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Watchdog Recommends FHFA Enhance Risk Assessment Audits for GSEs

investigationThe Office of the Inspector General (OIG) for the Federal Housing Finance Agency (FHFA) has recommended that the agency enhance its risk assessment framework in an effort to limit variations in risk assessments for Fannie Mae and Freddie Mac, according to a report from the OIG released this week.

FHFA and other financial regulators use a risk-based approach for examination activities to determine if the Enterprises are achieving their goal of providing a reliable source of liquidity and funding for the housing market and community investment, and risk assessments are critical to the success of such a risk-based approach. Risk assessments, which are revised regularly, provides the regulatory agency with a comprehensive view identifying primary risks to the examined entity as well as the causes of unfavorable trends and the entity’s strengths and vulnerabilities.

The OIG conducted the examination of the FHFA’s supervisory activities to “assess whether FHFA’s requirements for its risk assessments of the Enterprises are sufficiently robust to produce risk assessments that achieve the purpose for which they are intended,” wrote Angela Choy, Assistant Inspector General for Evaluations, in the report.

The report found that despite the fact that the Enterprises have “virtually identical federal charters, substantially comparable business models, and similar risk profiles,” significant variations in risk assessments exist between the GSEs. Even though the GSEs share the same type of risk and those risks lend themselves to standardized measures, the significant variations in risk assessments limits the ability to use those assessments as a tool to compare risks between the GSEs. Hence, the OIG made three recommendations to the FHFA to enhance the risk assessment framework for the GSEs:

  1. The OIG recommends that the FHFA adopt minimum requirements for risk assessments that facilitate comparable analyses for each Enterprise’s risk positions. The recommended requirements include common criteria for determining whether risk levels are high, medium, or low, year over year. In its response, FHFA stated that its Division of Enterprise Regulation (DER) agreed with the recommendation and will “amend its existing internal guidance on the performance of risk assessments to include key definitions of terms used in risk assessments and to specify measures for inclusion in risk assessments in the areas of credit, market, and operational risk” by May 25, 2016.
  2. The OIG recommend that the FHFA adopt standard requirements and the necessary documentation to support conclusions that will reduce the amount of variability in the DER’s risk assessments between the GSEs. In its response, FHFA said that by May 25, 2016, DER agreed with the recommendation would amend internal guidance on risk assessment performance to include “more specific guidance on the format for presentation of risk analysis and on supporting documentation needed for risk assessment conclusions.”
  3. The OIG directed that DER train its examiners in charge of semi-annual risk assessments to use the enhanced guidance consistent with the first two recommendations above. FHFA stated in the response that the DER agrees and will have provided such training by October 14, 2016.

Click here to read the FHFA Office of Inspector General’s full report.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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