OIG Report Shines Light On FHFA Deficiencies

OIG Report Shines Light On FHFA Deficiencies A new congressional report from the Federal Housing Finance Agency's (FHFA) Office of the Inspector General (OIG) criticizes the conservator for too often deferring to Fannie Mae and Freddie Mac decision making without first independently validating their decisions.

The semi-annual report, which covers FHFA activity though Sept. 30, also faults the agency for its poor resource allocation, claiming the distribution of its workforce has impeded the FHFA's ability to oversee the GSEs and enforce its directives.

According to the OIG, these two broad themes are to blame for a number of operational deficiencies at the FHFA.

For example, the FHFA's lax attitude toward testing and validating the GSEs' decision-making helped pave the way for Freddie Mac's December 2010 repurchase settlement with Bank of America – a $1.35 billion deal that prompted Rep. Maxine Waters, D-Calif., to accuse Freddie Mac of providing the bank with a "backdoor bailout."

"An FHFA-OIG report found that FHFA did not act timely or test concerns raised by an FHFA senior examiner about limitations in Freddie Mac's existing loan review process for mortgage repuchase claims," the congressional report's executive summary explains. "The senior examiner was concerned that the loan review process Freddie Mac used for repurchase claims failed to account adequately for changes in foreclosure patterns among loans originated during the housing boom.

"According to the senior examiner, this could potentially cost the enterprise a considerable amount of money," the report continued.

The FHFA's hands-off approach to GSE decision-making led to problems elsewhere – namely, the GSEs' administration of the Home Affordable Modification Program and the companies' executive compensation programs. According to the OIG, the FHA provided limited oversight of the GSEs' HAMP contracts, as well as failed to test or validate calculations that the GSEs used to base their executive compensation recommendations.

The OIG report also placed substantial blame on the FHFA's resource allocations, saying the agency's strategy prevented the FHFA from identifying emerging risks – such as alleged abusive foreclosure practices – that had the potential to impact the GSEs. According to the OIG, the FHFA moved too slowly in investigating claims about foreclosure deficiencies caused by default-service legal providers.

Before news stories of such deficiencies began surfacing in mid-2010, the FHFA "had not previously considered risks associated with foreclosure processing to be significant," the report says.

"However, an FHFA-OIG report found that there were multiple indications of foreclosure issues prior to mid-2010 that could have led FHFA to foresee the heightened potential for risk in foreclosure processing abuses," the report continues.

The FHFA also failed to dedicate sufficient resources to handle consumer complaints and may not have enough examiners to meet its oversight responsibilities, the report states.

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