Catching up on some news from last week … Freddie & Fannie just can’t catch a break. Three evaluation reports were released by the FHFA’s Office of Inspector General (OIG) regarding the oversight of activities of Fannie & Freddie (“Frannie”).
One honed in on Frannie’s participation in the 2011 MBA Convention and Exposition in Chicago caught the FHFA’s attention. The GSE’s together spent over $600,000 to participate in the convention and 90 GSE employees were registered to attend, 48 for Fannie Mae and 42 for Freddie Mac. OIG states that, while the expense of the convention was small in relation to all GSE expenses, the money expended did occasion comment and prompt the office to investigate. OIG found that the GSE’s per-capita expenditures for registration, travel, and lodging were comparable to allowable expenses for federal employees however it questioned the $140,000 spent to sponsor the convention and $140,415 for business meals and hosted dinners.
Audits have also recently focused on the extent of FHFA’s oversight of Fannie Mae’s single-family mortgage underwriting standards.
Specifically, OIG reviewed FHFA’s written policies for oversight of these standards and oversight of Fannie Mae’s internal controls over its implementation of the standards.
OIG also plans to contract for additional audit coverage related to the effectiveness of quality controls used by the GSEs to determine compliance with underwriting standards.
It is not a simple job: during the first 10 months of 2011, Fannie Mae purchased nearly 2.1 million loans valued at $427 billion, for example.
To be eligible for purchase, a mortgage must satisfy the GSEs’ underwriting standards or have their approval to vary from them. Fannie Mae’s underwriting standards, which it refers to as eligibility requirements, derive from a combination of Congressional charter-based and traditional risk-based criteria.
Charter-based criteria would include original principal balance limits and loan-to-value ratios while risk based criteria focus on collateral, capacity, and creditworthiness.
Notwithstanding the housing boom and subsequent housing collapse, Fannie Mae’s basic underwriting standards for purchase-money loans secured by single-family, principal residences have not changed materially, most believe, since 2006 – and many argue that they don’t have to.
Fannie Mae, however, has authorized a number of variances that have impacted those underwriting standards and the numbers of these have fluctuated substantially over time.
In 2005 when standards were loose, Fannie Mae authorized over 11,000 variances. Between January 2005 and August 2007, Fannie Mae began rescinding variances, which tightened underwriting standards. Fannie Mae had over 600 variances as of September 2011.
These variances from underwriting standards effectively relax those standards and this contributed to the credit losses and credit-related expenses suffered by Fannie Mae in recent years.
But hey, if Fannie & Freddie are overseeing the aggregators, and the OIG is overseeing them, who is overseeing the OIG?