oversight

$1.1 Billion Increase in Expenses for Fannie Mae and Freddie Mac from 2012 through 2015: Where the Money Went

Published by the Federal Housing Finance Agency, Office of Inspector General on 2016-03-09.

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

         Federal Housing Finance Agency
             Office of Inspector General




$1.1 Billion Increase in Expenses for
   Fannie Mae and Freddie Mac
      from 2012 through 2015:
       Where the Money Went




 White Paper  WPR-2016-001  March 9, 2016
                Executive Summary
                The Federal National Mortgage Association (Fannie Mae) and the Federal
                Home Loan Mortgage Corporation (Freddie Mac) (collectively, the
                Enterprises) have been under the conservatorship of the Federal Housing
                Finance Agency (FHFA) since September 2008. For the Enterprises’ first
WPR-2016-001    three fiscal years in conservatorship, 2009 through 2012, FHFA delegated
                to the Enterprises the authority to establish their annual operating budgets.
March 9, 2016   Acting pursuant to this delegated authority, both Enterprises set their annual
                operating budgets for these years. In November 2012, FHFA, acting as
                conservator, rescinded that delegation and directed the Enterprises to obtain
                its review and approval of their annual operating budgets. FHFA’s stated
                purpose for that action was to ensure that the budgets aligned with its strategic
                direction and safety and soundness priorities. To date, FHFA has reviewed
                and approved the Enterprises’ budgets for fiscal years 2013 through 2015.

                Our evaluation, FHFA’s Exercise of Its Conservatorship Powers to Review
                and Approve the Enterprises’ Annual Operating Budgets Has Not Achieved
                FHFA’s Stated Purpose, September 30, 2015 (EVL-2015-006), assessed
                FHFA’s process to review and approve each of the Enterprises’ annual
                operating budgets, beginning with fiscal year 2013. Based on information
                provided by FHFA, we reported that the Enterprises’ combined budgets for
                2015 totaled $5.1 billion, a $1.2 billion increase from combined Enterprise
                expenses in 2012 of $3.9 billion. We found that FHFA’s budget review and
                approval process had not achieved FHFA’s stated purpose for reasserting
                its approval authority because of late timing, cursory-level analysis, and
                inadequate resources. We identified shortcomings in this process that
                prevented FHFA from exercising effective control over Enterprise spending
                in both amount and direction and recommended four actions to address them.
                FHFA agreed with three of our recommendations and “generally” agreed with
                the fourth.

                Given the significant size of these increases, we committed in that evaluation
                to trace, in a later project, the FHFA-approved net spending increases of more
                than $1 billion from 2012 through 2015 by the Enterprises. In this white
                paper, we report on the results of our efforts to trace the increase in Fannie
                Mae’s expenses, from $2.366 billion in 2012 to a projected $3.092 billion
                in 2015, a net increase of $726 million, or 30.68%, and in Freddie Mac’s
                expenses, from $1.561 billion in 2012 to a projected $1.937 billion in 2015, a
                net increase of $376 million, or 24.08%, as shown below.1

                While we identified shortcomings                            Enterprise Expenses 2012-2015
                with FHFA’s review and                                          (Actual and Projected)
                approval process in our earlier                          $3,300
                evaluation, we recognize that                                                   +30.68%
                                                                         $3,100
WPR-2016-001    FHFA approved all of these                               $2,900
                increases and we do not seek                             $2,700   Fannie




                                                            $ Millions
March 9, 2016   to second-guess its decisions.                           $2,500   Mae
                As a consequence, we make no                             $2,300
                findings on the reasonableness of                        $2,100
                the net increases in expenses in                                                +24.08%
                                                                         $1,900   Freddie
                this white paper.                                                 Mac
                                                                         $1,700

                While in conservatorship, the               $1,500
                                                                    2012 2013 2014 2015
                Enterprises have required $187.5
                billion in financial investment from the U.S. taxpayers to avert their insolvency
                and, through December 2015, the Enterprises have paid approximately $241.2
                billion in dividends on this investment. Despite their high leverage, lack of
                capital, conservatorship status, and uncertain future, the Enterprises have
                grown in size during conservatorship and, according to FHFA, their combined
                market share of newly issued mortgage-backed securities is approximately
                70%. Given this enormous investment in the Enterprises by the U.S.
                taxpayers, the unknown duration of the conservatorships, the Enterprises’
                critical role in the secondary mortgage market, and their unknown ability to
                sustain future profitability, we emphasize transparency in our oversight work
                to the fullest reasonable extent to foster accountability to stakeholders.

                This white paper, which tracks FHFA-approved net spending increases of more
                than $1 billion from 2012 through 2015 by the Enterprises, sheds light on
                where these monies were spent to provide an accounting for stakeholders.



                1
                 During our field work for this white paper, the Enterprises provided actual 2015
                expense data through August 2015 (for Fannie Mae) and September 2015 (for Freddie
                Mac) as well as their projected expenses for the remainder of 2015, and we used the
                actual and projected expense data for this white paper.
                Two weeks ago, after this white paper was drafted, the Enterprises issued their annual
                reports for the fiscal year ended December 31, 2015. According to these annual reports,
                actual administrative expenses for 2015 were $52 million less than the amount projected
                by the Enterprises ($42 million less for Fannie Mae and $10 million less for Freddie
                Mac), which resulted in an increase in actual expenses for Fannie Mae from $2.366
                billion in 2012 to $3.050 billion in 2015, a net increase of $684 million, or 28.90%, and
                an increase in actual expenses for Freddie Mac from $1.561 billion in 2012 to $1.927
                billion in 2015, a net increase of $366 million, or 23.44%.
                This report was prepared by Tara Lewis, Audit Director, with assistance
                from Alisa Davis, Senior Auditor; Anya Philbert, Auditor-In-Charge;
                Terese Blanchard, Senior Auditor; and Pamela L. Williams, Auditor.

                We appreciate the cooperation of FHFA and Enterprise staff, as well as the
                assistance of all those who contributed to the preparation of this report. This
                report has been distributed to Congress, the Office of Management and Budget,
WPR-2016-001    and others and will be posted on our website: www.fhfaoig.gov.

March 9, 2016


                Stacey Nahrwold
                Acting Deputy Inspector General for Audits
TABLE OF CONTENTS ................................................................
EXECUTIVE SUMMARY .............................................................................................................2

ABBREVIATIONS .........................................................................................................................6

BACKGROUND .............................................................................................................................7

WHERE THE MONEY WENT ......................................................................................................8
      Fannie Mae ...............................................................................................................................8
             Increases............................................................................................................................8
             Decreases ........................................................................................................................11
      Freddie Mac ............................................................................................................................13
             Increases..........................................................................................................................13
             Decreases ........................................................................................................................16

CONCLUSION ..............................................................................................................................18

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................19

ADDITIONAL INFORMATION AND COPIES .........................................................................20




                                            OIG  WPR-2016-001  March 9, 2016                                                                  5
ABBREVIATIONS .......................................................................

CSP                   Common Securitization Platform

Enterprises           Fannie Mae and Freddie Mac

ERM                   Enterprise Risk Management

Expenses              Administrative Expenses

Fannie Mae            Federal National Mortgage Association

FHFA                  Federal Housing Finance Agency

Freddie Mac           Federal Home Loan Mortgage Corporation

MHA                   Making Home Affordable

OIG                   Federal Housing Finance Agency Office of Inspector General

PLS                   Private Label Securities

Treasury              U.S. Department of the Treasury




                          OIG  WPR-2016-001  March 9, 2016                        6
BACKGROUND ..........................................................................

In September 2015, the Federal Housing Finance Agency Office of Inspector General (OIG)
issued an evaluation, FHFA’s Exercise of Its Conservatorship Powers to Review and Approve
the Enterprises’ Annual Operating Budgets Has Not Achieved FHFA’s Stated Purpose,
September 30, 2015 (EVL-2015-006), which assessed FHFA’s process to review and
approve each of the Enterprises’ annual operating budgets, beginning with fiscal year 2013.
We found, at that point in time, that the Enterprises’ combined budgets for 2015 totaled
$5.1 billion, a $1.2 billion increase from combined Enterprise administrative expenses
(expenses) in 2012 of $3.9 billion.2 In that evaluation, we committed to trace where those
increases were spent. This white paper reports on the results of that tracing effort.

For this white paper, the Enterprises provided us with actual 2015 expense data through
August 2015 (for Fannie Mae) and September 2015 (for Freddie Mac) as well as their
projected expenses through the end of 2015. Based on that actual and projected data, the
Enterprises’ combined annual net expenses increased from $3.9 billion in 2012 to $5 billion
at year end 2015, representing a net increase of $1.1 billion during this period (the review
period).3

Fannie Mae reported to us that its expenses increased from $2.366 billion in 2012 to a
projected $3.092 billion in 2015, a net increase of $726 million, or 30.68%, during the review
period. Freddie Mac reported to us that its expenses increased from $1.561 billion in 2012 to
a projected $1.937 billion in 2015, a net increase of $376 million, or 24.08%, during the
review period.




2
  While the Enterprises label this spending as “administrative expenses,” we recognize that use of this term
could cause confusion; therefore, for purposes of this report, we use the term “expenses” to refer to this
spending.
3
  This $1.1 billion net increase in expenses reflects both increases and decreases in actual and projected
expenses for the Enterprises during the review period. As explained in footnote 1, the actual expenses through
December 31, 2015, as reported by the Enterprises in their recently released annual reports, reflect a net
increase in administrative expense of $1.05 billion for 2012-2015.



                                    OIG  WPR-2016-001  March 9, 2016                                           7
WHERE THE MONEY WENT .......................................................

We now trace the $1.1 billion in net increases in expenses, by Enterprise, during the review
period.

Fannie Mae

Fannie Mae’s expenses increased from $2.366 billion in 2012 to a projected $3.092 billion in
2015, a net increase of over $726 million, or 30.68%, over four years. We discuss below the
drivers of this net increase and summarize them in Figure 1.

   Increases

Implementation of Specific FHFA Strategic Goals and Initiatives – $476 Million Increase.
Each year, FHFA announces its strategic goals and initiatives relating to reform of the
housing finance system. FHFA achieves its strategic goals, in part, by issuing significant
policy determinations and initiatives in conservatorship directives, and by delegating to the
Enterprises the responsibility to implement and comply with the initiatives and directives.
Of the over $726 million net increase in Fannie Mae’s expenses during the review period,
$476 million (or 66%) was spent on implementation of three of FHFA’s strategic goals and
initiatives:

      Common Securitization Platform (CSP) Integration – $145 Million Increase. FHFA’s
       2012 Strategic Plan announced a new housing finance infrastructure was required in
       order to achieve FHFA’s goal of improving the overall liquidity of the mortgage
       market. At that time, FHFA determined that there was no existing private sector
       infrastructure capable of securitizing the $100 billion per month in new mortgage
       originations and concluded that investment in this new infrastructure by the
       Enterprises would facilitate reform of the housing finance system. The CSP initiative
       involves the development of a common information technology platform that is
       designed to use industry-standard software, systems, and data requirements, and is
       adaptable for use by other market participants in the future. According to FHFA, this
       increase was driven by the number and significance of system and process changes
       required at Fannie Mae for CSP integration.

      Reduction of Retained Portfolio – $16 Million Increase. Pursuant to the terms of
       agreements with the U.S. Department of the Treasury (Treasury) and additional limits
       from FHFA, both Enterprises must reduce the size of its retained portfolio over the
       next few years. As Fannie Mae disclosed in its 10-K, its retained portfolio consists
       of mortgage loans that are performing and nonperforming and mortgage-related



                              OIG  WPR-2016-001  March 9, 2016                                8
       securities owned by Fannie Mae. According to Fannie Mae, the status of a significant
       volume of nonperforming loans in its retained portfolio had changed to re-performing
       loans and it determined that it could reduce the size of its retained portfolio by
       securitizing and then reselling such re-performing loans as mortgage backed securities.
       Fannie Mae reported that it modified more than 35 existing systems to develop the
       capability to certify and securitize re-performing loans in its retained portfolio, and
       obtain and disclose updated borrower and co-borrower credit scores, among other
       things. Development of this capability drove the $16 million net increase.

      Pension Plan Termination – $315 Million Increase. In 2013, FHFA instructed both
       Enterprises to terminate their defined benefit plans because it determined that
       termination would conserve Enterprise assets. In 2015, Fannie Mae recognized
       expenses related to the termination of its defined benefit plan and settlement of its
       pension plan obligations. Payouts to defined benefit pension plan participants were
       made either in the form of a lump sum or an annuity. To replace the defined benefit
       retirement plans, Fannie Mae will provide retirement benefits for their employees
       through defined contribution plans. Going forward, Fannie Mae employees will
       be able to elect a pension annuity or rollover their benefits into another retirement
       vehicle, such as an IRA or 401k. According to FHFA, key factors contributing to this
       expense increase include the amount of Fannie Mae’s unfunded obligations under the
       company’s nonqualified plan and Fannie Mae’s decision, in 2005, to fund qualified
       plan obligations using the accumulated benefits method.

Implementation of Fannie Mae’s Strategic Goals and Initiatives – $369 Million Increase.
During the review period, Fannie Mae launched a number of initiatives it considered critical
to prepare its business and infrastructure for potential future changes in the structure of the
U.S. housing finance system and to help ensure its safety and soundness. Fannie Mae
reported to us that its initiatives are necessary for it to meet industry benchmarks and/or
remediate risks within its operating environment. These initiatives include:

      Critical Safety and Soundness – $267 Million Increase. Fannie Mae reported $101
       million in projects such as: replacing its securities accounting and capital markets
       infrastructure to modernize its existing aging infrastructure, creating a single source
       for securities data, and connecting with a new capital markets trading system to meet
       evolving industry requirements, regulatory changes, and to enable better decision-
       making within the housing finance industry. Also, Fannie Mae advised us that it is
       reducing the physical footprint of its data centers, upgrading its infrastructure, moving
       to cloud based services, and seeking to simplify its operational model.

       In addition, Fannie Mae reported to us that it spent $110 million ($60 million in year 1
       and $50 million in year 2) in expenses for an out-of-region data center to improve its


                              OIG  WPR-2016-001  March 9, 2016                                   9
       internal controls, enhance its compliance function, increase capacity, and strengthen
       its information technology infrastructure; and spent $56 million on workplace
       consolidation, Enterprise data, and risk controls and security.

      Other Modernization Efforts – $102 Million Increase. Fannie Mae reported that it
       formalized plans to integrate several large multi-year infrastructure modernization
       projects, including its multifamily initiative to develop an independent platform for its
       multifamily business with a stand-alone infrastructure. Since 2013, Fannie Mae has
       been replacing or upgrading specific software programs to eliminate legacy
       technologies.

Consulting Services – $25 Million Increase. Fannie Mae incurred $25 million in additional
consulting services expenses in 2015 due to a company-wide simplification and operational
efficiency project, which was designed to increase operating performance and cut costs.

Miscellaneous – $35 Million Increase. During the review period, additional expenses of
$35 million in miscellaneous items were incurred by Fannie Mae. These miscellaneous items
are:

      Enterprise Risk Management (ERM) – $14 Million Increase. Fannie Mae’s increased
       ERM expenses of $14 million were incurred, nearly equally, for two projects: a re-
       organization of the model research and analytics functions into ERM and increased
       hiring, and implementation of a capital markets risk initiative “Daily Green Package,”
       which provides daily pricing on the securities in Fannie Mae’s portfolio.

      Human Resources – $9 Million Increase. This increase was driven by Fannie Mae’s
       efforts to identify possible sites to relocate its headquarters in Washington D.C. and
       due diligence for the sites identified ($2 million), rent increases for regional offices
       ($2 million), increased compensation to human resources employees ($3 million),
       increases in professional services associated with the diversity and inclusion program
       ($1 million), increases in employee services programs, and increases in general
       building maintenance ($1 million).

      Multifamily – $4 Million Increase. Increase was driven by consolidation of functions
       transferred from other areas of Fannie Mae into this business unit and associated
       increases in personnel expenses.

      Legal – $4 Million Increase. Increases in legal fees by Fannie Mae’s external counsel
       primarily drove this increase in expenses.




                              OIG  WPR-2016-001  March 9, 2016                                   10
          Internal Audits – $2 Million Increase. This increase was largely driven by higher
           costs for professional services required to perform testing of new information
           technology controls, as required by Sarbanes-Oxley.

          Compliance and Ethics and Executive Office – $2 Million Increase. The compliance
           and ethics increase was primarily driven by increased hiring to fill existing vacant
           positions in anti-fraud management and anti-money laundering. In addition, Fannie
           Mae’s Executive Office increase was largely driven by the net of increases and
           decreases associated with a consulting project in support of the FHFA Scorecard
           and recruitment fees incurred during the General Counsel search.

      Decreases

Credit and Making Home Affordable – $41 Million Decrease. Expenses in both the Credit
and Making Home Affordable (MHA)4 divisions decreased by $41 million during the review
period. That decrease was attributed to the following factors: a decrease of $32 million in
Credit division expenses was primarily due to position reductions along with a reduction of
real estate owned inventory and of volume of seriously delinquent loans; also, a decrease of
$9 million related to a lower headcount and higher reimbursement paid by Treasury for MHA
related services.

Underwriting, Pricing, and Capital Markets – $62 Million Decrease. This net decrease was
driven by the Loan Quality Center division. According to Fannie Mae officials, a decrease
of $98 million in expenses was achieved by completion of most loan reviews for loans
purchased by Fannie Mae prior to January 1, 2013. This total was offset by a $36 million
increase related to Fannie Mae’s efforts to conduct upfront quality control reviews on loans
purchased on or after January 1, 2013, under the new representation and warranty framework
as well as its efforts to improve business efficiencies.

Miscellaneous – $76 Million Decrease. During the review period, Fannie Mae’s expenses in
a number of different areas decreased:

          Extraordinary Litigation – $18 Million Net Decrease. During the review period,
           Fannie Mae’s expenses for extraordinary litigation declined, after a peak in 2013.
           These expenses relate to litigation against various financial institutions, responsible for
           marketing and selling private label securities (PLS) to Fannie Mae and Freddie Mac
           under alleged fraud and/or misrepresentation with respect to the characteristics of the
           loans underlying the securities sold to the company. Fannie Mae bears half of the



4
    The MHA program is designed to help at-risk homeowners obtain mortgage relief and avoid foreclosure.



                                    OIG  WPR-2016-001  March 9, 2016                                     11
        costs of PLS securities fraud litigation brought and managed by FHFA, which
        amounted to $16 million of the net decrease in this category.

       Customer Engagement, Communications, and Marketing Services – $17 Million
        Decrease. Decreases were driven by reorganization of staff from Customer
        Engagement to Underwriting, Pricing, and Capital Markets, in order to centralize and
        align various core functions and capabilities for the overall Single Family Business.
        In addition, the Corporate Contributions Program, a program focused on the housing
        crisis and efforts to stabilize the housing market, including foreclosure prevention,
        neighborhood stabilization, and preservation of affordable housing, was terminated,
        adding to the decrease in expenses.

       Maintenance – $16 Million Decrease. Fannie Mae’s decline in maintenance expenses
        was primarily driven by reduced demand in multiple areas – including PeopleSoft,
        Servicer and Investor Reporting, Enhanced Regression, Single Family Real Estate
        Owned Migration, and by temporary reductions prior to large initiative
        implementations, which was offset by normal annual variations (+/– 5%) associated
        with a portfolio of small project activities necessary to sufficiently maintain the
        existing technology assets.

       Corporate Expense – $13 Million Net Decrease. This net decrease was driven by
        a large decrease in corporate expenses in 2013 due to an adjustment relating to the
        freeze of employee defined pension plan benefits,5 and decreases in software
        development amortization and severance. This decrease was offset by increases
        in 2014 and 2015 driven by incentive compensation and the return on assets rate
        assumption in 2014 being higher than the rate assumption incorporated during the
        third quarter budget cycle. The change in assumption resulted from clarification of
        accounting guidance on actuarial assumptions for terminated pension plans.

       Finance Division – $7 Million Decrease. This decrease was driven by decreased
        positions, reallocation of workplace services, and lower software and professional
        fees.

       ERM PLS Forensics – $5 Million Decrease. Decrease in expenses was driven by a
        decline in the need for professional services fees for loan reviews, re-underwriting
        work, business consulting, data services, and document storage to support legal
        efforts, as well as by Fannie Mae’s efforts to resolve outstanding litigation.


5
 FHFA directed the Enterprises to terminate their defined benefit retirement plans effective December 31,
2013. Fannie Mae had determined to freeze employee benefits in its plan earlier in 2013 and amended its plan
accordingly.



                                   OIG  WPR-2016-001  March 9, 2016                                          12
                                              FIGURE 1. FANNIE MAE
                       SUMMARY OF DRIVERS IN NET INCREASES OF EXPENSES DURING REVIEW PERIOD
               $500
               $450
               $400
               $350
               $300
 $ Millions




               $250
               $200
               $150
               $100
                $50
                 $0
               ($50)
              ($100)
                                           Implement-
                            Implement-
                                             ation of                                          Under-
                              ation of                                            Credit and
                                              Fannie                                           writing,
                               FHFA’s                   Consulting   Miscellan-    Making                 Miscellan-
                                              Mae’s                                            Pricing,
                              Strategic                  Services      eous         Home                    eous
                                             Strategic                                         Capital
                             Goals and                                            Affordable
                                            Goals and                                          Markets
                             Initiatives
                                            Initiatives
                  Series1       476           369          25           35           -41         -62         -76

Freddie Mac

Freddie Mac’s expenses increased from $1.561 billion in 2012 to a projected $1.937 billion
in 2015, a net increase of $376 million, or 24.08%, during the review period. We discuss the
drivers of this net increase and summarize them below in Figure 2.

Increases

Implementation of Specific FHFA Strategic Goals and Initiatives – $128 Million Increase.
Like Fannie Mae, a significant percentage of the net increases in Freddie Mac’s expenses is
attributed to implementation of three of FHFA’s strategic goals and initiatives. Of the $376
million net increase in Freddie Mac’s expenses during the review period, $128 million, or
34%, was spent on implementation of these FHFA strategic goals and initiatives:

                  CSP – $61 Million Increase. As discussed earlier, the Enterprises are developing and
                   implementing the CSP, at FHFA’s direction and under its oversight. Freddie Mac’s
                   implementation expenses for this effort increased by $60 million and its expenses for
                   information testing support for CSP increased by $1 million.

                  Reduction of Retained Portfolio – Freddie Mac reported to us that it incurred increased
                   expenses in connection with reducing the size of its retained portfolio relating to
                   managing liquid and less liquid assets and managing interest-rate risk, maintaining


                                               OIG  WPR-2016-001  March 9, 2016                                  13
       models and performing analytics, and managing operational risk and controls.
       Because Freddie Mac captured these increased expenses in different expense accounts,
       it advised us that it could not readily determine the amount of the increase. For that
       reason, we report that Freddie Mac’s increased expenses associated with reduction
       of the size of its retained portfolio are reflected in the overall $376 million increase
       during the review period.

      Pension Plan Termination – $67 Million Increase. As discussed earlier, FHFA
       directed the Enterprises to terminate their defined benefit retirement plan in 2013.
       Freddie Mac employees were offered the election of a pension annuity or a roll-over
       of benefits into another retirement vehicle, such as an IRA or 401k. In 2013, 2014,
       and 2015, Freddie Mac incurred expenses related to its pension plan termination as a
       result of a true-up of the company’s liability based on changes in the discount rate and
       payout options selected by plan participants against assumptions in actuarial valuation
       made in 2013. Freddie Mac funded its pension plan under the projected benefits
       method.

Implementation of Freddie Mac’s Strategic Goals and Initiatives – $105 Million Increase.
During the review period, Freddie Mac launched a number of initiatives it considered critical
for its business. These initiatives include:

      Loan Advisor Suite – $58 Million Increase. Freddie Mac reported that this initiative,
       which included efforts begun in 2013, was designed to give lenders a way to originate
       and deliver high quality mortgages and acquire insight into representation and
       warranty relief earlier in the loan production process. The Loan Advisor Suite is
       comprised of about 15 components geared toward driving greater usage of Freddie
       Mac’s credit scoring tools intended to help manage risk. Major components include
       efforts on upfront quality control reviews for the new representation and warranty
       framework ($10 million), assessment of collateral ($14 million), and assistance with
       identifying purchase eligibility issues before loan delivery ($23 million). According
       to Freddie Mac, the remaining components of Loan Advisor Suite include other
       projects relating to loan manufacturing quality ($11 million).

      Enhanced and New Operations and Technology Capabilities – $35 Million Increase.
       According to Freddie Mac, increased expenses for enhancements and new operations
       and technologies include $29 million for an out-of-region data center, which Freddie
       Mac reports will improve its ability to recover business systems in the event of a
       catastrophic regional business event and $6 million for investments in technologies
       designed to protect personal information.




                              OIG  WPR-2016-001  March 9, 2016                                  14
      Pricing Execution – $12 Million Increase. Freddie Mac advised that this initiative,
       which began in 2013, was undertaken to deliver flexible, attribute based pricing
       capabilities and provide more accurate pricing of loans for risk.

Core Business – $233 Million Increase. Over half of the $376 million in net increases was
driven by increased expenses for Freddie Mac’s core business functions:

      Increased Number of Employees – $96 Million Increase. Freddie Mac increased
       staffing by 795 positions, from 2,480 to 3,275, because of higher business volumes,
       new loan products, and additional demands for IT support staff.

      Increases in Salaries and Benefits – $42 Million Increase. Freddie Mac increased
       salaries and benefits for its staffing related to its three lines of business and
       information technology. These expenses related to employee health benefits, retiree
       benefits, payroll taxes, and long-term incentives.

      Professional Services – $40 Million Increase. These expenses were the result of
       higher volumes in lines of business, cyber security, and support for the new voice data
       contract.

      Computer Data Services – $15 Million Increase. According to Freddie Mac, this
       increase was attributable to a new voice data contract and increased use of a software
       licensing and delivery model in which software was licensed on a subscription basis
       and was centrally hosted. In addition, Freddie Mac increased the number of external
       hosting engagements in an effort to provide cost savings, enhanced controls, and/or
       specialized services.

      Loan Prospector – $10 Million Increase. In 2015, Freddie Mac self-initiated a change
       in Loan Prospector, its automated underwriting system that provides lenders with an
       assessment of a loan’s eligibility for purchase by Freddie Mac. Specifically, Freddie
       Mac assumed responsibility for fees associated with Loan Prospector (such as
       purchase of a credit score).

      Software Lease and Maintenance – $8 Million Increase. This increase is driven by
       a 2014 change in accounting policy that resulted in acceleration of recognition of
       expenses, vendor rate increases, and increased licenses required for higher staffing
       levels.

      Travel – $5 Million Increase. Increased travel expenses were driven by increasing
       contacts by Freddie Mac with its customers.




                             OIG  WPR-2016-001  March 9, 2016                                  15
      Various Other Expenses – $17 Million Increase. Various other expenses were
       incurred related to Freddie Mac’s three lines of business.

PLS and Other Litigations – $8 Million Increase. Freddie Mac bears half of the costs of PLS
securities fraud litigation brought and managed by FHFA, which accounted for $7 million
of the increase in this category. The remaining $1 million in expenses were attributed to
efforts to resolve outstanding litigation and for expenses incurred by outside counsel firms
representing Freddie Mac in litigation, such as the settlement of the SEC investigation and
Ohio Public Employee Retirement System matters. Those expenses include attorneys’ fees,
expert witness fees, deposition costs, and discovery costs.

   Decreases

Single-family Extraordinary Credit and Operations Expenses – $54 Million Decrease.
According to Freddie Mac officials, its single-family extraordinary credit and operations
expenses have decreased as a result of the improving housing market. The main drivers of
this decreased spending were:

      Quality control expenses relating to underwriting peaked in 2013 and then reduced
       significantly in 2014 and 2015 as Freddie Mac completed most loan reviews for loans
       purchased by it prior to January 1, 2013.

      Expenses related to Freddie Mac’s efforts to enforce contractual representation and
       warranty provisions for defaulted loans as the volume of defaulted loans subject to the
       old representation and warranty framework declined.

      Expenses related to loan modifications and servicer support declined as the
       performance of Freddie Mac’s single-family book improved.

Support Staffing – $41 Million Decrease. Freddie Mac decreased support staffing by 316
positions, from 1,828 to 1,512.

Miscellaneous – $3 Million Decrease. This category includes dozens of projects which
change each year, based on the needs of Freddie Mac’s business.




                             OIG  WPR-2016-001  March 9, 2016                                  16
                                             FIGURE 2. FREDDIE MAC
                      SUMMARY OF DRIVERS IN NET INCREASES OF EXPENSES DURING REVIEW PERIOD
             $250
             $200
             $150
$ Millions




             $100
               $50
                $0
              ($50)
             ($100)
                                       Implement-                               Single-
                        Implement-
                                         ation of                 Private        family
                          ation of
                                          Freddie                  Label      Extraordin-
                           FHFA’s                      Core                                 Support    Miscellan-
                                           Mac’s                 Securities    ary Credit
                          Strategic                   Business                              Staffing     eous
                                         Strategic               and Other        and
                         Goals and
                                        Goals and                Litigation   Operations
                         Initiatives
                                        Initiatives                            Expenses
              Series1       128            105          233          8           -54          -41          -3




                                            OIG  WPR-2016-001  March 9, 2016                                      17
CONCLUSION ............................................................................

The Enterprises, which were put into conservatorship in September 2008, have required
$187.5 billion in financial investment from the U.S. taxpayers to avert insolvency. Through
December 2015, the Enterprises have paid approximately $241.2 billion in dividends on this
investment. Despite their high leverage, lack of capital, conservatorship status, and uncertain
future, the Enterprises have grown in size during conservatorship and, according to FHFA,
their combined market share of newly issued mortgage-backed securities is approximately
70%.

Given this enormous investment in the Enterprises by the U.S. taxpayers, the unknown
duration of the conservatorships, the Enterprises’ critical role in the secondary mortgage
market, and their unknown ability to sustain future profitability, we emphasize transparency
in our oversight work to the fullest reasonable extent to foster accountability to stakeholders.

This white paper, which tracks FHFA-approved net spending increases of more than
$1 billion from 2012 through 2015 by the Enterprises, sheds light on where these monies were
spent to provide an accounting for stakeholders.




                               OIG  WPR-2016-001  March 9, 2016                                  18
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

The objective of this white paper was to track the net increases in the Enterprises’ expenses
from 2012 through 2015, and provide the reasons offered by the Enterprises for those
increases.

The scope of our work included changes in the Enterprises’ expenses from 2012 projected
through December 31, 2015.

To address the objective, we performed the following:

      Reviewed the Enterprises’ Audited Annual Reports (Form 10-K) for Fiscal Years
       2012, 2013, and 2014 for information about expenses;

      Reviewed the Enterprises’ Proposed 2015 Operating Budgets submitted to FHFA for
       review and approval;

      Held meetings and discussions with FHFA and Enterprise officials about expenses and
       the reasons for the changes; and,

      Reviewed documents provided to us by the Enterprises regarding their expenses.

The performance period for this white paper was August 2015 through January 2016.

We appreciate the efforts of FHFA, the Enterprises, and their staff in providing information
and documents necessary to accomplish this assignment.




                              OIG  WPR-2016-001  March 9, 2016                                19
ADDITIONAL INFORMATION AND COPIES .................................


For additional copies of this report:

      Call: 202-730-0880

      Fax: 202-318-0239

      Visit: www.fhfaoig.gov



To report potential fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

      Call: 1-800-793-7724

      Fax: 202-318-0358

      Visit: www.fhfaoig.gov/ReportFraud

      Write:

                FHFA Office of Inspector General
                Attn: Office of Investigations – Hotline
                400 Seventh Street SW
                Washington, DC 20219




                               OIG  WPR-2016-001  March 9, 2016                          20