oversight

Second Semiannual Report to the Congress

Published by the Federal Housing Finance Agency, Office of Inspector General on 2011-09-30.

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

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Federal Housing Finance Agency
  Office of Inspector General

  Se m iann ual R ep ort to t he Cong r e ss
           April 1, 2011, through September 30, 2011
Federal Housing Finance Agency
  Office of Inspector General



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  Semiann ual Rep ort to t h e C ong r e ss
            April 1, 2011, through September 30, 2011
Table of Contents
  FHFA-OIG’s Mission .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . i
  A Message from the Inspector General. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 1
  Executive Summary. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 3
      Overview	4
      FHFA-OIG Reporting Requirements	 8
      Organization of this Report	     9

  Section 1: Description of FHFA-OIG. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 11
      Leadership and Organizational Structure	                                                                                   12
      FHFA-OIG’s Strategic Plan	                                                                                                 15
      Performance Plan and Organizational Guidance	                                                                              15

  Section 2: Operations of FHFA and the GSEs.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 17
      FHFA	18
      FHFA Authorities	                      18
      Fannie Mae and Freddie Mac	            19
      FHLBanks	24
      Selected FHFA Programs and Activities	 26

  Section 3: Accomplishments and Strategy of FHFA-OIG .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 35
      FHFA-OIG Audit and Evaluation Activities	                                                                                  36
      FHFA-OIG Audit and Evaluation Plan	                                                                                        48
      FHFA-OIG Investigation Activities	                                                                                         49
      FHFA-OIG Investigations Strategy	                                                                                          53
      FHFA-OIG Regulatory Activities	                                                                                            53
      FHFA-OIG Communications and Outreach Efforts	                                                                              56

  Section 4: FHFA-OIG Recommendations .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 63
  An Overview of the Home Foreclosure Process.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 71
      Fundamentals of the Mortgage	 72
      Default	75
      Foreclosure and Its Effects	  79
      Foreclosure Alternatives	     86
Appendices. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 91
     Appendix A:      Glossary and Acronyms	                                                                                        92
     Appendix B:      Information Required by the Inspector General Act	                                                           105
     Appendix C:      FHFA-OIG Reports	                                                                                            109
     Appendix D:      FHFA-OIG Organizational Chart	                                                                               110
     Appendix E:      Endnotes	                                                                                                    112
       FHFA-OIG’s 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 or the Agency) programs and
       operations; prevent and detect fraud, waste, or abuse in FHFA programs
       and operations; review and, if appropriate, comment on pending legislation and
       regulations; and seek administrative sanctions, civil recoveries, and criminal
       prosecutions of those responsible for fraud, waste, or abuse in connection with
       the programs and operations of FHFA.

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




       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’s Mission
                                                            Semiannual Report to the Congress | SEPTEMBER 30, 2011




A Message from the Inspector General
This second FHFA-OIG Semiannual Report covers the office’s activities and
operations for the period from April 1, 2011, through September 30, 2011.

The continuing fragility of the nation’s housing market remains a significant
source of ongoing concern. Further, 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 Banks (FHLBanks) – continue to be key players in
that market. FHFA faces significant challenges under these circumstances.
In addition to serving as the GSEs’ safety and soundness regulator, FHFA has
now acted as the conservator of Fannie Mae and Freddie Mac (the Enterprises)
for more than three years. During that period, the federal government has
committed approximately $169 billion to the Enterprises, thereby ensuring
their continued solvency.

FHFA-OIG provides independent and objective assessments of the
work of FHFA. Since the office began operations in October of last year,
it has issued 10 reports, which reveal a number of emerging trends.
FHFA-OIG credits FHFA with several accomplishments and for identifying
                                                                                   Steve A. Linick
areas where improvements should be made. But FHFA-OIG’s reports                    Inspector General of the Federal
identified deficiencies in FHFA operations that appear to reflect two              Housing Finance Agency

significant themes. First, the reports identified specific instances in which
FHFA has relied on work done by the Enterprises without independently
testing and validating that work, thereby according undue deference to
Enterprise decision-making. Second, the reports discussed situations in
which FHFA’s allocation of resources may have affected its ability to oversee
the Enterprises and enforce its directives. As the work of the office continues,
it expects to issue additional reports assessing the operations of the Agency
and its impact on the GSEs.

The office has also actively assisted law enforcement efforts aimed at combating
systemic mortgage fraud. FHFA-OIG’s law enforcement agents played a
central role in obtaining convictions of multiple individuals connected with
the Taylor, Bean & Whitaker fraud scheme – among the largest mortgage
fraud schemes in history – which Freddie Mac claimed caused it losses of
approximately $1.8 billion. Currently, FHFA-OIG is involved in a variety of
continuing mortgage fraud investigations across the nation.

We remain mindful of the privilege afforded us to serve our fellow citizens
and of the importance of our work. We look forward to working with our
colleagues throughout the federal government and remain grateful for the
support of Congress, FHFA, and others.

Steve A. Linick
Inspector General
October 31, 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 discusses the operations of FHFA-OIG from April
                                                           1, 2011, through September 30, 2011.a

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

                                                                • t aking over the assets of and operating the regulated entity with all the
                                                                   powers of the shareholders, directors, and officers of the entity; and
For a description of the Government-Sponsored
                                                                •p
                                                                  reserving and conserving the assets and property of the regulated
Enterprises, see Section 2: “Operations of FHFA
and the GSEs.”
                                                                 entity.
                                                           FHFA has exercised those powers by replacing senior executives and members
                                                           of the Enterprises’ boards of directors, as well as reviewing and approving
                                                           senior executive compensation and all Enterprise transactions greater than
                                                           $50 million.

                                                           FHFA also has instituted several initiatives intended to improve the
                                                           Enterprises’ internal operations, mitigate their credit losses, and enhance the
Mortgage-Backed Securities (MBS):
                                                           availability of information in the secondary mortgage market. For example,
MBS are debt securities that represent
                                                           FHFA, the Department of Housing and Urban Development (HUD), and
interests in the cash flows – anticipated
                                                           the Enterprises studied alternative fee structures for mortgage servicers.
principal and interest payments – from
pools of mortgage loans, most commonly on
                                                           On the basis of this study, FHFA recently issued for public comment two
residential property.
                                                           alternative compensation structures for mortgage servicers. Additionally,
                                                           FHFA, on behalf of the Enterprises, filed civil lawsuits against 18 financial
Private-Label MBS:                                         services firms that marketed private-label mortgage-backed securities
MBS derived from mortgage loan pools                       (MBS) to the Enterprises. The lawsuits allege that the financial services firms
assembled by entities other than GSEs                      failed to perform proper due diligence as underwriters of the securities that
or federal government agencies, such as                    the Enterprises purchased.
private-sector finance companies. They do
not carry an explicit or implicit government               Emerging Themes from FHFA-OIG Reports
guarantee, and the private-label MBS
investor bears the risk of losses on its                   An important facet of FHFA-OIG’s mission is promoting transparency in
investment.                                                FHFA’s program administration and oversight of GSE operations. FHFA-
                                                           OIG also seeks to promote public understanding of matters affecting FHFA,
                                                           the GSEs, and housing policy. In light of these objectives, FHFA-OIG has
                                                           published 10 audit and evaluation reports as of September 30, 2011.

                                                           The reports credit FHFA’s work in several areas, both as regulator and
a
 The Inspector General Act of 1978, 5 U.S.C. App. 3 § 5,
requires that each inspector general compile a report of   conservator. For example, FHFA-OIG has found:
operations for the preceding six months for the periods
ending March 31 and September 30.




    4 |   Executive Summary
                                                            Semiannual Report to the Congress | September 30, 2011




     • FHFA has eliminated golden parachute compensation awards to
        terminated Enterprise executives;                                              Golden Parachute:
                                                                                       A term used to describe special
     • no evidence that FHFA’s independence has been compromised in
        connection with the Making Home Affordable (MHA) programs;                     compensation arrangements, such as cash,
                                                                                       special bonuses, stock options, or vesting of
     • FHFA has taken steps to mitigate its shortage of qualified examiners;          previously awarded compensation, between
     • FHFA has taken steps that may improve Enterprise repurchase claims             a company and its senior executives in case
        recoveries, thereby reducing Enterprise losses; and                            the company is acquired or if an individual
                                                                                       is fired or involuntarily separated.
     • FHFA has positively responded to FHFA-OIG’s recommendations to
        improve FHFA’s effectiveness and efficiency and reduce its vulnerability
        to fraud, waste, or abuse.
On the other hand, FHFA-OIG also has identified deficiencies in FHFA
operations, and these deficiencies appear to reflect two significant and related
themes. First, FHFA often relied on determinations of the Enterprises without
independently testing and validating them, thereby giving undue deference
to Enterprise decision-making. Second, FHFA’s allocation of resources may
have affected its ability to oversee the Enterprises and enforce its directives.
As detailed below, both themes have emerged in multiple reports.

I. 	FHFA Has Not Independently Tested and Validated Enterprise
     Decision-Making
In four reports to date, FHFA-OIG identified significant instances in
which FHFA has displayed undue deference to Enterprise decision-making.
Without adequately testing or validating data, FHFA has deferred to the
Enterprises regarding: (1) Freddie Mac’s assessment of mortgage repurchase
claim issues involving Bank of America; (2) the Enterprises’ participation in
MHA; (3) the Enterprises’ decisions regarding executive compensation; and
(4) numerous transactions of the Enterprises.

The Agency’s actions in each case reflect its approach as conservator to delegate
most business decisions to the Enterprises. In each case, it relied upon review
and corporate governance processes already in place at the Enterprises.
However, FHFA-OIG concluded that some matters are sufficiently important
to warrant greater involvement and scrutiny by the Agency.

FHFA Deferred to Freddie Mac’s Analysis of Repurchase Claim Exposure
At the end of 2010, FHFA approved a $1.35 billion settlement of mortgage            For more information about FHFA’s approval
repurchase claims Freddie Mac asserted against Bank of America. In approving        of Freddie Mac’s repurchase claim settlement
the settlement, FHFA relied on Freddie Mac’s analysis of the settlement             with Bank of America, see pages 36-37 of this
without testing the assumptions underlying the Enterprise’s existing loan           report, or examine the full text of the Evaluation
review process. An FHFA-OIG report found that FHFA did not act timely               of the Federal Housing Finance Agency’s
or test concerns raised by an FHFA senior examiner about limitations in             Oversight of Freddie Mac’s Repurchase
Freddie Mac’s existing loan review process for mortgage repurchase claims.1         Settlement with Bank of America.
The senior examiner was concerned that the loan review process Freddie



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




                                                    Mac used for repurchase claims failed to account adequately for changes
                                                    in foreclosure patterns among loans originated during the housing boom.
                                                    According to the senior examiner, this could potentially cost the Enterprise a
                                                    considerable amount of money.

                                                    FHFA Provided Limited Oversight of the Enterprises’ Administration of
                                                    the Home Affordable Modification Program
For more information about FHFA’s oversight         The Department of the Treasury (Treasury) initiated the MHA programs.
of the Enterprises’ relationships with Treasury,    A key initiative of MHA is the Home Affordable Modification Program
see pages 40-42 of this report, or examine          (HAMP), which involves servicers agreeing to modify mortgages for borrowers
the full text of the Evaluation of FHFA’s Role in   facing default or foreclosure. In early 2009, the Enterprises began participating
Negotiating Fannie Mae’s and Freddie Mac’s          in HAMP. They started modifying mortgages in their portfolios and entered
Responsibilities in Treasury’s Making Home          into five-year agreements with Treasury to manage the program and oversee
Affordable Program.                                 participants’ compliance with program requirements. An FHFA-OIG report
                                                    found that FHFA largely removed itself from overseeing the negotiations of
                                                    the five-year agreements.2 FHFA believed its appropriate role was to ensure
                                                    the Enterprises were legally authorized to administer HAMP, not to participate
                                                    actively in negotiations between the Enterprises and Treasury. Thus, FHFA did
                                                    not engage in any formal substantive review to evaluate the agreements’ feasibility,
                                                    risks, or the suitability of the Enterprises to serve as Treasury’s financial agents.
                                                    This lack of engagement may have contributed to the agreements’ omission of
                                                    significant details concerning payments to the Enterprises, the scope of their
                                                    responsibilities, and processes to resolve differences. As a consequence of
                                                    the omissions, significant problems developed in these areas almost from the
                                                    beginning, requiring FHFA and the Enterprises to devote substantial time and
                                                    resources to resolve ambiguities.

                                                    FHFA Did Not Fully Analyze Factors Related to Executive Compensation
                                                    at Fannie Mae and Freddie Mac
For more information about FHFA’s oversight         For 2009 and 2010, the Enterprises awarded their top six officers over $35
of the Enterprises’ executive compensation,         million in compensation. FHFA reviewed and approved these compensation
see pages 28-29 of FHFA-OIG’s inaugural             awards based on the Enterprises’ determinations and recommendations.
Semiannual Report, or examine the full text         However, an FHFA-OIG report found that FHFA did not test or validate the
of the Evaluation of Federal Housing Finance        means by which the Enterprises calculated their recommended compensation
Agency’s Oversight of Fannie Mae’s and Freddie      levels and did not consider factors that might have resulted in reduced executive
Mac’s Executive Compensation Programs.              compensation costs.3 These factors included the lower levels of compensation
                                                    paid to senior officials at federal agencies supporting the housing market and
                                                    whether compensation awards should be discounted to reflect the significant
                                                    level of federal financial support provided to the Enterprises.

For more information about FHFA’s examination       FHFA Does Not Perform Sufficient Transaction Testing of Enterprise
capacity, see pages 37-39 of this report,           Activities
or examine the full text of the Evaluation of       Transaction testing is the method employed by financial institution examiners
Whether FHFA Has Sufficient Capacity to             to arrive at independent impressions about the financial and operational
Examine the GSEs.                                   conditions of an institution, as well as its compliance with applicable laws and



  6 |     Executive Summary
                                                              Semiannual Report to the Congress | September 30, 2011




regulations. An example of transaction testing would be reviewing a regulated
entity’s loan files to test the veracity of statements concerning loan underwriting
and performance. During an evaluation of FHFA’s capacity to examine the
GSEs, a senior FHFA manager acknowledged to FHFA-OIG that examiners
too often accept assertions made by Enterprise managers rather than validate
such assertions through appropriate transaction testing.4

II.	      HFA’s Resource Allocations May Have Affected Its Ability to
         F
         Oversee the GSEs and Enforce Its Directives
In four reports, FHFA-OIG identified instances in which FHFA’s resource
allocations may have affected its ability to oversee the GSEs and enforce
its directives. For example, FHFA may have too few examiners to meet its
oversight responsibilities. In addition, FHFA may not have assigned sufficient
priority and resources to handle consumer complaints or address new and
emerging risks that may impact the GSEs. Additionally, FHFA-OIG found
that FHFA (along with its predecessor agency, the Office of Federal Housing
Enterprise Oversight (OFHEO)) has permitted five years of compliance
delays by Fannie Mae, which has been under directives to implement an
effective operational risk management program.

FHFA May Not Have Enough Examiners to Meet Its Regulatory and
Conservatorship Oversight Responsibilities
FHFA has critical regulatory responsibilities with respect to the GSEs
and conservator responsibilities regarding the Enterprises. To satisfy these              For more information about FHFA’s examination
responsibilities, Congress provided FHFA significant budget and hiring                    capacity, see pages 37-39 of this report,
authority. Nonetheless, an FHFA-OIG report noted that FHFA-OIG had                        or examine the full text of the Evaluation of
previously found shortfalls in the Agency’s examination coverage, and this                Whether FHFA Has Sufficient Capacity to
finding was corroborated by statements of senior FHFA officials.5 Internal                Examine the GSEs.
Agency reviews also corroborated that FHFA has too few examiners to ensure
the efficiency and effectiveness of its examination program. Additionally, only
34% of the Agency’s line examiners are accredited federal financial examiners.
FHFA has taken steps to mitigate its shortage of qualified examiners, but it
needs to move quickly and aggressively in this area. Last winter, for example,
the Acting Director announced and implemented a substantial restructuring                 For more information about FHFA’s
of FHFA’s supervision units and reassigned numerous staff. These steps,                   organizational restructuring, see page 33 of this
which also include plans to add examination staff and implement an examiner               report.
accreditation program, are designed to enhance FHFA’s supervision program.

Further, although FHFA’s near-term plans include hiring up to 44 additional
staff in the supervision divisions, FHFA-OIG concluded that there is                  a
substantial uncertainty as to whether this number of additional examiners
will enable FHFA to overcome its examination capacity shortfalls and ensure
the success of the Agency’s 2011 reorganization of its examination structure.




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




                                                                  FHFA Did Not Allocate Sufficient Resources to Handle Consumer
                                                                  Complaints
    For more information about FHFA’s handling                    Due in part to deteriorating financial conditions in the housing market, FHFA
    of consumer complaints, see pages 47-48                       and OFHEO experienced a substantial increase in consumer complaints
    of this report, or examine the full text of the               about the Enterprises. A number of these complaints contained important
    Audit of the Federal Housing Finance Agency’s                 information about alleged foreclosure processing abuses and fraud.b However,
    Consumer Complaints Process.                                  an FHFA-OIG report found that FHFA did not adequately process consumer
                                                                  complaints.6 This deficiency occurred because FHFA did not establish
                                                                  sound internal controls and did not assign sufficient priority and resources to
                                                                  complaint processing. For example, FHFA-OIG found that FHFA assigned
    For more information about FHFA’s oversight of                only two employees – on a part-time basis – to handle consumer complaints.
    the Enterprises’ default-related legal services
    activities, see pages 42-43 of this report, or                FHFA Did Not Identify and Address New and Emerging Risks Potentially
    examine the full text of FHFA’s Oversight of                  Impacting the GSEs
    Fannie Mae’s Default-Related Legal Services.
                                                                  FHFA did not begin to schedule comprehensive examination coverage of
                                                                  foreclosure issues, including allegations of abuse by its default-related legal
                                                                  services vendors, until after news stories about alleged abuses surfaced in
                                                                  mid-2010. FHFA had not previously considered risks associated with
                                                                  foreclosure processing to be significant. However, an FHFA-OIG report
                                                                  found that there were multiple indications of foreclosure issues prior to mid-
    Operational Risk:                                             2010 that could have led FHFA to foresee the heightened potential for risk
    Exposure to loss resulting from inadequate                    in foreclosure processing abuses.7 These indications included significant
    or failed internal processes, people, and                     increases in the volume of foreclosures (which accompanied the collapse of the
    systems, or from external events (including                   housing market), rising consumer complaints alleging improper foreclosures,
    legal events).                                                contemporaneous media reports about foreclosure abuses by the Enterprises’
                                                                  law firms, and public court filings highlighting such abuses.

                                                                  FHFA Has Not Enforced Directives Regarding Fannie Mae’s Operational
    For more information about FHFA’s oversight of                Risk Program
    Fannie Mae’s management of operational risk,
                                                                  Between 2006 and 2011, FHFA and OFHEO repeatedly found that
    see pages 39-40 of this report, or examine the
                                                                  Fannie Mae had failed to establish an acceptable and effective operational
    full text of the Evaluation of FHFA’s Oversight of
                                                                  risk management program despite outstanding Agency requirements to do
    Fannie Mae’s Management of Operational Risk.
                                                                  so.8 FHFA possesses broad authority to enforce its directives. However, an
                                                                  FHFA-OIG report found that FHFA did not take decisive action to compel
                                                                  Fannie Mae’s compliance.
    b
      For example, in June 2008, an investigative reporter
    complained that a mortgage lender, Taylor, Bean &             FHFA-OIG REPORTING REQUIREMENTS
    Whitaker, with which Freddie Mac did a large volume
    of business, was fraudulently selling loans. The              The Inspector General Act states that each inspector general is required,
    complaint was not properly pursued by FHFA, and it was        no later than April 30 and October 31 each year, to prepare semiannual
    not referred to law enforcement. Due to an unrelated
                                                                  reports summarizing the activities of his/her office during the preceding
a   investigation, in April 2011, a jury convicted the lender’s
    chairman of participating in a multibillion dollar scheme     six-month periods ending March 31 and September 30.c The specific
    against Freddie Mac and others, as described further on       reporting requirements, as stipulated in the Inspector General Act, are listed
    page 49.
                                                                  in Appendix B.
    c
        The Inspector General Act of 1978, 5 U.S.C. App. 3 § 5.




         8 |     Executive Summary
                                                            Semiannual Report to the Congress | September 30, 2011




The above-described reports issued since April 1, 2011; two additional audit
reports; FHFA-OIG’s investigative activities; and other FHFA, FHFA-OIG,
and GSE developments are discussed in detail in this Semiannual Report.

ORGANIZATION OF THIS REPORT
This Semiannual Report is organized as follows:

     • Section 1, Description of FHFA-OIG, provides a brief overview of the
        organization.
     • Section 2, Operations of FHFA and the GSEs, describes the organization
        and operation of FHFA, Fannie Mae, Freddie Mac, and the FHLBanks
        and discusses notable developments related to FHFA-OIG’s oversight
        of these organizations.
     • Section 3, Accomplishments and Strategy of FHFA-OIG, describes
        FHFA-OIG’s oversight activities, including audits, evaluations, and
        investigations. It also discusses FHFA-OIG’s current priorities and
        goals for the future.
     • Section 4, FHFA-OIG’s Recommendations, discusses selected FHFA-
        OIG recommendations to improve the operations and transparency of
        FHFA and the GSEs. It also provides an update on the implementation
        of each outstanding recommendation.
Additionally, this Semiannual Report includes, as background, An Overview
of the Home Foreclosure Process. This overview illustrates for readers the rights
and obligations of each party with respect to an appropriately executed home
foreclosure process in order to provide context for this high-profile, often
controversial aspect of the housing crisis.




                                                                                                 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
                                             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 FHFA.

                                             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 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 Department of Justice
                                             (DOJ). Previously, Mr. Linick was an Assistant U.S. 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. 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 organization-wide responsibilities are
                                             the Executive Office (EO) and the Office of Administration (OAd).
                                             FHFA-OIG’s organizational chart can be found in Appendix D.

                                             Office of Audits
                                             OA provides a full range of professional audit and attestation 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, or abuse in FHFA’s activities and operations;
                                             and (3) ensure compliance with applicable laws and regulations. Under the
                                             Inspector General Act, inspectors general are required to comply with the
                                             Government Auditing Standards, commonly referred to as the “Yellow Book,”
                                             issued by the Government Accountability Office (GAO). OA performs its
                                             audits and attestation engagements in accordance with the Yellow Book.

                                             Office of Evaluations
                                             OE provides independent and objective reviews, studies, and analyses of
                                             FHFA’s programmatic and operational activities. OE’s evaluations are
                                             generally limited in scope and completed more quickly than traditional audits.

                                             The Inspector General Reform Act of 2008 requires that inspectors general
                                             adhere to the Quality Standards for Inspection and Evaluation, commonly
                                             referred to as the “Blue Book,” issued by the Council of the Inspectors


 12 |   Section 1: Description of FHFA–OIG
                                                                                      Semiannual Report to the Congress | SEPTEMBER 30, 2011




       George Grob, currently Deputy Inspector General for Evaluations, delivers an instructional seminar
       on evaluations.


General on Integrity and Efficiency (CIGIE). OE performs its evaluations
in accordance with the Blue Book.

Office of Investigations
OI investigates allegations of misconduct and fraud involving the programs
and operations of FHFA and the GSEs. OI adheres to CIGIE’s Quality
Standards for Investigations and guidelines issued by the Attorney General.

OI’s investigations focus on allegations of wrongdoing and may address
administrative, civil, and criminal violations of laws and regulations. The
target of an FHFA-OIG investigation can be an agency employee, contractor,
or consultant or any person or entity involved in alleged wrongdoing affecting
FHFA’s or the GSEs’ programs and operations. To date, OI has opened
numerous criminal and civil investigations, which by their nature are not
made public. These investigations involve issues such as accounting fraud,
mail fraud, wire fraud, securities fraud, bank fraud, mortgage fraud, false
statements, obstruction of justice, money laundering, and tax code violations.

If an investigation reveals criminal activity, OI will refer the matter to DOJ
for possible prosecution or recovery of monetary damages and penalties.
If administrative misconduct is found, OI will forward the report to the
appropriate management officials for consideration of disciplinary or remedial
action. OI investigative reports are generally not public documents.

Further, OI manages FHFA-OIG’s Hotline, which is available to receive and
process tips and complaints regarding fraud, waste, or abuse affecting FHFA’s
programs and operations. The Hotline allows concerned parties to report



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




The FHFA-OIG Hotline can be reached at        their allegations to FHFA-OIG directly and confidentially. OI honors all
(800) 793-7724 or via e-mail at               applicable whistleblower protections. As part of its effort to raise awareness
OIGHOTLINE@FHFA.GOV.                          of fraud, OI actively promotes the Hotline through the FHFA-OIG website,
                                              posters, targeted e-mails to FHFA and GSE employees, and the Semiannual
                                              Reports.

                                              Executive Office
                                              EO provides leadership and programmatic direction for all FHFA-OIG
                                              offices and activities.

                                              EO includes the Office of Counsel (OC). OC serves as the chief legal advisor
                                              to the Inspector General and supports FHFA-OIG by providing independent
                                              legal advice, counseling, and opinions concerning FHFA-OIG’s programs and
                                              operations. OC reviews audit, investigation, and evaluation reports for legal
                                              sufficiency and compliance with FHFA-OIG’s policies and priorities. It also
                                              reviews drafts of FHFA regulations and policies and prepares comments as
                                              appropriate. Additionally, OC 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.

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

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

                                              OAd also provides administrative support to the Chief of Staff and the
                                              Deputy Inspector General for Audits as they manage FHFA-OIG’s Internal
                                              Management Assessment Program, which requires the regular inspection of
                                              each FHFA-OIG office to ensure compliance with applicable requirements.
                                              Additionally, FHFA-OIG’s Equal Employment Opportunities program is
                                              housed in OAd.




  14 |   Section 1: Description of FHFA–OIG
                                                            Semiannual Report to the Congress | SEPTEMBER 30, 2011




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

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

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

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

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

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

PERFORMANCE PLAN AND ORGANIZATIONAL GUIDANCE
FHFA-OIG has also developed and implemented an Annual Performance
Plan, which specifies objective, measurable performance goals for each year
of FHFA-OIG’s operation. The Annual Performance Plan describes the
organization’s plan to achieve its performance goals and the performance
indicators and metrics that will be used to measure progress. It also identifies
FHFA-OIG’s major management challenges. FHFA-OIG plans to develop,
quarterly and annually, performance reports comparing its progress with the
benchmarks set forth in the Annual Performance Plan.

FHFA-OIG has developed and promulgated policies and procedures manuals
for each office. These manuals set forth uniform standards and guidelines for



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




                                             the performance of each office’s essential responsibilities and are intended to
                                             help ensure the consistency and integrity of FHFA-OIG’s operations.




 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
                                                       FHFA
                                                       HERA was enacted on July 30, 2008, in the midst of the financial crisis. It
                                                       created FHFA as the successor agency to OFHEO and the Federal Housing
                                                       Finance Board (FHFB). OFHEO had been established in 1992 to regulate
                                                       Fannie Mae and Freddie Mac. Prior to HERA’s enactment, OFHEO had
                                                       functioned as an independent agency within HUD. FHFB was established
                                                       in 1989 as the regulator of the nation’s 12 FHLBanks. FHFA now regulates
                                                       and supervises Fannie Mae, Freddie Mac, and the FHLBanks.

                                                       FHFA AUTHORITIES
                                                       HERA
                                                       Under HERA, FHFA oversees the GSEs’ operations. HERA authorizes
                                                       FHFA to:

                                                            •	ensure the GSEs operate “in a safe and sound manner, including
                                                                maintenance of adequate capital and internal controls;”
                                                            •	establish criteria for investments the GSEs may hold in their
                                                               portfolios;
                                                            •	establish risk-based capital requirements for the GSEs;
Preferred Stock:
A security that usually pays a fixed dividend               •	require the GSEs to increase their capital;
and gives the holder a claim on corporate
                                                            •	review and approve GSE executive compensation;
earnings and assets superior to that of
holders of common stock, but inferior to                    •	review and approve any new products that Fannie Mae or Freddie
that of investors in the corporation’s debt                     Mac propose to offer;
securities.
                                                            •	establish affordable housing goals for Fannie Mae and Freddie Mac;
Senior Preferred Stock Purchase
                                                            •	enforce compliance with housing goals; and
Agreements (PSPAs):
Entered into at the time the                                •	appoint itself conservator or receiver of the GSEs.
conservatorships were created, the PSPAs
authorize the Enterprises to request                   On September 6, 2008, weeks after HERA’s enactment, the Enterprises were
and obtain funds from Treasury, under                  placed into conservatorships overseen by FHFA due to their deteriorating
a preferred stock investment facility for              financial conditions. As conservator, FHFA assumed all the powers of the
each Enterprise. Under the PSPAs, the                  shareholders, directors, and officers, with the goal of preserving and conserving
Enterprises agreed to consult Treasury                 the assets and property of the Enterprises.9
concerning a variety of significant
business activities, capital stock issuance            HERA also expanded the authority of Treasury to provide financial support
and dividend payments, ending the                      to the GSEs.10 At the time the conservatorships were created, Treasury
conservatorships, transferring assets, and             exercised that authority when it began to make preferred stock investments in
awarding executive compensation.                       Fannie Mae and Freddie Mac pursuant to Senior Preferred Stock Purchase
                                                       Agreements (PSPAs).



  18 |    Section 2: Operations of FHFA and the GSEs
                                                             Semiannual Report to the Congress | SEPTEMBER 30, 2011




Emergency Economic Stabilization Act
Soon after the Enterprises were placed into conservatorships, and as the
financial crisis continued, the Emergency Economic Stabilization Act                     Primary Mortgage Market:
(EESA) was enacted on October 3, 2008. With respect to the housing market,               The market for newly originated mortgages.
EESA contains provisions to protect home values and investments, preserve
homeownership and promote economic growth, and maximize returns to the                   Secondary Mortgage Market:
taxpayer.11                                                                              The market for buying and selling existing
                                                                                         mortgages; this could be in the form of
To preserve homeownership, EESA requires FHFA to implement a plan to                     whole mortgage or MBS sales.
maximize assistance to homeowners and to use its authority to encourage
the servicers of Fannie Mae and Freddie Mac mortgages to take advantage                  Both the primary and secondary mortgage
of federal programs to minimize foreclosures.12 In addition, EESA requires               markets are over-the-counter markets –
FHFA to coordinate with Treasury on homeowner assistance plans and to                    there is no central exchange. Rather, loans
                                                                                         are bought and sold through personal and
submit monthly reports to Congress detailing the progress of its efforts.
                                                                                         institutional networks.

FANNIE MAE AND FREDDIE MAC                                                               Conventional Conforming Mortgage
                                                                                         Loans:
Fannie Mae was chartered in 1938 to support the creation of stable funding in            Conventional mortgage loans are mortgages
the U.S. housing and mortgage markets. Freddie Mac was chartered in 1970                 that are not insured or guaranteed by
with a similar mission to provide stability for the nation’s residential mortgage        the Federal Housing Administration, the
markets and expand opportunities for home ownership and affordable rental                Department of Veterans Affairs, or the
housing.                                                                                 Department of Agriculture and that meet
                                                                                         the Enterprises’ underwriting standards.
As Figure 1 (see page 20) illustrates, Fannie Mae and Freddie Mac support                Conforming mortgage loans have original
the nation’s housing finance system through the secondary mortgage market.               balances below a specific threshold, set
Neither Enterprise makes home loans directly to borrowers; rather, banks,                by law and published by FHFA, known as
credit unions, and other retail financial institutions originate home loans.             the “conforming loan limit.” For 2011,
Generally, lenders do not retain the mortgages they originate as assets on               the conforming loan limit is $417,000 for
their own books. Instead, they often sell conventional conforming mortgage               most areas of the contiguous United States,
                                                                                         although generally it can increase to a
loans soon after origination to Fannie Mae or Freddie Mac. The Enterprises
                                                                                         maximum of $625,500 in specific higher
thus provide liquidity for mortgage lenders.
                                                                                         cost areas.
The Enterprises typically securitize the loans they purchase by aggregating
                                                                                         Guarantee:
or pooling them into MBS, which are then sold to investors. As part of
                                                                                         A pledge to investors that the guarantor will
the securitization process, and to reduce investors’ risk, the Enterprises               bear the default risk on the collateral pool of
guarantee payment of principal and interest on their MBS in exchange for a               loans, thereby ensuring the timely payment
fee. Alternatively, the Enterprises may hold these loans or purchase MBS for             of principal and interest owed to investors.
their own investment portfolios, which are funded through issuance of debt
obligations.                                                                             Implied Guarantee:
                                                                                         The assumption, prevalent in the financial
The Enterprises have historically benefited from an implied guarantee                    markets, that the federal government will
that the federal government would prevent default on their financial                     cover GSE debt obligations.
obligations.13 After the Enterprises were placed into conservatorships, this
guarantee effectively became explicit.14 As a result, over time, the cost of
borrowing for the Enterprises has been lower than that for other for-profit
companies.15




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




                                         Figure 1. Mortgage Origination and Securitization Process




                                                     With the federal government’s financial support, the Enterprises added to their
                                                     dominant position in the residential housing finance market as the housing
                                                     crisis continued and private-sector financing for the secondary market nearly
                                                     disappeared, as Figure 2 illustrates.




 20 |   Section 2: Operations of FHFA and the GSEs
                                                                                  Semiannual Report to the Congress | SEPTEMBER 30, 2011




                                             Figure 2. Primary Sources of MBS Issuances from 2000 to 2010
                                                                      ($ trillions)

 $3.0



 $2.5
                                                       0.6


 $2.0


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

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




                                                Ginnie Mae MBS                Enterprise MBS          Non-Agency MBS


Source: Inside Mortgage Finance, 2011 Mortgage Market Statistical Annual.


Enterprise Financial Performance and Government Support
As Figure 3 (see page 22) indicates, delinquencies on home mortgages,
including those owned or guaranteed by the Enterprises, began to rise in 2007
and reached unprecedented levels in 2009.




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




                                                  Figure 3. Enterprise Delinquency Rates 2000 to 2011


             Seriously Delinquent Mortgages: (90+ Days Delinquent) - Freddie Mac        Seriously Delinquent Mortgages: (90+ Days Delinquent) - Fannie Mae
     6%




     5%




     4%




     3%




     2%




     1%




     0%
            2000       2001        2002       2003        2004       2005       2006        2007       2008        2009       2010       2011


  Sources: Fannie Mae, Monthly Summary (online at www.fanniemae.com/ir/monthly/index.jhtml) (accessed Oct. 20, 2011); Freddie Mac, Monthly Volume Summaries (online at
  www.freddiemac.com/investors/volsum/) (accessed Oct. 20, 2011); Freddie Mac, Financial Archives (online at www.freddiemac.com/investors/archives.html#mvs)
  (accessed Oct. 20, 2011).

                                                           As a result of these delinquencies, losses escalated and drove rapid financial
                                                           deterioration at the Enterprises. As shown in Figure 4 (see page 23), during
                                                           the year they went into conservatorships, 2008, the Enterprises reported
                                                           combined losses of $109 billion, a figure that exceeded their cumulative
                                                           earnings during the preceding 21 years. The Enterprises have continued to
                                                           lose money since, although the magnitude of their annual losses diminished
                                                           to $28 billion in 2010.

                                                           Financial performance continued to improve for both Enterprises in the
                                                           first half of fiscal year 2011, although both companies continued to report
                                                           losses. Fannie Mae reported a net loss of $9.4 billion for the first half of 2011,
                                                           while Freddie Mac reported a net loss of $1.4 billion for that period. The
                                                           comparable figures for the first half of 2010 were losses of $12.8 billion and
                                                           $11.4 billion, respectively.



 22 |     Section 2: Operations of FHFA and the GSEs
                                                                                      Semiannual Report to the Congress | SEPTEMBER 30, 2011




                                                Figure 4. Enterprises’ Annual Net Income (Loss) 1986-2010
                                                          and the Six Months Ended June 30, 2011
                                                                        ($ billions)


        $20



         $0



      $(20)



      $(40)



      $(60)



      $(80)



     $(100)



     $(120)

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


                                                                           Freddie Mac              Fannie Mae


Sources: Federal Housing Finance Agency, 2008 FHFA Annual Report to Congress, at 110, 127 (online at www.fhfa.gov/webfiles/2335/FHFA_ReportToCongress2008508rev.pdf) (accessed
Sept. 23, 2011); Fannie Mae, 2009 and 2010 Fannie Mae 10-K Reports, at F-4 (online at www.fanniemae.com/ir/sec/index.jhtml?s=SEC+Filings) (accessed Sept. 23, 2011); Freddie Mac,
2009 and 2010 Freddie Mac 10-K Reports, at 208, 174 (online at www.freddiemac.com/investors/sec_filings/index.html) (accessed Sept. 23, 2011); Fannie Mae, 2011 Fannie Mae Second
Quarter 10-Q Report, at 94 (online at www.fanniemae.com/ir/pdf/earnings/2011/q22011.pdf) (accessed Sept. 23, 2011); Freddie Mac, 2011 Freddie Mac Second Quarter 10-Q Report, at
102 (online at www.freddiemac.com/investors/er/pdf/10q_2q11.pdf) (accessed Sept. 23, 2011).



To offset these losses, government support of the Enterprises since 2008 also
has been unprecedented. Figure 5 (see page 24) breaks down, by quarter,
Treasury’s investment in the Enterprises through September 30, 2011.
Treasury has provided $169 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% of the outstanding
investment. The rate shall increase to 12% if, in any quarter, the dividends
are not paid in cash, until all accrued dividends have been paid in cash. To
date, Treasury generally has had to increase its investment in the Enterprises
to finance these dividend payments to Treasury. As of September 30, 2011,
$32.1 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 $220 billion to $311 billion
through 2014.16



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


                                             Figure 5. Treasury Capital and Dividends Due Under PSPAs ($ billions)

                                              Freddie Mac                                        Fannie Mae                                           Combined
                              Treasury        Dividends Due    Net Capital       Treasury       Dividends Due     Net Capital         Treasury       Dividends Due    Net Capital
                            Investment        Treasury Under   Provided to     Investment       Treasury Under    Provided to       Investment       Treasury Under   Provided to
     Period Covered
                            Under PSPA             PSPA        Enterprise      Under PSPA            PSPA         Enterprise       Under PSPAs           PSPAs        Enterprises


 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            14.2             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)             8.5               2.2             6.3              8.5                 3.8            4.7

 Second Quarter 2011                 1.5                 1.6           (0.1)             5.1               2.3             2.8              6.6                 3.9            2.7
 Third Quarter 2011                      -               1.6           (1.6)                -              2.5            (2.5)                  -              4.1          (4.1)
 Total as of
                                  $65.2               $14.9          $50.3           $103.8             $17.2            $86.6          $169.0               $32.1        $136.9
 September 30, 2011


Source: Federal Housing Finance Agency, Data as of September 30, 2011 on Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-Related Securities (online at www.
fhfa.gov/webfiles/22692/TSYSupport09302011.pdf) (accessed Oct. 7, 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 more than $1.3 trillion in Enterprise
                                                               MBS, and the Federal Reserve has purchased an additional $135 billion of
                                                               bonds issued by the Enterprises.17

                                                               FHLBANKS
                                                               The FHLBank System was 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.18 The 12 FHLBanks are each separate legal
                                                               entities that must adhere to specific management and capitalization criteria.19
                                                               The geographic areas that comprise the FHLBank System are shown in the
                                                               map in Figure 6 (see page 25).

                                                               The 12 FHLBanks are privately capitalized. Each regional FHLBank is
                                                               cooperatively owned by the members it serves, which include financial




   24 |     Section 2: Operations of FHFA and the GSEs
                                                                                      Semiannual Report to the Congress | SEPTEMBER 30, 2011




                                Figure 6. Map of the Regional FHLBanks




Source: Federal Home Loan Bank of Boston, The Federal Home Loan Bank System (online at www.fhlbboston.com/aboutus/
thebank/08_01_04_fhlb_system.jsp) (accessed Sept. 23, 2011).



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.20

The primary business of the FHLBanks is providing their members with
low-cost funding for mortgage lending and other purposes. To do so, each
FHLBank makes loans (referred to as advances) to its members. FHLBank                                                     Collateral:
                                                                                                                          Assets used as security for a loan that can
advances are available in a variety of maturities and structures. Such advances
                                                                                                                          be seized by the lender if the borrower fails
are collateralized by single-family mortgage assets, investment-grade
                                                                                                                          to repay the loan.
securities, or, in some cases, agricultural and small business loans. Interest
earned on advances is a primary revenue source for the FHLBanks.                                                          Joint and Several Liability:
                                                                                                                          The concept of joint and several liability
The FHLBanks also maintain investment portfolios containing mortgage-                                                     provides that each obligor in a group is
related assets, and some face heightened credit risks due to their larger                                                 responsible for the debts of all in that
holdings of private-label MBS.                                                                                            group. In the case of the FHLBanks, if any
                                                                                                                          individual FHLBank were unable to pay a
To fund member advances, the FHLBanks issue debt securities through                                                       creditor, the other 11 would be required to
their Office of Finance.21 In the event of a default on a debt obligation,                                                step in and cover that debt.
each FHLBank is jointly and severally liable for losses incurred by other
FHLBanks. Like Fannie Mae and Freddie Mac, the FHLBank System has
also historically enjoyed cost benefits stemming from the implicit government
guarantee of its debt obligations.




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


                                                           Figure 7. FHLBanks’ Annual Net Income 2000-2010
                                                                and the Six Months Ended June 30, 2011
                                                                              ($ billions)

                     $3.0



                     $2.5



                     $2.0



                     $1.5



                     $1.0



                     $0.5



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

Sources: Federal Housing Finance Agency, 2008 FHFA Annual Report to Congress, at 141 (online at www.fhfa.gov/webfiles/2335/FHFA_ ReportToCongress2008508rev.pdf) (accessed Sept. 23, 2011);
Federal Home Loan Banks, 2010 Federal Home Loan Banks Combined Financial Report, at F-5 (online at www.fhlb-of.com/ofweb_userWeb/resources/10yrend.pdf) (accessed Sept. 23, 2011); Federal Home
Loan Banks, 2011 Federal Home Loan Banks Combined Financial Report, at F-3 (online at www.fhlb-of.com/ofweb_userWeb/resources/11Q2end.pdf) (accessed Sept. 23, 2011).



For more information on the conforming loan                        SELECTED FHFA PROGRAMS AND ACTIVITIES
limit, see page 19 of this report.
                                                                   FHFA-OIG follows developments in the programs and operations of FHFA
                                                                   and the GSEs. A number of developments are discussed below.

Servicer:
                                                                   Conforming Loan Limit
Servicers act as intermediaries between
mortgage borrowers and owners of the                               The Enterprises are required by law to purchase single-family mortgages with
loans, such as the Enterprises or MBS                              origination balances below the conforming loan limit. As of October 1, 2011,
investors. They collect the homeowners’                            the maximum conforming loan limit for high cost areas for single-family
mortgage payments, remit them to the                               properties decreased to $625,500 from $729,750. As required by HERA,
owners of the loans, maintain appropriate                          loans originated on or after October 1, 2011, will use the permanent high cost
records, and address delinquencies or
                                                                   area loan limits established by FHFA. The formula used to determine this
defaults on behalf of the owners of the
                                                                   limit was 115% of the local median home price, up to a maximum of $625,500
loans. For their services, they typically
receive a percentage of the unpaid principal
                                                                   for a single-family property in the continental United States.22
balance of the mortgage loans they service.
                                                                   Mortgage Servicing Compensation
The recent financial crisis has put more
                                                                   Concerns arose regarding servicer compensation for nonperforming loans
emphasis on servicers’ handling of defaults,
modifications, short sales, and foreclosures,                      and that this compensation difficulty could adversely impact lenders and
in addition to their more traditional duty                         homeowners. In response, in January 2011, FHFA announced a joint initiative
of collecting and distributing monthly                             with the Enterprises and HUD to review future alternative fee structures for
mortgage payments.                                                 mortgage servicers. The main goals of the initiative were to:




   26 |     Section 2: Operations of FHFA and the GSEs
                                                            Semiannual Report to the Congress | SEPTEMBER 30, 2011




     •	 improve service for borrowers;
     •	 reduce financial risk to servicers;
     •	provide guarantors flexibility for better management of non-
         performing loans; and
     •	 promote continued ease of trading for MBS investors.
The joint initiative explored alternatives to the current industry standard
structure for mortgage servicing compensation, which consists of a fixed
percentage of the serviced loans’ unpaid principal balance. It sought to
evaluate the potential impact of these alternatives on industry participants
and submitted solutions for public comment.

On September 27, 2011, FHFA released two alternative mortgage servicing
compensation structures for public comment. One proposal would create a
reserve account within the current servicing compensation structure to cover
non-performing loan servicing costs. The alternative proposal would create a
fee-for-service compensation model. The goal of the fee-for-service model
is to link servicer compensation more closely to actual services performed.
FHFA is seeking comments on these two proposals for 90 days from the date
of the announcement.23

Private-Label MBS Lawsuits
On July 27, 2011, FHFA filed suit on behalf of the Enterprises against UBS
Americas, Inc. (UBS), several affiliated entities, and individual UBS employees.
Subsequently, on September 2, 2011, FHFA filed further actions against 17
additional financial services firms:

      •	Ally Financial Inc., formerly known as GMAC, LLC
      •	Bank of America Corporation
      •	Barclays Bank PLC
      •	Citigroup, Inc.
      •	Countrywide Financial Corporation
      •	Credit Suisse Holdings (USA), Inc.
      •	Deutsche Bank AG
      •	First Horizon National Corporation
      •	General Electric Company
      •	Goldman Sachs & Co.
      •	HSBC North America Holdings, Inc.
      •	JPMorgan Chase & Co.



                                                                                   Section 2: Operations of FHFA and the GSEs   | 27
Federal Housing Finance Agency Office of Inspector General




                                                             •	Merrill Lynch & Co./First Franklin Financial Corp.
                                                             •	Morgan Stanley
                                                             •	Nomura Holding America Inc.
                                                             •	The Royal Bank of Scotland Group PLC
                                                             •	Societe Generale
                                                       The lawsuits also name individual employees of each firm as well as affiliates.
                                                       The lawsuits allege violations of federal, state, and common laws related to
                                                       the offer and sale of certain residential private-label MBS purchased by the
                                                       Enterprises. These suits do not pertain to the Enterprises’ investments in or
                                                       guarantees of conventional conforming mortgage loans. Rather, at issue are
                                                       separate investments the Enterprises made in private-label MBS that were
                                                       created and sold by the companies named as defendants.

                                                       FHFA’s principal complaint is that the companies allegedly failed to perform
                                                       proper due diligence as required in their capacity as underwriter for their
Underwriter:
                                                       securities offerings. The lawsuits also allege that the firms’ disclosure
In the context of the securities markets,
an underwriter is an entity that purchases
                                                       documents contained misstatements and omissions about the mortgage loans
newly issued bonds from the issuer and                 underlying the private-label MBS, including materially false or inadequate
resells them to investors. In their role as            characterizations of the mortgage borrowers’ creditworthiness, the quality of
marketing and sales agents, underwriters               the origination process, and practices used to evaluate and approve the loans.
have specific obligations to disclose
accurate and pertinent information about               FHFA seeks damages and civil penalties under the Securities Act of 1933
such bond offerings, many of which are                 and for state securities law violations to recover losses incurred by the
stated in the Securities Act of 1933.                  Enterprises due to investments in the firms’ MBS offerings. In the cases of
                                                       Ally Financial Inc., Countrywide Financial Corporation, Deutsche Bank AG,
                                                       General Electric Company, Goldman Sachs & Co., JPMorgan Chase & Co.,
                                                       Merrill Lynch & Co., Morgan Stanley, and UBS, FHFA also seeks punitive
                                                       damages.24

                                                       Bank of America Private-Label MBS Settlement
                                                       On June 29, 2011, Bank of America announced it will pay $8.5 billion to a
                                                       group of 22 investors to settle claims that they were sold poor quality MBS.
                                                       The MBS involved in the settlement were issued by Countrywide Financial,
                                                       which was purchased by Bank of America in 2008. On August 30, 2011,
                                                       FHFA, on behalf of the Enterprises, filed an Appearance and Conditional
                                                       Objection in reference to the proposed settlement between Bank of America
                                                       and the 22 investors included in the settlement. FHFA filed the objection
                                                       in order to obtain additional pertinent information regarding the matter.
                                                       However, FHFA noted it was not aware of a basis upon which it would raise
                                                       a substantive objection to the proposed settlement. FHFA indicated the
                                                       proposed settlement’s loan servicing and document deficiency improvements
                                                       were considered positive and expressed encouragement that a number of
                                                       significant market participants supported the deal. By submitting its filing,
                                                       FHFA reserved its right to object to the settlement if the need should arise.25


  28 |    Section 2: Operations of FHFA and the GSEs
                                                            Semiannual Report to the Congress | SEPTEMBER 30, 2011




Disposition of Real Estate Owned Properties
FHFA, Treasury, and HUD issued a Request for Information (RFI) on
August 11, 2011, soliciting proposals to address the inventory of single-family
                                                                                        Real Estate Owned (REO):
real estate owned (REO) properties held by the Enterprises and the Federal
                                                                                        Foreclosed homes owned by government
Housing Administration (FHA). As of June 30, 2011, the Enterprises                      agencies or financial institutions, such as
collectively owned 196,318 REO properties.26 The stated goal of the RFI is              the Enterprises or real estate investors.
to gather information and explore means to address the current and future               REO homes represent collateral seized to
REO inventory, increase private investment in the housing market, maximize              satisfy unpaid mortgage loans. The investor
value to taxpayers, and support rental and affordable housing needs.                    or its representative then must sell the
                                                                                        property on its own.
The RFI seeks feedback and strategies to:

     •	reduce the REO portfolios of the Enterprises and FHA in a cost-
         effective manner;
     •	reduce average loan loss severities of the Enterprises and FHA
         relative to individual distressed property sales;
     •	address property repair and rehabilitation needs;
     •	respond to economic and real estate conditions in specific regions;
     •	assist in neighborhood and home price stabilization efforts; and
     •	develop analytic approaches to determine the appropriate disposition
         strategy for individual properties, whether sale, rental or, in certain
         instances, demolition.
FHFA, Treasury, and HUD have indicated that the RFI’s objectives could be
best achieved through “REO to rental structures” such as:

     • programs for previous homeowners to rent properties or for current
        renters to become owners; and
     • strategies through which REO assets could be used to support markets
        with a strong demand for rental units and a substantial volume of
        REO.
The agencies are also open to additional ideas regarding strategic planning,
transactions, and venture investment.27 The RFI envisioned proposals for
transactions between $50 million and $1 billion in value, including both
single-family and condominium REO properties. The deadline for responses
was September 15, 2011.28




                                                                                   Section 2: Operations of FHFA and the GSEs   | 29
Federal Housing Finance Agency Office of Inspector General




                                                         Standard & Poor’s Downgrade
                                                         Standard & Poor’s Rating Services (S&P), a prominent credit rating agency,
Credit Rating Agency:                                    announced on August 5, 2011, that the long-term sovereign credit rating for
Credit rating agencies provide their                     Treasury debt was lowered to AA+ from AAA. To date, S&P is the only
opinions on the creditworthiness of                      major credit rating agency to take such an action. Of the other two major
institutional borrowers and their financial
                                                         rating agencies, Moody’s Investors Service (Moody’s) affirmed its top credit
obligations. While the Securities and
Exchange Commission recognizes 10 credit
                                                         rating of Aaa for Treasury obligations on August 2, 2011, and Fitch Ratings
rating agencies as Nationally Recognized                 (Fitch) affirmed its top AAA credit rating on August 16, 2011. Highly rated
Statistical Rating Organizations, 3 (S&P,                institutions tend to be able to borrow funds in the bond markets more readily
Moody’s, and Fitch) are considered the most              and at a lower cost.
prominent. Their credit scales used for
long-term obligations (those of 13 months                As a result of the downgrade, the outlook (i.e., prospects for future changes in
or longer) are listed below, descending from             creditworthiness) for the GSEs was deemed “negative” by S&P. On August
highest-rated to lowest:                                 8, 2011, S&P lowered the credit ratings on Fannie Mae and Freddie Mac to
                                                         AA+ from AAA. Additionally, the credit ratings on 10 of the 12 FHLBanks
 Moody’s         S&P            Fitch                    and the FHLBank System’s senior debt were lowered to AA+ from AAA.
 Aaa             AAA            AAA                      S&P noted that the downgrades were directly related to these entities’ reliance
 Aa1             AA+            AA+                      on the U.S. government.29
 Aa2             AA             AA
                                                         In response to the downgrade of the GSEs’ debt, FHFA’s Acting Director
 Aa3             AA-            AA-
                                                         announced that the downgrades would have no effect on FHFA’s calculation
 A1              A+             A+
                                                         of risk-based capital for the GSEs.30
 A2              A              A
 A3              A-             A-
                                                         Completion of Resolution Funding Corporation Obligation
 Baa1            BBB+           BBB+
 Baa2            BBB            BBB                      On August 5, 2011, FHFA announced that the 12 FHLBanks had satisfied
 Baa3            BBB-           BBB-                     their obligation to pay interest on Resolution Funding Corporation (RefCorp)
 Ba1             BB+            BB+                      bonds issued from 1989 to 1991. RefCorp bonds were originally authorized by
 Ba2             BB             BB                       Congress and issued to help finance the resolution of failing savings and loans.
 Ba3             BB-            BB-
                                                         Under the original repayment agreement, the federal government required
 B1              B+             B+
                                                         the FHLBanks to pay RefCorp $300 million per year towards repayment
 B2              B              B
                                                         of the RefCorp obligation. Since 1999 each FHLBank has been required
                                                         to pay 20% of its net earnings – reduced by contributions to the FHLBanks’
 B3              B-             B-
                                                         affordable housing programs – to service the RefCorp obligation.
 Caa1            CCC+           CCC+
 Caa2            CCC            CCC                      In anticipation of this event, the 12 FHLBanks signed a Joint Capital
 Caa3            CCC-           CCC-                     Enhancement Agreement on February 28, 2011. Under the agreement’s terms,
 Ca              CC             CC                       beginning September 30, 2011, each FHLBank will allocate 20% of its annual
 C               C              C                        net income to a restricted retained earnings account until the account balance
                 D              D                        equals 1% of the bank’s outstanding consolidated obligations. Amendments
                                                         were approved by the FHFA Acting Director on August 5, 2011, making the
High-quality, “investment grade” debt is                 allocation of restricted retained earnings part of each FHLBank’s capital plan.
rated Baa3/BBB- or higher; lower-rated                   FHFA monitors the FHLBanks’ compliance with their capital plans.31
obligations are typically referred to as
“high-yield” or “junk” debt. A “D” from S&P
or Fitch indicates actual default.                       Bank of America Servicing Rights
                                                         On August 3, 2011, FHFA, acting in its capacity as conservator, approved Fannie
                                                         Mae’s payment of approximately $500 million to Bank of America in return


     30 |   Section 2: Operations of FHFA and the GSEs
                                                             Semiannual Report to the Congress | SEPTEMBER 30, 2011




for the transfer of loan servicing rights on mortgages owned or guaranteed by        FHFA-OIG recently released an evaluation
Fannie Mae from Bank of America to other loan servicers. In the aftermath            (Evaluation of the Federal Housing Finance
of that approval, members of Congress and others have raised questions about         Agency’s Oversight of Freddie Mac’s
the payment. FHFA’s Acting Director has publicly stated that the transfer of         Repurchase Settlement with Bank of America)
servicing rights made sense for Fannie Mae and Bank of America.32 FHFA-              discussing Freddie Mac’s settlement with Bank
OIG is currently reviewing this transaction.                                         of America on repurchase claims.


FHFA 2010 Annual Report
On June 13, 2011, FHFA delivered its 2010 Report to Congress, which
presented FHFA’s examination findings for Fannie Mae, Freddie Mac, and
the FHLBank System.

Fannie Mae and Freddie Mac each received composite examination ratings
reflecting “critical supervisory concerns.” FHFA cited continuing and
forecasted credit losses on mortgages originated in 2005 through 2007 as a
principal factor in these ratings and identified credit risk, operational risk,
modeling risk, and retention of leadership and personnel as key challenges
for both Enterprises. With respect to FHFA’s conservatorship duties, the
report noted that, under the oversight and guidance of FHFA as conservator
and regulator, the Enterprises have improved underwriting standards for
loan purchases in the past two years. It also noted, “another way FHFA
minimized losses was to require the Enterprises to enforce existing contractual
representation and warranty loan repurchase agreements with lenders.”

With respect to the FHLBank System, FHFA described the overall condition              FHFA-OIG plans to conduct several reviews
of the FHLBanks of Boston, Chicago, Pittsburgh, and Seattle as “present[ing]          centering on the FHLBanks, including such
supervisory concerns,” while the FHLBanks of Atlanta and San Francisco                topics as advance and collateral management,
presented supervisory concerns that were more limited in nature. The                  capital, troubled banks, organizational structure,
FHLBanks of Cincinnati, Dallas, Des Moines, Indianapolis, New York, and               and affordable housing programs.
Topeka were described as “satisfactory.” Additionally, FHFA’s review of the
FHLBanks’ Office of Finance noted several supervisory concerns. FHFA
concluded that “although the financial condition and performance of the
                                                                                      For further information on private-label MBS,
FHLBanks generally stabilized in 2010, the FHLBanks continued to be
                                                                                      see page 4 of this report.
negatively affected by exposure to private-label MBS and declines in advances
(loans to members).”33

Servicing Alignment Initiative
On April 28, 2011, FHFA introduced the Servicing Alignment Initiative,               For more information on the role of the servicer,
which directed the Enterprises to align their guidance for servicers of              see page 75 of this report.
delinquent mortgages they own or guarantee. Historically, each Enterprise had
set forth different requirements for handling delinquent loans. The new directive
seeks to establish consistent, transparent standards for servicing delinquent
mortgage loans. It includes cash incentives for exemplary performance, as
well as monetary penalties for underperformance.34 It addresses four aspects
of delinquent loan servicing: borrower contact, delinquency management
practices, loan modifications, and foreclosure timelines.


                                                                                    Section 2: Operations of FHFA and the GSEs    | 31
Federal Housing Finance Agency Office of Inspector General




                                                             •B
                                                               orrower Contact. The new directive calls for earlier, more frequent
                                                              contact between the servicer and the homeowner. It specifies standards
                                                              for call center service levels and servicers’ solicitations for borrower
                                                              assistance measures, such as loan modifications. The directive also sets
                                                              forth a standard for such interactions known as “Quality Right Party
                                                              Contact,” under which the servicer must establish a rapport with the
                                                              borrower; determine the reason for the delinquency, the borrower’s
                                                              plans for the property, and his or her ability to make the mortgage
                                                              payments; set payment expectations and educate the borrower on
                                                              appropriate assistance programs; and obtain a commitment to resolve
                                                              the delinquency. The servicer must be able to provide proof that it
                                                              honored these standards with respect to each delinquent loan, upon
                                                              the Enterprise’s request.
As noted in further detail in Section 3, FHFA-OIG            •D
                                                               elinquency Management. The new directive sets forth a uniform
has recently released reports discussing the                  requirement that servicers timely acknowledge certain events
performance of Fannie Mae’s Retained Attorney                 pertaining to borrowers, including receipt of requests for assistance.
Network and its management of operational                     Servicers must also provide borrowers consistent information about the
risks.                                                        evaluation process and timeline, the foreclosure process, and instances
                                                              when foreclosure actions may not be halted. Additionally, they must
                                                              evaluate the assistance programs that may be appropriate, such as
                                                              HAMP and Home Affordable Foreclosure Alternatives (HAFA),
                                                              simultaneously for each borrower. They must also implement measures
                                                              that will provide borrowers with continuity throughout the process of
                                                              delinquency resolution.
                                                             • Loan Modifications. Both Enterprises must conform to guidelines
                                                               previously published by Fannie Mae that provide standards for
                                                               evaluating borrowers for modifications, permissible lengths for
                                                               modification trial periods, documentation requirements, and credit
                                                               bureau reporting.d
                                                             •F
                                                               oreclosure Timelines. The new guidance sets forth consistent
                                                              timing standards for foreclosure processing steps and standardizes
                                                              the circumstances under which the Enterprises may assess penalties
                                                              against their servicers for noncompliance.35
                                                        According to FHFA, the Servicing Alignment Initiative is intended to provide
                                                        superior service to borrowers with clearer and more consistent borrower
                                                        communications, efficient processing of loan modifications, a fair foreclosure
                                                        process, increased servicer accountability, and, ultimately, reduced taxpayer
                                                        losses through improved loan servicing.

                                                        Risk Retention Proposal
                                                        On March 31, 2011, the Federal Reserve Board, HUD, the Federal Deposit
d
 The relevant announcement is Fannie Mae Servicing
Guide Announcement SVC 2011-03, Updates to Fannie       Insurance Corporation (FDIC), FHFA, the Office of the Comptroller of
Mae’s Mortgage Modification Requirements, published     the Currency, and the Securities and Exchange Commission (SEC) issued
April 4, 2011.                                          a proposed rule to implement the credit risk-related requirements of the


    32 |   Section 2: Operations of FHFA and the GSEs
                                                             Semiannual Report to the Congress | SEPTEMBER 30, 2011




Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act). The Dodd-Frank Act requires sponsors of certain classes
of new bond issuances, including MBS, to retain not less than 5% of the credit
risk of the underlying assets, such as mortgage loans. The Dodd-Frank Act
also includes several exceptions to these requirements, such as an exemption
for MBS collateralized exclusively by qualified residential mortgages (QRMs).
The proposed rule would limit the definition of QRMs to loans of very high
credit quality, as indicated by criteria such as borrower credit history, payment
terms, and loan-to-value ratio.

The proposed rule also includes investor disclosure requirements for certain
material information designed to provide investors and the agencies with an
efficient way to monitor compliance with risk-retention requirements. Last,
it would specify that the Enterprises’ guarantee of principal and interest
would constitute qualifying risk retention for as long as the Enterprises
are in conservatorship or receivership with capital support from the federal
government.36 Comments on the proposed rule were due to the agencies by
August 1, 2011.37

FHFA Organizational Restructuring
FHFA implemented an organizational restructuring of its safety and
soundness and housing mission offices; the reorganization was announced
on February 2, 2011. According to FHFA, the restructuring is intended to
promote greater consistency and uniformity in the examinations of the GSEs.
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 GSEs’ activities, affordable housing, the state of the
secondary mortgage market, and activities related to the Dodd-Frank Act.




                                                                                    Section 2: Operations of FHFA and the GSEs   | 33
Federal Housing Finance Agency Office of Inspector General




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




                                                       Section 3: Accomplishments and Strategy of
                                                       FHFA-OIG
                                                       From April 1, 2011, through September 30, 2011, FHFA-OIG recorded
                                                       several significant accomplishments. These included: (1) issuing eight audit
                                                       and evaluation reports; (2) participating in a number of significant criminal
                                                       and civil investigations; and (3) reviewing and commenting on proposed
                                                       FHFA rules.

                                                       FHFA-OIG Audit and Evaluation Activities
The title of each audit and evaluation report in       During this semiannual period, FHFA-OIG has released eight reports, which
this section is linked to the report posted on         are briefly summarized below.
FHFA-OIG’s website.
                                                       Evaluation of the Federal Housing Finance Agency’s Oversight of Freddie
                                                       Mac’s Repurchase Settlement with Bank of America (EVL-2011-006,
                                                       September 27, 2011)
                                                       In December 2010, FHFA, in its capacity as conservator of the Enterprises,
                                                       approved two agreements totaling $2.87 billion that settled mortgage
                                                       repurchase claims asserted against Bank of America. Freddie Mac’s $1.35
                                                       billion settlement with Bank of America could serve as a precedent for future
                                                       repurchase settlements. Fannie Mae and Freddie Mac have purchased millions
                                                       of mortgages from loan sellers, such as Bank of America. The contracts under
                                                       which the Enterprises purchased the mortgages provide them with the right to
                                                       require the sellers to repurchase mortgages that do not meet the underwriting
                                                       criteria represented and warranted by them.

                                                       FHFA-OIG began a review after members of Congress and others questioned
                                                       the adequacy of the settlements. During the review, two individuals
                                                       independently reported their concerns about the Freddie Mac-Bank of
                                                       America settlement.

                                                       Accordingly, FHFA-OIG initiated an evaluation of that agreement.
                                                       FHFA-OIG found that FHFA senior management did not timely address
                                                       significant concerns raised about Freddie Mac’s loan review process and its
                                                       ramifications on the underlying settlement. Specifically, FHFA-OIG made
                                                       three findings:

                                                                 •	First, in mid-2010, prior to the Bank of America settlement, an
                                                                    FHFA senior examiner raised serious concerns about limitations in
                                                                    Freddie Mac’s existing loan review process for mortgage repurchase
                                                                    claims, which, according to the senior examiner, could potentially cost
                                                                    Freddie Mac a considerable amount of money. Freddie Mac’s internal
                                                                    auditors independently identified concerns about the process at the
                                                                    end of 2010. These concerns merited prompt attention by FHFA
                                                                    because they potentially involve significant recoveries for Freddie



  36 |     Section 3: Accomplishments and Strategy of FHFA-OIG
                                                           Semiannual Report to the Congress | SEPTEMBER 30, 2011




        Mac and, ultimately, the taxpayers. Further, unless examined and
        addressed, the underlying problems are susceptible to recurrence.
     •	Second, FHFA did not act timely or test the ramifications of these
        concerns prior to approving the Bank of America settlement.
        FHFA-OIG did not independently validate Freddie Mac’s existing
        loan review process and, therefore, does not reach any final conclusion
        about it. Nevertheless, by relying on Freddie Mac’s analysis of
        the settlement without testing the assumptions underlying the
        Enterprise’s existing loan review process, FHFA senior managers may
        have inaccurately estimated the risk of loss to Freddie Mac.
     •	Third, following the initiation of FHFA-OIG’s evaluation, FHFA,
        to its credit, suspended future Enterprise mortgage repurchase
        settlements premised on the Freddie Mac loan review process and set
        in motion activities to test the assumptions underlying the loan review
        process. Additionally, other findings tend to support the validity of
        the concerns about the process. For example, on June 6, 2011, Freddie
        Mac’s internal auditors issued an audit opinion that the Enterprise’s
        internal governance controls over this process were “Unsatisfactory.”
        Furthermore, at the end of 2010 and then again in mid-2011, a
        Freddie Mac senior manager advised the board of directors that the
        Enterprise could recover more from future repurchase claims if it uses
        a more expansive loan review process.
In light of these findings, FHFA-OIG recommended that FHFA:

     •	promptly act on the specific and significant concerns raised by FHFA
        staff and Freddie Mac internal auditors about Freddie Mac’s loan
        review process; and
     •	initiate management reforms to ensure that senior managers are
        apprised of and timely act on significant concerns brought to their
        attention.
FHFA agreed in principle with FHFA-OIG’s recommendations, noting that
it has already begun to take actions in response. However, FHFA noted that it
“has not changed its view that the settlement was … appropriate and reasonable”
and does not concur with all of the inferences that could be drawn from
the report.

Evaluation of Whether FHFA Has Sufficient Capacity to Examine the
GSEs (EVL-2011-005, September 23, 2011)
FHFA’s examination program is the primary means by which it supervises and
regulates the GSEs. The Agency’s 120 line examiners carry out the program
through periodic examinations, but FHFA’s Acting Director has stated that
FHFA has too few examiners to fulfill its oversight responsibilities.




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




                                                            In 2011, to its credit, FHFA initiated efforts to address the shortage of
                                                            examiners. First, it developed a plan to hire about 26 examiners, which
                                                            will increase the Agency’s examination staff by about 22%. Second, FHFA
                                                            reorganized the structure of its examination program to strengthen its
                                                            oversight of the GSEs.

                                                            FHFA-OIG initiated an evaluation to assess both the extent of FHFA’s current
                                                            examination capacity and its efforts to hire examination staff. FHFA-OIG
                                                            found significant shortfalls in the Agency’s examination coverage, particularly
                                                            in the areas of REO and default-related legal services. Furthermore, statements
                                                            by senior FHFA officials and internal Agency reviews corroborate that FHFA
                                                            has too few examiners overall to ensure the efficiency and effectiveness of its
                                                            examination program. Due to examiner shortages, FHFA has scaled back
                                                            planned work during examinations, and examinations have often taken much
                                                            longer than expected to complete.

                                                            Further, the efficiency and effectiveness of FHFA’s examination program is at
                                                            risk due to a shortage of accredited examiners. Although FHFA’s examiners
                                                            have diverse professional skills, Agency data indicate that only 34% of its 120
                                                            non-executive examiners are accredited federal financial examiners.e However,
                                                            the Agency does not yet have an accreditation program in place to improve
                                                            this condition. Other federal financial regulators, such as the FDIC, generally
                                                            require all of their examiners to be accredited or enrolled in accreditation
                                                            programs as a condition of employment.

                                                            FHFA has sought to address these challenges. Although this is a positive
                                                            response, the Agency has expressed concern that its current hiring initiative
                                                            will neither enable it to overcome its examination capacity shortfalls nor
                                                            ensure the effectiveness of its 2011 reorganization. For example, FHFA’s
                                                            Enterprise core examination teams will be staffed by only 13 examiners
                                                            each – approximately half of the 20-25 examiners that FHFA’s Chief Operating
                                                            Officer estimated to be necessary. FHFA also said that there would not be
                                                            enough examiners to help ensure the success of its 2011 reorganization of its
                                                            GSE examination structure.

                                                            Moreover, FHFA has not reported upon its examination capacity shortfalls
                                                            in a systematic manner. Given FHFA’s critical responsibilities, it is essential
                                                            that it keep Congress, the Executive Branch, and the public fully and currently
                                                            informed about its examination capacity.

                                                            In light of these findings, FHFA-OIG recommended that FHFA:
e
   Agency officials told FHFA-OIG that many of its
examiners have alternative credentials and experiences            •	assess: (1) the extent to which examination capacity shortfalls may
in critical areas such as financial analysis, accounting,            have adversely affected GSE examination quality and (2) potential
and the mortgage industry, and that this professional                strategies to mitigate risks, such as achieving efficiencies in the
diversity enhances the quality of FHFA’s work products,
including its examinations. Nonetheless, Agency officials            assignment of examiners or the examination process;
conceded that the lack of accreditation of many of its
examiners impedes the efficiency and effectiveness of its
examination program.



    38 |    Section 3: Accomplishments and Strategy of FHFA-OIG
                                                                Semiannual Report to the Congress | SEPTEMBER 30, 2011




      •	monitor the development and implementation of the examiner
         accreditation program and take needed actions to address any
         shortfalls;
      •	consider using detailees from other federal agencies, retired annuitants,
         or contractors to augment its examination program in the near- to
         mid-term; and
      •	report periodically to Congress and the public, which might include
         the augmentation of existing reports on the Agency’s examiner
         capacity shortfalls, such as the number of examiners needed to meet
         its responsibilities; progress in addressing these shortfalls, including
         the status of examiner recruitment and retention efforts; and the
         development and implementation of its examiner accreditation
         program.
FHFA agreed with these recommendations and noted that it had already
begun to take steps to support their implementation.

Evaluation of FHFA’s Oversight of Fannie Mae’s Management of
Operational Risk (EVL-2011-004, September 23, 2011)
FHFA views operational risk management as an important financial safety and
soundness challenge facing the Enterprises. The Agency defines operational
risk as the risk of loss resulting from failures in people, processes, or systems, or
from external events (such as foreclosure abuses). In September 2008, FHFA
issued guidance requiring the Enterprises to develop and implement programs
to identify, report, and remedy operational risks. Effective operational risk
management programs can assist FHFA’s safety and soundness examiners to
identify trends in such risks and focus their examinations accordingly.

FHFA reported that Fannie Mae has not taken adequate steps to establish an
acceptable and effective operational risk management program. FHFA-OIG
initiated an evaluation to assess FHFA’s oversight of Fannie Mae’s efforts to
establish an acceptable operational risk management program.

FHFA-OIG found that between 2006 and early 2011 FHFA and OFHEO
repeatedly determined that Fannie Mae had not established an acceptable
and effective operational risk management program despite outstanding
requirements to do so. Nonetheless, FHFA has not taken decisive action
to compel Fannie Mae to create and administer an acceptable and effective
operational risk management program. As Fannie Mae’s regulator and
conservator, FHFA’s authority over the Enterprise is broad and includes the
ability to discipline or remove Enterprise personnel to ensure compliance
with Agency mandates. To date, FHFA has not exercised this or other
authorities to compel Fannie Mae’s compliance with the operational risk
requirement. Instead FHFA has pursued the matter principally through less
forceful supervisory means, such as conducting operational risk examinations




                                                                                 Section 3: Accomplishments and Strategy of FHFA-OIG   | 39
Federal Housing Finance Agency Office of Inspector General




                                                    and issuing Matters Requiring Attention, which were ineffective during the
                                                    period.

                                                    Fannie Mae’s lack of an acceptable and effective operational risk management
                                                    program may have resulted in missed opportunities to strengthen the oversight
                                                    of law firms with which it contracts to process foreclosures. For example,
                                                    in a May 2006 internal report, Fannie Mae learned that attorneys acting on
                                                    its behalf in Florida and elsewhere had filed false documents in foreclosure
                                                    proceedings. The report further stated that Fannie Mae did not oversee the
                                                    quality of its attorneys’ representation or the legal positions taken by them.
                                                    Nonetheless, in a 2011 preliminary report, FHFA concluded that Fannie Mae
                                                    still had not acted on the recommendations to improve its attorney oversight
                                                    contained in the 2006 report.

                                                    According to FHFA, Fannie Mae has recently made improvements in its
                                                    operational risk program, and the Agency expects that the Enterprise will
                                                    have an acceptable program in place no later than the first quarter of 2012.
                                                    Given Fannie Mae’s history of non-compliance, FHFA-OIG believes that the
                                                    Agency must exercise maximum diligence and take forceful action to ensure
                                                    Fannie Mae meets the Agency’s expectations in this regard. Otherwise,
                                                    FHFA’s safety and soundness examination program, as well as its delegated
                                                    approach to conservatorship management, may be adversely affected.

                                                    In light of these findings, FHFA-OIG recommended that FHFA:

                                                              •	closely monitor Fannie Mae’s implementation of its operational risk
                                                                 management program;
                                                              •	take decisive and timely actions to ensure the implementation of the
                                                                 program if Fannie Mae fails to establish an acceptable and effective
                                                                 operational risk program by the end of the first quarter of 2012; and
                                                              •	ensure Fannie Mae has qualified personnel in place to administer its
                                                                 operational risk management program appropriately.
                                                    While FHFA agreed with the report’s recommendations, it disagreed that
                                                    foreclosure abuses may have been prevented had Fannie Mae established
                                                    an effective operational risk program. In response, given the factual record,
                                                    FHFA-OIG maintains that strengthened law firm oversight could have
                                                    detected, if not prevented, the abuses by attorneys.

                                                    Evaluation of FHFA’s Role in Negotiating Fannie Mae’s and Freddie
                                                    Mac’s Responsibilities in Treasury’s Making Home Affordable Program
                                                    (EVL-2011-003, August 12, 2011)
                                                    FHFA-OIG evaluated FHFA’s oversight of the Enterprises’ participation in
                                                    MHA, a Treasury initiative established in response to the financial crisis. The
                                                    Enterprises began to participate in MHA in early 2009. One key MHA
                                                    program initiative, HAMP, involves mortgage servicers agreeing to modify



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mortgage terms (e.g., lower the monthly payment) for borrowers facing
imminent default or foreclosure.

The Enterprises participate in HAMP through modification of loans in their
portfolios. They also administer and enforce the program for other loan servicers
as Treasury’s financial agents under financial agency agreements (FAAs).

Questions arose concerning the Enterprises’ participation in MHA programs.
Some argued that Treasury employed the Enterprises to manage MHA in
ways that jeopardize their financial interests and did so without adequate
consultation and coordination with FHFA, potentially compromising its
independence as the Enterprises’ conservator and regulator.

FHFA-OIG initiated an evaluation to assess the relationship between
FHFA and Treasury in the context of FHFA’s oversight of Enterprise
participation in MHA programs. FHFA-OIG found no evidence that when
developing and implementing MHA programs Treasury had compromised
FHFA’s independence as the Enterprises’ conservator and regulator. EESA
requires FHFA to coordinate within the federal government in developing
and implementing loan modification programs such as HAMP. FHFA
has supported HAMP as a means to limit the Enterprises’ credit losses by
minimizing costly foreclosures. At the same time, FHFA has exhibited
independence by prohibiting the Enterprises from participating in other
MHA programs it views as being inconsistent with their financial soundness.

However, FHFA did not play an active role in reviewing and negotiating
Treasury’s FAAs with the Enterprises.              The FAAs represented
long-term commitments of significant resources at a time when there were
substantial concerns about the Enterprises’ financial and operational capacity.
Nevertheless, FHFA limited its review to ensuring that the Enterprises were
legally authorized to enter into the FAAs and did not review their substance.
As a consequence, key terms were left undefined, such as the scope of the
work to be performed by the Enterprises; the terms under which they would
be compensated; and the process for resolving disputes. Significant problems
developed in these areas, requiring FHFA and the Enterprises to devote
substantial time and resources to their resolution. Thus, FHFA-OIG found
that FHFA’s conservatorship interests would have been better served if FHFA
had played a more active role during the negotiation and review of the FAAs.

In early 2010, Treasury, FHFA, and the Enterprises developed a new method
for reviewing and approving tasks assigned to the Enterprises under the FAAs.
It represents a significant improvement compared to the process contained in
the initial FAAs. However, the continued lack of a specific dispute resolution
process in the revised approach increases the risk that disputes among parties
will not be resolved efficiently.

In light of these findings, FHFA-OIG recommended that FHFA engage
in negotiations with Treasury and the Enterprises to amend the FAAs by



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Federal Housing Finance Agency Office of Inspector General




                                                      incorporating a specific dispute resolution process under which the parties
                                                      may discuss differences that arise in the Enterprises’ administration of
                                                      HAMP and establish strategies by which to resolve or mitigate them. In
                                                      its response, FHFA concurred with the recommendation. It plans to engage
                                                      the Enterprises (separately) and Treasury to establish more specific dispute
                                                      resolution procedures.

                                                      FHFA’s Oversight of Fannie Mae’s Default-Related Legal Services
                                                      (AUD-2011-004, September 30, 2011)
For more information on robo-signing, see page        In 1997, Fannie Mae established its Retained Attorney Network (RAN) to
80 of this report.                                    acquire default-related legal services associated with foreclosure, bankruptcy,
                                                      loss mitigation, eviction, and REO closings. In August 2010, news reports
                                                      alleged that RAN attorneys had engaged in inappropriate foreclosure
                                                      practices, such as routinely filing false documents in court proceedings
                                                      and “robo-signing.”

                                                      FHFA commenced a special review of Fannie Mae’s RAN in late 2010
                                                      to determine whether the program met safety and soundness standards,
                                                      to evaluate the design and implementation of the RAN, and to identify
                                                      vulnerabilities in its control structure. As of September 30, 2011, FHFA had
                                                      not released the results of its review.

                                                      On February 25, 2011, a member of Congress requested that FHFA-OIG
                                                      examine “widespread allegations of abuse by … law firms hired to process
                                                      foreclosures as part of ” the RAN, and Fannie Mae’s and FHFA’s efforts “to
                                                      investigate these allegations and implement corrective action.” Pursuant to
                                                      the request, FHFA-OIG performed an audit to assess FHFA’s oversight of
                                                      Fannie Mae’s default-related legal services performed by law firms within
                                                      the RAN.

                                                      FHFA-OIG found that FHFA can strengthen its oversight of default-
                                                      related legal services. FHFA recognized the importance of its oversight
                                                      of the Enterprises’ default-related legal services and gradually accumulated
                                                      information on the attorney network programs of Fannie Mae and Freddie
                                                      Mac. However, FHFA did not schedule comprehensive examination
                                                      coverage of foreclosure issues, including allegations of abuse by RAN law
                                                      firms, until mid-2010. FHFA had not previously considered risks associated
                                                      with foreclosure processing to be significant. Instead, FHFA focused its
                                                      examination resources on assessing areas it deemed high-risk, such as the
                                                      Enterprises’ management of credit risk.

                                                      Also, there were indicators prior to mid-2010 that could have led FHFA to
                                                      identify the heightened risk posed by foreclosure processing within Fannie
                                                      Mae’s RAN. These indicators included significant increases in foreclosures,
                                                      which accompanied the deterioration of the housing market, consumer
                                                      complaints alleging improper foreclosures, contemporaneous media reports
                                                      about foreclosure abuses by Fannie Mae’s law firms, and public court



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filings in Florida and elsewhere highlighting such abuses. Although as of
September 30, 2011, FHFA’s management had not published the results
of its special review of Fannie Mae’s RAN, the examiners’ preliminary
findings confirm that at least one of these indicators – deteriorating industry
conditions – should have provided adequate warning of the increased risk
associated with default-related legal services.

FHFA needs to develop procedures to identify and assess new or heightened
risks as it simultaneously addresses historic risks with which it is familiar.
FHFA had neither an ongoing risk-based supervisory plan detailing
examination and continuous supervision of default-related legal services, nor
finalized examination guidance and procedures for use in performing targeted
examinations and supervision of such services. Consequently, FHFA has
limited assurance that foreclosure processing abuses will be prevented and
detected through its supervisory activities.

Additionally, FHFA has not developed formal policies to address poor
performance by law firms that have relationships – either directly through
contract or through loan servicers – with both Enterprises. FHFA-OIG
identified instances in which Freddie Mac terminated law firms that processed
foreclosures on its behalf for poor performance, but Fannie Mae continued to
use these firms. FHFA did not specifically review such terminations and,
therefore, lacks assurance that law firms with histories of deficient performance
do not jeopardize the safety and soundness of the Enterprises.

In light of these findings, FHFA-OIG recommended that FHFA:

     •	review the circumstances surrounding FHFA’s not identifying the
       RAN foreclosure abuses at an earlier stage and develop potential
       enhancements to its capacity to identify new and emerging risks;
     •	develop and implement comprehensive examination guidance and
       procedures together with supervisory plans for default-related legal
       services; and
     •	develop and implement policies and procedures to address poor
       performance by default-related legal services vendors that have
       contractual relationships with both of the Enterprises.
FHFA agreed with FHFA-OIG’s recommendations. Following the reporting
period, on October 18, 2011, FHFA directed Fannie Mae and Freddie Mac
“to transition away from current foreclosure attorney network programs and
move to a system where mortgage servicers select qualified law firms that
meet certain minimum, uniform criteria.”38




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Federal Housing Finance Agency Office of Inspector General




                                                      Clifton Gunderson LLP’s Independent Audit of the Federal Housing
                                                      Finance Agency’s Privacy Program and Implementation – 2011
                                                      (AUD-2011-003, September 30, 2011)
                                                      The Consolidated Appropriations Act of 2005 requires that each federal agency
                                                      designate a Chief Privacy Officer (CPO) and implement comprehensive
                                                      privacy and data protection procedures governing its collection, use, sharing,
                                                      disclosure, transfer, storage, and security of information relating to agency
                                                      employees and the public. Additionally, the Consolidated Appropriations Act
                                                      requires the inspector general of each agency to conduct periodic reviews of
                                                      the agency’s implementation of the Consolidated Appropriations Act.

                                                      A comprehensive privacy program helps to ensure that risks related to the
Personally Identifiable Information (PII):            collection, storage, transmission, and destruction of personally identifiable
Information that can be used to identify              information (PII) are mitigated. A strong privacy program also provides a
an individual, such as name, date of birth,           framework for an agency to consider the implications of business decisions
social security number, or address.                   as they pertain to PII. Additionally, a privacy program should help maintain
                                                      public trust and confidence in an organization, protect its reputation, and
                                                      protect against legal liability by providing the safeguards necessary to minimize
                                                      the risk of unintended disclosure of PII.

                                                      FHFA-OIG contracted with Clifton Gunderson LLP to conduct a
                                                      performance audit to fulfill its responsibilities for a periodic review of
                                                      FHFA’s privacy program and its implementation, including compliance
                                                      with the statutory and regulatory requirements concerning the protection of
                                                      PII. Specific sub-objectives of the audit were to determine whether FHFA
                                                      implemented comprehensive privacy and data protection procedures as
                                                      required by the Consolidated Appropriations Act, and whether it accurately
                                                      reported on its use of PII.

                                                      The report noted that FHFA’s privacy program had a number of strengths,
                                                      such as a policy on the use and protection of PII. However, FHFA did not
                                                      meet all of the Consolidated Appropriations Act’s key requirements for
                                                      developing and implementing comprehensive privacy and data protection
                                                      procedures. Specifically, the audit identified that FHFA had not:

                                                                •	completed a required privacy program baseline report summarizing
                                                                   FHFA’s use of PII and establishing the control framework for privacy
                                                                   protection (the report was submitted to FHFA-OIG after completion
                                                                   of audit field work in August 2011);
                                                                •	designed a job-specific privacy training program to ensure FHFA
                                                                   employees and contractors are familiar with privacy protection roles
                                                                   and responsibilities;
                                                                •	established a process for timely publication of required System of
                                                                   Records Notices (SORNs) that describe the existence and character
                                                                   of the subject systems of records containing PII before they become
                                                                   operational;



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     •	prepared Privacy Impact Assessments of all systems that contain PII
        and documented assessments made of Agency-proposed rules to help
        ensure protection of PII was adequately considered in the systems’
        development and rulemaking process; or
     •	implemented a process for FHFA’s Privacy Office to monitor
        information systems containing PII after they are placed into
        production.
Addressing these control deficiencies in privacy and data protection procedures
will strengthen FHFA’s privacy program, further protect individuals from the
impact of breaches that occur, and contribute to ongoing efforts to achieve
reasonable assurance of adequate PII security.

The report contained nine recommendations to strengthen FHFA’s privacy
program by improving controls over privacy documentation, training, and
systems. Several of the recommendations made in the report relate to privacy
practices that have not been incorporated into the Agency’s policies and
procedures. Absent formal policies and procedures, FHFA cannot ensure
consistent privacy program implementation across all Agency operations and
protect the confidentiality, integrity, and availability of privacy information
consistent with statutory and regulatory requirements.

FHFA agreed with the report’s recommendations.

Clifton Gunderson LLP’s Independent Audit of the Federal Housing
Finance Agency’s Information Security Program – 2011 (AUD-2011-002,
September 29, 2011)
The Federal Information System Management Act of 2002 (FISMA) requires
agencies to develop, document, and implement agency-wide information
security programs to protect their information and information systems,
including those provided or managed by another agency, contractor, or
other source. Additionally, FISMA requires agencies to undergo an annual
independent evaluation of their information security programs and practices
and an assessment of compliance with FISMA. Moreover, FISMA requires
the National Institute of Standards and Technology (NIST) to issue standards
and guidelines for federal information and systems, including minimum
security requirements. NIST has defined an overall information security risk
management framework.

Additionally, the Office of Management and Budget (OMB) has issued
guidance related to information security, including plans of action and
milestones (POA&Ms) for addressing findings from security control
assessments, security impact analyses, and continuous monitoring activities.
POA&Ms provide a roadmap for continuous agency security improvement
and assist agency officials with prioritizing corrective action and resource
allocation.



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Federal Housing Finance Agency Office of Inspector General




                                                    FHFA-OIG contracted with Clifton Gunderson LLP to conduct a
                                                    performance audit to fulfill its FISMA responsibilities for an annual
                                                    independent evaluation of FHFA’s information security program. The
                                                    objective of the audit was to evaluate the effectiveness of FHFA’s information
                                                    security program and practices and its compliance with FISMA and related
                                                    information security policies, procedures, standards, and guidelines.

                                                    Although FHFA’s information security program has a number of strengths,
                                                    including but not limited to its information system security training, system-
                                                    level planning, risk assessment, access authorization, and continuous control
                                                    monitoring, FHFA-OIG found that a number of security practices can be
                                                    improved. Specifically, FHFA had not:

                                                              •	finalized, disseminated, and implemented a NIST-recommended
                                                                 organization-wide information security program plan that defines
                                                                 such key requirements as security-related roles and responsibilities
                                                                 and security program controls;
                                                              •	updated its policies and procedures to address completely all of
                                                                 the NIST-recommended components within the control families
                                                                 applicable to the FHFA information system;
                                                              •	developed, disseminated, and implemented           an   information
                                                                 categorization policy and methodology;
                                                              •	implemented adequate procedures for tracking and monitoring
                                                                 correction of weaknesses or deficiencies through POA&Ms; and
                                                              •	implemented adequate procedures for ensuring remediation of
                                                                 weaknesses noted in network vulnerability assessments.
                                                    Addressing these control deficiencies in information security practices
                                                    will strengthen FHFA’s information security program and contribute to
                                                    ongoing efforts to achieve reasonable assurance of adequate security over
                                                    information resources.

                                                    In light of these findings, FHFA-OIG recommended that FHFA:

                                                              •	finalize the Agency-wide information security program plan;
                                                              •	update policies and procedures to address all NIST requirements
                                                                 and recommendations applicable to the FHFA information security
                                                                 environment;
                                                              •	develop and implement an information categorization policy and
                                                                 methodology;




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     •	establish a process to monitor compliance with procedures, including
        timely completion of POA&Ms; and
     •	track and monitor remediation actions to address weaknesses
        identified in network vulnerability assessments.
FHFA agreed with FHFA-OIG’s recommendations.

Audit of the Federal Housing Finance Agency’s Consumer Complaints
Process (AUD-2011-001, June 21, 2011)
The current national housing crisis has left millions of existing borrowers,
communities, and investors struggling with delinquent and defaulted
mortgages, loan modifications, and foreclosures. At the same time, consumers
suffering from the effects of the crisis increasingly filed complaints with
the Enterprises and FHFA, their conservator and regulator. FHFA staff
estimated that 70-75% of all complaints filed with the Agency pertained to
the Enterprises.

As a result, Congress and others expressed interest in whether FHFA
adequately responded to consumer complaints including, but not limited to,
complaints involving fraud, waste, or abuse. These complaints run the gamut
from difficulties obtaining information from the Enterprises to allegations of
potential criminal activity. FHFA-OIG initiated an audit to assess how
FHFA processed consumer complaints.

FHFA-OIG found that FHFA did not adequately process consumer
complaints. Specifically, the Agency did not:

     •	sufficiently define its role in processing complaints received by FHFA
        or the Enterprises;
     •	develop and maintain a consolidated system for receiving and
        processing complaints;
     •	establish effective procedures for evaluating complaints alleging
        potential criminal conduct and for referring such complaints to law
        enforcement authorities;
     •	consistently follow up on consumer complaints referred to the
        Enterprises;
     •	 comply with its own records management policy;
     •	perform routine substantive analyses to identify overall trends in
        complaints and assess the timeliness of responses to complainants;
     •	 comply with safeguards for PII received from complainants; or
     •	prioritize complaints or assess the timeliness of responses to
        complaints.




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Federal Housing Finance Agency Office of Inspector General




                                                       These deficiencies occurred because FHFA did not establish a sound internal
                                                       control environment governing consumer complaints, including formal
                                                       policies and procedures for processing complaints received by the Agency and
                                                       the Enterprises. Additionally, FHFA did not assign the complaint processing
                                                       function sufficient priority, did not allocate adequate resources to the function
                                                       (it assigned two individuals from its public relations staff to carry out
                                                       the function), and did not provide effective oversight including performance
                                                       reporting on the resolution of complaints (the Agency was unable to identify
                                                       the total number of complaints received during the audit period and report
                                                       the disposition of each complaint). As a result, FHFA lacks assurance that
                                                       complaints, including those alleging fraud, waste, or abuse, such as improper
                                                       foreclosures, were appropriately addressed in an efficient and effective manner
                                                       in order to minimize risks.

                                                       In light of these findings, FHFA-OIG recommended that FHFA:

                                                                 •	draft and implement written policies, procedures, and controls
                                                                    governing the receipt, processing, and disposition of consumer
                                                                    complaints and allegations of fraud that, among other things, define
                                                                    the related roles and responsibilities for FHFA and the Enterprises
                                                                    and provide for consultation with FHFA-OIG to process allegations
                                                                    of fraud;
                                                                 •	assess the sufficiency of resources allocated to the complaints process;
                                                                    and
                                                                 •	determine whether there are unresolved complaints alleging fraud or
                                                                    other potential criminal activity.
                                                       FHFA agreed with FHFA-OIG’s recommendations.

                                                       FHFA-OIG AUDIT AND EVALUATION PLAN
                                                       FHFA-OIG maintains a detailed Audit and Evaluation Plan that focuses
                                                       strategically on the areas of FHFA’s operations posing the greatest risks and
                                                       providing the greatest potential benefits to FHFA, Congress, and the public.
                                                       Originally developed with input from an independent, third-party risk
                                                       assessment, the Audit and Evaluation Plan reflects continuous feedback from
                                                       FHFA-OIG’s reviews of current events and comments from FHFA officials,
                                                       members of Congress, and others.f

                                                       Broadly, FHFA-OIG’s audit and evaluation strategies include reviews of the
                                                       following FHFA activities:

                                                                 •	Regulatory efforts and its management of the Enterprise
                                                                    conservatorships. Areas of focus include foreclosure prevention
                                                                    and loss mitigation efforts, mortgage loan servicing controls, and
f
  FHFA-OIG’s plan is dynamic and will be revised as
                                                                    foreclosed property management and sales processes. These are
necessary.




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        particularly high-risk areas because Treasury has invested $169
        billion of taxpayer funds in the Enterprises. As conservator, FHFA
        must regulate and oversee the Enterprises in an efficient, effective,
        and transparent manner so as to minimize taxpayer costs, conserve
        Enterprise resources, and meet all statutory mandates.
     •	Oversight of the FHLBanks and their associated risks, including
        investment portfolio management and concentrations, credit
        underwriting, and administration.
     •	Internal operations, such as privacy and allegations of fraud, waste, or
        abuse.
The Audit and Evaluation Plan identifies a number of other ongoing and
planned reviews of specific FHFA programs.

FHFA-OIG INVESTIGATION ACTIVITIES
OI has made significant contributions to a range of mortgage-related
investigations. As of September 30, 2011, OI had 48 investigations under
way. While many of them remain confidential, FHFA-OIG and its law
enforcement partners, which include federal agencies, U.S. Attorneys’ Offices,
and state and local entities nationwide, have released details about several
high-profile mortgage fraud investigations involving Colonial Bank and
Taylor, Bean & Whitaker Mortgage Corporation (TBW), Marshall Home
and Margaret Broderick, and Home Owners Protection Economics, Inc.
(HOPE). Each is detailed below.

Colonial Bank and TBW
On June 30, 2011, Lee Bentley Farkas, former chairman and owner of
TBW, was sentenced to 30 years in prison. He was also ordered to forfeit
approximately $38.5 million for his role in a $2.9 billion fraud scheme that
contributed to the failure of TBW and Colonial Bank. He had previously
been convicted on April 19, 2011, of offenses including conspiracy, wire fraud,
bank fraud, and securities fraud.

TBW originated, purchased, sold, and serviced residential mortgage loans. It
also pooled loans as collateral for MBS guaranteed by Freddie Mac and the
Government National Mortgage Association (Ginnie Mae). At one time,
TBW was one of the largest privately held mortgage lending companies in
the United States. Colonial Bank was one of the 25 largest banks in the
United States.

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 that 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.


                                                                             Section 3: Accomplishments and Strategy of FHFA-OIG   | 49
Federal Housing Finance Agency Office of Inspector General




                                                      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 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 undivided ownership
                                                      interests 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 six other defendants for their
                                                      roles in the fraud scheme:
                                                                •	Paul R. Allen. On June 21, 2011, the former chief executive officer
                                                                   of TBW was sentenced to 40 months in prison after pleading guilty
                                                                   on April 1, 2011, to one count of conspiracy to commit bank and wire
                                                                   fraud and one count of making false statements. The SEC also has
                                                                   civil charges pending against Allen for violations of the Securities
                                                                   Exchange Act of 1934.
For more information on suspension and                          •	Sean W. Ragland. On June 21, 2011, the former senior financial
debarment, please see page 59 of this report.                      analyst for TBW was sentenced to three months in prison after
                                                                   pleading guilty to one count of conspiracy on March 31, 2011.
                                                                •	Catherine Kissick. On June 17, 2011, the former head of Colonial
Debarment:                                                         Bank’s Mortgage Warehouse Lending Division was sentenced to
Disqualification of a firm or individual                           eight years in prison after pleading guilty to one count of conspiracy
from contracting with the government                               on March 2, 2011. The SEC also has civil charges pending against
or participating in government non-                                Kissick for violations of the Securities Exchange Act of 1934.
procurement transactions for a specific
period of time. The grounds for debarment                       •	Teresa Kelly. On June 17, 2011, the former operations supervisor
include conviction for fraud or for similar                        in Colonial Bank’s Mortgage Warehouse Lending Division was
offenses.                                                          sentenced to three months in prison after pleading guilty to one count
                                                                   of conspiracy on March 16, 2011. Additionally, Kelly was debarred
Suspension:
                                                                   from federal procurement contracts and government programs. Her
The temporary disqualification of a firm
or individual from contracting with the
                                                                   debarment is effective beginning the date of her suspension, May 6,
government or participating in government                          2011, through May 5, 2014. The SEC also has civil charges pending
programs, pending the outcome of an                                against Kelly for violations of the Securities Exchange Act of 1934.
investigation, an indictment, or based upon                     •	Raymond Bowman. On June 10, 2011, the former president of
adequate evidence that supports claims of
                                                                   TBW was sentenced to 30 months in prison after pleading guilty on
program violations.
                                                                   March 14, 2011, to one count of conspiracy and one count of making
A suspension means that an individual                              false statements to federal agents.
or entity is immediately excluded from
                                                                •	Desiree Brown. On June 10, 2011, the former treasurer of TBW
participating in further federal executive
branch procurement and non-procurement
                                                                   was sentenced to six years in prison after pleading guilty to one count
programs. Suspension frequently leads to                           of conspiracy on February 24, 2011. The SEC also has civil charges
debarment.                                                         pending against Brown for violations of the Securities Exchange Act
                                                                   of 1934.


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In addition, on September 27, 2011, federal prosecutors won a $3.5 billion
restitution judgment against the seven defendants convicted in this case.
Farkas and Brown were held liable for the full amount; Allen and Ragland were
held liable for $2.6 billion; and Bowman, Kissick, and Kelly were held liable
for $500 million. The $3.5 billion judgment is a joint and several obligation,
meaning that each defendant is responsible for payment of amounts up to the
named limits, and an overall total of $3.5 billion.

FHFA-OIG’s investigation partners in these cases include the Office of the
Special Inspector General for the Troubled Asset Relief Program (SIGTARP),
the FBI, the Office of Inspector General for the Federal Deposit
Insurance Corporation (FDIC-OIG), the Office of Inspector General
for the Department of Housing and Urban Development (HUD-OIG),
Internal Revenue Service-Criminal Investigation (IRS-CI), and the SEC.
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 DOJ and the U.S. Attorney’s Office
for the Eastern District of Virginia.

Marshall Home and Margaret Broderick
On July 1, 2011, Marshall E. Home, of Tucson, Arizona, was arrested by the
FBI and FHFA-OIG Special Agents as a result of a criminal complaint filed
in the U.S. District Court for the District of Arizona charging him with two
counts of false claims in bankruptcy. He was indicted on these charges on July
13, 2011. On September 7, 2011, Home and his wife, Margaret E. Broderick,
were charged in a superseding indictment.

Home and Broderick allegedly operated the “Individual Rights Party;
Mortgage Rescue Service.” Home and Broderick charged individuals
undergoing foreclosure proceedings $500, purportedly to make the foreclosure
process stop. Their website advised that the property of individuals who used
their service would become part of a “larger overall bankruptcy liquidation.”

The superseding indictment further alleges that on March 20, 2011, Home filed
in the U.S. Bankruptcy Court in Tucson an Involuntary Petition in Bankruptcy,
which sought to place the United States into bankruptcy. According to the
superseding indictment, Home and Broderick falsely told the Bankruptcy
Court that they had a financial claim of over $250 billion against the United
States. Subsequently, Home and Broderick filed or caused to be filed in the
U.S. Bankruptcy Court 173 false claims relating to individuals participating
in the “Mortgage Rescue Service.” Many of these false bankruptcy claims
involved loans guaranteed by the Enterprises.

In addition, Home allegedly registered the name “Federal National Mortgage
Association” with the Arizona Secretary of State as a trade name. The Federal
National Mortgage Association is the official name of Fannie Mae. Home was
not an authorized representative of Fannie Mae and did not have authority


                                                                          Section 3: Accomplishments and Strategy of FHFA-OIG   | 51
Federal Housing Finance Agency Office of Inspector General




                                                    to convey property owned by the Enterprise. Yet, Home and Broderick filed
                                                    and caused to be filed with county recorders deeds for real property that had
                                                    been acquired by Fannie Mae. These deeds purported to transfer title from
                                                    Fannie Mae to the “Independent Rights Party.” Home and Broderick also
                                                    inappropriately transferred properties owned by Freddie Mac. Home and
                                                    Broderick conducted purported transfers with at least 28 properties, valued at
                                                    over $8 million. These transfers interfered with the Enterprises’ rights in the
                                                    properties, causing them losses.

                                                    Finally, the superseding indictment alleges that Home and Broderick then
                                                    rented these properties to unsuspecting tenants, who paid them security
                                                    deposits and rent to which they were not entitled. This investigation is being
                                                    conducted jointly by the FBI and FHFA-OIG.

                                                    Home Owners Protection Economics, Inc.
                                                    On August 8, 2011, four individuals were arrested pursuant to a 20-count
                                                    indictment that was unsealed in the U.S. District Court for the District of
                                                    Massachusetts, charging Christopher S. Godfrey, of Delray Beach, Florida;
                                                    Dennis Fischer, of Highland Beach, Florida; Vernell Burris Jr., of Boynton
                                                    Beach, Florida; and Brian M. Kelly, of Boca Raton, Florida, with conspiracy,
                                                    wire fraud, mail fraud, and misuse of a government seal.

                                                    According to the indictment, Godfrey was the president and Fischer was the
                                                    vice president and treasurer of a Florida company called HOPE. Burris was
                                                    the manager and primary trainer of HOPE telemarketers, and Kelly was one of
                                                    the principal telemarketers as well as a trainer for other HOPE telemarketers.

                                                    The indictment alleges that from January 2009 through May 2011, the
                                                    defendants made, and instructed their employees to make, a series of
                                                    misrepresentations to induce financially distressed homeowners seeking
                                                    a federally funded home loan modification to pay HOPE a $400–$900
                                                    up-front fee in exchange for HOPE’s home loan modifications, modification
                                                    services, and “software licenses.” Many of these distressed homeowners’ loans
                                                    are held or guaranteed by the Enterprises. According to the indictment,
                                                    these misrepresentations included claims that homeowners were virtually
                                                    guaranteed, with HOPE’s assistance, to receive a loan modification under the
                                                    federal government’s HAMP. Additional misrepresentations to homeowners
                                                    included that HOPE was affiliated with the homeowner’s mortgage lender,
                                                    that the homeowner had been approved for a home loan modification, that
                                                    homeowners could stop making mortgage payments while they waited for
                                                    HOPE to arrange their loan modification, and that HOPE would refund the
                                                    customer’s fee if the modification was not successful.

                                                    In exchange for these up-front fees, HOPE allegedly sent its customers a
                                                    do-it-yourself application package that was nearly identical to the HAMP
                                                    application, which the federal government provides free of charge. HOPE
                                                    instructed customers to fill out the application and submit it to their mortgage


 52 |   Section 3: Accomplishments and Strategy of FHFA-OIG
                                                           Semiannual Report to the Congress | SEPTEMBER 30, 2011




lender. According to the indictment, the HOPE customers who used the
provided forms to apply for loan modifications had no advantage in the
application process, and, in fact, most of their applications were denied.
Through these misrepresentations, HOPE was able to persuade thousands of
homeowners collectively to pay it more than $3 million in fees. This case is
being jointly investigated with the U.S. Attorney’s Office for the District of
Massachusetts, SIGTARP, IRS-CI, the U.S. Marshals Service, the Office of
the Attorney General of Florida, the Palm Beach County Sheriff ’s Office, and
the Delray Beach, Florida Police Department.

FHFA-OIG INVESTIGATIONS STRATEGY
As mentioned, FHFA-OIG and its law enforcement partners are engaged
in 48 non-public investigations. FHFA-OIG intends to develop further its
close working relationships with other law enforcement agencies, including
DOJ and the U.S. Attorneys’ Offices, FinCEN, DOJ and local Mortgage
Fraud Working Groups (MFWGs), the Secret Service, the FBI, HUD-OIG,
FDIC-OIG, IRS-CI, SIGTARP, and other federal, state, and local agencies.
During the reporting period, OI worked closely with FinCEN to review
allegations of mortgage fraud for follow-up investigations and to determine
geographic areas in the United States to which FHFA-OIG may assign special
agents to investigate frauds targeting the GSEs. Drawing on the FinCEN
data for these tasks allows FHFA-OIG more effectively to identify and target
areas with the highest risk of fraud. FHFA-OIG will also pursue an innovative
approach to ensure the timely prosecution of investigations. Specifically,
FHFA-OIG will offer to U.S. Attorneys’ Offices dedicated FHFA-OIG
investigative counsels – attorneys who possess substantial criminal prosecution
experience – to assist with the prosecution of FHFA-OIG’s investigations. In
addition, FHFA-OIG has undertaken law enforcement outreach efforts to a
number of state attorneys general.

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. From April 1, 2011,
through September 30, 2011, FHFA-OIG reviewed 20 new or proposed                      g
                                                                                        It is FHFA-OIG policy to note that comments were made
                                                                                      on a “draft” rule during the semiannual period and then
FHFA policies and regulations and provided substantive comments on several,           follow up with a substantive discussion of the rule in a
which are discussed below.g                                                           later semiannual report once the “draft” rule is completed
                                                                                      and published. Three “draft” rules that FHFA-OIG noted in
                                                                                      its inaugural Semiannual Report have yet to be finalized:
  1. J oint Agency Steering Committee’s Proposed Rules on Incentive-based            FHFA Draft Final Rule on Executive Compensation
      Executive Compensation (RIN 2590-AA42, FHFA-OIG Comments                        (RIN 2590-AA12); FHFA Draft Re-Proposed Rule on
                                                                                      Golden Parachute and Indemnification Payments (RIN
      Submitted on March 28, 2011)                                                    2590-AA08); and FHFA Draft Enterprise New Activity
      ursuant to Section 956 of the Dodd-Frank Act, seven federal
     P                                                                                Protocol (RIN 2590-AA17). The Joint Agency Steering
                                                                                      Committee’s Proposed Rules on Incentive-based
     financial regulators proposed jointly to issue rules requiring their             Executive Compensation, which also was noted in the
     respective regulated entities to disclose information pertaining to              inaugural Semiannual Report, has been completed and
                                                                                      is discussed substantively herein.



                                                                           Section 3: Accomplishments and Strategy of FHFA-OIG            | 53
Federal Housing Finance Agency Office of Inspector General




                                                                 their “incentive-based compensation arrangements,” and barring
                                                                 any such arrangements that encourage inappropriate risk-taking.h
                                                                 FHFA-OIG commented that Section 956 of the Dodd-Frank
                                                                 Act specifies that all rules issued pursuant to it “shall be enforced
                                                                 under Section 505 of the Gramm-Leach-Bliley” Financial Services
                                                                 Modernization Act of 1999 (Gramm-Leach-Bliley), and no other
                                                                 enforcement authority is provided in Section 956. Section 505 of
                                                                 Gramm-Leach-Bliley references all of the regulators covered by the
                                                                 proposed rules except for FHFA because Gramm-Leach-Bliley was
                                                                 enacted approximately nine years before the establishment of FHFA.

                                                                  HFA-OIG recognized, however, that FHFA has authorities separate
                                                                 F
                                                                 and apart from those set forth in the Dodd-Frank Act and Gramm-
                                                                 Leach-Bliley. Accordingly, FHFA-OIG recommended that FHFA: (1)
                                                                 amend the proposed rules to identify authority apart from Section 956
                                                                 permitting it to regulate incentive-based compensation arrangements or
                                                                 (2) seek an amendment to Section 505 of Gramm-Leach-Bliley.

                                                                  HFA published the proposed rule on April 14, 2011. In doing so,
                                                                 F
                                                                 FHFA asserted that it has enforcement authorities separate from
                                                                 Section 505 of Gramm-Leach-Bliley and amended the “Authority and
                                                                 Issuance” section of the proposed rule to reference Section 1319G of
                                                                 the Federal Housing Enterprises Financial Safety and Soundness Act
                                                                 of 1992 (Safety and Soundness Act).

                                                          2. F
                                                              HFA Draft Rule: Permissible Federal Home Loan Bank Investments
                                                             (RIN 2590-AA32, FHFA-OIG Comments Submitted on April 5,
                                                             2011)
                                                                  HFA proposed a draft final regulation controlling the investments
                                                                 F
                                                                 that FHLBanks may hold. Among other things, the regulation bases the
                                                                 permissibility of certain investments upon credit ratings. Specifically,
                                                                 the regulation would prohibit investments in “[d]ebt instruments that
                                                                 are not rated as investment grade” and in obligations of state, local, or
                                                                 tribal government units or agencies, unless they have “at least the second
                                                                 highest credit rating from [a Nationally Recognized Statistical Rating
                                                                 Organization (NRSRO)].” Additionally, the regulation would require
                                                                 certain FHLBanks to “hold retained earnings plus general allowances
                                                                 for losses as support for the credit risk of all investments that are not
                                                                 rated by an NRSRO.” The regulation defines NRSRO as “a credit rating
                                                                 organization registered with the Securities and Exchange Commission.”

                                                                  ection 939A of the Dodd-Frank Act requires federal government
                                                                 S
                                                                 agencies to review all their rules by July 21, 2011, identify those that
h
  These regulators include FHFA, the Office of the               require use of an assessment of credit-worthiness or credit ratings,
Comptroller of the Currency, the Office of Thrift                and “remove any reference to or requirement of reliance on credit
Supervision, the Federal Reserve, FDIC, the National
Credit Union Administration, and the SEC. See Dodd-              ratings and … substitute in such regulations such standard of credit-
Frank Act § 956(e)(1).                                           worthiness as each respective agency shall determine as appropriate for


  54 |     Section 3: Accomplishments and Strategy of FHFA-OIG
                                                      Semiannual Report to the Congress | SEPTEMBER 30, 2011




  such regulations.” FHFA-OIG commented that FHFA’s regulation
  as currently written would have to be substantially revised within
  a few months. It thus recommended, for the sake of efficiency and
  conformance to section 939A of the Dodd-Frank Act, that FHFA
  revise the proposed regulation accordingly.

   HFA published the final regulation on May 20, 2011, without making
  F
  revisions recommended by FHFA-OIG.

3. R
   evised Conservatorship Delegations/Operating Protocol for
   Delegations (FHFA-OIG Comments Submitted on May 10, 2011)
   HFA proposed a revised Conservatorship Delegations/Operating
  F
  Protocol for Delegations (the Delegations) that will replace delegations
  made to the Enterprises in November 2008. The Delegations advise the
  Enterprises of the actions they may take in the ordinary course of their
  business and those actions they must submit to FHFA for approval.
  FHFA-OIG reviewed the proposal and commented, but FHFA has not
  issued the final Delegations. FHFA and FHFA-OIG, thus, have not
  completed their resolution of the comments. 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. D
    raft Final Rule: Practice and Procedure for Administrative
   Enforcement Proceedings (RIN 2590-AA14, FHFA-OIG Comments
   Submitted on May 11, 2011)
   rior to the commencement of FHFA-OIG’s operations, FHFA issued
  P
  a proposed rule to govern civil administrative enforcement actions by
  FHFA under sections 1371-1379D of the Safety and Soundness Act.
  FHFA accepted and considered comments to the proposed rule and
  proposed a draft final rule on civil enforcement actions. FHFA-OIG
  reviewed the proposal and recommended revision of the rule to avoid
  confusion concerning FHFA-OIG’s subpoena authority.

   e Safety and Soundness Act, as amended, authorizes FHFA to
  Th
  issue subpoenas in connection with proceedings, examinations, and
  investigations conducted pursuant to its civil enforcement authority.
  FHFA may also “revoke, quash or modify” its subpoenas as necessary.
  Conversely, although FHFA-OIG is an office within FHFA, it derives
  its authority to issue subpoenas from the Inspector General Act.

   HFA-OIG commented that it was concerned about potential
  F
  confusion arising from the dual subpoena authorities under the Safety
  and Soundness Act and the Inspector General Act. Specifically, FHFA-
  OIG was concerned that a future FHFA decision-maker could decide
  erroneously that FHFA-OIG’s origin within FHFA constitutes a
  legally sufficient basis on which FHFA may interfere with a pending



                                                                      Section 3: Accomplishments and Strategy of FHFA-OIG   | 55
Federal Housing Finance Agency Office of Inspector General




                                                              FHFA-OIG subpoena. To avoid future confusion, and thereby to
                                                              preclude potential FHFA interference with FHFA-OIG subpoenas,
                                                              FHFA-OIG recommended clarifying language to the effect that FHFA
                                                              cannot revoke, quash, or modify FHFA-OIG subpoenas.

                                                               HFA published the final regulation on August 26, 2011, and the final
                                                              F
                                                              regulation clarifies that FHFA is not authorized to revoke, quash, or
                                                              modify subpoenas issued by FHFA-OIG.

                                                       5. D
                                                           raft Proposed Rule: Prudential Management and Operations
                                                          Standards (RIN 2590-AA13, FHFA-OIG Comments Submitted on
                                                          June 10, 2011)
                                                               HFA is statutorily directed to establish prudential standards relating
                                                              F
                                                              to the management and operations of Fannie Mae, Freddie Mac, and
                                                              the FHLBanks.39 FHFA forwarded to FHFA-OIG a draft proposed
                                                              rule that would implement this direction through a series of guidelines
                                                              and an appendix. In response to the draft proposed rule, FHFA-OIG
                                                              acknowledged as positive FHFA’s efforts thus far to establish prudential
                                                              standards. However, FHFA-OIG believes that, in order to improve
                                                              efficiency, effectiveness, and transparency, FHFA should consider
                                                              adding more specificity to the proposed rule (i.e., details, directions, and
                                                              benchmarks) to inform the GSEs how to comply with it and to enable
                                                              FHFA-OIG to review effectively FHFA’s administration of it.

                                                               ithout adding the recommended specificity, FHFA released the
                                                              W
                                                              proposed rule on June 20, 2011.

                                                       6. F
                                                           HFA Draft Proposed Rule: Federal Home Loan Bank Community
                                                          Support Requirements (RIN 2590-AA38, FHFA-OIG Comments
                                                          Submitted on August 29, 2011)
                                                               HFA drafted a proposed rule to transfer its responsibilities for
                                                              F
                                                              monitoring FHLBank member compliance with the Community
                                                              Reinvestment Act and with first-time homebuyer standards from
                                                              FHFA to the FHLBanks themselves. FHFA-OIG commented on the
                                                              proposed rule, but FHFA and FHFA-OIG have not completed their
                                                              resolution of the comments. The substance of the comments and their
                                                              resolution will be published in a subsequent semiannual report.

                                                    FHFA-OIG Communications and Outreach Efforts
                                                    A key component of FHFA-OIG’s mission is to communicate clearly with
                                                    Congress, the GSEs and industry groups, the public, and colleagues at other
                                                    federal agencies.




 56 |   Section 3: Accomplishments and Strategy of FHFA-OIG
                                                             Semiannual Report to the Congress | SEPTEMBER 30, 2011




Hotline
FHFA-OIG OI operates the FHFA-OIG Hotline, which allows concerned                       The FHFA-OIG Hotline can be reached at
parties to report directly and in confidence information regarding possible             (800) 793-7724 or via e-mail at
fraud, waste, or abuse related to FHFA or the GSEs. FHFA-OIG honors all                 OIGHOTLINE@FHFA.GOV.
applicable whistleblower protections. As part of its effort to raise awareness of
fraud and how to combat it, FHFA-OIG promotes the Hotline through the
FHFA-OIG website, posters, targeted e-mails 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 Department of Veterans
Affairs (VA); the Department of Agriculture (USDA); Treasury’s Office of
Financial Stability (which manages the Troubled Asset Relief Program));
and their inspectors general, 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 semiannual period ended September
30, 2011, representatives of FHFA-OIG participated in the following
cooperative activities:

     •	CIGIE, which meets monthly, seeks to increase the professionalism
        and effectiveness of offices of inspectors general. The Inspector
        General and his Principal Deputy are active participants in CIGIE
        activities.
     •	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 Inspector General is an active member of
        CIGFO and has attended all of its meetings. In addition, along with
        the eight other CIGFO member agencies, FHFA-OIG participated
        in the development of the inaugural CIGFO annual report, which
        was published on July 25, 2011.
     •	FHFA-OIG spearheaded the creation of a new interagency working
        group, the Federal Housing Inspectors General. In addition to
        FHFA-OIG, this group includes the Offices of Inspector General for
        other federal agencies with primary responsibility for federal housing
        programs and activities, including HUD, VA, and USDA. This group
        was formed to coordinate efforts and to work proactively in combating
        fraud, waste, abuse, and misconduct involving federal housing
        programs and activities. Further, the Federal Housing Inspectors
        General intend to combine their resources for maximum effectiveness
        and to achieve economies of scale in pursuing their statutory
        mandates, all in service of the federal government’s varied efforts



                                                                             Section 3: Accomplishments and Strategy of FHFA-OIG   | 57
Federal Housing Finance Agency Office of Inspector General




                                                                to serve the American homebuyer and the primary and secondary
                                                                mortgage markets. The Federal Housing Inspectors General have
                                                                begun to collaborate on multiple joint initiatives, including criminal
                                                                investigations and audits in areas of common interest. In addition,
                                                                the Federal Housing Inspectors General are drafting a Compendium
                                                                of Federal Housing Programs and Activities, which will serve as a quick
                                                                reference guide concerning their agencies’ single-family mortgage
                                                                programs and related activities. It will be designed to enable the
                                                                reader to identify various important facts about these programs
                                                                quickly – including their statutory and regulatory authority and
                                                                intended clientele – and to understand how the programs work. The
                                                                Federal Housing Inspectors General anticipate producing additional
                                                                materials for public benefit in subsequent semiannual periods.
                                                              •	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 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:
                                                                   o	The FFETF MFWG combats mortgage fraud related to
                                                                      the financial crisis. Members of FFETF MFWG include
                                                                      FHFA-OIG, DOJ, HUD-OIG, the FBI, and the National
                                                                      Association of Attorneys General (NAAG).
                                                                   o	The Recovery Act, Procurement, and Grant Fraud Working
                                                                      Group addresses procurement and grant fraud, including
                                                                      fraud arising in connection with the expenditure of funds
                                                                      provided by the American Recovery and Reinvestment
                                                                      Act of 2009. It also fights fraud committed in connection
                                                                      with federal procurement generally, and/or in connection
                                                                      with federal grants. Among FHFA-OIG’s partners in this
                                                                      working group are DOJ, the Recovery Accountability and
                                                                      Transparency Board (RATB), and NAAG.
                                                                   o	FFETF’s Securities and Commodities Fraud Working Group
                                                                      works to eliminate fraud in America’s financial markets.
                                                                      FHFA-OIG participates in this working group with, among
                                                                      others, DOJ, the SEC, and the Commodity Futures Trading
                                                                      Commission.




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•	FHFA-OIG has established partnerships with several federal agencies
   to share data, analyze internal complaints, and identify trends. These
   agencies include the FBI, HUD-OIG, FinCEN, the Secret Service,
   and SIGTARP. Each of FHFA-OIG’s partnerships with these
   agencies is designed to enhance interagency cooperation. These
   partnerships focus the participating agencies’ combined investigative
   resources, 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, the SEC, IRS-CI, U.S.
   Attorneys’ Offices throughout the nation, and a number of state
   attorneys general.
•	The FHFA Inspector General is vice chairman 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:
     o	On May 6, 2011, the FHFA Inspector General sponsored
        a Working Group meeting at FHFA-OIG’s offices. The
        purpose of the meeting was to discuss strategies to improve
        outreach efforts to executive agency debarment officials and
        to evaluate the results of a survey of executive agency use of
        debarment procedures.
     o	
       The Working Group has taken several substantial steps
       towards raising awareness of suspension and debarment as
       valuable tools for protecting federal agencies from ongoing
       misconduct from irresponsible parties. One such step
       was conducting a survey regarding actual suspension and
       debarment practices within the inspector general community.
       The Working Group’s report of that survey’s results – which
       CIGIE has endorsed unanimously – demonstrates that
       suspension and debarment could be used more frequently,
       debunks certain myths regarding their use, and offers
       suggested practices for inspectors general that seek to pursue
       them more effectively. In addition to its report on the survey,
       the Working Group published an article detailing the survey’s
       results in the Journal of Public Inquiry, a semiannual CIGIE
       magazine containing articles of interest to the inspector
       general community.




                                                                       Section 3: Accomplishments and Strategy of FHFA-OIG   | 59
Federal Housing Finance Agency Office of Inspector General




                                                                •	During the most recent reporting period, the Deputy Inspector
                                                                   General for Investigations delivered several presentations on
                                                                   FHFA-OIG’s achievements, available resources, and procedures for
                                                                   referring fraud allegations. These presentations have been made to
                                                                   a wide range of law enforcement and regulatory organizations with
                                                                   housing-related responsibilities, including:
                                                                     o	   the Illinois MFWG
                                                                     o	   the Annual National Fraud Advisory Council Conference
                                                                     o	   the Secret Service National Mortgage Fraud Conference
                                                                     o	   HUD-OIG Annual Conference
                                                                     o	   the State of California’s Real Estate Fraud Conference
                                                                     o	the 2011 “Race Against Fraud” Conference hosted by the
                                                                        International Association of Financial Crimes Investigators

The Deputy Inspector General for                      Communications with Congress
Investigations, Christopher Sharpley, speaks
to the International Association of Financial         To fulfill his responsibility to keep Congress fully apprised of developments
Crimes Investigators in Charlotte, North              concerning oversight of FHFA and the GSEs, the Inspector General meets
Carolina, on August 30, 2011.                         regularly with members of Congress and their staffs. During the six-month
                                                      period ended September 30, 2011, the Inspector General provided briefings
                                                      on topics including FHFA-OIG’s reports, organization, and strategy. Copies
                                                      of the Inspector General’s written testimony to Congress, hearing transcripts,
                                                      and related materials are available at www.fhfaoig.gov.




  60 |    Section 3: Accomplishments and Strategy of FHFA-OIG
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             Section 3: Accomplishments and Strategy of FHFA-OIG   | 61
Federal Housing Finance Agency Office of Inspector General




 62 |   Section 3: Accomplishments and Strategy of FHFA-OIG
section 4
FHFA-OIG Recommendations
Federal Housing Finance Agency Office of Inspector General




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




 64 |   Section 4: FHFA-OIG Recommendations
                                                                                Semiannual Report to the Congress | SEPTEMBER 30, 2011




                                              Figure 8. Summary of FHFA-OIG Recommendations
       No.                                     Recommendation                                                    Report                            Status
EVL-2011-006-1   FHFA should promptly act on the specific significant concerns raised by           Evaluation of the Federal Housing   Recommendation agreed to
                 FHFA staff and Freddie Mac internal auditors about its loan review process.       Finance Agency’s Oversight          by FHFA; implementation of
                                                                                                   of Freddie Mac’s Repurchase         recommendation pending.
                                                                                                   Settlement with Bank of America
EVL-2011-006-2   FHFA should initiate reforms to ensure that senior managers are apprised of       Evaluation of Federal Housing       Recommendation agreed to
                 and timely act on significant concerns brought to their attention, particularly   Finance Agency’s Oversight          by FHFA; implementation of
                 when they receive reports that the normal reporting and supervisory               of Freddie Mac’s Repurchase         recommendation pending.
                 process is not working properly.                                                  Settlement with Bank of America
EVL-2011-005-1   FHFA should assess: (1) the extent to which examination capacity shortfalls       Evaluation of Whether FHFA Has      Recommendation agreed to
                 may have adversely affected the examination program and (2) potential             Sufficient Capacity to Examine      by FHFA; implementation of
                 strategies to mitigate risks, such as achieving efficiencies in the assignment    the GSEs                            recommendation pending.
                 of examiners or the examination process.		
EVL-2011-005-2   FHFA should monitor the development and implementation of the examiner            Evaluation of Whether FHFA Has      Recommendation agreed to
                 accreditation program and take needed actions to address any shortfalls.          Sufficient Capacity to Examine      by FHFA; implementation of
                                                                                                   the GSEs                            recommendation pending.
EVL-2011-005-3   FHFA should consider using detailees from other federal agencies, retired         Evaluation of Whether FHFA Has      Recommendation agreed to
                 annuitants, or contractors to augment its examination program in the near-        Sufficient Capacity to Examine      by FHFA; implementation of
                 to mid-term.                                                                      the GSEs                            recommendation pending.

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

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

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

EVL-2011-002-1   To improve transparency, FHFA should post on its website information about        Evaluation of Federal Housing       Recommendation agreed to
                 executive compensation packages, the Enterprises’ corporate performance           Finance Agency’s Oversight of       by FHFA; implementation of
                 goals and performance against those goals, related trend data, and provide        Fannie Mae’s and Freddie Mac’s      recommendation pending.
                 links to the Enterprises’ securities filings.                                     Executive Compensation Programs

EVL-2011-002-2   FHFA should establish written criteria and procedures for reviewing annual        Evaluation of Federal Housing       Recommendation agreed to
                 performance and assessment data. FHFA should conduct independent                  Finance Agency’s Oversight of       by FHFA; implementation of
                 testing and verification, perhaps on a randomized basis, to gain assurance        Fannie Mae’s and Freddie Mac’s      recommendation pending.
                 that the Enterprises’ bases for developing recommended individual                 Executive Compensation Programs
                 executive compensation levels is reasonable and justified.

EVL-2011-002-3   FHFA should establish an ongoing review and analysis process to include           Evaluation of Federal Housing       Recommendation agreed to
                 such issues as the level of federal support for the Enterprises and the           Finance Agency’s Oversight of       by FHFA; implementation of
                 compensation levels for the senior executives of housing-related federal          Fannie Mae’s and Freddie Mac’s      recommendation pending.
                 entities that are providing critical support to the housing finance system.       Executive Compensation Programs




                                                                                                                        Section 4: FHFA-OIG Recommendations         | 65
Federal Housing Finance Agency Office of Inspector General




        No.                                     Recommendation                                                  Report                              Status
EVL-2011-002-4     FHFA should create and implement policies to ensure that all key executive      Evaluation of Federal Housing        Recommendation agreed to
                   compensation documents are stored consistently and remain readily               Finance Agency’s Oversight of        by FHFA; implementation of
                   accessible to appropriate Agency officials and staff.                           Fannie Mae’s and Freddie Mac’s       recommendation pending.
                                                                                                   Executive Compensation Programs

EVL-2011-001-1     FHFA should develop an external reporting strategy, which might include the     Federal Housing Finance Agency’s     Recommendation agreed to
                   augmentation of existing reports, to chronicle FHFA’s progress, including the   Exit Strategy and Planning Process   by FHFA; implementation of
                   adequacy of its resources and capacity to meet multiple responsibilities and    for the Enterprises’ Structural      recommendation pending.
                   mitigate any shortfalls.                                                        Reform
EVL-2011-001-2     FHFA should establish timeframes and milestones, descriptions of                Federal Housing Finance Agency’s     Recommendation agreed to
                   methodologies to be used, criteria for evaluating the implementation of the     Exit Strategy and Planning Process   by FHFA; implementation of
                   initiatives, and budget and financing information necessary to carry out its    for the Enterprises’ Structural      recommendation pending.
                   responsibilities.                                                               Reform
AUD-2011-004-1     FHFA should review the circumstances surrounding its not identifying the        FHFA’s Oversight of Fannie Mae’s     Recommendation agreed to
                   foreclosure abuses at an earlier stage and develop potential enhancements       Default-Related Legal Services       by FHFA; implementation of
                   to its capacity to identify new and emerging risks.                                                                  recommendation pending.



AUD-2011-004-2     FHFA should develop and implement comprehensive examination guidance            FHFA’s Oversight of Fannie Mae’s     Recommendation agreed to
                   and procedures, together with supervisory plans, for default-related legal      Default-Related Legal Services       by FHFA; implementation of
                   services.                                                                                                            recommendation pending.
AUD-2011-004-3     FHFA should develop and implement policies and procedures to address            FHFA’s Oversight of Fannie Mae’s     Recommendation agreed to
                   poor performance by default-related legal services vendors that have            Default-Related Legal Services       by FHFA; implementation of
                   contractual relationships with both of the Enterprises.                                                              recommendation pending.
AUD-2011-003-1     FHFA should document, disseminate, and implement a privacy training plan        Clifton Gunderson LLP’s              Recommendation agreed to
                   and implementation approach.                                                    Independent Audit of the Federal     by FHFA; implementation of
                                                                                                   Housing Finance Agency’s Privacy     recommendation pending.
                                                                                                   Program and Implementation –
                                                                                                   2011
AUD-2011-003-2     FHFA should identify those employees that would benefit from                    Clifton Gunderson LLP’s              Recommendation agreed to
                   additional job-specific or role-based privacy training based on increased       Independent Audit of the Federal     by FHFA; implementation of
                   responsibilities related to PII.                                                Housing Finance Agency’s Privacy     recommendation pending.
                                                                                                   Program and Implementation –
                                                                                                   2011
AUD-2011-003-3     FHFA should develop and implement targeted, role-based training for             Clifton Gunderson LLP’s              Recommendation agreed to
                   employees whose job functions require additional job-specific or role-based     Independent Audit of the Federal     by FHFA; implementation of
                   privacy training.                                                               Housing Finance Agency’s Privacy     recommendation pending.
                                                                                                   Program and Implementation –
                                                                                                   2011
AUD-2011-003-4     FHFA should develop and implement additional training for employees             Clifton Gunderson LLP’s              Recommendation agreed to
                   about SORN requirements, focusing on the inadvertent creation of systems        Independent Audit of the Federal     by FHFA; implementation of
                   of records. This training should stress the legal ramifications potentially     Housing Finance Agency’s Privacy     recommendation pending.
                   associated with creating systems of records prior to publishing a SORN.         Program and Implementation –
                                                                                                   2011
AUD-2011-003-5     FHFA should strengthen its privacy-related procedures to ensure SORNs are       Clifton Gunderson LLP’s              Recommendation agreed to
                   completed prior to systems becoming operational.                                Independent Audit of the Federal     by FHFA; implementation of
                                                                                                   Housing Finance Agency’s Privacy     recommendation pending.
                                                                                                   Program and Implementation –
                                                                                                   2011

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




 66 |    Section 4: FHFA-OIG Recommendations
                                                                              Semiannual Report to the Congress | SEPTEMBER 30, 2011




      No.                                    Recommendation                                                 Report                            Status
AUD-2011-003-7   FHFA should document the privacy impact assessments conducted for             Clifton Gunderson LLP’s            Recommendation agreed to
                 proposed rules of the Agency as required by Section 522.                      Independent Audit of the Federal   by FHFA; implementation of
                                                                                               Housing Finance Agency’s Privacy   recommendation pending.
                                                                                               Program and Implementation –
                                                                                               2011
AUD-2011-003-8   FHFA should establish a process for the completion of template- or            Clifton Gunderson LLP’s            Recommendation agreed to
                 checklist-based privacy impact assessments and modify policies and            Independent Audit of the Federal   by FHFA; implementation of
                 procedures as necessary.                                                      Housing Finance Agency’s Privacy   recommendation pending.
                                                                                               Program and Implementation –
                                                                                               2011
AUD-2011-003-9   FHFA should ensure privacy risk is continuously assessed on systems in        Clifton Gunderson LLP’s            Recommendation agreed to
                 production, including when functionalities change or when a major update      Independent Audit of the Federal   by FHFA; implementation of
                 is done. The CPO should document, disseminate (to system owners and the       Housing Finance Agency’s Privacy   recommendation pending.
                 Chief Information Security Officer), and implement policies and procedures    Program and Implementation –
                 for continuous monitoring of information systems containing PII after they    2011
                 are placed in production. The policies and procedures at a minimum should:
                 • document the privacy-related security controls that are to be monitored
                     to protect information in an identifiable form and information systems
                     from unauthorized access, use, disclosure, disruption, modification, or
                     destruction;
                 • determine the frequency of the privacy-related security controls
                     monitoring and reporting process to the privacy office;
                 • document review of reports generated by the monitoring of the privacy-
                     related security controls; and
                 • if necessary, take action on results of monitoring and document results
                     of action taken.


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


                                                                                                             d




                                                                                                                   Section 4: FHFA-OIG Recommendations         | 67
Federal Housing Finance Agency Office of Inspector General




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

AUD-2011-001-2     FHFA should assess the sufficiency of allocated resources, inclusive of        Audit of the Federal Housing   Recommendation agreed to
                   staffing, in light of the additional controls implemented to strengthen the    Finance Agency’s Consumer      by FHFA; implementation of
                   consumer complaints process.                                                   Complaints Process             recommendation pending.

AUD-2011-001-3     FHFA should determine if there are unresolved consumer complaints              Audit of the Federal Housing   Recommendation agreed to
                   alleging fraud to ensure that appropriate action is taken promptly.            Finance Agency’s Consumer      by FHFA; implementation of
                                                                                                  Complaints Process             recommendation pending.




 68 |    Section 4: FHFA-OIG Recommendations
Semiannual Report to the Congress | SEPTEMBER 30, 2011




                       Section 4: FHFA-OIG Recommendations   | 69
Federal Housing Finance Agency Office of Inspector General




 70 |   Section 4: FHFA-OIG Recommendations
AN OVERVIEW OF THE HOME FORECLOSURE PROCESS
Federal Housing Finance Agency Office of Inspector General




                                                             An Overview of the Home Foreclosure
                                                             Process
                                                             Among the most prominent features of the current housing crisis has been
Foreclosure:
                                                             an unprecedented jump in the incidence of mortgage delinquencies and
The legal process used by a lender to                        foreclosures. Public policy and financial market observers have attributed
secure possession of a mortgaged property.                   delinquency and foreclosure increases to a wide range of causes and have
                                                             offered varying policy prescriptions for what remains a continuing problem.
                                                             Allegations of improper or deficient practices on the part of mortgage
                                                             originators and servicers have also been a major source of controversy over the
                                                             past few years. By identifying and describing the procedures and requirements
                                                             that characterize an appropriately executed foreclosure process, FHFA-OIG
                                                             seeks to provide useful context and understanding for policymakers and
                                                             members of the public.

                                                             Most home purchases in the United States are financed through loans provided
                                                             by banks or other lenders. Lenders, as part of the legal process that provides
                                                             cash financing to borrowers, typically require a secured interest or mortgage
                                                             on the property financed. Borrowers agree to accept the secured interest on
                                                             their properties and to repay the loans provided over time. The foreclosure
                                                             process typically commences only after a borrower has stopped repaying the
                                                             loan (meaning that the loan has gone into default); the lender therefore uses
                                                             the foreclosure process to recover the proceeds of the loan through the sale of
                                                             the property. Foreclosure involves specific rights and obligations with respect
                                                             to both the homeowner/borrower and the lender (or its representatives)
                                                             through each step of the process.

                                                             Before turning to default and the foreclosure process, however, this overview
                                                             reviews the legal process supporting mortgage loans. It next turns to default,
                                                             the gateway to foreclosure, before discussing the foreclosure process and loss
                                                             mitigation options. This discussion will also identify sources of information
                                                             regarding federal programs designed to assist homeowners who may be
                                                             involved in, or at risk of, foreclosure proceedings.

                                                             Fundamentals of the Mortgage
                                                             A mortgage is a loan secured by real estate collateral, specifically the borrower’s
                                                             house or apartment.i While the term “mortgage” is used colloquially to refer to
                                                             both the loan and the security, there are actually two separate legal documents:
                                                             a note and a security instrument.

                                                             The Note
i
 Although real estate investors may also finance their       The note represents the promise or agreement of the homeowner (mortgagor)
purchases of commercial properties, such as office
buildings and rental apartment complexes, through            to repay the loan to the lender or noteholder and specifies the terms of
mortgage debt, this discussion will center specifically on   repayment, such as the interest rate and schedule of payments. Most mortgage
residential mortgages.                                       notes are freely transferable from the original lender to others. Lenders, in fact,


    72 |    An Overview of the Home Foreclosure Process
                                                           Semiannual Report to the Congress | SEPTEMBER 30, 2011




sell most loans to third parties, either directly or through the securitization
process in which groups of mortgages are pooled together and sold as a security           Securitization:
to investors. The Enterprises are the most prominent participants in the                  A process whereby a financial institution
purchases and sale of mortgages; they accounted for approximately 70% of the              assembles pools of income-producing
nation’s issuances of MBS in 2010. Rather than lend directly to homeowners,               assets (such as loans) and then sells an
                                                                                          interest in the cash flows as securities to
they purchase mortgages from the original lenders and other buyers. The
                                                                                          investors. See page 20, Figure 1.
mortgage note specifies that the borrower must repay the noteholder, which
may differ from the original lender if the loan is sold.


                                                   Figure 9. Mortgage


 HOMEOWNER                Homeowner agrees               If no payment on note,                                 LENDER
(MORTGAGOR)                  to pay bank                 lender may take house                                (MORTGAGEE)

                                                  +
                                                                SECURITY
                                NOTE                            INTEREST




                                                         $        Bank provides funds
                                                                  for home purchase


The Security Instrument
The security instrument is the separate legal document or agreement that
pledges the house as collateral for repayment of the note. The security
instrument goes by various names, such as the “mortgage,” the “deed of trust”
(DOT), or the “trust deed,” depending on its form and the state in which
the house is located. In many states, it is typically recorded in the county
recorder of deeds offices in order to establish the mortgagee’s interest in the
property as a matter of public record. This is important because it establishes
the mortgagee’s rights in the property relative to other parties, including
other mortgagees. The majority of mortgages are recorded using a private
recordation company known as the Mortgage Electronic Registration System
(MERS). When MERS is used, it is listed in county property records as the
mortgagee, while the real mortgagee is tracked in MERS’ private registry. The     e
validity of MERS’ various processes has been the subject of significant and
on-going legal controversy.




                                                                                      An Overview of the Home Foreclosure Process   | 73
    Federal Housing Finance Agency Office of Inspector General




                                                                      The form of the security instrument affects the foreclosure process. Legally
                                                                      speaking, a mortgage is the granting of a lien. The homeowner, as mortgagor,
    Lien:                                                             retains title to the property and grants a contingent interest to the lender as
    The lender’s right to have a specific piece                       mortgagee. Alternatively, a DOT is more akin to a sale and repurchase: the
    of the debtor’s property sold if the debt                         homeowner, as trustor, gives title to the property to the DOT trustee, who
    is not repaid. With respect to residential
                                                                      holds it on behalf of the lender as beneficiary. The DOT trustee is typically a
    mortgages, the noteholder retains a lien on
    the house (as evidenced by the mortgage or
                                                                      title company or a local attorney. The DOT trustee is charged with releasing
    deed of trust) until the loan is repaid.                          the deed to the trustor if the loan is paid off or with foreclosing if the trustor
                                                                      defaults. In the standard DOT arrangement, if the homeowner defaults, the
                                                                      beneficiary noteholder will appoint a substitute trustee, often an affiliate, to
                                                                      handle foreclosure. The precise duties of DOT trustees may be a potential
                                                                      issue in foreclosures.j




                                                                             Figure 10. Deed of Trust

                                                                                   TRUSTEE
                                                                            (HOLDS DEED TO HOUSE)
                                                                                                        If t y th DE OUS
                                                                                                            he e h ED E
                                                                                                            b
                                                                      t




                                                                                                              no om
                                                                  us




                                                                                                                 te e
                                                                 Tr




                                                                                                                   is ow
                                                                 in


                                                                         E




                                                                                                    T
                                                                    HO ED




                                                                                                                     no ne
                                                                      US




                                                                                                                     O
                                                             ed
                                                                  TO DE




                                                                                                                       H




                                                                                                                       tp r
                                                           De




                                                                                                                         aid




                                                                                       Note

                                                                                       IOU



                                       HOMEOWNER                                                                            LENDER
                                        (TRUSTOR)                                        $                               (BENEFICIARY)

    j DOT trustees should not be confused with securitization
    trustees. Many securitizations involve a trust that holds
    legal title to the mortgages and notes. These trusts have
    a trustee – a major financial institution – that acts as
    an agent for the trust, carrying out functions such as
    remitting payments to investors in the securities issued
    by the trust and reporting to investors on the performance
f   of the trust’s mortgages. The actual management of
    the mortgages, though, is carried out by another entity,
    known as the servicer.



       74 |     An Overview of the Home Foreclosure Process
                                                              Semiannual Report to the Congress | SEPTEMBER 30, 2011




The Servicer
All mortgage loans are “serviced,” meaning the payments are collected and             For more information on the servicer, see pages
the loan otherwise is administered, including the release of liens upon payoff        26-27 of this report, Selected FHFA Programs
or the management of defaults. The servicer may be an arm of the original             and Activities.
lender, or it may be an unrelated third party, in which case it is acting on behalf
of the current owner of the loan, typically under a detailed contract known
as a “pooling and servicing agreement” or “loan servicing agreement.” As
the majority of mortgage loans are sold by their original lender (sometimes
referred to as the loan’s “originator”), most loans have servicers that are
unaffiliated with the original lender. For example, the Enterprises do not
service any of the loans they own themselves; instead, they use third-party
servicers, typically affiliates of the parties that sold the loans to them.

Subcontracting arrangements are common in servicing, so a borrower’s contact
may in fact be with a subservicer, a vendor, or an attorney engaged by one of
these parties. Both servicing and subservicing contracts frequently impose
limitations on the servicer’s ability to manage the loan, including when and
how the servicer may modify or otherwise restructure a loan.

Default
Default is the prelude to foreclosure. Although various technical defaults are
possible, the typical default is a failure to make payments as required on the
mortgage. Most mortgages require defined payments each month (though the
amount due may vary if the mortgage has an adjustable rate), and mortgage
servicers will often refuse to accept partial payments. Figure 11 illustrates
the remediation process for a defaulted loan. The outcomes following a
default depend on factors such as the amount and degree of delinquency, the
borrower’s overall financial situation, the value of the property and amount
of indebtedness, the servicer’s economic interests (as distinct from the
mortgagee’s), and constraints placed on the servicer by contract and applicable
laws. Thus, a defaulted residential mortgage may return to good standing or
be modified, or the property may be sold or repossessed by the mortgagee via
foreclosure or a voluntary surrender.

Generally, servicers will not commence a foreclosure until a mortgage is 90
days delinquent – that is, until the borrower has missed three consecutive
payments. Thus, a homeowner can conceivably fall behind on a mortgage for
a month or two and catch up without the servicer commencing a foreclosure.
However, it is important to note that a servicer may legally begin foreclosure
proceedings before a mortgage is 90 days late. Ninety days is a common
practice, not a legal requirement.




                                                                                      An Overview of the Home Foreclosure Process   | 75
Federal Housing Finance Agency Office of Inspector General




                                                      Figure 11. Foreclosure Process Flowchart


                                                                        Homeowner/
                                                                         Borrower/
                                                                         Mortgagor



                                                         YES

                                       No Action                       Scheduled Payments
                                                                         Made on Time?




                                                                                     NO


                                                                 Default – Initiate Foreclosure
                                                                 Process (usually after 90 days
                                                                   or 3 delinquent payments)




                           Judicial                      Nonjudicial                       Deed in Lieu
                         Foreclosure                     Foreclosure                      of Foreclosure             Short Sale




                           Notice of                      Notice of
                            Default                        Default




                           Mediation                      Mediation
                          if Required                    if Required




                                                          Notice of
                         Foreclosure                                                      Proceed to Advertisement                     Vacate
                                                          Intent to
                            Filing                                                             of Sale and Sale                   Property/Eviction
                                                          Foreclose
                                                         If Required



                             Trial




 76 |   An Overview of the Home Foreclosure Process
                                                          Semiannual Report to the Congress | SEPTEMBER 30, 2011




Loss Mitigation
In some cases, the default may be cured and the loan reinstated. In addition,
depending on individual circumstances, alternatives may exist that permit
defaulted borrowers to remain in their homes while addressing their payment
delinquency. It is important to note that most of these options are voluntary,
but state law and contractual arrangements, including the acceptance of MHA
program funds from Treasury, may trigger particular loss mitigation duties on
the part of the servicer.

Mediation. Many states offer or require pre-foreclosure mediation between
homeowners and servicers. In some states servicers are required to mediate in        Mediation:
good faith in order to proceed with foreclosure. This may include presenting         Mediation is a process by which a
the homeowner with all appropriate paperwork for a foreclosure and having            neutral third party (mediator) assists the
authority to accept settlement offers.                                               homeowner and lender in reaching a fair,
                                                                                     voluntary, negotiated agreement. The
Modification. Common modifications include extending the mortgage’s                  mediator does not decide who is right or
maturity date, adding past-due payments to the end of the mortgage, and              wrong.
making both permanent and temporary interest rate reductions. In most
cases, when appropriately applied, these measures will lower the borrower’s
re-amortized monthly mortgage payment to a more affordable level.

Reductions in the borrower’s unpaid principal balance are uncommon.              Figure 12, at the end of this overview, lists
Although HAMP permits principal reductions at participants’ option, the          those states that offer or require mediation as
Enterprises do not provide for principal reductions in their implementation      part of the mortgage loan default remediation
of HAMP. Homeowners should be aware that under certain circumstances             process.
the forgiven debt may be deemed income for tax purposes.40

Forbearance. Lenders may always exercise forbearance on defaulted loans,
meaning that the lender may simply decline to proceed with foreclosure.
                                                                                 A detailed listing of borrower eligibility criteria
Homeowners have no right to forbearance, unless they are active duty military
                                                                                 for HAMP and other MHA assistance programs
servicemembers covered by the Servicemembers Civil Relief Act or have been
                                                                                 is available at www.makinghomeaffordable.gov.
so within the previous 90 days. Note that some types of modifications, such
as ones that tack past-due balances onto the end of loans as balloon payments,
are sometimes referred to as forbearance.

By contrast to payment reductions, payment forbearance involves temporarily      The websites of Fannie Mae (www.fanniemae.
suspending the need to make mortgage payments. In their guidance to loan         com) and Freddie Mac (www.freddiemac.com)
servicers, Fannie Mae and Freddie Mac permit payment forbearance for up          incorporate utilities that permit borrowers to
to six months in the cases of unemployed borrowers. Servicers must consider      learn whether those organizations guarantee or
unemployed borrowers for such forbearance before consideration for a HAMP        own specific home loans.
loan modification. Borrowers who are not offered any such forbearance must
be evaluated for HAMP.




                                                                                 An Overview of the Home Foreclosure Process   | 77
Federal Housing Finance Agency Office of Inspector General




   Common Misperceptions About Enterprise Policies for HAMP Participants

   Published reports indicate that mistaken or outdated understandings may persist among participants (both servicers and borrowers) in HAMP for
   loans owned or guaranteed by the Enterprises. Three common misperceptions are discussed below:

           •	    HAMP Participants Must Be Delinquent. HAMP does not require homeowners to be actually delinquent in their payments before
                 participating. Despite reported cases of mortgage servicers indicating that homeowners must be delinquent, and in some cases actually
                 encouraging them to fall behind in their payments, program guidance and the Enterprises’ servicer directives explicitly permit participation
                 by homeowners who remain current, but for whom default is “reasonably foreseeable.”
           •	    HAMP Requires a Very Long Trial Period. The Enterprises’ published guidance states that the initial trial period for HAMP participants
                 “must be three months long for mortgage loans already in default and four months long for mortgage loans where the servicer has
                 determined that default is imminent but has not yet occurred,” contrary to reported instances of borrowers making trial payments for
                 much longer.
           •	    The Foreclosure Process Can Proceed While Loss Mitigation Efforts Are Underway. As a result of FHFA’s Servicing Alignment
                 Initiative, current Enterprise guidance states that servicers may not commence the foreclosure process as long as they are engaged in
                 a good faith effort with the borrower to resolve the delinquency. “Dual tracking” a single loan for both foreclosure and modification is
                 prohibited. Additionally, before a loan is referred for foreclosure, the servicer must also perform a formal review of the case to ensure that
                 appropriate alternatives were considered.


                                                        Refinancing. Another option for handling a defaulted loan is to replace it
                                                        with a new loan via a refinancing. The terms of the new loan can be whatever
                                                        the borrower and new lender negotiate; the proceeds of the new loan are used
                                                        to pay off the balance on the old loan. When the old lender is paid off, the old
                                                        lender releases its lien on the property.

                                                        The difference between refinancing and modification is that refinancing
                                                        entails a new loan, whereas modification is simply a change to the terms of
Equity:                                                 an existing loan. A refinancing can involve the substitution of a new lender
In the context of residential mortgage                  for the existing lender or a new loan from the existing lender, whereas a
finance, equity is the difference between               modification involves the same lender. Because a refinancing involves a new
the fair market value of the borrower’s                 loan, there are generally closing costs associated with a refinancing, whereas
home and the outstanding balance on the                 modification may or may not involve fees to the borrower.
mortgage (and any other debt secured by it,
such as home equity loans).                             Traditionally, refinancing requires the payment in full of the existing loan.
                                                        Most mortgage loans have “due on sale” clauses that require payment of the
Underwater:                                             full balance of the loan upon the sale of the property and further define a
Term used to describe situations in which
                                                        refinancing as a sale. Unless the existing mortgage is paid off, the existing
the homeowner’s equity is below zero (i.e.,
                                                        mortgagee continues to hold a lien on the property that is senior to the new
the home is worth less than the balance of
the loan(s) it secures).
                                                        lender’s. Payment in full via a refinancing thus requires the homeowner
                                                        to have equity in the property, as today lenders will almost never extend
                                                        credit beyond the value of the property (above a 100% loan-to-value ratio).
                                                        Accordingly, refinancing has not been an option, generally, for borrowers
On October 24, 2011, FHFA announced
                                                        who are underwater, even if they are current on their mortgage. However,
revisions to HARP to expand the number of
eligible homeowners. FHFA-OIG will discuss
                                                        the Enterprises will refinance qualifying underwater mortgages they own
these revisions in greater detail in the next
                                                        or guarantee under the federal government’s Home Affordable Refinancing
Semiannual Report.
                                                        Program (HARP). Loans that are held on banks’ balance sheets or in private-
                                                        label securitizations are not eligible for HARP.


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In addition, some lenders will accept a “short refinancing” in which they
receive less than the full unpaid principal balance, may forgive the remaining
balance, and release the lien. They may choose to do so if they believe that
they will make more in a partial payment via a refinancing than they will in a
foreclosure sale. FHA, for example, offers a short-refinancing program: for
qualifying borrowers who do not currently have FHA-insured loans, FHA
will insure a new first lien mortgage loan at up to 97.75% loan-to-value ratio
based on a fresh appraisal. This means that the existing lender must agree
to a write-down of the balance as part of the refinancing. FHA requires
that the existing lender reduce the existing balance by at least 10% and that
the combined loan-to-value ratio of all mortgages on the property be no
more than 115%. While short refinancing may be a valuable solution for
underwater borrowers, refinancing with a new lender is often very difficult for
borrowers with impaired credit scores (which includes any borrower who has
defaulted), or even for those with relatively good credit scores.

Foreclosure and Its Effects
If loss mitigation efforts do not succeed, the defaulted loan will proceed to
foreclosure. There are two basic types of foreclosure. Judicial foreclosures
proceed through the court system, while nonjudicial foreclosures take place
outside it. The type of foreclosure process and other specific features are
governed by state law, which varies considerably among the states, and by
the terms of the mortgage itself. Some mortgages permit only one type of
foreclosure. Some states permit only one type of foreclosure, while others
provide for the possibility of either. State law can also vary depending on
the type of property involved (its size and use) and by whether the mortgage
was a purchase money mortgage or a refinancing of a previous mortgage.
This overview is designed to present a general description of the foreclosure
process. Actual state law may vary from the process described herein, and this
overview should not be relied upon as a legal guide.

Judicial Foreclosure
A judicial foreclosure is a litigation process with a specific remedy. Generally,
the loan servicer, on the noteholder’s behalf, commences the foreclosure                Junior Lienholder:
by filing a suit against the homeowner. If those bringing the suit cannot               The security interest that can be availed
prove that they are acting on behalf of the party entitled to repayment under           only after the senior lien is satisfied, is
the terms of the note, they may lack legal standing to do so. Similarly, a              called a junior lien. The holder of this
foreclosure may be invalid if the foreclosing party or its representative files         security interest is the junior lienholder.
suit before becoming the holder of the note and the mortgagee.                          Depending on the relative priority of the
                                                                                        junior lien, the junior lienholder may be the
To begin a foreclosure action, the noteholder’s representative files various            second mortgagee, third mortgagee, etc.
documents with the court in the form of a “complaint.” It also must serve               For example, a bank holding a home equity
the complaint to the homeowner, notifying him or her of the litigation.                 mortgage on a home is the junior lienholder
                                                                                        to the bank holding the primary mortgage.
Additionally, notice must typically be sent to all junior lienholders, such as




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                                                       home equity lenders. The specific requirements vary by state, but state law
                                                       typically requires the foreclosing party to assert for the record that:

                                                              	 • the homeowner is indebted to the foreclosing party;

                                                              	 • the homeowner has defaulted on the loan;

                                                              	 • the loan is secured by a mortgage, and the foreclosing party is or
                                                                   represents the mortgagee; and

                                                              	 • service of process has been made on the homeowner.

                                                       These are typically made via affidavits – sworn written statements submitted to
                                                       the court. For example, the fact and amount of the indebtedness are typically
                                                       established via an affidavit of indebtedness. State law requires that affidavits
                                                       be sworn out by affiants who have personal knowledge of the facts to which
                                                       they attest. Such affidavits are typically notarized.




  Robo-signing. In mid-2010, certain leading mortgage servicers were found to be routinely submitting flawed affidavits to courts in foreclosure cases.
  Affidavits are supposed to be sworn out by affiants with personal knowledge of the facts, which are attested to in the affidavit, such as the fact and
  amount of the homeowner’s indebtedness and that the homeowner had defaulted on the loan. In the course of depositions in foreclosure cases,
  servicers were found to have employees whose sole job was to sign foreclosure affidavits, as many as 10,000 affidavits in a single month by some
  employees (roughly one per minute). These employees had no personal knowledge of any of the facts to which they attested.

  As robo-signing began to garner media attention, several major servicers imposed voluntary moratoria on their foreclosure activities. All have
  subsequently resumed foreclosures, although some foreclosure filings have been withdrawn and resubmitted and, in Maryland, a state judge threw out
  over 10,000 foreclosures filed by Ally Financial Inc. (formerly known as GMAC, LLC) because of robo-signing. Federal banking regulators commenced
  an investigation of robo-signing practices that resulted in consent orders between leading servicers and the federal regulators, in which the servicers
  agreed to improved internal controls. State attorneys general are still investigating robo-signing and related issues.

  While media attention was focused on the lack of personal knowledge of the affiants and the sheer volume of signatures made by individual robo-
  signers, more serious issues lurk in the robo-signing scandal. In particular, the backdating of mortgage transfer documents was the focus of the
  depositions in which robo-signing was uncovered. The date of the transfer of a mortgage is critical for three reasons:

          •	   First, it may affect whether a servicer has legal standing to foreclose; only the mortgagee has such standing. In Ibanez v. U.S. Bank, the
               Massachusetts Supreme Judicial Court upheld the reversal of a foreclosure in which the servicer could not prove that the loan had been
               transferred to the securitization trust before the foreclosure was commenced.
          •	   Second, it may affect whether the servicer is a “holder-in-due-course,” a special legal status that prevents the homeowner from raising
               certain defenses (including that the homeowner was fraudulently induced into the mortgage) and counterclaims. A party that receives a
               loan that is in default cannot be a holder-in-due-course, so determining the date of transfer is critical to ensure that the homeowner is not
               wrongfully deprived of his or her legal rights to raise defenses and counterclaims.
          •	   Third, for securitized loans, tax and trust law rules depend on the date of the transfer. If the loan was transferred too late, there may be
               adverse tax consequences for the investors in the mortgage-backed securities and the transfer may itself be void under trust law.

  Thus, issues related to the timing of transfers of mortgages (often referred to as “chain of title”) have profound legal implications.




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Generally, state law requires that a copy of the mortgage note accompany the
complaint. The foreclosing party may be required to produce the original “wet
ink” or “blue ink” note. Often state law requires the filing of the mortgage itself
as part of the complaint, but because recorded mortgages (unlike notes) are
public records, a reference to the mortgage may be sufficient. Some states also
require certification of mandatory loss mitigation efforts, such as mediation,
prior to foreclosure.

Most judicial foreclosures are not contested and result in default judgments
against the homeowner. In such cases, it is rare for courts to undertake more
than a cursory examination of the sufficiency of the foreclosing party’s filings.

If a homeowner contests a foreclosure, either because of procedural deficiencies
or on the basis of substantive defenses and counterclaims, then the case is
litigated like a regular civil action. A homeowner’s ability to raise defenses
and counterclaims depends on whether the foreclosing party is a “holder-
in-due-course” of the defaulted note. To be a holder-in-due-course, the
foreclosing party must: (1) possess the actual note; (2) have given value for
the note and taken it in good faith; and (3) have no notice of any defect in the
note, including that the note is in default. This means that if the note were
transferred to the foreclosing party subsequent to the default, the foreclosing
party is not a holder-in-due-course, so the homeowner may raise a full battery
of defenses and counterclaims in the foreclosure action.

If the court awards judgment to the foreclosing party, the property is then
scheduled for sale, typically by the county sheriff. Sale scheduling is determined
in part by requirements for advertisement of the sale for a minimum time
period. The homeowner may, of course, appeal the foreclosure judgment.




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 Show Me The Note. Foreclosure defense litigation has begun to feature variations of the “show-me-the-note” defense, in which the homeowner
 challenges the foreclosing party to prove that it has the right to foreclose. In its most basic form, this defense is a demand that the foreclosing party
 produce the original mortgage note, but the term refers to a range of challenges relating to the foreclosing party’s standing.

 Critically, the show-me-the-note defense does not involve a claim that the homeowner is not in default. Instead, it focuses on whether the foreclosing
 party is the party that is legally entitled to foreclose and has made the required evidentiary showings. Determining the proper party is important for
 issues of legal standing, holder-in-due-course status, and the homeowner’s ability to raise various defenses and counterclaims, and because it affects
 settlement abilities and incentives. A portfolio lender, for example, may have very different settlement abilities and incentives than a third-party
 mortgage servicer.

 Kemp v. Countrywide Home Loans, Inc., 449 Bankr. 624 (Bankr. D.N.J. 2010) provides an illustration of a successful “show-me-the-note” defense. In
 Kemp, the homeowner had taken out a loan from Countrywide Home Loans, Inc. Countrywide subsequently securitized the loan, selling it to a trust
 named CWABS Asset-Backed Certificates, Series 2006-8. The Bank of New York served as trustee for the trust and Countrywide as servicer for the
 trust.

 The homeowner filed for bankruptcy, having previously defaulted on his mortgage. Countrywide, as servicer, filed a claim in the bankruptcy on behalf
 of the trust. The homeowner challenged that claim based on the fact that the mortgage note had not been properly endorsed to the Bank of New York
 as trustee for the securitization trust and was never placed in the Bank of New York’s possession. Accordingly, the homeowner argued, the trust was
 not a party entitled to enforce the note, as only a physical holder of the note, a non-holder in possession, or someone who has lost a note may enforce
 a note.

 During the trial, Countrywide produced an “allonge” — a separate sheet of paper to be affixed to a note to allow room for additional endorsements.
 This allonge contained the endorsement that was missing on the note itself (albeit with an error in the name of the trust). Countrywide’s official
 witness, however, testified that the allonge had been created in anticipation of the litigation. The official witness further testified that the original note
 had never left Countrywide’s possession and that the new allonge had never actually been affixed to the note — it was simply a piece of paper with
 an endorsement, but no indication of what had been endorsed.

 The bankruptcy court denied the claim Countrywide had filed on behalf of the trust because the trust could not show that it was a party entitled to
 enforce the note. The trust was neither a holder of the note (an owner of the note in physical possession of the note), nor a non-holder (someone who
 lacks ownership of the note) in possession of the note, nor had it lost the note. Because the Bank of New York, as trustee, and Countrywide, as its
 agent, were not entitled to enforce the note, the bankruptcy claim against Kemp was disallowed.


                                                        Nonjudicial Foreclosure
                                                        Nonjudicial foreclosures proceed rather differently. There are no court filings
                                                        or showings of proof required. Instead, in a nonjudicial foreclosure, the
                                                        foreclosing party must notify the homeowner of the default and the scheduled
                                                        sale. Sometimes this requires a formal “notice of intent to foreclose.” It is also
                                                        required to advertise the sale. Advertisement requirements vary significantly
                                                        by jurisdiction, but generally the sale must be advertised in a newspaper of
                                                        record for the community for a few weeks prior to the sale. The assumption
                                                        in a nonjudicial foreclosure proceeding is that the foreclosing party has the
                                                        right to foreclose, provided that it appropriately provides notice and advertises
                                                        the sale.

                                                        A nonjudicial foreclosure may effectively be transformed into a judicial
                                                        foreclosure if the homeowner brings a quiet title action or the equivalent,
                                                        which has the effect of contesting the foreclosure sale’s transfer of title to



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the foreclosure sale purchaser. Conversely, foreclosure sale purchasers will
sometimes bring subsequent judicial actions to ensure quiet title, particularly
if there are any questions about the procedural propriety of the sale.

The Foreclosure Sale
The rules governing the actual foreclosure sale vary by jurisdiction. Sales are
conducted by auction, but there are usually few if any rules governing the
actual sale in nonjudicial foreclosures. The timing and the bidding in judicial
foreclosure sales is frequently specified in detail by statute, including minimum
bids, appraisal requirements, deposits, and completion of payment. Some
jurisdictions, however, leave details of the bidding up to the local government
official, typically the sheriff, who conducts the auctions.

Two constant rules for all foreclosure sales are the order of payment and the
effect on liens. The proceeds of a foreclosure sale are used first to cover the           Perfection:
expenses of the sale. They are then paid to the foreclosing party, and, if there          The legal recording of evidence for a
are surplus funds, to junior lienholders in their order of seniority. Rules of            creditor’s lien on a particular item of
lien priority generally follow a first-in-time, first-in-right pattern, with the          property.
first lienholder to perfect its lien (by making the necessary legal filings or
automatically in some cases) having seniority over subsequently perfected
(or unperfected) liens. There are many exceptions to this pattern, however.
Notably, state tax liens frequently have priority over other previously perfected
liens. If any surplus remains, it is paid to the (former) homeowner.

There is no right for prospective buyers (or the foreclosing party) to inspect
the property before the foreclosure sale. Prior to the completion of the sale,
the property still belongs to the mortgagor/homeowner. Accordingly, third
parties tend to discount foreclosure sale purchase bids heavily. Although they
can ascertain the external condition of the property, they cannot discern the
layout or condition of the property internally, and many foreclosed properties
have been damaged prior to sale.

The inability to inspect the property pre-sale, as well as the foreclosing
party’s ability to “credit bid,” means that there are relatively few bidders in
most foreclosure sales other than the foreclosing party. Most foreclosure sale
properties are purchased by the foreclosing party via a “credit bid.” This means
that the foreclosing party bids the amount it is owed on the loan rather than
bidding with cash. In other words, a credit bidding party merely credits itself
rather than writing itself a check. A credit bidding party typically bids in the
full amount of the debt owed, which means that a third-party bidder must be
willing to pay a higher cash price to win the auction. By credit bidding, the
foreclosing party can obtain clear title to the property, inspect the property, fix
it as necessary, and then resell it subsequently.

It is important to note that foreclosure sales are frequently cancelled or
rescheduled. This may occur for a variety of reasons, including ongoing
negotiations between the borrower and the lender; intervening bankruptcy


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Federal Housing Finance Agency Office of Inspector General




                                                        filings; and inability to complete procedural steps, including accumulation of
                                                        necessary documentation.

                                                        Cures
                                                        Until the completion of the foreclosure sale, the homeowner may cure the
Acceleration:                                           default and stop the foreclosure. Typically this requires payment of the entire
The declaring of a debt due and payable                 mortgage debt, as the lender will have accelerated the debt. The lender may
immediately. Lenders may possess this                   be willing, but is under no obligation, to stop the sale if only past due payments
right under certain conditions, according               are tendered.
to the terms of the obligation or applicable
law.                                                    If the homeowner files for bankruptcy, the foreclosure sale is automatically
                                                        stayed, and federal bankruptcy law permits homeowners to unwind the
                                                        acceleration of a mortgage and cure by paying only the past due payments and
                                                        associated costs.

                                                        Deficiency Judgments
                                                        The foreclosure sale may not provide proceeds sufficient to satisfy the mortgage
                                                        debt. In such cases, the noteholder’s representative (and any junior lienholders)
                                                        may seek a deficiency judgment – a legal judgment for the remaining amount
                                                        of the debt. A deficiency judgment is an unsecured debt, like credit card
                                                        debt, and collection follows the procedure for other unsecured debt. This
                                                        means that deficiency judgments are often difficult for lenders to collect, as
                                                        many states place restrictions on wage garnishment and unsecured debts are
                                                        generally dischargeable in bankruptcy. Accordingly, noteholders often sell
                                                        deficiency judgments to third-party debt collectors at substantial discounts
                                                        from face value. Attempts to collect these debts are typically subject to the
                                                        provisions of the Fair Debt Collection Practices Act as well as to state debt
                                                        collection law.

                                                        The availability and procedure for a deficiency judgment varies by state and
                                                        foreclosure process. Generally, deficiency judgments are not available when
                                                        nonjudicial foreclosure is used because of concerns that private sales might
                                                        be manipulated to suppress foreclosure sales prices in order to produce a
                                                        larger deficiency judgment. In some states, deficiency judgments are available
                                                        automatically following a judicial foreclosure. In others, the foreclosing party
                                                        must file a motion or a complaint for a deficiency judgment. Even then, there
                                                        is variation as to whether a deficiency judgment (if allowed) is awarded as a
                                                        matter of right or by judicial discretion.

                                                        Right of Redemption
Figure 12, at the end of this overview,                 In some states, homeowners have a statutory post-foreclosure sale “right of
summarizes provisions for right of redemption           redemption.” This means that the homeowner can redeem – reclaim title
by state.                                               to – the house by tendering the amount of the unpaid debt and foreclosure sale
                                                        costs. The length of the statutory redemption period varies considerably, from
                                                        as short as 10 days in New Jersey to 2 years in Tennessee. The existence of


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rights of redemption is a factor foreclosure sale purchasers are likely to consider,
as they run the risk of being deprived of their foreclosure sale purchase (even
though the purchase price is returned). While it is uncommon for foreclosed
homeowners to come up with the cash to redeem their properties during the
redemption period, the right is exercised at times.

Eviction
If the former homeowner does not voluntarily surrender the property
following the foreclosure sale, the foreclosure sale purchaser can have the
former homeowner evicted. Eviction is also a state law procedure; the precise
process varies by state law, but it is not always automatic. Because foreclosure
sale purchasers are often concerned about former homeowners damaging
the property before they leave, they are often willing to negotiate with
homeowners regarding relocation timetables and costs. They are, however,
under no obligation to do so.

Renters Living in Foreclosed Property
Sometimes a foreclosed property is occupied by renters. Renters’ rights in a
foreclosure involving their landlord vary by state. Since 2009, however, the
Helping Families Save Their Homes Act has included minimum protections
for renters in the foreclosure of most mortgages, including all mortgages
owned by the Enterprises. If the renter has a bona fide lease entered into prior
to the notice of foreclosure, then the renter may occupy the property until the
end of the remaining term on the lease unless the renter is given notice of
termination by the foreclosure sale purchaser, in which case the renter has 90
days of occupancy rights. If the renter is not renting under a lease or the lease
is terminable at will, then the renter also has 90 days of occupancy rights from
notice of termination. Some states give renters additional occupancy rights;
others merely give renters the right to notice of the foreclosure.

Liability for Insurance, Taxes, and Homeowners’ Fees
Until title passes to the foreclosure sale purchaser, the homeowner typically
remains liable for taxes, homeowners’ association dues, nuisances, and
accidents on the property. Noteholders or their representatives typically have
the right to force-place insurance on the property if the homeowner has failed
to maintain insurance payments. Force-placement of insurance involves the
noteholder’s purchasing insurance on the property with itself as the loss-
payee. Force-placed insurance can be expensive relative to regular insurance,
and some servicers force-place insurance with their affiliates.

Post-sale, the liability falls on the property’s new owner. In some communities,
however, a phenomenon known as “bank walkaway” has occurred in which a
servicer will commence a foreclosure, but not complete it. Frequently, bank
walkaway occurs when the property’s value is so low that it is not worth the
expense of foreclosure. In bank walkaway cases, the homeowner remains the


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Federal Housing Finance Agency Office of Inspector General




                                                       owner of the property, although in many cases he or she will have moved out
                                                       because of the anticipated foreclosure. Because the homeowner remains the
                                                       title owner of the property, he or she remains liable for property taxes and
                                                       upkeep. Thus, the homeowner could be subject to fines and other penalties
                                                       if the property becomes a nuisance, or the homeowner could be liable for
                                                       accidents that occur. Similarly, the noteholder’s representative may complete
                                                       the foreclosure and purchase the property itself in the foreclosure sale, but fail
                                                       to record the deed in its own name. In such cases, the homeowner remains
                                                       liable for property taxes.

                                                       Impact on Credit Score
                                                       Mortgage defaults, foreclosures, deeds in lieu of foreclosure, and short sales
                                                       can have adverse impacts on consumers’ credit scores. A default, foreclosure,
                                                       deed in lieu, or short sale may remain on a consumer’s credit report for up
                                                       to seven years. A bankruptcy may remain on a consumer’s credit report for
                                                       up to 10 years. The presence of adverse events on credit reports is likely to
                                                       lower a consumer’s credit score, which can make it more difficult or expensive
                                                       for a consumer to obtain credit in the future. Credit reports are also used by
                                                       insurers and employers, so adverse credit events can affect the cost of insurance
                                                       and/or employment opportunities.

                                                       Foreclosure Alternatives
More information on HAFA is available at www.          Depending on individual circumstances, alternatives may exist to foreclosure
makinghomeaffordable.gov/programs/exit-                proceedings that reduce expenses or legal liability for troubled homeowners.
gracefully/Pages/hafa.aspx.                            However, like foreclosure, these options will typically result in the homeowner’s
                                                       loss of his or her house. These alternatives may include short sales, deeds in
                                                       lieu, and bankruptcy. The Enterprises participate in the federal government’s
                                                       HAFA program, which is designed to encourage alternatives to the foreclosure
                                                       process for troubled home mortgage loans. Participating HAFA servicers
                                                       may not seek deficiency judgments and may provide relocation incentives of
                                                       up to $3,000 for eligible homeowners who tender deeds in lieu of foreclosure
                                                       or do short sales.

                                                       Short Sale
                                                       Lenders may agree to a “short sale,” in which the homeowner conducts a
                                                       private sale of the house, and the lender releases its lien in exchange for the
                                                       sale proceeds, even though the sale proceeds are insufficient to pay off the
                                                       debt. A short sale does not necessarily discharge the homeowner’s debt; it
                                                       merely results in a release of the lien, so the homeowner may still be liable
                                                       for the deficiency. If the lender forgives the deficiency, it may be imputed
                                                       as taxable income for the homeowner, particularly if the mortgage had a
                                                       cash-out component.

                                                       There are certain barriers to a short sale. Servicers are frequently wary of short
                                                       sale offers because of concerns that they are settling the debt at too low a price


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and that the bidder may have colluded with the homeowner. In addition, the
high rate of denials for short sale offers has made realtors reluctant to handle
them because realtors are only paid upon consummation of a sale and put in
more effort in short sales than for regular sales.

Deed in Lieu of Foreclosure
Lenders will sometimes accept a deed in lieu of foreclosure. This means that
the homeowner will surrender title and possession of the property voluntarily,
rather than requiring the lender to go through the full foreclosure process.
For the lender, a deed in lieu spares the time and expense of the foreclosure
process. For the homeowner, a deed in lieu may be attractive because the
terms under which the homeowner surrenders the property may be negotiated
— the lender may be willing to provide the homeowner with some relocation
funds or a more generous timetable for moving out.

Critically, a deed in lieu does not extinguish junior liens, so the lender will
acquire the property with junior liens still attached. Thus, if neither the
homeowner nor the lender who has taken the deed in lieu pays off the junior
lienholder(s), the latter may foreclose on the property. Accordingly, lenders
may be reluctant to accept deeds in lieu when there is a junior lien on a
property.

Bankruptcy
A homeowner may file for bankruptcy at any point before, during, or after the
foreclosure process. Bankruptcy is a federal judicial proceeding. A bankruptcy
filing automatically stops the foreclosure process. If a lender wishes to
proceed with a foreclosure against a bankrupt homeowner, the lender must
get permission from the bankruptcy court to do so.

If the homeowner files for Chapter 7 bankruptcy and has defaulted, the
homeowner will not be able to retain the property after the bankruptcy absent
the lender’s consent. If the homeowner files for Chapter 13 bankruptcy and
has defaulted, the homeowner may de-accelerate the note and cure the default
simply by making up missed payments rather than the full amount of the
note. The homeowner may not, absent the lender’s consent, modify the terms
of the mortgage in bankruptcy if the property is a single-family residence.
For multi-family residences, the homeowner may be able to restructure the
mortgage in bankruptcy.




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Federal Housing Finance Agency Office of Inspector General




                                                                          Figure 12. Summary of Foreclosure Process by State
For further information on homeowner                           State             Foreclosure Process41         Right of Redemption42                   Mediation
assistance programs, borrowers should visit                                                                                                            Programs
www.makinghomeaffordable.gov or call 888-                    Alabama           Primarily nonjudicial     1 year                                    None
995-HOPE.                                                     Alaska           Primarily nonjudicial     No                                        None
                                                              Arizona          Primarily nonjudicial     No                                        None
                                                             Arkansas          Primarily nonjudicial     No                                        None
                                                             California        Primarily nonjudicial     2 years if court grants deficiency        Yes43
                                                                                                         judgment
                                                             Colorado          Primarily nonjudicial     Redemption by lienholders allowed         Yes44
                                                                                                         only within specified periods
                                                           Connecticut         Primarily judicial        Yes, after judgment and before sale       Yes45
                                                             Delaware          Primarily judicial        No                                        Yes46
                                                        District of Columbia   Primarily nonjudicial     In optional judicial procedure there      Yes47
                                                                                                         is a provision for redemption before
                                                                                                         judgment
                                                              Florida          Primarily judicial        Yes, up to date clerk files certificate   Yes48
                                                                                                         of sale
                                                              Georgia          Primarily nonjudicial     No                                        None
                                                              Hawaii           Primarily nonjudicial     No                                        Yes49
                                                               Idaho           Primarily nonjudicial     No                                        None
                                                              Illinois         Primarily judicial        Yes, later of 7 months after service      Yes50
                                                                                                         of complaint or 3 months after
                                                                                                         judgment
                                                              Indiana          Primarily judicial        No                                        Yes51
                                                               Iowa            Primarily judicial        1 year                                    None
                                                              Kansas           Primarily judicial        3 to 12 months depending on               None
                                                                                                         percentage of debt that has been
                                                                                                         paid
                                                             Kentucky          Primarily judicial        1 year                                    Yes52
                                                             Louisiana         Primarily judicial        No                                        None
                                                              Maine            Primarily judicial        Mortgages after 10/1/75, 90 days.         Yes53
                                                                                                         Mortgages prior to 10/1/75, 1 year
                                                             Maryland          Primarily nonjudicial     No                                        Yes54
                                                          Massachusetts        Primarily nonjudicial     No                                        Yes55
                                                             Michigan          Primarily nonjudicial     1 month to 1 year depending               Yes56
                                                                                                         on size of parcel, number of
                                                                                                         units, percentage of original loan
                                                                                                         outstanding, and whether property
                                                                                                         is abandoned
                                                            Minnesota          Primarily nonjudicial     6 or 12 months depending on date          Yes57
                                                                                                         of mortgage, size of property, and
                                                                                                         whether use is agricultural
                                                            Mississippi        Primarily nonjudicial     No                                        None
                                                             Missouri          Primarily nonjudicial     1 year                                    None
                                                             Montana           Primarily nonjudicial     Generally 1 year; for small tracts no None
                                                             Nebraska          Primarily nonjudicial     No                                        None




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    State          Foreclosure Process41         Right of Redemption42                Mediation
                                                                                      Programs
   Nevada        Primarily nonjudicial     No                                     Yes58
New Hampshire    Primarily nonjudicial     No                                     Yes59
 New Jersey      Primarily judicial        6 months                               Yes60
 New Mexico      Primarily nonjudicial     9 months                               Yes61
  New York       Primarily judicial        No                                     Yes62
North Carolina   Primarily nonjudicial     10 days                                None

 North Dakota    Primarily judicial        60 days or 1 year for agricultural     None
                                           land
     Ohio        Primarily judicial        Before confirmation of sale with       Yes63
                                           the amount of judgment and
                                           associated costs paid
  Oklahoma       Primarily nonjudicial     Up to confirmation of sale             None
   Oregon        Primarily nonjudicial     No                                     Yes64
 Pennsylvania    Primarily judicial        No                                     Yes65
 Puerto Rico     Primarily judicial        No                                     None
 Rhode Island    Primarily nonjudicial     No, except if foreclosure by process   Yes66
                                           of law or by open entry then 3
                                           years
South Carolina   Primarily judicial        No redemption after sale.              None
                                           Redemption possible for 5 days
                                           after sheriff takes possession
South Dakota     Primarily nonjudicial     1 year                                 None
  Tennessee      Primarily nonjudicial     Generally no, could be 2 years but     None
                                           right to redemption is routinely
                                           waived
    Texas        Primarily nonjudicial     No                                     None
     Utah        Primarily nonjudicial     6 months for judicial foreclosure      None
   Vermont       Primarily judicial        In judicial strict foreclosure with    Yes67
                                           no sale, 6 months. In judicial
                                           foreclosure with sale may redeem
                                           until sale
   Virginia      Primarily nonjudicial     No                                     None
 Washington      Primarily nonjudicial     8 months                               Yes68
 West Virginia   Primarily nonjudicial     No                                     None
  Wisconsin      Primarily judicial        Up to time of sale; 12 months after    Yes69
                                           judgment unless creditor waives
                                           right, if waived 6 months
  Wyoming        Primarily nonjudicial     3 months                               None




                                                                                                  An Overview of the Home Foreclosure Process   | 89
Federal Housing Finance Agency Office of Inspector General




 90 |   An Overview of the Home Foreclosure Process
appendices
Federal Housing Finance Agency Office of Inspector General




                                            Appendix A: Glossary and Acronyms
                                            Glossary of Terms
                                            Acceleration: The declaring of a debt due and payable immediately. Lenders
                                            may possess this right under certain conditions, according to the terms of the
                                            obligation or applicable law.

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

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

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

                                            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, FHFA
                                            placed the Enterprises into conservatorships. As conservator, FHFA has
                                            undertaken to preserve and conserve the assets of the Enterprises and restore
                                            them to safety and soundness. FHFA also has assumed the powers of the 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 mortgages that are not insured or guaranteed by the Federal Housing
                                            Administration, the Department of Veterans Affairs, or the Department
                                            of Agriculture and that meet the Enterprises’ underwriting standards.
                                            Conforming mortgage loans have original balances below a specific threshold,
                                            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 States, although generally it can increase to a maximum of $625,500
                                            in specific higher cost areas.




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Credit Rating Agency: Credit rating agencies provide their opinions on the
creditworthiness of institutional borrowers and their financial obligations.
While the Securities and Exchange Commission recognizes 10 credit rating
agencies as Nationally Recognized Statistical Rating Organizations, 3 (S&P,
Moody’s, and Fitch) are considered the most prominent.

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 include conviction
for fraud or similar offenses.

Deed in Lieu: A deed in lieu of foreclosure is a disposition option in which a
mortgagor voluntarily deeds collateral property in exchange for a release from
all obligations under the mortgage.

Default: Default is failure to comply with the terms of an obligation.

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

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

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

Fair Debt Collection Practices Act: Legislation that prohibits deceptive,
unfair, and abusive practices by third-party collectors, but the Act permits
reasonable collection efforts that promote repayment of legitimate debts. For
the most part, creditors are exempt when they are collecting their own debts.

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




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Federal Housing Finance Agency Office of Inspector General




                                            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 HUD, FHA provides
                                            mortgage insurance on loans made by approved lenders throughout the
                                            United States and insures residential mortgages against payment losses. 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
                                            (Safety and Soundness Act): Legislation that modernized the regulatory
                                            oversight of Fannie Mae and Freddie Mac. It created 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.” The
                                            Safety and Soundness Act established risk-based and minimum capital
                                            standards for the Enterprises and established HUD-imposed housing goals
                                            for financing of affordable housing, housing in central cities, and other rural
                                            areas. OFHEO was eliminated by HERA.

                                            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.

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

                                            Golden Parachute: A term used to describe special compensation
                                            arrangements, such as cash, special bonuses, stock options, or vesting of
                                            previously awarded compensation, between a company and its senior executives
                                            in case the company is acquired or if an individual is fired or involuntarily
                                            separated.

                                            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 insured and guaranteed mortgages.

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

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




 94 |   Appendix A: Glossary and Acronyms
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Housing and Economic Recovery Act (HERA): HERA, enacted in 2008,
establishes FHFA-OIG and FHFA, which oversees the GSEs’ operations.
HERA also expands Treasury’s authority to provide financial support to the
GSEs.

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

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

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

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

Junior Lienholder: The security interest that can be availed only after the
senior lien is satisfied, is called a junior lien. The holder of this security interest
is the junior lienholder. Depending on the relative priority of the junior lien,
the junior lienholder may be the second mortgagee, third mortgagee, etc. For
example, a bank holding a home equity mortgage on a home is the junior
lienholder to the bank holding the primary mortgage.

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

Mediation: Mediation is a process by which a neutral third party (mediator)
assists the homeowner and lender in reaching a fair, voluntary, negotiated
agreement. The mediator does not decide who is right or wrong.

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



                                                                                           Appendix A: Glossary and Acronyms   | 95
Federal Housing Finance Agency Office of Inspector General




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

                                            Perfection: The legal recording of evidence for a creditor’s lien on a particular
                                            item of property.

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

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

                                            Primary Mortgage Market: The market for newly originated mortgages.

                                            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.

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

                                            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.

                                            Senior Lienholder: The security interest that has priority over all other
                                            interests in a property, is called a senior lien. The holder of this security interest
                                            is the senior lienholder or first mortgagee. For example, the bank holding the
                                            first mortgage on a home is the senior lienholder.




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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, under a preferred stock investment
facility for each Enterprise. Under the PSPAs, the Enterprises agree 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.

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

Short Refinancing: A refinancing option offered by FHA to homeowners
who owe more on their mortgages than their homes are worth.

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

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

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

Underwriter: In the context of the securities markets, an underwriter is an
entity that purchases newly issued bonds from the issuer and resells them
to investors. In their role as marketing and sales agents, underwriters have
specific obligations to disclose accurate and pertinent information about such
bond offerings, many of which are stated in the Securities Act of 1933.




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Federal Housing Finance Agency Office of Inspector General




                                            References
                                            Department of Housing and Urban Development, Glossary (online at http://
                                            portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/buying/
                                            glossary) (accessed Sept. 22, 2011).

                                            American Recovery and Reinvestment Act of 2009 (ARRA), Pub. L. No.
                                            111-5.

                                            United States Courts, Glossary (online at www.uscourts.gov/FederalCourts/
                                            Bankruptcy/BankruptcyBasics/Glossary.aspx) (accessed Sept. 22, 2011).

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

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

                                            FHLB of Dallas, Glossary of Common Terms (online at www.fhlb.com/
                                            Glossary.html#C) (accessed Sept. 22, 2011).

                                            Federal Housing Finance Agency, Office of Conservatorship Operations (online
                                            at www.fhfa.gov/Default.aspx?Page=344) (accessed Sept. 22, 2011).

                                            Federal Housing Finance Agency, FHFA Announces Suspension of Capital
                                            Classifications During Conservatorship and Discloses Minimum and Risk-
                                            Based Capital Classifications as Undercapitalized for the Second Quarter 2008
                                            for Fannie Mae and Freddie Mac (Oct. 9, 2008) (online at www.fhfa.gov/
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                                            Federal Housing Finance Agency, Conforming Loan Limit (online at www.
                                            fhfa.gov/Default.aspx?Page=185) (accessed Sept. 22, 2011).

                                            Credit Rating Agency Reform Act, Pub. L. No. 109-291, § 3 (2006).

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                                            Report_to_the_Congress.pdf ).


 98 |   Appendix A: Glossary and Acronyms
                                                            Semiannual Report to the Congress | SEPTEMBER 30, 2011




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

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

Federal Trade Commission, Annual Report 2009: Fair Debt Collection
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(accessed Sept. 22, 2011).

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at www.fhlbanks.com/assets/pdfs/sidebar/FHLBanksWhitePaper.pdf )
(accessed Sept. 22, 2011).

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about_freddie.html) (accessed Sept. 22, 2011).

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Administration (FHA) (online at http://portal.hud.gov/hudportal/
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(B-302825) (online at www.gao.gov/decisions/appro/302825.htm).

Office of the Special Inspector General for the Troubled Asset Relief
Program, Despite Evolving Rules On Executive Compensation, SIGTARP
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(online at www.sigtarp.gov/reports/audit/2009/Despite%20Evolving%20
Rules%20on%20Exec%20Comp..._8_19_09.pdf ).

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ginniemae.gov/media/ginnieFAQ.asp?Section=Media) (accessed Sept. 22,
2011).

Ginnie Mae, About Ginnie Mae (online at www.ginniemae.gov/about/about.
asp?Section=About) (accessed Sept. 22, 2011).

W. Scott Frame & Lawrence J. White, Regulating Housing GSEs: Thoughts
on Institutional Structure and Authorities, Federal Reserve Bank of Atlanta:
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filelegacydocs/er04_framewhite.pdf ) (accessed Sept. 22, 2011).

Freddie Mac, Glossary of Finance and Economic Terms (online at www.
freddiemac.com/smm/g_m.htm) (accessed Sept. 22, 2011).

Government Accountability Office, Management Report: Opportunities for
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2010) (GAO/10-587R) (online at www.gao.gov/products/GAO-10-587R).




                                                                                      Appendix A: Glossary and Acronyms   | 99
Federal Housing Finance Agency Office of Inspector General




                                             Congressional Budget Office, Written Testimony of Douglas Holtz-
                                             Eakin, Director of CBO, Regulation of the Housing Government-
                                             Sponsored Enterprises (Oct. 23, 2003) (online at www.cbo.gov/doc.
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                                             sogpubs.unc.edu/electronicversions/pdfs/ptb150.pdf ).

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                                             foreclosure/homeowner_qs.htm#2) (accessed Oct. 19, 2011).

                                             Securities and Exchange Commission, Mortgage-Backed Securities (online at
                                             www.sec.gov/answers/mortgagesecurities.htm) (accessed Sept. 22, 2011).

                                             Freddie Mac, Glossary of Finance and Economic Terms (online at www.
                                             freddiemac.com/smm/n_r.htm#O) (accessed Sept. 29, 2011).

                                             Federal Housing Finance Agency, 2010-2011 Enterprise Housing Goals;
                                             Enterprise Book-entry Procedures (RIN-2590-AA26) (online at www.fhfa.
                                             gov/webfiles/16603/FinalRuleAffHsgGoals9210.pdf ) (accessed Sept. 22,
                                             2011).

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

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

                                             Office of the Special Inspector General for the Troubled Asset Relief
                                             Program, Quarterly Report to Congress, at 150 (Oct. 26, 2010) (online at
                                             www.sigtarp.gov/reports/congress/2010/October2010_Quarterly_Report_
                                             to_Congress.pdf ).




 100 |   Appendix A: Glossary and Acronyms
                                                         Semiannual Report to the Congress | SEPTEMBER 30, 2011




Freddie Mac, Single-Family Credit Guarantee Business (online at www.
freddiemac.com/corporate/company_profile/our_business/index.html)
(accessed Sept. 22, 2011).

Federal Housing Finance Agency, Senior Preferred Stock Purchase Agreement
(online at www.fhfa.gov/Default.aspx?Page=364) (accessed Sept. 22, 2011).

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

Freddie Mac, Glossary of Finance and Economic Terms (online at www.
freddiemac.com/smm/s_z.htm#S) (accessed Sept. 29, 2011).

United States Department of Justice, FY 2009 Congressional Budget Tax
Division, at 16 (online at www.justice.gov/jmd/2009justification/pdf/fy09-
tax.pdf ) (accessed Sept. 29, 2011).

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

Internal Revenue Service, Module A-Introduction to Tax-Exempt Bonds
(4232-002) (online at www.irs.gov/pub/irs-tege/ph1moda.pdf ) (accessed
Sept. 22, 2011).




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                                             Acronyms and Abbreviations
                                             Agency- Federal Housing           FDIC-OIG- Federal Deposit
                                             Finance Agency                    Insurance Corporation Office of
                                                                               Inspector General
                                             Blue Book- Quality Standards
                                             for Inspection and Evaluation     FFETF- Financial Fraud
                                                                               Enforcement Task Force
                                             CIGFO- Council of Inspectors
                                             General on Financial Oversight    FHA- Federal Housing
                                                                               Administration
                                             CIGIE- Council of the
                                             Inspectors General on Integrity   FHFA- Federal Housing Finance
                                             and Efficiency                    Agency

                                             CPO- Chief Privacy Officer        FHFA-OIG- Federal Housing
                                                                               Finance Agency Office of
                                             Delegations- Conservatorship      Inspector General
                                             Delegations/Operating Protocol
                                             for Delegations                   FHFB- Federal Housing Finance
                                                                               Board
                                             Dodd-Frank Act- Dodd-
                                             Frank Wall Street Reform and      FHLBank System- Federal
                                             Consumer Protection Act of 2010   Home Loan Bank System

                                             DOJ- United States Department     FHLBanks- Federal Home Loan
                                             of Justice                        Banks

                                             DOT- Deed of Trust                FinCEN- Financial Crimes
                                                                               Enforcement Network
                                             EESA- Emergency Economic
                                             Stabilization Act                 FISMA- Federal Information
                                                                               System Management Act of 2002
                                             Enterprises- Fannie Mae and
                                             Freddie Mac                       Fitch- Fitch Ratings

                                             EO- Executive Office              Freddie Mac- Federal Home
                                                                               Loan Mortgage Corporation
                                             FAAs- Financial Agency
                                             Agreements                        GAO- United States
                                                                               Government Accountability
                                             Fannie Mae- Federal National      Office
                                             Mortgage Association
                                                                               Ginnie Mae- Government
                                             FBI- Federal Bureau of            National Mortgage Association
                                             Investigation
                                                                               Gramm-Leach-Bliley- Financial
                                             FDIC- Federal Deposit             Services Modernization Act of
                                             Insurance Corporation             1999




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GSEs- Government-Sponsored       NIST- National Institute of
Enterprises                      Standards and Technology

HAFA- Home Affordable            NRSRO- Nationally Recognized
Foreclosure Alternatives         Statistical Rating Organization

HAMP- Home Affordable            OA- Office of Audits
Modification Program
                                 OAd- Office of Administration
HARP- Home Affordable
Refinancing Program              OC- Office of Counsel

HERA- Housing and Economic       Ocala- Ocala Funding LLC
Recovery Act of 2008             OE- Office of Evaluations
HOPE- Home Owners                OFHEO- Office of Federal
Protection Economics, Inc.       Housing Enterprise Oversight
HUD- United States Department    OI- Office of Investigations
of Housing and Urban
Development                      OMB- Office of Management
                                 and Budget
HUD-OIG- United States
Department of Housing and        OPOR- Office of Policy,
Urban Development Office of      Oversight, and Review
Inspector General
                                 PII- Personally Identifiable
IRS-CI- Internal Revenue         Information
Service-Criminal Investigation
                                 POA&Ms- Plans of Action and
MBS- Mortgage-Backed             Milestones
Securities
                                 PSPAs- Senior Preferred Stock
MERS- Mortgage Electronic        Purchase Agreements
Registration System
                                 QRMs- Qualified Residential
MFWG- Mortgage Fraud             Mortgages
Working Group
                                 RAN- Retained Attorney
MHA- Making Home                 Network
Affordable Programs
                                 RATB- Recovery Accountability
Moody’s- Moody’s Investors       and Transparency Board
Service
                                 RefCorp- Resolution Funding
NAAG- National Association of    Corporation
Attorneys General
                                 REO- Real Estate Owned




                                                                         Appendix A: Glossary and Acronyms   | 103
Federal Housing Finance Agency Office of Inspector General




                                             RFI- Request for Information

                                             S&P- Standard & Poor’s Rating
                                             Services

                                             Safety and Soundness Act- Federal
                                             Housing Enterprises Financial
                                             Safety and Soundness Act of 1992

                                             SEC- Securities and Exchange
                                             Commission

                                             SIGTARP- Office of the Special
                                             Inspector General for the Troubled
                                             Asset Relief Program

                                             SORN- System of Records Notice

                                             TBW- Taylor, Bean & Whitaker
                                             Mortgage Corporation

                                             Treasury- United States
                                             Department of the Treasury

                                             UBS- UBS Americas, Inc.

                                             USDA- United States Department
                                             of Agriculture

                                             VA- United States Department of
                                             Veterans Affairs

                                             Working Group- Council of the
                                             Inspectors General on Integrity
                                             and Efficiency Suspension and
                                             Debarment Working Group

                                             Yellow Book- Government
                                             Auditing Standards




 104 |   Appendix A: Glossary and Acronyms
                                                                                        Semiannual Report to the Congress | SEPTEMBER 30, 2011




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

 Source/Requirement                                                                              Pages

 Section 5(a)(1)- A description of significant problems, abuses, and deficiencies relating to     5-8
 the administration of programs and operations of FHFA.                                          36-48

 Section 5(a)(2)- A description of the recommendations for corrective action made by FHFA-
                                                                                                 36-48
 OIG with respect to significant problems, abuses, or deficiencies.

 Section 5(a)(3)- An identification of each significant recommendation described in previous
                                                                                                 65-66
 semiannual reports on which corrective action has not been completed.

 Section 5(a)(4)- A summary of matters referred to prosecutive authorities and the
                                                                                                 49-53
 prosecutions and convictions that have resulted.

 Section 5(a)(5)- A summary of each report made to the Director of FHFA.                         36-48

 Section 5(a)(6)- A listing, subdivided according to subject matter, of each audit and
 evaluation report issued by FHFA-OIG during the reporting period and for each report, where
 applicable, the total dollar value of questioned costs (including a separate category for the   36-48
 dollar value of unsupported costs) and the dollar value of recommendations that funds be
 put to better use.

 Section 5(a)(7)- A summary of each particularly significant report.                             36-48

 Section 5(a)(8)- Statistical tables showing the total number of audit and evaluation reports
                                                                                                  106
 and the total dollar value of questioned and unsupported costs.

 Section 5(a)(9)- Statistical tables showing the total number of audit and evaluation reports
                                                                                                  107
 and the dollar value of recommendations that funds be put to better use by management.

 Section 5(a)(10)- A summary of each audit and evaluation report issued before the
 commencement of the reporting period for which no management decision has been made              107
 by the end of the reporting period.

 Section 5(a)(11)- A description and explanation of the reasons for any significant revised
                                                                                                  107
 management decision made during the reporting period.




                                                                                                 Appendix B: Information Required by the Inspector General Act   | 105
Federal Housing Finance Agency Office of Inspector General




                                                        Source/Requirement                                                                         Pages

                                                        Section 5(a)(12)- Information concerning any significant management decision with which
                                                                                                                                                    107
                                                        the Inspector General is in disagreement.

                                                        Section 5(a)(13)- The information described under section 05(b) of the Federal Financial
                                                                                                                                                   107-108
                                                        Management Improvement Act of 1996.



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

                                                      Audit and Evaluation Reports with Questioned and
                                                      Unsupported Costs
                                                      During this semiannual period, FHFA-OIG has released eight reports:

                                                              • E
                                                                 valuation of the Federal Housing Finance Agency’s Oversight
                                                                of Freddie Mac’s Repurchase Settlement with Bank of America
                                                                (EVL-2011-006, September 27, 2011)
                                                              • E
                                                                 valuation of Whether FHFA Has Sufficient Capacity to Examine
                                                                the GSEs (EVL-2011-005, September 23, 2011)
                                                              • E
                                                                 valuation of FHFA’s Oversight of Fannie Mae’s Management of
                                                                Operational Risk (EVL-2011-004, September 23, 2011)
                                                              • E
                                                                 valuation of FHFA’s Role in Negotiating Fannie Mae’s and Freddie
                                                                Mac’s Responsibilities in Treasury’s Making Home Affordable
                                                                Program (EVL-2011-003, August 12, 2011)
                                                              • F
                                                                 HFA’s Oversight of Fannie Mae’s Default-Related Legal Services
                                                                (AUD-2011-004, September 30, 2011)
                                                              • C
                                                                 lifton Gunderson LLP’s Independent Audit of the Federal Housing
                                                                Finance Agency’s Privacy Program and Implementation – 2011
                                                                (AUD-2011-003, September 30, 2011)
                                                              • C
                                                                 lifton Gunderson LLP’s Independent Audit of the Federal Housing
                                                                Finance Agency’s Information Security Program – 2011 (AUD-2011-
                                                                002, September 29, 2011)
                                                              • A
                                                                 udit of the Federal Housing Finance Agency’s Consumer Complaints
                                                                Process (AUD-2011-001, June 21, 2011)
                                                      These reports evaluated and audited certain aspects of the Agency’s operations
                                                      and its compliance with certain federal requirements. These reports do not
                                                      include dollar values for questioned and unsupported costs.




 106 |   Appendix B: Information Required by the Inspector General Act
                                                           Semiannual Report to the Congress | SEPTEMBER 30, 2011




Audit and Evaluation Reports with Recommendations That
Funds Be Put to Better Use by Management
FHFA-OIG’s audit and evaluation reports listed above do not include
recommendations with dollar values for funds to be put to better use by
management.

Audit and Evaluation Reports with No Management Decision
Section 5(a)(10) of the Inspector General Act, as amended, requires that
FHFA-OIG report on each audit and evaluation report issued before the
commencement of the reporting period for which no management decision
has been made by the end of the reporting period. There were no audit or
evaluation reports issued before the beginning of the reporting period that are
awaiting a management decision.

Significantly Revised Management Decisions
Section 5(a)(11) of the Inspector General Act, as amended, requires that
FHFA-OIG report information concerning the reasons for any significant
revised management decision made during the reporting period. During
the six-month reporting period ended September 30, 2011, there were no
significant revised management decisions on FHFA-OIG’s audits and
evaluations.

Significant Management Decision with Which the Inspector
General Disagrees
Section 5(a)(12) of the Inspector General Act, as amended, requires that
FHFA-OIG report information concerning any significant management
decision with which the Inspector General is in disagreement. During the
current reporting period, there were no management decisions with which the
Inspector General disagreed.

Federal Financial Management Improvement Act of 1996
The provisions of HERA require FHFA to implement and maintain financial
management systems that comply substantially with federal financial
management systems requirements, applicable federal accounting standards,
and the U.S. Government Standard General Ledger at the transaction level.

For fiscal year 2010, FHFA received from GAO an unqualified (clean) audit
opinion on its annual financial statements and internal control over financial
reporting. GAO also reported that it identified no material weaknesses in
internal controls or instances of noncompliance with laws or regulations.
As part of its audit, GAO assessed FHFA’s compliance with the applicable
provisions of HERA.



                                                                     Appendix B: Information Required by the Inspector General Act   | 107
Federal Housing Finance Agency Office of Inspector General




                                                      Several FHFA-OIG reports published during the semiannual period identified
                                                      specific opportunities to strengthen FHFA’s internal controls. These reports
                                                      are summarized on pages 36 through 48.




 108 |   Appendix B: Information Required by the Inspector General Act
                                                          Semiannual Report to the Congress | SEPTEMBER 30, 2011




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

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

Evaluation of Whether FHFA Has Sufficient Capacity to Examine the GSEs
(EVL-2011-005, September 23, 2011).

Evaluation of FHFA’s Oversight of Fannie Mae’s Management of Operational Risk
(EVL-2011-004, September 23, 2011).

Evaluation of FHFA’s Role in Negotiating Fannie Mae’s and Freddie Mac’s
Responsibilities in Treasury’s Making Home Affordable Program (EVL-2011-003,
August 12, 2011).

Audit Reports
FHFA’s Oversight of Fannie Mae’s Default-Related Legal Services (AUD-2011-004,
September 30, 2011).

Clifton Gunderson LLP’s Independent Audit of the Federal Housing Finance
Agency’s Privacy Program and Implementation - 2011 (AUD-2011-003,
September 30, 2011).

Clifton Gunderson LLP’s Independent Audit of the Federal Housing
Finance Agency’s Information Security Program - 2011 (AUD-2011-002,
September 29, 2011).

Audit of the Federal Housing Finance Agency’s Consumer Complaints Process
(AUD-2011-001, June 21, 2011).

Other Reports
Strategic Plan: Fiscal Years 2012-2014 (September 7, 2011).




                                                                                    Appendix C: FHFA-OIG Reports   | 109
Federal Housing Finance Agency Office of Inspector General




Appendix D: FHFA-OIG Organizational Chart


                                                                Inspector General
                                                                  Principal Deputy
                                                                 Inspector General


                                   Chief of
                                                                                                  Chief Counsel
                                    Staff



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




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




 110 |   Appendix D: FHFA-OIG Organizational Chart
Semiannual Report to the Congress | SEPTEMBER 30, 2011




                 Appendix D: FHFA-OIG Organizational Chart   | 111
Federal Housing Finance Agency Office of Inspector General




                                   Appendix E: Endnotes
                                   1.	    Federal Housing Finance Agency Office of Inspector General, Evaluation
                                          of the Federal Housing Finance Agency’s Oversight of Freddie Mac’s Repurchase
                                          Settlement with Bank of America (Sept. 27, 2011) (EVL-2011-006) (online
                                          at www.fhfaoig.gov/Content/Files/EVL-2011-006.pdf ).

                                   2.	     ederal Housing Finance Agency Office of Inspector General, Evaluation
                                          F
                                          of FHFA’s Role in Negotiating Fannie Mae’s and Freddie Mac’s Responsibilities
                                          in Treasury’s Making Home Affordable Program (Aug. 12, 2011) (EVL-2011-
                                          003) (online at www.fhfaoig.gov/Content/Files/EVL-2011-003.pdf ).

                                   3.	    Federal Housing Finance Agency Office of Inspector General, Evaluation
                                          of Federal Housing Finance Agency’s Oversight of Fannie Mae’s and Freddie
                                          Mac’s Executive Compensation Programs (Mar. 31, 2011) (EVL-2011-002)
                                          (online at www.fhfaoig.gov/Content/Files/Exec%20Comp%20DrRpt%20
                                          03302011%20final,%20signed.pdf ).

                                   4.	     ederal Housing Finance Agency Office of Inspector General, Evaluation
                                          F
                                          of Whether FHFA Has Sufficient Capacity to Examine the GSEs (Sept. 23,
                                          2011) (EVL-2011-005) (online at www.fhfaoig.gov/Content/Files/EVL-
                                          2011-005.pdf ).

                                   5.	    Id.

                                   6.	     ederal Housing Finance Agency Office of Inspector General, Audit of
                                          F
                                          the Federal Housing Finance Agency’s Consumer Complaints Process ( June
                                          21, 2011) (AUD-2011-001) (online at www.fhfaoig.gov/Content/Files/
                                          AUD-2011-001.pdf ).

                                   7.	     ederal Housing Finance Agency Office of Inspector General, FHFA’s
                                          F
                                          Oversight of Fannie Mae’s Default-Related Legal Services (Sept. 30, 2011)
                                          (AUD-2011-004) (online at www.fhfaoig.gov/Content/Files/AUD-2011-
                                          004.pdf ).

                                   8.	     ederal Housing Finance Agency Office of Inspector General, Evaluation
                                          F
                                          of FHFA’s Oversight of Fannie Mae’s Management of Operational Risk (Sept.
                                          23, 2011) (EVL-2011-004) (online at www.fhfaoig.gov/Content/Files/
                                          EVL-2011-004.pdf ).

                                   9.	     ousing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-
                                          H
                                          289, § 1145.

                                   10.	   Id. at § 1117.

                                   11.	    mergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110-
                                          E
                                          343, § 2.

                                   12.	   Id. at § 110.



 112 |   Appendix E: Endnotes
                                                              Semiannual Report to the Congress | SEPTEMBER 30, 2011




13.	   Id.

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

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

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

17.	   ederal Housing Finance Agency, Data as of September 30, 2011 on
       F
       Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-
       Related Securities, at 4-7 (online at www.fhfa.gov/webfiles/22692/
       TSYSupport09302011.pdf) (accessed Oct. 7, 2011).

18.	    ederal Housing Finance Agency, The FHLBank System (online at www.
       F
       fhfa.gov/Default.aspx?Page=22) (accessed Sept. 22, 2011).

19.	    HLBanks Office of Finance, History of Service (online at www.fhlb-of.
       F
       com/ofweb_userWeb/pageBuilder/mission--history-29) (accessed Sept.
       22, 2011).

20.	   I d.; FHLBanks, Frequently Asked Questions: Federal Home Loan
        Bank Advances (online at www.fhlbanks.com/overview_faqs_advances.
        htm) (accessed Sept. 22, 2011).

21.	    HLBanks Office of Finance, Funding (online at www.fhlb-of.com//
       F
       ofweb_userWeb/pageBuilder/funding-30) (accessed Sept. 22, 2011);
       FHLBanks, Frequently Asked Questions: Federal Home Loan Bank
       Advances (online at www.fhlbanks.com/overview_faqs_advances.htm)
       (accessed Sept. 22, 2011).

22.	   Fannie Mae, Loan Limits for Conventional Mortgages, 2011 Loan
        Limits (online at www.efanniemae.com/sf/refmaterials/loanlimits/
       indexjsp?from=hp) (accessed Oct. 7, 2011).

23.	   ederal Housing Finance Agency, Alternative Mortgage Servicing
       F
       Compensation Discussion Paper (Sept. 27, 2011) (online at www.fhfa.
       gov/webfiles/22663/ServicingCompDiscussionPaperFinal092711.
       pdf); Federal Housing Finance Agency, Joint Initiative Seeks Public




                                                                                               Appendix E: Endnotes   | 113
Federal Housing Finance Agency Office of Inspector General




                                          Comment on Alternative Mortgage Servicing Compensation; Releases
                                          Discussion Paper (Sept. 27, 2011) (online at www.fhfa.gov/webfiles/22664/
                                          WhitePaperServComp092711.pdf).

                                   24.	    ederal Housing Finance Agency, FHFA Sues 17 Firms to Recover Losses
                                          F
                                          to Fannie Mae and Freddie Mac (Sept. 2, 2011) (online at www.fhfa.gov/
                                          webfiles/22599/PLSLitigation_final_090211.pdf ).

                                   25.	    ederal Housing Finance Agency, Federal Housing Finance Agency Action
                                          F
                                          Regarding Court Consideration of Proposed Bank of America Settlement (Aug.
                                          30, 2011) (online at www.fhfa.gov/webfiles/22570/BofA83011.pdf ).

                                   26.	   ederal Housing Finance Agency, Foreclosure Prevention & Refinance
                                          F
                                          Report Second Quarter 2011, FHFA Federal Property Manager’s Report.

                                   27.	    ederal Housing Finance Agency, Department of Housing and Urban
                                          F
                                          Development, Department of the Treasury, FHFA, Treasury, HUD Seek
                                          Input on Disposition of Real Estate Owned Properties Range of Ideas Sought,
                                          Including Transition to Rental (Aug. 10, 2011) (online at www.fhfa.gov/
                                          webfiles/22367/FHFARFIReleaseFinal.pdf ).

                                   28.	   ederal Housing Finance Agency, Request for Information: Enterprise/
                                          F
                                          FHA REO Asset Disposition (Aug. 10, 2011) (online at www.fhfa.gov/
                                          webfiles/22366/RFIFinal081011.pdf ).

                                   29.	    tandard & Poor’s, Ratings On Select GREs And FDIC- And NCUA-
                                          S
                                          Guaranteed Debt Lowered After Sovereign Downgrade (Aug. 8, 2011).

                                   30.	   ederal Housing Finance Agency, Statement of FHFA Acting Director
                                          F
                                          Edward J. DeMarco on Recent Standard & Poor’s Rating Action (Aug. 8, 2011)
                                          (online at www.fhfa.gov/webfiles/22171/SP_statement_080811.pdf ).

                                   31.	    ederal Housing Finance Agency, FHFA Announces Completion of RefCorp
                                          F
                                          Obligation and Approves FHLB Plans to Build Capital (Aug. 5, 2011) (online
                                          at www.fhfa.gov/webfiles/21861/Refcorp080511.pdf ).

                                   32.	    HFA Internal Memorandum from Office of Housing and Regulatory
                                          F
                                          Policy, Office of Conservatorship Operations, Division of Examination
                                          Program Support, Office of Policy Analysis and Research, and Office of
                                          the General Counsel to Edward DeMarco, Acting Director, Record of
                                          Decision Memo – Fannie Mae Transfer of Servicing Transaction (Aug. 3,
                                          2011).

                                   33.	   ederal Housing Finance Agency, FHFA’s Report to Congress Details
                                          F
                                          Annual Examinations of Fannie Mae, Freddie Mac and Federal Home
                                          Loan Banks ( June 13, 2011) (online at www.fhfa.gov/webfiles/21571/
                                          ReporttoCongress201061311.pdf); Federal Housing Finance Agency,




 114 |   Appendix E: Endnotes
                                                              Semiannual Report to the Congress | SEPTEMBER 30, 2011




       Report to Congress 2010 ( June 13, 2011) (online at www.fhfa.gov/
       webfiles/21572/FHFA2010_RepToCongress6_13_11.pdf).

34.	    ederal Housing Finance Agency, Fannie Mae and Freddie Mac to Align
       F
       Guidelines for Servicing Delinquent Mortgages (Apr. 28, 2011) (online at
       www.fhfa.gov/webfiles/21190/SAI42811Final.pdf).

35.	   Fannie Mae, Servicing Alignment Initiative – Overview for Fannie Mae
        Servicers (Apr. 28, 2011) (online at www.efanniemae.com/sf/servicing/pdf/
        saioverview.pdf); Freddie Mac, Servicing Alignment Initiative Overview
        for Freddie Mac Servicers ( June 3, 2011) (online at www.freddiemac.com/
        service/factsheets/pdf/servicing_alignment.pdf).

36.	    oard of Governors of the Federal Reserve System, Department of Housing
       B
       and Urban Development, Federal Deposit Insurance Corporation, Federal
       Housing Finance Agency, Office of the Comptroller of the Currency,
       Securities and Exchange Commission, Agencies Seek Comment on Risk
       Retention Proposal (Mar. 31, 2011) (online at www.fhfa.gov/webfiles/20689/
       QRM331F.pdf ).

37.	    oard of Governors of the Federal Reserve System, Department of Housing
       B
       and Urban Development, Federal Deposit Insurance Corporation, Federal
       Housing Finance Agency, Office of the Comptroller of the Currency,
       Securities and Exchange Commission, Agencies Extend Comment Period on
       Risk Retention Proposed Rulemaking ( June 7, 2011) (online at www.fhfa.
       gov/webfiles/21523/RiskRetentionextPR6711.pdf ).

       
38.	 Federal   Housing Finance Agency, FHFA Directs Fannie Mae and Freddie
       Mac to Adopt Uniform Improvements to Foreclosure Attorney Networks (Oct.
       18, 2011) (online at www.fhfa.gov/webfiles/22718/RANDCP101811.
       pdf ).

39.	 HERA at § 1108 (added Section 1313b to the Federal Housing Enterprises
       Safety and Soundness Act, 12 U.S.C. § 4513b).

40.	 Commissioner   v. Wilcox, 327 U.S. 404 (1946).

       
41.	 National Consumer Law Center, Foreclosure Report: Survey of State Foreclosure
       Laws (online at www.nclc.org/images/pdf/foreclosure_mortgage/state_
       laws/survey-foreclosure-card.pdf ) (accessed Sept. 22, 2011).

42.	 Id.


43.	 
     National    Consumer Law Center, Foreclosure Mediation Programs by State
       (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
       html) (accessed Sept. 22, 2011).




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




                                   44.	 
                                        Douglas     County Housing Partnership, Foreclosure Mediation Program
                                          (online at www.douglascountyhousingpartnership.org/foreclosure.htm)
                                          (accessed Sept. 22, 2011).

                                   45.	 
                                        State    of Connecticut Judicial Branch, Foreclosure Mediation Program
                                          (online at www.jud.ct.gov/foreclosure/) (accessed Sept. 22, 2011);
                                          National Consumer Law Center, Foreclosure Mediation Programs by State
                                          (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                          html) (accessed Sept. 22, 2011).

                                   46.	 Delaware   State Housing Authority, NEW Residential Mortgage Foreclosure
                                          Mediation Program (online at www.deforeclosurehelp.org/mediation.html)
                                          (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure
                                          Mediation Programs by State (online at www.nclc.org/issues/foreclosure-
                                          mediation-programs-by-state.html) (accessed Sept. 22, 2011).

                                   47.	 
                                        District of Columbia, Foreclosure Mediation Program (FMP) (online at
                                          www.disb.dc.gov/disr/cwp/view,a,1299,q,645508.asp) (accessed Sept. 22,
                                          2011).

                                   48.	 
                                        Collins    Center for Public Policy, Mortgage Mediation (online at www.
                                          collinscenter.org/page/mediation_home) (accessed Oct. 27, 2011);
                                          National Consumer Law Center, Foreclosure Mediation Programs by State
                                          (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                          html) (accessed Sept. 22, 2011).

                                          
                                   49.	 Governor      of the State of Hawaii, Help for At-Risk Homeowners
                                          (online at www.hawaii.gov/gov/newsroom/in-the-news/help-for-at-risk-
                                          homeowners) (accessed Sept. 22, 2011); National Consumer Law Center,
                                          Foreclosure Mediation Programs by State (online at www.nclc.org/issues/
                                          foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).

                                          
                                   50.	 Circuit   Court of Cook County, Mortgage Foreclosure Mediation Program
                                          (online at www.cookcountyforeclosurehelp.org/) (accessed Sept. 22, 2011);
                                          National Consumer Law Center, Foreclosure Mediation Programs by State
                                          (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                          html) (accessed Sept. 22, 2011).

                                          
                                   51.	 Indiana    Courts, Help With Mortgage Foreclosures (online at www.in.gov/
                                          judiciary/home/#how) (accessed Sept. 12, 2011); National Consumer Law
                                          Center, Foreclosure Mediation Programs by State (online at www.nclc.org/
                                          issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 12,
                                          2011).

                                   52.	    ity of Louisville, Kentucky, Mayor Abramson and Congressman John
                                          C
                                          Yarmuth Announce Foreclosure Conciliation Project ( June 30, 2009) (online
                                          at www.louisvilleky.gov/Housing/News/2009); National Consumer Law




 116 |   Appendix E: Endnotes
                                                            Semiannual Report to the Congress | SEPTEMBER 30, 2011




   Center, Foreclosure Mediation Programs by State (online at www.nclc.org/
   issues/foreclosure-mediation-programs-by-state.html) (accessed Sept. 22,
   2011).

   
53.	 State
         of Maine Courts Judicial Branch, Foreclosure Diversion Program
   (online at www.courts.state.me.us/court_info/fdp/index.html) (accessed
   Sept. 22, 2011); National Consumer Law Center, Foreclosure Mediation
   Programs by State (online at www.nclc.org/issues/foreclosure-mediation-
   programs-by-state.html) (accessed Sept. 22, 2011).

   
54.	 Maryland Home Owners Preserving Equity,Maryland’s Foreclosure Mediation
   (online at www.mdhope.dhcd.maryland.gov/ForeclosureMediation/Pages/
   default.aspx) (accessed Sept. 22, 2011); National Consumer Law Center,
   Foreclosure Mediation Programs by State (online at www.nclc.org/issues/
   foreclosure-mediation-programs-by-state.html) (accessed Sept. 22, 2011).

   
55.	 NationalConsumer Law Center, Foreclosure Mediation Programs by State
   (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
   html) (accessed Sept. 22, 2011).

   
56.	 Community  Economic Development Association of Michigan, Michigan
   Foreclosure Task Force (online at www.cedam.info/resources/mftf/index.
   php) (accessed Sept. 22, 2011); National Consumer Law Center, Foreclosure
   Mediation Programs by State (online at www.nclc.org/issues/foreclosure-
   mediation-programs-by-state.html) (accessed Sept. 22, 2011).

   
57.	 Minnesota  Housing Finance Agency, Foreclosure Prevention (online
   at www.mnhousing.gov/consumers/home-owners/foreclosure) (accessed
   Sept. 28, 2011).

   
58.	 The Nevada Judiciary, Foreclosure Mediation (online at www.nevadajudiciary.
   us/index.php/foreclosuremediation) (accessed Sept. 12, 2011); National
   Consumer Law Center, Foreclosure Mediation Programs by State
   (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
   html) (accessed Sept. 22, 2011).

   
59.	 New  Hampshire Judicial Branch, Office of Mediation and Arbitration -
   Summary of the Foreclosure Mediation Program (online at www.courts.
   state.nh.us/adrp/foreclosure/index.htm) (accessed Sept. 22, 2011);
   National Consumer Law Center, Foreclosure Mediation Programs by State
   (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
   html) (accessed Sept. 22, 2011).

   
60.	 New Jersey Judiciary Foreclosure Mediation Program, Home Page
   (online at www.nj.gov/foreclosuremediation/) (accessed Sept. 22, 2011);
   National Consumer Law Center, Foreclosure Mediation Programs by State




                                                                                             Appendix E: Endnotes   | 117
Federal Housing Finance Agency Office of Inspector General




                                      (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                      html) (accessed Sept. 22, 2011).

                                      
                                   61.	 State
                                            of New Mexico First Judicial District Court, Forms (online at
                                      www.firstdistrictcourt.com/Forms.htm) (accessed Sept. 22, 2011);
                                      National Consumer Law Center, Foreclosure Mediation Programs by State
                                      (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                      html) (accessed Sept. 22, 2011).

                                   62.	 
                                        NationalConsumer Law Center, Foreclosure Mediation Programs by State
                                      (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                      html) (accessed Sept. 22, 2011).

                                   63.	 Save
                                           the Dream Ohio, Help for Homeowners (online at www.savethedream.
                                      ohio.gov/Homeowners.aspx) (accessed Sept. 13, 2011); National Consumer
                                      Law Center, Foreclosure Mediation Programs by State (online at www.nclc.
                                      org/issues/foreclosure-mediation-programs-by-state.html) (accessed Sept.
                                      22, 2011).

                                   64.	 
                                        NationalConsumer Law Center, Foreclosure Mediation Programs by State
                                      (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                      html) (accessed Sept. 22, 2011).

                                   65.	 
                                        NationalConsumer Law Center, Foreclosure Mediation Programs by State
                                      (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                      html) (accessed Sept. 22, 2011).

                                   66.	 
                                        NationalConsumer Law Center, Foreclosure Mediation Programs by State
                                      (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                      html) (accessed Sept. 22, 2011).

                                      
                                   67.	 TheUniversity of Vermont, Mortgage Issues and Foreclosure (online at www.
                                      uvm.edu/consumer/?Page=foreclosure.html) (accessed Sept. 13, 2011);
                                      National Consumer Law Center, Foreclosure Mediation Programs by State
                                      (online at www.nclc.org/issues/foreclosure-mediation-programs-by-state.
                                      html) (accessed Sept. 22, 2011).

                                      
                                   68.	 Washington State Department of Financial Institutions, Washington
                                      Foreclosure Mediation Program (online at www.dfi.wa.gov/consumers/
                                      homeownership/foreclosure-mediation.htm) (accessed Sept. 22, 2011).

                                      
                                   69.	 Marquette  University Law School, Milwaukee Foreclosure Mediation
                                      Program (online at www.law.marquette.edu/foreclosure/) (accessed Sept.
                                      22, 2011); National Consumer Law Center, Foreclosure Mediation Programs
                                      by State (online at www.nclc.org/issues/foreclosure-mediation-programs-
                                      by-state.html) (accessed Sept. 29, 2011).




 118 |   Appendix E: Endnotes
Semiannual Report to the Congress | SEPTEMBER 30, 2011




                                 Appendix E: Endnotes   | 119
Federal Housing Finance Agency Office of Inspector General




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

Se m iann ual R e p ort
to t h e Cong r e ss
April 1, 2011, through September 30, 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