Fannie Mae and Freddie Mac returned to profitability in 2012, four years after requiring a combined $187.5 billion taxpayer bailout. The year 2012 also marked the beginning of a four-year period in which the GSEs’ expenses increased by a combined $1.1 billion, and a white paper released by the Office of Inspector General of the Federal Housing Finance Agency (FHFA OIG), the Enterprises’ conservator, gives a detailed account of where the extra $1.1 billion went.
The paper is part of an effort by FHFA’s OIG to emphasize transparency in its oversight work “to the fullest reasonable extent to foster accountability to stakeholders,” given the taxpayers’ enormous investment in the GSEs, their critical role in the secondary mortgage market (a 70 percent market share of newly-issued mortgage-backed securities), the unknown duration of the conservatorships, and the uncertain future of Fannie Mae and Freddie Mac to remain profitable. Despite the GSEs’ high leverage, lack of capital, conservatorship status, and uncertain future, they have grown in size under the conservatorship, which is now in its eighth year.
Expenses for Fannie Mae increased by more than 30 percent during the four-year period, from $2.366 billion in 2012 up to $3.092 billion by the end of 2015. The net increase in expenses over the four-year period amounted to $726 million.
The majority of the increase for Fannie Mae went to the implementation of specific FHFA strategic goals and initiatives ($476 million) and implementation of Fannie Mae’s strategic goals and initiatives ($369 million). Consulting services and miscellaneous items such as Enterprise Risk Management, human resources, multifamily expenses, and legal fees accounted for a combined increase of about $60 million.
The FHFA’s strategic goals and initiatives that accounted for much of the increase were pension plan termination ($315 million), Common Securitization Platform (CSP) Integration ($145 million), and reduction of retained portfolio ($16 million). Fannie Mae’s goals and initiatives that resulted in an increase in expenses were critical safety and soundness ($267 million) and other modernization efforts ($102 million).
The factors that led to decreases in expenses for Fannie Mae were Credit and Making Home Affordable ($41 million), Underwriting, Pricing, and Capital Markets ($62 million), and miscellaneous ($76 million), which included extraordinary litigation, customer engagement, communications, and marketing services, maintenance, and corporate expense.
For Freddie Mac, expenses rose from 2012 to 2015 by 24 percent, from $1.561 billion up to $1.937 billion, a net increase of about $376 million.
Likewise for Freddie Mac, the implementation of FHFA’s specific strategic goals and initiatives (CSP, reduction of retained portfolio, and pension plan termination) resulted in an increase of $128 million over the four-year period. Implementation of specific Freddie Mac strategic goals and initiatives (loan advisor suite, enhanced and new operations and technologies capabilities, and pricing execution) resulted in an increase of $105 million. Freddie Mac’s core business accounted for more than half of the total $376 million net increase at $233 million. The increase in the number of employees by 795, from 2,480 to 3,275, resulted in an expense increase of $96 million, and salaries and benefits were increased by about $42 million over the four years.
Offsetting Freddie Mac’s increases in expenses were decreases due to Single-family Extraordinary Credit and Operations Expenses ($54 million) and support staffing ($41 million).
The OIG notes that while the GSEs received a combined $187.5 billion bailout from taxpayers in 2008 to avert insolvency, they have paid approximately $241.2 billion in dividends on that investment through December 2015. The OIG also points out that all increases in expenses were approved by FHFA and that the paper simply reported what the expenses were without determining whether or not they were reasonable.
“While we identified shortcomings with FHFA’s review and approval process in our earlier evaluation, we recognize that FHFA approved all of these increases and we do not seek to second-guess its decisions,” wrote Stacey Nahrwold, Acting Deputy Inspector General for Audits, in the paper. “As a consequence, we make no findings on the reasonableness of the net increases in expenses in this white paper.”
Click here to view the entire white paper, including a breakdown and full explanation of all expenses.