More Heat on Housing Regulator

It can’t be much fun to work at the Federal Housing Finance Agency these days.

The housing regulator is under fire from the left for not allowing Fannie Mae and Freddie Mac to allow loan forgiveness for troubled homeowners. The agency also faces constant attacks from lawmakers on Capitol Hill, and from an aggressive federal watchdog.

Reports released Thursday by the agency’s inspector general called out the FHFA for not adequately monitoring Fannie Mae’s and Freddie Mac’s mortgage-lending standards or spending on conferences.

The reports illustrate how the public spotlight on formerly obscure aspects of the government-controlled mortgage-finance giants operations has intensified over the past year, especially after the creation of the new inspector general’s office.

That office, led by Steve Linick, a former Justice Department official, has been persistent in its scrutiny of the mortgage firms, which buy up home loans and package them into securities with a guarantee against default. The two companies have been propped up by the U.S. government since September 2008, a rescue that has cost taxpayers $151 billion to date.

Brendan Smialowski for The Wall Street Journal
Steve Linick, inspector general for the Federal Housing Financing Agency.

One report, on mortgage-lending standards, focused on how many lenders received exceptions from Fannie Mae’s mortgage-lending standards. It noted that Fannie Mae reduced the number of outstanding exceptions from 11,000 for 857 lenders in January 2005 to 638 variances for 188 lenders last fall.

Fannie canceled those exceptions, also known as variances, for loans made without verification of borrowers’ income or assets, the report said.

While those changes were positive, the inspector general criticized FHFA for delegating authority over lending standards to Fannie and Freddie. The regulator “should assume a more active role in reviewing [Fannie’s and Freddie’s] underwriting standards and variances, and should develop detailed procedures governing its review process,” the report said.

However, in a letter written in response to the report, the FHFA defended its approach to oversight of lending standards, noting that the newest loans backed by Fannie and Freddie have had low default rates.

“We believe the current approach to overseeing underwriting standards … has been effective in recent years,” the agency wrote.

The inspector general, in another report, faulted the FHFA for failing to approve or review Fannie’s and Freddie’s sponsorship and participation in the Mortgage Bankers Association’s annual conference, held in Chicago last October.

As first disclosed by U.S. House lawmakers in December, the two companies spent more than $600,000 on that conference. That included $140,000 to sponsor the event and another $140,000 for business meals, the inspector general said.

Fannie’s and Freddie’s spending on airfare and hotels was in line with typical spending for federal employees, the report said. But the inspector general called the companies’ spending on conference sponsorship, meals and hosted dinners “of questionable value.”

After the companies spending became public last year, the FHFA’s acting director, Edward DeMarco, has ruled that Fannie and Freddie should not sponsor conferences without the regulator’s approval. However, the report noted that Fannie and Freddie should have been able to “accomplish their business at the convention at a substantially lower cost.”

Neither company, the report said, “was able to articulate tangible benefits accruing from its sponsorships, hosted dinners, and other business meals that would have warranted the expenditures.”

The report recommended that the housing regulator conduct a comprehensive review of travel and entertainment policies, and FHFA agreed with the recommendation.

A third report applauded FHFA’s oversight of Fannie’s and Freddie’s charitable giving, which the regulator has ordered the companies to wind down amid continuing losses and taxpayer assistance.

The companies’ charitable giving has declined to $50 million last year from $73 million in 2008. The companies’ corporate donations are scheduled to end in 2013. Fannie Mae’s foundation was dissolved in 2009 and Freddie Mac’s is scheduled to wind down by 2015, the report noted.

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