The regulator of the Federal National Mortgage Association has done too little to ensure that underwriting standards at the government-controlled enterprise are sufficient, according to a new report. But actions are underway to address the concerns.
That assessment was made by the Federal Housing Finance Agency’s Office of Inspector General.
In a report released Wednesday, the inspector general said FHFA’s oversight of Fannie’s underwriting is limited.
It’s the latest in a string of inspector general reports critical of FHFA as the Obama administration turns up the pressure on the regulator to use the housing finance agencies as tools of entitlement through principal reductions.
A report released earlier this month called into question FHFA’s supervision of Freddie Mac’s controls over mortgage servicing. Last month, the inspector general issued a report that criticized legal fees being paid on behalf of former senior executives at the two secondary lenders. And in November, another report found that FHFA didn’t do enough of its own testing and validating when it approved decisions on issues such as repurchases, the Home Affordable Modification Program and executive compensation.
In the latest report, the inspector general acknowledged that FHFA informally reviews proposed changes to Fannie’s credit policy. FHFA also makes comments on, and approves, the Washington, D.C.-based firm’s corporate scorecard — a tool that in intended to improve loan quality. In addition, it reviewed a small sample of loans to determine if they complied with underwriting standards.
A targeted examination conducted by FHFA last year that included Fannie’s quality control of compliance with underwriting standards was “a positive step,” the inspector general said.
But FHFA’s actions don’t necessarily impact underwriting standards.
“FHFA-OIG concluded that the agency can further strengthen its oversight by creating formal processes for reviewing both the enterprises’ underwriting standards and variances from them,” the report said.
In response to the recommendation, FHFA said that while it has been in the process of establishing a system to track and monitor changes to underwriting standards, it hasn’t yet issued formal guidance. But it will enhance the review process and formalize and implement procedures by Sept. 30 and provide a final status update to the inspector general by March 1, 2013.
The report additionally said, “FHFA can also enhance its guidance for planning and conducting its examinations of the enterprises’ underwriting quality control.”
FHFA’s response indicated that it will complete an assessment of the need for further examiner guidance by June 30 and will develop any additional needed guidance by March 1, 2013.
The inspector general noted wild swings in Fannie’s variances to underwriting standards. It cited more than 11,000 variances in 2005, “when standards were loose.” Then, between January 2005 and August 2007, the secondary lender began rescinding variances — leading to tighter underwriting. As of September 2011, Fannie had more than 600 variances.
FHFA should establish formal guidance and procedures for the review of underwriting standards and variances, according to the report.
The recommendations also apply to supervision of Freddie Mac.
“FHFA has taken a number of steps to oversee enterprise controls to ensure purchased mortgages conform to strengthened underwriting standards,” the report concluded. “The agency can further enhance its oversight by improving its controls for reviewing both the enterprises’ underwriting standards and variances from them. FHFA can also enhance its guidance for planning and conducting its examinations of the enterprises’ underwriting quality control.”
