The Federal Housing Finance Agency  (FHFA) Office of the Inspector General  (OIG) performed an audit on the financial conditions of mortgage insurers used for loans purchased by Fannie Mae  and Freddie Mac  to assess their exposure to risk. The FHFA, as the regulator for Fannie and Freddie, provides oversight of the GSEs and contracted CohnReznick LLP to perform the audit.
The OIG commented, "The Enterprises typically require mortgage insurance underwritten by private mortgage insurers as a credit enhancement to reduce the amount of losses in the event of borrower default." The GSEs currently hold over $587 billion in single-family residential mortgage loans insured by private mortgage insurance companies.
CohnReznick found that FHFA has "opportunities to further strengthen its oversight of the Enterprises' monitoring of the financial condition of mortgage insurers and their related risk exposure."
Specifically, the company reported FHFA could better coordinate the oversight of risk by issuing a formal oversight plan that defines roles and responsibilities. The FHFAOIG reported distressed insurers were potentially responsible for up to $49 billion in the event of borrower defaults, representing over a third of coverage for both Fannie and Freddie.
Furthermore, the audit found the FHFA can provide better oversight when approving new mortgage insurers. CohnReznick said that the FHFA delegated the approval decisions for a new mortgage insurer to the GSEs.
"FHFA does not have a formal process for evaluating new mortgage insurers, including Enterprise risk assessments and justification for conditional approval requirements," the company's audit found.
The group suggested that the FHFA be directly involved in the review and approval process for new mortgage insurers, which would strengthen governance over new approval decisions.
CohnReznick also suggested that the FHFA establish policies, procedures, and processes to help execute the FHFA's oversight of the GSEs business with mortgage insurers, as well as develop specific criteria and methodology for reviewing new mortgage insurers.
"FHFA generally agreed with the first recommendation but did not provide responsive comments to the second and third recommendations, which OIG considers unresolved," the report said.
The audit was performed from September 2008 through May 2013. Fieldwork was performed from April 2013 through January 2014 at FHFA's and Fannie Mae's headquarters in Washington, D.C. as well as Freddie Mac's headquarters in McLean, Virginia.