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A Message from the Acting Inspector General I am pleased to present OIG’s sixth Semiannual Report to the Congress, which covers our activities and operations from April 1, 2013, to September 30, 2013. During this semiannual reporting period, OIG continued to reinforce the effectiveness, integrity, and transparency of FHFA’s programs and operations. At the same time, OIG experienced a watershed event: our founder departed. Effective September 29, 2013, Steve A. Linick resigned from OIG and was appointed the State Department Inspector General. During his three years with OIG, Mr. Linick established our vision and mission; recruited seasoned professionals with backgrounds in housing, securities, finance, investigations, statistics, and economics; built our infrastructure; and led audit, evaluative, and investigative efforts that resulted in the recovery of billions of dollars and the indictments and convictions of hundreds of individuals. We are grateful for his extraordinary leadership. It is now my honor to lead OIG, pending the appointment of a permanent Inspector General. I look forward to the challenge and am gratified by OIG’s accomplishments during the reporting period. OIG issued 16 audit, evaluation, and other reports focusing on high-risk mission areas affecting the nation’s housing finance system. These reports address a range of topics from concerns relating to the security of information technology owned by Fannie Mae and Freddie Mac (collectively, the enterprises) to a mid-program assessment of the Home Affordable Refinance Program (HARP) to an evaluation of FHFA’s efforts to gradually increase the guarantee fees charged by the enterprises to reduce their dominant position in the housing finance system. Additionally, OIG remains active on the law enforcement front. During this period, OIG’s investigative efforts resulted in the indictment of 75 individuals and the conviction of 55 individuals, as well as the award of more than $104 million in criminal fines and restitution orders. All of OIG’s reports and selected law enforcement actions are detailed herein. Michael P. Stephens Acting Inspector General of the Federal Housing Finance Agency This Semiannual Report also describes the current status of the significant players under our purview (i.e., FHFA, the enterprises, and the Federal Home Loan Banks (FHLBanks)). It then includes a detailed discussion of three important factors that bear on housing finance reform—soundness, oversight, and balance—all of which are important for a stable and liquid mortgage market. We present this discussion, which draws from our experience, to provide FHFA, Congress, policymakers, and the public with information that may be useful during the debate on housing finance reform. I want to thank all of the dedicated employees at OIG for their efforts in making this report possible. This report comes once every six months, but they work continuously throughout the year and the results of their work are long lasting. Michael P. Stephens Acting Inspector General October 31, 2013 Semiannual Report to the Congress • April 1, 2013–September 30, 2013 1
Executive Summary Overview This Semiannual Report discusses OIG operations and FHFA developments from April 1, 2013, to September 30, 2013. 1 The changing conditions noted in our last Semiannual Report have continued during this period. The enterprises’ dominance of the secondary market for residential mortgages persists in an environment of escalating home prices, improved credit quality, and increasing guarantee* fees. Thus, their profitability has steadily improved since the end of 2011. Further, in light of the August 2012 amendments to the Senior Preferred Stock Purchase Agreements (PSPAs), the enterprises’ profits are beginning to offset losses that began in 2007. As the enterprises’ profits have increased, their need for government financial assistance has decreased. Accordingly, for the third semiannual reporting period, the Department of the Treasury (Treasury) was not required to increase its investment in the enterprises, which remains at approximately $187.5 billion. Meanwhile, during the first six months of 2013, advance demand among the FHLBanks continued to show signs of stabilizing, and the FHLBanks experienced a marginal increase in profitability. *Terms and phrases in bold are defined in Appendix A, Glossary and Acronyms. If you are reading an electronic version of this Semiannual Report, then simply move your cursor to the term or phrase and click for the definition. Exploring these and other issues, this report is organized as follows. Section 1, OIG Description, Accomplishments, and Strategy, highlights several OIG audits, evaluations, and investigations relating to the programs and operations of FHFA. Section 2, FHFA and GSE Operations, provides a closer look at FHFA and government-sponsored enterprise (GSE) developments during this reporting period. And, finally, Section 3, Lessons for Housing Finance Reform: Five Years After the Federal Government’s Takeover of Fannie Mae and Freddie Mac, discusses three important factors that bear on housing finance reform—soundness, oversight, and balance—all of which are important for a stable and liquid mortgage market. Section 1: OIG Description, Accomplishments, and Strategy This section provides a brief overview of OIG’s organization and describes its oversight activities, including audits, evaluations, and investigations. It also discusses OIG’s priorities and goals. For example, in this section we discuss: • FHFA’s Initiative to Reduce the Enterprises’ Dominant Position in the Housing Finance System by Raising Gradually Their Guarantee Fees (EVL- 2013-005, July 16, 2013), in which we analyzed the agency’s initiative to increase the enterprises’ guarantee fees to encourage greater private-sector investment in mortgage credit risk and reduce the enterprises’ dominant position in housing finance. We also assessed FHFA’s communication and interaction with the Federal Housing Administration (FHA), a government agency that 2 Federal Housing Finance Agency Office of Inspector General
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The bill would replace the enterpri
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mortgage credit. For its part, the
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Figure 20. Reform Models and Reform
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Multifamily We have also found indi
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Based on recent history, a reformed
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Figure 26. The Mortgage Servicing P
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Even though the FHFA senior examine
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assistance to homeowners and to use
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positive NPV, then the servicer is
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Siloed Practices: Harmonizing Busin
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Semiannual Report to the Congress
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overseen by FHFA. As conservator, F
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Interest Rate Swap: An interest rat
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References Federal Deposit Insuranc
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Department of the Treasury Financia
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Acronyms and Abbreviations Agency A
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Figure 29. Summary of OIG Recommend
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No. Recommendation Report Status AU
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No. Recommendation Report Status EV
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Audit and Evaluation Reports with R
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Appendix D: OIG Reports See www.fhf
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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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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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