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Financial Regulation News | Mortgage Regulations
Bank and mortgage regulators, regulations and regulatory actions. Coverage of regulatory legislation and testimony.
Report Criticizes FHFA Oversight

FHFA OIG, GAO issue separate reports

Nov. 29, 2011

By staff

A report on the activities of the regulator of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. found that the regulator didn't do enough of its own testing and validating when approving decisions on issues such as repurchases, the government modification program and executive compensation. A separate report, however, found that the regulator's financial statements were in order.

The Federal Housing Finance Agency has relied too much on Fannie Mae and Freddie Mac in overseeing their decision-making processes without adequately testing or validating their data.

That was one of the deficiencies outlined in a semi-annual report to Congress from FHFA's Office of Inspector General. The report reviewed activities from April 1 through Sept. 30.

One example of the deficiencies cited was Freddie's assessment of repurchase claims with Bank of America Corp. FHFA approved a $1.35 billion settlement with BofA, but the inspector general found that the FHFA moved too slowly and didn't test concerns raised by a senior FHFA examiner about limitations in Freddie's loan review process for repurchase claims -- which might have been very costly.

"The senior examiner was concerned that the loan review process Freddie Mac used for repurchase claims failed to account adequately for changes
in foreclosure patterns among loans originated during the housing boom," the report said.

The FHFA also deferred to both Fannie and Freddie for their participation in the Making Home Affordable program. The FHFA should have been more involved in the negotiation of five-year agreements between the two secondary lenders and the Department of the Treasury on the Home Affordable Modification Program.

The FHFA's lack of being proactive in the agreements led to problems soon after the two companies became involved in HAMP.

In addition, the regulator relied on the government-controlled enterprises' decisions on executive compensation. The report said that the regulator didn't test or validate the factors used to determine that six top officers would receive more than $35 million in compensation.

Among the causes for some of the shortcomings were too few FHFA examiners and poor resource allocation despite a significant budget provided by Congress. The regulator also needs to quickly improve the ratio of accredited examiners, which currently stands at just over a third. While the FHFA plans to hire 44 more supervisory employees, the inspector general questioned whether this was enough.

"The agency's actions in each case reflect its approach as conservator to delegate
most business decisions to the enterprises," the report stated. "In each case, it relied upon review and corporate governance processes already in place at the enterprises."

While several other shortcomings were outlined in the 128-page report, the inspector general also highlighted achievements made by the FHFA such as the elimination of golden parachute compensation to terminated executives, steps taken to improve repurchase claims recovery and positive responses to the inspector general's recommendations.

A separate report from the Government Accountability Office indicated that a GAO audit of fiscal-years 2010 and 2011 found that the FHFA's financial statements were fairly represented and its management maintained effective internal control over financial reporting.

"GAO found no reportable instances of noncompliance with the laws and regulations it tested," the report said. "FHFA's fiscal year 2011 financial statements include costs for the FHFA Office of Inspector General, which make up approximately 10 percent of FHFA's fiscal year 2011 costs."

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