Tag Archives: Inspector General

Appraisals in the Coal Mine

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The Federal Housing Finance Agency Office of Inspector General released an Audit Report, FHFA’s Oversight of the Enterprises’ Use of Appraisal Data Before They Buy Single-Family Mortgages. As the IG notes,

Assessing the value of collateral securing mortgage loans is one of the pillars in making sound underwriting decisions. Since September 2008, the Federal Housing Finance Agency (FHFA) has operated Freddie Mac and Fannie Mae (the Enterprises) in conservatorship, due to poor business decisions and risk management that led to enormous losses. While in conservatorship, the Enterprises have relied on Treasury’s financial support to operate in the secondary mortgage market, buying loans in order to provide needed liquidity to lenders. In 2010, FHFA directed the Enterprises to improve single-family residential loan quality and risk management through, among other things, developing a uniform collateral data portal (portal).

Unfortunately, the IG found that

  • from January 2013 through June 2013, Fannie Mae spent $13 billion buying over 56,000 loans even though the portal’s analysis of the associated appraisals warned the Enterprise that the appraisals were potentially in violation of its underwriting requirements.
  • from June 2013 through September 2013, Freddie Mac spent $6.7 billion buying over 29,000 loans despite the portal warning the Enterprise that either no property value could be provided or the value of the property was in question.

  • the Enterprises bought nearly $88 billion in loans when system logic errors in the portal did not allow them to determine if the appraiser was properly licensed to assess the value of the properties, which served as collateral for the loans.

The IG did not characterize these problems as particularly worrisome, but I wonder if they are somewhat symbolic of the limbo state that the Enterprises find themselves in. Like canaries in a coal mine, they alert us to a serious problem.

Neither private companies nor government instrumentalities, the Enterprises must stagger on until the federal government decides what to do with them. Let’s hope that the Enterprises are not silently building up to another crisis, one not driven by the profit-motive as the last one was, but driven by bureaucratic incompetence. “Bureaucratic” in the sense of the “rule of no one,” as Mary McCarthy defined it.

Fannie and Freddie’s current profitability should not be used as an excuse to delay reform further. They are too important to have been left in limbo for so long.

 

Fannie and Freddie’s Unreported Billions of Losses

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The Federal Housing Finance Agency’s Inspector General has warned FHFA Acting Director DeMarco that the FHFA has allowed Fannie and Freddie to defer acknowledgment of billions of dollars of losses relating to seriously delinquent singe-family residential mortgage loans for far too long.

The Office of the IG recommends that estimates of these losses be reported immediately, on an ongoing basis. There are all sorts of obvious good reasons to do this, including the fact that “[c]lassification of loans according to risk characteristics is a critical factor considered by financial regulators to evaluate a financial institution’s safety and soundness”  and that it accords with Generally Accepted Accounting Principles. (1)

directly through interest

Fannie and Freddie’s recent reports of billions of dollars of profits have caused a scrum to form around the two companies, as investors in preferred shares seek to get a slice of those profits through a series of lawsuits (here, here, here and here for example), as low-income advocates seek to fund the Housing Trust Fund through a lawsuit (here) and as some politicians forget the risks that these two companies present to the American taxpayer and seek to reanimate the two companies.

In a perfect world, we would ask what kind of residential housing finance infrastructure we want to implement for the next fifty years or so and what should happen to Fannie and Freddie should have little to nothing to do with their current profits or losses. But the political reality is that it does. With that as a given, we should at least have an honest assessment of their balance sheets. But the FHFA is keeping us in the dark. It needs to turn the lights on so that we can understand the true magnitude of these unreported losses so that the debate about Fannie and Freddie can be held with as much accurate information as possible.