The Federal Housing Finance Agency (FHFA) repeatedly defers to Fannie Mae and Freddie Mac without independently testing their decisions, according to a report released Tuesday by a government watchdog.
In its semi-annual report to Congress, Steve Linick, the inspector general for the FHFA's Office of the Inspector General (IG), identified several "deficiencies in FHFA that appear to reflect two significant themes."
In addition to overly deferring to Fannie and Freddie, he said how the agency used its resources may have negatively impacted how it was able to oversee the two government sponsored enterprises.
The report largely summed up earlier reports released by the IG's office this year, several of which found the FHFA was relying too heavily on those it was supervising.
Four reports issued by the IG's office show the FHFA "displayed undue deference" to decisions made by the enterprises when it came to Freddie's assessment of mortgage repurchase claim issues involving Bank of America Corp.; the enterprises' participation in Making Home Affordable program; the enterprises' decision regarding executive compensation; and numerous transactions of the enterprises.
In late 2010, for example, FHFA approved a $1.35 billion settlement of mortgage repurchase claims Freddie asserted against BofA without ever examining its process — even after a senior examiner raised issues on the enterprise's existing loan review process.
Another case involved the U.S. Treasury Department's Home Affordable Modification Program (HAMP) used to modify mortgages for borrowers facing default or foreclosure. Fannie Mae and Freddie Mac began participating in the program in 2009, entering into five-year agreements with Treasury. An IG report later found that the FHFA removed itself from overseeing the negotiations of those agreements.
"FHFA believed its appropriate role was to ensure the enterprises were legally authorized to administer HAMP, not to participate actively in negotiations between the enterprises and Treasury," according to the report. "Thus, FHFA did not engage in any formal substantive review to evaluate the agreements' feasibility, risk, or the suitability of the enterprises to serve as Treasury's financial agents."
Thirdly, it failed to analyze executive compensation packages for the top six executives at Fannie and Freddie who received $35 million between 2009 and 2010, the IG said. While FHFA reviewed and approved the compensation packages, they never tested or validated how the enterprises calculated those sums, according to the report.
Finally, the IG claimed FHFA didn't perform sufficient transaction testing of enterprise activities. Part of the blame is due to how FHFA utilized its resources, according to the IG's office.
For example, the agency didn't have enough examiners to meet oversight responsibilities. It didn't assign sufficient priority or resources to handle consumer complaints or address new and emerging risks that could impact the two companies. It also allowed Fannie Mae to delay compliance of an operational risk management program by five years.
It even failed to provide a comprehensive examination of foreclosure issues until media reports about alleged abuses surfaced in mid-2010. Up until then, according to the IG's report, "FHFA had not previously considered risks associated with foreclosure processing to be significant," even though there been signs of issues prior to mid-2010.
Of course, there was some praise offered to the agency for eliminating golden parachute compensation awards to terminated executives at Fannie Mae and Freddie Mac. Efforts to hire more qualified examiners were also applauded; although the IG questioned whether the 44 brought on would be enough to overcome the agency's capacity shortfalls.
The FHFA also received praise for not compromising its independence under the Treasury's Making Home Affordable program.
