FEDERAL

For example, although FHFA has supported
modifying loans to help homeowners, it has decided
against allowing the enterprises to forgive debt
on mortgage loans. Thus, the enterprises do not
participate in programs such as Treasury’s HAMP
PRA, which reduces the amount of mortgage debt
in order to lower monthly payments for those whose
homes are underwater. 200
Additionally, our report assessing the conservatorships
describes the mission tension arising between FHFA’s
mandated responsibilities to advance the enterprises’
business interests and to help homeowners. For
example, stricter underwriting standards, which
can reduce risk for the enterprises, may also make
mortgages harder to obtain. Home affordability
programs, in essence, can have the opposite effect. 201
Minimizing conflicting legal objectives and
clarifying how participants should resolve potential
tensions should be a goal for a reformed secondary
mortgage market.
Blended Roles: FHFA as Regulator and
Conservator
In a reformed housing finance market, an oversight
body with a stake in business performance may
find itself subject to tensions between promoting
performance and ensuring that regulated entities
act in a safe and sound manner. If such dual roles
continue to exist in the future, we believe there is a
need to clarify how those differing responsibilities
should be balanced.
When assessing the conservatorships, we recognized
the potential for conflict between FHFA’s dual
missions to both conserve and preserve the
enterprises’ assets as conservator and to examine
their business practices for safety and soundness as
regulator. 202 These dual roles can give rise to potential
conflicts. For example, our assessment of the
conservatorships found that FHFA faces challenges in
ensuring its independence as a regulator. Specifically,
FHFA’s role as conservator is to direct the enterprises’
business activities and operations. Meanwhile, its role
as regulator is to independently review and critique
the outcomes of those directives. So, the agency
could find that, as regulator, it needs to critique its
performance as conservator. 203
In one instance of this potential conflict from early
in the conservatorships, FHFA used examination
staff—who review regulatory compliance, risk
management, and other business performance—to
help with conservator issues. In 2010 and 2011, the
agency reorganized to separate its responsibilities as
conservator and regulator, including returning the
examination staff to their original duties. 204
In general, senior FHFA employees have stated that
the agency’s roles as the enterprises’ conservator
and safety and soundness regulator are generally
aligned. Specifically, the agency believes that,
both as a conservator and as a regulator, it has an
interest in ensuring that the enterprises conduct
their businesses in a manner that limits risk taking.
Overall, the agency’s actions since becoming
conservator have backed this up. In particular,
FHFA has taken steps to reduce the risk associated
with business practices that generated billions
of dollars of credit losses. 205 Nonetheless, under
different leadership the alignment of roles could
diverge or one of the roles could become superior.
Further, FHFA has attempted to avoid conflicts
between its conservator and regulator roles by
delegating much of the management of the
enterprises to their boards of directors and managers.
However, such delegation of responsibility presents its
own inherent risks, and if the agency were to become
a more active conservator, that could increase the
potential for tension between its dual roles. 206
68 Federal Housing Finance Agency Office of Inspector General