays a critical role in the
                                                       Seattle FHLBank’s classification as undercapitalized will remain in place until
safety and soundness of individual banks
                                                       the Consent Order is lifted.21
and the banking system. In most cases,
federal regulators set requirements for
adequate bank capitalization.




  26 |    Section 2: Operations of FHFA and the GSEs
section 3
Accomplishments of FHFA-OIG
Federal Housing Finance Agency Office of Inspector General




                                                    Section 3: Accomplishments of FHFA-OIG
                                                    Although the Federal Housing Finance Agency Office of Inspector General
                                                    (“FHFA-OIG”) has been in existence only since October 2010, and has
                                                    been primarily focused on building the organization, it has recorded several
                                                    significant accomplishments through March 31, 2011. These include: (1)
                                                    the issuance of two evaluation reports of Federal Housing Finance Agency
                                                    (“FHFA” or the “Agency”) activities; (2) participation in a significant mortgage
                                                    fraud investigation; and (3) reviews and comments on proposed FHFA rules.
                                                    Further, FHFA-OIG established and began to implement communication
                                                    outreach strategies for the Government-Sponsored Enterprises (“GSEs”),
                                                    Congress, and others.

                                                    FHFA-OIG Audit and Evaluation Activities
                                                    Through March 31, 2011, FHFA-OIG has released two public reports, which
                                                    are briefly summarized below.

A full copy of the report is available at           Evaluation of Federal Housing Finance Agency’s Oversight of Fannie
www.fhfaoig.gov.                                    Mae’s and Freddie Mac’s Executive Compensation Programs, EVL-2011-
                                                    002, March 31, 2011

                                                    Since placing the Federal National Mortgage Association (“Fannie Mae”)
                                                    and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) into
                                                    conservatorships in September 2008, FHFA has taken a range of actions to
                                                    improve their finances and operations, including removing and replacing senior
                                                    executives and establishing new executive pay plans. FHFA oversees executive
                                                    compensation levels for Fannie Mae and Freddie Mac (the “Enterprises”) and
                                                    monitors their ongoing implementation. In 2009 and 2010, FHFA approved
                                                    executive compensation packages totaling $34.4 million in annual base salaries
                                                    and deferred performance pay for the Enterprises’ top six officers.

                                                    Given the concerns about executive compensation levels at companies that
                                                    have received federal financial support, FHFA-OIG initiated an evaluation
                                                    to assess: (1) the processes used to develop Fannie Mae’s and Freddie Mac’s
                                                    compensation packages; (2) FHFA’s ongoing oversight efforts; and (3)
                                                    the transparency of the Enterprises’ executive compensation policies and
                                                    practices.

                                                    In its evaluation, FHFA-OIG made several findings. FHFA coordinated with
                                                    the U.S. Department of the Treasury (“Treasury”) and outside consultants to
                                                    develop the Enterprises’ compensation programs. FHFA believes that such
                                                    programs are necessary to recruit and retain talented executives. Enterprise
                                                    executive compensation packages include provisions designed to mitigate
                                                    abusive compensation practices, such as “golden parachute” arrangements
                                                    that assure senior executives of significant benefits if their employment is
                                                    terminated. However, FHFA has not considered factors that might have
                                                    resulted in reduced executive compensation costs, such as the impact that


  28 |     Section 3: Accomplishments of FHFA-OIG
                                                   Inaugural Semiannual Report to the Congress | March 31, 2011




federal financial support has on the Enterprises’ corporate and executive
performance and the compensation paid to senior officials at federal entities
that also play a critical role in housing finance.

FHFA-OIG also found that FHFA lacks key controls necessary to monitor
the Enterprises’ ongoing executive compensation decisions under the approved
packages. Specifically, FHFA has neither developed written procedures to
evaluate the Enterprises’ recommended compensation levels each year, nor
required FHFA staff to verify and test independently the means by which
the Enterprises calculate their recommended compensation levels. Although
the Agency apparently is enhancing its procedures, which is a positive
development, the new procedures do not address all of FHFA-OIG’s concerns,
such as FHFA’s lack of independent testing and verification of the Enterprises’
submissions in support of executive compensation packages.

The report also found that FHFA does not provide sufficient transparency
to the public regarding the Enterprises’ executive compensation programs.
Although the Enterprises report relevant information in public securities
filings, more user-friendly information is generally unavailable. For example,
FHFA does not post the Enterprises’ executive compensation data or related
trend data on its website.

In light of these observations, FHFA-OIG made several recommendations.
FHFA should establish an ongoing review and analysis process to include
issues such as the influence of federal support for the Enterprises and the
compensation levels for the heads of housing-related federal entities.
Additionally, FHFA should establish written criteria and procedures for
reviewing performance data and conduct independent verification and testing
of the basis for executive compensation levels. These factors may warrant
lower compensation for Enterprise executives. Also, to improve transparency,
FHFA should post information on its website about executive compensation
and provide links to the securities filings.

FHFA agreed with most of these recommendations. FHFA did not agree,
however, with FHFA-OIG’s recommendations to: (1) assess disparities
in compensation among senior officials at Fannie Mae and Freddie Mac,
FHFA, the Federal Housing Administration, and the Government National
Mortgage Association (“Ginnie Mae”); and (2) test and verify independently
Fannie Mae’s and Freddie Mac’s annual salary recommendations for their
individual executives.

Federal Housing Finance Agency’s Exit Strategy and Planning Process for           A full copy of the report is available at
the Enterprises’ Structural Reform, EVL-2011-001, March 31, 2011                  www.fhfaoig.gov.

On February 11, 2011, the Administration proposed reforms to Fannie Mae’s
and Freddie Mac’s fundamental roles and structures. FHFA-OIG initiated a
study to identify the steps FHFA is expected to take in the short to medium




                                                                                  Section 3: Accomplishments of FHFA-OIG      | 29
Federal Housing Finance Agency Office of Inspector General




                                                 term under the Administration’s proposal and the adequacy of its planning
                                                 efforts to do so.

                                                 The Administration’s proposal recommends that FHFA implement several
                                                 steps under its regulatory authority in the short to medium term to reduce
                                                 significantly the Enterprises’ currently dominant position in the housing
                                                 finance system, which the Administration views as contributing to excessive
                                                 risk-taking and exposing taxpayers to significant losses. These short to medium
                                                 term regulatory steps, such as requiring Fannie Mae and Freddie Mac to
                                                 raise guarantee fees on the mortgage-backed securities (“MBS”) they issue,
                                                 are intended to offset their cost advantages over potential competition and
                                                 thereby encourage greater private sector participation and capital in mortgage
                                                 finance. Over the longer term, the Administration proposes that Congress
                                                 enact legislation that could further restrict the Enterprises’ role in housing
                                                 finance or eliminate them altogether.

                                                 FHFA-OIG found that FHFA has taken steps to improve the Enterprises’
                                                 finances and operations during their conservatorships, including replacing
                                                 board members and key executives and increasing underwriting standards
                                                 and guarantee fees. However, FHFA has not developed an overall planning
                                                 strategy for the Enterprises’ exit from their conservatorships. Moreover, under
                                                 current circumstances, it is unclear whether FHFA has sufficient resources to
                                                 meet its existing responsibilities as conservator for the Enterprises as well as
                                                 impending responsibilities contained in the Administration’s proposal.

                                                 FHFA-OIG concluded that, because FHFA has a significant role in
                                                 implementing the Administration’s reform proposal, careful planning will
                                                 be essential. FHFA-OIG views FHFA’s potential implementation of its
                                                 regulatory authorities under the Administration’s proposal in the short to
                                                 medium term as an area of significant risk because, if not managed effectively,
                                                 its actions could have negative consequences, such as unnecessarily limiting
                                                 mortgage credit.

                                                 FHFA-OIG recommended that FHFA take specific steps to help ensure the
                                                 effective implementation of its responsibilities, including: (1) establishing
                                                 timeframes and milestones, descriptions of methodologies to be used, criteria
                                                 for evaluating the implementation of the initiatives, and budget and financing
                                                 information necessary to carry out its responsibilities; and (2) developing an
                                                 external reporting strategy, which might include the augmentation of existing
                                                 reports, to chronicle FHFA’s progress, including the adequacy of its resources
                                                 and capacity to meet multiple responsibilities and mitigate any shortfalls.
                                                 FHFA agreed with these recommendations.

                                                 FHFA-OIG Investigation Activities
                                                 The Office of Investigations (“OI”) has made a significant contribution to the
                                                 investigation of fraud involving Colonial Bank and Taylor, Bean & Whitaker
                                                 Mortgage Corporation (“TBW”), which, to date, has resulted in the conviction


 30 |   Section 3: Accomplishments of FHFA-OIG
                                                  Inaugural Semiannual Report to the Congress | March 31, 2011




of seven defendants. TBW was servicing $51 billion in Freddie Mac loans
when it ceased operations in August 2009. Freddie Mac suffered significant
economic losses as a result of this fraud.

Colonial Bank/Taylor, Bean & Whitaker
TBW was one of the largest privately-held mortgage lending companies in          More information on the TBW cases is available
the United States. TBW originated, purchased, sold, and serviced residential     at www.fhfaoig.gov.
mortgage loans. TBW also pooled loans that it originated as collateral for
mortgage-backed securities guaranteed by Freddie Mac and Ginnie Mae.

Beginning in early 2002, TBW began to experience significant cash flow
problems. In an effort to cover these shortfalls, a group of conspirators
devised various schemes, which involved defrauding Colonial Bank (which
provided short term funding to mortgage lending companies like TBW),
Ocala Funding LLC (“Ocala”), a TBW special purpose entity, and U.S.
taxpayers. By the middle of 2009, the conspirators had diverted nearly $3
billion from Colonial Bank and Ocala; attempted to misappropriate over
$500 million from Treasury; and filed numerous false records with Freddie
Mac, Ginnie Mae, and the Securities and Exchange Commission (“SEC”).
Additionally, the conspirators allegedly covered up the diversions by selling
loans owned by Colonial Bank to Freddie Mac without paying Colonial Bank
for the loans. As a result, the conspirators caused Freddie Mac and Colonial
Bank to believe that each had an undivided ownership interest in thousands
of the same loans. TBW and Colonial Bank both failed in 2009. Freddie
Mac reported losses and filed a proof of claim of nearly $1.8 billion in TBW’s
bankruptcy proceeding.

Federal prosecutors have charged and convicted seven defendants. The status
of cases against each defendant is described briefly below:

     • Lee Bentley Farkas, the former Chairman of TBW, was charged in
        a multi-count indictment with offenses including conspiracy, wire
        fraud, bank fraud, and securities fraud. On April 19, 2011, Farkas
        was convicted on 14 counts following a jury trial. His sentencing is
        scheduled for July 2011.
     • Paul R. Allen, the former Chief Executive Officer of TBW, pled guilty
        to one count of conspiracy to commit bank and wire fraud and one
        count of making false statements. He is scheduled to be sentenced in
        June 2011.
     • Raymond Bowman, the former President of TBW, pled guilty to
        one count of conspiracy and one count of making false statements to
        federal agents on March 14, 2011. He is scheduled to be sentenced in
        June 2011.




                                                                                 Section 3: Accomplishments of FHFA-OIG    | 31
Federal Housing Finance Agency Office of Inspector General




                                                      •D
                                                        esiree Brown, the former Treasurer of TBW, pled guilty to one count
                                                       of conspiracy on February 24, 2011. Her sentencing is scheduled for
                                                       June 2011.
                                                      •S
                                                        ean W. Ragland, a former Senior Financial Analyst for TBW, pled
                                                       guilty to one count of conspiracy on March 31, 2011. His sentencing
                                                       is scheduled for June 2011.
                                                      •C
                                                        atherine Kissick, the former head of Colonial Bank’s Mortgage
                                                       Warehouse Lending Division, pled guilty to one count of conspiracy
                                                       on March 2, 2011. She is scheduled to be sentenced in June 2011.
                                                      • Teresa Kelly, a former operations supervisor in Colonial Bank’s
                                                         Mortgage Warehouse Lending Division, pled guilty to one count of
                                                         conspiracy on March 16, 2011. Her sentencing is scheduled for June
                                                         2011.

                                                 FHFA-OIG’s investigation partners in these cases include the Office
                                                 of the Special Inspector General for the Troubled Asset Relief Program
                                                 (“SIGTARP”), the Federal Bureau of Investigation (“FBI”), the Office of
                                                 Inspector General for the Federal Deposit Insurance Corporation (“FDIC-
                                                 OIG”), the Office of Inspector General for the U.S. Department of Housing
                                                 and Urban Development (“HUD-OIG”), and the Internal Revenue Service
                                                 – Criminal Investigation (“IRS-CI”). The Financial Crimes Enforcement
                                                 Network (“FinCEN”) also provided investigative support. Additionally, the
                                                 cases are being prosecuted by the Fraud Section of the Criminal Division at
                                                 the U.S. Department of Justice (“DOJ”) and the United States Attorney for
                                                 the Eastern District of Virginia.

                                                 In related developments, the SEC has filed enforcement actions against Farkas,
                                                 Brown, Kissick, and Kelly for violations of the antifraud, reporting, books and
                                                 records, and internal controls provisions of federal securities laws.

                                                 FHFA-OIG Regulatory Activities
                                                 Consistent with the Inspector General Act, FHFA-OIG considers whether
                                                 proposed legislation and regulations related to FHFA are effective, efficient,
                                                 economical, legal, and susceptible to fraud and abuse.22 Through March 31,
                                                 2011, FHFA-OIG had reviewed 16 new or proposed FHFA policies and
                                                 regulations and provided substantive comments on 7, which are discussed
                                                 below.

                                                 1. FHFA Proposed Rule on Office of the Ombudsman (RIN 2590-AA20)
                                                     (FHFA-OIG Comments submitted on December 3, 2010)

                                                 On August 6, 2010, FHFA published a proposed rule to establish an Office of
                                                 the Ombudsman within FHFA, pursuant to the Federal Housing Enterprise
                                                 Financial Safety and Soundness Act of 1992, as amended by the Housing and
                                                 Economic Recovery Act of 2008 (“HERA”).23 According to the proposed rule,



 32 |   Section 3: Accomplishments of FHFA-OIG
                                                   Inaugural Semiannual Report to the Congress | March 31, 2011




the Ombudsman would consider complaints and appeals from: (1) the GSEs;
and (2) parties that have a business relationship with them. The Ombudsman
would consider only complaints and appeals pertaining to FHFA’s oversight
of the GSEs.

FHFA-OIG made two comments on the proposed rule. FHFA-OIG’s
first comment addressed the description of the Ombudsman’s authority to
“investigate” allegations that FHFA had retaliated against complaining
entities for having contacted the Ombudsman. FHFA-OIG cautioned
against using language that would permit the Ombudsman to conduct
“investigations” because Congress has made clear that an agency’s audit
and investigative resources are “consolidated … under the direction of the
Inspector General.”24 FHFA-OIG suggested alternative language that would
permit the Ombudsman to examine retaliation allegations in coordination
with FHFA-OIG.

FHFA-OIG’s second comment pertained to the proposed rule’s guarantee
of confidentiality to parties who request it, unless disclosure would be to
“appropriate reviewing or investigating officials, or as required by law.” To
avoid future misunderstandings regarding FHFA-OIG’s access to information
in the Ombudsman’s possession, FHFA-OIG recommended that the
proposed rule’s reference to “appropriate reviewing or investigative officials”
be amended to include the Inspector General expressly.

FHFA published a final rule establishing an Office of the Ombudsman
on February 10, 2011.25 The final rule incorporates both of FHFA-OIG’s
comments in their entirety.

2. F
    HFA Draft Advisory Bulletin 2011-AB-01, “Operational
   Readiness for Swaps-Related Reporting, Clearing, Trading, and                    Swap:
   Recordkeeping Requirements.” (FHFA-OIG Comments submitted on                     An agreement between two parties
   January 20, 2011)                                                                to exchange cash flows of underlying
                                                                                    securities. For example, in an interest rate
FHFA developed a draft bulletin related to the FHLBanks’ preparations               swap, a common type of swap, one party
for regulations proposed by the Commodity Futures Trading Commission                agrees to pay a fixed interest rate in return
(“CFTC”). The CFTC’s regulations seek to implement Title VII of the                 for receiving a variable rate from the other
                                                                                    party.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
“Dodd-Frank Act”), which addresses swaps. These proposed regulations
include: (1) “Process for Review of Swaps for Mandatory Clearing;”26 (2)
“Real-Time Public Reporting of Swap Transaction Data;”27 and (3) “Swap
Data Recordkeeping and Reporting Requirements.”28 To ensure that the
FHLBanks would be ready to comply with these proposed regulations once
they become final, the draft bulletin stated that they should undertake several
substantial steps. All of these steps would constitute new duties for the
FHLBanks to perform. The draft bulletin also stated that FHFA examiners
would “review and assess” the FHLBanks’ readiness to comply with the
proposed regulations.



                                                                                  Section 3: Accomplishments of FHFA-OIG      | 33
Federal Housing Finance Agency Office of Inspector General




                                                 FHFA-OIG’s primary comment on the draft bulletin was that FHFA should
                                                 have engaged in notice-and-comment rulemaking in order to impose new
                                                 duties on the FHLBanks. In FHFA-OIG’s view, the draft bulletin constituted
                                                 a “legislative rule” for purposes of the Administrative Procedure Act, 5 U.S.C.
                                                 § 551 et seq. (“APA”), because it clearly imposed new responsibilities on the
                                                 FHLBanks. As a legislative rule, the draft bulletin would be subject to the
                                                 APA’s notice-and-comment requirements at 5 U.S.C. § 553(a). Further,
                                                 FHFA-OIG determined that the draft bulletin should not be characterized
                                                 as merely interpretive – and therefore exempt from notice-and-comment
                                                 requirements – because it did not interpret the proposed CFTC regulations.
                                                 It only referenced them and referred readers seeking guidance to the CFTC
                                                 website. For these reasons, FHFA-OIG concluded that if FHFA wished for
                                                 the FHLBanks to comply with the draft bulletin’s new duties, FHFA should
                                                 undertake notice-and-comment rulemaking.

                                                 Based on FHFA-OIG’s comments, FHFA revised the draft bulletin to
                                                 clarify that the CFTC regulatory compliance steps described therein were
                                                 “recommended” as opposed to “required.” FHFA issued the revised advisory
                                                 bulletin on March 4, 2011.

                                                 3. FHFA Draft Final Rule on Executive Compensation (RIN 2590-AA12)
                                                     (FHFA-OIG Comments submitted on March 1, 2011)

                                                 FHFA drafted a proposed final rule to implement its responsibility to prohibit
                                                 and withhold unreasonable compensation for executives of Fannie Mae and
                                                 Freddie Mac, pursuant to HERA. Due to ongoing discussions between
                                                 FHFA and FHFA-OIG on this issue, the substance of the comments and
                                                 their resolution will be published at a later date.

                                                 4. FHFA Draft Re-Proposed Rule on Golden Parachute and
                                                     Indemnification Payments (RIN 2590-AA08) (FHFA-OIG Comments
                                                     submitted on March 1, 2011)

                                                 FHFA re-proposed a rule to implement its responsibility to regulate golden
                                                 parachute and indemnification payments to parties affiliated with the GSEs,
                                                 pursuant to HERA.29 Due to ongoing discussions between FHFA and
                                                 FHFA-OIG on this issue, the substance of the comments and their resolution
                                                 will be published at a later date.

                                                 5. FHFA Draft Enterprise New Activity Protocol (RIN 2590-AA17)
                                                     (FHFA-OIG Comments submitted on March 18, 2011)

                                                 FHFA drafted a proposed protocol to implement a requirement that the
                                                 Enterprises submit for approval monthly reports describing new activities in
                                                 which they would like to engage. It would also withdraw an existing regulation,
                                                 12 C.F.R. Part 1253. Due to ongoing discussions between FHFA and FHFA-
                                                 OIG on this issue, the substance of the comments and their resolution will be
                                                 published at a later date.



 34 |   Section 3: Accomplishments of FHFA-OIG
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




6. FHFA Draft Regulatory Policy Guidance on Reporting of Fraudulent
    Financial Instruments (FHFA-OIG Comments submitted on
   March 18, 2011)

FHFA proposed policy guidance to implement the fraud reporting
requirements set forth in FHFA’s regulation at 12 C.F.R. Part 1233. FHFA-
OIG issued three comments regarding the policy guidance. First, FHFA-
OIG recommended that FHFA consider adding to or revising definitions of
the terms used in the guidance. Second, FHFA-OIG recommended that it
be copied on all reports required by the policy guidance. As the only division
within FHFA with criminal law enforcement authority, FHFA-OIG should
receive copies of all reports of potential criminal activities, e.g., fraudulent
activities. Third, FHFA-OIG recommended that FHFA-OIG be afforded
access to the records supporting fraud reports and that the GSEs maintain
supporting records in an encrypted, web-based interface. In the latter regard,
if the GSEs were required to store this information electronically, and if it
were accessible remotely, the supporting records would be far more useful for
investigators and evaluators.

FHFA issued the policy guidance on March 23, 2011.30 FHFA adopted
FHFA-OIG’s recommendations concerning FHFA-OIG’s access to
information and accepted some of its suggested changes to the definitions, but
did not implement its recommendation concerning the web-based interface
for supporting records.

7. J oint Agency Steering Committee’s Proposed Rules on Incentive-based
    Executive Compensation (RIN 2590-AA42) (FHFA-OIG Comments
    submitted on March 28, 2011)

Pursuant to Section 956 of the Dodd-Frank Act, seven federal
financial regulators proposed jointly to issue rules requiring their
respective regulated entities to disclose information pertaining to their
“incentive-based compensation arrangements” and prohibiting any
such arrangements that encourage inappropriate risk-taking. Due to
ongoing discussions between FHFA and FHFA-OIG on this issue, the
substance of the comments and their resolution will be published at a
later date.

FHFA-OIG Communications and Outreach Efforts
A vital component of FHFA-OIG’s mission is to communicate clearly with
                                                                                     The FHFA-OIG Hotline can be reached
Congress, the GSEs and industry groups, the public, and colleagues at other          at (800) 793-7724 or via email at
federal agencies.                                                                    OIGHOTLINE@FHFA.GOV.

Hotline
FHFA-OIG OI operates the FHFA-OIG Hotline, which allows concerned
parties to report directly and in confidence information regarding possible



                                                                                   Section 3: Accomplishments of FHFA-OIG   | 35
Federal Housing Finance Agency Office of Inspector General




                                                 fraud, waste, or abuse related to FHFA or the GSEs. FHFA-OIG honors all
                                                 applicable whistleblower protections. As part of its effort to raise awareness
                                                 of fraud and how to combat it, FHFA-OIG is actively promoting the Hotline
                                                 through the FHFA-OIG website, posters, targeted emails to FHFA and GSE
                                                 employees, and the Semiannual Report.

                                                 Coordination with Other Oversight Bodies
                                                 FHFA-OIG shares oversight of federal housing program administration
                                                 with several other federal agencies (including HUD, the U.S. Department of
                                                 Veterans Affairs (“VA”), the U.S. Department of Agriculture, Treasury’s Office
                                                 of Financial Stability (which manages the Troubled Asset Relief Program)),
                                                 and their inspectors general, as well as other law enforcement organizations.
                                                 To further its mission, FHFA-OIG participates in coordinating the efforts of
                                                 these agencies and exchanging best practices, case information, and professional
                                                 expertise. During the period ending March 31, 2011, representatives of
                                                 FHFA-OIG participated in the following cooperative activities:

                                                      • The Council of the Inspectors General on Integrity and Efficiency
                                                         (“CIGIE”), which meets monthly, seeks to increase the professionalism
                                                         and effectiveness of offices of inspectors general. The FHFA Inspector
                                                         General and his Chief Counsel are active participants in CIGIE
                                                         activities and have attended all monthly CIGIE meetings.
                                                      • The Dodd-Frank Act established the Council of Inspectors General on
                                                         Financial Oversight (“CIGFO”) to facilitate the sharing of information
                                                         among inspectors general at agencies responsible for financial oversight.
                                                         The FHFA Inspector General is an active member of CIGFO and has
                                                         attended all of its meetings.
                                                      • FHFA-OIG works closely with FinCEN, which Treasury established in
                                                         1990 to provide, among other things, a government-wide, multisource
                                                         financial intelligence and analysis network. Through its partnership
                                                         with FinCEN, FHFA-OIG both provides and receives valuable
                                                         financial intelligence in support of federal law enforcement activities.
                                                         FHFA-OIG hosted a meeting with FinCEN on January 29, 2011.
                                                      • The Financial Fraud Enforcement Task Force (“FFETF”) is a broad
                                                         coalition of state and federal law enforcement agencies, prosecutors,
                                                         and other entities. President Obama 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 financial discrimination in the lending
                                                         and financial markets. FHFA-OIG is an active member of FFETF and
                                                         has begun to work with FFETF partners to combat financial crimes
                                                         relevant to FHFA-OIG’s mission. FHFA-OIG also participated in
                                                         several FFETF working groups that, as described below, will enable
                                                         FHFA-OIG to leverage other law enforcement entities’ knowledge
                                                         and assets in various areas relevant to FHFA-OIG’s mission.


 36 |   Section 3: Accomplishments of FHFA-OIG
                                                   Inaugural Semiannual Report to the Congress | March 31, 2011




           o The FFETF Mortgage Fraud Working Group (“MFWG”)
              combats mortgage fraud related to the financial crisis. The FHFA      Suspension:
              Inspector General made a presentation on the role and mission         The temporary disqualification of a firm
                                                                                    or individual from contracting with the
              of FHFA-OIG at the March 3, 2011, MFWG meeting.
                                                                                    government or participating in government
           o The Recovery Act, Procurement, and Grant Fraud Working                programs, pending the outcome of an
              Group addresses procurement and grant fraud, including fraud          investigation, an indictment, or on adequate
              arising in connection with the expenditure of funds provided          evidence that supports claims of program
              by the American Recovery and Reinvestment Act of 2009. The            violations.
              FHFA Inspector General made a presentation on suspension              A suspension means that an individual
              and debarment at the group’s March 9, 2011, meeting.                  or entity is immediately excluded from
                                                                                    participating in further federal executive
           o FFETF’s Securities and Commodities Fraud Working Group
                                                                                    branch procurement and non-procurement
              works to eliminate fraud in America’s financial markets. FHFA-        programs. Suspension frequently leads to
              OIG participates in this working group with, among others,            debarment.
              DOJ, SEC, and the CFTC.
                                                                                    Debarment:
     • FHFA-OIG has established partnerships with several federal agencies         Disqualification of a firm or individual
        to share data, analyze internal complaints, and identify trends. These      from contracting with the government
        agencies include the FBI, HUD-OIG, FinCEN, the Secret Service, and          or participating in government non-
        SIGTARP. Each of FHFA-OIG’s partnerships with these agencies                procurement transactions for a specific
        is designed to enhance interagency cooperation. These partnerships          period of time. The grounds for debarment
        focus the participating agencies’ combined investigative resources,         may be either statutory or administrative.
        powers, experience, and expertise on the identification, investigation,
        and prosecution of individuals and entities involved in fraud schemes
        related to the entities regulated by the participants.
     • FHFA-OIG also has carried out additional outreach and coordination
        efforts to a wide range of government agencies, including DOJ, the
        Office of the Comptroller of the Currency, SEC, IRS-CI, United
        States Attorney’s Offices throughout the nation, and a number of state
        Attorneys General.
     • The FHFA Inspector General is vice chair of the CIGIE Suspension
        and Debarment Working Group (the “Working Group”). The Working
        Group is a subcommittee of the CIGIE Investigations Committee, and
        its mission is to improve the effectiveness of suspension and debarment
        practices throughout the federal government.

Communications with the GSEs and Industry Groups
FHFA-OIG seeks to partner with private sector participants in the housing
and financial markets in its effort to detect, combat, and prevent mortgage
fraud and related crimes that directly affect the businesses and reputations of
individuals, firms, and the industry as a whole. To that end, FHFA-OIG has
undertaken industry outreach efforts, including:

     • In December 2010, the FHFA Inspector General made a presentation
        to the executive committees of Fannie Mae and Freddie Mac regarding
        the role and mission of FHFA-OIG.


                                                                                  Section 3: Accomplishments of FHFA-OIG    | 37
Federal Housing Finance Agency Office of Inspector General




                                                      • I n February 2011, the FHFA Inspector General made a presentation
                                                         on the role and mission of FHFA-OIG to the Presidents of the
                                                         FHLBanks.
                                                      • I n March 2011, the FHFA Inspector General made a presentation
                                                         on FHFA-OIG’s efforts to combat mortgage fraud to the Mortgage
                                                         Bankers Association at their National Fraud Issues Conference.

                                                 Communications with Congress
                                                 To fulfill his responsibility to keep Congress fully apprised of developments
                                                 concerning oversight of FHFA and the GSEs, the FHFA Inspector General
                                                 meets regularly with Members of Congress and their staff. For example:

                                                      • I n January 2011, the FHFA Inspector General briefed a bipartisan
                                                         group of staff members of the House of Representatives. The briefing
                                                         covered the background of FHFA-OIG, the Inspector General’s vision,
                                                         FHFA-OIG’s progress at building infrastructure and recruiting staff,
                                                         and ongoing audits and evaluations.
                                                      • I n March 2011, the FHFA Inspector General briefed a bipartisan group
                                                         of Senate staff members. Similar to the House of Representatives
                                                         briefing, the Inspector General discussed background information, his
                                                         vision and progress in launching FHFA-OIG, and ongoing audits and
                                                         evaluations.
                                                      • The FHFA Inspector General has provided a number of briefings to
                                                         individual Members of Congress.

                                                 Copies of the FHFA Inspector General’s written testimony to Congress,
                                                 hearing transcripts, and related materials are available at www.fhfaoig.gov.




 38 |   Section 3: Accomplishments of FHFA-OIG
section 4
FHFA-OIG’s Oversight Strategy
Federal Housing Finance Agency Office of Inspector General




                                                     Section 4: FHFA-OIG’s Oversight Strategy
                                                     The Federal Housing Finance Agency Office of Inspector General (“FHFA-
                                                     OIG”) is following a strategy of identifying vulnerabilities and risk areas in
                                                     Federal Housing Finance Agency (“FHFA” or the “Agency”) and Government-
                                                     Sponsored Enterprise (“GSE”) programs and initiating audits, evaluations,
                                                     and investigations where warranted. Based in part on identified risks, FHFA-
                                                     OIG has developed an Audit and Evaluation Plan to guide its work relating
                                                     to FHFA’s oversight of the Federal National Mortgage Association (“Fannie
                                                     Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and
                                                     the Federal Home Loan Banks (“FHLBanks”).

                                                     Independent Risk Assessment
BDO’s risk assessment is available at                To deepen its understanding of the management and performance challenges
www.fhfaoig.gov.                                     facing FHFA, FHFA-OIG has established a continuing risk assessment
                                                     process. As part of this process, FHFA-OIG contracted with an independent,
                                                     third-party professional services firm, BDO USA, LLP (“BDO”), to identify
                                                     the programs and activities that pose the greatest risk to FHFA and the GSEs.
                                                     BDO reviewed and summarized existing reports and findings prepared by
                                                     FHFA and the GSEs, including internal risk assessment materials. Although
                                                     FHFA-OIG does not necessarily endorse BDO’s findings and conclusions,
                                                     FHFA-OIG plans to consider them, along with other materials, when
                                                     planning future work.

                                                     BDO’s assessment identified several risks confronting FHFA:

                                                          •R
                                                            isk that FHFA’s internal policies, procedures, and controls may not be
                                                           adequate to manage the Agency effectively and efficiently in a number
                                                           of critical areas, including human resource management, budgeting,
                                                           procurement, and financial reporting;
                                                          •R
                                                            isk that FHFA will not be able to manage the conservatorships
                                                           effectively; and
                                                          •R
                                                            isk that FHFA will not be able to manage and implement the
                                                           Administration’s current reforms and proposals for restructuring the
                                                           housing finance system effectively.

                                                     BDO’s assessment identified four categories of risk confronting the GSEs:

                                                          •F
                                                            inancial Risk: Risk that the GSEs will experience direct financial
                                                           loss from market, model, credit, and liquidity risks;
                                                          •O
                                                            perational Risk: Risk resulting from the failure of internal processes
                                                           and controls, human capital, and information technology, including
                                                           such items as financial reporting and employee recruitment and
                                                           retention risks;




  40 |    Section 4: FHFA-OIG’s Oversight Strategy
                                                     Inaugural Semiannual Report to the Congress | March 31, 2011




     • Compliance Risk: Risk from failing to comply with legal or regulatory
        requirements (other than legal violations resulting from fraud or
        employment practices); and
     • Strategic Risk: Risk of failing to meet strategic goals and objectives,
        including reputational and business direction risks.

The following are among the top risk areas identified by BDO for the GSEs:

Fannie Mae and Freddie Mac
     • F inancial Model Risk: Financial and other institutions regularly
        rely on financial models to manage their businesses and measure                  Financial Models:
        and monitor risk exposure. For Fannie Mae and Freddie Mac (the                   Financial models are computer simulations
        “Enterprises”), these models are used to measure, monitor, and forecast          designed to forecast the financial
                                                                                         performance of a company or project or
        exposure to interest rate, credit, and market risks. This risk stems
                                                                                         estimate the impact of key parameters,
        from the models’ reliance on parameters and processes that may vary
                                                                                         such as interest rates.
        with changing circumstances, as well as the exercise of subjective
        management judgment.
     • Real Estate Owned (“REO”) Risk: REO refers to real estate the
        Enterprises own as a result of foreclosure-related activities. Since the
        start of the financial crisis, the Enterprises’ REO sales activities and
        portfolios have grown dramatically. Accordingly, the Enterprises face
        elevated financial risks associated with the ownership and disposition
        of these properties. The risks include: whether adequate systems and
        processes are in place to assure security and maintenance of REO
        properties; whether such properties can be sold at prices that will
        minimize financial losses; and deficiencies in loan servicer and law firm
        foreclosure processes. The Enterprises also face ongoing challenges in
        accurately estimating the full impact of the REO inventory on their
        future default losses.
     • Single-Family Lender Channel/Pricing Risk: The Enterprises are in
        the business of providing loan guarantees to investors in exchange for
        fees. If fees are underpriced, the Enterprises experience financial losses.
        The Enterprises confront ongoing risks in accurately pricing guarantee
        fees, particularly with respect to single-family home loans, because of
        the need to rely on financial models and management judgment.
     • Single-Family Credit Loss Management Risk: The Enterprises face
        continuing risks in their efforts to prevent foreclosures and reduce costs
        of defaulted loans through foreclosure alternatives.

Federal Home Loan Banks
While the BDO risk assessment concluded that the FHLBanks’ credit
quality is currently better than that of Fannie Mae and Freddie Mac and the
mortgage industry as a whole, it identified several important risks, including
those described below:


                                                                                      Section 4: FHFA-OIG’s Oversight Strategy   | 41
    Federal Housing Finance Agency Office of Inspector General




                                                                   •M
                                                                     any FHLBanks face ongoing risks related to credit quality due to
                                                                    the private-label mortgage-backed securities (“MBS”) held in their
                                                                    portfolios. In particular, the risk assessment states that further decline
                                                                    in the value of private-label MBS could further degrade many of the
                                                                    FHLBanks’ financial condition and performance; and
                                                                   •B
                                                                     ecause the lending portfolios of some FHLBanks are more
                                                                    concentrated among fewer large borrowers, the default or withdrawal
                                                                    of a major member institution poses a greater risk to the FHLBanks’
                                                                    financial and operational performance.

    The full Audit and Evaluation Plan is available at        FHFA-OIG Audit and Evaluation Plan
    www.fhfaoig.gov.
                                                              FHFA-OIG has created a detailed audit and evaluation plan that focuses
                                                              strategically on the areas of FHFA’s operations that pose the greatest risks
                                                              and provide the greatest potential benefits to FHFA, Congress, and the
                                                              public. The current plan was developed based on the independent BDO risk
                                                              assessment, reviews of relevant reports and documentation, and interviews
                                                              with FHFA officials, Members of Congress, and others.c

                                                              Key aspects of the strategy include reviews of FHFA’s:

                                                                   •R
                                                                     egulatory efforts and its management of the Enterprise conser-
                                                                    vatorships. Areas of focus include FHFA staff capacity, Enterprise
                                                                    executive compensation, Enterprise mortgage buyback settlements,
                                                                    foreclosure prevention and loss mitigation efforts, mortgage loan
                                                                    servicing controls, foreclosed property management and sales process-
                                                                    es, model validation and risk-based guarantee pricing, and payment
                                                                    of legal fees. These are particularly high-risk areas because Treasury
                                                                    has invested nearly $154 billion of taxpayer funds in the Enterprises.
                                                                    FHFA must regulate and oversee (as conservator) the GSEs in an
                                                                    efficient, effective, and transparent manner so as to minimize taxpayer
                                                                    costs, conserve Enterprise resources, and meet all statutory mandates;
                                                                   •O
                                                                     versight of the FHLBanks and their associated risks, including
                                                                    investment portfolio management, concentrations, and credit
                                                                    underwriting and administration;
                                                                   •O
                                                                     versight of the GSEs’ housing missions, including affordable housing
                                                                    programs; and
                                                                   • I nternal operations, such as information security, privacy, and the
                                                                      handling of consumer complaints and allegations of fraud, waste,
                                                                      and abuse.

                                                              As discussed in Section 3 of this Report, FHFA-OIG has issued two
                                                              reports addressing issues in its highest priority area: FHFA’s oversight and
c   c
        F HFA-OIG’s plan is dynamic and will be revised as
                                                              conservatorships of the Enterprises. The Audit and Evaluation Plan identifies
         necessary.                                           a number of other ongoing and planned reviews of specific FHFA programs



         42 |      Section 4: FHFA-OIG’s Oversight Strategy
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




and activities that fall into each of the risk areas. The following summarizes
some of the projects that are currently in the plan, arranged by their strategic
risk area.d

FHFA’s Oversight and Conservatorships of the Enterprises
FHFA’s Independence: This project will examine FHFA’s independence and
the processes it uses in exercising its decision-making authority, particularly
in light of its multiple responsibilities. For example, FHFA has statutory
obligations both to act as conservator for the Enterprises and to support
the housing finance system, which often includes Treasury’s mortgage loan
modification programs. FHFA-OIG will assess whether balancing potentially
competing responsibilities may test FHFA’s capacity going forward and its
ultimate effectiveness.

FHFA’s Oversight of Fannie Mae’s Network of Foreclosure Processing
Attorneys: Concerns have emerged that many foreclosures in recent years may
not have been conducted according to state laws and regulations, which may
have resulted in individuals and families losing their homes improperly. This
project will assess FHFA’s oversight of Fannie Mae’s selection, management,
and oversight of foreclosure attorney networks. Future work may also address
FHFA’s oversight of Freddie Mac’s attorney networks.

FHFA’s Review and Approval of Freddie Mac Settlement with Bank of
America Relating to Mortgage Buybacks: FHFA recently approved three
settlements for more than $3 billion between the Enterprises and Ally
Financial (formerly GMAC) and Bank of America relating to Ally Financial’s
and Bank of America’s buyback obligations. This project will assess FHFA’s
review and approval process for the settlement between Freddie Mac and
Bank of America.

FHFA’s Oversight of Fannie Mae’s Loss Management Practices: As
conservator, FHFA must preserve and conserve the assets of the Enterprises,
including minimizing losses. This project will assess FHFA’s oversight of
Fannie Mae’s loan loss analyses used to determine the least costly approach to
addressing seriously delinquent loans.

FHFA’s Oversight of Enterprise Real Estate Owned Contractors: The
Enterprises engage contractors to handle the management and disposition
of REO. These activities can significantly impact the sales proceeds received.
This project will assess FHFA’s oversight of the Enterprises’ controls over
REO contractors engaged to manage and market single-family residential
properties.

Federal Home Loan Banks
                                                                                   d   d
                                                                                           It should be noted, as described earlier, that FHFA-OIG
FHFA’s Oversight of Troubled FHLBanks: As discussed in the independent                      may revise the plan as new information and priorities are
risk assessment by BDO, several FHLBanks face financial challenges due to                   identified, and therefore, not all of these projects may
                                                                                            remain in the plan.
their investments in private-label MBS, including those collateralized by


                                                                                       Section 4: FHFA-OIG’s Oversight Strategy                | 43
Federal Housing Finance Agency Office of Inspector General




                                                   subprime mortgages that have been impacted by the decline in housing values.
                                                   This project will assess the steps that FHFA is taking to help ensure that these
                                                   troubled FHLBanks return to financial soundness.

                                                   FHFA’s Examinations of FHLBank Advance and Collateral Management
                                                   Practices: FHLBank advances to their member financial institutions are
                                                   secured by pledged collateral, such as single-family residential mortgages. Due
                                                   to the dramatic decline in housing values in recent years, concerns have arisen
                                                   about the value of collateral securing advances and the FHLBanks’ collateral
                                                   management practices. Further, as stated in the BDO risk assessment, some
                                                   FHLBanks face substantial credit risks due to their relatively large advances
                                                   to a small number of very large financial institutions. This project will assess
                                                   FHFA’s oversight of the FHLBanks’ controls over underwriting standards and
                                                   their compliance with such standards relative to credit decisions for advances
                                                   and collateral verification.

                                                   FHFA Operations
                                                   FHFA’s Complaint Handling Process: As a consequence of the financial
                                                   crisis, consumer complaints and allegations of fraud, waste, and abuse
                                                   presented to the Enterprises and FHFA have increased dramatically. The
                                                   objective of this ongoing audit is to assess the adequacy of FHFA’s processing
                                                   of complaints.

                                                   FHFA’s Implementation of Information Security Requirements: The
                                                   Federal Information System Management Act of 2002 (“FISMA”) requires
                                                   federal agencies, including FHFA, to have an annual independent evaluation
                                                   of their information security program and practices and to report the results
                                                   of the evaluation to the Office of Management and Budget. FISMA states
                                                   that the independent evaluation is to be performed by the agency Inspector
                                                   General or an independent external auditor, as determined by the Inspector
                                                   General. This audit will assess FHFA’s information security program and
                                                   practices to determine whether they meet the security responsibilities outlined
                                                   in FISMA.

                                                   FHFA-OIG Investigation Strategy
                                                   FHFA-OIG and its law enforcement partners are engaged in a number of
                                                   non-public investigations. FHFA-OIG intends to develop further its close
                                                   working relationships with other law enforcement agencies, including DOJ,
                                                   the United States Attorney’s Offices, the Financial Crimes Enforcement
                                                   Network, the Mortgage Fraud Working Group, the United States Secret
                                                   Service, the Federal Bureau of Investigation, the Office of Inspector General
                                                   for the U.S. Department of Housing and Urban Development, the Office of
                                                   Inspector General for the Federal Deposit Insurance Corporation, the Internal
                                                   Revenue Service – Criminal Investigation, the Office of the Special Inspector
                                                   General for the Troubled Asset Relief Program, and other federal, state, and
                                                   local agencies. In addition, FHFA-OIG has undertaken law enforcement


 44 |   Section 4: FHFA-OIG’s Oversight Strategy
                                                   Inaugural Semiannual Report to the Congress | March 31, 2011




outreach efforts to United States Attorney’s Offices across the nation, as well
as a number of state Attorneys General.

Moreover, FHFA-OIG will continue to use all sources at its disposal to identify
and investigate mortgage frauds that jeopardize the finances and operations          The FHFA-OIG Hotline can be reached
                                                                                     at (800) 793-7724 or via email at
of the housing GSEs. To do so, FHFA-OIG will continue to work effectively
                                                                                     OIGHOTLINE@FHFA.GOV.
with its law enforcement partners and whistleblowers. Further, FHFA-OIG
has a Hotline to which tips and complaints may be made regarding potential
mortgage fraud.

FHFA-OIG Legal Reviews and Comments on Proposed
FHFA Rules
Pursuant to its statutory authority, FHFA-OIG will continue to review
all proposed FHFA rules to ensure their compliance with established
requirements. FHFA-OIG will make recommendations to FHFA as deemed
necessary and monitor its compliance with recommended courses of action.




                                                                                  Section 4: FHFA-OIG’s Oversight Strategy   | 45
Federal Housing Finance Agency Office of Inspector General




 46 |   Section 4: FHFA-OIG’s Oversight Strategy
A Brief History of the Housing
Government-Sponsored Enterprises
Federal Housing Finance Agency Office of Inspector General




Timeline                                                           A Brief History of the Housing
1930s                                                              Government-Sponsored Enterprises
1932	 Federal Home Loan Bank Act is passed,
	     creating the FHLBank System                                  The housing Government-Sponsored Enterprises (“GSEs”) have a long
1933	Home Owners’ Loan Act is passed, creating the Home           history. Understanding the role that these organizations played historically
      Owners’ Loan Corporation
1934	National Housing Act enacted, establishing the Federal
                                                                   in the mortgage markets is important to understanding the financial crisis, its
      Housing Administration                                       causes, and lessons for the future.
1938	 Fannie Mae established

1940s                                                              The housing GSEs are the Federal National Mortgage Association (“Fannie
1944	GI bill authorizes VA mortgage loans and Fannie Mae’s
                                                                   Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and
      purchases of such mortgages                                  the Federal Home Loan Bank System (“FHLBank System”), which currently
1950s                                                              consists of 12 Federal Home Loan Banks (“FHLBanks”).
1954	Charter Act reorganizes Fannie Mae

1960s                                                              Housing Finance Before Federal Involvement
1968	Fannie Mae reorganized as publicly-traded,
      shareholder-owned company                                    Before the Great Depression of the 1930s, housing finance was exclusively
1968	Housing and Urban Development Act of 1968 created            the realm of the private sector. Housing finance generally consisted of short
      the Government National Mortgage Association (“Ginnie
      Mae”)
                                                                   term renewable loans. The features of these loans, which included high down
1970s                                                              payments (approximately half the home’s purchase price), short maturities (10
                                                                   years or less), and large balloon payments, presented significant challenges
1970	 Freddie Mac created
1971	Freddie Mac offers its first conventional Mortgage-
                                                                   to widespread home ownership.31 The primary source of mortgage funding
      Backed Security                                              came from life insurers, commercial banks, and thrifts.32 In the absence of
1970s and early 1980s                                              a nationwide housing finance market, availability and pricing for mortgage
	Fannie Mae and Freddie Mac pursue differing business
       strategies: Fannie Mae holds mortgages in portfolio,        loans varied widely across the country.33
       while Freddie Mac securitizes them

1980s
Early 1980s
                                                                   The Great Depression
	Fannie Mae suffers financial deterioration due to rising
        interest rates, while Freddie Mac’s losses are limited
                                                                   The Great Depression proved as traumatic to the nation’s housing market as
        due to securitization strategy                             it was to the U.S. economy. By 1932, the unemployment rate had risen to
1989	Financial Institutions Reform, Recovery, and                 23.6%,34 and by early 1933, the government estimated that 20% to 25% of the
      Enforcement Act (“FIRREA”) is passed to address the
      savings and loan crisis                                      nation’s home mortgage debt was in default.35
1989	Freddie Mac becomes a publicly-traded, shareholder-
      owned company
1990s                                                              Federal Response to the Depression Era Housing Crisis
1992	Federal Housing Enterprises Financial Safety and             The federal government began its response to the housing crisis in 1932,
      Soundness Act enacted, creating the Office of Federal
      Housing Enterprise Oversight
                                                                   with the enactment of the Federal Home Loan Bank Act (the “Bank Act”).
1995	HUD establishes new goals for Fannie Mae and Freddie         The Bank Act created the FHLBank System and the Federal Home Loan
      Mac, requiring them to meet an “affirmative obligation       Bank Board (“FHLBank Board”) as its regulator.36 The federal government
      to facilitate the financing of affordable housing for low-
      income and moderate-income families”                         also created the Home Owners’ Loan Corporation (“HOLC”), the Federal
2000s                                                              Housing Administration (“FHA”), and Fannie Mae.
2000s	Fannie Mae and Freddie Mac began purchasing Alt-A
       and subprime mortgages                                      Federal Home Loan Bank System
2006	Housing prices begin to fall nationwide for the first time
      since the 1930’s                                             The FHLBank System was designed to serve as a reserve credit system to
2008	Housing and Economic Recovery Act enacted, creating          support housing finance and provide relief to troubled homeowners and lending
      FHFA and FHFA-OIG
2008	Fannie Mae and Freddie Mac enter FHFA-supervised
                                                                   institutions.37 Member institutions, including building and loan associations,
      conservatorships                                             cooperative banks, homestead associations, insurance companies, and savings


    48 |      A Brief History of the Housing Government-Sponsored Enterprises
                                                   Inaugural Semiannual Report to the Congress | March 31, 2011




banks, were required to purchase the stock of the regional FHLBanks.38 The
Bank Act provided the FHLBanks with budgetary authority to borrow up to                          Balloon Payment:
$215 million from Treasury and issue tax-free bonds as a source of funds for                     A payment the borrower must make to the
                                                                                                 lender at the mortgage term’s end. This
the benefit of member institutions.39
                                                                                                 final payment is comparatively much larger
                                                                                                 than the payments that preceded it.
Creation of Home Owners’ Loan Corporation
In June 1933, as part of the New Deal, President Roosevelt signed into law the                   Thrift:
                                                                                                 An organization that primarily accepts
Home Owners’ Loan Act.40 This Act established the HOLC. The HOLC was
                                                                                                 savings account deposits and invests most
managed by the FHLBank Board, and its key role was to refinance mortgages                        of the proceeds in mortgages. Savings
to slow down the rate of foreclosures.41 The HOLC established a precedent                        banks and savings and loan associations
by introducing long-term, fixed-rate mortgage financing, specifically a self-                    are examples of thrift institutions.
amortizing, fixed-rate mortgage. The HOLC stopped making loans in 1936
and ultimately ceased operations in 1951.42                                                      Self-Amortizing Loans:
                                                                                                 Loans in which periodic payments of
                                                                                                 principal and interest are scheduled
Creation of Federal Housing Administration
                                                                                                 over the life of the loan. Self-amortizing
Another New Deal measure, the National Housing Act, was enacted in 1934.                         loans provide more opportunity for
It established FHA to offer federally backed insurance for home mortgages                        homeownership by allowing these
made by FHA approved lenders.43 FHA insurance protected approved                                 scheduled payments, as opposed to large
lenders against losses on the mortgages they originated. FHA insurance                           balloon payments at maturity (the end of the
gave lenders added security and expanded the pool of potential homebuyers                        loan term).
for whom lenders were willing to underwrite loans.44 FHA financed its                            FHA Approved Lenders:
operations through insurance premiums charged to borrowers and interest                          Financial institutions that have been
earned on its reserves.45 Further, FHA expanded the use of fixed-rate, long-                     approved by FHA for the origination and
term mortgages.                                                                                  servicing of FHA-insured mortgages.

Creation of Fannie Mae
                                                                                          Refer to Section 2: “Operations of FHFA and
A 1938 amendment to the National Housing Act established Fannie Mae.e                     the GSEs, Fannie Mae and Freddie Mac” for
Originally, Fannie Mae was a federal government agency. Its mandate was to                a description of the Enterprises’ business for
act as a secondary mortgage market facility that could purchase, hold, and sell           secondary mortgages and liquidity.
FHA-insured loans. By purchasing FHA-insured loans from private lenders,
Fannie Mae created liquidity in the mortgage market, providing lenders with
cash to fund new home loans.

Creation of Veterans Administration Mortgages
The mortgage market remained relatively unchanged following the
establishment of Fannie Mae until 1944, when the Servicemen’s Readjustment
Act (commonly known as the “GI Bill”) created the Veterans Administration
(“VA”) mortgage insurance program.46 The program offered veterans long-
term, low-cost mortgages. Fannie Mae began to purchase VA-insured loans
in 1948, and its business grew rapidly.47                                             e   e
                                                                                              F annie Mae was originally chartered as the National
                                                                                               Mortgage Association of Washington.




                                                                    A Brief History of the Housing Government-Sponsored Enterprises               | 49
    Federal Housing Finance Agency Office of Inspector General




                                                                    Reorganizations of Fannie Mae
                                                                    The Federal National Mortgage Association Charter Act of 1954 (“Charter
                                                                    Act”) transformed Fannie Mae from a government agency into a public-
                                                                    private, mixed ownership corporation.f 48 The Charter Act also exempted
                                                                    Fannie Mae from all state and local taxes, except real property taxes.49

                                                                    The Housing and Urban Development Act of 1968 (the “1968 HUD Act”)
                                                                    reorganized Fannie Mae from a mixed ownership corporation to a for-profit,
                                                                    shareholder-owned company.50 This reorganization removed Fannie Mae
                                                                    from the federal budget,51 and Fannie Mae began funding its operations
                                                                    through the stock and bond markets.

                                                                    The 1968 HUD Act also gave HUD regulatory authority over Fannie Mae,
                                                                    including authority to require that it devote a reasonable portion of mortgage
                                                                    purchases to low- and moderate-income housing.52

                                                                    Creation of Ginnie Mae
    Refer to page 19 for an explanation of                          The 1968 HUD Act also created a new housing finance organization, the
    conventional conforming mortgage loans.                         Government National Mortgage Association (“Ginnie Mae”).53 Unlike
                                                                    Fannie Mae, Ginnie Mae was established as a government owned corporation
                                                                    within HUD,54 a structure it retains to this day. For a fee, Ginnie Mae guar-
                                                                    antees timely payment of principal and interest on privately issued mortgage-
                                                                    backed securities (“MBS”) collateralized by FHA, VA, or other government
                                                                    insured or guaranteed mortgages.55 In contrast, Fannie Mae and Freddie Mac
                                                                    (the “Enterprises”) typically purchase conventional conforming mortgage
                                                                    loans. They also issue and guarantee MBS collateralized by these mortgage
                                                                    loans or hold mortgage loans and MBS in their portfolios.

                                                                    Creation of Freddie Mac
                                                                    In 1970, the secondary mortgage market was expanded when Congress passed
    Interest Rate Risk:
                                                                    the Emergency Home Finance Act, which established Freddie Mac,56 to help
    The exposure of an institution’s financial
                                                                    thrifts manage the challenges associated with interest rate risk.
    condition to adverse movements in interest
    rates.                                                          The FHLBanks originally capitalized Freddie Mac with a $100 million
                                                                    contribution.57 Freddie Mac began to purchase long-term mortgages from
                                                                    thrifts, increasing their capacity to fund additional mortgages and reducing
                                                                    their interest rate risk. The Act also authorized Fannie Mae and Freddie Mac to
                                                                    buy and sell mortgages not insured or guaranteed by the federal government.58
                                                                    In 1971, Freddie Mac issued the first conventional loan MBS.

                                                                    Fannie Mae’s and Freddie Mac’s Business Practices in the
                                                                    1970s and 1980s
                                                                    Although both Fannie Mae and Freddie Mac provided lenders a secondary
f   f
        In this case, the federal government owned the preferred
         stock, and the investors held the non-voting common
                                                                    market for conventional mortgages, they pursued different business strategies
         stock.                                                     during the 1970s and 1980s. Freddie Mac focused its business activities on


          50 |     A Brief History of the Housing Government-Sponsored Enterprises
                                                   Inaugural Semiannual Report to the Congress | March 31, 2011




purchasing conventional conforming mortgages from thrifts and issuing MBS
rather than holding these mortgages in its portfolio. In doing so, Freddie
Mac transferred the interest rate risks associated with the mortgages that it
purchased to investors in its MBS. By contrast, Fannie Mae followed its
traditional business strategy of purchasing mortgage loans and holding them
in its portfolio, which increased its interest rate risk.59

The inflation and recessions of the late 1970s and early 1980s and the sharp
rises in interest rates that accompanied them put tremendous financial strain
on Fannie Mae and many thrifts, which funded their mortgage holdings
principally with short term obligations such as deposits. By contrast, Freddie
Mac’s financial performance was relatively unaffected because of its emphasis
on issuing MBS.60

During this period, the federal government provided financial benefits to
Fannie Mae, such as regulatory forbearance and tax benefits, to help Fannie
Mae recover from its financial losses.61 Additionally, the Garn-St. Germain
Depository Institutions Act of 1982 permitted thrifts to diversify their
investments into potentially more profitable, but riskier, investment and loan
activities. Due to the associated risks, many thrifts experienced substantial
losses because of risky loans and investments, a condition that was aggravated
by the recession of the early 1980s.62

Freddie Mac Reorganized
The savings and loan crisis of the 1980s resulted in billions of dollars of
losses throughout the housing market. By 1989, the Federal Savings and
Loan Insurance Corporation (“FSLIC”), which provided deposit insurance                       Federal Savings and Loan Insurance
for thrift customers, was insolvent. In response, Congress enacted the                       Corporation (“FSLIC”):
                                                                                             Created by the National Housing Act of
Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”)
                                                                                             1934, the FSLIC, which was administered
in 1989. Among its provisions, FIRREA abolished the FSLIC, transferred
                                                                                             by the FHLBank Board, insured savings and
its assets, liabilities, and operations to the newly created FSLIC Resolution                loan deposits until 1989.
Fund, and created a new insurance fund for thrift depositors known as the
Savings Association Insurance Fund. FIRREA also created the Resolution
Trust Corporation to resolve all troubled financial institutions placed into
conservatorship or receivership.63 Ultimately, the savings and loan crisis cost
taxpayers about $125 billion and the thrift industry $29 billion.64

FIRREA also reorganized Freddie Mac’s corporate structure to one similar to
Fannie Mae’s: a for-profit corporation owned by private shareholders rather
than by the FHLBanks.

FIRREA also restructured the regulatory framework for FHLBanks by
abolishing the FHLBank Board. FIRREA assigned oversight responsibilities
of the FHLBanks to the newly created Federal Housing Finance Board and
opened membership in the FHLBank System to depository institutions
(including eligible commercial banks and credit unions) that had more than
10% of their loan portfolios in residential mortgage-related assets.65 As a


                                                                    A Brief History of the Housing Government-Sponsored Enterprises   | 51
Federal Housing Finance Agency Office of Inspector General




                                                        result of this change, despite the closing of troubled thrifts, FHLBank System
                                                        membership increased between 1989 and 2005 from 3,200 to more than
                                                        8,000, and total assets grew from approximately $175 billion to $1 trillion.66

                                                        1992 GSE Reforms
                                                        Given ongoing concerns about regulatory oversight of Fannie Mae and Freddie
                                                        Mac, Congress passed the Federal Housing Enterprises Financial Safety and
                                                        Soundness Act of 1992, which created the Office of Federal Housing Enterprise
                                                        Oversight (“OFHEO”) as an independent regulator within HUD. OFHEO
                                                        had the authority to conduct routine safety and soundness examinations of
                                                        Fannie Mae and Freddie Mac and to take enforcement actions.67

                                                        Further, the measure amended Fannie Mae’s and Freddie Mac’s charters,
                                                        requiring them to meet an “affirmative obligation to facilitate the financing
                                                        of affordable housing for low-income and moderate-income families.”68 In
                                                        1995, HUD began to require Fannie Mae and Freddie Mac to meet certain
                                                        mortgage purchase goals each year.69

                                                        Fannie Mae and Freddie Mac: 2000-2008
                                                        In 2003 and 2004, controversy arose concerning the Enterprises’ accounting
                                                        practices. Additionally, from about 2004 through 2007, Fannie Mae and
Prime Mortgages:
                                                        Freddie Mac embarked on aggressive strategies to purchase mortgages and
A classification of mortgages that are
                                                        mortgage assets originated under questionable underwriting standards. For
considered to be of high quality.
                                                        example, the Enterprises purchased large volumes of Alt-A mortgages, which
Alt-A Mortgages:                                        typically lacked full documentation of borrowers’ incomes and had higher
A classification of mortgages in which                  loan-to-value or debt-to-income ratios. They also purchased private-label
the risk profile falls between prime and                MBS collateralized by subprime mortgages.
subprime. Alt-A mortgages are generally
                                                        In 2007 and 2008, housing prices plummeted and loan delinquencies
considered higher risk than prime due to
                                                        and defaults significantly increased. Fannie Mae and Freddie Mac lost
factors that may include higher loan-to-
                                                        billions of dollars on their investment portfolios and MBS guarantees,
value and debt-to-income ratios or limited
documentation of the borrower’s income.
                                                        including MBS collateralized by Alt-A loans.70 As foreclosures and losses
                                                        increased, investor confidence in the Enterprises deteriorated. This led to
Subprime Mortgages:                                     a sharp increase in the Enterprises’ borrowing costs and drastic declines in
A classification of mortgages with a higher             shareholder equity, triggering concerns about their potential failure and its
perceived risk of default than prime and                broader implications.
Alt-A loans. Interest rates on subprime
mortgage loans are often higher, reflecting             During the mid-2000s, several FHLBanks also purchased large volumes of
the greater risk.                                       private-label MBS for their mortgage investment portfolios. Subsequently,
                                                        many FHLBanks suffered financial deterioration due to their investments
                                                        in private-label MBS collateralized by subprime mortgages. For example,
                                                        FHFA’s Acting Director stated that 6 of the 12 FHLBanks experienced
                                                        financial challenges in 2009 primarily as a result of deterioration in the
                                                        value of their private-label securities. Four of these six FHLBanks recorded
                                                        cumulative net losses in the first three quarters of 2009: Boston, Chicago,
                                                        Pittsburgh, and Seattle.71


  52 |    A Brief History of the Housing Government-Sponsored Enterprises
                                                                  Inaugural Semiannual Report to the Congress | March 31, 2011




  Accounting Problems of Fannie Mae and Freddie Mac
  In 2003, Freddie Mac disclosed it had used improper accounting. OFHEO found that Freddie Mac had misstated earnings by $5 billion between 2000
  and 2003 and fined Freddie Mac $175 million.

  OFHEO also investigated Fannie Mae accounting problems and reported:

       • “during the period …1998 to mid-2004, Fannie Mae reported extremely smooth profit growth…those achievements were illusions
          deliberately and systematically created by the Enterprise’s senior management with the aid of inappropriate accounting and improper earnings
          management.”
       • “…the Enterprise also had serious problems of internal control, financial reporting, and corporate governance.”
       • Fannie Mae engaged in excessive risk-taking, which included increased holdings of subprime and Alt-A private-label MBS and the use of
          derivatives to manage the interest-rate risk of GSE investment portfolios.
       • Those errors resulted in Fannie Mae overstating reported income and capital by an estimated $10.6 billion.

  Fannie Mae paid a $400 million civil penalty.

  The misapplication of accounting rules served to smooth out variations in the Enterprises’ reported earnings over time, masking their volatility and
  giving the Enterprises the appearance of low-risk companies. Among the accounting rule violations was their improper booking of derivatives, which
  the companies used to hedge against the effects of movements in interest rates on their investment portfolio of mortgages. These improper accounting
  practices ultimately led to the Securities and Exchange Commission directing Fannie Mae to restate its financial results for 2002 through mid-2004;
  the departure of the CEO, Franklin Raines, and the CFO, Timothy Howard; and losses of tens of billions of dollars in market capitalization for Fannie Mae
  shareholders. OFHEO estimated that expenses for the restatement process, regulatory examinations, investigations, and litigation would exceed $1.3
  billion in 2005 and 2006.

  Sources:
  Office of Federal Housing Enterprise Oversight. Report of the Special Examination of Fannie Mae. May 2006. <http://www.fanniemae.com/media/
  pdf/newsreleases/FNMSPECIALEXAM.pdf>, accessed 4/27/2011; United States Department of Housing and Urban Development, Office of Policy
  Development and Research, DiVenti, Theresa R. Fannie Mae and Freddie Mac: Past, Present, and Future. Volume II, Number 3 (2009), <http://www.
  huduser.org/periodicals/cityscpe/vol11num3/ch11.pdf>, accessed 4/27/2011.


As discussed in Section 2, Congress enacted HERA in July 2008. Less
than six weeks later, FHFA placed Fannie Mae and Freddie Mac into
conservatorships, where they remain today. The FHFA Office of Inspector
General, an independent oversight and law enforcement arm of FHFA, has
begun an array of audits and evaluations examining FHFA’s regulation of the
housing GSEs and its conservatorships of Fannie Mae and Freddie Mac, as
noted in Sections 3 and 4.




                                                                                        A Brief History of the Housing Government-Sponsored Enterprises   | 53
Federal Housing Finance Agency Office of Inspector General




 54 |   A Brief History of the Housing Government-Sponsored Enterprises
appendices
Federal Housing Finance Agency Office of Inspector General




                                            Appendix A: Glossary and Acronyms
                                            Glossary of Terms
                                            Alt-A Mortgages: 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 loan-to-value and
                                            debt-to-income ratios or limited documentation of the borrower’s income.

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

                                            Balloon Payment: A payment the borrower must make to the lender at the
                                            mortgage term’s end. This final payment is comparatively much larger than
                                            the payments that preceded it.

                                            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.

                                            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
                                            Federal Housing Finance Agency (“FHFA”) placed Fannie Mae and Freddie
                                            Mac (collectively the “Enterprises”) into conservatorships. The statutory
                                            role of FHFA as conservator requires FHFA to take actions to preserve
                                            and conserve the assets of the Enterprises and restore them to safety and
                                            soundness. FHFA assumed the powers of the board of directors, officers, and
                                            shareholders; however, the day-to-day operations of the company are still with
                                            the Enterprises’ existing management.

                                            Conventional Conforming Mortgage Loans: Conventional mortgage
                                            loans are those mortgages that are not insured or guaranteed by the Federal
                                            Housing Administration, the U.S. Department of Veterans Affairs, or the U.S.
                                            Department of Agriculture and 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
                                            2011, the conforming loan limit is $417,000 for most areas of the contiguous
                                            United Sates, although higher limits apply in specific areas.



 56 |   Appendix A: Glossary and Acronyms
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




Debarment: Disqualification of a firm or individual from contracting with the
government or participating in government non-procurement transactions for
a specific period of time. The grounds for debarment may be either statutory
or administrative.

Default: Default is failure to comply with the terms of an obligation to such
an extent that a judgment has been rendered in favor of a failed institution or,
in the case of a secured obligation, when the property on which such obligation
is secured is foreclosed.

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

Emergency Economic Stabilization Act (“EESA”): A 2008 statute that
authorized the U.S. Department of the Treasury to undertake specific measures
to provide stability and prevent disruption in the financial system and the
economy. It also provided funds to preserve homeownership.

Emergency Home Finance Act of 1970: The Emergency Home Finance
Act of 1970 created Freddie Mac and authorized it to create a secondary
market for conventional mortgages. Parallel authority and limitations to
deal in conventional mortgages was given to Fannie Mae. To alleviate credit
concerns raised by acquisition of conventional mortgages, several eligibility
restrictions and/or risk sharing requirements were imposed on the mortgages
Fannie Mae and Freddie Mac could buy.

Federal Home Loan Bank Act of 1932: This Act established the Federal
Home Loan Bank Board (“FHLBank Board”), which charters and supervises
Federal Savings and Loans Institutions (“S&Ls”). Additionally, the Act
established the Federal Home Loan Banks (“FHLBanks”) and gave the
FHLBank Board authority to regulate and supervise S&Ls. The FHLBanks
were given the authority to lend to S&Ls to finance home mortgages.

Federal Home Loan Banks (“FHLBanks”): The Federal Home Loan
Banks 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 Bank Board (“FHLBank Board”): A five-member
board established in 1932 by the Federal Home Loan Bank Act. The FHLBank
Board provided the FHLBanks with the authority to regulate and supervise
savings and loan institutions (“S&Ls”), as well as to lend money to S&Ls,
which would in turn finance home loans. The FHLBank Board retained these



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Federal Housing Finance Agency Office of Inspector General




                                            basic responsibilities until the passage of the Financial Institutions Reform,
                                            Recovery, and Enforcement Act of 1989 (“FIRREA”). FIRREA created the
                                            Federal Housing Finance Board to succeed the FHLBank Board, and some
                                            of the FHLBank Board’s functions were transferred to the Federal Deposit
                                            Insurance Corporation, the Resolution Trust Corporation, and the Office of
                                            Thrift Supervision.

                                            Federal Home Loan Mortgage Corporation (“Freddie Mac”): 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 (“FHA”): Part of the U.S. Department
                                            of Housing and Urban Development (“HUD”), FHA provides mortgage
                                            insurance on loans made by approved lenders throughout the United States
                                            and insures mortgages on single family and multifamily homes, including
                                            manufactured homes and hospitals. It is the largest insurer of mortgages in
                                            the world, insuring over 34 million properties since its inception in 1934.

                                            Federal Housing Enterprises Financial Safety and Soundness Act of 1992:
                                            The Act modernized the regulatory oversight of Fannie Mae and Freddie Mac.
                                            It created the Office of Federal Housing Enterprise Oversight (“OFHEO”)
                                            as a new regulatory office within HUD with the responsibility to “ensure that
                                            Fannie Mae and Freddie Mac are adequately capitalized and operating safely.”
                                            OFHEO was funded by assessments on Fannie Mae and Freddie Mac. The
                                            Act established risk-based and minimum capital standards for Fannie Mae
                                            and Freddie Mac and established HUD-imposed housing goals for financing
                                            of affordable housing, housing in central cities, and other rural areas.

                                            Federal National Mortgage Association (“Fannie Mae”): 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.

                                            Federal National Mortgage Association Charter Act of 1954 (“Charter
                                            Act”): The Charter Act transformed Fannie Mae from a government agency
                                            into a public-private, mixed ownership corporation. It also exempted Fannie
                                            Mae from all state and local taxes, except real property taxes.

                                            Federal Savings and Loan Insurance Corporation (“FSLIC”): Created by
                                            the National Housing Act of 1934, the FSLIC, which was administered by
                                            the FHLBank Board, insured savings and loan deposits until 1989.

                                            FHA Approved Lenders: Financial institutions that have been approved by
                                            FHA for the origination and servicing of FHA-insured mortgages.

                                            Financial Institutions Reform, Recovery, and Enforcement Act
                                            (“FIRREA”): Enacted by Congress in 1989 in response to the savings and loan
                                            crisis of the 1980s, FIRREA abolished FSLIC, transferred its assets, liabilities,


 58 |   Appendix A: Glossary and Acronyms
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




and operations to the newly created FSLIC Resolution Fund, and created a
new insurance fund for thrift depositors known as the Savings Association
Insurance Fund. FIRREA also created the Resolution Trust Corporation
to resolve all troubled financial institutions placed into conservatorship or
receivership and reorganized Freddie Mac into a for-profit corporation owned
by private shareholders.

Financial Models: Financial models are computer simulations designed to
forecast the financial performance of a company or project or estimate the
impact of key parameters, such as interest rates.

Garn-St. Germain Depository Institutions Act: Legislation enacted in
1982 that provided the thrift industry more flexibility in managing assets
and liabilities. As a result, the thrifts were authorized to: (1) invest up to
50% of assets in construction and development loans; (2) invest up to 30% of
assets in consumer loans, commercial paper, and corporate debt; (3) own real
estate development companies; (4) use land and other noncash assets in the
capitalization of new charters, instead of the previously required cash; and (5)
offer money market deposit accounts.

Government National Mortgage Association (“Ginnie Mae”): 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 issued and guaranteed mortgages.

Government-Sponsored Enterprises (“GSEs”): Business organizations
chartered and sponsored by the federal government, which include Fannie
Mae, Freddie Mac, and the FHLBanks.

Guarantee: A pledge to investors that the issuing company will bear the
default risk on the collateral pool of loans, thereby ensuring the timely payment
of principal and interest owed to investors.

Home Owners’ Loan Act: Enacted in 1933, this Act established the Home
Owners’ Loan Corporation and authorized steps to: provide emergency relief
with respect to home mortgage indebtedness; refinance home mortgages; and
extend relief to homeowners who were unable to pay their mortgages and
faced foreclosure.

Housing and Economic Recovery Act (“HERA”): HERA was enacted in
2008, and it established FHFA-OIG and FHFA, which oversees the GSEs’
operations. HERA also expanded Treasury’s authority to provide financial
support to the GSEs.

Housing and Urban Development Act: Enacted in 1968, this Act partitioned
Fannie Mae into two separate organizations, a government-sponsored
corporation (Fannie Mae) and a wholly-owned government corporation,
Government National Mortgage Association (“Ginnie Mae”). Ginnie Mae
expanded the availability of mortgage funds for moderate-income families


                                                                                    Appendix A: Glossary and Acronyms   | 59
Federal Housing Finance Agency Office of Inspector General




                                            using government guaranteed mortgage-backed securities. The Act subjected
                                            Fannie Mae to the regulatory control of HUD, which had to approve the
                                            issuance of all stocks and other obligations by Fannie Mae and could require it
                                            to allocate a portion of its mortgage purchases to low- and moderate-income
                                            housing.

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

                                            Inspector General Act: Enacted in 1978, this Act authorized 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 and 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 Act amended the
                                            Inspector General Act to enhance the independence of inspectors general
                                            and to create a Council of the Inspectors General on Integrity and Efficiency.
                                            Further, it requires the inspectors general for designated federal entities to
                                            be appointed without regard to political affiliation and solely on the basis of
                                            integrity and demonstrated ability in accounting, auditing, financial analysis,
                                            law, management analysis, public administration, or investigations.

                                            Interest Rate Risk: The exposure of an institution’s financial condition to
                                            adverse movements in interest rates.

                                            Mortgage-Backed Securities (“MBS”): MBS are debt securities that
                                            represent claims to the cash flows from pools of mortgage loans, most
                                            commonly on residential property. Mortgage loans are purchased from banks,
                                            mortgage companies, and other originators and then assembled into pools.
                                            The MBS represent claims on the principal and interest payments made by
                                            borrowers on the loans in the pool.

                                            Preferred Stock: A security that usually pays a fixed dividend and gives the
                                            holder a claim on corporate earnings and assets that is 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.

                                            Prime Mortgages: A classification of mortgages that are considered to be of
                                            high quality.



 60 |   Appendix A: Glossary and Acronyms
                                                    Inaugural Semiannual Report to the Congress | March 31, 2011




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

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.

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

Self-Amortizing Loans: Loans in which periodic payments of principal and
interest are scheduled over the life of the loan. Self-amortizing loans provide
more opportunity for homeownership by allowing these scheduled payments,
as opposed to large balloon payments at maturity (the end of the loan term).

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

Servicemen’s Readjustment Act: Enacted in 1944 and also known as the
GI Bill, this Act offered veterans of the Second World War educational and
financial benefits, including long-term, low-cost mortgages.

Subprime Mortgages: A classification of mortgages with a higher perceived
risk of default than prime and Alt-A loans. Interest rates on subprime
mortgage loans are often higher, reflecting the greater risk.

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 on 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.

Swap: An agreement between two parties to exchange cash flows of underlying
securities. For example, in an interest rate swap, a common type of swap, one
party agrees to pay a fixed interest rate in return for receiving a variable rate
from the other party.


                                                                                    Appendix A: Glossary and Acronyms   | 61
Federal Housing Finance Agency Office of Inspector General




                                            Thrift: An organization that primarily accepts savings account deposits and
                                            invests most of the proceeds in mortgages. Savings banks and savings and
                                            loan associations are examples of thrift institutions.




 62 |   Appendix A: Glossary and Acronyms
                                                  Inaugural Semiannual Report to the Congress | March 31, 2011




References
Council of the Inspectors General on Integrity and Efficiency. Inspector
General Act of 1978.
<http://ignet.gov/pande/leg/igactasof0609.pdf>, accessed 4/27/2011.

Fannie Mae. About Fannie Mae: Our Charter.
<http://www.fanniemae.com/aboutfm/charter.jhtml?p=About Fannie Mae>,
accessed 4/27/2011.

Federal Deposit Insurance Corporation. Breaking New Ground in U.S.
Mortgage Lending.
<http://www.fdic.gov/bank/analytical/regional/ro20062q/na/2006_
summer04.html>, accessed 4/27/2011.

Federal Deposit Insurance Corporation. FDIC Learning Bank.
<http://www.fdic.gov/about/learn/learning/when/1930s.html>, accessed
4/27/2011.

Federal Home Loan Bank of Des Moines. About Us; Brief History.
<http://www.fhlbdm.com/au_history.htm>, accessed 4/27/2011.

Federal Housing Finance Agency. Conforming Loan Limit.
<http://www.fhfa.gov/Default.aspx?Page=185>, accessed 4/27/2011.

Federal Reserve Bank of San Francisco. What is bank capital and what are the
levels or tiers of capital? (September 2001). <http://www.frbsf.org/education/
activities/drecon/2001/0109.html>, accessed 4/27/2011.

Federal Reserve Bank of St. Louis. What Is Subprime Lending? ( June 2007).
<http://research.stlouisfed.org/publications/mt/20070601/cover.pdf>,
accessed 4/27/2011.

Frame, W. Scott, and Lawrence J. White, “Regulating Housing GSEs:
Thoughts on Institutional Structure and Authorities.”
<http://www.frbatlanta.org/filelegacydocs/er04_framewhite.pdf>, p. 87,
accessed 4/27/2011.

Freddie Mac. About Freddie Mac. <http://www.freddiemac.com/corporate/
about_freddie.html>, accessed 4/27/2011.

Freddie Mac. Glossary of Finance and Economic Terms.
<http://www.freddiemac.com/smm/a_f.htm#C>, accessed 4/27/2011.

Freddie Mac. Glossary of Finance and Economic Terms.
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Freddie Mac. Single-Family Credit Guarantee Business.
<http://www.freddiemac.com/corporate/company_profile/our_business/
index.html>, accessed 4/27/2011.



                                                                                  Appendix A: Glossary and Acronyms   | 63
Federal Housing Finance Agency Office of Inspector General




                                            Ginnie Mae. Ginnie Mae Frequently Asked Questions.
                                            <http://www.ginniemae.gov/media/ginnieFAQ.asp?Section=Media>,
                                            accessed 4/27/2011.

                                            Ginnie Mae. About Us. <http://www.ginniemae.gov/about/about.
                                            asp?Section=About>, accessed 4/27/2011.

                                            Public Law 111-203-July 21, 2010. Dodd-Frank Wall Street Reform
                                            and Consumer Protection Act. <http://www.gpo.gov/fdsys/pkg/PLAW-
                                            111publ203/pdf/PLAW-111publ203.pdf>, accessed 4/27/2011.

                                            Public Law 111-5-February 17, 2009. American Recovery and
                                            Reinvestment Act of 2009. <http://frwebgate.access.gpo.gov/cgibin/getdoc.
                                            cgi?dbname=111_cong_bills&docid=f:h1enr.pdf>, accessed 4/27/2011.

                                            Public Law 110-343-October 3, 2008. Emergency Economic Stabilization Act
                                            of 2008. <http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=110_
                                            cong_bills&docid=f:h1424enr.txt.pdf>, accessed 4/27/2011.

                                            Public Law 110-409-October 14, 2008. Inspector General Reform Act of 2008.
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                                            National Archives. Servicemen’s Readjustment Act (1944).
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                                            National Information Center. All Institution Types Defined.
                                            <http://www.ffiec.gov/nicpubweb/Content/HELP/Institution%20Type%20
                                            Description.htm>, accessed 4/27/2011.

                                            National Institute of Science and Technology. Detailed Overview of Federal
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                                            fisma/overview.html>, accessed 4/27/2011.

                                            Office of the Special Inspector General for the Troubled Asset Relief
                                            Program. SIGTARP: Initial Report to the Congress. (February 6, 2009).
                                            <http://www.sigtarp.gov/reports/congress/2009/SIGTARP_Initial_Report_
                                            to_the_Congress.pdf>, accessed 4/27/2011.

                                            Office of the Special Inspector General for The Troubled Asset Relief
                                            Program. SIGTARP: Quarterly Report to Congress. ( January 30, 2010).
                                            <http://www.sigtarp.gov/reports/congress/2010/January2010_Quarterly_
                                            Report_to_Congress.pdf>, accessed 4/27/2011.

                                            Office of Thrift Supervision. Home Owners’ Loan Act.
                                            <http://www.ots.treas.gov/_files/73183.pdf>, accessed 4/27/2011.	


 64 |   Appendix A: Glossary and Acronyms
                                                  Inaugural Semiannual Report to the Congress | March 31, 2011




The Financial Crisis Inquiry Commission. Final Report of the National
Commission on the Causes of the Financial and Economic Crisis in the United
States. <http://cybercemetery.unt.edu/archive/fcic/20110310172443/http:/
fcic.gov/>, accessed 4/27/2011.

The Federal Home Loan Banks. The Federal Home Loan Banks.
<http://www.fhlbanks.com/assets/pdfs/sidebar/FHLBanksWhitePaper.pdf>,
accessed 4/27/2011.

The Federal Reserve Bank of Minneapolis. Glossary.
<http://www.minneapolisfed.org/glossary.cfm#s>, accessed 4/27/2011.

The Federal Reserve Board. Community Reinvestment Act.
<http://www.federalreserve.gov/dcca/cra/>, accessed 4/27/2011.

U.S. Department of Housing and Urban Development. HUD History.
<http://portal.hud.gov/hudportal/HUD?src=/about/hud_history>, accessed
4/27/2011.

U.S. Department of Housing and Urban Development. 1930 to 2010.
<http://www.huduser.org/hud_timeline/index.html>, accessed 4/27/2011.

U.S. Department of Housing and Urban Development. Glossary.
<http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/
buying/glossary>, accessed 4/27/2011.

U.S. Department of Housing and Urban Development. The Federal Housing
Administration (FHA). <http://portal.hud.gov/hudportal/HUD?src=/
program_offices/housing/fhahistory>, accessed 4/27/2011.

U.S. Government Accountability Office. GAO-11-33R Fannie Mae and
Freddie Mac: The Cooperative Model as A Potential Component of Structural
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<http://www.gao.gov/new.items/d1133r.pdf>, accessed 4/27/2011.

U.S. Securities and Exchange Commission. Mortgage-Backed Securities.
<http://www.sec.gov/answers/mortgagesecurities.htm>, accessed 4/27/2011.




                                                                                  Appendix A: Glossary and Acronyms   | 65
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                                            Acronyms and Abbreviations
                                            1968 HUD Act- Housing and         FBI- Federal Bureau of
                                            Urban Development Act of 1968     Investigation

                                            Alt-A- Alternative A-Paper        FDIC-OIG- Federal Deposit
                                            Mortgages                         Insurance Corporation Office of
                                                                              Inspector General
                                            Agency- Federal Housing
                                            Finance Agency                    FFETF- Financial Fraud
                                                                              Enforcement Task Force
                                            APA- Administrative Procedure
                                            Act                               FHA- Federal Housing
                                                                              Administration
                                            Bank Act- The Federal Home
                                            Loan Bank Act                     FHFA- Federal Housing Finance
                                                                              Agency
                                            BDO- BDO USA, LLP
                                                                              FHFA-OIG- Federal Housing
                                            Blue Book- Standards for          Finance Agency Office of
                                            Inspection and Evaluation         Inspector General
                                            Charter Act- Federal National     FHFB- Federal Housing Finance
                                            Mortgage Association Charter      Board
                                            Act of 1954
                                                                              FHLBanks- Federal Home Loan
                                            CFTC- Commodity Futures           Banks
                                            Trading Commission
                                                                              FHLBank Board- Federal Home
                                            CIGFO- Council of Inspectors      Loan Bank Board
                                            General on Financial Oversight
                                                                              FHLBank System- Federal
                                            CIGIE- Council of the             Home Loan Bank System
                                            Inspectors General on Integrity
                                            and Efficiency                    FinCEN- Financial Crimes
                                                                              Enforcement Network
                                            Dodd-Frank Act- Dodd-
                                            Frank Wall Street Reform and      FIRREA- Financial Institutions
                                            Consumer Protection Act of        Reform, Recovery, and
                                            2010                              Enforcement Act of 1989

                                            DOJ- United States Department     FISMA- Federal Information
                                            of Justice                        System Management Act of 2002

                                            EESA- Emergency Economic          Freddie Mac- Federal Home
                                            Stabilization Act                 Loan Mortgage Corporation

                                            Enterprises- Fannie Mae and       FSLIC- Federal Savings and
                                            Freddie Mac                       Loan Insurance Corporation

                                            Fannie Mae- Federal National      GI Bill- Servicemen’s
                                            Mortgage Association              Readjustment Act

 66 |   Appendix A: Glossary and Acronyms
                                        Inaugural Semiannual Report to the Congress | March 31, 2011




Ginnie Mae- Government           OP- Office of Policy, Oversight,
National Mortgage Association    and Review

GSE- Government-Sponsored        Plan- Reforming America’s
Enterprise                       Housing Finance Market

HERA- Housing and Economic       PSPAs- Senior Preferred Stock
Recovery Act of 2008             Purchase Agreements

HOLC- Home Owners’ Loan          Report- Semiannual Report
Corporation
                                 REO- Real Estate Owned
HUD- United States
Department of Housing and        S&L- Savings and Loan
Urban Development                Institutions

HUD-OIG- United States           SEC- Securities and Exchange
Department of Housing and        Commission
Urban Development Office of      SIGTARP- Office of the
Inspector General                Special Inspector General for the
IRS-CI- Internal Revenue         Troubled Asset Relief Program
Service-Criminal Investigation   Treasury- United States
MBS- Mortgage-Backed             Department of the Treasury
Securities                       TBW- Taylor, Bean & Whitaker
MFWG- Mortgage Fraud             Mortgage Corporation
Working Group                    USDA- United States
NAAG- National Association of    Department of Agriculture
Attorneys General                VA- United States Department
OA- Office of Audits             of Veterans Affairs (formerly the
                                 Veterans Administration)
OAd- Office of Administration
                                 Yellow Book- Government
OC- Office of Counsel            Auditing Standards

Ocala- Ocala Funding LLC

OE- Office of Evaluations

OFHEO- Office of Federal
Housing Enterprise Oversight

OI- Office of Investigations

OIG- Office of Inspector
General


                                                                        Appendix A: Glossary and Acronyms   | 67
Federal Housing Finance Agency Office of Inspector General




                                                      Appendix B: Information Required by the
                                                      Inspector General Act
                                                      Section 5(a) of the Inspector General Act provides that the Federal Housing
                                                      Finance Agency Office of Inspector General (“FHFA-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 FHFA-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, FHFA-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. However, FHFA-OIG commenced operations in October 2010,
                                                      and, thus, some of the required information is not applicable. For example,
                                                      FHFA-OIG did not issue an audit report prior to October 1, 2010, for which
                                                      a management decision has not been rendered, nor have any management
                                                      decisions been revised. Where the required information is not applicable, the
                                                      table indicates accordingly.

                                                        Source/Requirement                                                                                   Pages

                                                        Section 5(a)(1)- A description of significant problems, abuses, and deficiencies relating to
                                                                                                                                                             28 – 30
                                                        the administration of programs and operations of FHFA.

                                                        Section 5(a)(2)- A description of the recommendations for corrective action made by FHFA-           28 – 30,
                                                        OIG with respect to significant problems, abuses, or deficiencies.                                  32 – 35

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

                                                        Section 5(a)(4)- A summary of matters referred to prosecutive authorities and the
                                                                                                                                                             30 – 32
                                                        prosecutions and convictions that have resulted.

                                                        Section 5(a)(5)- A summary of each report made to the Director of FHFA.                              28 – 30

                                                        Section 5(a)(6)- A listing, subdivided according to subject matter, of each audit report issued
                                                        by FHFA-OIG during the reporting period and for each audit report, where applicable, the
                                                        total dollar value of questioned costs (including a separate category for the dollar value           28 – 30
                                                        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.                                  28 – 30

                                                        Section 5(a)(8)- Statistical tables showing the total number of audit reports and the total
                                                                                                                                                          Not Applicable
                                                        dollar value of questioned and unsupported costs.

                                                        Section 5(a)(9)- Statistical tables showing the total number of audit reports and the dollar
                                                                                                                                                          Not Applicable
                                                        value of recommendations that funds be put to better use by management.




 68 |   Appendix B: Information Required by the Inspector General Act
                                                                        Inaugural Semiannual Report to the Congress | March 31, 2011




Source/Requirement                                                                              Pages

Section 5(a)(10)- A summary of each audit report issued before the commencement of
the reporting period for which no management decision has been made by the end of the        Not Applicable
reporting period.

Section 5(a)(11)- A description and explanation of the reasons for any significant revised
                                                                                             Not Applicable
management decision made during the reporting period.

Section 5(a)(12)- Information concerning any significant management decision with which
                                                                                             Not Applicable
the Inspector General is in disagreement.

Section 5(a)(13)- The information described under section 05(b) of the Federal Financial
                                                                                             Not Applicable
Management Improvement Act of 1996.




                                                                                                 Appendix B: Information Required by the Inspector General Act   | 69
Federal Housing Finance Agency Office of Inspector General




                                                  Appendix C: FHFA-OIG Public Reports and
                                                  Testimony
                                                  See www.fhfaoig.gov for complete copies of FHFA-OIG’s reports and
                                                  testimonies.

                                                  Evaluation Reports
                                                  “Federal Housing Finance Agency’s Exit Strategy and Planning Process for
                                                  the Enterprises’ Structural Reform,” Evaluation Report: EVL-2011-001,
                                                  dated March 31, 2011.

                                                  “Evaluation of Federal Housing Finance Agency’s Oversight of Fannie Mae’s
                                                  and Freddie Mac’s Executive Compensation Programs,” Evaluation Report:
                                                  EVL-2011-002, dated March 31, 2011.

                                                  TestimonY
                                                  Statement of Steve A. Linick, Nominee for Inspector General, Federal
                                                  Housing Finance Agency
                                                  Before the Senate Committee on Banking, Housing, and Urban Affairs,
                                                  July 15, 2010.




 70 |   Appendix C: FHFA-OIG Public Reports and Testimony
                         Inaugural Semiannual Report to the Congress | March 31, 2011




Appendix D: FHFA-OIG Organizational Chart




                                                 Appendix D: FHFA-OIG Organizational Chart   | 71
Federal Housing Finance Agency Office of Inspector General




                                   Appendix E: Endnotes
                                   1
                                       U.S. Government Accountability Office. Fannie Mae and Freddie Mac:
                                       Analysis of Options for Revising the Housing Enterprises’ Long-term Structures.
                                       (September 2009) <http://www.gao.gov/new.items/d09782.pdf>.
                                       (hereinafter “GAO-09-782”), p. 2, accessed 4/27/2011.
                                   2
                                        annie Mae. Monthly Summary. (March 2011) <http://www.fanniemae.
                                       F
                                       com/ir/pdf/monthly/2011/033111.pdf>, accessed 5/19/2011.
                                       Freddie Mac. Monthly Volume Summary. (March 2011) <http://www.
                                       freddiemac.com/investors/volsum/pdf/0311mvs.pdf>, accessed 5/19/2011.
                                   3
                                        ederal Housing Finance Agency. FHFA Releases Projections Showing
                                       F
                                       Range of Potential Draws for Fannie Mae and Freddie Mac. (Oct. 21,
                                       2010) <http://www.fhfa.gov/webfiles/19409/Projections_102110.pdf>.
                                       (hereinafter “FHFA Releases Projections Showing Range of Potential
                                       Draws for Fannie Mae and Freddie Mac”), accessed 4/27/2011.
                                   4
                                        ederal Reserve Bank of New York. FAQs: MBS Purchase Program. (Aug.
                                       F
                                       20, 2010) <http://www.newyorkfed.org/markets/mbs_faq.html>, accessed
                                       4/27/2011.
                                   5
                                        ederal Home Loan Banks Office of Finance. Federal Home Loan Banks:
                                       F
                                       Combined Financial Report For the year ended December 31, 2010.
                                       <http://www.fhlb-of.com/ofweb_userWeb/resources/10yrend.pdf>,
                                       accessed 4/27/2011.
                                   6
                                        ublic Law No. 110-289 (Housing and Economic Recovery Act of 2008),
                                       P
                                       § 1145.
                                   7
                                        ublic Law No. 110-289 (Housing and Economic Recovery Act of 2008),
                                       P
                                       § 1117.
                                   8
                                        ublic Law No. 110-343 (Emergency Economic Stabilization Act of
                                       P
                                       2008), § 2.
                                   9
                                        ublic Law No. 110-343 (Emergency Economic Stabilization Act of
                                       P
                                       2008), § 110.
                                   10
                                         ublic Law No. 110-343 (Emergency Economic Stabilization Act of
                                        P
                                        2008), § 110.
                                   11
                                        United States Department of the Treasury. Written Testimony by Secretary
                                        of the Treasury Timothy F. Geithner before the Senate Committee on Banking,
                                        Housing & Urban Affairs. (March 15, 2011) <http://www.treasury.gov/
                                        press-center/press-releases/Pages/tg1103.aspx>, accessed 4/27/2011.
                                   12
                                        GAO-09-782, supra note 1, at p. 3.




 72 |   Appendix E: Endnotes
                                                      Inaugural Semiannual Report to the Congress | March 31, 2011




13
      HFA Releases Projections Showing Range of Potential Draws for
     F
     Fannie Mae and Freddie Mac, supra note 3.
14
      ederal Housing Finance Agency. Data as of March 31, 2011 on Treasury
     F
     and Federal Reserve Purchase Programs for GSE and Mortgage-Related
     Securities. (Tables 3, 4 and 5) <http://www.fhfa.gov/webfiles/20758/
     TreasFED033120111.pdf>, accessed 4/27/2011.
15
      ederal Housing Finance Agency. The FHLBank System.
     F
     <http://www.fhfa.gov/Default.aspx?Page=22>, accessed 4/27/2011.
16
      HLBanks. Office of Finance. History of Service.
     F
     <http://www.fhlb-of.com/ofweb_userWeb/pageBuilder/mission--
     history-29>, accessed 4/27/2011.
17
     I bid.
      FHLBanks: A Nation of Local Lenders. Frequently Asked Questions:
      Federal Home Loan Bank Advances. <http://www.fhlbanks.com/overview_
      faqs_advances.htm>. (hereinafter “Frequently Asked Questions: Federal
      Home Loan Bank Advances”), accessed 4/27/2011.
18
      HLBanks Office of Finance. Funding. <http://www.fhlb-of.com//
     F
     ofweb_userWeb/pageBuilder/funding-30>, accessed 4/27/2011.
     Frequently Asked Questions: Federal Home Loan Bank Advances, supra
     note 17.
19
      lly Financial Inc., Form 8-K, (Dec. 23, 2010) <http://www.ally.com/
     A
     about/investor/sec-filings/?term=*&start=46>, accessed 4/27/2011.
20
      annie Mae. Form 8-K. (Dec. 31, 2010) <http://phx.corporate-
     F
     ir.net/phoenix.zhtml?c=108360&p=irol-secCurrent&control_
     SelectGroup=Current%20Reports>, accessed 4/27/2011.
     Freddie Mac. Form 8-K. (Dec. 31, 2010) <http://www.freddiemac.com/
     investors/sec_filings/index.html>, accessed 4/27/2011.
21
      ederal Home Loan Bank of Seattle. Federal Home Loan Bank of
     F
     Seattle Announces 2010 Unaudited Preliminary Financial Highlights.
     (Feb. 17, 2011) <http://www.fhlbsea.com/OurCompany/News/
     NewsReleases/2011/20110217.aspx,>, accessed 4/27/2011.
22
      ection 4(a)(2) of the Inspector General Act requires FHFA-OIG to
     S
     “review existing and proposed legislation and regulations relating to
     programs and operations” of FHFA. See 5 U.S.C. App. 3 § 4 (a)(2).
23
     12 U.S.C. § 4517(i); see also 75 Fed. Reg. 47,495 (Aug. 6, 2010).
24
     I nspector General Act Amendments of 1987, S. Rep. No. 150, 100th
      Cong., 1st sess. 4-5 (1987) (further citations omitted).
25
     Published at 75 Federal Register 7479 (Feb. 10, 2011).


                                                                                              Appendix E: Endnotes   | 73
Federal Housing Finance Agency Office of Inspector General




                                   26
                                        Published at 75 Federal Register 67,277 (Nov. 2, 2010).
                                   27
                                        Published at 75 Federal Register 76,139 (Dec. 7, 2010).
                                   28
                                        Published at 75 Federal Register 76,573 (Dec. 8, 2010).
                                   29
                                        Published at 74 Federal Register 30,975 ( June 29, 2009).
                                   30
                                         ederal Housing Finance Agency. Regulatory Policy Guidance RPG-
                                        F
                                        2011-001. (March 2011) <http://www.fhfa.gov/webfiles/20685/
                                        FHFAFraudReportingGuidance32011.pdf>, accessed 4/27/2011.
                                   31
                                         ernanke, Ben S., “Housing, Housing Finance, and Monetary Policy,”
                                        B
                                        The Federal Reserve Bank of Kansas City’s Economic Symposium.
                                        Jackson Hole. August 31, 2007. Speech, <http://www.federalreserve.gov/
                                        newsevents/speech/bernanke20070831a.htm>, accessed 4/27/2011.
                                   32
                                        GAO-09-782, supra note 1, at p. 12.
                                   33
                                         nowden, Kenneth A., “Mortgage Rates and American Capital Market
                                        S
                                        Development in the Late Nineteenth Century,” The Journal of Economic
                                        History (1987), p. 671.
                                   34
                                         anGiezen, Robert and Schwenk, Albert E., “Compensation from Before
                                        V
                                        World War I through the Great Depression,” <http://www.bls.gov/opub/
                                        cwc/cm20030124ar03p1.htm>, accessed 4/27/2011.
                                   35
                                         enate Committee on Banking and Currency, Subcommittee on Home
                                        S
                                        Mortgages, Etc., “Testimony of Horace Russell,” General Counsel,
                                        Federal Home Loan Bank Board of Atlanta, Home Owners Loan Act, 73rd
                                        Congress, at 6, 9 (April 20 and 22, 1933).
                                   36
                                         olton, Kent, “Housing Finance in the United States: The Transformation
                                        C
                                        of the U.S. Housing Finance System,” Joint Center for Housing Studies,
                                        Harvard University W02-5 ( July 2002), <http://www.jchs.harvard.edu/
                                        publications/finance/W02-5_Colton.pdf>. (hereinafter “Housing Finance
                                        in the United States: The Transformation of the U.S. Housing Finance
                                        System”), p. 3, accessed 4/27/2011.
                                   37
                                        I bid.
                                   38
                                        I bid.
                                   39
                                        I bid.
                                   40
                                         heelock, David C., “The Federal Response to Home Mortgage Distress:
                                        W
                                        Lessons from the Great Depression.” Federal Reserve Bank of St. Louis
                                        Review (2008): Part 1 p. 134 May/June. <http://research.stlouisfed.org/
                                        publications/review/08/05/Wheelock.pdf>, accessed 4/27/2011.




 74 |   Appendix E: Endnotes
                                                     Inaugural Semiannual Report to the Congress | March 31, 2011




41
      ousing Finance in the United States: The Transformation of the U.S.
     H
     Housing Finance System, supra note 36, at p. 4.
42
      ose, Jonathan D., “The Incredible HOLC? Mortgage Relief during the
     R
     Great Depression,” ( January 15, 2010), <http://www.uncg.edu/bae/econ/
     seminars/2010/Rose.pdf>, p. 9, accessed 4/27/2011.
43
     Public Law No. 73-479 (National Housing Act).
44
      reen, Richard K. and Watcher, Susan M., “The American Mortgage in
     G
     Historical and International Context,” Journal of Economic Perspectives
     Volume 19 Issue 4 (2005), <http://repository.upenn.edu/cgi/viewcontent.
     cgi?article=1000&context=penniur_papers&sei-redir=1#search=”The+am
     erican+mortgage+in+historical+and+international+context,”> (hereinafter
     “The American Mortgage in Historical and International Context”), p. 95,
     accessed 4/27/2011.
45
      ousing Finance in the United States: The Transformation of the U.S.
     H
     Housing Finance System, supra note 36, at p. 5.
46
     U.S. Department of Veterans Affairs. Legislative History of the VA Home
     Loan Guaranty Program. <http://www.benefits.va.gov/homeloans/docs/
     history.pdf>, accessed 4/27/2011.
47
      e American Mortgage in Historical and International Context, supra
     Th
     note 44, at p. 96.
48
     GAO-09-782, supra note 1, at p. 13.
49
      ederal National Mortgage Association Charter Act. Public Law 83-
     F
     560. (Aug. 2, 1954) <http://www.law.cornell.edu/uscode/html/uscode12/
     usc_sup_01_12_10_13_20_III.html>, accessed 4/27/2011.
50
     GAO-09-782, supra note 1, at p. 13.
51
     Ibid.
52
     Ibid.
53
     Ibid.
54
     Ibid.
55
     GAO-09-782, supra note 1, at p. 6.
56
     GAO-09-782, supra note 1, at p. 14.
57
      ederal Housing Finance Agency. Securitization of Mortgage Loans by the
     F
     Federal Home Loan Bank System. ( July 30, 2009) <http://www.fhfa.gov/
     webfiles/14699/>, p. 1, accessed 4/27/2011.




                                                                                             Appendix E: Endnotes   | 75
Federal Housing Finance Agency Office of Inspector General




                                   58
                                         annie Mae. About Fannie Mae: Our Charter. <http://www.fanniemae.
                                        F
                                        com/aboutfm/charter.jhtml?p=About Fannie Mae>, accessed 4/27/2011.
                                   59
                                        GAO-09-782, supra note 1, at p. 14.
                                   60
                                        I bid.
                                   61
                                        I bid.
                                   62
                                        U.S. Government Accountability Office. Resolution Trust Corporation’s
                                        1995 and 1994 Financial Statements. ( July 1996) <http://www.gao.gov/
                                        archive/1996/ai96123.pdf> (hereinafter “GAO/AIMD-96-123 Financial
                                        Audit”), p. 7, accessed 4/27/2011.
                                   63
                                        GAO/AIMD-96-123 Financial Audit, supra note 62, at p. 8.
                                   64
                                         ederal Deposit Insurance Corporation Banking Review. The Cost of
                                        F
                                        the Savings and Loan Crisis: Truth and Consequences. <http://www.fdic.
                                        gov/bank/analytical/banking/2000dec/brv13n2_2.pdf>, p. 33, accessed
                                        4/27/2011.
                                   65
                                         ederal Reserve Bank of Atlanta. The Federal Home Loan Bank System: The
                                        F
                                        “Other” Housing GSE. Economic Review. (Third Quarter 2006). <http://
                                        www.frbatlanta.org/filelegacydocs/erq306_frame.pdf>, (hereinafter “The
                                        Federal Home Loan Bank System: The ‘Other”’ Housing GSE”), p. 33,
                                        accessed 4/27/2011.
                                   66
                                         e Federal Home Loan Bank System: The “Other” Housing GSE, supra
                                        Th
                                        note 65, at p. 33, p. 34.
                                   67
                                        GAO-09-782, supra note 1, at p. 18.	
                                   68
                                        U.S. Code Title 12, Ch 46, Sec 4501. Section 1302(7) of Housing and
                                        Community Development Act.
                                   69
                                        United States Department of Housing and Urban Development, Office
                                        of Policy Development and Research, DiVenti, Theresa R. Fannie Mae
                                        and Freddie Mac: Past, Present, and Future. Volume II, Number 3 (2009),
                                        <http://www.huduser.org/periodicals/cityscpe/vol11num3/ch11.pdf>,
                                        p. 234, accessed 4/27/2011.
                                   70
                                        U.S. Government Accountability Office. GAO-11-33R Fannie Mae and
                                        Freddie Mac: The Cooperative Model as A Potential Component of Structural
                                        Reform Options for Fannie Mae and Freddie Mac. (Nov. 15, 2010).
                                        <http://www.gao.gov/new.items/d1133r.pdf>, p. 4, accessed 4/27/2011.
                                   71
                                         eMarco, Edward, “Women in Housing and Finance Public Policy
                                        D
                                        Luncheon,” Washington, D.C., February 18, 2010, <http://www.fhfa.
                                        gov/webfiles/15411/FINAL_2-18_WHF_Speech.pdf>, p. 7, accessed
                                        4/27/2011.



 76 |   Appendix E: Endnotes
Federal Housing Finance Agency
Office of Inspector General
i nau g u r a l S em i a n n ua l R ep o rt
to t h e Co n g r e ss
October 12, 2010, through March 31, 2011




Federal Housing Finance Agency
Office of Inspector General
1625 Eye Street, NW
Washington, DC 20006-4001
Main (202) 408-2544
Hotline (800) 793-7724
www.fhfaoig.gov