The Federal Housing Finance Agency's
Office of Inspector General (FHFA-OIG) submitted its fourth semi-annual report
to Congress on Wednesday. The Office,
which serves as a watchdog over FHFA in its capacity as regulator of the Federal
Home Loan Banks (FHLBanks) and both regulator and conservator of Fannie Mae and
Freddie Mac, (the GSEs) reported on its activities during the period April 1 to
September 30, 2012.
FHFA-OIG said that the numerous reports
it issued during the six month period continued to reflect two themes it has identified
in its overall body of work. The first
is that, with regard to the conservatorships of the two GSEs, "FHFA has often
relied on determinations of the GSEs without independently testing and
validating them, thereby giving undue deference to GSE decision making." Second, "With regard to its regulatory
responsibilities, FHFA faces challenges in risk management, including its
ability to identify new and emerging risks potentially impacting the GSEs,
issue guidance and regulations governing risk management oversight at the GSEs;
and provide strong consistent enforcement for violations of policy."
OIG has prioritized work involving the
conservatorship and issued four reports that deal with the first issue. One was a report on an audit of FHFA's
process for approving matters under the conservatorships that concluded that
FHFA should exert greater control over the GSEs. A second report found that FHFA had not
conducted reviews of many servicing transfers under Fannie Mae's High Touch
Servicing Program. Two other reports
found FHFA's certifications to Treasury regarding the Preferred Stock Purchase
Agreements between Treasury and the GSEs were lacking but noted that FHFA has
now corrected that deficiency.
OIG also followed up on a report on
Freddie Mac's loan repurchase process that was issued in a previous period and
found that Freddie Mac and FHFA had acted on OIG's recommendations and that the
improved process should result in additional recoveries in the range of $0.8
billion to $1.2 billion this year and $2.2 billion to $3.4 billion overall.
OIG produced five reports dealing with
FHFA's regulatory function. One looked
at FHFA's oversight of the GSE's management of high risk sellers and servicers
and recommended strengthening the GSE's counterparty risk management. Another audit found that despite FHFA's
identification of the GSE's owned real estate portfolios (REO) as a prominent
and ascending risk, FHFA did not conduct targeted examinations of REO until
2011. OIG recommended changes to those
examinations but these have not been fully implemented by FHFA.
Two of the reports dealt with oversight
of FHLBanks. OIG found that FHFA can
improve its framework for supervising advances and collateral risk management
for those banks presenting supervisory concerns and found a lack of
appreciation among member banks for the risks associated with unsecured
In its law enforcement capacity OIG
engaged in what it termed significant investigative and outreach efforts. Its investigations resulted in the indictment
of 11 former employees of Abacus Federal Savings bank and guilty pleas from 8
former employees in connection with a scheme to sell hundreds of millions of
dollars in fraudulent loans to Fannie Mae.
There were indictments of 10 persons accused of fraudulently obtaining $39
million in mortgages to purchase units at a Florida condo complex. Eleven employees of 21st Century
Real Estate Investment Corporation were indicted for allegedly collecting over
$7 million from 4,000 homeowners in a loan modification scheme. In addition, guilty pleas were obtained from
the former President of American Mortgage Field Services and the former chief
credit officer for Appalachian Community Bank.
The former admitted to taking part in a scheme involving property flips
and the latter to submitting approximately $13.5 million in fraudulent
inspection reports related to GSE REO.