December 13, 2011

Senators Cite Deficiencies in FHFA's Oversight of Fannie and Freddie

Conservatorship of Fannie and Freddie 'was never intended to last this long,' says Sen. Shelby

As part of an ongoing series of hearings on how to reform housing finance, the Senate Banking Committee heard testimony on Tuesday from the Federal Housing Finance Agency’s first inspector general, Steve Linick.

Sen. Richard ShelbySen. Richard Shelby (left), R-Ala., ranking member on the committee, said in his opening remarks that “first and foremost,” Linick “must provide oversight of FHFA’s conservatorship of Fannie and Freddie to ensure that taxpayer dollars are spent wisely.”

Shelby went on to say that the IG’s work “shines a light on the larger issue of the costs arising from the administration’s failure to propose a detailed plan to end the conservatorship of Fannie and Freddie,” adding that it has been three years and 98 days since the conservatorship began. The conservatorship, Shelby said, “was never intended to last this long. Nor was FHFA designed to handle the ‘conservatorship to nowhere’ that we face today.”

As the IG noted, Shelby said, it has found “significant shortfalls” in FHFA’s examination program, including having “too few examiners overall to ensure the efficiency and effectiveness” of FHFA’s oversight of the GSEs. “This is no small finding,” Shelby said, “since examination is the primary means by which FHFA supervises and regulates the GSEs.” This “serious problem exists in large measure because the perceived short-term nature of the conservatorship makes it difficult for FHFA to hire enough qualified examiners.”

Sen. Tim Johnson, D-S.D., chairman of the committee, stated in his opening remarks that the “need to reform our housing finance system and the need to improve the housing market go hand in hand.” The FHFA, as conservator of Fannie Mae and Freddie Mac, “could play a significant role in improving the housing market, but based on reports from the inspector general’s office, there are deficiencies at the agency that are holding back those efforts.”

Johnson went on to say the he’s “concerned” that the reports produced by the IG’s office show “several negative trends in FHFA’s oversight of operations” at Fannie and Freddie. First, he said, “the regulator defers to the GSEs on major decisions without independently verifying the benefits to the conservatorship or the taxpayers.”

Second, Johnson continued, “the FHFA appears to allocate staffing resources in a manner that limits its ability to enforce directives and adequately oversee operations at the GSEs.” These two trends, he said, “appear to restrict the FHFA’s ability to help stabilize the housing market and protect taxpayer dollars while also continuing the problematic relationship that Fannie Mae and Freddie Mac had with their previous regulator.”

The Senate Banking Committee held 12 housing finance related hearings in 2011, and Johnson said more hearings will follow next year.

As Linick testified, Fannie and Freddie currently own or guarantee home mortgages worth over $5 trillion and account for 70% of the nation’s secondary mortgage market. To date, the two GSEs have received $183 billion in taxpayer money in order to ensure their continuing solvency.

Linick testified that the IG office’s reports have identified “deficiencies in FHFA operations,” and that “these deficiencies appear to reflect two significant and related trends.”

First, he said, FHFA often relied on “determinations of [Fannie and Freddie] without independently testing and validating them, thereby giving undue deference” to their decision-making. Second, “FHFA was not proactive in oversight and enforcement, and accordingly, resource allocations may have affected its ability to oversee the GSEs and enforce its directives.”

However, Linick cited several other areas the IG office has reported on related to the FHFA as regulator and conservator of Fannie Mae and Freddie Mac. For example, he said, the IG’s office has found:

  • FHFA has eliminated golden parachute compensation awards to terminated Fannie Mae and Freddie Mac executives;
  • FHFA has taken steps to mitigate its shortage of qualified examiners;
  • FHFA has increased underwriting standards and raised guarantee fees;
  • FHFA has taken steps that may improve Enterprise repurchase claims recoveries, thereby reducing Enterprise losses; and
  • FHFA has positively responded to FHFA-OIG’s recommendations to improve FHFA’s effectiveness and efficiency and to reduce its vulnerability to fraud, waste, and abuse.
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