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Fannie, Freddie, and Mortgage Regulator Balked at Oversight, Watchdog Says

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When a federal inspector general set out to examine the work of Fannie Mae, Freddie Mac and their regulator two years after taxpayers were called upon to prop up the giant mortgage finance companies, the inspector general met resistance.

Fannie Mae and Freddie Mac questioned the inspector general’s authority to demand their records, according to government correspondence recently released under the Freedom of Information Act.

The regulator in charge of overseeing the two companies directed them not to turn over the records, according to the correspondence. The regulator asserted that the inspector general was exceeding his authority.

The document shows that, even as Fannie Mae and Freddie Mac were receiving billions of dollars from the government to continue playing a central role in the nation’s crippled housing market, the mortgage companies and their regulator, the Federal Housing Finance Agency, were balking at more oversight.

In a March 2011 letter, the inspector general, Steve A. Linick, suggested that there was something wrong with this picture.

The fact that Fannie and Freddie have become charges of the government heightens their obligation “to operate with absolute transparency and accountability,” Linick said in his letter.

The “sheer magnitude of taxpayer obligations associated with [Fannie and Freddie] is, in and of itself an indicator of the need for vigilance in the prevention of fraud, waste, and abuse,” Linick said.

Ultimately, the regulator acceded to the inspector general’s requests and gave Fannie and Freddie a green light to do the same.

Still, these episodes provide insight into an attitude within the Federal Housing Finance Agency, which took control of Fannie and Freddie during the financial crisis of 2008. By the end of 2011, taxpayers had invested nearly $185 billion to keep the mortgage giants afloat.

“This is an affront to taxpayers,” said Angela Canterbury, director of public policy at the Project On Government Oversight (POGO), a nonprofit watchdog. “Nothing at Fannie and Freddie should be off limits to the inspector general.”

Linick gave his account of events in a letter to Sen. Charles E. Grassley (R-Iowa), who, along with Sen. Tom Coburn (R-Okla.), had asked inspectors general throughout the federal government to disclose any instances in which agencies “resisted and/or objected to oversight activities and/or restricted your access to information.”

Linick has served as the Federal Housing Finance Agency’s inspector general since 2010. His letter was released recently to the web site governmentattic.org, which posts records obtained through the Freedom of Information Act.

POGO found the letter in a batch of documents posted on the site.

The inspector general’s tension with the regulator has previously received attention. The agency “says Mr. Linick’s jurisdiction should be confined to the regulator, while Mr. Linick says his mandate includes Fannie and Freddie,” The Wall Street Journal wrote in a December story titled, “Inspector General’s Aggressive Stance Chafes Mortgage-Finance Firms’ Regulator.”

Linick’s recently released letter to Grassley provides additional perspective on the situation. It suggests that Fannie and Freddie, in addition to the Federal Housing Finance Agency, have questioned the inspector general’s authority. It also shows that Edward DeMarco, the acting head of the agency, has personally disputed the inspector general’s authority to make demands of the agency, and on at least one occasion told Fannie and Freddie not to cooperate with the inspector general’s request.

In November 2010, shortly after taking office, Linick told DeMarco that he planned to review the agency’s handling of waste, fraud and abuse complaints. The inspector general also wanted to evaluate how Fannie and Freddie dealt with complaints, according to Linick’s letter.

Linick made this request against the backdrop of a housing crisis that had left millions of borrowers struggling with delinquent mortgages, loan modifications and foreclosures, as described in an inspector general audit.

In January 2011, DeMarco told Linick that Fannie and Freddie had “questioned [the inspector general’s] jurisdiction and the purpose of the records request,” according to Linick’s letter.

DeMarco instructed Fannie and Freddie “not to produce the requested material” because he “believed that my request exceeded the statutory authority granted to me,” Linick wrote.

Fannie Mae later “corroborated Acting Director DeMarco’s assertion that he had instructed Fannie Mae not to comply with the request,” the letter says.

After meeting with Linick, DeMarco permitted Fannie and Freddie to cooperate with the inspector general’s request.

But that wasn’t the end of the dispute.

Linick told Grassley that, “as of this writing, Acting Director DeMarco and I disagree as to the scope of my authority to obtain records from [Fannie and Freddie] directly.”

In a separate incident, the regulatory agency temporarily denied the inspector general access to internal agency documents, Linick wrote. That “impeded progress” when the watchdog was trying to scrutinize Fannie, Freddie and companies that service mortgages, the letter says.

At one point, Linick’s office learned that the agency had told its employees “they should not communicate with [the inspector general] without first apprising FHFA management,” according to the letter.

DeMarco later agreed that agency staff “must be allowed to communicate freely” with the inspector general, the letter says.

Linick told Grassley that the conflicts occurred during his first few months in office, and that “most of these instances have since been resolved.” The regulatory agency generally cooperated with the inspector general after Linick made personal appeals to DeMarco, according to the letter.

Grassley did not respond to requests for comment. Spokesmen for Fannie and Freddie referred POGO to the regulatory agency. A spokesman for the agency referred POGO to the inspector general’s office.

“While there were some challenges in the beginning, those kinks have been worked out and [the Office of Inspector] now has a very productive and respectful working relationship with FHFA,”  inspector general spokeswoman Kristine Belisle said.

Fannie and Freddie play a crucial role in the housing finance system, purchasing residential mortgages and, in many cases, packaging them into securities that are in turn sold to investors. As government-backed entities, Fannie and Freddie guarantee the mortgage payments on the securities they sell.

The bursting of the housing bubble had severe consequences for Fannie and Freddie, which did not have enough capital to protect against the growing losses caused by homeowners who became delinquent on their mortgages, according to a recent inspector general report.

A 2008 law expanded the U.S. Treasury Department’s ability to provide financial assistance to Fannie and Freddie. It also created the FHFA and the inspector general’s office. This office, which reports to the FHFA director and to Congress, is tasked with improving the efficiency and effectiveness of the agency’s programs, and ferreting out waste, fraud and abuse.

Linick is the agency’s first inspector general. He was nominated by President Obama and confirmed by the Senate in September 2010, two years after Fannie and Freddie were placed into conservatorship overseen by FHFA. The agency was initially monitored by an internal audit office that reported to the director.

A few months after Linick sent his letter to Grassley, the inspector general released a widely publicized audit which found that “FHFA did not adequately process consumer complaints…including those alleging fraud, waste, or abuse, such as improper foreclosures.”

The inspector general reported that the agency initially assigned the task of processing complaints to just two employees in the external relations office, who already had other significant responsibilities. The agency “treated its complaints processing function more as a public or external relations task, as opposed to a core regulatory or conservator function,” according to the audit.

It is unclear whether this was the same audit described in Linick’s letter to Grassley.

As of March 2012, the agency had not finished implementing a recommendation to create written policies for handling complaints, according to the inspector general’s latest semiannual report to Congress issued a few months ago.

DeMarco has recently been at the center of a controversy over principal reductions for struggling homeowners with mortgages backed by Fannie and Freddie. Administration officials, members of Congress, and outside advocates have called on the agency to support principal reductions, which would reduce the mortgage debt owed by struggling homeowners on loans held by Fannie and Freddie. DeMarco has argued this plan could lead to further taxpayer losses because the money spent on principal reductions would ultimately be paid by taxpayers.

In another recent report, the inspector general noted that DeMarco and the agency face many challenges in overseeing Fannie and Freddie. “These challenges include: (1) attempting to advance [Fannie and Freddie’s] business interests while assisting distressed homeowners; and (2) simultaneously serving as both…conservator and regulator,” according to the report.

At the same time, the inspector general said the agency has given “undue deference to [Fannie and Freddie’s] decision-making” and has not been “proactive in its oversight and enforcement efforts.”

For his part, Linick assured Grassley in his letter that he is committed to ensuring that the agency, Fannie, and Freddie are transparent and accountable, “not only to help undo what may have occurred already, but to help ensure that we do not find ourselves in similar circumstances again.”

Mary Peng, an intern at the Project On Government Oversight, contributed to this report. Image by www.FutureAtlas.com.

By: Michael Smallberg
Investigator, POGO

Michael Smallberg, Investigator Michael Smallberg is an investigator for the Project On Government Oversight. Michael's investigations center on oversight of the financial sector.

Topics: Financial Sector

Related Content: Financial Oversight

Authors: Michael Smallberg

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