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Figure 26. The Mortgage Servicing Process HOMEOWNERS SERVICER ENTERPRISE • Make monthly payments under terms of mortgage • Collects payments and calculates balances • Distributes principal and interest to mortgage owner, net of service fees • Performs loss mitigation or foreclosure, if required • Owns or guarantees mortgages • Receives principal and interest or guarantee fee Oversight: Lessons of the Present OIG’s work reveals recurring oversight issues that policymakers may want to consider as part of reforming the secondary mortgage market. Specifically, our work has found that it is important to: • Equip: oversight bodies need the resources to do their jobs; • Verify: regulated entities’ decision making should be independently tested and validated; and • Enforce: when rules are established, they must be enforced. These oversight issues are discussed in detail below. Equip: Providing Sufficient Supervisory Capacity Ensuring that housing finance oversight bodies are equipped with sufficient resources to accomplish their missions is critical. If they do not have the resources to cover major risk areas timely, they will not be well positioned to identify and mitigate such risks. This is particularly true with FHFA, which has critical responsibilities as the regulator of the GSEs and the conservator of the enterprises. However, senior agency officials and internal agency reviews have acknowledged that it has too few examiners to ensure efficient and effective GSE oversight. 159 Our reports have supported their assessment by demonstrating shortfalls in the agency’s examination coverage. For example, OIG has raised concerns about FHFA’s resources and capacity to carry out its multiple Figure 26. The Mortgage responsibilities, Servicing Process particularly given its task of unifying a fragmented regulatory structure. 160 We followed up in a later review and confirmed that FHFA’s limited capacity affected its ability to examine the GSEs. Due to examiner shortages, FHFA scaled back planned work during examinations, which often took longer than expected. We also identified shortfalls in the agency’s examination coverage, particularly in the crucial area of REO. In general, FHFA agreed that it should better assess the relation between its examination capacity and the quality of its examinations. 161 Semiannual Report to the Congress • April 1, 2013–September 30, 2013 61
Figure 27. Freddie Mac Loans Originated in 2001 and 2006 Entering Foreclosure Foreclosure Starts 60,000 50,000 40,000 30,000 20,000 10,000 0 1 2 3 4 5 Foreclosure Year Originated in 2001 Originated in 2006 As our work has shown, it is incumbent upon FHFA to ensure that adequate supervisory resources are in place, and housing finance oversight agencies must actively verify the mortgage market decision making under their purview. Verify: Independently Testing and Validating Decision Making Figure 27. Freddie Mac Loans Originated in 2001 and 2006 Entering Foreclosure We have repeatedly identified significant instances in which FHFA has displayed undue deference to enterprise decision making in its capacity as conservator. Without adequately testing or validating, the agency has deferred to the enterprises on key issues. The agency’s actions in each case reflect its approach as conservator to delegate most business decisions to the enterprises. However, our reports have shown that some matters are sufficiently important to warrant greater agency involvement, such as issues that touch on the causes of the housing crisis, the conservatorships, and the taxpayers’ investment in the enterprises. For example, our work demonstrated how FHFA relies on the enterprises to oversee and establish underwriting standards and to grant variances from them. 162 Another report showed a similar pattern of accepting the enterprises’ decision making without testing or validating their logic and conclusions. In general, we determined that FHFA did not require conservatorship approval for various major business decisions, such as a servicing program, which involved multiple transfers of MSR for over Originated in 2006 700,000 loans with an Originated unpaid in 2001 principal balance over $130 billion. 163 The same report also showed that FHFA unduly relied on information provided by Fannie Mae when it issued a “no objection” response to the enterprise’s request to make an investment of between $55 million and $70 million in order to protect an existing $40 million investment. On the same day as the request for approval was submitted, FHFA stated that given the complex nature of the transaction and the short decision time frame, the agency could not assess the reasonableness of the proposal. Yet, FHFA still made “no objection” to the transaction. 164 Another report documented how FHFA approved a $1.35 billion settlement of mortgage repurchase claims that Freddie Mac asserted against Bank of America without testing the enterprise’s underlying assumptions. Essentially, the settlement assumed that loans originated during the housing boom and purchased by Freddie Mac would behave no differently than loans bought before the boom. 165 However, an FHFA senior examiner—and Freddie Mac’s internal auditors—observed a different foreclosure pattern associated with the housing boom era loans (i.e., loans originated around 2006). As shown in Figure 27 (see above), for these loans— many of which are higher risk—foreclosures peaked three to five years after origination, instead of two to three years for pre-boom loans originated in 2001. 166 This difference was important because Freddie Mac did not review defaulted loans for repurchase claims if the defaults occurred more than three years after origination. That meant Freddie Mac had not reviewed for repurchase claims over 300,000 foreclosed loans originated between 2004 and 2007. These loans had an unpaid principal balance exceeding $50 billion. 167 62 Federal Housing Finance Agency Office of Inspector General
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Federal Housing Finance Agency Offi
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Section 3: Lessons for Housing Fina
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OIG’s Accomplishments from 2010 t
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A Message from the Acting Inspector
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insures mortgages against credit lo
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Semiannual Report to the Congress
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in a number of criminal and civil i
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Figure 3. Scoring of Investor Quali
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Appendix F: Description of OIG Offi
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Strategic Goal 2—Operating with I
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Figure 17. Federal Home Loan Banks
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Semiannual Report to the Congress
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15 Federal Housing Finance Agency,
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33 Fannie Mae, “Multifamily Busin
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Federal Home Loan Banks Office of F
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to FHFA Scorecard Directive, at 48,
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it is preferable to limit our discu
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Position in the Housing Finance Sys
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144 Fannie Mae, “Comparison of Mu
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157 Id., “Mortgage Servicing,”
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184 Federal Housing Finance Agency,
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Transparency and Certainty for Lend
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