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Even though the FHFA senior examiner raised concerns about Freddie Mac’s loan review process more than six months before the agency approved the Bank of America settlement, FHFA did not timely act on or test the ramifications of the examiner’s concerns before approving the settlement. Instead, the agency relied on the enterprise’s analysis of the settlement without testing its underlying assumptions. 168 After we issued our report, Freddie Mac changed its loan review process for repurchase claims. The enterprise now reviews all nonperforming loans originated between 2004 and 2007 for repurchase claims without regard to when they defaulted. We found in a follow-up report that such an expanded review may generate as much as $3.4 billion in additional revenue for Freddie Mac. 169 Going forward, FHFA has generally agreed with our recommendations to take a more proactive oversight stance in response to the issues our work has raised. We believe these positive steps will help the agency identify and manage risks, but we have also found that this must be accompanied by a steadfast will to enforce compliance. Enforce: Ensuring Regulatory Compliance Even when FHFA has identified risks and taken steps to manage them, the agency has not consistently enforced its directives to ensure that identified risks are, in fact, adequately addressed. As conservator and regulator, the agency’s authority over the enterprises is broad and includes the ability to enforce compliance with agency mandates. We have reported that FHFA’s supervision and regulation of the GSEs could be strengthened by better exercising this authority when warranted. For example, we determined that FHFA had not compelled Fannie Mae to comply with the requirement to have an effective program to manage operational risk—i.e., the risk of loss resulting from failed people, processes, systems, or external events. Effective operational risk management can help agency examiners to identify trends in such risks and focus their examinations accordingly. 170 Between 2006 and early 2011, FHFA and its predecessor agency repeatedly identified Fannie Mae’s lack of an acceptable operational risk management program. But, as Figure 28 (see below) Figure 28. Supervisory Identification of Fannie Mae’s Operational Risk Management Deficiencies May 2006 FHFA's predecessor agency's consent order: implement operational risk plan in three years March 2009 FHFA’s examination of Fannie Mae: operational management oversight an area of “significant concern” May 2009 FHFA’s review of Fannie Mae results in three MRAs for operational risk March 2010 FHFA’s report of examination identifies ongoing operational risk and management deficiencies April 2011 FHFA’s Fannie Mae examination finds noncompliance with 2006 consent order re: operational risk 2006 2007 2008 2009 2010 2011 September 2008 FHFA’s letter to Fannie Mae re: deficiencies in operational risk management program December 2009 FHFA issues analysis of deficiencies in Fannie Mae’s operational risk oversight program September 2010 FHFA’s noncompliance letter re: three operational risk MRAs Semiannual Report to the Congress • April 1, 2013–September 30, 2013 63
illustrates, FHFA and its predecessor did not compel Fannie Mae to create such a program, preferring less forceful supervisory means, such as years of repeated examinations and letters of concern and noncompliance. 171 The benefit of stronger FHFA enforcement also extends to the FHLBanks. For example, we found that four FHLBanks have faced significant financial and operational difficulties since 2008, primarily because of their investments in high-risk mortgage securities. The agency has oversight responsibility over the FHLBanks and recognizes the need to ensure that they do not abuse their GSE status and engage in imprudent activities. 172 One of our reports revealed, though, that FHFA had not established a consistent and transparent written enforcement policy for troubled FHLBanks classified as having “supervisory concerns.” Specifically, of the four FHLBanks receiving this classification, FHFA took formal enforcement actions against only two. This has contributed to instances in which the agency may not have held these banks and their officers sufficiently accountable for engaging in questionable risk taking. 173 Overall, our work has led us to conclude that sound supervision in the secondary mortgage market requires resources equal to the oversight mission. Further, some of these resources should be allocated to test and validate compliance and decision making by market participants. And, rules need to be enforced. Not everything, though, can be fixed by better oversight. As we discuss below, any reform proposal will have to wrestle with inherent tensions between intersecting housing finance elements. Balance: Lessons for the Future Achieving housing finance reform will require balancing between complementary and sometimes competing factors in housing finance. Below, we summarize some of our work, which illustrates the tensions inherent in current housing finance oversight. Overlapping Laws: HERA and EESA FHFA’s powers and responsibilities mainly come from two laws with different emphases: HERA, which focuses on the GSEs’ financial soundness, and the subsequently enacted Emergency Economic Stabilization Act (EESA), which, as relevant to FHFA, focuses on the welfare of existing homeowners. 174 In July 2008, in the face of a turbulent market, HERA created FHFA to oversee the enterprises and the FHLBanks—vital components of the secondary mortgage market. Under HERA, the agency’s mission is to provide supervision, regulation, and oversight of the GSEs in order to promote their safety and soundness, support housing finance and affordable housing, and facilitate a stable and liquid mortgage market. 175 HERA also vested FHFA with the power to place the GSEs into conservatorship, if warranted. That power was invoked in September 2008, when due to their deteriorating financial conditions, the enterprises entered conservatorships overseen by FHFA. As conservator, FHFA’s goal is to conserve and preserve the enterprises’ assets. 176 In contrast, EESA was enacted in October 2008, as the housing crisis deepened, to protect home values and investments, preserve homeownership and promote economic growth, and maximize returns to taxpayers. To preserve homeownership, EESA requires FHFA to implement a plan to maximize 64 Federal Housing Finance Agency Office of Inspector General
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Section 3: Lessons for Housing Fina
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A Message from the Acting Inspector
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15 Federal Housing Finance Agency,
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33 Fannie Mae, “Multifamily Busin
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it is preferable to limit our discu
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Transparency and Certainty for Lend
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