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IG Condemns FHFA’s Review of GSE Budgets

investigation [1]As conservator of Fannie Mae [2] and Freddie Mac [3] since September 2008, the Federal Housing Finance Agency (FHFA [4]) is charged with reviewing and approving the GSEs' budget to ensure that the budget is achieving the FHFA's stated purpose.

According to a recent report [5] from the FHFA Office of the Inspector General [6], however, the Agency's budget review and approval process has fallen short of achieving that stated purpose due to a number of factors that include late timing, cursory-level analysis, and inadequate resources.

Simply put, the independent watchdog found that FHFA's process for reviewing the budget of Fannie Mae and Freddie Mac is not accomplishing what the FHFA said it is setting out to accomplish, which is aligning Enterprise spending with FHFA’s strategic direction and safety and soundness priorities.

"These shortcomings prevent FHFA from exercising effective control over Enterprise spending, both in amount and direction," wrote Kyle D. Roberts, Deputy Inspector General for Evaluations, in the report. "As a consequence, FHFA’s budget review and approval process has imposed virtually no budget control on the Enterprises, and FHFA’s approval of the budgets creates the risk that it has endorsed Enterprise spending that has not been well understood by FHFA."

"These shortcomings prevent FHFA from exercising effective control over Enterprise spending, both in amount and direction."

The GSEs' combined budget for 2015 totals $5.1 billion, an increase of nearly one-third (31 percent) from 2012—the first year the GSEs became profitable after receiving a $187.5 billion taxpayer bailout in 2008. Through the second quarter of 2015, the GSEs had paid $239 billion to Treasury in dividends for the taxpayers' investment.

In order to address the issue of what the OIG found to be an ineffective budget review process by the FHFA, the OIG made four recommendations for the Agency:

  1. Direct both Enterprises to submit an operating budget and supporting materials for the following fiscal year in order to give FHFA sufficient time to adequately analyze the proposals before the next fiscal year begins
  2. Revise the existing budget process so as to staff the review process with employees who have the qualifications and experience necessary to conduct critical financial assessments of the proposed GSE budget, and determine whether that budget aligns with the strategic direction of the FHFA as well as its safety and soundness priorities
  3. Set a date certain during the first quarter of 2016 by which FHFA will take final action on each proposed annual operating budget for 2016 and approve the budget by that date
  4. Set a date prior to January 31 of each subsequent fiscal year by which FHFA will take final action on each proposed annual operating budget for that particular year and approve the budget by that date

According to the OIG, FHFA agreed with recommendation items 1, 2, and 3, and "generally agreed" with recommendation item 4, stating that "FHFA strongly believes that basing budget decisions on the most up to date financial information available and having prior review and approval of the budgets by the Boards of the Enterprises are critical. Consequently, FHFA approvals with conditions or disapprovals, which may cause FHFA to need additional time to receive supplemental information from the Enterprises and time for additional board approvals, may result in justifiable delays in providing final FHFA approval."

10-7 FHFA OIG graph [7]

While the GSEs' budget has been increasing over the last three years, however, their profits have been on the decline. In 2013, the GSEs recorded a combined record profit of $132.6 billion in net income, although more than half of that ($79 billion, or 60 percent) came from non-recurring events such as settlements. The following year, in 2014, the Enterprises totaled just $21.9 billion in net income, with 45 percent ($10 billion) coming from non-recurring events. The profitability of the GSEs is in doubt, according to the FHFA OIG, which released a report in March [8] to that effect. That report revealed the results of a stress test which found that under the worst economic conditions (akin to those from the 2008 financial crisis), Fannie Mae and Freddie Mac would require an additional draw of either $84 billion or $190 billion depending on the treatment of deferred assets.

To view the complete report, click here [5].