An inspector general report examined legal fees being paid on behalf of former senior executives of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. One way that the two government-controlled enterprises can cut back on legal expenses is to stay all litigation until they are out of conservatorship since neither will ever be in a position to pay such fees.
That was one possibility discussed in a report from the Federal Housing Finance Agency Office of Inspector General.
An OIG evaluation was performed to assess FHFA’s oversight of legal expenses paid on behalf of former senior executives at the two secondary lenders.
The report highlighted the case of three former executives of Fannie Mae — including former chief executives officer Franklin D. Raines, former chief financial officer J. Timothy Howard and former controller Leanne G. Spencer — who are accused of engaging in practices to artificially inflate the company’s stock price.
The three settled with FHFA’s predecessor, the Office of Federal Housing Enterprise Oversight, in August 2008 for a combined $31 million.
In addition to paying $99 million so far for the executives’ legal expenses in various actions, Fannie was required to pay $400 million in restitution and penalties and undertake a plan of corrective action in a related settlement with the Securities and Exchange Commission.
More legal expenses are being racked up in an SEC lawsuit against six other former Fannie executives.
Members of Congress are joining others in questioning how appropriate the legal expense payments are given the federal government’s $183 billion investment in the enterprises as of Dec. 31.
The OIG said that while FHFA’s tools to curtail litigation are limited, some options do exist.
A recent regulation issued by FHFA makes shareholder claims that arise from successful class action litigation the lowest priority in any reorganization of the companies. The move gives the FHFA the option not to pay securities litigation claims while it operates the companies as their conservator.
“Based on the new regulation, the Treasury Department’s $183 billion investment in the enterprises will be accorded repayment priority ahead of litigation claims,” the report states. “That, and the view that the enterprises will not be able to earn enough to repay Treasury’s investment and emerge from conservatorships, means that, for all practical purposes, it is unlikely that Fannie Mae and Freddie Mac will ever be in a position to pay litigation claims.”
But that argument failed when FHFA attempted to have a stay issued in a case filed in U.S. District Court for the District of Columbia. FHFA’s regulation is now the subject of legal challenge.
“FHFA-OIG believes that, given the significant amounts of taxpayer money involved and the issue’s high visibility, FHFA must continue to scrutinize intensively the enterprises’ advances in order to limit costs,” the report said.
The OIG has been looming heavily over FHFA as the Obama administration pressures FHFA Acting Director Edward J. DeMarco to use Fannie and Freddie as tools to jumpstart the real estate market.
One D.C. insider previously noted that the administration has beefed up staffing at the OIG, bringing it to around a four-to-one ratio in terms of FHFA employees to inspector general employees. The ratio is “unheard of” among other government agencies.
