Staffing Woes Harm Fannie and Freddie Oversight, Government Watchdog Says

Regulators lack the staff to effectively oversee Fannie Mae and Freddie Mac and have scaled back examinations of the two mortgage companies as a result, a government watchdog reported.

A hiring campaign by the Federal Housing Finance Agency has missed targets and, when completed, will still leave the agency shorthanded. Those conclusions were part of a report released today by the FHFA’s Office of Inspector General.

The report singled out the agency’s monitoring of the housing inventory that Fannie Mae and Freddie Mac own. Despite a surge in foreclosures that has increased Fannie Mae’s inventory sixfold since 2007, “FHFA has yet to conduct a targeted examination” of how the companies manage repossessed homes, known as real-estate owned properties or REO, the report said.

“REO represents a significant financial risk to the enterprises” because they cost money to maintain, the report found. “These costs increase the longer it takes to resell the REO, and all the while the value of the properties may be declining.”

Congress established the FHFA in 2008 to oversee Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The government-sponsored entities, which supply qualified lenders with funds to make home loans, were created to ensure a reliable and abundant source of mortgage credit. Fannie Mae and Freddie Mac were taken under government control after losses from subprime lending threatened them with insolvency.

The report criticized the agency for failing to scrutinize the companies’ stable of outside law firms until late last year, after evidence of bogus legal documents led most mortgage companies to suspend foreclosures.

HAMP Problems

An Obama administration effort to modify mortgages for delinquent homeowners contributed to FHFA’s woes in 2009 and 2010, the report found. The Home Affordable Modification Program, or HAMP, is administered by Fannie Mae and Freddie Mac on behalf of the Treasury.

FHFA diverted credit risk examiners to ensure that the enterprises handled the program “in a safe and sound manner,” the report found. “As a result, the enterprises’ credit risk operations were insufficiently covered.”

The FHFA this year set out to recruit and hire 26 people to join its team of about 120 examiners. Even if those hires are completed, agency executives told the inspector general they will have only about half the examiners they need.

FHFA Deputy Director Stephen M. Cross said the agency has hired 18 examiners since January.

“It is one thing to say that the agency should increase examination staffing or that the hiring of examiners is behind schedule, but quite another to say that FHFA cannot carry out a credible or effective examination program with the staff available,” Cross said in a written response to the report.

‘No Evidence’

Noting that the inspector general’s conclusions were based on interviews with unnamed FHFA officials, Cross said the report offers “no evidence” that the agency’s oversight has been compromised.

With a $176 million operating budget and a staff of about 550, the FHFA oversees the dominant source of U.S. mortgage financing. Fannie Mae and Freddie Mac backed about 70 percent of all loans made in 2010. They guarantee almost $5 trillion worth of loans and have another $1.5 trillion worth of loans in their portfolios.

The 12 home loan banks, which make cheap loans to mortgage lenders with the support of government backing, had $878 billion in assets at the end of last year.

Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, were taken under U.S. conservatorship in 2008. Since then, the two companies have drawn more than $170 billion in U.S. Treasury Department aid to continue operating.

In a separate report released today, the inspector general faulted the agency for failing to force Fannie Mae to quickly adopt internal risk controls. Better controls could have alerted the company to the robo-signing foreclosure scandal sooner, the report found.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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