The two government entities that oversee most of the nation’s residential mortgage transactions face ongoing hurdles, according to a pair of government reports. Among the issues outlined are uncertainty about the future of the government sponsored enterprises, poor management of a technology infrastructure overhaul and inadequate management of risk.
Loans purchased or guaranteed by Fannie Mae or Freddie Mac accounted for approximately 74 percent of the roughly $1.3 trillion in new home loans originated last year.
The Federal Housing Administration insured around 16 percent of 2011 production.
Fannie and Freddie are controlled by the Federal Housing Finance Agency, which was named conservator of the two secondary lenders during the darkest days of the financial crisis in 2008.
A new report from FHFA’s inspector general indicates that the regulator faces “significant challenges” in managing the conservatorships of Fannie and Freddie. So far, the federal government has forked out $183 billion to keep the duo solvent.
One of the challenges, according to the report, is trying to advance the interests of the two companies while assisting distressed borrowers.
FHFA also is faced with the difficulty of simultaneously serving as their conservator and their regulator.
“As if these challenges were not daunting enough, the uncertain future of the enterprises overshadows all aspects of FHFA’s regulatory and conservatorship efforts,” the inspector general said. “Although FHFA recently published a strategic plan for the next phase of the conservatorships (that focuses on building infrastructure for a private secondary mortgage market), the best method for resolving the enterprises is dependent on many variables outside of FHFA’s control.”
Among the variables are the health of the U.S. housing market and debate about what the country’s housing finance system should look like.
Congress has continuously been introducing legislation about the future role of the government in the secondary market, but it has yet to come to agreement with the administration and other policymakers about a definitive path. In addition, the ultimate resolution of Fannie and Freddie remains uncertain.
The inspector general said that prospects are dim for a quick recovery of the housing market.
The report said that close attention and oversight is needed for how FHFA can best manage the conservatorships.
A separate report from the Government Accountability Office found that the capital ratio for FHA’s Mutual Mortgage Insurance Fund has not met the statutory 2 percent minimum for three consecutive years now.
FHA blames higher-than-expected defaults, claims and losses for the shortfall. In addition, insurance obligations have grown rapidly.
But FHA says that it will narrowly escape depleting all of the insurance funds and having to ask for more funds during fiscal-year 2012.
The GAO said that FHA has not addressed its 2010 recommendation for improving the reliability of its estimates, and FHA still relies on a single economic forecast that doesn’t fully account for variability in future home prices in interest rates.
The report highlighted how FHA has not yet integrated quality control and risk office activities as recommended by its own consultant and the GAO.
“Without integrated and updated risk assessments that identify emerging risks, FHA lacks assurance it has identified all its risks,” according to the report.
In a separate report, GAO criticized FHA’s modernization of its technology because it is not assessing performance against the goals that were established. FHA has also failed to establish policies and procedures for evaluating its portfolio of investments — limiting its ability to control risks and achieve benefits associated with the mix of legacy systems and modernization investments it selected.
FHA’s chief information officer was criticized for not adequately assessing information technology workforce needs or identifying gaps between the existing capabilities of FHA staff and additional staffing needs — leaving it lacking it the skill set needed.
FHA has also failed to fully develop its enterprise architecture, which provides a blueprint for investing that connects strategic plans with individual programs and system solutions.
GAO also said that Ginnie Mae’s staff remains too limited, while the corporation maintains a substantial reliance on contractors. The government-owned company also needs more modernized systems to manage its risk.
While Ginnie has planned several initiatives to enhance its risk-management processes related to gaps in resources, contracts, and issuers — it has not yet fully implemented the plans. GAO said that the plans need to be quickly implemented.
“Also, in developing inputs and procedures for the model used to forecast costs and revenues, the agency did not consider certain practices identified in guidance for preparing cost estimates of federal credit programs,” the report stated. “Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data.
“By not fully implementing certain practices, which GAO believes represent sound internal controls for models, Ginnie Mae’s model may not use critical data that could affect the agency’s ability to provide well-informed budgetary cost estimates and financial statements.”
