FHFA OIG – Negligent & Complicit

In March 2012, FHFA OIG published a White Paper entitled: FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and Freddie Mac. In the paper, OIG makes an error in their assessment that Fannie Mae and Freddie Mac will not return to profitability — they did. However, more importantly OIG makes it clear they believed that Fannie and Freddie possessed the ability to repay the money that the Treasury Department injected into them.

Notice that OIG cavalierly dismisses Fan and Fred’s ability to end the conservatorships via repayment. In an audacious comment that is well beyond their scope and expertise, OIG states “the model on which they were built is broken beyond repair.”  This statement makes it clear that OIG has no intention to fulfill its mandate, which is to make certain all laws are being followed.  No, OIG has declared that the model is broken, so any illegal action taken by FHFA, Treasury or anyone related is inconsequential… because FHFA OIG declared Fannie and Freddie broken…

If FHFA OIG did indeed believe that Fan and Fred had the ability to repay the debt in March 2012 then they clearly should have objected to the third amendment (sweep) just five months later in August 2012.

FHFA OIG was negligent in 2012, which points to their ongoing complicity today.  This example is just one of many that proves the third amendment was not “to end circular draws,” rather it was to prevent Fannie and Freddie from repaying the money that Treasury injected into them.

Below is the entire passage:

D. An Uncertain Future

The Fannie Mae and Freddie Mac conservatorships were intended to be temporary solutions to a larger problem. Indeed, FHFA has emphasized that the conservatorships “cannot be a permanent state for the Enterprises.”47 The lack of guidance about the outcome of the conservatorships has been difficult for the Agency and becomes harder with each passing day. As reflected above, the Agency has found it increasingly difficult to make investments in organizational infrastructure and to make human resources decisions without knowledge as to when – or, indeed, if – the conservatorships can be concluded.

According to the Agency, a conservator’s goal “is to continue the operations of a regulated entity, rehabilitate it and return it to a safe, sound and solvent condition.” Once this has been accomplished, “the Director will issue an order terminating the conservatorship.”48 HERA does not limit the duration of the conservatorships, but the statute indicates that Congress intended the conservatorships to be finite. Specifically, the statues states:

The Agency may, at the discretion of the Director, be appointed conservator or receiver for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.49

As a practical matter, however, the Enterprises’ future solvency – and, thus, emergence from the conservatorships – is unlikely without legislative action. FHFA officials have stated that the PSPAs have made it virtually impossible for the Enterprises to emerge from the conservatorships. For example, the Enterprises currently owe Treasury $183 billion, and are required to pay 10% dividends on Treasury’s outstanding investment. Merely paying the 10% annual dividend (i.e., $18.3 billion, presently) would not reduce Treasury’s outstanding investment. Moreover, the Enterprises have had to borrow from Treasury at least part of their dividend payments to Treasury, thus increasing the value of their outstanding debt. As a result, it would appear highly unlikely – if not mathematically impossible – for the Enterprises to buy themselves out of the conservatorships. FHFA’s Acting Director has stated that:

[T]he Enterprises will not be able to earn their way back to a condition that allows them to emerge from conservatorship. In any event, the model on which they were built is broken beyond repair. Conservatorship allows the Enterprises to continue serving their public purpose while lawmakers determine the ultimate resolution of the conservatorships and the future legal structure for housing finance.50

Despite the uncertain future, and pending a long-term congressional resolution, FHFA has created a three-part strategic plan for the conservatorships. FHFA’s goals are to: (1) build a new infrastructure for the secondary mortgage market; (2) gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations; and (3) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. FHFA believes that this plan “leav[es] open all options for Congress and the Administration regarding the resolution of the conservatorships.”51