Members of the Senate Banking Committee voiced significant concerns Tuesday in how the agency in charge of overseeing Fannie Mae and Freddie Mac has been lagging behind in critical areas identified by a government watchdog.

Testifying before the panel, Steve Linick, the Federal Housing Finance Agency's (FHFA) Inspector General, detailed a number of deficiencies identified in the FHFA's operations, showing how the agency overly relied on decisions made by Fannie and Freddie.

"FHFA was not proactive in oversight and enforcement, and accordingly, resource allocations may have affected its ability to oversee the GSEs and enforce its directive," said Linick.

The IG's office released 10 audits this year, and has also begun a series of criminal and civil investigations.

During the hearing, Chairman Tim Johnson, D-S.D. expressed dismay over the number of negative trends highlighted in the IG's recent semi-annual report to Congress detailing its oversight of Fannie and Freddie.

"First, the regulator defers to the GSEs on major decisions without independently verifying the benefits to the conservatorship or the taxpayers," said Johnson. "Second, the FHFA appears to have allocated staffing resources in a manner that limits its ability to enforce directives and adequately oversee operations at the GSEs."

According to Linick, four of the 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; the enterprises' participation in the Making Home Affordable program; the enterprises' decision regarding executive compensation; and numerous transactions of the enterprises.

Lawmakers also made the point repeatedly that failure by the FHFA to provide robust oversight of the government-sponsored enterprises would only end up costing the taxpayers even more.

Sen. Richard Shelby, the top Republican on the panel, blamed Democrats for stalling on housing finance reform.

"This is just one of many problems created by the GSEs' prolonged conservatorship," he said. "And the longer we wait to reform our housing finance system, the larger these problems will grow and the solutions will become more expensive for the taxpayer."

Topping the list of concerns by lawmakers was the need for more examiners at the agency to oversee operations. The FHFA has been able to hire 44 more examiners in the supervision division, but more are still required.

Linick said the FHFA has been making efforts to hire more examiners, but with so much uncertainty at the two companies it oversees, it's been difficult attracting talent.

"I believe they are moving aggressively in this area," Linick said. "I know they have recognized the agency and made examination a priority, but it's been very difficult … to attract examiners. It's already difficult when you're not in a conservatorship, when you're not in a financial crisis; it's very difficult if you are. I do think that examiners are reluctant to come to the agency because they don't know where there future lies."

Others, like Sen. Jon Tester, D-Mont., questioned whether FHFA has begun taking steps to readjust its executive compensation procedures and would be able to do so by next year. The top six executives at Fannie and Freddie received millions of dollars in incentive payments recently, sparking a furor on Capitol Hill.

Linick warned while action is being taking by the FHFA on this front, reforms may take more time given the fact that the companies are now in the process of developing compensation packages for next year.

"I'm concerned that we're going to be in the same exact spot next year as we're at this year. I believe they are going to do it, the problem is whether they are going to do it in time for the next cycle," said Linick.

Separately, Linick also said his staff is currently working on several audits of the Federal Home Loan Banks, which the FHFA also oversees.

"There a number of issues we are looking into," said Linick, "We have a number of reports which are in progress now. One on the four troubled banks, we're also looking at advance and collateral management, and we're looking at capital management as well."

Because of the importance of the FHFA's mission, Johnson called on the White House to put forth a new nominee to be director of the agency given the amount of work that needs to be done there. In January, the administration withdrew the nomination of Joseph Smith, the North Carolina bank commissioner, after Shelby opposed the nominee and Democrats were unable to proceed to a Senate vote on his nomination

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