United States Government Accountability Office Washington, DC 20548 November 15, 2012 The Honorable Tim Johnson Chairman The Honorable Richard Shelby Ranking Member Committee on Banking, Housing, and Urban Affairs United States Senate The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives Subject: Financial Audit: Federal Housing Finance Agency’s Fiscal Years 2012 and 2011 Financial Statements This report transmits the GAO auditor’s report on the results of our audits of the fiscal years 2012 and 2011 financial statements of the Federal Housing Finance Agency (FHFA), which is incorporated in the enclosed Federal Housing Finance Agency Performance and Accountability Report for Fiscal Year 2012. As discussed more fully in the auditor’s report that begins on page 74 of the enclosed PAR, we found: the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles; FHFA maintained, in all material respects, effective internal control over financial reporting as of September 30, 2012; and no reportable noncompliance in fiscal year 2012 with provisions of laws and regulations we tested. Page 1 GAO-13-124R FHFA’s Fiscal Years 2012 and 2011 Financial Statements The Housing and Economic Recovery Act of 20081 established FHFA as an independent agency empowered with supervisory and regulatory oversight of the housing-related government-sponsored enterprises: Fannie Mae, Freddie Mac, the 12 Federal Home Loan Banks, and the Office of Finance.2 The Act requires FHFA to annually prepare financial statements and requires GAO to audit the agency’s financial statements. This report responds to these requirements. We are sending copies of this report to the Chairman of the Federal Housing Finance Oversight Board; the Secretary of Treasury; the Secretary of Housing and Urban Development; the Chairperson of the Securities and Exchange Commission; the Director of the Office of Management and Budget; and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you have questions about this report, please contact me at (202) 512-3406 or firstname.lastname@example.org. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. J. Lawrence Malenich Director Financial Management and Assurance Enclosure 1 Pub. L. No. 110-289, 122 Stat. 2654, (July 30, 2008). The 12 Federal Home Loan Banks and the Office of Finance, whose primary function is to issue and service all debt securities for the FHLBanks, comprise the Federal Home Loan Bank System. 2 The Office of Finance is operated on behalf of the 12 Federal Home Loan Banks. Its primary function is to issue and service all debt securities for the Federal Home Loan Banks, while obtaining the most cost-effective terms possible given current market conditions. Page 2 GAO-13-124R FHFA’s Fiscal Years 2012 and 2011 Financial Statements 2012 FEDERAL HOUSING FINANCE AGENCY Performance and Accountability Report FHLB Atlanta . FHLB Boston . FHLB Chicago . FHLB Cincinnati . FHLB Dallas . FHLB Des Moines . Fannie Mae . Freddie Mac . FHLB Indianapoli FHLB New York . FHLBanks . FHLB Pittsburgh . FHLB San Francisco FHLB Seattle . FHLB Topeka . FHLB Atlanta . FHLB Boston . FHLB Chicag FHLB Cincinnati . FHLB Dallas . FHLB Des Moines . Fannie Mae . Freddi Mac . FHLB Indianapolis . FHLB New York . FHLBanks . FHLB Pittsburg FHLB San Francisco . FHLB Seattle . FHLB Topeka . FHLB Atlanta FHLB Boston . FHLB Chicago . FHLB Cincinnati . FHLB Dallas . FHLB De Moines . Fannie Mae . Freddie Mac . FHLB Indianapolis . FHLB New York FHLBanks . FHLB Pittsburgh . FHLB San Francisco . FHLB Seattle . FHLB Topeka B U I L D I N G A N I N F R A S T R U C T U R E F O R T H E S E C O N D A R Y M O R T G A G E M A R K E T 2012 Performance and Accountability Report MISSION Provide effective supervision, regulation, and housing mission oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. VISION A reliable, stable, and liquid housing finance system. F H FA V A L U E S RESPECT INTEGRITY We strive to act with respect for We seek to adhere to the highest each other, to promote diversity, to ethical and professional standards share information and resources, and to inspire trust and confidence to work together in teams, and to in our work. collaborate to solve problems. EXCELLENCE DIVERSITY We aspire to excel in every We pursue the full inclusion of all aspect of our work and to seek segments of the U.S. population better ways to accomplish in our business endeavors and our mission and goals. at the entities we regulate. FEDERAL HOUSING FINANCE AGENCY 2012 PERFORMANCE AND A C C O U N TA B I L I T Y R E P O R T Table of Contents | Message from the Acting Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 How the Report is Organized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 | Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Strategic Goals and Resource Management Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Alignment of Resource Allocation with Strategic Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 FHFA at a Glance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Management Challenges and What Lies Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Performance Highlights by Strategic Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 FY 2012 Performance Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Overview of FHFA’s Seven Key Performance Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Program Evaluations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Analysis of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Analysis of Systems, Controls and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Management Report on Final Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 FHFA’s Statement of Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 | Performance Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Managing and Measuring Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Strategic Human Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Strategic Goal 1: Safety and Soundness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Strategic Goal 2: Stable, Liquid, and Efficient Mortgage Market . . . . . . . . . . . . . . . . . . . . . 58 Strategic Goal 3: Preserve and Conserve Enterprise Assets . . . . . . . . . . . . . . . . . . . . . . . . 63 Resource Management Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 | Financial Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Message from the Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Appendix I: Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . 80 Appendix II: FHFA Response to Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 | Other Accompanying Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Performance Goals and Measures No Longer Reported . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Inspector General’s FY 2013 Management and Performance Challenges . . . . . . . . . . . . . . 106 Summary of Financial Statements Audit and Management Assurances . . . . . . . . . . . . . . . 115 | Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Index of Figures and Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 FHFA Agency Key Management Officials . . . . . . . . . . . . . . . . . . . . . . . . . (inside back cover) Message from the Acting Director I am pleased to present the Federal Housing Finance Agency’s (FHFA’s) FY 2012 Performance and Accountability Report. FHFA is an independent agency responsible for providing effective supervision, regulation, and housing mission oversight of Fannie Mae and Freddie Mac (the Enterprises), the Federal Home Loan Banks (FHLBanks) and the FHLBank’s joint Office of Finance to promote their safety and soundness, support housing finance, affordable housing, and a stable and liquid mortgage market. Together, these 14 regulated entities are known as the housing government-sponsored enterprises, or housing GSEs. This report describes FHFA’s performance highlights, the challenges we face in supervising the regulated entities, the collective work among FHFA and the Enterprises to assist homeowners and support the housing market, and the ongoing initiatives by the agency to ensure FHFA meets the strategic goals that are set. FHFA’S FY 2012 STRATEGIC GOALS AND RESOURCE MANAGEMENT STRATEGY 1 The housing GSEs operate in a safe and sound manner and comply with legal requirements. 2 The housing GSEs support a stable, liquid, and efficient mortgage market including sustainable homeownership and affordable housing. 3 FHFA preserves and conserves the assets and property of the Enterprises, ensures focus on their housing mission, and facilitates their financial stability and emergence from conservatorship. 4 FHFA has the personnel, resources, and infrastructure to manage effectively and efficiently to achieve its mission and goals. Enterprises The Enterprises have been in conservatorships since September 2008 and they have maintained a functioning conventional mortgage market throughout that period. Under FHFA direction, the Enterprises made significant progress remediating the problems that led to their being placed in conservatorships and refining programs designed to keep borrowers in their homes. 4 Federal Housing Finance Agency | 2012 Performance and Accountability Report However, open-ended conservatorships cannot continue indefinitely. In February 2012, FHFA released A Strategic Plan for Enterprise Conservatorships. This plan identifies three strategic goals for the next phase of the conservatorships: Build a new infrastructure for the secondary mortgage market; Contract the Enterprises’ dominant presence in the marketplace gradually while simplifying and shrinking their operations; and Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. The plan is a roadmap for work FHFA and the Enterprises will undertake while the companies remain in conservatorship. FHFA created the Office of Strategic Initiatives to help the agency execute the activities associated with this plan. Federal Home Loan Banks MESSAGE FROM THE ACTING DIRECTOR The FHLBanks continued to improve their financial condition and performance during the fiscal year. Balances of private-label mortgage-backed securities (MBS) continued to decline and credit losses on these securities subsided, allowing the FHLBanks to generate positive net income and augment their retained earnings. In April 2012, FHFA concluded that the FHLBank of Chicago had satisfied the requirements established by the cease and desist order that had been in place since October 2007 and removed that cease and desist order. In September 2012, FHFA determined that the FHLBank of Seattle was adequately capitalized under the risk-based capital framework, removing the discretionary undercapitalized designation that had been in place. The FHLBanks’ capital levels remained at or near historic highs during the fiscal year. Retained earnings have increased dramatically in the past five years and now top $9 billion. Retained earnings should continue to increase because of the capital plan provisions adopted last year to set aside 20 percent of income in restricted retained earnings. New FHFA Strategic Plan FHFA developed a new Strategic Plan for FHFA for Fiscal Years 2013-2017 and released it in early October 2012. The plan sets four strategic goals: The new strategic plan builds on the agency’s FHFA’S FY 2013–2017 STRATEGIC GOALS earlier document, A Strategic Plan for Enterprise 1 Safe and sound housing GSEs. Conservatorships and lays out a series of initiatives and strategies designed to improve current mortgage Stability, liquidity, and access in housing processes, inspire greater confidence among potential 2 finance. market participants and set the stage for an improved 3 Preserve and conserve Enterprise assets. future system of housing finance. Prepare for the future of housing finance in the In addition, the agency’s FY 2013 Annual Performance 4 United States. Plan includes new performance measures for monitoring progress toward meeting the strategic and performance goals described in the Strategic Plan for FHFA for Fiscal Years 2013-2017. Building an Infrastructure for the Secondary Mortgage Market 5 Program Data and Financial Performance For the fourth consecutive year, FHFA received an unqualified (clean) opinion on its financial statements from the U.S. Government Accountability Office (GAO). FHFA has no material internal control weaknesses, and our financial and performance data contained in this report are reliable and complete in accordance with Office of Management and Budget Circular A-123. FHFA met or exceeded 23 (92 percent) of its performance measures. The agency did not meet two (8 percent) of the measures (see the Performance Summary section on page 34). Conclusion The conservatorships of the Enterprises were never intended as a long-term solution but were meant primarily as a “time out.” However, in the four years since FHFA established the conservatorships, we have made significant strides towards maintaining a functioning mortgage market. The cornerstone of A Strategic Plan for Enterprise Conservatorships is to build a new securitization platform that could serve both Fannie Mae and Freddie Mac while in conservatorship—and potentially serve the secondary mortgage market in a post-conservatorship world that has multiple issuers of mortgage-backed securities. The FHLBanks have continued to play an important role in housing finance. There are many opportunities and challenges ahead, and the role of the FHLBanks in the country’s housing finance system will be part of the policy discussion. While the future structure of housing finance remains undetermined, the nation’s confidence in the housing market seems to be returning. FHFA looks forward to working with the Administration, Congress, and market participants in continuing the work of rebuilding the country’s housing finance system. EDWARD J. DEMARCO Acting Director November 15, 2012 6 Federal Housing Finance Agency | 2012 Performance and Accountability Report How the Report is Organized This report highlights the agency’s accomplishments in FY 2012 and our future challenges. This report has five sections, as follows: MANAGEMENT’S DISCUSSION AND ANALYSIS This section is an overview of the entire Performance and Accountability Report. It briefly describes FHFA’s mission and organization, performance highlights, management challenges, and key performance measures. It also gives a financial overview and management assurances of internal controls. PERFORMANCE This section identifies FHFA’s strategic goals and describes the fiscal year performance relative to the goals and MESSAGE FROM THE ACTING DIRECTOR measures set forth in the agency’s Annual Performance Plan. FINANCIAL This section includes a Message from the Chief Financial Officer, the independent auditor’s report, Appendix I: Management’s Report on Internal Control over Financial Reporting, Appendix II: FHFA Response to Auditor’s Report, FHFA’s Financial Statements, and Notes to the Financial Statements. OTHER ACCOMPANYING INFORMATION This section includes performance goals and measures no longer reported, the Inspector General’s primary management and performance challenges and the Summary of Financial Statements Audit and Management Assurances. APPENDIX The appendix includes a glossary, a list of abbreviations and acronyms used in the report, acknowledgements, and an index of figures and features. Building an Infrastructure for the Secondary Mortgage Market 7 Management’s Discussion and Analysis | Strategic Goals and Resource Management Strategy | Alignment of Resource Allocation with Strategic Goals | FHFA at a Glance | Organization | Management Challenges and What Lies Ahead | Performance Highlights by Strategic Goal | FY 2012 Performance Summary | Overview of FHFA’s Seven Key Performance Measures | Program Evaluations | Analysis of Financial Statements | Analysis of Systems, Controls and Legal Compliance | Management Report on Final Actions | FHFA’s Statement of Assurance 2 0 1 2 F E D E R A L H O U S I N G F I N A N C E A G E N C Y P E R F O R M A N C E A N D A C C O U N TA B I L I T Y R E P O R T DISCUSSION AND ANALYSIS MANAGEMENT’S Strategic Goals and Resource Management Strategy STRATEGIC GOAL 1: The housing government-sponsored enterprises (GSEs)—Fannie Mae, Freddie SAFE AND SOUND Mac, and the Federal Home Loan Banks—operate in a safe and sound manner HOUSING GSES and comply with legal requirements. STRATEGIC GOAL 2: The housing GSEs support a stable, liquid, and efficient mortgage market HOUSING MISSION including sustainable homeownership and affordable housing. STRATEGIC GOAL 3: FHFA preserves and conserves the assets and property of the Enterprises, CONSERVATORSHIP ensures focus on their housing mission, and facilitates their financial stability and emergence from conservatorship. RESOURCE MANAGEMENT FHFA has the personnel, resources, and infrastructure to manage effectively STRATEGY and efficiently to achieve its mission and goals. Alignment of Resource Allocation with Strategic Goals FHFA tracks resource allocations and program costs on each goal. Resources associated with the Resource according to strategic goals. Figure 1 illustrates the Management Strategy were distributed proportionately to costs that FHFA expended from FY 2010 to FY 2012 Strategic Goals 1 through 3 based on the percentage of to accomplish its three strategic goals. Figure 2 shows direct costs of each strategic goal to the total direct costs the number of full-time equivalent employees working for FHFA. Figure 1: ACTUAL DOLLARS FY 2010–2012 Figure 2: ACTUAL FULL-TIME EQUIVALENTS FY 2010–2012 (DOLLARS IN MILLIONS) 500 200 421 426 400 $153.6 150 326 $126.0 300 $95.9 100 $ Millions 200 $39.0 100 82 50 54 69 57 $24.9 $24.2 36 43 $16.0 $17.2 $16.7 0 STRATEGIC STRATEGIC STRATEGIC 0 GOAL 1 GOAL 2 GOAL 3 STRATEGIC STRATEGIC STRATEGIC GOAL 1 GOAL 2 GOAL 3 2010 2011 2012 2010 2011 2012 Note: Full-time equivalent (FTE) is calculated as the total number of hours worked (or to be worked) divided by the number of compensable hours in each fiscal year. Building an Infrastructure for the Secondary Mortgage Market 9 FHFA at a Glance OVERVIEW CONSERVATOR OF THE ENTERPRISES The Federal Housing Finance Agency was created as In accordance with the Federal Housing Enterprises an independent agency on July 30, 2008, when the Financial Safety and Soundness Act of 1992 as amended President signed the Housing and Economic Recovery by HERA, FHFA was appointed conservator of Fannie Act of 2008 (HERA). This law merged the staffs at the Mae and Freddie Mac on September 6, 2008. Office of Federal Housing Enterprise Oversight, the As conservator, FHFA is authorized to “take such action Federal Housing Finance Board, and certain staff from as may be: the U.S. Department of Housing and Urban Development (HUD). FHFA is responsible for overseeing the financial (i) necessary to put the regulated entity in a sound and safety and soundness and housing mission compliance of solvent condition; and the housing GSEs. (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and REGULATOR OF THE ENTERPRISES AND property of the regulated entity.” THE FHLBANKS In addition, FHFA holds authority over the management, As regulator, FHFA has a statutory responsibility to ensure boards, and shareholders of the Enterprises in that each regulated entity operates in a safe and sound conservatorship. However, the Enterprises continue to manner and that the operations and activities of each operate as business corporations. For example, they regulated entity foster liquid, efficient, competitive, and have chief executive officers and boards of directors, and resilient national housing finance markets. must follow the laws and regulations governing financial FHFA participates in a number of interagency initiatives disclosure, including requirements of the Securities to improve the effectiveness of its oversight, including Exchange Commission. the Financial Stability Oversight Council (FSOC), the Like other corporate executives, the Enterprises’ Federal Housing Finance Oversight Board, and the executive officers have legal responsibilities to use sound Financial Stability Oversight Board (FINSOB). The FHFA and prudent business judgment in their stewardship of the Director is appointed by the President, subject to Senate companies. approval. The Director represents the agency on FSOC and FinSOB, and chairs the Federal Housing Finance While FHFA has broad authority, the focus of the Oversight Board. conservatorships is not to manage every aspect of the Enterprises’ operations. Instead, FHFA leadership reconstituted the Enterprises' boards of directors in 2008 and charged them with ensuring that normal corporate governance practices and procedures are in place. The boards are responsible for carrying out normal board functions, which are subject to FHFA review and approval on critical matters. This division of duties represents the most efficient structure for carrying out FHFA responsibilities as conservator. 10 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S FY 2012 Profile During each calendar year (CY), FHFA completes FHFA worked with the Enterprises to complete examinations for Fannie Mae, Freddie Mac, each of foreclosure prevention actions, which helped 522,575 the 12 FHLBanks, and the Office of Finance. FHFA homeowners avoid foreclosure from October 2011 presents reports of examination to the respective to August 2012. These actions are intended to assist boards of directors, though the scheduling of homeowners whose mortgages are in distress to examination fieldwork and reviews of examination maintain their homes. The Home Affordable Refinance reports may vary from year to year. Results of the Program (HARP) was established as a pre-distressed examinations are reported to Congress. action to enable homeowners to refinance their FHFA mortgages and lower their monthly payments. From consolidated its operations from three separate October 2011 to August 2012, 711,409 mortgages locations to a new headquarters at Constitution were refinanced through HARP. Center in Washington, D.C., in January 2012. This move allowed the headquarters staff to work in a FHFA increased its staff by 64 employees in FY 2012, single location, which facilitates coordination and ending the year at 574 employees. communications across the agency’s divisions and FHFA’s budget for FY 2012 was $185.8 million offices and contributes to more effective and efficient (excluding the Office of Inspector General); the operations for the agency. agency’s FY 2011 budget was $176.4 million. FHFA developed two new strategic plans during FY 2012—A Strategic Plan for Enterprise Conservatorships that describes the initiatives Figure 3: FHFA’S WORKFORCE BY SPECIALIZED AREA that will be undertaken in the next phase of the FHFA EMPLOYEES conservatorships and the Strategic Plan for FHFA for (by specialized area) Fiscal Years 2013-2017. 2012 2013 FHFA created the Office of Strategic Initiatives to Year End Budgeted coordinate and oversee activities associated with A Examinations 242 272 Strategic Plan for Enterprise Conservatorships. Other Mission 139 134 FHFA expanded its regulatory presence at the Office of the Director 27 30 Enterprises by increasing the number of examiners Legal 40 42 permanently onsite at Fannie Mae and Freddie Mac. Information Technology 53 54 FHFA handled 246 congressional inquiries, 2,065 Infrastructure 73 78 non-consumer general public inquiries, and 2,554 TOTAL 574 610 consumer inquiries in FY 2012. Building an Infrastructure for the Secondary Mortgage Market 11 Organization FHFA is an independent government agency with a workforce that includes highly skilled examiners, economists, financial and policy analysts, attorneys, and subject matter experts in banking, technology, accounting, and legal matters. The Acting Director sets the direction for the agency to achieve its mission with core divisions and offices working together to ensure effective execution of the agency’s mission (see Figure 4). The Office of Inspector General (OIG) is responsible for conducting independent objective audits, evaluations, investigations, surveys, and risk assessments of FHFA’s programs and operations. OIG informs the FHFA Director, FHFA staffers chat before the annual employee awards ceremony in June 2012. Congress, and the public of any problems or deficiencies relating to programs and operations. OIG activities assist FHFA staff and program participants in ensuring the or a person for submitting a complaint or appeal to the effectiveness, efficiency, and integrity of FHFA’s programs Ombudsman. The office was created by regulation under and operations. The office was established by HERA in HERA and commenced operation in March 2011. 2008 and commenced operation in October 2010. The Office of Chief Operating Officer oversees the The Office of Ombudsman is responsible for considering agency’s day-to-day operations, including facilities complaints and appeals from any regulated entity, the management, contingency planning, continuity of Office of Finance, or any person who has a business operations, financial and strategic planning and relationship with a regulated entity or the Office of Finance budgeting. The office also directs human resources concerning any matter relating to FHFA’s regulation and management, information technology, quality assurance, supervision. Neither FHFA nor any of its employees may internal and external communications, and coordination retaliate against a regulated entity, the Office of Finance, with the FHFA Office of Inspector General. The office leads Figure 4: FHFA PRINCIPAL ORGANIZATION UNITS OFFICE OF THE DIRECTOR INSPECTOR GENERAL Office of the Ombudsman Office of the Division of Division of Division of Bank Division of Housing Chief Operating Enterprise Supervision Policy Regulation Mission and Goals Officer Regulation and Support Office of Office of Minority Office of General Office of Conservatorship and Counsel Strategic Initiatives Operations Women Inclusion 12 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S reporting on strategic planning and accountability, and FHFA’s mission and the Director’s responsibilities as a develops recommendations for long-term improvements member of the Federal Housing Finance Oversight Board, in agency operations. the Financial Stability Oversight Board, and the Financial Stability Oversight Council, the division also oversees and The Division of Enterprise Regulation (DER) is coordinates FHFA activities that involve data analysis, responsible for the supervision of the Enterprises to market surveillance, systemic risk monitoring, and analysis ensure their safe and sound operation. This office affecting housing finance and financial markets. provides management oversight, direction, and support for all examination activity involving the Enterprises, the The Office of Conservatorship Operations assists the development of supervision findings, and preparation of FHFA Director, as conservator, in preserving and conserving the annual reports of examination. The division monitors Fannie Mae’s and Freddie Mac’s assets and property. The and assesses the financial condition and performance office ensures that the Enterprises focus on their mission— of the Enterprises and their compliance with regulations providing stability, liquidity, and affordability to the housing through annual on-site examinations and periodic market. The office interacts with the Enterprises and the visitations. An examiner-in-charge leads examination conservator to help restore confidence in the Enterprises, activity at each Enterprise. enhance their ability to fulfill their mission, and mitigate issues of systemic risk leading to market instability. The The Division of Federal Home Loan Bank Regulation office facilitates communications between the Enterprises (DBR) is responsible for supervising the FHLBanks and and the conservator to ensure the prompt identification of the Office of Finance to promote their safe and sound emerging issues and their timely resolution. The office also operation. The division oversees and directs all FHLBank works with the Enterprises’ boards and senior management examination activities, develops examination findings, to establish priorities and milestones for accomplishing the and prepares annual examination reports. The division goals of the conservatorship. monitors and assesses the financial condition and performance of the FHLBanks and the Office of Finance The Office of the General Counsel advises and and tests their compliance with laws and regulations supports the Director and FHFA staff on legal matters through annual on-site examinations, periodic visits, related to the functions, activities, and operations of and off-site monitoring and analysis. DBR also conducts FHFA and the regulated entities. It supports supervision Affordable Housing Program (AHP) on-site examinations functions, regulations writing, and enforcement actions. and visits each FHLBank annually to ensure compliance The office oversees the bringing or defense of litigation. with program regulations and to evaluate the effectiveness The office also manages the Freedom of Information of each FHLBank’s AHP program. Act (FOIA) and Privacy Act programs. The ethics official advises, counsels, and trains FHFA employees on ethical The Division of Supervision Policy and Support is standards and conflicts of interest, and manages the responsible for monitoring the regulated entities for agency’s financial disclosure program. emerging risks in housing and financial markets and key counterparties. The division also is responsible for working The Office of Strategic Initiatives leads, coordinates with other federal financial regulators on identifying and and clarifies agency and Enterprise activities related to assessing emerging risks and regulatory best practices FHFA’s A Strategic Plan for Enterprise Conservatorships as well as working with DER and DBR to incorporate this to achieve the objectives set forth therein. It oversees information into FHFA’s supervisory program. FHFA activities involving engagement with the Enterprises on specific projects associated with the strategic plan. The Division of Housing Mission and Goals is The office promotes consistency between FHFA and the responsible for FHFA policy development and analysis, Enterprises with regard to priorities and timelines and oversight of housing and regulatory policy, and oversight ensures that projects achieve their objectives in a timely of the mission and goals of the Enterprises, and and efficient manner. the housing finance and community and economic development mission of the FHLBanks. In support of Building an Infrastructure for the Secondary Mortgage Market 13 The Office of Minority and Women Inclusion (OMWI) and protects staff against workplace discrimination. is responsible for all matters of diversity in employment, OMWI ensures that minorities, women, service-disabled management, and business activities at FHFA as well as veterans, and persons with disabilities are fully included in programs to monitor minority and women inclusion at the all job and business opportunities created as a part of the regulated entities. OMWI ensures that FHFA is compliant Federal Government’s efforts to reform and strengthen the with Equal Employment Opportunity laws and regulations, banking system and the financial services industry. 14 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S The Housing Government-Sponsored Enterprises FANNIE MAE AND FREDDIE MAC The agreements require a 15 percent reduction in (THE ENTERPRISES) the Enterprises’ retained portfolios each year. At the Fannie Mae and Freddie Mac were created by inception of the conservatorships, FHFA made clear that Congress to provide stability and liquidity in the the Enterprises would continue to be responsible for secondary market for home mortgages. The Enterprises normal business activities and day-to-day operations. purchase mortgages that lenders have already made FHFA exercises oversight as safety and soundness to homeowners. These mortgages are guaranteed by regulator while serving a more active role as conservator. the Enterprise, pooled into mortgage-backed securities To manage the work of overseeing the Enterprises’ (MBS), and either sold to investors or kept by the conservatorships and to assist the FHFA Director, FHFA Enterprise as an investment (see Figure 5). created the Office of Conservatorship Operations in 2008. In February 2012, FHFA released A Strategic The Enterprises have operated under conservatorship Plan for Enterprise Conservatorships that describes the since 2008 with FHFA as the legal conservator. The U.S. next phase of the conservatorships. The Management Department of the Treasury supports the Enterprises Challenges and Performance Highlights sections of this through Preferred Stock Purchase Agreements, which report detail more about the strategic plan on pages ensure each Enterprise maintains a positive net worth. 20–21 and 29. Figure 5: FHFA OVERSIGHT AND CONSERVATORSHIP ROLES — FANNIE MAE AND FREDDIE MAC PRIMARY MORTGAGE MARKET Borrower Applies for Mortgage Market in which financial institutions provide mortgage loans to home buyers. LENDER Borrower Borrower Receives Loan Lenders Sell Loans that Meet Underwriting and Product Standards Lenders Receive SECONDARY MORTGAGE MARKET Cash or MBS Market in which existing mortgages and mortgage-backed securities Conservator FANNIE MAE and (MBS) are traded. FREDDIE MAC Credit Portfolio Guarantee Investment Lenders Sell MBS Lenders Financial Safety and Business Business Soundness Regulator Received from Receive Fannie Mae or Cash Freddie Mac Issues Issues MBS Debt Buys Buys MBS Debt WALL STREET Sells MBS & Debt to Investors Buys MBS & Debt INVESTORS • Individual • Institutional • Foreign Building an Infrastructure for the Secondary Mortgage Market 15 Despite being in conservatorship, the Enterprises continue accounting period (second quarter 2012) and for the first to play a dominant role in the secondary mortgage time since 2008, neither Enterprise needed additional market. At the end of August 2012, the Enterprises funding from the Treasury Department. owned or guaranteed nearly $5.2 trillion of mortgages consisting of approximately $1.2 trillion in mortgages and FEDERAL HOME LOAN BANKS MBS held in the Enterprises’ investment portfolios and Congress passed the Federal Home Loan Bank Act in nearly $4.0 trillion in MBS held by investors other than the 1932 to establish the Federal Home Loan Bank System Enterprises. and reinvigorate a housing market devastated by the The Enterprises have been responsible for issuing the Great Depression. majority of all MBS to the market since 2008, when, as The System includes 12 district banks, each serving a a result of the financial crisis, the private sector virtually designated geographic area of the United States, and the withdrew from the market. As of August 2012, for Office of Finance, which issues consolidated obligations example, the share of total MBS issued by the Enterprises to fund the banks. stood at 78 percent. When combined with the 22 percent share for the Government National Mortgage Corporation The FHLBanks are member-owned cooperatives and (Ginnie Mae), the government sector accounted provide a reliable source of liquidity to member financial essentially for all issuances of MBS (see Figure 6). institutions. At the end of fiscal year 2012, there were 7,699 FHLBank members, which included: The Enterprises have received substantial support from the Federal Government while in conservatorship. 1,004 thrifts; Through the purchase of Senior Preferred Stock, the 5,266 commercial banks; Treasury Department has provided $187.5 billion to the 1,158 credit unions; and Enterprises—$116.2 billion to Fannie Mae and $71.3 billion to Freddie Mac. In the most recent quarterly 271 insurance companies Figure 6: ENTERPRISES’ MARKET SHARE—MBS ISSUANCE VOLUME $300 $250 $200 $ Billions $150 $100 $50 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q1 Q2 Q3 Enterprises 67% 68% 70% 47% 41% 40% 58% 73% 72% 70% 73% 79% 74% 78% Ginnie Mae 13% 9% 8% 7% 4% 4% 5% 22% 25% 26% 25% 20% 26% 22% Total Agency 80% 77% 78% 54% 45% 44% 63% 95% 97% 96% 98% 99% 100% 100% Private-Label Ginnie Mae Freddie Mac Fannie Mae Sources: Inside Mortgage Finance, Enterprise Monthly Volume Summaries. Issuance figures exclude MBS issued backed by assets previously held in the Enterprises' portfolios. 16 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S As of September 30, 2012, with total assets of $749 billion, and community development financial institutions the FHLBank system represents one of the largest banking engaged in residential housing finance. Approximately 58 structures in the country. Few bank holding companies— percent of members are borrowers (see Figure 9). Each Citigroup, JP Morgan Chase, Bank of America, Wells FHLBank district comprises whole contiguous states, Fargo, Goldman Sachs, and Met Life—are larger. including the District of Columbia and U.S. territories. The districts range in size from two to nine states (see Figure The FHLBank of Atlanta, with assets of $112.1 billion, 10). is the largest FHLBank, and the FHLBank of New York, with assets of $107.1 billion, is the second largest. The In addition to advances, the FHLBanks offer members FHLBank of Dallas is the smallest in the System at $35.2 letters of credit, correspondent banking (which includes billion in assets, followed by Topeka, at $35.4 billion in security safekeeping, wire transfers, and settlements), assets as of September 30, 2012 (see Figure 7). cash management services, and derivative intermediation. Some FHLBanks have Acquired Member Assets (AMA) FHLBanks make loans, known as advances, to member programs to purchase mortgages from their members. institutions and housing associates, such as state housing The volume of loan purchases is low relative to advances, agencies. Those loans are underwritten based on the and AMA balances have generally declined over the past borrower’s ability to repay and are collateralized by whole five to seven years. mortgage loans, securities, and other real estate related collateral (see Figure 8). Advances are the largest category The FHLBanks also offer their members several housing of FHLBank assets and no FHLBank has ever incurred a and community investment programs, such as the credit loss on an advance. FHLBank advances and other Affordable Housing Program. Members receive a credit-related products increase the availability of credit for subsidy from an FHLBank used typically in conjunction residential mortgages. with an affordable housing sponsor for the purchase, construction, or rehabilitation of housing for low- and As a condition of membership in an FHLBank or to obtain moderate-income households. The Affordable Housing an advance, an institution purchases capital stock in that Program supports both multifamily rental properties bank. Only member institutions can purchase the capital and single-family home ownership projects. Each stock in an FHLBank and, with the exception of certain FHLBank must contribute the greater of 10 percent of housing associates, only member institutions can borrow its net income or an aggregate $100 million to fund the from an FHLBank. Affordable Housing Program. Since 1990, the FHLBanks have contributed $4.1 billion in subsidy to this program as Membership is limited to regulated depository institutions of September 30, 2012. (banks, thrifts, and credit unions), insurance companies, Figure 7: TOTAL ASSETS OF THE FHLBANKS AT SEPTEMBER 30, 2012 140 120 112.1 107.1 100 94.2 80 $ Billions 67.2 66.4 60.1 60 48.7 45.7 41.2 40 35.6 35.4 35.2 20 0 San Des Atlanta New York Francisco Cincinnati Chicago Pittsburgh Moines Boston Indianapolis Seattle Topeka Dallas Building an Infrastructure for the Secondary Mortgage Market 17 Figure 8: FHFA OVERSIGHT ROLE — FHLBANKS Borrower Applies for Mortgage LENDER Borrower Borrower Receives Loan Lender Pledges Lender Collateral* Receives Cash (Advance) FHLBANK Ensures All Debt Is Issued Financial through the Safety and Office of Finance Soundness OFFICE OF FINANCE Issues Debt to Underwriters Receives Cash from INVESTORS Underwriters • Individual Sells Bonds to Investors • Institutional WALL STREET • Foreign * Note: The collateral pledged may include assets other Investors Purchase Bonds than mortgages. Also, the collateral pledged may from Underwriters be loans originated well in the past. Figure 9: NUMBER OF FHLBANK MEMBERS AND PERCENT OF MEMBERS THAT BORROW 9,000 90% 8,000 80% 7,000 70% Borrowing Percent 6,000 60% Members 5,000 50% 4,000 40% 3,000 30% 2,000 20% 1,000 10% 0 DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC JUN 0% ´91 ´92 ´93 ´94 ´95 ´96 ´97 ´98 ´99 ´00 ´01 ´02 ´03 ´04 ´05 ´06 ´07 ´08 ´09 ´10 ´11 ´12 Members Borrowing Percent 18 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S Figure 10: BANK LOCATIONS Alaska Seattle Hawaii Boston Guam New York Des Moines Pittsburgh Chicago Cincinnati San Indianapolis Puerto Rico Francisco Topeka Virgin Islands Atlanta Dallas ATLANTA Alabama, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia BOSTON Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont CHICAGO Illinois, Wisconsin CINCINNATI Kentucky, Ohio, Tennessee DALLAS Arkansas, Louisiana, Mississippi, New Mexico, Texas DES MOINES Iowa, Minnesota, Missouri, North Dakota, South Dakota INDIANAPOLIS Indiana, Michigan NEW YORK New Jersey, New York, Puerto Rico, Virgin Islands PITTSBURGH Delaware, Pennsylvania, West Virginia SAN FRANCISCO Arizona, California, Nevada SEATTLE Alaska, Guam, Hawaii, Idaho, Montana, Oregon, Utah, Washington, Wyoming TOPEKA Colorado, Kansas, Nebraska, Oklahoma Building an Infrastructure for the Secondary Mortgage Market 19 Management Challenges and What Lies Ahead Several of the more challenging initiatives organized by goal, are described below. Building a New Infrastructure for the Secondary Mortgage Market Securitization Platform FHFA and the Enterprises have begun work on a possible design for a common securitization platform to replace the Enterprises’ current proprietary systems, which are aging, inflexible and in need of substantial improvement. This important infrastructure investment will provide a sound securitization platform designed to issue securities supported with or without a government guarantee. FHFA issued a white paper entitled Building a New Infrastructure for the Secondary Mortgage Market on October 4, 2012. The white paper identifies the core components of mortgage securitization necessary in Acting Director Edward J. Demarco addresses FHFA staff at a town hall the housing finance system going forward, including meeting on the Conservatorship Strategic Plan in March 2012. two cornerstone operational features: 1) a securitization platform to process payments and perform other functions that could be used by multiple MBS issuers, FHFA continues to face numerous challenges as regulator and 2) a contractual framework supporting the new of the housing GSEs and conservator of the Enterprises. infrastructure. FHFA requested public input on the concepts outlined in the paper. MANAGING THE ENTERPRISES As the agency looks ahead to 2013, FHFA will continue In the four years since the establishment of the to coordinate Enterprise efforts on new systems and conservatorships of the Enterprises, FHFA has made a common platform while seeking input from industry significant progress in maintaining a functioning mortgage stakeholders throughout this process. FHFA will remain market; but there is still more to do. In February 2012, mindful of policymakers’ possible future determinations FHFA Acting Director Edward DeMarco formalized about the degree of government involvement and support the agency’s plans about long-term improvements to in the nation’s housing finance system. the housing finance system into A Strategic Plan for Enterprise Conservatorships. The plan details three Model Pooling and Servicing Agreements strategic goals for the next phase of conservatorship and outlines an expansive and aggressive agenda of activities Building for the future also requires developing and for FHFA, Fannie Mae, and Freddie Mac. implementing standards for underwriting, disclosures, and servicing. Creating a robust and standardized pooling In conjunction with the strategic plan, FHFA developed and servicing agreement is essential to improving the a conservatorship scorecard for the Enterprises. This existing system. The white paper entitled Building a scorecard will hold management at the Enterprises New Infrastructure for the Secondary Mortgage Market, accountable for meeting certain objectives. FHFA has also published in October 2012 by the agency, also sought established the Office of Strategic Initiatives to coordinate industry feedback on a potential contractual framework and oversee the initiatives associated with the plan. for standardized pooling and servicing agreements. 20 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S The conservatorship scorecard sets a goal for the More Private Sector Risk Sharing Enterprises to propose a model pooling and servicing Shifting mortgage credit risk from the Enterprises to agreement framework, seek public feedback and produce private investors is central to Goal 2—Contracting final recommendations for standard Enterprise trust Enterprise Operations—outlined in A Strategic Plan documentation by December 31, 2012. The longer-term for Enterprise Conservatorships. FHFA is considering goal is to develop pooling and servicing standards that not a number of alternatives, including expanded use of only create more efficiencies and best practices for the mortgage insurance and security structures that allow for Enterprises, but also provide an option for other investors private sharing of risk. and participants to enter the secondary market by using a functional contractual framework that could address many Risk sharing is a complex, nuanced process that requires of the shortcomings in today’s private-label structures. the evaluation of various avenues for investors to deploy private capital. In the private sector, the role of credit risk-taking through securitization can be divided into two Contracting the Enterprises’ Footprint in the categories: 1) operating companies such as the two GSEs Market and mortgage insurance companies that provide credit Raising Guarantee Fees guarantee for a fee; and 2) investors in non-agency or FHFA has been taking steps to improve the Enterprises’ private label securities (PLS). pricing of credit risk. In addition to strengthening market A Strategic Plan for Enterprise Conservatorships focuses practices, these steps contribute to the strategic goal on creating a securitization framework of the future to of gradually reducing the Enterprises’ footprint in the facilitate mortgage funding. Among various alternatives for mortgage market. Since being placed into conservatorship, credit risk transfer, FHFA has considered expanded use the Enterprises have steadily raised guarantee fees, which of mortgage insurance and senior-subordinate securities should gradually reduce taxpayers’ risk. structures that allow for private sharing of risk with the During fiscal year 2012, there were two guarantee fee Enterprises. In addition to evaluating various mechanisms increases. The first increase was an across-the-board for risk transfer with regard to market opportunities, FHFA 10-basis-point increase mandated by Congress and and the Enterprises also need to make operational changes used to fund the temporary payroll tax cut. The second and develop proper risk metrics and controls. FHFA and was designed to average 10 basis points, but the actual the Enterprises are working diligently and making progress increase will vary depending on loan terms and other on this and other complex risk-related issues. factors. Retained Portfolio Contraction The agency plans to continually increase guarantee fees FHFA ensured that Fannie Mae and Freddie Mac in anticipation of a future market where credit risk is contracted their respective retained portfolios consistent borne principally or exclusively by private capital. These with the Senior Preferred Stock Purchase Agreements increases may also encourage private firms to increase (SPSPA). FHFA is working with both GSEs to ensure their participation in the mortgage market. that both remain in compliance with the revised SPSPA FHFA will also consider guarantee fee pricing based executed by the Treasury Department and FHFA as on the costs of doing business in different parts of the conservator in August 2012 (see sidebar regarding country. FHFA sent a Notice to the Federal Register in SPSPA on page 31). September 2012, presenting an approach to adjust the guarantee fees that the Enterprises charge on Maintaining Foreclosure Prevention Efforts and single-family mortgages in states where costs related Credit Availability to foreclosure practices are statistically higher than the Improving Loss Mitigation Efforts national average. The third goal outlined in A Strategic Plan for Enterprise Conservatorships—maintaining foreclosure prevention Building an Infrastructure for the Secondary Mortgage Market 21 activities and credit availability—continues to be central IMPROVING HOUSING GSEs to the conservator’s obligation to preserve and conserve SUPERVISION the assets and property of the Enterprises. Foreclosure prevention efforts are designed to reduce credit losses, Fully Implemented Realignment of Supervision primarily on mortgages originated in the years before Staff conservatorship. In August 2012, Acting Director DeMarco announced organizational refinements that will place additional Although loss mitigation efforts that focus on helping examiners on-site at each Enterprise. This move will delinquent households as early as possible are in place, consolidate core examination activities and provide high levels of mortgage delinquencies continue. Since in-depth technical support, advice, and analysis to the conservatorships began, the Enterprises’ foreclosure enhance supervision under the examiners-in-charge at the prevention activities, including loan modifications and Enterprises. short sales, have helped nearly 2.5 million borrowers avoid foreclosure as of August 2012. The Home Affordable This supervision structure emphasizes: Modification Plan (HAMP) and other modification The authority and responsibility of the examiner-in- programs have enabled the Enterprises to help more than charge as the focal point for FHFA’s supervision; one million families modify their loans since the start of the Communication with the Enterprises; and conservatorships. Both Enterprises have used HAMP as the first option for troubled borrowers. FHFA’s collaborative and coordinated approach to supervision. In 2012, FHFA also announced steps to align and consolidate a number of previously existing short sales Coordination and transition to new positions and offices programs into one program. This streamlining will enable have begun, but the agency is challenged to have the lenders and servicers to more quickly and easily qualify restructured division fully staffed and operating by the eligible borrowers for a short sale. FHFA also announced start of the 2013 exam cycle. that the Enterprises would accelerate review and approvals of short sale transactions. FHFA will continue to Implementing Examiner Development Program find ways to help homeowners avoid foreclosure, reduce In August 2012, FHFA Acting Director DeMarco taxpayer losses, and help stabilize communities. emphasized at an all-hands meeting the agency’s commitment to examiner development, including The Home Affordable Refinance Program (HARP) was establishing an examiner-commissioning program and modified in late 2011 to expand eligibility for participation. a “corporate university”-styled training program. FHFA From January 2012 to August 2012, the new and has already made progress on developing an examiner- streamlined HARP 2.0 has helped more than 618,217 commissioning program, which it expects to introduce borrowers refinance their loans. As FHFA continues to in FY 2013. The FHFA corporate university will focus on gain insight from the program, we will make adjustments as necessary to enhance access to HARP. Although loss mitigation efforts have greatly improved, FHFA remains committed to enhancing these programs further. FHFA and the Enterprises will continue to improve existing programs for loan modifications, refinances, and other foreclosure avoidance tools. In addition to the initiatives related to the strategic plan, the following initiatives support the goals of FHFA. Executives Steve Cross (left), Wanda DeLeo (center) and Jon Greenlee (right) spoke to FHFA staff at the annual supervision conference in December 2011. 22 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S continuous training for all employees, offering courses to FHFA’s challenge is to make sure the FHLBanks stay improve skills and encourage professional development. focused on their core business—particularly advances to members—and promote competitive and balanced mortgage finance and servicing systems. MONITORING THE FHLBANKS IN A CHANGING ENVIRONMENT After increasing during the financial crisis to an historic high of more than $1 trillion in October 2008, advances Aligning Operating Expenses to Assets fell to approximately $412 billion in September 2012. The Despite the 12 FHLBanks’ earnings improvements, the decline was in part a reversal of the increase observed System still faces challenges. Advances and total assets during the crisis. In addition, low loan generation and of the System have contracted, but operating expenses thriving deposits leave members with less need for the have remained relatively steady. liquidity offered by FHLBank advances. FHLBanks price advances with relatively narrow spreads over funding The combination of lower interest income and level costs to make them competitive to other sources of operating expenses means the FHLBanks spend a larger liquidity available to members, but advances have still share of net interest income on operating costs. The ratio dropped precipitously from their 2008 peaks. of operating expenses to net interest income was 21 percent in 2012, compared to the 2008 ratio of 14 percent. The percentage of members with outstanding advances decreased to 58.4 percent as of June 30, 2012, To address this challenge, FHFA must ensure that the compared with 60.3 percent on December 31, 2011. FHLBanks better align operating expenses with assets. However, demand for advances has begun to show However, FHFA also must ensure that the FHLBanks some signs of regional stabilization and some FHLBank do not cut operating expenses imprudently, which may members have increased their use of advances during the increase operational risks. third quarter of 2012. Expanding Core Business in a Weak Economy Over the past year, FHLBank earnings have felt downward pressure because of the low interest-rate environment and a decline in demand for advances. The low interest-rate environment adversely affects the FHLBanks’ net interest income by reducing return on invested capital, while fewer advances can lead to fewer return-generating assets. Building an Infrastructure for the Secondary Mortgage Market 23 Performance Highlights by Strategic Goal The housing government-sponsored enterprises operate in a safe and sound STRATEGIC GOAL 1 manner and comply with legal requirements COMPLETED 2011 EXAMINATIONS OF A YEAR IN THE LIFE OF AN EXAMINER THE ENTERPRISES AND FHLBANKS AND REPORTED SUMMARIES TO CONGRESS FHFA’s staff examiners collectively perform annual safety and soundness assessments of the 12 FHFA released its 2011 annual Report to Congress Federal Home Loan Banks, the Office of Finance, in June 2012. The report contains the results and Freddie Mac and Fannie Mae. During these annual conclusions of the annual examinations of the Enterprises assessments, examiners perform a variety of tasks onsite at the subject institutions with the goal of and the FHLBanks. identifying significant credit, market, and operational risks. Additionally, examiners evaluate effectiveness of Report of Examinations of the Enterprises board and senior management oversight during the onsite examination. The overall ratings for both Enterprises did not change Key duties performed by an examiner before, during from FY 2010 to FY 2011. However, Fannie Mae improved and after examinations include: in three categories, including governance, which changed Collaborates internally with FHFA staff to develop from significant concerns to limited concerns while both the supervisory plans market risk and operational risk management improved from Identifies issues, trends and concerns on a broad critical concerns to significant concerns. The management range of business processes and the boards at both Enterprises were responsive Plans, organizes and leads examinations throughout 2011 to FHFA findings while continuing to take Performs multiple complex tasks concurrently appropriate steps to resolve identified issues. Directs, guides and consults with FHFA staff Observes FHLBank/Enterprise management Report of Examinations of the FHLBanks meetings and conducts interviews with their staff Evaluates effectiveness of risk management The FHLBanks showed some improvements in 2011. practices Overall, governance practices improved. The FHLBanks’ Ensures pertinent regulations, policies and financial condition and performance in terms of return on procedures are followed assets and return on equity remained fairly stable. All Communicates with FHLBank/Enterprise FHLBanks exceeded the minimum statutory capital representatives in a tactful and effective manner requirement of 4 percent of total assets and their risk-based Prepares report of examination, memoranda and capital requirements at year end. Credit risk management other written communications was generally stable while mortgage assets continued to be Presents results to management and board of directors in a professional manner the greatest source of market risk for the FHLBanks. Documents support for findings, conclusions and annual assessments APPOINTMENT OF NEW CEOs FOR Exercises restraint and tact when approaching FANNIE MAE AND FREDDIE MAC adversarial situations Provides performance input on examination team During FY 2012, FHFA as conservator for both Fannie members Mae and Freddie Mac appointed new chief executive Consults with examiners and senior agency officers (CEOs) for their respective companies. Both officials on major oversight issues CEOs possess a breadth of knowledge and experience in Reviews and edits examiners’ work products housing finance and financial services. They will also lead internally efforts in continuing to strengthen their companies while 24 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S promoting foreclosure prevention activities and supporting comply with statutory requirements enacted as part of the A Strategic Plan for Enterprise Conservatorships. Gramm-Leach-Bliley Act of 1999, making the Chicago Bank the last FHLBank to make this conversion. In April 2012, FHFA terminated the cease and desist order on IMPROVED FINANCIAL CONDITION OF THE ENTERPRISES REDUCING NEED the FHLBank of Chicago because of improvements in FOR ADDITIONAL TREASURY SUPPORT its financial and capital positions, the resolution of risk management concerns, and consideration of specific To date, the Enterprises drew $187.5 billion from Treasury commitments and assurances made by the FHLBank’s to maintain positive net worth. FHFA's projections on the board of directors to FHFA. This includes the limitation financial performance of the Enterprises (using data as of of dividends, maintenance of retained earnings, and the October 2012), including potential draws under the Senior reduction of excess stock so long as certain financial Preferred Stock Purchase Agreements with the Treasury thresholds are maintained. Department show cumulative Treasury draws are reduced and more stable compared to previous projections. The key drivers to these results include an overall reduction in actual FHLBANK OF SEATTLE ADEQUATELY and projected credit-related expenses and changes in the CAPITALIZED dividend structure contained in the Senior Preferred Stock In 2010 as a result of deterioration in the value of its Purchase Agreements, which eliminates the need to borrow private-label MBS and other issues principally related to from the Treasury Department to pay dividends. its capitalization, the FHLBank of Seattle entered into a consent order with FHFA. The consent order provided for Modeling results under three different Moody's house price a stabilization period for the FHLBank to meet financial paths, ranging from stronger near-term rebound, current thresholds related to retained earnings, securities baseline, and deeper second recession, reveal that Freddie impairments, and market value before the FHLBank Mac would not require additional Treasury draws after Seattle could resume certain activities, including the 2012 in any of the three scenarios while Fannie Mae would paying of dividends and the repurchase or redemption of not require additional Treasury draws after 2012 in two of its capital stock. the three scenarios (only in the deeper second recession scenario). In September of 2012, FHFA reclassified the FHLBank of Seattle as ‘adequately capitalized’. This designation now FHFA TERMINATES FHLBANK OF permits the FHLBank of Seattle to repurchase excess CHICAGO CEASE AND DESIST ORDER capital stock, which is something it had been unable to do since December 2008. This reclassification is a significant In October 2007, the FHLBank of Chicago entered into milestone as the FHLBank of Seattle works its way back a consent cease and desist order with one of FHFA’s to autonomous activities. predecessor agencies, the Federal Housing Finance Board. The cease and desist order limited the Bank’s ability to redeem, repurchase, or pay dividends on its capital stock, and required the FHLBank to implement new management policies and practices acceptable to FHFA. Following a period of improvement, in January 2012, the FHLBank of Chicago converted its capital structure to Building an Infrastructure for the Secondary Mortgage Market 25 The housing government-sponsored enterprises support a stable, liquid, and STRATEGIC GOAL 2 efficient mortgage market including sustainable homeownership and affordable housing BORROWER ASSISTANCE ACTIVITIES Consequently, 711,409 refinances were completed The Enterprises completed 389,741 home retention through HARP from October 2011 to August 2012 actions that allowed homeowners to save their homes compared with 448,746 refinances from October 2010 from October 2011 to August 2012. Home retention to September 2011. For the month of August 2012, actions include loan modifications, repayment plans, 51 percent of refinances through HARP have been to forbearance plans, and charge-offs-in-lieu. These actions underwater borrowers with a LTV ratio greater than 105 are intended to assist homeowners whose mortgages are percent, a substantial improvement over the month of in distress with the goal of maintaining their homes. This September 2011 when such borrowers accounted for number does not include HARP refinancing. just 17 percent of HARP refinances (see Figure 11). Since the program’s inception in April 2009, the Enterprises have financed more than 1.6 million loans through HARP HARP Enhancements as of August 2012. HARP was established as a pre- HARP was established in 2009 to assist homeowners distressed action to enable homeowners to refinance their unable to refinance due to a decline in home values. mortgages and lower their monthly payments. The program was originally designed to provide these borrowers with an opportunity to refinance by permitting The continued high volume of HARP loans is attributed to the transfer of existing mortgage insurance to their newly record-low mortgage rates and program enhancements refinanced loan, or by allowing those without mortgage (see Figures 11a). insurance on their previous loan to refinance without obtaining new coverage. During FY 2012, FHFA worked collaboratively with Figure 11: HARP REFINANCES the GSEs and other industry participants in an effort to increase access to the program for responsible HARP REFINANCES SHARE OF HARP REFINANCES LTV> 105% borrowers. The result of these efforts was a series of enhancements to the program (HARP 2.0) which 711,409 included: 51% removing the 125 percent loan-to-value (LTV) ceiling 448,746 for fixed-rate loans; waiving of certain lender representations and 17% warranties; eliminating the need for an appraisal in many cases; OCT 2011– OCT 2010– AUG 2012 SEP 2011 AUG 2012 SEPT 2011 eliminating certain risk-based fees for borrowers refinancing into a shorter term; and lowering fees for other borrowers, and extending the HARP end date to December 31, 2013. 26 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S Figure 11a: MONTHLY HARP VOLUME BY LTV As part of the approval process, servicers will evaluate borrowers for capacity to cover some or all of the shortfall 120,000 between the outstanding loan balance and the property sales price. Fannie Mae and Freddie Mac will waive 100,000 the right to pursue deficiency judgments for a financial 80,000 contribution for all approved short sales. Borrowers who 60,000 sell their home through a short sale will not be eligible for a new mortgage backed by Fannie Mae or Freddie Mac 40,000 for at least two years after the short sale. 20,000 The new Standard Short Sale policies allow for a 0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 AUG* streamlined approach for borrowers who are seriously ´09 ´09 ´10 ´10 ´10 ´10 ´11 ´11 ´11 ´11 ´12 ´12 ´12 delinquent and who have low credit scores. In addition, HARP LTV HARP LTV HARP LTV >80%–105% >105%–125% >125% Fannie Mae and Freddie Mac will offer up to $6,000 to second lien holders who expedite a short sale. * The number of completed HARP refinances reported for deeply underwater borrowers increased sharply in June 2012 as further enhancements to HARP went into effect. Starting June 1, 2012, lenders became able to deliver loans with loan-to-value ratios From October 2011 to August 2012, the Enterprises greater than 125 percent refinanced through HARP to the Enterprises to be securitized. completed 132,834 short sales and deeds-in-lieu (nonforeclosure-home forfeiture actions) compared to 107,382 during the same period in 2011. Streamlining Short Sales In August 2012, Fannie Mae and Freddie Mac published aligned guidance that consolidates four existing short Improvements to Foreclosure Attorney Networks sale programs into one Standard Short Sale program. In an effort to produce uniform foreclosure processing The newly enhanced and streamlined program rules standards to assist servicers, homeowners, and lenders, will enable servicers to quickly and easily qualify eligible FHFA directed the Enterprises to change the procedures borrowers for a short sale. for selecting foreclosure attorneys. FHFA instructed the Enterprises to transition away from current foreclosure The new guidelines went into effect on November 1, attorney network programs and move to a system where 2012, and permit borrowers with a Fannie Mae or mortgage servicers select qualified law firms that meet Freddie Mac mortgage who have an eligible hardship to certain minimum, uniform criteria. These changes will sell their home in a short sale, even if they are current support the consent orders entered into by financial on their mortgage. Servicers will not need Fannie Mae regulators and servicers. FHFA is also working with other or Freddie Mac approval to expedite short sales that regulators and industry stakeholders to create uniform provide relief for borrowers with the following hardships: qualifications and oversight of foreclosure attorneys. death of a borrower or co-borrower, divorce, disability, or employment relocation of more than 50 miles. OVERSIGHT OF FEDERAL HOME LOAN Military service members who relocate under Permanent BANKS’ HOUSING AND COMMUNITY Change of Station (PCS) orders will automatically be INVESTMENT PROGRAMS eligible for a short sale, even if they are current on their FHFA has a responsibility to ensure that all FHLBanks existing mortgage. Moreover, service members with PCS comply with statutory and regulatory requirements. As orders will not be obligated to contribute funds to cover required by law, the FHLBanks direct 10 percent of the shortfall between the outstanding loan balance and their previous year’s annual earnings to the Affordable the sales price for principal residences purchased on or Housing Program (AHP). In both 2011 and 2012, the before June 30, 2012. Building an Infrastructure for the Secondary Mortgage Market 27 FHLBanks fully funded their AHP programs consistent to FHFA on the low-income housing activities of the with their statutory mandate. In 2012, FHFA developed FHLBanks. FHFA, in turn, analyzes the councils’ reports an examination module for the AHP and the Community and delivers a consolidated report to the councils on the Investment Program (CIP).This module is currently low-income housing activities of all of the FHLBanks. The being pilot tested. AHP examiners conducted on-site FHLBanks’ advisory councils and FHFA fully complied examinations of all 12 FHLBanks and additional on-site with these requirements. visitations. During this reporting period, FHFA conducted On November 10, 2011, FHFA issued proposed on-site data integrity reviews of AHP and CIP data for five amendments to its community support regulation (12 CFR FHLBanks. All 12 FHLBanks complied with AHP and CIP 1290). The proposed amendments, among other things, data reporting requirements in a timely manner. would require the FHLBanks to monitor and assess The Federal Home Loan Bank Act requires each FHLBank the eligibility of each member institution for long-term to appoint an advisory council made up of community advances based on compliance with the regulation’s representatives with experience in affordable housing. Community Reinvestment Act of 1977 and first-time The law further requires that each council annually report homebuyer standards. 28 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S FHFA preserves and conserves assets and property of the Enterprises, ensures STRATEGIC GOAL 3 focus on their housing mission, and facilitates their financial stability and emergence from conservatorship STRATEGIC PLAN FOR THE delivery of foreclosure prevention options. Through SAI, CONSERVATORSHIPS DEVELOPED the Enterprises: FHFA released A Strategic Plan for Enterprise Established new borrower communication Conservatorships that describes the next phase of requirements that ensure borrowers are contacted at conservatorship for the Enterprises in February 2012. the earliest stage of delinquency, when alternatives to The plan sets forth a series of initiatives and strategies foreclosure are most successful; to improve current mortgage processes, inspire greater Required that servicers simultaneously consider confidence among prospective market participants, and borrowers for the full range of loss mitigation options set the stage for an improved future system of housing (as opposed to treating the consideration of each finance. The plan also sets forth objectives that are option as a separate process); and consistent with FHFA’s legal mandate and the policy Required that servicers refer a loan to foreclosure only direction that emerged from the Administration and Congress. The three strategic goals identified for the next after an independent review of the case to ensure phase of the conservatorships are discussed in detail on that the borrower was, in fact, considered for an pages 64–66. alternative. Under SAI, FHFA and the Enterprises have taken a Office of Strategic Initiatives highly targeted approach with the goal of refocusing the During FY 2012, FHFA appointed an executive to lead servicers’ resources and attention on moving all borrowers the newly established Office of Strategic Initiatives in into alternatives to foreclosure, quickly, efficiently, and coordinating and overseeing the activities associated with aggressively. To accomplish this, the Enterprises aligned A Strategic Plan for Enterprise Conservatorships. This their requirements for servicing troubled loans and position reports directly to the Director and is responsible removed a significant barrier for homeowners seeking a for identifying and organizing key stakeholders, work loan modification—inconsistencies that caused servicers streams, and deliverables that flow from the plan. confusion and delay. Uniform Mortgage Data Program Conservatorship Scorecards Developed for FHFA first announced the Uniform Mortgage Data Enterprises to Achieve the Plan Program in May of 2010, when Fannie Mae and Freddie A month after the release of A Strategic Plan for Mac were directed to develop uniform standards for Enterprise Conservatorships, FHFA published a data reporting on mortgage loans and appraisals. This Conservatorship Scorecard to provide the implementation initiative is designed to improve the consistency, quality, roadmap for the plan. The strategic plan is a multi-year and uniformity of data collected at the front-end of the endeavor; the scorecard sets forth performance goals mortgage process. By identifying potential defects as under the plan for the current calendar year. FHFA, in early in the origination and delivery process as possible, concert with the Enterprises implemented the following the Enterprises will improve the quality of mortgage initiatives: purchases, which should reduce repurchase risk for originators. Servicing Alignment Initiative FHFA directed the Enterprises to develop the Servicing In the last two years, substantial progress has been Alignment Initiative (SAI) to focus more aggressively on made. In March 2012, use of the Uniform Collateral Data Portal became mandatory, which ensures that all Building an Infrastructure for the Secondary Mortgage Market 29 lenders are now submitting standard appraisal forms and In August 2012, FHFA directed the Enterprises to make appraisal data electronically. This allows the Enterprises to further changes to the single-family guarantee fees they evaluate the information in a more seamless and efficient charge lenders to be effective in December 2012. These manner. changes will: Result in the Enterprises increasing guarantee fees The Enterprises also developed the Uniform Loan Delivery on single-family mortgages by an additional 10 basis Dataset standards that dictate the file format required at points on average; loan delivery for all mortgages delivered to the Enterprises on or after July 23, 2012, with applications dated on or Make the guarantee fees the Enterprises charge after December 1, 2011. The Uniform Mortgage Data lenders that deliver small and large volumes of loans Program requires lenders to adopt this file format in an more uniform; and effort to further streamline and improve submissions of Begin to address the cross-subsidization of pricing mortgage data. These efforts pave the way for future that exists whereby lower-risk loans currently subsidize enhancements and offer an integrated and efficient the pricing of higher-risk loans. way for mortgage investors to access basic loan-level information. In addition, FHFA announced in August 2012 that it was soliciting public comment on an approach to impose an Enhanced Loan-Level MBS Disclosure Initiative up-front fee on newly acquired loans originated in specific During FY 2012, Fannie Mae began making public states where the Enterprises are likely to incur default- disclosures of loan-level data about the mortgages related losses much higher than the national average backing newly issued single-class, single-family MBS, because of the individual laws in these states. which are comparable to the MBS disclosures that Freddie Mac has been making to investors since 2005. Real Estate Owned Disposition Initiative Both Fannie Mae and Freddie Mac now disclose loan- The Real Estate Owned (REO) Disposition Initiative is a level information when MBS are issued, and they will both joint initiative with the Treasury Department, Department issue monthly ongoing disclosures over the life of each of Housing and Urban Development, Federal Deposit security after Fannie Mae begins disclosures in the first Insurance Corporation, the Federal Reserve System, and quarter of FY 2013. the Enterprises. The Enterprises also jointly developed and submitted The REO Initiative is designed to reduce taxpayer losses, a template with a comprehensive list of loan-level stabilize neighborhoods and home values, shift to more disclosure data elements for their single-class, single- private management of properties, and reduce the supply family fully guaranteed MBS. In FY 2012, the Enterprises of REO properties in the marketplace. This initiative holds also began working, at FHFA’s direction, to develop promise for providing support to local neighborhoods plans to implement enhancements of their loan-level that were especially hard hit by the housing crisis and will MBS disclosures consistent with the template. They help meet the rising demand for rental housing in many are now working on a second version of the template communities. that will encompass data elements needed to support FHFA began the initiative with a Request for Information nonguaranteed mortgage securities. aimed at garnering industry ideas on how to sell REO Changes In Enterprise Guarantee Fees properties of Fannie Mae, Freddie Mac, and the Federal Housing Administration. After reviewing more than 4,000 In December 2011, Congress directed FHFA in the responses, FHFA announced the first pilot transaction Temporary Payroll Tax Cut Continuation Act of 2011 under the initiative in February 2012, targeting some to increase single-family guarantee fees by at least an of the metropolitan areas hardest hit by the housing average of 10 basis points. In fulfillment of that mandate, market crisis—Atlanta, Chicago, Las Vegas, Los Angeles, FHFA directed the Enterprises to raise guarantee fees by Phoenix, and parts of Florida. 10 basis points beginning in April 2012. 30 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S Investors were qualified to bid after a rigorous evaluation Requiring an annual risk management plan from the process. The process consisted of several factors, Enterprises while they are in conservatorship. Plans including financial strength, asset management will detail actions each Enterprise will take to reduce experience, property management expertise and both the financial and operational risk associated with experience in the geographic area. each reportable business segment. Replacing the 10 percent fixed-dividend payment The winning bidders for the REO initiative were chosen with a variable payment based on the Enterprise’s to purchase approximately 1,772 single-family Fannie net worth to ensure all earnings generated by the Mae foreclosed properties. Pacifica Companies, LLC has Enterprise benefit taxpayers and eliminate the need to purchased 699 Fannie Mae properties in Florida, The borrow from the Treasury Department and pay back Cogsville Group, LLC has purchased 94 properties in dividends. Chicago, and Colony Capital, LLC has purchased 970 properties in California, Arizona and Nevada. Although the Atlanta properties have not been awarded, they will be SENIOR PREFERRED STOCK evaluated for future transactions. PURCHASE AGREEMENTS This pilot is not intended to be a nationwide program. It The Enterprises continue to operate under is a targeted effort only in markets with a large number conservatorship, as they have since 2008. The U.S. Department of the Treasury provides the Enterprises of foreclosed properties where local market conditions with financial support through the Senior Preferred suggest a possible benefit from this approach. Stock Purchase Agreements, established at the same time the Enterprises entered conservatorship. MODIFICATIONS TO THE TREASURY The Senior Preferred Stock Purchase Agreements SENIOR PREFERRED STOCK PURCHASE were designed to ensure each Enterprise maintained positive net worth. If FHFA determines, on a quarterly AGREEMENTS basis, that an Enterprise’s liabilities have exceeded In August 2012, FHFA and the Treasury Department its assets under generally accepted accounting modified the Senior Preferred Stock Purchase principles, the Treasury Department will contribute Agreements. Key components of the changes include: cash capital to the Enterprise in an amount equal to the difference between liabilities and assets. An Accelerating reduction of the retained mortgage amount equal to such contribution will be added investment portfolios of the Enterprises from 10 to the senior preferred stock of the Enterprise percent per year to 15 percent per year. To begin held by the Treasury Department. The terms of with, the upaid principal balance (UPB) of Enterprise- the agreements require a 15 percent reduction in related investments portfolio may not exceed $650 the Enterprises’ retained portfolios each year. The billion on December 31, 2012. Also, on December 31 only material additions to these portfolios come from delinquent mortgages pulled out of Enterprise of each year thereafter, each Enterprise’s portfolio will mortgage-backed securities after being four months not be allowed to exceed 85 percent of the aggregate delinquent. The Enterprises are required to pay the amount of the preceding year’s UPB until the portfolio Treasury Department a variable payment based upon reaches $250 billion. the Enterprise’s net worth. Building an Infrastructure for the Secondary Mortgage Market 31 RESOURCE FHFA has the personnel, resources and infrastructure to manage effectively and MANAGEMENT efficiently to achieve its mission and goals STRATEGY CONSOLIDATING AGENCY RESOURCES among the staff and program areas. It also allows for TO IMPROVE COLLABORATION AND expansion in, and greater integration of, our examination COMMUNICATION – CONSTITUTION and supervisory personnel and programs. The new CENTER headquarters is in the same building as the Office of the FHFA consolidated its operations from three separate Comptroller of the Currency and located directly across locations into its new headquarters at Constitution the street from the Department of Housing and Urban Center in Washington, D.C., in January 2012. This Development. move has improved collaboration and communications FHFA SUPPORT FOR 40 EXTERNAL AUDITS, SURVEYS, AND EVALUATIONS During FY 2012, FHFA staff and management effectively responded to 40 different external audits, evaluations, and surveys. As a result, significant amounts of resources were allocated into these efforts, especially in the mission areas. In order to more efficiently manage the volume of these outside reviews, FHFA expanded its capacity by assigning additional staff for audit follow-up and by developing an automated system to track audit Chief Operating Officer Rick Hornsby spoke to the agency’s supervision recommendations and agency responses. divisions at the December 2011 annual FHFA supervision conference. CERTIFICATE OF EXCELLENCE IN ACCOUNTABILITY REPORTING FHFA has received the Certificate of Excellence in Accountability Reporting from the Association of Government Accountants each year since 2008, our first year as a new agency. This award demonstrates the agency’s commitment to accountability and spotlights the high quality of our performance and financial information reporting. FHFA has won the CEAR award for four years. 32 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S FREEDOM PROJECT year to reflect on and celebrate the accomplishments of great men and women of our past and present. During In FY 2010, FHFA began a special set of events called FY 2012, the Freedom Project recognized and celebrated the Freedom Project to highlight and demonstrate how Veterans Day, Martin Luther King (MLK), Jr. Day, Americans of all races and backgrounds have contributed Washington’s Birthday, Memorial Day, Independence Day, to the freedoms we enjoy in America. The Freedom and Constitution Day. Project brings agency employees together throughout the FY 2012 FREEDOM PROJECT EVENTS MLK & WASHINGTON’S BIRTHDAY VETERANS DAY In February 2012, Dr. Daisy FHFA held a special luncheon Nelson Century, a historical to honor all the employees reenactor, portrayed who are military veterans. The Sojourner Truth in her later veterans spoke about their time years remembering life from in the military, their service, childhood through adulthood. and how long they served. She also recited Truth’s most famously and oft-quoted speech, “Ain’t I a Woman?” FREEDOM LECTURE U.S. Representative John Lewis is often called “one of MEMORIAL DAY the most courageous persons” Thomas Sherlock, senior historian of Arlington National the Civil Rights Movement Cemetery, spoke to employees ever produced. Representative about the history of America’s Lewis shared with FHFA his most famous burial ground contributions to the Civil Rights to celebrate Memorial Day as Movement and to building part of the Freedom Project. what he calls “The Beloved Community” in America. INDEPENDENCE DAY Abigail Adams reminded CONSTITUTION DAY FHFA of her famous plea to FHFA celebrated Constitution “Remember the Ladies” in the Day with copies of a ”Pocket creation of the Constitution Constitution” that contains the of the United States. Adams Declaration of Independence, was the wife of President John the Constitution of the United Adams and mother of President States, the Bill of Rights, John Quincy Adams. She was Amendments XI-XXVII and portrayed by actress and re- Significant Dates for the staff. enactor Kim Hanley. Building an Infrastructure for the Secondary Mortgage Market 33 FY 2012 Performance Summary This section describes FHFA’s strategic and performance- Figure 12: FY 2012 PERFORMANCE RESULTS planning framework, performance measures not met, the reasons why, proposed improvements, and the seven 100 key performance measures that most closely reflect the 54% 14% 8% (2) (14) (4) agency’s achievements and desired outcomes. For a 80 Target Met comprehensive list of performance measures, see pages 54–70. FHFA’s performance measures are rated as: 60 Target Not Met Target Met; or 40 Target Not Met. 20 46% 86% 92% (12) (25) (23) FHFA determines that performance goals are met if 0 FY 2010 FY 2011 FY 2012 targets for all performance measures have been achieved. Goals are counted as not met if at least one target performance measure has not been achieved. In FY 2012, FHFA had 25 performance measures. The agency met FHFA met 92 percent and did not meet eight percent or exceeded 23 of its measures and failed to meet two of its performance measures in FY 2012. For additional performance measures (see Figure 12). details on unmet measures see Figure 13. Figure 13: STATUS OF PERFORMANCE MEASURES UNMET UNMET MEASURES REASON STEPS REQUIRED TO MEET Measure 1.1.1 Component ratings at the Enterprises remain FHFA will continue to conduct examinations and Improve component unchanged given the absence of capital, the ongoing monitoring of the Enterprises and give ratings at each Enterprise. continuation of credit losses and subpar financial feedback on remediation efforts. performance. Improvements in the ratings are also hampered by the ongoing challenges the Enterprises face in strengthening the operational risk environment and improving corporate governance. Measure 4.3.2 One recommendation was originally closed by FHFA FHFA and the OIG agreed to extend the timeline to Ensure management in the 4th quarter and then re-opened per agreement close the recommendation to February 28, 2013, completes corrective with the OIG. since the recommendations identified required work action on OIG findings beyond FY 2012. This will enable the required final within agreed timeframe actions to be completed. 34 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S FHFA’S STRATEGIC PLANNING PROCESS Coordination with the applicable offices to validate performance measures is carried out with senior level FHFA sets long-term and annual goals and monitors executives. FHFA is also in the process of developing an progress throughout the year. The agency assesses its automated performance measurement system that will be record in meeting its performance measures through in place at the end of the first quarter of FY 2013. quarterly performance tracking meetings with the senior executive leadership team. Based on the agency’s assessment of internal controls and compliance with Office of Management and Budget The FHFA Director chairs these quarterly meetings. FHFA Circular A-123, the agency’s risk management and staff prepare the performance reports and discusses the internal control systems, taken as a whole, conform to agency’s record relative to its performance measures. the standards prescribed by the GAO and the Federal The meetings highlight the agency’s record-to-date and Manager’s Financial Integrity Act. challenges for the future, with a focus on how to meet targets and ensure success in support of the agency mission. FY 2012 ANNUAL PERFORMANCE PLAN FHFA’s FY 2012 Annual Performance Plan includes During FY 2012, FHFA operated under its FY 2009-2014 25 performance measures (four that are new) and strategic plan. FHFA began working on a new strategic 14 performance goals to support our three strategic plan after enactment of the Government Performance goals and one resource management strategy. The and Results Act Modernization Act of 2010. The agency new measures represent ongoing activities related to published a new Strategic Plan for FHFA for Fiscal the Office of Inspector General and FHFA’s A Strategic Years 2013-2017 in October 2012. This plan details the Plan for Enterprise Conservatorships. The link to this outcomes the agency is seeking to achieve, the means plan is located at http://www.fhfa.gov/webfiles/23344/ and strategies that will be used to accomplish those StrategicPlanConservatorshipsFINAL.pdf. outcomes, and the performance measures that will be used to gauge the agency’s progress. This section also describes the agency’s performance against its FY 2012 Annual Performance Plan, which DATA COMPLETENESS AND RELIABILITY outlined the means and strategies to achieve the annual performance goals and related measures for the past This report contains complete and reliable performance year. Eight measures were deleted from the FY 2012 and financial data for FHFA. Where appropriate, the plan: seven, which were process-oriented, and one that report notes data limitations of specific performance was met in FY 2011. (See page 105 for a list of the goals. FHFA reviews, verifies and validates the accuracy deleted measures in the Other Accompanying Information of performance data reported on a quarterly basis. section.) Building an Infrastructure for the Secondary Mortgage Market 35 Overview of FHFA’s Seven Key Performance Measures FHFA identified seven of the 25 performance measures for FY 2012 as key performance measures. These measures are critical to achieving our strategic goals and objectives. The key performance measures address external and internal influences at the housing GSEs, loss mitigation efforts, and promptly responding to the Inspector General’s recommendations. The seven key performance measures apply to all the agency’s three strategic goals and the resource management strategy. During FY 2012, FHFA met or exceeded all but two of the key performance measures. The housing government-sponsored enterprises operate in a safe and sound STRATEGIC GOAL 1 manner and comply with legal requirements The focus of Strategic Goal 1 is to promote the safety the former Division of Examinations and Program Support and soundness of the housing GSEs through prudential (renamed the Division of Supervision Policy and Support). supervision and regulation (see pages 54–57 of the These changes will improve the oversight and risk focus Performance Section for a list of all measures associated of examinations and encourage more coordination and with this goal). communication among the examination staff. Performance measure 1.1.1 requires an improvement in component Table 1 summarizes the key performance measures ratings at each Enterprise. The measure was not met. for safety and soundness of the housing GSEs. During As stated in Figure 13, improvements in the ratings are FY 2012, FHFA reassigned some examiners to the hampered by ongoing challenges the Enterprises face Enterprises to improve the efficiency and effectiveness in strengthening the operational risk environment and of examinations and oversight functions. To consolidate improving corporate governance. FHFA will continue to core examination activities under the supervision of the conduct examinations and ongoing monitoring of the examiner-in-charge at each of the regulated entities, FHFA Enterprises and provide feedback on remediation efforts. also restructured the Division of Enterprise Regulation and Table 1: KEY PERFORMANCE MEASURES FOR SAFETY AND SOUNDNESS OF THE HOUSING GSES PERFORMANCE GOAL 1.1 Fannie Mae and Freddie Mac comply with legal requirements and operate in a safe and sound manner with adequate capital and access to funds and capital. PERFORMANCE MEASURE 1.1.1 Improve component ratings at each Enterprise. FY 2010 FY 2011 FY 2012 Target Improve in one or more by Improve in one or more by September Improve in one or more by September 30, September 30, 2010 30, 2011 2012 Performance Results Key: Goal Fulfillment Target Not Met Target Not Met Target Not Met PERFORMANCE GOAL 1.2 The FHLBanks and the Office of Finance comply with legal requirements and operate in a safe and sound manner with adequate capital and access to funds and capital. PERFORMANCE MEASURE 1.2.1 Composite rating at each FHLBank. Note: If rating is less than “2”, an acceptable performance improvement plan shall be included with the Bank’s response to the Report of Examination. FY 2010 FY 2011 FY 2012 Target “2” or better or, within 180 days of “2” or better or, within 180 days of “2” or better or, within 180 days of a rating a rating downgrade to below “2”, a rating downgrade to below “2”, downgrade to below “2”, operating under operating under an approved capital operating under an approved capital an acceptable performance improvement restoration plan restoration plan plan: Quarterly Performance Results Key: Goal Fulfillment Target Not Met Target Met Target Met 36 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S The housing government-sponsored enterprises support a stable, liquid, and STRATEGIC GOAL 2 efficient mortgage market including sustainable homeownership and affordable housing The focus of the second strategic goal is the housing GSEs met or exceeded their required liquidity levels. A mission of FHFA. As the supervisor for the housing recent change to the Senior Preferred Stock Purchase GSEs, FHFA has a critical responsibility to foster a well- Agreements with the Treasury Department will improve functioning, stable, and liquid housing finance system. Only stability in the housing finance market and decrease the through effective supervision can FHFA ensure that the roles of the Enterprises in the market over the longer term. entities serve as a source of liquidity to homeowner and See the Performance Highlights section on page 31 for rental housing markets at an efficient and reasonable price. more about the amendment and pages 58–62 of the Performance Section for a list of all measures associated Table 2 summarizes the key performance measures with this goal. for the housing mission. During FY 2012, the housing Table 2: KEY PERFORMANCE MEASURES FOR THE HOUSING MISSION PERFORMANCE GOAL 2.1 FHFA ensures the housing GSEs support a stable, liquid and efficient mortgage market. PERFORMANCE MEASURE 2.1.1 Ensure liquidity levels at Fannie Mae and Freddie Mac meet or exceed required levels or are brought into compliance within 5 business days. FY 2010 FY 2011 FY 2012 Target Monthly 95 Percent 95 Percent Quarterly Performance Results Key: Goal Fulfillment Target Not Met Target Met Target Met PERFORMANCE MEASURE 2.1.2 Ensure liquidity levels at the FHLBanks meet or exceed required levels or are brought into compliance within 5 business days. FY 2010 FY 2011 FY 2012 Target Annually 95 Percent 95 Percent Quarterly Performance Results Key: Goal Fulfillment Target Met Target Met Target Met Building an Infrastructure for the Secondary Mortgage Market 37 FHFA preserves and conserves assets and property of the Enterprises, ensures STRATEGIC GOAL 3 focus on their housing mission, and facilitates their financial stability and emergence from conservatorship The focus of Strategic Goal 3 is on conservatorship of significant progress improving loss mitigation strategies the Enterprises. As conservator, FHFA’s role is to foster by streamlining the short sale process, and implementing improvement in the Enterprises’ financial condition, HARP 2.0. underwriting practices, and operational capacity so they FHFA met or exceeded the key measures of performance can fulfill their role in the nation’s housing finance system. goal 3 during FY 2012. Pages 63–66 of the Table 3 summarizes the key performance measures Performance Section includes a list of all measures that demonstrate FHFA’s goal to preserve and conserve associated with this goal. the Enterprise assets. During FY 2012, FHFA made Table 3: KEY PERFORMANCE MEASURE DEMONSTRATING FHFA’S GOAL OF PRESERVING AND CONSERVING ENTERPRISE ASSETS PERFORMANCE GOAL 3.3 Ensure the Enterprises have effective programs that respond to problems in mortgage markets by reducing preventable foreclosures. PERFORMANCE MEASURE 3.3.1 Prevent current loans from going delinquent by helping borrowers to refinance. FY 2010 FY 2011 FY 2012 Target Maintain the volume of HARP refinances as a percent of total New Measure for 2012 New Measure for 2012 refinances at 10 percent or higher Performance Results Key: Goal Fulfillment Target Met PERFORMANCE MEASURE 3.3.2 Maintain the percentage of modified loans that are 60 plus days delinquent, nine months after modification, at or below 20 percent. FY 2010 FY 2011 FY 2012 Target 35 Percent or less 35 Percent or less Less than or equal to 20 percent Performance Results Key: Goal Fulfillment Target Met Target Met Target Met 38 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S RESOURCE FHFA has the personnel, resources and infrastructure to manage effectively and MANAGEMENT efficiently to achieve its mission and goals STRATEGY The focus of the resource management strategy is to a list of all measures associated with this goal. create and sustain an infrastructure responsive to mission- Performance measure 4.3.2 was not met. This measure critical program management. FHFA ensures effectiveness requires management to complete corrective action and efficiency in this area through the recruitment and on OIG findings within an agreed timeframe. One retention of a diverse and highly skilled staff. recommendation was originally closed by FHFA in the 4th quarter and later re-opened after a mutual agreement Table 4 summarizes the key performance measure between FHFA and the OIG. The timeline was extended to that demonstrates FHFA’s use of its resources. Pages close the recommendation by February 28, 2013. 67–70 of the Performance Section includes Table 4: KEY PERFORMANCE MEASURE DEMONSTRATING FHFA’S USE OF RESOURCES PERFORMANCE GOAL 4.3 FHFA has effective financial and risk management programs. PERFORMANCE MEASURE 4.3.2 Ensure management completes corrective action on OIG findings within agreed timeframe. FY 2010 FY 2011 FY 2012 Target No overdue corrective actions outstanding New Measure for 2012 New Measure for 2012 Performance Results Key: Goal Fulfillment Target Not Met Building an Infrastructure for the Secondary Mortgage Market 39 Program Evaluations During fiscal year 2012, FHFA operated under its FY serious management issues during FY 2012. See pages 2009-2014 strategic plan. In October 2012, the agency 106–114 of the Other Accompanying Information released a new Strategic Plan for FHFA for Fiscal Years section. 2013-2017. This plan sets out the agency’s mission, FHFA reviewed 10 audits, 7 evaluations, 2 evaluation vision, values, and strategic goals through FY 2017. surveys, and 3 white papers issued by the OIG in FY 2012. Through quarterly performance tracking meetings with The OIG also issued 50 recommendations that were due senior leadership, FHFA reviews its progress, and verifies in FY 2012. FHFA completed/closed 49 recommendations and validates performance data to ensure reliability and while one recommendation will remain open due to final accuracy. FHFA did not have an independent external actions that will extend beyond FY 2012—the new timeline evaluation conducted this fiscal year. was extended to February 28, 2013. FHFA’s Office of Inspector General began operations in As of September 2012, OIG had completed the following October 2010. OIG assessed several of FHFA’s most evaluations of FHFA: OIG PERFORMANCE EVALUATIONS Evaluation Summary Summary of FHFA’s Response FHFA’s Oversight Although FHFA has taken several important steps to monitor FHFA disagrees with a number of statements, characterizations, of Troubled Federal closely and control the four troubled FHLBanks, FHFA lacks a or inferences in the report but generally agrees with the Home Loan Banks – clear consistent and transparent written enforcement policy. substance of the report’s recommendations. FHFA will develop January 2012 The lack of a management reporting system as well as FHFA’s and implement a written enforcement policy; develop an practice of not consistently documenting troubled FHLBank automated information system for agency managers cataloguing interactions (i.e., recommending that FHLBank boards of examination findings, planned corrective actions, timeframes directors remove certain senior officers), also impedes outside and status; and develop guidelines for documenting significant oversight of the agency. oral and written actions involving an FHLBank, including actions relating to the removal or replacement of senior officers. Evaluation of FHFA’s FHFA confronts a challenging balance of interests in avoiding FHFA concurs with the recommendations and will Management potential losses by effectively defending ongoing lawsuits against undertake additional steps to address future indemnification of Legal Fees the Enterprises while having an interest in controlling significant agreements. FHFA will continue its efforts at cost control for Indemnified costs, particularly the tens of millions of dollars of payments and work expeditiously to seek greater standardization in the Executives – made to attorneys and others involved in representing former administration of such legal costs by the Enterprises while February 2012 senior executives. OIG recommends that FHFA work to limit legal increasing its scrutiny of legal costs. FHFA will also document expenses to the extent possible and reasonable and continue to oversight mechanisms and provide a summary report to OIG. control costs of legal expenses. FHFA’s Oversight As part of FHFA’s ongoing horizontal review of unsecured FHFA agrees with both recommendations. FHFA has alerted the of the Federal credit practices at the FHLBanks, OIG recommends that FHFA FHLBanks of violations of existing regulatory limits identified by Home Loan Bank’s follow up on any potential evidence of violations of the existing the OIG evaluation. Factors that led to those violations are being Unsecured Credit regulatory limits and take supervisory and enforcement actions addressed. FHFA will follow-up on the adequacy of those efforts Risk Management as warranted, determine the extent to which inadequate systems through its FHLBank examination program. Practices – and controls may compromise the FHLBanks’ capacity to The Dodd-Frank Wall Street Reform and Consumer Protection June 2012 comply with regulatory limits, and take any supervisory actions Act of 2010 require a review and modification of FHFA necessary to correct such deficiencies, as warranted. regulations that rely on such ratings. This effort is currently To strengthen the regulatory framework around the extension underway – FHFA will consider the factors recommended by of unsecured credit by the FHLBanks, OIG recommends, as a OIG as part of its review and modification of the regulation component of future rulemakings, that FHFA consider the utility governing unsecured credit at the FHLBanks. FHFA will complete of establishing maximum overall exposure limits; lowering the its assessment and propose revisions to its rule governing existing individual counterparty limits; and ensuring that the unsecured credit at the FHLBanks by April 15, 2013. unsecured exposure limits are consistent with the FHLBank System’s housing mission. continued on next page 40 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S OIG PERFORMANCE EVALUATIONS Evaluation Summary Summary of FHFA’s Response FHFA’s OIG recommended and FHFA agreed to: (1) adhere to the FHFA took immediate action to strengthen oversight controls Certifications requirements to certify both that the Enterprises have complied for the preferred stock agreements identified by OIG. FHFA for the Preferred with the preferred stock agreement covenants and that the established processes to enhance ongoing compliance with Stock Purchase Enterprises’ financial statements and related documents are free the agreements and has implemented additional procedures to Agreements – of materially false or misleading representations; and (2) monitor oversee the certification processes including the engagement August 2012 the implementation of its oversight procedures to ensure that of the Enterprises’ external auditors to independently test the they are effective. These certifications enhance oversight of the covenant compliance. These actions will improve the oversight of preferred stock agreements and reduce the potential for errors the Preferred Stock Purchase Agreement process. and waste of taxpayer dollars. Follow-up on FHFA and Freddie Mac have acted on the concerns raised in FHFA agrees that reforms currently in place or underway Freddie Mac’s OIG’s report by adopting a more expansive loan review process. will address the weaknesses identified by OIG and Freddie Loan Repurchase Specifically, Freddie Mac changed its policies to review for Mac Internal Audit. Additional steps are not planned at this Process – potential repurchase claims significantly larger numbers of loans time, but as noted in the follow-up report, three measures September 2012 that defaulted more than two years after origination. FHFA and remain in progress for FHFA senior management: 1) ensure Freddie Mac should continue to carry out the loan review and that Freddie Mac management resolves concerns associated related reforms they have initiated since OIG’s original report with ‘unsatisfactory’ audit opinion; 2) initiate an independent was issued. assessment of Enterprise repurchase practices; and 3) evaluate whether the Enterprises should adopt consistent review practices for repurchase claims. Evaluation of FHFA’s Fannie Mae’s purchase of mortgage servicing rights (MSR) FHFA agrees with the following recommendations: 1) to consider Oversight of Fannie was the most recent of several transactions executed as part revising FHFA’s Delegation Authorities to require FHFA approval Mae’s Transfer of of an ongoing initiative. BOA transaction was the largest of the of unusual, high new initiatives; 2) ensure Fannie Mae does Mortgage Servicing transfers in the High Touch Servicing Program to date – however, not have to pay a premium to transfer inadequately performing Rights from the amount that Fannie Mae paid was consistent with the portfolios; 3) ensure Fannie Mae applies additional scrutiny Bank of America amount it had paid to other servicers from which it purchased and rigor to pricing significant MSR transactions and consider (BOA) to High MSR under the program. FHFA OIG found that Fannie Mae relied requiring Fannie Mae to assess the valuation methods of Touch Servicers – on a single consultant to price most of the MSR transactions multiple MSR valuators in order to discern best practices; and September 2012 under the program. OIG determined that FHFA can improve its 4) access the efficacy of the program and direct any necessary oversight of Fannie Mae’s program. modifications. FHFA’s Oversight OIG uncovered no evidence that FHFA or Freddie Mac obstructed The following are FHFA’s responses to the OIG of Freddie Mac’s homeowners’ abilities to refinance their mortgages in an effort recommendations: 1) FHFA will continue to follow Freddie Mac’s Investment in to influence the yields of the inverse floating-rate bonds that portfolio and its hedging activities closely for many years (-this Inverse Floaters – the Enterprise retained in its investment portfolio. Freddie Mac activity is part of our ongoing supervision program); 2) FHFA will September 2012 has an “information wall” policy to prevent its capital markets incorporate reviews of Freddie Mac’s information wall as part of business from using non-public information to guide its its risk-based supervision of Freddie Mac’s investment activities investments. OIG found that FHFA’s position on inverse floaters (-this activity is part of our ongoing supervision program); could have been communicated more clearly. 3a) FHFA does not agree with the implication that there was confusion based on the timeline provided in our response, FHFA nevertheless agrees it is important to confirm supervisory views in writing and will continue to make this a critical part of our supervisory process; 3b) FHFA agrees that supervisory work and supervisory concerns should be based on the agency’s work and analysis; and that the facts and high level timeline provided demonstrate that we base our supervisory work, discussions and findings on work that was well underway or completed prior to the reports, including the receipt of a confirming communication from Freddie Mac; 4) FHFA strongly believes that the public statement issued regarding inverse floaters accurately reflected all relevant facts and is supported by the timeline referenced in this memorandum and documentation provided to OIG. Building an Infrastructure for the Secondary Mortgage Market 41 Analysis of Financial Statements Overview $76.4 million net position as of September 30, 2011 see FHFA prepares annual consolidated and combined Figure 14). financial statements for the agency and its Office of Inspector General in accordance with U.S. generally Statement of Net Cost accepted accounting principles (GAAP) for Federal The Statement of Net Cost presents the components Government entities and subjects the statements to an of FHFA’s net cost, which is the gross cost incurred less independent audit to ensure their integrity and reliability in any revenues earned. FHFA’s FY 2012 total program net assessing performance. (income)/costs, as reflected on the Statement of Net Cost, were -$8.4 million (or net revenue) as compared to FY 2012 Financial Statement Audit the -$33.4 million in FY 2011. This change reflects the increase in gross costs and earned revenue needed to FHFA achieved an unqualified opinion from the GAO on carry out its mission as reflected in its FY 2012 operating its annual financial statements. GAO noted no material budget. The operating budget increase between fiscal weaknesses or significant deficiencies in FHFA’s internal years is the result of increased mission costs. However, controls and cited no instances of noncompliance with during the course of the year, FHFA was unable to fully laws and regulations. expend its FY 2012 earned revenue, thereby resulting in an excess of revenue over cost. Understanding the Financial Statements The principal financial statements present FHFA’s financial Consistent with the Government Performance and Results position, net cost of operations, changes in net position, Act of 1993, the Statement of Net Cost is reported by and budgetary resources for fiscal years 2012 and 2011. FHFA’s strategic goals. FHFA tracked resource allocations Financial statements and notes for fiscal years 2012 and and program costs to the strategic goals (responsibility 2011 appear on pages 82–103. Highlights of the segments) developed for FHFA’s strategic plan. Strategic financial information presented in the principal financial Goals, 1–Safety and Soundness; 2–Affordable Housing statements are shown below. (Housing Mission); and 3–Conservatorship, guide program offices to carry out FHFA’s vision and mission. Balance Sheet FHFA has a Resource Management Strategy, which is distributed proportionately to Strategic Goals 1-3 based The Balance Sheet presents, as of the end of the fiscal year, the recorded value of assets and liabilities retained or managed by FHFA. The difference between the Figure 14: ASSETS AND LIABILITIES assets and liabilities represents FHFA’s net position. The (Dollars in Thousands) Balance Sheet reflects total assets of $144.8 million, a 44 $160,000 percent increase over FY 2011. The increase is primarily $144,799 due to a $40.0 million increase in Property, Equipment, $120,000 and Software due to leasehold improvements and $100,781 furniture, fixtures and equipment purchases associated $ Thousands $80,000 with FHFA’s new location at Constitution Center. FHFA’s $54,126 total liabilities increased by $29.8 million, a 122 percent increase over FY 2011. The increase is primarily due to $40,000 $24,350 a tenant allowance provided to FHFA related to the new Constitution Center lease and an increase in deferred $0 SEPTEMBER 2011 SEPTEMBER 2012 rent. As a result, FHFA’s net position as of September 30, 2012 was $90.7 million, a $14.2 million increase over the Assets Liabilities 42 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S Figure 15: TOTAL NET (INCOME FROM)/COST OF OPERATIONS Figure 16: STATEMENT OF CHANGES IN NET POSITION (Dollars in Thousands) (Dollars in Thousands) $50,000 $100,000 $90,673 $40,000 $76,431 $76,431 $28,890 $75,000 $30,000 $20,000 $50,000 $10,000 $37,856 $ Thousands $ Thousands $2,366 $0 $25,000 -$10,000 -$3,232 $5,193 $5,810 -$9,336 $0 -$20,000 -$20,814 -$8,432 -$30,000 -$25,000 -$40,000 -$33,382 -$39,688 -$50,000 -$50,000 CUMULATIVE NET INCOME TOTAL BEGINNING SEPTEMBER 2011 SEPTEMBER 2012 RESULTS OF OF FINANCING BALANCES OPERATIONS OPERATIONS SOURCES Strategic Goal 1: Safety and Soundness Strategic Goal 2: Affordable Housing September 2011 September 2012 Strategic Goal 3: Conservatorship Figure 17: STATEMENT OF BUDGETARY RESOURCES on the percentage of direct costs of each goal to the COMPARISONS total direct costs for FHFA. FHFA places a significant (Dollars in Thousands) emphasis on Strategic Goal 1, Safety and Soundness, $350,000 which comprises a major portion of the total program $304,635 $300,000 costs. FHFA-OIG allocated their costs to FHFA’s Resource $259,100 $262,252 $253,568 Management Strategy, which is distributed proportionately $250,000 $225,896 to Strategic Goals 1-3 based on the percentage of direct $200,000 $186,945 $ Thousands costs of each goal to the total direct costs for FHFA (see $150,000 Figure 15). $100,000 Statement of Changes in Net Position $50,000 The Statement of Changes in Net Position presents those $0 BUDGETARY OBLIGATIONS GROSS RESOURCES INCURRED OUTLAYS accounting items that caused the net position section of the Balance Sheet to change from the beginning to the September 2011 September 2012 end of the reporting period. Financing sources increase net position. FHFA’s financing source is imputed financing statement shows that FHFA had $304.6 million in total from costs absorbed on FHFA’s behalf by other Federal budgetary resources for the 12 months ended September agencies. Net income from/cost of operations impacts net 30, 2012. The 20 percent increase in budgetary resources position. is the result of an increase in mission costs. Obligations FHFA’s cumulative results of operations for the period incurred increased 15 percent to $259.1 million. Gross ending September 30, 2012 increased $14.2 million (see outlays increased 40 percent to $262.3 million (see Figure 16). Figure 17). Statement of Budgetary Resources Source of Funds This statement provides information about the budgetary HERA authorizes FHFA to collect annual assessments resources available to FHFA and the status of these from its regulated entities to pay its costs and expenses resources and the outlay of budgetary resources for and maintain a working capital fund. Under HERA, the years ending September 30, 2012 and 2011. The annual assessments are levied against the Enterprises Building an Infrastructure for the Secondary Mortgage Market 43 and the FHLBanks to cover the cost and expenses of during FY 2012, which included a $5.4 million special the agency’s operations for supervision of the regulated assessment on the Enterprises related to conservatorship entities. activities and a $38.8 million assessment for costs related to the operations of the Office of Inspector General. FHFA calculates the assessments for each Enterprise by determining the proportion of each Enterprise’s assets and off-balance sheet obligations to the total for both Limitations of the Financial Statements Enterprises and then applying each of the Enterprise’s The principal financial statements have been prepared proportion (expressed as a percentage) to the total to report the financial position and results of operations budgeted costs for regulating the Enterprises. FHFA of FHFA, pursuant to the requirements of 31 U.S.C. calculates the assessments for each of the 12 FHLBanks 3515(b). While the statements have been prepared from by determining each FHLBank’s share of minimum the books and records of FHFA in accordance with GAAP required regulatory capital as a percentage of the total for Federal entities and the formats prescribed by OMB, minimum capital of all the FHLBanks and applying this the statements are in addition to the financial reports percentage to the total budgeted costs for regulating the used to monitor and control budgetary resources, which banks. Assessments are paid semiannually on October 1 are prepared from the same books and records. The and April 1. FHFA collected assessments of $224.4 million statements should read with the realization that they are for a component of the U.S. Government, a sovereign entity. Analysis of Systems, Controls and Legal Compliance MANAGEMENT ASSURANCES During FY 2012, pursuant to its obligations under OMB Circular A-123, FHFA monitored and assessed the Federal Managers’ Financial Integrity Act following three areas: During FY 2012, FHFA adhered to the internal control requirements of the Federal Managers’ Financial Integrity Reliability over Financial Reporting Act (FMFIA) and the guidance provided by OMB Circular FHFA’s Office of Budget and Financial Management A-123. FHFA’s Executive Committee on Internal Controls assessed the agency’s financial reporting controls (ECIC) met quarterly to oversee internal controls and according to the requirements outlined in OMB Circular provide recommendations to the FHFA Acting Director on A-123, Appendix A. the effectiveness of FHFA’s internal controls. Compliance with Laws and Regulations In 2012, the ECIC members were the Chief Operating Assessment teams from FHFA divisions and offices Officer who served as the Chairman, the Chief Financial identified the significant laws and regulations that relate Officer who served as the Vice-Chairman, the Chief to the operations for their respective offices. Assessment Information Officer, the Deputy Director for Enterprise teams documented the actions that demonstrated Regulation, the Deputy Director for Bank Regulation, the compliance, and the agency’s Office of General Counsel Deputy Director for Examination Programs and Support, reviewed all submissions. the Deputy Director for Housing Mission and Goals, the General Counsel, and the Associate Director Office of Effectiveness and Efficiency of Operations Quality Assurance. The Chairman and Vice Chairman of the ECIC invited other FHFA executives and managers Assessment teams from FHFA divisions and offices when appropriate. The ECIC also established senior reviewed controls over operations using the criteria assessment teams to review specific areas when needed. outlined in the GAO Internal Control Management and Evaluation Tool. Division and office managers and the 44 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S Office of Budget and Financial Management reviewed the relative to the three areas assessed by the OIG; internal reports of the assessment teams. control over financial reporting, effectiveness and efficiency of operations, and compliance with laws and regulations. The ECIC reviewed documentation from all three areas. In compliance with the FMFIA requirements, the FHFA Acting Director, on the basis of a recommendation Federal Management System and Strategy from the ECIC, provided reasonable assurance that Section 1106(g)(3) of HERA requires FHFA to implement internal controls over the effectiveness and efficiency and maintain financial management systems that comply of operations, compliance with applicable laws and substantially with federal financial management systems regulations, and financial reporting as of September 30, requirements, applicable federal accounting standards, 2012 were operating effectively and that no material and the U.S. Government Standard General Ledger at weaknesses were found in the design or operation of the the transaction level. FHFA, including FHFA-OIG, uses internal controls. the Bureau of the Public Debt for its accounting services and that agency’s financial management system (FMS) The FHFA-OIG began operation in mid-October 2010 and which includes (1) a core accounting system—Oracle adhered to the internal control requirements of FMFIA Federal Financials; (2) three feeder systems—PRISM and the guidance provided by OMB Circular A-123. In (procurement), GovTrip (travel), and Citidirect (charge card); order to ensure compliance, the FHFA-OIG formed an (3) a reporting system—Discoverer; and (4) an inventory ECIC and established a senior assessment team headed tracking system. FHFA is responsible for overseeing the by the Chief of Staff to assess the internal controls of the Bureau of the Public Debt’s performance of accounting OIG. The assessment team included participants from services for the agency. A financial oversight document each office within the FHFA-OIG. Based on its review of outlines the assignment of activities between FHFA and the internal control assessments, the FHFA-OIG ECIC the Bureau of the Public Debt. FMS includes manual and provided reasonable assurance that OIG offices have automated procedures and processes from the point at developed and maintained effective internal controls which a transaction is initiated to issuance of financial for FY 2012, and no significant deficiencies or material reports. FMS meets the requirements of HERA Section weaknesses have been identified. 1106(g)(3). FHFA also uses the National Finance Center, a service provider within the Department of Agriculture, for The Office of Counsel (OC), under the Chief Counsel’s its payroll and personnel processing. FHFA has streamlined direction, is FHFA-OIG’s principal authority on legal matters accounting processes by electronically interfacing data pertaining to FHFA-OIG activities, duties, and authorities. from charge cards, investment activities, the GovTrip travel The OC works to ensure that all FHFA-OIG activities system, the PRISM procurement system, and the National are conducted in accordance with applicable legal Finance Center payroll system to FMS. requirements. Starting with the creation of FHFA-OIG in mid-October 2010, the OC has developed rules, policies, and procedures to ensure full FHFA-OIG compliance with Federal Information Security Management Act such requirements. Although these efforts continue, no Title III of the Electronic Government Act of 2002, FHFA-OIG office identified substantive deviations from commonly referred to as the Federal Information Security full compliance with those legal authorities to which Management Act (FISMA), requires all Federal agencies it is subject. Based on these factors and the controls to develop and implement an agency-wide information assessments performed at each OIG office, the FHFA-OIG security program. The program provides a framework to ECIC members determined that the FHFA-OIG’s A-123 protect the agency’s information, operations, and assets. efforts provide reasonable assurance that FHFA-OIG During FY2011 and into FY2012, OMB issued guidance complies with laws and regulations applicable to FHFA requiring federal agencies to continuously monitor the generally, and to FHFA-OIG specifically. As such, the security posture of information systems to enable timely FHFA-OIG ECIC recommended the Inspector General decision making regarding identified vulnerabilities and sign an assurance statement to the FHFA Acting Director threats. In FY2012, OMB directed Federal Agencies to recommending an unqualified statement of assurance Building an Infrastructure for the Secondary Mortgage Market 45 increase monitoring of security-related events and to management capability, updating information security acquire tools to automate security activities. policy with corresponding procedures, and performing annual security control assessments of FHFA information The FHFA-OIG is required to review the agency’s systems, including the Agency’s Financial Management information security program annually and report the System (FMS). FHFA maintained security authorization results to OMB as required by FISMA. FHFA’s information on 100 percent of all major systems in production security program activities during FY2012 reflect which included a significant upgrade to the general efforts focused on enhancing the Agency’s continuous support system as a result of the Agency’s move to a monitoring program as well as increasing automation new building. FHFA developed and distributed monthly, capabilities. The continuous monitoring program requires non-technical cyber security newsletters to all employees FHFA to proactively monitor the security posture of to enhance user awareness and successfully provided its information technology infrastructure through the annual security training to all employees and contractors. implementation of operational, management, and FHFA also addressed security-related weaknesses for technical controls, including automated security tools and systems noted in the prior year FISMA review as well supplemental resources for monitoring activities. The tools as mitigating vulnerabilities identified during other SA&A and activities include the FHFA Security Assessment and activities. Authorization (SA&A) process for evaluating information systems before they become operational; reviewing To support the annual FY2012 FISMA review, the OIG system logs and configuration management activities; and conducted several audits, including a network vulnerability conducting periodic vulnerability scans. assessment that resulted in a clean audit with no findings. The FY2012 FISMA audit report is in the final stages of Other FY2012 information security program activities OIG management review. include implementing an enhanced vulnerability 46 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S Management Report on Final Actions As required under amended Section 5 of the Inspector General Act of 1978, the FHFA must report information on final action taken by management on certain audit reports. The tables that follow provide information on final action taken by management on audit reports for the Federal fiscal year period October 1, 2011, through September 30, 2012. Table 5: MANAGEMENT REPORT ON FINAL ACTION ON AUDITS WITH DISALLOWED COSTS FOR FISCAL YEAR 2012 NUMBER OF DISALLOWED AUDIT REPORTS REPORTS COSTS Dollars in Thousands A. Management decisions – Final action not taken at beginning of period 0 $0 B. Management decisions made during the period 0 $0 C. Total reports pending Final action during the period (A and B) 0 $0 D. Final action taken during the period: 1. Recoveries: (a) Collections & offsets 0 $0 (b) Other 0 $0 2. Write-offs 0 $0 3. Total of 1(a), 1(b), & 2 0 $0 E. Audit reports needing final action at the end of the period 0 $0 Table 6: MANAGEMENT REPORT ON FINAL ACTION ON AUDITS WITH RECOMMENDATIONS TO PUT FUNDS TO BETTER USE FOR FISCAL YEAR 2012 NUMBER OF DISALLOWED AUDIT REPORTS REPORTS COSTS Dollars in Thousands A. Management decisions – Final action not taken at beginning of period 0 $0 B. Management decisions made during the period 0 $0 C. Total reports pending Final action during the period (A and B) 0 $0 D. Final action taken during the period: 1. Value of recommendations implemented (completed) 0 $0 2. Value of receommendations that management concluded should not or could not be 0 $0 implemented or completed 3. Total of 1(a), 1(b), & 2 0 $0 E. Audit reports needing final action at the end of the period 0 $0 Building an Infrastructure for the Secondary Mortgage Market 47 Table 7: AUDIT REPORTS WITHOUT FINAL ACTIONS BUT WITH MANAGEMENT DECISIONS OVER ONE YEAR OLD FOR FISCAL YEAR 2012 MANAGEMENT ACTION IN PROCESS Report No. and Issue Date Recommendation Management Action EVL 2011-06, Evaluation of The OIG recommended that FHFA and its senior In 2012, FHFA has completed corrective actions to address the Federal Housing Finance management must promptly act on the significant concerns the recommendations, including continuing to work Agency’s Oversight of Freddie raised about the loan review process. To ensure that with Freddie Mac on repurchase settlement processes Mac’s Repurchase Settlement Freddie Mac is maximizing its repurchase claim recoveries: and approvals. However, the actions to fully address the with Bank of America, recommendations are still underway at the end of the fiscal September 27, 2011 year. FHFA should continue to withhold approval of Freddie Completed Mac repurchase settlements until such time as it is confident that the concerns about the Enterprise’s loan review process have been resolved. FHFA senior management should ensure that Freddie In-process, FHFA senior management has met regularly Mac management resolves the concerns that prompted with Freddie Mac’s Chief Enterprise Risk Office and its their internal auditors to issue an “Unsatisfactory” audit General Auditor and agree that progress has been made opinion. but work remains to be completed. FHFA senior management should oversee Freddie Mac’s In-process, Freddie Mac continues to perform “out-of- “out-of-sample” loan testing and consider independently sample” loan testing. FHFA is currently in the process of validating the testing. independently validating the conclusions. Freddie Mac’s internal auditors also intend to validate the out-of- sample testing. FHFA should evaluate whether Fannie Mae and Freddie In-process, FHFA issued a directive covering future Mac should adopt consistent review practices for repurchase claims by Fannie Mae and Freddie Mac. repurchase claims FHFA continues to assess the sampling strategies and implications for legacy repurchase claims. FHFA senior management should initiate an In-process, FHFA issued a directive covering future independent assessment of Enterprise repurchase repurchase claims by Fannie Mae and Freddie Mac. practices in order to ensure that they are maximizing FHFA continues to assess the sampling strategies and their repurchase claim recoveries implications for legacy repurchase claims. FHFA should issue internal guidance regarding its Completed handling of future repurchase settlements, should they arise. Expected Completion Date: FHFA will monitor the repurchase settlement process throughout fiscal year 2013. 48 Federal Housing Finance Agency | 2012 Performance and Accountability Report DISCUSSION AND ANALYSIS MANAGEMENT’S FHFA’s Statement of Assurance Building an Infrastructure for the Secondary Mortgage Market 49 Performance Section | Managing and Measuring Performance | Strategic Human Capital Management | Strategic Goal 1: Safety and Soundness | Strategic Goal 2: Housing Mission | Strategic Goal 3: Conservatorship | Resource Management Strategy 2 0 1 2 F E D E R A L H O U S I N G F I N A N C E A G E N C Y P E R F O R M A N C E A N D A C C O U N TA B I L I T Y R E P O R T Managing and Measuring Performance During FY 2012, FHFA retooled its performance measures The annual performance budget describes how FHFA to align with initiatives that are mission critical and achieves its goals and the costs, systems, and initiatives reflective of how the housing market has evolved. The associated with them. The agency accomplishes its agency identified eight performance measures that will mission primarily by: no longer be reported on externally. Although these Examining the regulated entities; performance measures will no longer be reported on Monitoring their progress in completing their externally, they remain important and will continue to be remediation plans; PERFORMANCE SECTION tracked and reviewed internally (see page 105 of the Other Accompanying Information for more information). Assessing their capital adequacy; Preserving and conserving Enterprise assets; The Performance Section is organized by strategic goals to describe FHFA’s efforts to meet the goals defined in Setting and enforcing affordable housing goals; the agency’s FY 2009–2014 strategic plan. In October Monitoring credit and financial market conditions; and 2012, FHFA released a new Strategic Plan for FHFA for Researching and analyzing the regulated entities and Fiscal Years 2013-2017. As a result of this plan and in the housing markets. concert with the initiatives associated with the new A Strategic Plan for Enterprise Conservatorships, four new FHFA continued to employ a numbering system to link performance measures will be added in FY 2013. The performance measures to strategic and performance initiatives associated with the conservatorship strategic goals. For each performance measure, the first digit plan will be guided by our newly created Office of represents the strategic goal it supports, the second digit Strategic Initiatives. is the number of the performance goal, and the third digit is the number of the performance measure related to that The Performance Section also includes a discussion of goal. For example, performance measure 1.1.1 supports each performance goal, the results of the performance strategic goal 1 and performance goal 1.1—it is the first measures for the current year as well as two prior fiscal performance measure under that goal. years, the associated targets, how the agency verifies performance data, factors describing why performance Strategic and performance goals are developed during measures were not met and our plans to improve our the planning process and approved by the Acting performance. Director. Senior executive leaders develop performance FHFA’s annual performance plan establishes specific outcomes to accomplish the strategic goals. The annual Figure 18: FHFA’S GOAL HIERARCHY plan also outlines performance measures used to track achievement of each goal while providing the means and strategies that will be utilized. Performance measures also G highlight the achievement level towards the overarching RIN ITO performance goal. In FY 2012, there were 14 performance ON MISSION &M goals; 10 supported the agency’s three strategic goals ION and 4 supported our resource management strategy. UT STRATEGIC GOALS EC EX Figure 18 shows the hierarchy of FHFA’s performance goals and measures. It also depicts how FHFA intends to PERFORMANCE GOALS PL AN devote its resources to fulfill its mission in practical and NIN measurable ways. G PERFORMANCE MEASURES Building an Infrastructure for the Secondary Mortgage Market 51 Figure 19: FHFA’S PERFORMANCE MANAGEMENT CYCLE Strategic Planning • Mission • Strategic goals • Performance standards FHFA’s FIVE-YEAR STRATEGIC PLAN Performance Planning • Reconfirms goals Management, Monitoring & Accountability • Key means & strategies • Oversight and coordination of key means & strategies • Annual performance targets • Quarterly execution reviews of progress towards goals and • Propose new initiatives strategies • Accountability for results FHFA’s ANNUAL PERFORMANCE PLAN • Strategic plans for systems • Employee performance evaluation management systems (PEMS) FHFA’s ANNUAL PERFORMANCE & ACCOUNTABILITY REPORT Performance Budget Development • Resource levels • System requirements & investment decisions • Adjustments to targets based on investment decisions FHFA’s ANNUAL PERFORMANCE BUDGET measures, as well as the means and strategies that Most of FHFA’s performance measures, with the describe how FHFA is going to measure performance. exception of data used as input for capital calculations, Performance results are monitored throughout the year reflect internal milestones. Some of the performance to determine the success of program activities. During FY measures depend on the actions and results of the 2012, senior executives and supporting staff submitted regulated entities. Figure 20 depicts FHFA’s achievement quarterly reports on progress they made toward achieving of performance measures for FY 2012. performance measures for which they were accountable. These reports are reviewed and analyzed by the Performance Management and Strategic Planning staff Figure 20: FY 2012 PERFORMANCE MEASURES to ensure accuracy, validity of information being reported, and progress toward achieving planned performance levels. The FHFA Acting Director then holds quarterly 8% performance tracking meetings with senior executive Target Met leaders to review accomplishments and make required adjustments to programs. The agency uses the quarterly 92% Target Not Met reports as the basis for developing the Performance and Accountability Report. See Figure 19 for an outline of FHFA’s performance management cycle. 52 Federal Housing Finance Agency | 2012 Performance and Accountability Report VERIFICATION AND VALIDATION OF to obtain and validate the data to ensure the accuracy PERFORMANCE DATA and accountability of the information. Information reported in this Performance and During the performance planning cycle, the following data Accountability Report is complete and reliable. The are collected on each performance measure: sources of data are identified and verified to ensure Definition accuracy, reliability, and completeness. Individual offices maintain a checks and balances system that is reflective Data source of their performance measures, e.g., measures that Process for calculating or tabulating performance data are more reflective to external influence versus internal Process for validation and verification PERFORMANCE SECTION influence. The data for all the performance goals are complete and reliable. The data are created internally, Responsible manager reported in the agency’s performance tracking system, Location of documentation and reviewed each quarter by senior executive leadership. Additionally, FHFA’s staff documents the procedures used Data related to supervision activities are collected through FHFA’s supervision process and reviewed by the quality assurance staff and FHFA management. Strategic Human Capital Management FHFA’s Human Capital strategic plans, programs, and of the agency. The FHFA Human Capital Management operations are aligned to fully support the agency’s Balanced Scorecard highlights 18 key objectives that mission and performance goals. FHFA’s workforce is its provide the structure and direction needed to achieve most valuable resource. Attracting, hiring, developing, a high– performing workforce in support of FHFA’s rewarding, and retaining a diverse staff with cutting- important mission and for furthering an agency culture edge professional skills that possess the breadth and that encourages collaboration, flexibility, and fairness to depth of knowledge to support FHFA’s mission and enable individuals to participate to their full potential. strategic performance goals is critical to the success Building an Infrastructure for the Secondary Mortgage Market 53 Strategic Goal 1 STRATEGIC GOAL 1 The housing GSEs operate in a safe and sound manner and comply with legal requirements FHFA’s primary duty as regulator and conservator is During FY 2012, FHFA completed key organizational to ensure that the housing GSEs have the financial changes and established a new supervisory strategy to strength, operational capacity, and risk management lead and coordinate the agency’s activities highlighted controls to fulfill their critical role in the nation’s housing in this strategic goal. Through its examination process, finance system. Providing a comprehensive and effective FHFA is improving the efficiency and effectiveness of oversight program for the housing GSEs requires attention examinations by integrating examination resources and to all aspects of operations and management, the risks standards. In addition, FHFA verifies that the GSEs are inherent in their activities, and the dynamic environment in timely in managing required improvements, remedial which they operate. actions, and litigation. PERFORMANCE GOAL 1.1 Fannie Mae and Freddie Mac (the Enterprises) comply with legal requirements and operate in a safe and sound manner with adequate capital and access to funds and capital. PERFORMANCE MEASURE 1.1.1 Improve component ratings at each Enterprise. FY 2010 FY 2011 FY 2012 Target Improve in one or more by Improve in one or more by Improve in one or more by September 30, 2010 September 30, 2011 September 30, 2012 Performance The market risk rating for Freddie Mac The composite ratings for both Fannie Examinations have been conducted improved from critical to significant Mae and Freddie Mac are critical through the course of 2012. Ratings concerns for the quarter ending March concerns. Stress on the mortgage will be assigned and included in the 31, 2010, based on improvements market and poor financial performance 2012 Reports of Examination for the in interest rate risk management. by the Enterprises continues. Target Enterprises, which are scheduled to Component ratings did not improve at met for Fannie Mae though not for both be prepared, finalized, and reported Fannie Mae during FY 2010. Several Enterprises as Freddie Mac did not to the Enterprises in 2013. Target met areas, improved, increasing the have component improvements for Fannie Mae though not for both likelihood that some component ratings Enterprises as Freddie Mac did not will improve during the next fiscal year. have component improvements. Performance Results Key: Goal Fulfillment Target Not Met Target Not Met Target Not Met PERFORMANCE MEASURE 1.1.2 Matters Requiring Attention (MRAs) that are more than 120 days old are resolved or are being resolved in accordance with an acceptable remediation plan. FY 2010 FY 2011 FY 2012 Target 90 percent Quarterly 90 percent Quarterly At least 90 percent each quarter Performance 80 MRAs were cited. Of those, 61 All MRAs were open fewer than 20 All MRAs were resolved or were (76 percent) were resolved or were days. There were 27 total conclusion in the process of being resolved in the process of being resolved in letters in FY 2011. All of them were in accordance with a remediation accordance with a remediation plan resolved or were in the process of plan acceptable to FHFA within 120 acceptable to FHFA within 90 calendar being resolved in accordance with a calendar days of recognition. FHFA met days of recognition. FHFA met this remediation plan acceptable to FHFA this target at least 99 percent each performance measure the last three within 90 calendar days of recognition. quarter of FY 2012. quarters of the fiscal year, but the FHFA met this target 100 percent each target was “not met” because of the quarter of FY 2011. failure to meet the target in the first quarter of FY 2010. Performance Results Key: Goal Fulfillment Target Not Met Target Met Target Met 54 Federal Housing Finance Agency | 2012 Performance and Accountability Report OVERVIEW OF PERFORMANCE GOAL 1.1 process, FHFA works with the Enterprises to ensure the MRAs have been resolved within 120 days of identifying FHFA conducts risk-based supervision and examinations an issue by requiring and monitoring corrective action at the Enterprises to ensure they operate in a safe and plans. FHFA will continue to monitor the effectiveness of sound manner. Key areas of risk include: credit risk, loss mitigation efforts to support the conservation of GSE market risk, operational risk, governance, solvency and assets. earnings. While FHFA did not meet performance measure 1.1.1 in FY 2012, examinations were conducted and ratings will be assigned and included in the 2012 Reports DID YOU KNOW? of Examination (ROE). The absence of capital and the PERFORMANCE SECTION continuation of credit losses jeopardized improving FY 2011 FY 2012 the Enterprises’ ability to make improvements in those TOTAL NEW $1.08 Trillion VS. $1.31 Trillion areas. Human capital flight and the uncertainty of the BUSINESS 1 conservatorship status jeopardized improvement in Governance, Market Risk, and Operational Risk. FHFA TOTAL will continue to focus on the improvement of Enterprise ENTERPRISE HARP 448,746 VS. 711,409 2 REFINANCES operations. Key challenges to meeting this goal in the future will be the health of the U.S. economy, house INTEREST prices, and human capital risk at the Enterprises. It should 4.11% VS. 3.47% RATES Month of September 2011 Month of September 2012 be noted that this performance measure has not been carried forward for the next fiscal year. FHFA will continue Fannie 4.00% VS. 3.41% to conduct examinations and ongoing monitoring of the Mae Single Enterprises, and ratings will be assigned in accordance DELINQUENCY Family Freddie RATES 3.51% VS. 3.37% with the revised FHFA ratings system. Mac For performance measure 1.1.2, FHFA met its quarterly Fannie Multi- Mae .57% VS. .28% target of 90 percent in FY 2012, requiring the submission, Family Freddie review and resolution of remediation plans within 120 days Mac .33% VS. .27% of issuance of an MRA. FHFA accomplished this goal by meeting with the Enterprises biweekly to track progress RETAINED and reconcile to Enterprise remediation packages. The MORTGAGE $1.40 Trillion VS. $1.22 Trillion PORTFOLIO FHFA is in the process of developing an enhanced process for tracking MRA remediation due dates. FHFA TOTAL MBS continues to expend effort and resources to address high OUTSTANDING $3.90 Trillion VS. $3.94 Trillion levels of nonperforming loans and evaluate the success of U.S. government programs, while maintaining a core risk- 1 Data includes purchases of mortgages into portfolio and issuances of the MBS based supervision program. Throughout the supervision 2 FY 2012 total HARP refinancesis from Oct 2011–Aug 2012 Building an Infrastructure for the Secondary Mortgage Market 55 PERFORMANCE GOAL 1.2 The FHLBanks and the Office of Finance comply with legal requirements and operate in a safe and sound manner with adequate capital and access to funds and capital. PERFORMANCE MEASURE 1.2.1 Composite rating at each FHLBank. Note: If rating is less than “2”, an acceptable performance improvement plan shall be included with the Bank’s response to the Report of Examination. FY 2010 FY 2011 FY 2012 Target “2” or better or, within 180 days “2” or better or, within 180 days “2” or better or, within 180 days of a rating downgrade to below of a rating downgrade to below of a rating downgrade to below 2, operating under an approved 2, operating under an approved 2, operating under an acceptable capital restoration plan capital restoration plan performance improvement plan Performance Seven institutions were rated below One institution was downgraded below No FHLBanks were downgraded below 2 in FY 2010. Four were operating 2 during FY 2011 and developed a 2 in FY 2012. under an acceptable performance remediation plan within 180 days of improvement plan within 90 days of the downgrade. the downgrade, three were not. Performance Results Key: Goal Fulfillment Target Not Met Target Met Target Met PERFORMANCE MEASURE 1.2.2 Classify capital rating at each FHLBank. FY 2010 FY 2011 FY 2012 Target Quarterly Classified as “adequately Classified as “adequately capitalized” or, within 180 days capitalized” or, within 180 days of a rating downgrade, operating of a rating downgrade, operating under an approved capital under an approved capital restoration plan Quarterly restoration plan Quarterly Performance Eleven of the 12 FHLBanks were Eleven of the 12 FHLBanks were All of the 12 FHLBanks were adequately capitalized throughout adequately capitalized throughout adequately capitalized at the end of FY 2010. One Bank was classified FY 2011. FHFA has continued to FY 2012. One FHLBank, previously as undercapitalized. That Bank classify one Bank as undercapitalized. classified as undercapitalized through subsequently stipulated to a consent The consent order and associated a discretionary downgrade, was order, which constituted its approved agreement constitute the FHLBank’s upgraded to adequately capitalized for capital restoration plan. capital restoration plan. the quarter ending June 30, 2012. Performance Results Key: Goal Fulfillment Target Not Met Target Met Target Met PERFORMANCE MEASURE 1.2.3 MRAs that are more than 90 days old are resolved or being resolved in accordance with an acceptable remediation plan. FY 2010 FY 2011 FY 2012 Target 90 percent Quarterly 90 percent Quarterly At least 90 percent each Quarter Performance FHFA examiners identified MRAs FHFA examiners identified MRAs at FHFA examiners identified MRAs at FHLBanks during FY 2010. All FHLBanks during FY 2011. All MRAs at FHLBanks during FY 2012. All matters requiring attention were either more than 90 days old were either matters requiring attention were either successfully resolved or in the process successfully resolved or being resolved successfully resolved or in the process of being resolved in accordance with with an acceptable remediation plan of being resolved in accordance with an approved remediation plan within within 90 calendar days. an approved remediation plan within 90 calendar days. 90 calendar days. Performance Results Key: Goal Fulfillment Target Met Target Met Target Met 56 Federal Housing Finance Agency | 2012 Performance and Accountability Report OVERVIEW OF PERFORMANCE GOAL 1.2 capitalized and reflected on-going improvement in key risk metrics of the Bank, FHFA continues to monitor concerns FHFA supervises each FHLBank to ensure it operates in with the level of retained earnings and the poor quality of a safe and sound manner. In FY 2012, FHFA conducted the Bank’s private label securities portfolio. supervisory examinations primarily through on-site examinations and off-site monitoring and analysis. FHFA employs a risk-based examination program that focuses on five key areas: market risk, credit risk, During FY2012, composite ratings were assigned at each operational risk, governance, and financial condition and FHLBank. No FHLBanks were downgraded during FY performance. FHFA provides its ROE and related findings 2012. All Reports of Examination regardless of a Bank’s to FHLBank management and their boards of directors. composite rating, contain a summary of examination PERFORMANCE SECTION FHFA also provides information on the condition of each issues identified and Matters Requiring Attention (MRA), FHLBank and the Office of Finance in its Annual Report to which include follow-up dates by which the Bank is to Congress. resolve the identified issues. In FY 2012, the FHLBanks successfully resolved or In FY 2012, all of the FHLBanks were adequately began resolving all MRAs with an acceptable remediation capitalized per Prompt Corrective Action (PCA) rule plan. All ROE contain a summary of examination issues thresholds. It should be noted that one FHLBank identified and MRAs, which include follow-up dates by previously classified as undercapitalized through a which the Bank is to resolve the identified issues. The discretionary downgrade, was upgraded to adequately resolution of some MRAs are long-term in nature (e.g., capitalized for the quarter ending June 30, 2012. Although those that are information technology (IT)-related often do the PCA capital classification was upgraded to adequately not lend themselves to short-term resolution). Building an Infrastructure for the Secondary Mortgage Market 57 Strategic Goal 2 The housing GSEs support a stable, liquid, and efficient mortgage market, including STRATEGIC GOAL 2 sustainable home ownership and affordable housing. The housing GSEs contribute to the smooth operation During FY 2012, the housing GSEs have continued to of the markets by providing liquidity and stability and by have a central role in the mortgage market. FHFA’s policy meeting housing goals. Fostering a stable, liquid, and research and analysis helps inform stakeholders and efficient secondary mortgage market promotes a steady contributes to effective supervision. FHFA’s affordable stream of funds for sustainable homeownership and housing goals are intended to influence the housing affordable housing. Since the housing GSEs comprise GSEs’ actions. Further, they set a baseline for the housing a large share of an increasingly dynamic and complex finance system that includes community investment and market, their role is critical in providing liquidity and affordable housing. stability and in addressing affordable housing needs. PERFORMANCE GOAL 2.1 FHFA ensures the housing GSEs support a stable, liquid and efficient mortgage market. PERFORMANCE MEASURE 2.1.1 Ensure liquidity levels at Fannie Mae and Freddie Mac meet or exceed required levels or are brought into compliance within 5 business days. FY 2010 FY 2011 FY 2012 Target Monthly 95 percent 95 percent Quarterly Performance Fannie Mae did not maintain Both Fannie Mae and Freddie Mac In FY 2012, both Fannie Mae and liquidity levels consistent with FHFA maintained liquidity levels consistent Freddie Mac maintained liquidity levels requirements. All the other housing with FHFA requirements. consistent with FHFA requirements. GSEs met the liquidity requirements. Performance Results Key: Goal Fulfillment Target Not Met Target Met Target Met PERFORMANCE MEASURE 2.1.2 Ensure liquidity levels at the FHLBanks meet or exceed required levels or are brought into compliance within 5 business days. FY 2010 FY 2011 FY 2012 Target Annually 95 percent 95 percent Quarterly Performance Liquidity levels at the FHLBanks met All FHLBanks maintained liquidity levels During FY 2012, liquidity levels at the the required levels consistent with consistent with FHFA requirements. FHLBanks met the required levels FHFA requirements. consistent with FHFA requirements. Performance Results Key: Goal Fulfillment Target Met Target Met Target Met OVERVIEW OF PERFORMANCE GOAL 2.1 represent something that happens once every month at Both Enterprises and FHLBanks support the health of most. the secondary mortgage market through their regular The Enterprises must each meet certain liquidity criteria: activities of guaranteeing, securitizing, and purchasing maintain at least 30 calendar days of liquidity; hold at mortgage loans and securities. This support reduces the least 50 percent of their expected 30-day cash needs in cost of mortgages to the public and promotes sustainable Treasury and/or Federal deposits; and maintain at least home ownership. The 95 percent target for each measure 100 percent of their expected 365 day cash needs in represents a very good level of compliance based on daily cash and unencumbered assets. During FY 2012, liquidity observations. Not falling within the liquidity limit would levels were monitored daily at the Enterprises and as a 58 Federal Housing Finance Agency | 2012 Performance and Accountability Report result, the Enterprises exceeded required liquidity levels. Specifically, FHFA requires each FHLBank to maintain Given ongoing problems in Europe and the U.S. debt positive cash balances for 15 days assuming no access to ceiling debate, each Enterprise reduced or eliminated the capital markets while allowing maturing advances to unsecured bank deposits and increased Treasury and/or roll off, and for 5 days assuming no maturing advances roll Federal deposits to enhance liquidity. off. FHFA prepares a report each week to assess FHLBank compliance with these standards. Every FHLBank met the FHFA also monitored each FHLBank’s liquidity level to liquidity requirements for each week during FY 2012. ensure their ongoing ability to respond to market demands. PERFORMANCE GOAL 2.2 PERFORMANCE SECTION FHFA ensures the housing GSEs provide leadership in housing finance and affordable housing by operating these programs in an effective and efficient manner, developing products, establishing partnerships, and financing homes for very low, low, and moderate income households. PERFORMANCE MEASURE 2.2.1 Ensure all FHLBanks award affordable housing program (AHP) funds at least equal to statutory minimums. FY 2010 FY 2011 FY 2012 Target September 30, 2011 100 percent 100 percent Performance FHFA completed AHP examinations FHFA completed AHP examinations at FHFA completed AHP examinations at all 12 FHLBanks. FHFA identified all 12 FHLBanks. at all 12 FHLBanks. All FHLBanks one violation and recommended awarded AHP funds at least equal to remediation. statutory minimums. Performance Results Key: Goal Fulfillment Target Met Target Met Target Met PERFORMANCE MEASURE 2.2.2 Regulated entities will provide updated performance plans within 180 days in response to agency notification of potential performance shortfalls in meeting housing goals. FY 2010 FY 2011 FY 2012 Target 100 percent 100 percent Performance FHFA required no updated performance Each FHLBank provided updated plans during FY 2011 and met the performance plans during FY 2012. New Measure for 2012 target. Performance Results Key: Goal Fulfillment Target Met Target Met OVERVIEW OF PERFORMANCE GOAL 2.2 advised of any violations of this statutory requirement, and The Bank Act requires each FHLBank to establish an met performance measure 2.2.1. affordable housing program (AHP) to enable members to In response to agency notification of potential performance provide long-term subsidized financing for very low-, low-, shortfalls in meeting housing goals, FHFA met its goal of and moderate- income owner-occupied and affordable requiring the Enterprises to provide updated performance rental housing. These subsidies may be in the form of grants plans in FY 2012. Each performance plan addresses unique or subsidized interest rates on an advance to a member. benchmarks for the Enterprises. FHFA’s approach while The Bank Act also requires each FHLBank to contribute Fannie Mae and Freddie Mac are under conservatorship is at least 10 percent of its net earnings from the previous to compare the Enterprises’ affordable housing attainment year to its AHP, subject to a minimum annual combined to the overall volume of affordable housing produced in the contribution by all 12 FHLBanks of $100 million. FHFA primary market. With this fluctuating target, an indicative conducts on-site examinations and visitations of each measure will not be set but the affordable housing objective FHLBank to ensure compliance with AHP regulations and remains an important component of the Enterprises’ to evaluate the effectiveness of the FHLBanks’ programs. activities. During FY 2012, FHFA did not identify nor were we Building an Infrastructure for the Secondary Mortgage Market 59 PERFORMANCE GOAL 2.3 FHFA supports an efficient secondary mortgage market through research that increases transparency of the housing GSEs’ risks and activities and improves understanding of mortgage market developments. PERFORMANCE MEASURE 2.3.1 Develop and publish house price indexes that omit or reduce the influence of distressed sales from the estimation sample for Metropolitan Statistical Areas (MSAs) or states. FY 2010 FY 2011 FY 2012 Target By September 30, 2012 Performance The updated Housing Price Index (HPI) published in July 2012 included new price indexes that omit or reduce the New Measure for 2012 New Measure for 2012 influence of distressed sales from the estimation sample for MSAs or states. Performance Results Key: Goal Fulfillment Target Met PERFORMANCE MEASURE 2.3.2 Ensure working papers, mortgage market notes, or research papers are published. FY 2010 FY 2011 FY 2012 Target Six by September 30, 2010 At least 6 At least 6 Performance FHFA published two working papers, FHFA published two working papers, FHFA published two working papers, six research papers, and three two mortgage market notes, one two mortgage market notes, and two mortgage market notes during research paper, and one research research papers during FY 2012. FY 2010. report to Congress in FY 2011. These publications are posted on the These publications are posted on agency’s web site. www.fhfa.gov/ the agency’s web site. This measure Default.aspx?Page=5 pertains to the number of such publications released in FY 2011. Performance Results Key: Goal Fulfillment Target Met Target Met Target Met OVERVIEW OF PERFORMANCE GOAL 2.3 and publishing distress-free house price indexes During FY 2012, FHFA continued to provide information that are available to the public www.fhfa.gov/Default. to promote an efficient secondary mortgage market. The aspx?Page=14. presentation of accurate and timely information is critical During FY 2012, FHFA also published several research to understanding mortgages, mortgage markets and papers, staff working papers, and mortgage market the housing GSEs’ risks and activities. FHFA publishes a notes aimed at improving the public’s understanding of variety of data and reports throughout the year to increase mortgages, mortgage markets and the nation’s housing the transparency of mortgage market developments, as financial system. These various publications cover topics well as the housing GSEs’ risks and activities. related to the economic environment and complement FHFA conducted market research to assess likely FHFA’s supervision of the housing GSEs. These distress-indicators that enabled the production of a publications include: distress-free Housing Price Index (HPI). The distress Fannie Mae and Freddie Mac Single-Family Guarantee “discount” reflects a number of factors, including Fees in 2010 and 2011 http://www.fhfa.gov/ (frequently) deteriorated property condition. Many users webfiles/24558/rp_sf_guarantee_fees_2010_2011.pdf; of the HPI would prefer to remove the effects of those FHFA Technical Analysis of Principal Forgiveness factors from FHFA’s metrics. To satisfy that demand http://www.fhfa.gov/webfiles/24557/rp_ and to improve public understanding of housing technicalanalysisprincipalforgive.pdf; market developments, FHFA met its goal of developing 60 Federal Housing Finance Agency | 2012 Performance and Accountability Report Countercyclical Capital Regime: A Proposed Design In June 2012, FHFA delivered its 2011 Annual and Empirical Evaluation http://www.fhfa.gov/ Report to Congress and published the report on its webfiles/24538/countercyclicalcapitalregime122.pdf; website (http://www.fhfa.gov/webfiles/24009/FHFA_ House RepToCongr11_6_14_508.pdf). The report includes Price Indexes for Homes in Different Price the conclusions and findings of the agency’s annual Tiers: Biases and Corrections http://www.fhfa.gov/ examination of the Enterprises and the FHLBanks. webfiles/24272/FHFA_Working_Paper_12-1.pdf; 20 Year vs. 30 Year Refinance Option http://www. In 2012, FHFA leaders testified at various congressional fhfa.gov/webfiles/24521/FHFA_Mortgage_Market_ hearings, met and briefed Congress on current FHFA Note_12-2.pdf; and issues, provided technical assistance to members of PERFORMANCE SECTION A Congress on proposed legislation, gave presentations Primer on Price Discount of REO Properties http:// at industry functions, and responded to inquiries from www.fhfa.gov/webfiles/24490/FHFA_Mortgage_ members of Congress on a variety of issues. Market_Note_12-1.pdf. PERFORMANCE GOAL 2.4 FHFA collaborates with other federal agencies and stakeholders to share information concerning mortgage markets, the nation’s housing finance system, and regulatory issues. PERFORMANCE MEASURE 2.4.1 Respond to Ccongressional inquiries within 15 business days. FY 2010 FY 2011 FY 2012 Target 90 percent 85 percent 85 percent Performance For FY 2010, FHFA responded to 253 For FY 2011, 86 percent of the During FY 2012, FHFA responded to formal congressional inquiries, and responses to congressional inquiries 246 formal congressional inquiries, FHFA responded to 88 percent of those completed within 15 business days. and FHFA responded to 88 percent inquiries within 15 business days. of those inquiries within 15 business days. Performance Results Key: Goal Fulfillment Target Not Met Target Met Target Met OVERVIEW OF PERFORMANCE GOAL 2.4 soundness, promote affordable housing, and ensure an Communication with other federal agencies and efficient secondary mortgage market. stakeholders is key to FHFA’s support of an efficient Congress is a key stakeholder. During FY 2012, FHFA met secondary mortgage market. FHFA provides information its goal of responding to congressional inquiries within 15 on the housing GSEs that includes the risks they face, the days. The inquiries tracked are formal inquiries regarding economic environment in which they operate, and policy constituent or policy issues. Over the entire fiscal issues facing the agency. year, FHFA responded to a total of 246 congressional FHFA works with other federal agencies including the inquiries. Of the 246 inquiries, 216 received a response U.S. Department of Housing and Urban Development, the within 15 business days, which translates into 87.8 U.S. Department of the Treasury and the Federal Reserve percent receiving a response within the target range of System, and other stakeholders to share information and 15 business days. The annual average response time discuss issues of common interest to promote an efficient was 10 days. FHFA received congressional inquiries on secondary mortgage market. FHFA promotes regular a wide range of topics, including: Principal forgiveness, communication among financial regulators and works Home Affordable Refinance Program (HARP), Real Estate with the Financial Stability Oversight Council (FSOC) to Owned (REO) bulk sales pilot, executive compensation develop regulatory standards that will improve safety and at the Enterprises, constituent inquiries regarding their mortgages, Property Assessed Clean Energy (PACE) loans, Enterprise attorney networks, minority and women Building an Infrastructure for the Secondary Mortgage Market 61 inclusion, Freddie Mac investments, and the proposed policy positions, and activities of the agency that qualified residential mortgage regulation. serve to develop an improved understanding of the financial condition of the housing GSEs. FHFA met FHFA staff is also in continuous communication with with key organizations and associations in the housing relevant congressional staff on an informal basis. FHFA industry regarding A Strategic Plan for Enterprise also provided outreach through meetings with industry Conservatorships. stakeholders on mortgage market developments, 62 Federal Housing Finance Agency | 2012 Performance and Accountability Report Strategic Goal 3 FHFA preserves and conserves the assets and property of the Enterprises, ensures focus STRATEGIC GOAL 3 on their housing mission, and facilitates their financial stability and emergence from conservatorship. The conservatorships of Fannie Mae and Freddie Mac FHFA has also directed Fannie Mae and Freddie Mac allow FHFA to preserve the assets of the Enterprises, to pursue appropriate foreclosure mitigation activities, ensure they focus on their housing mission and remediate including loan modifications in a way intended to conserve PERFORMANCE SECTION operational and risk management shortcomings. As the Enterprises’ assets while providing foreclosure conservator, FHFA seeks to strengthen the Enterprises alternatives to eligible distressed borrowers. FHFA will financial condition, minimize losses, and strive for continue to closely monitor market conditions, guide the operations, controls and risk management that meet Enterprises’ activities and decisions, and work to improve or exceed industry standards. FHFA will continue to their operations to ensure they are safe and sound and promulgate regulations mandated by HERA and to promote liquidity and stability in the housing market. strengthen the Enterprises’ safety and soundness. PERFORMANCE GOAL 3.1 Preserve and conserve each Enterprise’s assets and property. PERFORMANCE MEASURE 3.1.1 Each Enterprise submits an acceptable asset disposition plan for assets identified by FHFA. FY 2010 FY 2011 FY 2012 Target September 30, 2011 September 30, 2012 Performance The plans the Enterprises submitted Both of the Enterprises submitted to FHFA in 2011 did not meet the acceptable asset disposition plans to New Measure for 2012 requirements and were unacceptable. FHFA during FY 2012. Performance Results Key: Goal Fulfillment Target Not Met Target Met PERFORMANCE MEASURE 3.1.2 Complete quarterly review of both Enterprises assets, partnerships, contracts and litigation activities. FY 2010 FY 2011 FY 2012 Target Quarterly, beginning 100% Quarterly 100% Quarterly December 31, 2009 Performance FHFA received Fannie Mae’s inventory Neither Enterprise submitted Both Enterprises submitted all their on July 13, 2010, and Freddie Mac’s inventories on time. quarterly inventories on time, allowing inventory on July 16, 2010. FHFA to conduct and complete its review of the Enterprises’ submissions relative to assets, partnerships, contracts, and litigation activities. Performance Results Key: Goal Fulfillment Target Not Met Target Not Met Target Met Building an Infrastructure for the Secondary Mortgage Market 63 OVERVIEW OF PERFORMANCE GOAL 3.1 Enterprises submitted acceptable plans to FHFA regarding REO disposition. FHFA placed both Fannie Mae and Freddie Mac in conservatorship in 2008 to preserve and conserve their During FY 2012, FHFA reviewed non-core assets for assets and put both entities in a sound and solvent feasibility of sale or liquidation, consistent with minimizing condition. During FY 2012, FHFA worked with the taxpayer’s losses and the portfolio shrinkage required by Enterprises to ensure they took important steps in the SPSPA with the U.S. Department of Treasury. FHFA asset disposition. The Senior Preferred Stock Purchase reviewed the quarterly asset inventory submissions, Agreement (SPSPA) required both Enterprises to reduce the GSEs’ non-mission activity reports, and the detail their retained mortgage portfolios by 10 percent from of specific accounts. We coordinated within FHFA to the previous year’s maximum allowed portfolio level begin the process for automated submission of certain by December 31, 2011(see page 31 in the MD&A information from the asset inventory report. As part of Section for SPSPA description). On December 31, the review, FHFA performed a comparison between 2011, both Enterprises were in compliance with this quarters identifying any unusual activities and changes requirement. In addition, each quarter of the year, the among accounts along with litigation trends (if any), new Enterprises submitted quarterly asset inventories to claims, dissolutions or new partnerships. The challenges FHFA. During the second quarter, Fannie Mae submitted faced include identifying assets and other items in the an asset disposition plan through the Financial Activities asset inventory submission in sufficient detail to make Review (FAR) process. Furthermore, as part of FHFA’s meaningful quarter to quarter comparisons. FHFA will REO Initiative targeted to the hardest-hit metropolitan continue to monitor developments in the markets and areas, which was announced in August of 2011, both work to stabilize each Enterprise. PERFORMANCE GOAL 3.2 Delegate appropriate authorities to each Enterprise’s management to continue with or improve upon the Enterprises’ mission and their business operations. PERFORMANCE MEASURE 3.2.1 All conservator requests received through the FHFA Conservator Decision email box are brought to the Conservatorship Governance Committee (CGC) and assigned to a lead office for resolution. FY 2010 FY 2011 FY 2012 Target Within 15 calendar days of receipt of the request. Performance All requests submitted through the email box were presented at CGC New Measure for 2012 New Measure for 2012 meetings or emailed to the CGC meetings and assigned to lead offices within 15 calendar days. Performance Results Key: Goal Fulfillment Target Met OVERVIEW OF PERFORMANCE GOAL 3.2 FHFA met this performance measure target for each As conservator, FHFA has delegated operational and quarter during FY 2012, assigning within 15 calendar days other duties to the Enterprises’ directors and officers. a lead office for resolution of all conservatorship requests. FHFA manages all conservator requests received through FHFA ensures the decision making process is timely and the FHFA Conservator Decision email box, which are appropriately coordinated throughout the agency. brought to the Conservator Governance Committee (CGC) and then assigned to a lead office for resolution within 15 calendar days of receipt of the request. 64 Federal Housing Finance Agency | 2012 Performance and Accountability Report PERFORMANCE GOAL 3.3 Ensure the Enterprises have effective programs that respond to problems in mortgage markets by reducing preventable foreclosures. PERFORMANCE MEASURE 3.3.1 Prevent current loans from going delinquent by helping borrowers to refinance. FY 2010 FY 2011 FY 2012 Target Maintain the volume of HARP refinances as a percent of total refinances at 10% or higher Performance The Volume of HARP refinances as PERFORMANCE SECTION a percent of total refinances during New Measure for 2012 New Measure for 2012 FY 2012 (through August 31, the most recent data available) was approximately 18%. Performance Results Key: Goal Fulfillment Target Met PERFORMANCE MEASURE 3.3.2 Maintain the percentage of modified loans that are 60- plus days delinquent, nine months after modification, at or below 20%. FY 2010 FY 2011 FY 2012 Target 35 percent or less 35 percent or less Less than or equal to 20 percent Performance Less than 35 percent of modified Approximately 16 percent of modified Approximately 13 percent of modified loans were 60-plus days delinquent loans were 60-plus days delinquent loans were 60-plus days delinquent after modification in three of the four six months after completion of a loan nine months after modification in four quarters. During one quarter, the modification. out of the four quarters. percentage of modified loans 60-plus days delinquent was 35 percent. Performance Results Key: Goal Fulfillment Target Met Target Met Target Met OVERVIEW OF PERFORMANCE GOAL 3.3 FHFA exceeded the annual target of having less than or Performance measure 3.3.1 is an indicator of the ability of equal to 20 percent of modified loans that are 60- plus current borrowers with high loan-to-value loans to obtain days delinquent, nine months after modification. For loans refinances, which may prevent delinquency at a later date. modified between July 1, 2011 and September 30, 2011, During FY 2012, FHFA tracked the Enterprises’ efforts 13 percent were 60-plus days delinquent nine months to prevent avoidable foreclosures through a variety of after completion of a loan modification. FHFA continues mechanisms including loan modifications, refinances and to work with the Enterprises and mortgage servicers to short sales. This information was reported publicly in a implement a Servicing Alignment Initiative to standardize monthly foreclosure prevention report. HARP, one of the their approaches to loss mitigation and foreclosure refinance programs, accounted for 17.9 percent of total prevention. However, high levels of unemployment loan refinances between October 1, 2011 and August 31, and underemployment and the decline of house prices 2012. continue to affect the ability and willingness of some borrowers to pay their mortgages. Building an Infrastructure for the Secondary Mortgage Market 65 PERFORMANCE GOAL 3.4 Work with the Administration and Congress to develop an effective structure for the Enterprises to emerge from conservatorship. PERFORMANCE MEASURE 3.4.1 Provide technical assistance to Congress and the Administration on various future structures for the secondary mortgage market and for post-conservatorship outcomes for the Enterprises. FY 2010 FY 2011 FY 2012 Target Ongoing Participate in interagency Develop and disseminate a meetings at least Quarterly strategic plan prescribing the next phase of the conservatorships for Fannie Mae and Freddie Mac. Performance FHFA provided technical assistance FHFA provided technical assistance FHFA published a strategic plan for to the Administration and Congress to the Administration and Congress the Conservatorships on February regarding the secondary mortgage through participation in meetings 21, 2012 and provided technical market and post conservatorship where options related to the future of assistance to the Administration outcomes for the Enterprises the secondary mortgage market and and Congress through participation through congressional testimony, post conservatorship outcomes for the in meetings and speeches on the full participation in the President’s Enterprises were discussed. secondary mortgage market and Working Group on Financial Markets, post- conservatorship outcomes. and meetings with key representative In addition, FHFA participated in to explore topics related to overall interagency meetings on Dodd-Frank, housing policy. including risk retention, Strategically Important Financial Institutions (SIFI’s), and Strategically Important Financial Market Utilities (SIFMU’s). Performance Results Key: Goal Fulfillment Target Met Target Met Target Met PERFORMANCE MEASURE 3.4.2 Discuss the progress regarding the objectives outlined in the Conservatorship Scorecard with each Enterprise. FY 2010 FY 2011 FY 2012 Target Quarterly Performance During FY 2012, FHFA held meetings with Fannie Mae and Freddie Mac to review the progress made on the Conservatorship Scorecard goals. Assessments are reviewed quarterly. New Measure for 2012 New Measure for 2012 Each goal has an FHFA owner who provides input on their assessment of Fannie Mae’s and Freddie Mac’s achievements and obstacles. Performance Results Key: Goal Fulfillment Target Met OVERVIEW OF PERFORMANCE GOAL 3.4 Many of the items on the Scorecard require Freddie Mac During FY 2012, FHFA provided technical assistance to and Fannie Mae to work together in order to achieve Congress on a variety of legislative measures to address success. These projects focused on: (1) building a new the future of secondary mortgage markets and mortgage infrastructure for the secondary mortgage market; (2) securities markets. FHFA published A Strategic Plan gradually contracting the Enterprises’ dominant position for Enterprise Conservatorships detailing the agency’s in the marketplace while simplifying and shrinking their plans, and later published a Conservatorship Scorecard operations; and (3) maintaining foreclosure prevention describing specific projects for the Enterprises to work on activities and credit availability for new and refinanced and accomplish in order for the Plan to be implemented. mortgages. 66 Federal Housing Finance Agency | 2012 Performance and Accountability Report Resource Management Strategy RESOURCE FHFA has the personnel, resources, and infrastructure to manage effectively and efficiently MANAGEMENT to achieve its mission and goals. STRATEGY FHFA approaches the resources management strategy by operations. Significant progress has been made with the ensuring that the agency is addressing its administrative implementation of new training programs for employees, and workforce needs including information technologies upgrading information technology systems, updating PERFORMANCE SECTION and systems, and financial and human resources programs infrastructure, and implementing a new strategic plan to and processes. FHFA management is successful with provide a focus and direction for the next five years. the integration of strategic planning efforts into everyday PERFORMANCE GOAL 4.1 FHFA has a diverse workforce that is highly skilled, highly motivated and results oriented. PERFORMANCE MEASURE 4.1.1 Improve FHFA Employee Viewpoint Survey (EVS) results in the area of “Communication.” FY 2010 FY 2011 FY 2012 Target Improvement over previous Improvement over previous year’s results year’s results Performance FHFA increased scores in 6 FHFA increased scores in 6 New Measure for 2012 of 10 questions in the area of of 10 questions in the area of communication. communication. Performance Results Key: Goal Fulfillment Target Met Target Met OVERVIEW OF PERFORMANCE GOAL 4.1 results. OPM is responsible for calculating and preparing FHFA’s workforce continues to be its most valuable survey result reports for each federal agency, based on resource. In accordance with Title 5, Code of Federal the number of participating employees and the number of Regulations (CFR), part 250, federal agencies are required responses received. Agencies are responsible for analyzing to annually survey employees. The Federal Employee and interpreting the results and using them to inform human Viewpoint Survey (FEVS) is administered each year by capital management policies, programs, and initiatives. the Office of Personnel Management (OPM), and is a tool The annual FEVS results in the area of communication used to measure employees’ feelings and perceptions in indicates FHFA increased scores in six of the ten topic areas such as Talent, Leadership and Knowledge communication related questions. Based on the survey Management, Performance Culture, and Job Satisfaction. results and subsequent comparison, FHFA fully met the The ultimate goal of the survey is to provide agencies fiscal year 2012 measure to improve FHFA FEVS results in with information to build on identified strengths and focus the area of “Communication” over fiscal year 2011 results. on areas requiring additional attention, based on survey Building an Infrastructure for the Secondary Mortgage Market 67 PERFORMANCE GOAL 4.2 FHFA demonstrates a strong commitment to equal employment opportunity that supports diversity in employment, operations and the contracting of services. PERFORMANCE MEASURE 4.2.1 Number and variation of targeted outreach events designed to provide information and education to qualified candidates and facilitate increased employment applications and inquiries by women and minority candidates. FY 2010 FY 2011 FY 2012 Target 10 Annually 10 Annually Performance FHFA participated in 10 conference FHFA participated in 17 conference events and career fairs with minority events and career fairs with minority New Measure for 2012 and women groups during FY 2011. and women groups during FY 2012. Performance Results Key: Goal Fulfillment Target Met Target Met PERFORMANCE MEASURE 4.2.2 Percentage or number of contracts that are executed with minority-owned and women-owned businesses above 2011 levels. FY 2010 FY 2011 FY 2012 Target Establish baseline and Increase from prior year as included in set a stretch goal the 2011 Annual Report to Congress Performance FHFA analyzed past and existing FHFA increased the number of contracts to determine its spending contracts executed by 122 percent on contracts with minority-owned, from prior year results during FY 2012. New Measure for 2012 women-owned, and disabled- person– owned businesses. A baseline amount and goal were established. Performance Results Key: Goal Fulfillment Target Met Target Met OVERVIEW OF PERFORMANCE GOAL 4.2 activities. FHFA also supports diversity in the contracting FHFA expanded its efforts to recruit qualified minority and of services by encouraging the use of small business, women candidates by leveraging the Agency’s resources veteran-owned small business, service-disabled veteran- with those of professional organizations that promote owned small business, Historically Underutilized Business and advocate for minority and women financial services Zone (HUBZone) small business, small disadvantaged professionals. Measure 4.2.1 was designed to reflect the business, and women-owned small business concerns number of organizations the Agency has worked with as in its acquisition of goods and services, whether as well as an estimate of the number of applications received contractors or subcontractors. as a result of these endeavors. FHFA’s hiring practices During FY 2012 FHFA sought partnerships, alliances, and follow merit system principles and OPM regulatory agreements with organizations in order to enhance its standards in addition to the hiring flexibilities provided to ability to include and utilize minorities, women, disabled it by law. individuals and minority-owned, women-owned, and During FY 2012, the agency participated in 17 events disabled-owned businesses when contracting for goods sponsored by different organizations to recruit qualified and services. FHFA has experienced a positive increase minority and women candidates for FHFA. FHFA also met in contracting actions with minority- and women-owned with representatives of several organizations that promote businesses (MWOBs) in FY 2012. The number of workforce diversity in order to increase their awareness transactions increased from 63 in FY 2011 to 140 in FY of FHFA and our job opportunities. FHFA also worked 2012. The 140 contracting actions represent $7.3 million directly with the regulated entities during this period to dollars of business with minority- and women-owned follow up on the results of targeted events and outreach firms and represent approximately 21 percent of the total dollars obligated during FY 2012. 68 Federal Housing Finance Agency | 2012 Performance and Accountability Report PERFORMANCE GOAL 4.3 FHFA has effective financial and risk management programs. PERFORMANCE MEASURE 4.3.1 Percentage of FHFA's external audits and reviews that receive unqualified opinions with no material weaknesses or unacceptable risks. FY 2010 FY 2011 FY 2012 Target 100 percent 100 percent 100 percent Performance In FY 2011, all external audits and In FY 2012, all external audits and In FY 2010, all external audits and reviews had unqualified opinions reviews had unqualified opinions reviews had unqualified opinions with with no material weaknesses or with no material weaknesses or no material weaknesses. PERFORMANCE SECTION unacceptable risks. unacceptable risks. Performance Results Key: Goal Fulfillment Target Met Target Met Target Met PERFORMANCE MEASURE 4.3.2 Ensure management completes corrective action on OIG findings within agreed timeframe. FY 2010 FY 2011 FY 2012 Target No overdue corrective actions outstanding Performance In FY 2012, 49 of 50 corrective actions were completed and closed on time. One recommendation was originally New Measure for 2012 New Measure for 2012 closed by FHFA in the 4th quarter and then re-opened per agreement with the OIG. Performance Results Key: Goal Fulfillment Target Not Met OVERVIEW OF PERFORMANCE GOAL 4.3 and efficiently used to achieve agency strategic and To ensure resources are managed effectively and performance goals. FHFA cooperated with the OIG, efficiently, FHFA will continue to expand its use of financial GAO and external auditors to conduct internal reviews and performance information in managing program of agency activities and respond to all audit findings and operations, integrating its budget and performance recommendations to improve agency operations. development, and making program improvements. FHFA did not meet Performance Goal 4.3.2 because FHFA must continue to maintain a strong internal control one recommendation that was originally closed in the 4th and risk management program. This includes financial quarter of fiscal year 2012 was re-opened per agreement management, information security and other management with the OIG. FHFA completed 49 of 50 corrective actions and operating processes. on time during fiscal year 2012. The timeline for the one During FY 2012, FHFA supported GAO’s FY 2012 audit of outstanding corrective action was extended to February FHFA’s financial statements and revised agency policies 2013 since the recommendations that were identified and procedures, ensuring that resources were effectively would require actions beyond FY 2012. Building an Infrastructure for the Secondary Mortgage Market 69 PERFORMANCE GOAL 4.4 FHFA has the information technology and physical infrastructure needed to achieve its mission and goals. PERFORMANCE MEASURE 4.4.1 Percentage of incidents responded to by Help Desk personnel within 15 business minutes. FY 2010 FY 2011 FY 2012 Target 80 percent or more 80 percent or more Quarterly Performance Help Desk personnel responded to Help Desk personnel responded to more than 80 percent of requests more than 93 percent of requests New Measure for 2012 within 15 minutes each quarter of FY within 15 minutes each quarter of FY 2011. 2012. Performance Results Key: Goal Fulfillment Target Met Target Met OVERVIEW OF PERFORMANCE GOAL 4.4 resources from three buildings into one facility helped with FHFA’s supervision of the housing GSEs is highly workload management and dispatching logistical support. dependent upon the strategic use of technology. FHFA FHFA links IT initiatives to the annual performance effectively uses IT to provide independent analysis of budget which supports the agency in achieving its long safety and soundness issues to accomplish FHFA’s term goals. FHFA will continue to ensure maximum mission. availability of FHFA information resources, and continue During FY 2012, 93 percent of Help Desk requests were to enhance the security, reliability and capacity of FHFA’s responded to within 15 minutes. FHFA closely monitors IT infrastructure, consistent with the Federal Information Help Desk trouble tickets to ensure expectations are met Security Management Act, Federal Information Processing for customers. The consolidation of users and Help Desk Standards, National Institute of Science and Technology special publications, and annual reviews and updates of common controls and continuous monitoring. 70 Federal Housing Finance Agency | 2012 Performance and Accountability Report PERFORMANCE SECTION Building an Infrastructure for the Secondary Mortgage Market 71 Financial Section | Message from the Chief Financial Officer | Independent Auditor’s Report | Appendix I: Management’s Report on Internal Control Over Financial Reporting | Appendix II: FHFA’s Response to Auditor’s Report | Financial Statements | Notes to the Financial Statements 2 0 1 2 F E D E R A L H O U S I N G F I N A N C E A G E N C Y P E R F O R M A N C E A N D A C C O U N TA B I L I T Y R E P O R T Message from the Chief Financial Officer I am pleased to present the FY 2012 financial statements for the Federal Housing Finance Agency as an important component of the agency’s 2012 Performance and Accountability Report (PAR). Once again, FHFA received an unqualified audit opinion on its financial statements from the Government Accountability Office (GAO). In its financial statements audit report, GAO concluded that 1) FHFA’s FY 2012 financial statements are fairly presented in all material respects; 2) FHFA had effective internal control over financial reporting; and 3) there were no reportable instances of noncompliance with the laws and regulations it tested. In addition to a clean audit opinion, FHFA received the Certificate for Excellence in Accountability Reporting (CEAR) award for its FY 2011 PAR from the Association of Government Accountants, the fourth straight year since its inception as a new agency that FHFA has received this prestigious award. The CEAR award is given to government agencies that received unqualified audit opinions on their financial statements and produced PARs that achieved the highest standards in communicating results and demonstrating accountability. This year’s PAR represents the last reporting year on FHFA’s 2009-2014 Strategic Plan. FHFA developed a new Strategic Plan for the years 2013-2017 that will guide the agency’s future activities and serve as the basis for performance reporting for next year’s PAR. The new Strategic Plan continues to maintain the agency’s focus on its core responsibilities FINANCIAL SECTION for regulating the housing GSEs and managing the conservatorships of the Enterprises. In addition, the new plan incorporates all of the key elements contained in the Strategic Plan for Enterprise Conservatorships that was released by the agency to the public in February 2012. Finally, the commitment of senior management and staff to maintain effective programs of internal control over agency activities and financial reporting provides the solid foundation necessary for managing and monitoring the effective and efficient use of FHFA resources. Sincerely, MARK KINSEY Chief Financial Officer November 15, 2012 Building an Infrastructure for the Secondary Mortgage Market 73 Independent Auditor’s Report 74 Federal Housing Finance Agency | 2012 Performance and Accountability Report FINANCIAL SECTION Building an Infrastructure for the Secondary Mortgage Market 75 76 Federal Housing Finance Agency | 2012 Performance and Accountability Report FINANCIAL SECTION Building an Infrastructure for the Secondary Mortgage Market 77 78 Federal Housing Finance Agency | 2012 Performance and Accountability Report FINANCIAL SECTION Building an Infrastructure for the Secondary Mortgage Market 79 Appendix I: Management’s Report on Internal Control Over Financial Reporting 80 Federal Housing Finance Agency | 2012 Performance and Accountability Report Appendix II: FHFA’s Response to Auditor’s Report FINANCIAL SECTION Building an Infrastructure for the Secondary Mortgage Market 81 F E D E R A L H O USING FINANCE AG ENCY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2012 AND 2011 (In Thousands) 2012 2011 Assets: Intragovernmental Fund Balance With Treasury - Note 2 $ 20,998 $ 16,445 Investments - Note 3 77,420 78,252 Accounts Receivable - Note 4 – 19 Total Intragovernmental 98,418 94,716 Accounts Receivable, Net - Note 4 13 5 Property, Equipment, and Software, Net - Note 5 45,528 5,569 Prepaid Expenses 840 491 Total Assets $ 144,799 $ 100,781 Liabilities: Intragovernmental Accounts Payable $ 766 $ 1,221 Other Intragovernmental Liabilities - Note 7 2,727 1,219 Total Intragovernmental 3,493 2,440 Accounts Payable 9,728 6,601 Other Liabilities - Note 7 40,905 15,309 Total Liabilities 54,126 24,350 Net Position: Cumulative Results of Operations 90,673 76,431 Total Net Position $ 90,673 $ 76,431 Total Liabilities and Net Position $ 144,799 $ 100,781 The accompanying notes are an integral part of these financial statements. 82 Federal Housing Finance Agency | 2012 Performance and Accountability Report F E D E R A L H O USING FINANCE AG ENCY CONSOLIDATED STATEMENTS OF NET COST FOR THE YEARS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands) 2012 2011 Program Costs by Strategic Goal: Safety and Soundness: Gross Costs $ 153,621 $ 125,961 Less: Earned Revenue (124,731) (135,297) Net Safety and Soundness (Income from)/Cost of Operations $ 28,890 $ (9,336) Affordable Housing: Gross Costs $ 24,919 $ 17,240 Less: Earned Revenue (64,607) (38,054) Net Affordable Housing (Income from)/Cost of Operations $ (39,688) $ (20,814) Conservatorship: Gross Costs $ 38,961 $ 24,200 Less: Earned Revenue (36,595) (27,432) FINANCIAL SECTION Net Conservatorship (Income from)/Cost of Operations $ 2,366 $ (3,232) Total Gross Program Costs $ 217,501 $ 167,401 Less:Total Earned Revenue (225,933) (200,783) Net (Income from)/Cost of Operations $ (8,432) $ (33,382) The accompanying notes are an integral part of these financial statements. Building an Infrastructure for the Secondary Mortgage Market 83 F E D E R A L H O USING FINANCE AG ENCY CONSOLIDATED STATEMENTS OF CHANGES IN NET POSITION FOR THE YEARS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands) 2012 2011 Cumulative Results of Operations: Beginning Balance $ 76,431 $ 37,856 Budgetary Financing Sources: Imputed Financing Sources 5,810 5,193 Total Financing Sources 5,810 5,193 Net Income From Operations 8,432 33,382 Net Change 14,242 38,575 Cumulative Results of Operations $ 90,673 $ 76,431 Net Position $ 90,673 $ 76,431 The accompanying notes are an integral part of these financial statements. 84 Federal Housing Finance Agency | 2012 Performance and Accountability Report F E D E R A L H O USING FINANCE AG ENCY COMBINED STATEMENTS OF BUDGETARY RESOURCES FOR THE YEARS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands) 2012 2011 Budgetary Resources: Unobligated Balance Brought Forward, October 1 $ 27,672 $ 22,743 Recoveries of Prior Year Unpaid Obligations 11,018 1,033 Unobligated Balance From Prior Year Budget Authority, Net 38,690 23,776 Appropriations 224,352 200,689 Spending Authority From Offsetting Collections 41,593 29,103 Total Budgetary Resources $ 304,635 $ 253,568 Status of Budgetary Resources: Obligations Incurred - Note 11 $ 259,100 $ 225,896 Unobligated Balance, End of Year: Exempt from Apportionment 45,535 27,672 Total Unobligated Balance, End of Year 45,535 27,672 Total Budgetary Resources $ 304,635 $ 253,568 Change in Obligated Balance: Unpaid Obligations, Brought Forward, October 1 $ 67,053 $ 29,135 FINANCIAL SECTION Uncollected Customer Payments From Federal Sources, Brought Forward, October 1 (28) – Obligated Balance, Start of Year 67,025 29,135 Obligations Incurred 259,100 225,896 Outlays (Gross) (262,252) (186,945) Change in Uncollected Customer Payments From Federal Sources 28 (28) Recoveries of Prior Year Unpaid Obligations (11,018) (1,033) Obligated Balance, End of Year Unpaid Obligations, End of Year (Gross) 52,883 67,053 Uncollected Customer Payments From Federal Sources, End of Year – (28) Obligated Balance, End of Year, Net $ 52,883 $ 67,025 Budget Authority and Outlays, Net: Budget Authority (Gross) $ 265,945 $ 229,792 Actual Offsetting Collections (41,621) (29,075) Change in Uncollected Customer Payments From Federal Sources 28 (28) Budget Authority, Net $ 224,352 $ 200,689 Outlays (Gross) $ 262,252 $ 186,945 Actual Offsetting Collections (41,621) (29,075) Outlays, Net 220,631 157,870 Distributed Offsetting Receipts (224,353) (200,689) Agency Outlays, Net $ (3,722) $ (42,819) The accompanying notes are an integral part of these financial statements. Building an Infrastructure for the Secondary Mortgage Market 85 F E D E R A L H O USING FINANCE AG ENCY Notes to the Financial Statements FOR THE YEARS ENDED SEPTEMBER 30, 2012 AND 2011 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity The Federal Housing Finance Agency (FHFA) was established on July 30, 2008, when the President signed into law the Housing and Economic Recovery Act of 2008 (HERA). FHFA is an independent agency in the Executive branch empowered with supervisory and regulatory oversight of the twelve Federal Home Loan Banks (FHLBanks), Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and the Office of Finance, all of which are referred to as Regulated Entities. FHFA is responsible for ensuring that each Regulated Entity operates in a safe and sound manner, including maintenance of adequate capital and internal control, and carries out their housing and community development finance missions. HERA provided for a FHFA Office of the Inspector General (FHFA-OIG), which has maintained its own Agency Location Code and set of books since April, 2011. The Inspector General Act of 1978, as amended, sets forth the functions and authorities of the FHFA-OIG. The reporting entity for purposes of financial statements includes FHFA and FHFA-OIG. Under the authority of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by HERA, FHFA placed Fannie Mae and Freddie Mac under conservatorship on September 6, 2008, to stabilize the two entities with the objective of maintaining normal business operations and restoring safety and soundness. FHFA, as Conservator, assumed the power of stockholders, boards, and management. FHFA delegated to Fannie Mae and Freddie Mac certain business and operational authority. FHFA personnel monitor the operations of the enterprises. In September 2008, after Fannie Mae and Freddie Mac were placed in conservatorship under the FHFA, the Office of Management and Budget (OMB) determined that the assets, liabilities and activities of the companies would not be included in the financial statements of the federal government. For fiscal year 2008, OMB and the Department of the Treasury (Treasury) concluded that Fannie Mae and Freddie Mac did not meet the conclusive or indicative criteria for a federal entity contained in OMB Circular A-136, Financial Reporting Requirements, and Statement of Federal Financial Accounting Concepts No. 2, Entity and Display, because they are not listed in the section of the federal government’s budget entitled “Federal Programs by Agency and Account,” and because the nature of FHFA’s conservatorships over Fannie Mae and Freddie Mac and the federal government’s ownership and control of the entities is considered to be temporary. Treasury reaffirmed this position for fiscal year 2009, with which FHFA concurs. OMB continued to hold this view in the President’s fiscal year 2010, 2011, 2012 and 2013 budget submissions to Congress. Consequently, the assets, liabilities, and activities of Fannie Mae and Freddie Mac have not been consolidated into FHFA’s financial statements. However, Treasury records the value of the federal government’s investments in Fannie Mae and Freddie Mac in its financial statements as a General Fund asset. Both Fannie Mae and Freddie Mac, as represented by FHFA as their Conservator, entered into separate agreements with Treasury known as the Senior Preferred Stock Purchase Agreements (Agreements) on September 7, 2008. These two Agreements are identical and have since been amended on September 26, 2008, May 6, 2009, December 24, 2009, and August 17, 2012. The Agreements commit Treasury to provide funding for each Enterprise up to the greater of: (1) $200 billion; or (2) $200 billion plus the cumulative total of draws for each calendar quarter in 2010, 2011 and 2012 minus any amount by which the assets of the Enterprise exceed its liabilities on December 31, 2012. This funding is to ensure that each Enterprise maintains a non-negative Net Worth, thereby avoiding a statutory requirement that 86 Federal Housing Finance Agency | 2012 Performance and Accountability Report an Enterprise be put in receivership following an extended period of negative Net Worth. Under the Agreements, each Enterprise submits a request for any needed draw amount once their financials (to be published in their 10-K or 10-Q) are finalized. The Enterprise also submits a statement certifying compliance with Agreement covenants, which include limits on portfolio size and indebtedness. FHFA, in its role as Conservator, reviews any request for a draw and certifies that the request is available for funding under the Agreement. FHFA then sends a letter to Treasury requesting the draw amount prior to the end of the current quarter. The August 17, 2012 amendment eliminates the circularity of Treasury funding dividends paid to Treasury. Beginning on January 1, 2013, all future net income/profits above an established threshold will be distributed to Treasury as dividends. The Agreements require each Enterprise to obtain Treasury approval for the disposition of assets, except under certain circumstances. FHFA as Conservator reviews these requests. Draws by Fannie Mae and Freddie Mac on their Agreements with Treasury are summarized below (dollars in billions). These draws are reported in Treasury’s financial statements. ENTERPRISE DRAWS ON TREASURY AGREEMENTS Quarter Fannie Mae Freddie Mac September 30, 2008 $ – $ 13.8 December 31, 2008 15.2 30.8 March 31, 2009 19.0 6.1 June 30, 2009 10.7 – September 30, 2009 15.0 – December 31, 2009 15.3 – March 31, 2010 8.4 10.6 June 30, 2010 1.5 1.8 FINANCIAL SECTION September 30, 2010 2.5 0.1 December 31, 2010 2.6 0.5 March 31, 2011 8.5 – June 30, 2011 5.1 1.5 September 30, 2011 7.8 6.0 December 31, 2011 4.6 0.1 March 31, 2012 – – June 30, 2012 – – Cumulative Draws $ 116.2 $ 71.3 B. Basis of Presentation FHFA’s principal statements were prepared from its official financial records and general ledger in conformity with accounting principles generally accepted in the United States and follow the presentation guidance established by OMB Circular No. 136 “Financial Reporting Requirements,” as amended. The statements are a requirement of the Government Management Reform Act of 1994, the Accountability of Tax Dollars Act of 2002, and HERA. These financial statements are in addition to the financial reports prepared by FHFA, pursuant to OMB directives, which are used to monitor and control budgetary resources. As required by HERA, the financial statements of FHFA are audited by the U.S. Government Accountability Office (GAO). The financial statements include the activities and transactions of the FHFA-OIG. The amounts reported in the financial statements are consolidated totals net of intra-entity transactions, except for the Statement of Budgetary Resources (SBR), which is presented on a combined basis. The financial statements have been prepared to report the financial position, net cost of operations, changes in net position, and the status and availability of budgetary resources of FHFA. Unless specified otherwise, all amounts are presented in thousands. Building an Infrastructure for the Secondary Mortgage Market 87 C. Basis of Accounting Transactions are recorded on both an accrual accounting basis and a budgetary basis. Under the accrual basis of accounting, revenues are recognized when earned, and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash. Budgetary accounting facilitates compliance with legal requirements and controls over the use of funds. FHFA’s financial statements conform to accounting principles generally accepted in the United States for federal entities as prescribed by the standards set forth by the Federal Accounting Standards Advisory Board (FASAB). FASAB is recognized by the American Institute of Certified Public Accountants as the body designated to establish generally accepted accounting principles for federal entities. Certain assets, liabilities, earned revenues, and costs have been classified as intragovernmental throughout the financial statements and notes. Intragovernmental is defined as transactions made between two reporting entities within the federal government. D. Revenues, Imputed & Other Financing Sources Operating revenues of FHFA are obtained through assessments of the Regulated Entities. The agency’s acting Director approved the annual budget in August 2012 and 2011. By law, FHFA is required to charge semi-annual assessments to the entities. Assessments collected shall not exceed the amount sufficient to provide for the reasonable costs associated with overseeing the entities, plus amounts determined by the acting Director to be necessary for maintaining a working capital fund. FHFA develops its annual budget using a ‘bottom up’ approach. Each office within the agency is asked to bifurcate their budget request between the amount of resources needed for the regulation of Fannie Mae and Freddie Mac and the resources needed for the regulation of the twelve FHLBanks. The office requests are then aggregated (with overhead costs distributed proportionately) to determine the total expected costs associated with regulating Fannie Mae and Freddie Mac and the total expected costs associated with regulating the FHLBanks. These two totals, along with any expected collection for the working capital fund, comprise the fiscal year budget for the agency. Additionally, FHFA levied a special assessment for conservatorship activities on Fannie Mae and Freddie Mac during fiscal years 2012 and 2011. Fannie Mae and Freddie Mac pay a pro rata share of their portion of the total assessment based on the combined assets and off-balance sheet obligations of each enterprise. Each FHLBank’s share of their portion of the total assessment is based on the dollar value of its capital stock relative to the combined dollar value of all FHLBanks’ capital stock. Assessment letters are sent to the entities 30 days prior to the assessment due dates of October 1st and April 1st. Assessments received prior to due dates are available for investment but are unavailable for obligation. These assessments are recorded as deferred revenue. Federal government entities often receive goods and services from other federal government entities without reimbursing the providing entity for all the related costs. In addition, federal government entities also incur costs that are paid in total or in part by other entities. An imputed financing source is recognized by the receiving entity for costs that are paid by other entities. FHFA recognized imputed costs and financing sources in fiscal years 2012 and 2011 as prescribed by accounting standards. FHFA recognizes as an imputed financing source the amount of pension and post-retirement benefit expenses for current employees accrued on FHFA’s behalf by the Office of Personnel Management (OPM). E. Use of Estimates The preparation of the accompanying financial statements in accordance with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. 88 Federal Housing Finance Agency | 2012 Performance and Accountability Report F. Earmarked Funds FASAB’s Statement of Federal Financial Accounting Standards (SFFAS) No. 27 “Identifying and Reporting Funds from Dedicated Collections” established certain disclosure requirements for funds defined as “funds from dedicated collections.” SFFAS No. 27 states that “funds from dedicated collections are financed by specifically identified revenues, provided to the government by non-federal sources, often supplemented by other financing sources, which remain available over time. These specifically identified revenues and other financing sources are required by statute to be used for designated activities, benefits or purposes and must be accounted for separately from the Government’s general revenues.” The standard also presents three required criteria for a fund from dedicated collections. Based on the standard’s criteria, FHFA determined that it has no funds from dedicated collections. G. Fund Balance with Treasury The U.S. Treasury (Treasury) processes cash receipts and disbursements on FHFA’s behalf. Funds held at the Treasury are available to pay agency liabilities and finance authorized purchase obligations. FHFA does not maintain cash in commercial bank accounts or foreign currency balances. During the year, increases to FHFA’s Fund Balance with Treasury are comprised of semi-annual assessments, investment interest, collections on reimbursable agreements, civil penalty monies, and Freedom of Information Act (FOIA) request fees. FHFA is not authorized to retain civil penalty monies or FOIA fees, and as such, records these as custodial liabilities (See Note 15. Incidental Custodial Collections) until transferred to the Treasury General Fund. HERA provides authority for FHFA to maintain a working capital fund. The working capital fund is defined in FHFA’s Assessment Regulation as an account for amounts collected from the Regulated Entities to establish an operating reserve that is intended to provide for the payment of large or multiyear capital and operating expenditures, as well as unanticipated expenses. The balance in the working capital fund is evaluated annually. FINANCIAL SECTION H. Investments FHFA has the authority to invest in U.S. Treasury securities with maturities suitable to FHFA’s needs. FHFA invests solely in U.S. Treasury securities, which are normally held to maturity and carried at amortized cost. Investments are adjusted for unamortized premiums or discounts. Premiums and discounts are amortized and interest is accrued using the level- yield, scientific method of effective interest amortization over the term of the respective issues. I. Accounts Receivable Accounts receivable consists of amounts owed to FHFA by other federal agencies and the public. Amounts due from federal agencies are considered fully collectible and consist of interagency agreements. Accounts receivable from the public include reimbursements from employees, civil penalty assessments, and FOIA request fees. An allowance for uncollectible accounts receivable from the public is established when either (1) management determines that collection is unlikely to occur after a review of outstanding accounts and the failure of all collection efforts, or (2) an account for which no allowance has been established is submitted to the Department of the Treasury for collection, which takes place when it becomes 180 days delinquent. Based on historical experience, all receivables are collectible and no allowance is provided. Building an Infrastructure for the Secondary Mortgage Market 89 J. Property, Equipment, and Software, Net Property, Equipment and Software is recorded at historical cost. It consists of tangible assets and software. Based on a review of capitalization policy thresholds of 22 other agencies, FHFA implemented new capitalization thresholds beginning in June 2011. The new capitalization thresholds are being applied prospectively. Under FHFA’s Oversight Procedures for the Identification of Capitalized Assets, revised June 2011, the following are the capitalization thresholds: Description Threshold Furniture and Equipment $ 50,000 Leasehold Improvements $ 250,000 Software: Internally Developed $ 500,000 Software: Off-the-Shelf $ 200,000 Capitalized Leases $ 250,000 Bulk Purchases $ 250,000 Prior to the revision in June 2011, the capitalization thresholds were as follows: Description Threshold Furniture and Equipment $ 25,000 Leasehold Improvements $ 25,000 Internal Use Software $ 25,000 Capitalized Leases $ 25,000 Bulk Purchases $ 250,000 Depreciation is calculated using the straight-line method over the estimated useful life of the asset. Applicable standard governmental guidelines regulate the disposal and convertibility of agency property and equipment. The useful life classifications for capitalized assets are as follows: Description Useful Life (Years) Furniture, Fixtures, and Equipment 3 Internal Use Software 3 A leasehold improvement’s useful life is equal to the remaining lease term or the estimated useful life of the improvement, whichever is shorter. FHFA has no real property holdings or stewardship or heritage assets. Other property items and normal repairs and maintenance are charged to expense as incurred. K. Advances and Prepaid Charges Advance payments are generally prohibited by law. There are some exceptions, such as reimbursable agreements, subscriptions, and payments to contractors and employees. Payments made in advance of the receipt of goods and services are recorded as advances or prepaid charges at the time of prepayment and recognized as expenses when the related goods and services are received. 90 Federal Housing Finance Agency | 2012 Performance and Accountability Report L. Liabilities Liabilities represent the amount of funds that are obligations to be paid by FHFA as the result of a transaction or event that has already occurred. FHFA reports its liabilities under two categories, Intragovernmental and With the Public. Intragovernmental liabilities represent funds owed to another government agency. Liabilities With the Public represent funds owed to any entity or person that is not a federal agency, including private sector firms and federal employees. Each of these categories may include liabilities that are covered by budgetary resources and liabilities not covered by budgetary resources. Liabilities covered by budgetary resources are liabilities funded by a current appropriation or other funding source. These consist of accounts payable and accrued payroll and benefits. Accounts payable represent amounts owed to another entity for goods ordered and received and for services rendered except for employees. Accrued payroll and benefits represent payroll costs earned by employees during the fiscal year which are not paid until the next fiscal year. The Department of Labor (DOL) is the central paying agent for all workman compensation claims filed under the Federal Employees Compensation Act (FECA). Accrued FECA represents the amount FHFA is to reimburse DOL for claims paid to FHFA employees. Liabilities not covered by budgetary resources are liabilities that are not funded by any current appropriation or other funding source. These liabilities consist of accrued annual leave, deferred rent, deferred liability and the amounts due to Treasury for collection and accounts receivable of civil penalties and FOIA request fees. Annual leave is earned throughout the fiscal year and is paid when leave is taken by the employee; the accrued liability for annual leave represents the balance earned but not yet taken. Deferred rent is the difference at year-end between the sum of monthly cash disbursements paid to-date for rent and the sum of the average monthly rent calculated based on the term of the lease. This determination and recording of deferred rent is applicable to the lease agreements on the properties at 400 7th Street Constitution Center and 5080 Spectrum Drive (See Note 8. Leases). FINANCIAL SECTION M. Employee Leave and Benefits All full-time FHFA employees are entitled to accrue sick leave at a rate of four hours per pay period. Annual leave is accrued based on years of creditable federal service and military service, with the following exceptions: Former Office of Federal Housing Enterprise Oversight (OFHEO) employees hired between April 25, 2005 and July 30, 2008 accrue annual leave based on years of creditable federal and military service as well as years of relevant private sector experience (HERA abolished OFHEO when FHFA was established in July 2008). Additionally, FHFA employees hired into mission critical positions, EL-13 and above, after May 2011 accrue annual leave under this same formula. For most employees, annual leave may be accrued up to 240 hours each year. The FHFA executive employees equivalent to the Senior Executive Service (SES) employees may accrue annual leave consistent with the rules for SES level employees. Accrued annual leave is treated as an unfunded expense with an offsetting liability when earned. The accrued liability is reduced when the annual leave is taken. Any unused annual leave balance is paid to the employee upon leaving federal service, based on the employee’s earnings per hour. There is no maximum limit on the amount of sick leave that may be accrued. Upon separation, any unused sick leave of Civil Service Retirement System (CSRS) plan employees is creditable as additional time in service for the purpose of calculating an employee’s retirement annuity. Credit is given for sick leave balances in the computation of annuities upon the retirement of Federal Employees Retirement System (FERS)-covered employees effective at 50% beginning in fiscal year 2010 and 100% beginning in fiscal year 2014. Health Benefits and Life Insurance: FHFA, through programs established for all agencies by the federal government, offers its employees health and life insurance coverage through the Federal Employees Health Benefits Program and Federal Employees Group Life Insurance Program. The cost of each is shared by FHFA and its employees. In addition, all employees have 1.45% of gross earnings withheld to pay for future Medicare coverage. Building an Infrastructure for the Secondary Mortgage Market 91 N. Retirement Plans FHFA employees participate in the retirement plans offered by OPM, which consist of CSRS, CSRS – Offset, or FERS (FERS is provided under calculations for both regular employees as well as law enforcement employees in the Office of the Inspector General). The employees who participate in CSRS are beneficiaries of FHFA’s contribution, equal to 7% of pay, distributed to the employee’s annuity account in the Civil Service Retirement and Disability Fund. Prior to December 31, 1983, all employees were covered under the CSRS program. From January 1, 1984 through December 31, 1986, employees had the option of remaining under CSRS or joining FERS. As of January 1, 1987, hires to FHFA without previous Federal service are automatically covered under FERS. Both CSRS and FERS employees may participate in the federal Thrift Savings Plan (TSP). FERS employees receive an automatic Agency contribution equal to 1% of pay. Effective July 31, 2010, FERS employees are automatically enrolled in TSP equal to 3% of pay unless they make an election to stop or change the contribution. FHFA matches any FERS employee contribution up to an additional 4% of pay. For FERS participants, FHFA also contributes the employer’s matching share of Social Security. FERS employees and CSRS – Offset employees are eligible to participate in the Social Security program after retirement. In these instances, FHFA remits the employer’s share of the required contribution, which is 11.9% for FERS and 7% for CSRS. FHFA expenses its contributions to the retirement plans of covered employees as the expenses are incurred. FHFA reports imputed (unfunded) costs with respect to retirement plans, health benefits and life insurance pursuant to guidance received from OPM. These costs are paid by OPM and not by FHFA. Disclosure is intended to provide information regarding the full cost of FHFA’s program in conformity with generally accepted accounting principles. FHFA does not report on its financial statements information pertaining to the retirement plans covering its employees. Reporting amounts such as plan assets, accumulated plan benefits, and related unfunded liabilities, if any, is the responsibility of OPM as the administrator. In addition to the TSP, FHFA offers a supplemental 401(K) plan that is administered by T. Rowe Price. All CSRS employees are eligible to contribute to the 401(K). Only FERS employees contributing at least 3% to the TSP are eligible to participate in the 401(K). All eligible employees that participate may contribute up to 10% of their bi-weekly salary on a pre-tax basis while FHFA will match contributions up to 3% of the employee’s salary. Qualified employees may participate in the TSP and/or FHFA’s 401(K) Savings Plan, up to the Internal Revenue Code limitations established for salary deferral and annual additions. O. Contingencies FHFA recognizes contingent liabilities, in the accompanying balance sheet and statement of net cost, when they are both probable and can be reasonably estimated. FHFA discloses contingent liabilities in the notes to the financial statements when a loss from the outcome of future events is more than remote but less than probable or when the liability is probable but cannot be reasonably estimated. 92 Federal Housing Finance Agency | 2012 Performance and Accountability Report NOTE 2. FUND BALANCE WITH TREASURY Fund Balance with Treasury consists of an Operating Fund and a Working Capital Fund. The funds in the Working Capital Fund were fully invested during fiscal years 2012 and 2011. Fund Balance with Treasury (FBWT) account balances as of September 30, 2012 and 2011, were as follows (dollars in thousands): 2012 2011 Fund Balances: Operating Fund $ (20,998) $ (16,445) Total $ (20,998) $ (16,445) Status of Fund Balance with Treasury: Unobligated Balance Available $ 45,535 $ 27,672 Obligated Balance Not Yet Disbursed 52,883 67,025 Investments (77,420) (78,252) Total $ 20,998 $ 16,445 (See Note 12. Legal Arrangements Affecting Use of Unobligated Balances) NOTE 3. INVESTMENTS FINANCIAL SECTION Investments as of September 30, 2012 consist of the following (dollars in thousands): Amortized Market Value Cost (Premium) Discount Interest Receivable Investments Net Disclosure Intragovernmental Securities: Non-Marketable Market-Based $ 77,420 $ – $ – $ 77,420 $ 77,420 Investments as of September 30, 2011 consist of the following (dollars in thousands): Amortized Market Value Cost (Premium) Discount Interest Receivable Investments Net Disclosure Intragovernmental Securities: Non-Marketable Market-Based $ 78,252 $ – $ – $ 78,252 $ 78,252 Non-marketable, market-based securities are Treasury notes and bills issued to governmental accounts that are not traded on any securities exchange, but mirror the prices of marketable securities with similar terms. FHFA is currently investing in one-day certificates issued by the U.S. Treasury. There were no amortized premiums/discounts or interest receivable on investments as of September 30, 2012 or 2011. Interest earned on investments was $57,000 and $66,000 for fiscal years 2012 and 2011, respectively. Building an Infrastructure for the Secondary Mortgage Market 93 NOTE 4. ACCOUNTS RECEIVABLE Accounts Receivable balances as of September 30, 2012 and 2011, were as follows (dollars in thousands): 2012 2011 Intragovernmental Accounts Receivable $ – $ 19 With the Public Accounts Receivable 13 5 Total Accounts Receivable $ 13 $ 24 There are no amounts that are deemed uncollectible as of September 30, 2012 and 2011. NOTE 5. PROPERTY, EQUIPMENT, AND SOFTWARE, NET Schedule of Property, Equipment, and Software as of September 30, 2012 (dollars in thousands): Accumulated Amortization/ Major Class Acquisition Cost Depreciation Net Book Value Equipment 24,630 10,980 $ 13,650 Leasehold Improvements 31,708 1,515 30,193 Capital Lease – – – Internal-Use Software 4,160 3,542 618 Construction-in-Progress 1,067 – 1,067 Total $ 61,565 $ 16,037 $ 45,528 Schedule of Property, Equipment, and Software as of September 30, 2011 (dollars in thousands): Accumulated Amortization/ Major Class Acquisition Cost Depreciation Net Book Value Equipment 13,958 10,874 $ 3,084 Leasehold Improvements 6,974 6,902 72 Capital Lease 22 22 – Internal-Use Software 30,316 29,286 1,030 Construction-in-Progress 1,383 – 1,383 Total $ 52,653 $ 47,084 $ 5,569 The leasehold improvement acquisition cost for September 30, 2012 includes a Constitution Center tenant allowance in the amount of $21 million. 94 Federal Housing Finance Agency | 2012 Performance and Accountability Report NOTE 6. LIABILITIES COVERED AND NOT COVERED BY BUDGETARY RESOURCES Liabilities Covered and Not Covered By Budgetary Resources as of September 30, 2012 consist of the following (dollars in thousands): Covered Not-Covered Total Intragovernmental Liabilities Accounts Payable $ 766 $ – $ 766 Other Intragovernmental Liabilities 2,727 – 2,727 Total Intragovernmental Liabilities $ 3,493 $ – $ 3,493 Accounts Payable $ 9,728 $ – $ 9,728 Other Liabilities 6,503 34,402 40,905 Total Public Liabilities $ 16,231 $ 34,402 $ 50,633 Total Liabilities $ 19,724 $ 34,402 $ 54,126 Liabilities Covered and Not Covered By Budgetary Resources as of September 30, 2011 consist of the following (dollars in thousands): Covered Not-Covered Total Intragovernmental Liabilities Accounts Payable $ 1,221 $ – $ 1,221 FINANCIAL SECTION Other Intragovernmental Liabilities 1,216 3 1,219 Total Intragovernmental Liabilities $ 2,437 $ 3 $ 2,440 Accounts Payable $ 6,601 $ – $ 6,601 Other Liabilities 5,809 9,500 15,309 Total Public Liabilities $ 12,410 $ 9,500 $ 21,910 Total Liabilities $ 14,847 $ 9,503 $ 24,350 Building an Infrastructure for the Secondary Mortgage Market 95 NOTE 7. OTHER LIABILITIES Current liabilities are amounts owed by a federal entity for which the financial statements are prepared, and which need to be paid within the fiscal year following the reporting date. The other liabilities for FHFA are comprised of FECA liability, unemployment insurance liability, payroll accruals, payroll taxes payable, deferred liabilities and unfunded leave. Payroll accruals represent payroll expenses that were incurred prior to year-end but were not paid. Deferred liabilities represent recording of the deferred rent that is associated with the leased premises at 400 7th Street SW – Constitution Center and at the leased premises at 5080 Spectrum Drive. The deferred liabilities also include the Constitution Center tenant allowance. Other Liabilities as of September 30, 2012 consist of the following (dollars in thousands): Non Current Current Total Intragovernmental Liabilities Funded FECA Liability $ – $ 11 $ 11 Accrued Funded Payroll – 36 36 Payroll Taxes Payable – 1,500 1,500 Advances and Prepayments – 1,180 1,180 Total Intragovernmental Other Liabilities $ – $ 2,727 $ 2,727 With the Public Payroll Taxes Payable $ – $ 713 $ 713 Accrued Funded Payroll – 5,790 5,790 Unfunded Leave 10,485 – 10,485 Deferred Lease Liabilities 22,352 1,565 23,917 Total Public Liabilities $ 32,837 $ 8,068 $ 40,905 Other Liabilities as of September 30, 2011 consist of the following (dollars in thousands): Non Current Current Total Intragovernmental Liabilities Funded and Unfunded FECA Liability $ – $ 3 $ 3 Unemployment Insurance Liability – 1 1 Payroll Taxes Payable – 1,215 1,215 Total Intragovernmental Other Liabilities $ – $ 1,219 $ 1,219 With the Public Payroll Taxes Payable $ – $ 624 $ 624 Accrued Funded Payroll – 5,185 5,185 Unfunded Leave – 9,500 9,500 Total Public Liabilities $ – $ 15,309 $ 15,309 96 Federal Housing Finance Agency | 2012 Performance and Accountability Report NOTE 8. LEASES Operating Leases Terminated During Fiscal Year 2012 1700 G Street NW FHFA had an occupancy lease with the Office of the Comptroller of the Currency (OCC) at 1700 G Street NW, Washington, DC that covered office space and building services, including utilities, security guards, janitorial services, mail delivery, use of the loading dock, garage parking and building operation and maintenance. The initial term of the lease was for five years beginning in 1993, with the option to renew for three 5-year terms with OFHEO. This lease was transferred to FHFA with its creation. FHFA exercised the third of the three option terms. FHFA terminated the lease effective January 31, 2012. 1750 Pennsylvania Avenue NW FHFA leased office space in Washington, DC at 1750 Pennsylvania Avenue NW. The lease term expired on January 31, 2012. 1625 Eye Street NW – FHFA-OIG Space FHFA-OIG leased office space at 1625 Eye Street NW. The FHFA-OIG lease terms at 1625 Eye Street NW expired one year after the occupation date, January 24, 2011, with optional renewal periods for up to two years. FHFA-OIG terminated the lease on January 24, 2012. Current Operating Leases 1625 Eye Street NW – FHFA Space FINANCIAL SECTION FHFA leases office space in Washington, DC at 1625 Eye Street NW. The lease terms of 1625 Eye Street expire on June 30, 2015. The lease is non-cancellable. FHFA entered into an Interagency Agreement (IAA) with the Consumer Financial Protection Bureau (CFPB) on March 29, 2012 for the use of certain already-acquired but unused services, supplies and space available on a short-term basis. The IAA includes, but is not limited to, furniture, equipment, IT network infrastructure, and space at 1625 Eye Street, NW. The CFPB took occupancy on April 1, 2012. The IAA expires on June 30, 2015 in conjunction with FHFA’s lease expiration. The receipts from CFPB are less than the lease expenditures, thus requiring FHFA to record a loss. Therefore, the loss recognized as of September 30, 2012 is $679 thousand. FHFA will not recognize a loss contingency for the remaining life of the IAA since the agreement is with a federal agency and is deemed collectable. 400 7th Street SW – Constitution Center FHFA entered into a lease for office space at 400 7th Street SW, Constitution Center, on January 31, 2011. FHFA took occupancy in January 2012. FHFA does not have the right to terminate the lease for the convenience of the government. FHFA may only exercise a one-time early termination at the end of the 10th year, contingent upon FHFA having less than 400 employees in the Washington DC area as of the date that is 20 months prior to the early termination date and representing that it reasonably believes it will have less than 400 employees in the DC area as of the termination date. The lease terms of 400 7th Street SW expire on January 31, 2027. 5080 Spectrum Drive FHFA entered into a lease for office space at 5080 Spectrum Drive in Addison, Texas on April 23, 2012. FHFA took occupancy on August 16, 2012. FHFA does not have the right to terminate the lease for the convenience of the government. FHFA may only exercise a one-time early termination at the end of the 39th month following the Building an Infrastructure for the Secondary Mortgage Market 97 commencement date of the lease. The written termination notice must be provided to the landlord nine months prior to the termination date. The lease terms of 5080 Spectrum Drive expire on July 31, 2017. The minimum future payments for the 400 7th Street SW, 1625 Eye Street NW, and 5080 Spectrum Drive operating leases are as follows (dollars in thousands): Fiscal Year Amount 2013 $ 19,544 2014 19,951 2015 19,362 2016 16,703 2017 16,982 Thereafter 77,557 Total Future Payments $ 170,099 The minimum future receipts for the IAA with CFPB for the 1625 Eye Street NW space are as follows (dollars in thousands): Fiscal Year Amount 2013 $ 2,877 2014 2,992 2015 2,319 2016 – 2017 – Thereafter – Total Future Operating Lease Receivables $ 8,188 Additionally, FHFA leases contingency space at an undisclosed location. The lease expires on March 31, 2013. Total rental payments for the fiscal years ended September 30, 2012 and 2011 were $15.6 million and $6.1 million, respectively. 98 Federal Housing Finance Agency | 2012 Performance and Accountability Report NOTE 9. COMMITMENTS AND CONTINGENCIES FHFA did not have any material commitments or contingencies that met disclosure requirements as of September 30, 2012 and 2011. NOTE 10. PROGRAM COSTS Pursuant to HERA, FHFA was established to supervise and regulate the fourteen Regulated Entities. The Regulated Entities include Freddie Mac, Fannie Mae and the twelve FHLBanks. FHFA tracks resource allocations and program costs to the strategic goals (responsibility segments) developed for FHFA’s strategic plan. Strategic Goals, 1–Safety and Soundness; 2–Affordable Housing; and 3–Conservatorship, guide program offices to carry out FHFA’s vision and mission. FHFA has a Resource Management Strategy, which is distributed proportionately to Strategic Goals 1–3 based on the percentage of direct costs of each goal to the total direct costs for FHFA. FHFA-OIG allocated their costs to FHFA’s Resource Management Strategy. FHFA’s revenue was provided by the Regulated Entities through assessments. FHFA-OIG received their funding through a $38.8 million transfer from FHFA in fiscal year 2012 and a $29 million transfer in fiscal year 2011. FHFA-OIG’s total expenses for fiscal years 2012 and 2011 were $36.2 million and $17.3 million, respectively. Program costs are broken out into two categories—“Intragovernmental” and “With the Public”. Intragovernmental costs are costs FHFA incurs through contracting with other federal agencies for goods and/or services, such as rent paid to OCC, payroll processing services received from the Department of Agriculture and imputed financing costs for post- retirement benefits with OPM. With the Public costs are costs FHFA incurs through contracting with the private sector for goods or services, payments for employee salaries, depreciation, annual leave and deferred rent expenses. Revenue FINANCIAL SECTION is comprised of assessments, investment interest, and miscellaneous revenue. Intragovernmental expenses relate to the source of goods and services purchased by the agency and not to the classification of related revenue. Such costs and revenue are summarized as follows (dollars in thousands): Building an Infrastructure for the Secondary Mortgage Market 99 2012 2011 Safety and Soundness Intragovernmental Costs $ 31,042 $ 27,364 Public Costs 122,579 98,597 Total Program Costs 153,621 125,961 Less: Intragovernmental Earned Revenue 904 108 Less: Public Earned Revenue 123,827 135,189 Net Safety and Soundness Program (Income)/Costs 28,890 (9,336) Affordable Housing Intragovernmental Costs 6,059 4,216 Public Costs 18,860 13,024 Total Program Costs 24,919 17,240 Less: Intragovernmental Earned Revenue 468 30 Less: Public Earned Revenue 64,139 38,024 Net Affordable Housing Program (Income)/Costs (39,688) (20,814) Conservatorship Intragovernmental Costs 267 2,683 Public Costs 38,694 21,517 Total Program Costs 38,961 24,200 Less: Intragovernmental Earned Revenue 265 22 Less: Public Earned Revenue 36,330 27,410 Net Conservatorship Program (Income)/Costs 2,366 (3,232) Total Intragovernmental costs 37,368 34,263 Total Public costs 180,133 133,138 Total Costs 217,501 167,401 Less: Total Intragovernmental Earned Revenue 1,637 160 Less: Total Public Earned Revenue 224,296 200,623 Total Net (Income)/Cost $ (8,432) $ (33,382) 100 Federal Housing Finance Agency | 2012 Performance and Accountability Report NOTE 11. APPORTIONMENT CATEGORIES OF OBLIGATIONS INCURRED All obligations incurred are characterized as Category C, Exempt from apportionment (i.e. not apportioned), on the Statement of Budgetary Resources. Obligations incurred and reported in the Statement of Budgetary Resources in fiscal years 2012 and 2011 consisted of the following (dollars in thousands): 2012 2011 Direct Obligations, Category C $ 256,340 $ 225,802 Reimbursable Obligations, Category C 2,760 94 Total Obligations Incurred $ 259,100 $ 225,896 NOTE 12. LEGAL ARRANGEMENTS AFFECTING USE OF UNOBLIGATED BALANCES HERA requires that any balance that remains unobligated at the end of the fiscal year, except for amounts assessed for contribution to FHFA’s working capital fund, must be credited against the next year’s assessment to the Regulated Entities. As of September 30, 2012 and 2011, the unobligated balance was $45.5 million and $27.7 million. The portion of the fiscal year 2012 unobligated available balance that will be credited against the Regulated Entities’ April 2013 assessments is $19.9 million with the remaining $10 million retained in the working capital fund and $15.6 million retained for conservatorship activities. The portion of the fiscal year 2011 unobligated balance that was credited against the Regulated Entities’ April 2012 assessment was $9.5 million with the remaining $9 million retained in the working capital fund and $9.2 million retained for conservatorship related activities. (See Note 2. Fund Balance With Treasury) FINANCIAL SECTION NOTE 13. BUDGETARY RESOURCE COMPARISONS TO THE BUDGET OF THE UNITED STATES GOVERNMENT Statement of Federal Financial Accounting Standards No. 7, “Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting”, calls for explanations of material differences between amounts reported in the Statement of Budgetary Resources and the actual balances published in the Budget of the United States Government (President’s Budget). The President’s Budget that will include fiscal year 2012 actual budgetary execution information has not yet been published. The President’s Budget is scheduled for publication in February 2014 and can be found at the OMB Web site: http://www.whitehouse.gov/omb/. The 2013 Budget of the United States Government, with the “Actual” column completed for 2011, has been reconciled to the Statement of Budgetary Resources and there were no material differences. NOTE 14. UNDELIVERED ORDERS AT THE END OF THE PERIOD For the fiscal years ended September 30, 2012 and 2011, budgetary resources obligated for undelivered orders amounted to $35.2 million and $52.7 million, respectively. Building an Infrastructure for the Secondary Mortgage Market 101 NOTE 15. INCIDENTAL CUSTODIAL COLLECTIONS FHFA’s custodial collections primarily consist of Freedom of Information Act requests and civil penalties assessed. Custodial collections are reflected in Fund Balance with Treasury during the year. While these collections are considered custodial, they are neither primary to the mission of the agency nor material to the overall financial statements. FHFA also collects civil penalties assessed against the Regulated Entities. FHFA’s custodial collections are $6.7 thousand for the year ended September 30, 2012. Custodial collections totaled $3.4 thousand for the year ended September 30, 2011. There were no civil penalties assessed or collected in fiscal year 2011 or 2012. Custodial collections are transferred to the Treasury General Fund on September 30 and are not reflected in the financial statements of the Agency. 102 Federal Housing Finance Agency | 2012 Performance and Accountability Report NOTE 16. RECONCILIATION OF NET COST OF OPERATIONS TO BUDGET FHFA has reconciled its budgetary obligations and non-budgetary resources available to its net cost of operations (dollars in thousands). 2012 2011 Resources Used to Finance Activities: Budgetary Resources Obligated Obligations Incurred $ 259,100 $ 225,896 Spending Authority from Offsetting Collections and Recoveries (52,611) (30,136) Obligations Net of Offsetting Collections and Recoveries 206,489 195,760 Offsetting Receipts (224,353) (200,689) Net Obligations (17,863) (4,929) Other Resources Imputed Financing from Costs Absorbed by Others 5,810 5,193 Net Other Resources Used to Finance Activities 5,810 5,193 Total Resources Used to Finance Activities (12,053) 264 Resources Used to Finance Items Not Part of the of the Net Cost of Operations: Change in Budgetary Resources Obligated for Goods, Services and Benefits Ordered But Not Yet Provided 18,689 (32,083) FINANCIAL SECTION Resources That Fund Expenses Recognized in Prior Periods (10) (55) Resources That Finance the Acquisition of Assets (47,679) (5,226) Total Resources Used to Finance Items Not Part of the Net Cost of Operations (29,000) (37,364) Total Resources Used to Finance the Net Cost of Operations (41,053) (37,100) Components of the Net Cost of Operations That Will Not Require or Generate Resources in the Current Period: Components Requiring or Generating Resources in Future Periods Increase in Annual Leave Liability 986 1,662 Other 23,917 2 Total Components of Net Cost of Operations That Will Require or Generate Resources in Future Periods 24,903 1,664 Components Not Requiring or Generating Resources Depreciation and Amortization 6,907 2,164 Revaluation of Assets or Liabilities 963 – Other (152) (110) Total Components of Net Cost of Operations That Will Not Require or Generate Resources 7,718 2,054 Total Components of Net Cost of Operations That Will Not Require or Generate Resources in the Current Period 32,621 3,718 Net (Income from)/Cost of Operations $ (8,432) $ (33,382) Building an Infrastructure for the Secondary Mortgage Market 103 Other Accompanying Information | Performance Goals and Measures No Longer Reported | Inspector General’s FY 2013 Management and Performance Challenges | Summary of Financial Statement Audit and Management Assurances 2 0 1 2 F E D E R A L H O U S I N G F I N A N C E A G E N C Y P E R F O R M A N C E A N D A C C O U N TA B I L I T Y R E P O R T FHFA FY 2011 Performance Goals and Measures No Longer Reported PERFORMANCE MEASURES STRATEGIC GOAL 2: The housing GSEs support a stable, liquid, and efficient mortgage market including sustainable homeownership and affordable housing. MEASURE 2.2.3: Finalize the duty to serve regulation. Why Discontinued: Although the final rule continues to be under consideration, FHFA is reassessing the duty to serve requirements in light of changing economic conditions, and the financial condition of the Enterprises to determine the best manner in which to proceed. STRATEGIC GOAL 3: FHFA preserves and conserves the assets and property of the Enterprises, ensures focus on their housing mission, and facilitates their financial stability and emergence from conservatorship. MEASURE 3.3.1: Number of loan modifications and foreclosure alternatives completed by the Enterprises. Why Discontinued: This measure was not discontinued but refined; the measure now reads “Prevent current loans from going delinquent by helping borrowers to refinance.” MEASURE 3.3.2: Percentage of modified loans that are 60-plus days delinquent. Why Discontinued: This measure was not discontinued but refined; the measure now reads “Maintain the percentage of modified loans that are 60 plus days delinquent, nine months after modification, at or below 20 percent.” RESOURCE MANAGEMENT STRATEGY: FHFA has the personnel, resources, and infrastructure to manage effectively and efficiently to achieve its mission and goals. MEASURE 4.1.2: Percentage of FHFA supervisors who receive supervisory, management, or leadership training in compliance with 5 CFR, part 412, which requires agencies to train new supervisors within one year of appointment and retrain every three years. Why Discontinued: Progress in supervisory training as gauged by this measure did not offer fair illustration of the wide-ranging trainings FHFA managers are exposed to. MEASURE 4.2.1: Number of partnerships, alliances, and agreements FHFA established to increase diversity in its workforce. Why Discontinued: FHFA currently has two measures which successfully reflect the outlook in this discontinued indicator (The activities within 4.2.1 and 4.2.3 are represented in the two measures that were kept that speak to (i) outreach events and (ii) number of contracts awarded). MEASURE 4.2.3: Number and variation of targeted outreach events designed to provide information, education and capacity building assistance to potential minority and women owned businesses to increase procurement contracts awarded for goods, services, and technical assistance provided to FHFA. Why Discontinued: FHFA currently has two measures which successfully reflect the outlook in this discontinued indicator (The activities within 4.2.1 and 4.2.3 are represented in the two measures that were kept that speak to (i) outreach events and (ii) number of contracts awarded). MEASURE 4.3.2: Percentage of FHFA resources allocated directly to supervision of the housing GSEs – Strategic Goals 1 and 2. Why Discontinued: This indicator is not illustrative of current agency resource apportionments which now include management of the two OTHER ACCOMPANYING conservatorships. INFORMATION MEASURE 4.4.1: Ensure FHFA’s infrastructure systems are continuously available for use by FHFA staff. Why Discontinued: While systems availability is a priority for the agency and continues to be monitored internally, FHFA regards this measure as more of a process indicator that does not warrant external reporting. Building an Infrastructure for the Secondary Mortgage Market 105 Inspector General’s FY 2013 Management and Performance Challenges 106 Federal Housing Finance Agency | 2012 Performance and Accountability Report OTHER ACCOMPANYING INFORMATION Building an Infrastructure for the Secondary Mortgage Market 107 108 Federal Housing Finance Agency | 2012 Performance and Accountability Report OTHER ACCOMPANYING INFORMATION Building an Infrastructure for the Secondary Mortgage Market 109 110 Federal Housing Finance Agency | 2012 Performance and Accountability Report OTHER ACCOMPANYING INFORMATION Building an Infrastructure for the Secondary Mortgage Market 111 112 Federal Housing Finance Agency | 2012 Performance and Accountability Report OTHER ACCOMPANYING INFORMATION Building an Infrastructure for the Secondary Mortgage Market 113 114 Federal Housing Finance Agency | 2012 Performance and Accountability Report Summary of Financial Statements Audit and Management Assurances Table 1: SUMMARY OF FINANCIAL STATEMENTS AUDIT AUDIT OPINION UNQUALIFIED Restatement No Material Weaknesses Beginning Balance New Resolved Consolidated Ending Balance Total Material Weaknesses 0 0 0 0 0 Table 2: SUMMARY OF MANAGEMENT ASSURANCES EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING (Federal Management Financial Integrity Act Paragraph 2) Statement of Assurance Unqualified Beginning Material Weaknesses Balance New Resolved Consolidated Reassessed Ending Balance Total Material Weaknesses 0 0 0 0 0 0 EFFECTIVENESS OF INTERNAL CONTROL OVER OPERATIONS (Federal Management Financial Integrity Act Paragraph 2) Statement of Assurance Unqualified Beginning Material Weaknesses Balance New Resolved Consolidated Reassessed Ending Balance Total Material Weaknesses 0 0 0 0 0 0 CONFORMANCE WITH FINANCIAL MANAGEMENT SYSTEM REQUIREMENTS (Federal Management Financial Integrity Act Paragraph 4) Statement of Assurance Systems conform to financial management system requirements Beginning Non-Conformances Balance New Resolved Consolidated Reassessed Ending Balance Total Non-Conformances 0 0 0 0 0 0 Erroneous Payments identified no activities susceptible to significant erroneous The Improper Payments Elimination and Recovery Act payments that meet the Act’s thresholds. requires that agencies (1) review activities susceptible to significant erroneous payments; (2) estimate the amount Prompt Pay of annual erroneous payments; (3) implement a plan to OTHER ACCOMPANYING The Prompt Payment Act requires federal agencies to reduce erroneous payments; and (4) report the estimated make timely payments to vendors and improve the cash amount of erroneous payments and the progress to INFORMATION management practices of the government by encouraging reduce them. The Act defines significant erroneous the use of discounts when they are justified. This also payments as the greater of 2.5 percent of program means that FHFA must pay its bills within a narrow activities or $10 million. window of time. In FY 2012, the dollar amount subject to prompt payment was $71.9 million. The amount of FHFA, in the spirit of compliance and as part of a sound interest penalty paid in FY 2012 was $372 or 0.00052 internal control structure, has established controls to percent of the total dollars disbursed. detect and prevent improper vendor payments. FHFA has Building an Infrastructure for the Secondary Mortgage Market 115 Appendix | Glossary | Acronyms | Index of Figures and Features | Acknowledgements | Federal Housing Finance Agency Key Management Officials (inside back cover) 2 0 1 2 F E D E R A L H O U S I N G F I N A N C E A G E N C Y P E R F O R M A N C E A N D A C C O U N TA B I L I T Y R E P O R T Glossary Advances – Core mission assets in the form of loans to Foreclosure – A legal process dictated by state law in which member institutions. the mortgaged property is sold to pay off the mortgage of the defaulting borrower. Basis Points – Unit of measure used in finance to denote a change in value. Basis points are commonly used to Governance – Includes policies and controls related to express a change of less than one percent. For example, financial and regulatory reporting, leadership effectiveness 50 basis points denote a 0.5 percent shift. of the board of directors and enterprise management, compliance, overall risk management, strategy, internal Capitalization – The sum of a firm’s or individual’s long-term audit, and reputational risk. debt, stock and retained earnings. Government Sponsored Enterprises (GSE) – Fannie Mae, Cease and Desist Order – A directive halting certain financial Freddie Mac and the twelve Federal Home Loan Banks. activities and requiring improvements to risk management policies and practices. Orders may be terminated Home Affordable Modification Program (HAMP) – A following improvements in and entity’s financial condition, program designed to help homeowners avoid foreclosure capital position, and resolution of risk management by modifying loans to a level that is affordable for concerns. borrowers and sustainable over the long term. Collateralize – To secure a financial instrument, such as a loan, Home Affordable Refinance Program (HARP) – A home APPENDIX with an asset, such as a security or property. retention program that focuses on mortgages Fannie Mae and Freddie Mac already hold in their portfolios or Conservatorship – Statutory process designed to stabilize guarantee through their mortgage-backed securities. a troubled institution with the objective of maintaining It provides unique flexibilities on the level of credit normal business operation and restoring safety and enhancement required on loans with loan-to-values soundness. greater than 80 percent. Borrowers who are current on Consolidated Obligations – A term for the joint obligations their mortgages can refinance into a lower mortgage of the 12 FHLBanks. Consolidated obligations are debt payment or more sustainable mortgage without requiring instruments that are sold to the public through the additional credit enhancements—generally private Office of Finance but are not guaranteed by the U.S. mortgage insurance. government. Loan Modification – A change or changes to the original Earnings – Includes adequacy of earnings to build and mortgage terms, such as a change to the product maintain capital and provide acceptable returns to (adjustable-rate or fixed-rate), interest rate, term and shareholders, the quality of earnings, earnings projections, maturity date, amortization term, or amortized balance. the integrity of management information systems, and the Matter Requiring Attention (MRA) – A specific written soundness of the business model. recommendation made to Enterprise management that Enterprise(s) – Represent Fannie Mae and Freddie Mac. requires attention and correction, but does not include consent order items. Each MRA requires a due date for Enterprise Risk – Includes enterprise credit risk, market risk, correction. and operational risk. Operating Risk – The risk of possible losses resulting from Forbearance Plans – An agreement between the servicer and inadequate or failed internal processes, people, and the borrower (or estate) to reduce or suspend monthly systems or from external events. payments for a defined period, after which the borrower resumes regular monthly payments and pays additional Permanent Capital – The sum of common stock, preferred money toward the delinquency to bring the account stock, and retained earnings. current or works with the servicer to identify a permanent solution, such as a loan modification or a short sale, to address the delinquency. Building an Infrastructure for the Secondary Mortgage Market 117 Permanent Change of Station (PCS) – The official relocation Secondary Mortgage Market – A market in which mortgages of an active duty military service member or a civilian or mortgage-backed securities are acquired by the employee along with any family members living with Enterprises and traded. him or her to a different duty location such as a military Senior Preferred Stock – Capital stock owned by the Treasury base – the permanent move may be within or outside the Department, which pays specific dividends before continental United States. A permanent change of station preferred stock or common stock dividends. In the event applies until muted by another PCS order, completion of of a liquidation, senior preferred stock takes precedence active duty service, or some other preemptive event. over preferred and common stock. Portfolio – A collection of investments, either diverse or similar Short Sale – A sale of real estate in which the proceeds do not in nature, held by an institution or individual. satisfy the full balance owed on the property’s loan. Preferred Stock Purchase Agreement (PSPA) – PSPAs Supervisory Rating – FHFA has established four rating levels ensure that the Enterprises maintain a positive net for supervisory concerns: (1) no or minimal concerns; worth so they can continue to be active suppliers of (2) limited concerns; (3) significant concerns; and (4) housing finance. The agreements are ongoing, explicit, critical concerns. These ratings describe how well risks and irreversible contractual commitments of the federal are identified, measured, monitored, controlled, and government ensuring that Fannie Mae and Freddie Mac managed. No or minimal concerns have very minor can meet their obligations and maintain a positive net weaknesses or criticisms that affect the Enterprise’s worth. safety and soundness, while critical concerns involve a Private-label Mortgage-backed Securities (PLMBS) – A consent order or formal agreement between FHFA and residential mortgage-backed security where the underlying the Enterprise to ensure that appropriate corrective action loans are not guaranteed by the U.S. government or a is taken. government-sponsored agency. The collateral is often Total Capital – The sum of permanent capital, the par value of referred to as “nonconforming loans” because the loans Class A stock outstanding, a general allowance for losses, usually do not meet all the strict requirements for a and the amount of any other instruments identified in an government or government agency guarantee. FHLBank’s capital plan that FHFA has determined to be Repayment Plans – An agreement between the servicer and available to absorb losses. a borrower that gives the borrower a defined period to Undercapitalized – A state of hindered operation for an reinstate the mortgage by paying normal regular payments FHLBank resulting from limited amounts of capital. plus an additional agreed upon amount in repayment of the delinquency. Underwriting Standards – The process a lender uses to determine whether the risk of lending to a particular Reports of Examination (ROEs) – During each calendar borrower under certain parameters is acceptable. Most year, FHFA complete ROEs for each of the 12 FHLBanks of the risks and terms underwriters consider fall under the and the Office of Finance (OF) and presents them to three C’s of underwriting: credit, capacity, and collateral. their respective boards of directors. The scheduling of examination fieldwork and the review of ROEs may vary from one year to the next. 118 Federal Housing Finance Agency | 2012 Performance and Accountability Report Acronyms AGA Association of Government Accountants HARP Home Affordable Refinance Program AHP Affordable Housing Program HERA Housing and Economic Recovery Act of 2008 BOA Bank of America HPI House Price Index C&D Cease and Desist HUD U.S. Department of Housing and Urban Development CEO Chief Executive Officer HUBZone Historically Underutilized Business Zone CFR Code of Federal Regulations ICP Incentive Compensation Plan CGC Conservatorship Governance Committee IT Information Technology CY Calendar Year LLC Limited Liability Company DBR Division of FHLBank Regulation LTV Loan-to-Value DER Division of Enterprise Regulation MBS Mortgage-backed Securities DOL U. S. Department of Labor MHA Making Homes Affordable (Program) DSPS Division of Supervision Policy and Support MRA Matter Requiring Attention ECIC Executive Committee on Internal Controls MSA Metropolitan Statistical Area EESA Emergency Economic Stabilization Act of 2008 MSR Mortgage Servicing Rights APPENDIX EIC Examiner in Charge MWOBs Minority-and-Women-Owned Businesses EVS Employee Viewpoint Survey OMB Office of Management and Budget Fannie Mae Federal National Mortgage Association OF Office of Finance FASAB Federal Accounting Standards Advisory board OFHEO Office of Federal Housing Enterprise Oversight FBWT Fund Balance with Treasury OIG Office of Inspector General FECA Federal Employees Compensation Act OPM Office of Personnel Management FEVS Federal Employee Viewpoint Survey PACE Property Assessed Clean Energy FHA Federal Housing Administration PCA Prompt Corrective Action FHFA Federal Housing Finance Agency PCS Permanent Change of Station FHFB Federal Housing Finance Board PLMBS Private-label Mortgage-backed securities FHLBank Federal Home Loan Bank POA&Ms Plan of Action and Milestones FICO Fair Isaac Corporation PRISM Procurement Request Information System FinSOB Financial Stability Oversight Board Management FISMA Financial Information Security Management Act PSPA (s) Preferred Stock Purchase Agreement FMFIA Federal Managers Financial Integrity Act of 1982 REO Real Estate-Owned FMS Federal Management System RFI Request for Information FOIA Freedom of Information Act ROE Reports of Examination Freddie Federal Home Loan Mortgage Corporation SA&A Security Assessment & Authorization Mac SAI Service Alignment Initiative FSOC Financial Stability Oversight Council SBR Statement of Budgetary Resources FTE Full-Time Equivalent SIFI Strategically Important Financial Institutions FY Fiscal Year SIFMU Strategically Important Financial Market Utilities GAAP Generally Accepted Accounting Principles SPSPA Senior Preferred Stock Purchase Agreement GAO U.S. Government Accountability Office TARP Troubled Asset Relief Program Ginnie Mae Government National Mortgage Association TSP Thrift Savings Plan GSE Government-Sponsored Enterprise UPB Unpaid Principal Balance HAMP Home Affordable Modification Program Building an Infrastructure for the Secondary Mortgage Market 119 Index of Figures and Features FIGURES Figure 1. Actual Dollars for FY 2010–2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 2. Actual Full-Time Equivalents for FY 2010–2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 3. FHFA Employees (by specialized areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 4. FHFA Principal Organization Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 5. FHFA Oversight of Fannie Mae and Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 6. Enterprise’s Market Share-MBS Issuance Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 7. Total Assets of the FHLBanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 8. FHFA’s Oversight Role – FHLBanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 9. Number of FHLBank Members and Percent of Members that Borrow . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 10. Federal Home Loan Bank Districts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 11. HARP Refinances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Figure 11a. Monthly HARP Volume by LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Figure 12. FY 2012 Performance Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Figure 13. Status of Performance Measures Unmet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Figure 14. Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Figure 15. Total Net (Income from)/Cost of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Figure 16. Statement of Changes in Net Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Figure 17. Statement of Budgetary Resources Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Figure 18. FHFA Goal Hierarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Figure 19. FHFA’s Performance Management Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Figure 20. FY 2012 Performance Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 PHOTO CREDITS Photos appearing in the text were taken in-house. Acknowledgements This Performance and Accountability Report was produced through the energies and talents of the FHFA staff. To them we offer our sincerest thanks and acknowledgement. We would also like to acknowledge the U.S. Government Accountability Office for the professional manner in which they conducted the audit of FHFA’s FY 2012 Financial Statements. 120 Federal Housing Finance Agency | 2012 Performance and Accountability Report Key Management Officials Edward J. DeMarco Jeffrey Spohn Acting Director, Deputy Director of Senior Associate Director, Office of Housing, Mission and Goals Conservatorship Operations Richard Hornsby Denise Dunckel Chief Operating Officer Senior Associate Director, Office of Congressional Affairs and Communications Alfred Pollard General Counsel Mark Kinsey Chief Financial Officer Jon Greenlee Deputy Director, Division of Enterprise Regulation Kevin Winkler Chief Information Officer Stephen Cross Deputy Director, Division of Federal Lee Bowman Home Loan Bank Regulation Associate Director, Office of Minority and Women Inclusion Wanda DeLeo Deputy Director, Office of Strategic Initiatives Michael Powers Ombudsman Fred Graham Acting Deputy Director, Division of Steve Linick Supervision Policy and Support Inspector General FHFA OVERSIGHT BOARD CONTACT INFORMATION Edward J. DeMarco We welcome your comments on how we Chairman can improve our report. Please provide comments or questions to: Timothy F. Geithner Secretary of the Treasury Toni R. Harris Performance Improvement Officer Shaun Donovan Secretary of Housing and 202-649.3800 Urban Development FHFAinfo@fhfa.gov Mary L. Schapiro The report can be accessed on the World Chairperson, Securities and Wide Web at: Exchange Commission www.fhfa.gov FHLB Atlanta . FHLB Boston . FHLBFINANCE FEDERAL HOUSING ChicagoAGENCY . FHLB Cincinnati . FHLB Dallas . FHLB Des Moines . Fannie Mae 400 7th . Freddie Mac . FHLB Indianapoli Street, SW FHLB New York . FHLBanks . FHLB Pittsburgh . FHLB San Francisco Washington, DC 20024 202.649.3800 FHLB Seattle . FHLB Topeka . FHLB atlanta . FHLB Boston . FHLB Chicag www.fhfa.gov FHLB Cincinnati . FHLB Dallas . FHLB Des Moines . Fannie Mae . Freddi Mac . FHLB Indianapolis . FHLB New York . FHLBanks . FHLB Pittsburg FHLB San Francisco . FHLB Seattle . FHLB Topeka . FHLB Atlanta FHLB Boston . FHLB Chicago . FHLB Cincinnati . FHLB Dallas . FHLB De Moines . Fannie Mae . Freddie Mac . FHLB Indianapolis . 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Financial Audit: Federal Housing Finance Agency's Fiscal Years 2012 and 2011 Financial Statements
Published by the Government Accountability Office on 2012-11-15.
Below is a raw (and likely hideous) rendition of the original report. (PDF)