Financial Audit
Federal Housing Finance Agency's Fiscal Year 2009 Financial Statements Gao ID: GAO-10-218 November 16, 2009The Housing and Economic Recovery Act of 2008 (HERA) created the Federal Housing Finance Agency (FHFA) and gave it responsibility for, among other things, the supervision and oversight of Fannie Mae, Freddie Mac, and the 12 federal home loan banks. Specifically, FHFA was assigned responsibility for ensuring that each of the regulated entities operates in a fiscally safe and sound manner, including maintenance of adequate capital and internal controls, and carries out its housing and community development finance mission. HERA also requires FHFA to annually prepare financial statements, and further requires the Government Accountability Office (GAO) to audit these statements. Pursuant to HERA's requirement, GAO audited FHFA's fiscal year 2009 financial statements to determine whether (1) the financial statements were fairly stated and (2) FHFA management maintained effective internal control over financial reporting. GAO also tested FHFA's compliance with selected laws and regulations. GAO is not making any recommendations in this report. In commenting on a draft of this report, FHFA noted the challenges it faced in establishing the new agency while working to stabilize the housing market. It noted that it would continue to work to enhance its internal controls and ensure the reliability of its financial reporting, its operational soundness, and public confidence in its mission.
In GAO's opinion, FHFA's fiscal year 2009 financial statements are fairly presented in all material respects. GAO also concluded that FHFA had effective internal control over financial reporting as of September 30, 2009. GAO found no reportable instances of noncompliance with the laws and regulations it tested. HERA established FHFA as an independent agency on July 30, 2008, and abolished, effective within 1 year of enactment, the Office of Federal Housing Enterprise Oversight (OFHEO) and the Federal Housing Finance Board (FHFB) - which, together with a mission group within the Department of Housing and Urban Development (HUD), had previous supervisory and oversight responsibilities for Fannie Mae, Freddie Mac, and the 12 federal home loan banks. During fiscal year 2009, OFHEO's and FHFB's personnel, property, and program activities, and certain employees and activities of HUD, were transferred to FHFA, and the assets, liabilities, and financial transactions of OFHEO and FHFB were consolidated into FHFA. While FHFA was in existence prior to the start of fiscal year 2009, this was its first full year of operations and the first year for which it prepared financial statements. Consequently, FHFA's financial statements do not present comparative information for the prior year. In early September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the Director of FHFA, with the stated intent to stabilize these entities. The assets, liabilities, and activities of the two entities, Fannie Mae and Freddie Mac, are not reflected in FHFA's fiscal year 2009 financial statements, based on determinations by the Office of Management and Budget (OMB) and the Department of the Treasury (Treasury) that they did not meet the criteria for inclusion in the financial statements of the U.S. government or the Treasury under federal accounting concepts. Specifically, OMB and Treasury concluded this because the entities are not currently reflected in the federal government's budget and because the conservatorship arrangement is considered to be temporary. FHFA management concurred with this conclusion. Should circumstances change, this decision would need to be revisited. Over the longer term, Congress and the executive branch face difficult decisions on how to restructure the entities and promote housing opportunities while limiting the risks to taxpayers and the financial markets. GAO issued a report containing a framework for evaluating various options available. GAO noted other less significant matters involving FHFA's internal controls and will be reporting separately to FHFA management on these matters.
GAO-10-218, Financial Audit: Federal Housing Finance Agency's Fiscal Year 2009 Financial Statements
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Report to the Congressional Committees:
United States Government Accountability Office:
GAO:
November 2009:
Financial Audit:
Federal Housing Finance Agency's Fiscal Year 2009 Financial Statements:
GAO-10-218:
GAO Highlights:
Highlights of GAO-10-218, a report to Congressional Committees.
Why GAO Did This Study:
The Housing and Economic Recovery Act of 2008 (HERA) created the
Federal Housing Finance Agency (FHFA) and gave it responsibility for,
among other things, the supervision and oversight of Fannie Mae,
Freddie Mac, and the 12 federal home loan banks. Specifically, FHFA was
assigned responsibility for ensuring that each of the regulated
entities operates in a fiscally safe and sound manner, including
maintenance of adequate capital and internal controls, and carries out
its housing and community development finance mission. HERA also
requires FHFA to annually prepare financial statements, and further
requires GAO to audit these statements.
Pursuant to HERA‘s requirement, GAO audited FHFA‘s fiscal year 2009
financial statements to determine whether (1) the financial statements
were fairly stated and (2) FHFA management maintained effective
internal control over financial reporting. GAO also tested FHFA‘s
compliance with selected laws and regulations.
GAO is not making any recommendations in this report. In commenting on
a draft of this report, FHFA noted the challenges it faced in
establishing the new agency while working to stabilize the housing
market. It noted that it would continue to work to enhance its internal
controls and ensure the reliability of its financial reporting, its
operational soundness, and public confidence in its mission.
What GAO Found:
In GAO‘s opinion, FHFA‘s fiscal year 2009 financial statements are
fairly presented in all material respects. GAO also concluded that FHFA
had effective internal control over financial reporting as of September
30, 2009. GAO found no reportable instances of noncompliance with the
laws and regulations it tested.
HERA established FHFA as an independent agency on July 30, 2008, and
abolished, effective within 1 year of enactment, the Office of Federal
Housing Enterprise Oversight (OFHEO) and the Federal Housing Finance
Board (FHFB) – which, together with a mission group within the
Department of Housing and Urban Development (HUD), had previous
supervisory and oversight responsibilities for Fannie Mae, Freddie Mac,
and the 12 federal home loan banks. During fiscal year 2009, OFHEO‘s
and FHFB‘s personnel, property, and program activities, and certain
employees and activities of HUD, were transferred to FHFA, and the
assets, liabilities, and financial transactions of OFHEO and FHFB were
consolidated into FHFA. While FHFA was in existence prior to the start
of fiscal year 2009, this was its first full year of operations and the
first year for which it prepared financial statements. Consequently,
FHFA‘s financial statements do not present comparative information for
the prior year.
In early September 2008, Fannie Mae and Freddie Mac were placed into
conservatorship by the Director of FHFA, with the stated intent to
stabilize these entities. The assets, liabilities, and activities of
the two entities, Fannie Mae and Freddie Mac, are not reflected in FHFA‘
s fiscal year 2009 financial statements, based on determinations by the
Office of Management and Budget (OMB) and the Department of the
Treasury (Treasury) that they did not meet the criteria for inclusion
in the financial statements of the U.S. government or the Treasury
under federal accounting concepts. Specifically, OMB and Treasury
concluded this because the entities are not currently reflected in the
federal government‘s budget and because the conservatorship arrangement
is considered to be temporary. FHFA management concurred with this
conclusion. Should circumstances change, this decision would need to be
revisited.
Over the longer term, Congress and the executive branch face difficult
decisions on how to restructure the entities and promote housing
opportunities while limiting the risks to taxpayers and the financial
markets. GAO issued a report containing a framework for evaluating
various options available.
GAO noted other less significant matters involving FHFA‘s internal
controls and will be reporting separately to FHFA management on these
matters.
View [hyperlink, http://www.gao.gov/products/GAO-10-218] or key
components. For more information, contact Steven J. Sebastian at (202)
512-3406 or sebastians@gao.gov.
[End of section]
Contents:
Letter:
Opinion on Financial Statements:
Agency Comments and Our Evaluation:
Audit Report4:
Appendix I: Management Report on Internal Control over Financial
Reporting:
Appendix II: Comments from the Federal Housing Finance Agency:
Abbreviations:
FHFA: Federal Housing Finance Agency:
FHFB: Federal Housing Finance Board:
HERA: Housing and Economic Recovery Act:
HUD: Department of Housing and Urban Development:
OFHEO: Office of Federal Housing Enterprise Oversight:
OMB: Office of Management and Budget:
FMFIA: Federal Managers' Financial Integrity Act of 1982:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
The Honorable Christopher Dodd:
Chairman:
The Honorable Richard Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
This report presents our opinion on whether the financial statements of
the Federal Housing Finance Agency (FHFA) are presented fairly, in all
material respects, in conformity with U.S. generally accepted
accounting principles for the year ended September 30, 2009 - the first
full year of FHFA's operation. These financial statements are the
responsibility of FHFA. This report also presents (1) our opinion on
the effectiveness of FHFA's internal control over financial reporting
as of September 30, 2009, and (2) the results of our tests of FHFA's
compliance with selected laws and regulations during fiscal year 2009.
The Housing and Economic Recovery Act of 2008[Footnote 1] established
FHFA as an independent agency empowered with supervisory and regulatory
oversight of Fannie Mae, Freddie Mac, and the 12 Federal Home Loan
Banks. The act requires FHFA to annually prepare and submit financial
statements to the Director of the Office of Management and Budget, and
requires GAO to audit the agency's financial statements and submit to
the Congress a report on the audit and to the President and FHFA a copy
of the report. We conducted this audit in accordance with U.S.
generally accepted government auditing standards. The accomplishment of
this first-ever audit of FHFA's financial statements was made possible
by the tremendous dedication of time and effort from FHFA management
and staff.
FHFA faced significant challenges during fiscal year 2009 in merging
the personnel and operations of the former Office of Federal Housing
Enterprise Oversight and Federal Housing Finance Board into one
regulatory entity. At the same time, FHFA was further challenged with
carrying out its responsibilities as conservator of Fannie Mae and
Freddie Mac to ensure these entities continued to meet their mission
requirements of providing stability to the secondary market for
residential mortgages and serving the needs of certain targeted groups.
FHFA placed both entities into conservatorship in September 2008 in the
wake of their deteriorating financial conditions with the objective of
stabilizing them. These stabilization efforts included direct financial
support from the U.S. Treasury to the entities of up to $200 billion
each in exchange for Treasury's purchase of the entities' senior
preferred stock. To date, the entities have received about $96 billion
through such purchases. FHFA has maintained that the conservatorship
arrangement is not intended to be permanent. Over the longer term,
Congress and the Executive branch will face difficult decisions on how
to restructure Fannie Mae and Freddie Mac and promote housing
opportunities while limiting the risks to taxpayers and the stability
of the financial markets.
In a recent report[Footnote 2], we analyzed the record of Fannie Mae
and Freddie Mac in meeting their housing mission objectives, their
organizational structures, and the circumstances which led to the
federal government's actions to intercede and stabilize them. In that
report, we discussed the need for Congress to reevaluate the roles,
structures, and performance of the entities, and to consider various
options to facilitate mortgage finance while mitigating safety and
soundness and systemic risk concerns. We also provided a framework for
identifying the trade-offs associated with the options, and identified
potential regulatory and oversight structures, principles, and actions
that could help ensure their effective implementation.
We are sending copies of this report to the Chairman of the Federal
Housing Finance Oversight Board, the Secretary of the Treasury, the
Secretary of Housing and Urban Development, the Chairman of the
Securities and Exchange Commission, the Director of the Office of
Management and Budget, and other interested parties. In addition, this
report also is available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you have any questions concerning this report, please contact me at
(202) 512-3406 or sebastians@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report.
Signed by:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
[End of section]
United States Government Accountability Office:
Washington, D.C. 20548:
To the Director of the Federal Housing Finance Agency:
In accordance with the Housing and Economic Recovery Act of 2008
(HERA), we are responsible for conducting audits of the financial
statements of the Federal Housing Finance Agency (FHFA). In our audit
of FHFA's fiscal year 2009 financial statements, we found:
* the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles;
* FHFA maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2009; and:
* no reportable noncompliance with laws and regulations we tested.
The following sections discuss in more detail (1) these conclusions;
(2) our conclusions on Management's Discussion and Analysis; (3) our
audit objectives, scope, and methodology; and (4) agency comments and
our evaluation.
Opinion on Financial Statements:
FHFA's financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, its assets, liabilities and net
position as of September 30, 2009, and its net costs, changes in net
position, and budgetary resources for the fiscal year then ended.
As discussed in note 1A of the financial statements, HERA[Footnote 3]
established FHFA on July 30, 2008, and charged it with the supervisory
and regulatory oversight of Fannie Mae, Freddie Mac, and the 12 Federal
Home Loan Banks. These responsibilities were previously assigned to the
Office of Federal Housing Enterprise Oversight (OFHEO), the Federal
Housing Finance Board (FHFB), and a mission group in the Department of
Housing and Urban Development (HUD). HERA abolished OFHEO and FHFB
effective no later than 1 year after enactment of the act, or by July
30, 2009. In accordance with HERA, during fiscal year 2009, personnel,
property, and program activities of OFHEO and FHFB, and certain HUD
employees and activities related to regulation of Fannie Mae and
Freddie Mac, were transferred to FHFA, with OFHEO and FHFB ceasing all
activity in July, 2009. The assets, liabilities, and financial
transactions of OFHEO and FHFB were consolidated into FHFA during
fiscal year 2009. Because fiscal year 2009 was the first full year of
FHFA's operations, this is the first year in which FHFA prepared
financial statements. Consequently, the financial statements do not
present comparative information for the prior year.
As discussed in note 1A of the financial statements, FHFA's fiscal year
2009 financial statements do not include the assets, liabilities, and
activities associated with Fannie Mae and Freddie Mac. In early
September 2008, less than 2 months after its establishment, the
Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship
under the authority of the Federal Housing Enterprises Financial Safety
and Soundness Act of 1992, as amended by HERA. As announced by the
Director, FHFA's goal in placing the two entities into conservatorship
was to stabilize them with the objective of maintaining normal business
operations and restoring safety and soundness. Shortly after Fannie Mae
and Freddie Mac were placed in conservatorship, the Office of
Management and Budget (OMB) and the Department of the Treasury
(Treasury) determined that the finances of these entities would not be
included in the financial statements of the federal government. In
making this determination, OMB and Treasury reviewed the criteria
contained in Statement of Federal Financial Accounting Concepts No. 2,
Entity and Display. They concluded that because the entities were not
listed in the section of the federal government's budget entitled
"Federal Programs by Agency and Account" and because the nature of the
conservatorships and the federal government's ownership and control of
the entities were considered to be temporary, the entities did not meet
the conclusive or indicative criteria in Concept Statement No. 2 for
consolidation. Treasury recently revisited this decision with respect
to its own financial statements and reaffirmed it and its underlying
basis. FHFA management concurs with this conclusion. Consequently, FHFA
did not consolidate Fannie Mae and Freddie Mac into its fiscal year
2009 financial statements. Should circumstances change, such as the
inclusion of Fannie Mae and Freddie Mac in the federal budget or a
determination that the current degree of federal control and ownership
of the entities is other than temporary, this decision would need to be
revisited.
Opinion on Internal Control:
FHFA maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2009, that provided
reasonable assurance that misstatements, losses, or noncompliance
material in relation to the financial statements would be prevented or
detected and corrected on a timely basis. Our opinion is based on
criteria established under 31 U.S.C. § 3512(c), (d), commonly known as
the Federal Managers' Financial Integrity Act of 1982 (FMFIA).
We identified certain deficiencies in FHFA's system of internal control
that we consider not to be material weaknesses or significant
deficiencies.[Footnote 4] These deficiencies involve matters related to
certain accounting and monitoring procedures, access controls, and
information security management. We have communicated these matters to
management and, where appropriate, will report on them separately.
Compliance with Laws and Regulations:
Our tests of FHFA's compliance with selected provisions of laws and
regulations for fiscal year 2009 disclosed no instances of
noncompliance that would be reportable under U.S. generally accepted
government auditing standards. The objective of our audit was not to
provide an opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.
Consistency of Other Information:
FHFA's Management's Discussion and Analysis contains a wide range of
information, some of which is not directly related to the financial
statements. We did not audit and we do not express an opinion on this
information. However, we compared this information for consistency with
the financial statements and discussed the methods of measurement and
presentation with FHFA officials. On the basis of this limited work, we
found no material inconsistencies with the financial statements or U.S.
generally accepted accounting principles or OMB Circular No. A-136,
Financial Reporting Requirements.
Objectives, Scope, and Methodology:
FHFA management is responsible for (1) preparing the financial
statements in conformity with U.S. generally accepted accounting
principles, (2) establishing and maintaining effective internal control
over financial reporting and evaluating its effectiveness, and (3)
complying with applicable laws and regulations. FHFA management
evaluated the effectiveness of FHFA's internal control over financial
reporting as of September 30, 2009, based on the criteria established
under FMFIA. FHFA management's assertion is included in appendix I.
We are responsible for planning and performing the audit to obtain
reasonable assurance and provide our opinion about whether (1) FHFA's
financial statements are presented fairly, in all material respects, in
conformity with U.S. generally accepted accounting principles, and (2)
FHFA management maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2009. We
are also responsible for (1) testing compliance with selected
provisions of laws and regulations that have a direct and material
effect on the financial statements and (2) performing limited
procedures with respect to certain other information accompanying the
financial statements.
In order to fulfill these responsibilities, we:
* examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
* assessed the accounting principles used and significant estimates
made by management;
* evaluated the overall presentation of the financial statements;
* obtained an understanding of the entity and its operations, including
its internal control over financial reporting;
* considered FHFA's process for evaluating and reporting on internal
control over financial reporting that FHFA is required to perform by
FMFIA;
* assessed the risk that a material misstatement exists in the
financial statements and the risk that a material weakness exists in
internal control over financial reporting;
* evaluated the design and operating effectiveness of internal control
over financial reporting based on the assessed risk;
* tested relevant internal control over financial reporting;
* tested compliance with selected provisions of the following laws and
their related regulations: 31 U.S.C. § 3902 (a), (b), (f) - Interest
penalties under the Prompt Payment Act; 31 U.S.C. § 3904 -Limitations
on Discount Payments Under the Prompt Payment Act; 5 U.S.C. § 5332 and
5343, and 29 U.S.C. § 206 - Pay and Allowance System for Civilian
Employees; Federal Employees' Retirement System Act of 1986 (FERSA), as
amended; Social Security Act of 1935, as amended; Federal Employees
Health Benefits Act of 1959, as amended; and Housing and Economic
Recovery Act of 2008; and:
* performed such other procedures as we considered necessary in the
circumstances.
An entity's internal control over financial reporting is a process
effected by those charged with governance, management, and other
personnel, the objectives of which are to provide reasonable assurance
that (1) transactions are properly recorded, processed, and summarized
to permit the preparation of financial statements in conformity with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or
disposition, and (2) transactions are executed in accordance with the
laws governing the use of budget authority and other laws and
regulations that could have a direct and material effect on the
financial statements.
We did not evaluate all internal controls relevant to operating
objectives as broadly established under FMFIA, such as those controls
relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to controls over
financial reporting. Because of inherent limitations, internal control
may not prevent or detect and correct misstatements due to error or
fraud, losses, or noncompliance. We also caution that projecting any
evaluation of effectiveness to future periods is subject to the risk
that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
We did not test compliance with all laws and regulations applicable to
FHFA. We limited our tests of compliance to selected provisions of laws
and regulations that have a direct and material effect on the financial
statements for the fiscal year ended September 30, 2009. We caution
that noncompliance may occur and not be detected by these tests and
that such testing may not be sufficient for other purposes.
We performed our audit in accordance with U.S. generally accepted
government auditing standards. We believe our audit provides a
reasonable basis for our opinions and other conclusions.
Agency Comments and Our Evaluation:
In commenting on a draft of this report, FHFA stated that it was
pleased that the audit found that its fiscal year 2009 financial
statements were presented fairly, that it maintained effective internal
control over financial reporting, and that there had been no instances
of reportable noncompliance with laws and regulations. FHFA noted the
challenges it had faced during fiscal year 2009 in trying to stabilize
the housing market in the midst of financial market turmoil while
creating the new agency and establishing a new financial accounting
system, policies, and controls, and noted that the unqualified audit
opinion was testimony to the hard work and dedication of its management
and staff in building a solid foundation for the agency. FHFA also
noted that it would continue to work to enhance its internal controls
and ensure the reliability of its financial reporting, its operational
soundness, and public confidence in its mission.
The complete text of FHFA's response is reprinted in appendix II.
Signed by:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
November 9, 2009:
[End of section]
Appendix I: Management Report on Internal Control over Financial
Reporting:
FHFA's Mission:
Provide effective supervision, regulation, and housing mission
oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks
to promote their safety and soundness, support housing finance and
affordable housing, and support a stable and liquid mortgage market.
FHFA's Values:
Accountability:
We foster responsibility on the part of individual employees and
divisions through defined delegations of authority. We align our
actions and resources with our mission and respond promptly and
proactively to emerging risks. We adhere to a predictable risk-based
supervision program. We use agency resources and authorities
efficiently and effectively to achieve our mission and goals.
Responsiveness:
We cooperate, collaborate, and communicate within the Federal Housing
Finance Agency (FHFA) and with other government agencies, Congress, and
the public We respond promptly to external requests and regularly
disseminate information about the housing industry and markets. We
promptly address and dearly communicate issues, decisions, and
conclusions to the regulated entities.
Independence:
We are the independent regulator of Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks. Our evaluations of the housing-related
regulated entities are unbiased and remain free from external
influence.
Integrity:
We adhere to the highest ethical and professional standards. We treat
the regulated entities, the public, policymakers and other stakeholders
fairly with impartiality and respect We apply consistent treatment to
and among the housing regulated entities and base our decisions on the
merits of their current actions and conditions.
Professionalism:
We maintain a highly skilled, dedicated, and diverse workforce. We
promote equal opportunity and advancement on the basis of merit. We
recognize employees who demonstrate competence and effectiveness in
their decisions and actions and whose results serve the agency's
mission and the public interest. We judge the regulated entities
against defined industry standards through a disciplined examination
approach.
Description of FHFA:
The Housing and Economic Recovery Act of 2008 (HERA) established FHFA
by merging the Office of Federal Housing Enterprise Oversight (OFHEO),
the Federal Housing Finance Board (FHFB), and the Department of Housing
and Urban Development's (HUD) mission group to oversee the financial
safety and soundness and the housing mission of all the housing-related
government-sponsored enterprises (GSEs), also referred to as the
regulated entities. These include the Federal National Mortgage
Association (Fannie Mae), the Federal Home Loan Mortgage Corporation
(Freddie Mac), and the Federal Home Loan Bank (FHLBank) System,
composed of 12 FHLBanks and the Office of Finance.
FHFA is a small government agency with a workforce that includes highly
skilled economists, market analysts, examiners, subject matter experts,
technology specialists, accountants, and attorneys. FHFA had a staff of
428 employees at the end of FY 2009. In FY 2010, the agency plans to
add 52 employees.
FHFA's Director sets the direction for the agency to achieve its
mission. FHFA divisions and offices have specific responsibilities and
work together to ensure effective execution of the agency's mission.
The Division of Federal Home Loan Bank Regulation is responsible for
the supervision and examination of the FHLBanks and the Office of
Finance. The division conducts annual on-site examinations, periodic
visitations, and off-site monitoring. Other division responsibilities
include supervisory policy and program development, regulatory analysis
and developments, and economic research and analysis in support of
FHLBank regulation.
The Division of Enterprise Regulation is responsible for the
supervision and examination of Fannie Mae and Freddie Mac (The
Enterprises). The division conducts annual on-site examinations and off-
site monitoring. The division provides oversight and ensures
coordination among all FHFA mission-critical supervisory functions,
including programs for capital adequacy, compliance, examination,
financial analysis, and quality assurance in support of the
Enterprises.
Figure 1: Organization Chart for FHFA:
[Refer to PDF for image: organization chart]
Top level: Office of the Director.
Second level, reporting to Office of the Director: Office of Internal
Audit.
Third level, reporting to Office of the Director:
Division of Enterprise Regulation;
Division of FLHBank Regulation;
Division of Housing Mission & Goals;
Office of the Chief Administrative Officer;
Office Of General Counsel;
Office of External Relations;
Office of Technology & Information Management.
Fourth level, reporting to Division of Enterprise Regulation and
Division of FLHBank Regulation:
Office of Conservatorship Operations.
Fourth level, reporting to Division of Housing Mission & Goals:
Office of Policy & Research Analysis;
Office of the Chief Accountant;
Office of Housing Mission & Goals.
Fourth level, reporting to Office of the Chief Administrative Officer:
Office of Budget & Financial Management;
Office of Human Resources Management.
[End of figure]
The Division of Housing Mission and Goals is composed of the following
three offices, each with responsibilities that span all of the
regulated entities:
The Office of Housing Mission and Goals is responsible for oversight of
the housing mission and goals of the Enterprises and the oversight of
the housing finance, community, and economic development mission of the
FHLBanks.
The Office of the Chief Accountant develops safety and soundness
guidance and policies related to accounting, auditing, and financial
reporting and disclosure at the regulated entities. The office monitors
the compliance of the regulated entities with such policies and also
promotes the application of consistent accounting policies across the
regulated entities.
The Office of Policy Analysis and Research conducts research and policy
analysis to assess the short- and long-term effect of trends and issues
in the activities of the regulated entities, housing finance, and
financial regulation on the regulatory and supervisory functions of
FHFA. The office also prepares data series and publications that inform
the public about the housing finance system and changes in house prices
and helps support development of FHFA regulatory policies.
The Office of Conservatorship Operations assists the FHFA Director, as
conservator, in preserving and conserving Fannie Mae's and Freddie
Mac's assets and property. The office ensures the Enterprises
appropriately focus on their mission, including the stability,
liquidity, and affordability of the housing market.
The Office of the General Counsel advises and supports the Director and
all FHFA staff on legal matters related to functions, activities, and
operations of FHFA and the regulated entities, specifically prproviding
support for supervision functions, promulgation of regulations, and
enforcement actions.
The Office of Internal Audit reports directly to the Office of the
Director and carries out certain audit functions for FHFA as delegated
by the Director. Until FHFA has an Office of Inspector General, the
Office of Internal Audit will address reports of violations of any law,
rule or regulation; gross mismanagement gross waste of funds; abuses of
authority; or substantial and specific dangers to public safety or
complaints regarding the programs and operations of the agency.
The Office of External Relations works with FHFA's external
stakeholders to effectively communicate information about the agency,
respond to public and congressional inquiries, and release pertinent
information to the public.
The Office of the Chief Administrative Officer provides operational
support and services and business solutions to FHFA offices. The
office's staff members work in a variety of areas, including human
resource management, budget and financial management, performance
management, and facilities management.
The Office of Technology and Information Management (OTIM) is
responsible for ensuring the integrity, confidentiality, and
availability of FHFA's information systems and assets. The office
maintains the information technology (IT) infrastructure, develops
information systems, provides storage and management of the agency's
information assets, provides support to FHFA employees on IT systems,
manages Freedom of Information Act requests, and ensures information
security.
To fulfill its mission, FHFA has available a full range of oversight
and regulatory authorities to deal with the regulated entities. These
authorities include full scope examinations and enforcement mechanisms,
such as cease and desist orders, civil money penalties, removal
authority, and independent litigation authority.
Description of Regulated Entities:
The Enterprises:
The primary and secondary mortgage markets work together to finance
homeownership opportunities. The secondary market provides liquidity to
the primary market and helps establish mortgage interest rates.
In the primary mortgage market, financial institutions make mortgage
loans directly to homebuyers. This process begins when the potential
homeowner, or borrower, applies for a mortgage loan from a lender. The
lender can be a savings bank, credit union, mortgage banking company,
commercial bank, savings and loan, or state or local housing finance
agency. Once the lender approves the application and the loan is
processed, the mortgage lender provides the money to the borrower, who
then applies the proceeds of the mortgage to the cost of the home. The
lender in the primary market either holds the loan in its own portfolio
or sells the loan into the secondary market.
Congress established Fannie Mae and Freddie Mac (the Enterprises) to
perform an important role in the nation's housing finance system:
providing liquidity, stability, and affordability to the secondary
mortgage market. In the secondary mortgage market, the Enterprises make
funds readily accessible for banks, savings and loans, and mortgage
companies that make loans in the primary mortgage market to finance
housing. Fannie Mae and Freddie Mac are the largest buyers of mortgages
in the secondary market. They hold the mortgages they purchase in their
portfolios or package the loans into mortgage-backed securities (MBS).
The Enterprises also buy other agency and private-label MBS (PLMBS) for
their own portfolios. Lenders can use the cash raised by selling
mortgages to the Enterprises to lend more so individuals and families
who buy homes and investors who purchase single-family homes or
apartment buildings and other multifamily dwellings will have a
reliable, stable supply of mortgage money. Roughly half of the
mortgages purchased by Fannie Mae and Freddie Mac finance dwelling
units that are affordable to low- and moderate-income households. More
than one-fourth are located in geographic areas designated as
"underserved."
Figure 2: FHFA's Oversight Role ” Fannie Mae & Freddie Mac:
[Refer to PDF for image: illustration]
[End of figure]
MBS are traded in the secondary mortgage market. Because Fannie Mae and
Freddie Mac package mortgages as MBS and guarantee timely payment of
principal and interest on the underlying mortgages, investors who might
not otherwise invest in mortgages enter the secondary mortgage market,
which expands the pool of funds available for housing. This process
makes the secondary mortgage market more liquid and helps lower the
interest rates paid by homeowners and other mortgage borrowers.
Figure 3: FHFA's Oversight Role ” FHLBanks:
[Refer to PDF for image: illustration]
Note: The collateral pledged may include assets other than mortgages.
Also, the collateral pledged may be loans originated well in the past.
[End of figure]
The Federal Home Loan Banks:
The fundamental business of the FHLBanks is to provide a readily
available, low-cost source of funds in a wide range of maturities to
meet the liquidity demands of members. The FHLBanks are cooperatives,
which means only members and former members own the capital stock in
each FHLBank. Membership is limited to regulated depositories,
insurance companies, and community development financial institutions
engaged in residential housing finance. As a member-owned cooperative,
each FHLBank conducts its credit and mortgage program businesses with
its members or eligible housing associates.
The FHLBanks make loans, called advances, to their members and eligible
housing associates on the security of mortgages and other collateral
pledged by the borrowing member or housing associate. This serves the
general public by increasing the availability of credit for residential
mortgages and community investments and by making the mortgages and
mortgage securities owned by members more liquid. Enhancing the
liquidity of mortgages makes members more likely to invest in mortgages
and MBS.
Advances are the largest category of assets of the FHLBanks. In
addition, some FHLBanks provide members with a means of enhancing
liquidity by purchasing or funding home mortgages through mortgage
programs developed for their members. Under these programs, members are
offered the opportunity to sell qualifying mortgages to, or fund them
through, an FHLBank. Members can also borrow from an FHLBank to fund
low-income housing, helping the members satisfy their regulatory
requirements under the Community Reinvestment Act. Finally, some
FHLBanks offer their members a variety of services such as
correspondent banking, which includes security safekeeping; wire
transfers and settlements; cash management letters of credit and
derivative intermediation.
The FHLBanks fund their assets and operations principally through the
sale of debt instruments, known as consolidated obligations, to the
public through the Office of Finance. Each FHLBank is jointly and
severally liable with the other FHLBanks for all consolidated
obligations issued. Consolidated obligations are not obligations of the
United States, and the U.S. government does not guarantee them.
Figure 4 • Federal Home Loan Bank Districts:
[Refer to PDF for image: US map and associated data]
Alabama, District of Columbia, Florida, Georgia, Maryland, North
Carolina, South Carolina, Virginia.
Boston:
Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island,
Vermont.
Chicago:
Illinois, Wisconsin.
Cincinnati:
Kentucky, Ohio, Tennessee.
Dallas:
Arkansas, Louisiana, Mississippi, New Mexico, Texas.
Des Moines:
Iowa, Minnesota, Missouri, North Dakota, South Dakota.
Indianapolis:
Indiana, Michigan.
New York:
New Jersey, New York, Puerto Rico, Virgin Islands.
Pittsburgh:
Delaware, Pennsylvania, West Virginia.
San Francisco:
Arizona, California, Nevada.
Seattle:
Alaska, Guam, Hawaii, Idaho, Montana, Oregon, Utah, Washington,
Wyoming.
Topeka:
Colorado, Kansas, Nebraska, Oklahoma.
[End of figure]
Performance Highlights:
Establishing FHFA:
At the beginning of FY 2009, former OFHEO and FHFB employees were
officially transferred to FHFA, less than 90 days after enactment of
HERA. Since then, FHFA has worked to integrate the separate
administrative and financial systems of the two predecessor agencies.
FHFA contracted with the Treasury Department's Bureau of the Public
Debt. Administrative Resource Center to provide accounting services for
the agency. The Bureau of the Public Debt is approved by the federal
Office of Management and Budget (OMB) as a "Center of Excellence for
Financial Management" A new accounting system, which went live on July
1, 2009, provides the agency with a cost-effective integrated system
for its accounting procurement, and travel activities. The project was
completed within established timeframes and budget Combining the
financial accounting functions of the predecessor agencies was an
important step toward completing the transition to an operationally
unified agency.
The Office of Human Resource Management coordinated the programming and
systems changes with the National Finance Center to achieve a
transition from two separate systems into a unified payroll and
processing system for FHFA. The integration was completed in July 2009,
on schedule and under budget With a unified FHFA personnel and payroll
system, the agency can move to the next phase of full employee
integration: the migration of employees into a combined compensation
and benefits package.
OTIM worked to unify FHFA information technology infrastructure
operations. The goal throughout the integration effort was to build and
operate one IT infrastructure to support FHFA's mission effectively.
Specifically, FHFA has:
* Implemented an integrated e-mail messaging system;
* Consolidated software licenses and services;
* Eliminated duplication of information systems and data sources;
* Established the FHFA.gov domain and developed and deployed a new
FHFA.gov Web site;
* Established an internal employee communication site; and
* Unified internal customer service operations.
Charting the Future:
Figure: Photograph: FHFA staff meet to develop the 2009 Agency
Strategic Plan in December of 2008.
[End of figure]
In its first year, FHFA published its first strategic plan, first human
capital plan, and first combined Performance and Accountability Report.
The combined PAR presented progress and accomplishments of FHFA, FHFB,
and OFHEO for FY 2008.
The FHFA Strategic Plan 2009-2014, formally approved and adopted in
July 2009, established the strategic goals and objectives of FHFA. For
those goals to be achieved, it is imperative to restore the financial
health of the Enterprises through the conservatorships, enhance the
safety and soundness of the FHLBanks and the Enterprises, support
efforts to return stability to domestic housing markets, and ensure
that the regulated entities contribute to affordable housing and
community and economic development.
The strategic plan recognizes Fannie Mae's and Freddie Mac's roles in
the Making Home Affordable (MHA) program, which seeks to stabilize
mortgage markets by combating preventable foreclosures. The strategic
plan also reinforces the strong supervisory framework HERA created for
the regulation and oversight of the regulated entities, which is
crucial in enhancing the financial safety and soundness of their
operations and in financing and otherwise supporting affordable housing
and community development activities.
The FHFA 2009-2011 Strategic Human Capital Plan links human capital
planning to FHFA's mission and strategic goals. The plan describes
FHFA's current workforce and business challenges that will affect the
management of human capital in the next few years. It also presents a
program to ensure that FHFA has the staff needed to meet its
performance goals and mission. The human capital plan is premised on
the principle that successful human resources management is the
foundation of the agency's ability to accomplish performance goals and
achieve its mission.
Conducting Examinations and Targeted Supervisory Reviews:
The Division of FHLBank Regulation's examination process emphasizes an
ongoing supervisory approach involving both off- and on-site
activities. Identifying excessive risk exposure through an evaluation
of an FHLBank's condition and practices is the primary examination
goal. FHFA accomplishes this by conducting risk-based examinations. The
scope, depth, and focus of the examinations are based on the results of
previous examinations, visitations, or other analyses. During FY 2009,
FHFA examiners conducted on-site safety and soundness examinations at
all 12 FHLBanks and the Office of Finance. The examination process was
enhanced in 2009 to allow an expansion of on-site activities to conduct
more rigorous analysis in areas of perceived risk. Significant
examination results, known as "matters requiring attention' (MRAs), are
reviewed by a committee of senior division staff before discussion with
the FHLBanks' Board of Directors.
The Division of Enterprise Regulation (DER) focuses on the safety and
soundness of Fannie Mae and Freddie Mac. To this end, FHFA conducted
continuous supervision activities and targeted reviews of key areas
such as financial performance, credit quality, operational risks,
liquidity planning, interest rate risk, retained portfolios, and
enterprise risk management. FHFA also strengthened its oversight of
MRAs through ongoing dialogue with management of the Enterprises about
corrective actions, additional management reporting for FHFA
executives, and establishing an Enforcement Oversight Committee. FHFA
will continue to review and revise its formal supervisory strategy for
the Enterprises to ensure examinations and targeted reviews reflect a
risk-focused approach.
Ensuring Continued Functioning of the Secondary Mortgage Market:
Throughout FY 2009, FHFA acted as both conservator of the Enterprises
and as the mission and safety and soundness regulator of all the
regulated entities. In both capacities, FHFA worked to ensure the
regulated entities continued to provide a stable and affordable source
of liquidity for the primary mortgage market.
The Department of Treasury's financial support for the Enterprises
served as a foundation for those efforts. In conjunction with the
establishment of the conservatorships in September 2008, FHFA, acting
as conservator, entered into agreements that committed the Treasury to
acquire senior preferred stock in each Enterprise to ensure each
maintained positive net worth. In February, Treasury doubled the size
of these agreements to $200 billion each. The financial support
provided through those agreements, FHFA's suspension of all regulatory
capital requirements following the conservatorships, and Treasury and
the Federal Reserve's purchases of Enterprise debt and MBS enabled the
Enterprises to carry out normal secondary mortgage market operations.
Those operations included providing liquidity to banks, thrifts, and
other mortgage lenders.
Enhancing Foreclosure Prevention Efforts:
Throughout the past year, FHFA encouraged the Enterprises to lead
foreclosure prevention initiatives to stabilize housing and financial
markets. FHFA worked with the Administration, the Enterprises, and
other industry participants on a plan to address the economic crisis
and keep people in their homes.
FHFA worked with HOPE NOW, an alliance of mortgage market participants,
and Treasury, the Federal Housing Administration (FHA), and the
Enterprises to design and implement a comprehensive Streamlined
Modification Program in November 2008. The streamlined program was
designed to reduce preventable foreclosures by transitioning borrowers
who were delinquent on their obligations into mortgages they could
afford. FHFA also coordinated the actions of the Enterprises to suspend
foreclosures of owner-occupied homes from November 26, 2008, until
January 31, 2009, and encouraged the Enterprises to update their tenant
eviction and foreclosure sale suspension plans.
In early 2009, FHFA helped develop the Administration's MHA program,
which is expected to help at-risk homeowners avoid foreclosure by
reducing monthly mortgage payments. This program is a major step
forward in reducing avoidable foreclosures and stabilizing the housing
market. This program will work in tandem with an expanded and improved
Hope for Homeowners Program. It builds on both the Federal Deposit
Insurance Corporation's (FDIC's) modification initiative and the
Streamlined Modification program.
The two principal elements of the MHA program comprise an important
step toward achieving a recovery for housing markets and the entire
economy.
1. Home Affordable Refinance Program (HARP). The Enterprises provide
access to low-cost refinancing for loans they own or guarantee. This
helps homeowners reduce their monthly payments and avoid foreclosure It
is designed for borrowers who are current in their payments and seek to
refinance at a lower rate or into a safer mortgage but who have
experienced difficulties because of declining home values and limited
availability of mortgage insurance.
2. Home Affordable Modification Program (HAMP). This program
establishes a national standard for loan modifications. Treasury shares
a portion of the costs, which provides financial incentives to
borrowers, lenders, and servicers. The Enterprises monitor servicer
compliance with the plan's rules. The Enterprises bear the incentive
costs of modifications for loans Fannie Mae or Freddie Mac own or
guarantee.
FHFA took the lead in coordinating implementation of the MHA loan
modification process by the regulated entities, including the
coordination of the development of the net present value (NPV) model
used to qualify loan modification recipients. The NW model was a joint
collaboration between the Enterprises, FHFA, FDIC, and Treasury. FHFA
also oversaw and assisted the Enterprises in their respective roles as
agents of the Treasury in implementing the program.
FHFA also actively promoted transparency regarding the results of the
Enterprises' foreclosure prevention and refinance activities. In
November 2008, FHFA began publishing a monthly Foreclosure Prevention
Report that provides updates on the Enterprises' loan modification and
other foreclosure prevention activities. In August 2009, FHFA began
publishing a monthly Refinance Report that summarizes the Enterprises
mortgage refinance activities, including HARP refinances These reports
together form the key elements of FHFA's monthly Federal Property
Managers Report to Congress, which FHFA began producing in December
2008 as required by Section 110 of the Emergency Economic Stabilization
Act of 2008.
Monitoring and Addressing the Challenges of PLMBS:
As high levels of delinquencies triggered ratings downgrades of PLMBS
and significant market illiquidity, these MBS presented significant
financial challenges for Fannie Mae, Freddie Mac and the FHLBanks.
Fannie Mae and Freddie Mac incurred significant accounting charges
related to other than temporary impairment (OTTI) of residential PLMBS
in 2008 and 2009. Through September 30, 2009, the Enterprises had taken
a cumulative $16.1 billion of credit-related losses on roughly $160
billion of mostly subprime, Alt-A, and option ARM (adjustable-rate
mortgage) PLMBS. Though the overall PLMBS market has slightly improved
because of government programs in the third quarter of 2009, prices
remain depressed at a weighted average of roughly 60 cents on the
dollar mark-to-market value.
FHFA worked with the FHLBanks on the adoption of a common platform for
accounting for PLMBS. By the end of FY2009, the common platform had
contributed to greater standardization and coordination among the
FHLBanks in valuing their PLMBS holdings and determining OTTI.
Exposure to OTTI varies considerably among the FHLBanks. This has
affected their retained earnings and accumulated other comprehensive
income. Preliminary data indicate the FHLBanks held $51.3 billion in
PLMBS as of September 30, 2009. These securities had a fair value of
$46.1 billion, or 90 cents on the dollar. Because of the deterioration
in the market, the FHLBanks took total OTTI charges in FY 2009 of $12.2
billion. Of that amount, $2 billion was due to credit factors. A total
of $8.4 billion was due to noncredit factors, which are recorded as
part of their balance sheet capital accounts but do not flow through
their income statements.
Providing Accounting Guidance to the Regulated Entities:
Figure: Photograph of FHFA General Counsel Alfred Pollard addresse4s
FHFA staff at an agency-wide event.
[End of figure]
In light of the changing regulatory landscape, FHFA's Office of the
Chief Accountant shared preliminary accounting examination guidance on
a range of accounting and auditing issues with the regulated entities.
The guidance reflected structural and regulatory differences between the
Enterprises and the FHLBanks. The new guidance, when finalized in
October 2009, replaced previous accounting guidance applicable only to
the Enterprises and supplemented regulations and other guidance
applicable only to the FHLBanks.
Several significant events had occurred since the original accounting
guidance and FHLBank regulations were issued. The HERA legislation was
passed, which created FHFA and made certain Securities and Exchange
Commission (SEC) regulations applicable to the regulated entities, and
the Enterprises were placed into conservatorship.
The new guidance gives examiners criteria to assess risks posed by an
entity's accounting, internal control over financial reporting, and
audit functions. One of the primary goals of the new guidance is to
promote consistency in implementation of generally accepted accounting
principles (GAAP) to enhance transparency. This is achieved in part by
establishing the expectation that the regulated entities maintain
complete and current accounting policies and procedures.
Another significant element of the new guidance articulates best
practices around audit-related governance matters and internal
controls. The guidance reinforces SEC, Public Company Accounting
Oversight Board, and New York Stock Exchange requirements for audit
committees. The updated guidance also reflects the different governance
structures of the Enterprises as compared to the FHLBanks. For example,
some audit committee independence requirements applicable to the
Enterprises will not apply to the FHLBanks because of the cooperative
ownership structure of the FHLBanks, which are subject to existing
regulations covering the composition of their audit committees.
Another key element of the new guidance relates to external auditor
independence at these systemically important institutions. The guidance
sets out regular rotation as a best practice for each regulated entity
to promote audit independence. The guidance states that regulated
entity audit committees should formally consider audit firm rotation
after 10 years of audits by the same firm and every five years
thereafter until there is a change in auditor. The new guidance also
requires examiners to consider the tenure of audit firms in their
assessments of auditor independence and related governance matters.
Fulfilling Requirements Established by HERA:
During FY 2009, FHFA began a review of existing OFHEO and FHFB
regulations as well as regulations required to be issued under HERA. As
a result, FHFA issued final and interim final regulations either
required by, or in response to, HERA provisions or which adopted, with
appropriate revisions, OFHEO or FHFB regulations. The published final
or interim final regulations are listed in Figure 5. For those
regulations issued as proposed or interim final regulations, FHFA
expects to issue final regulations in FY 2010 after considering public
comment.
In addition to promulgating regulations, FHFA prepared and issued
several reports required by HERA. On July 30, 2009, the agency
published the first annual report on guarantee fees charged by the
Enterprises for conventional single-family mortgages”loans the federal
government does not insure or guarantee that finance properties with
four or fewer residential units. The report, issued July 30,
2009, covered single-family fees for loans acquired by the Enterprises
in 2007 and 2008. The sample of mortgages used to prepare that report
represented 79 percent and 89 percent, respectively, of the unpaid
principal balance of single-family mortgages the Enterprises acquired
in 2007 and 2008.
Also on July 30, 2009, FHFA published a study on securitization of home
mortgage loans purchased, or to be purchased, by the FHLBanks from
member financial institutions under the acquired member assets
programs. The study focused on the:
* Benefits and risks associated with FHLBank securitization;
* Potential effects on liquidity in the mortgage markets and broader
credit markets;
* Abilities of FHLBanks to manage risk;
* Effects of risk management programs on existing activities of the
FHLBanks; and;
* Effects of risk management programs on joint and several liability of
the FHLBanks and the cooperative structure of the FHLBank System.
On the basis of the findings of this study and the recent calls for
regulatory reform, FHFA did not recommend permitting the FHLBanks to
securitize mortgages.
Finally, on July 30, 2009, FHFA published two reports related to
collateral securing advances at the FHLBanks. The first report, an
annual report required by Section 1212 of HERA, analyzed collateral
data as of December 31, 2008, by type and FHLBank district. On January
26, 2009, FHFA published this same report for data as of December 31,
2007. The second report, required by Section 1217 of HERA, studied the
extent to which loans and securities used as collateral to support
FHLBank advances were consistent with the interagency guidance issued
by federal banking regulators on nontraditional mortgage products and
subprime lending. The report noted that each FHLBank had adopted
policies, procedures, and practices requiring that mortgage loans and
securities used as collateral be consistent with interagency guidance
as well as policies addressing antipredatory lending.
Figure 5: Regulations Published in Response to HERA:
Proposed:
* Golden Parachutes and Indemnification Payments (74 FR 30975 Jun. 29,
2009, 12 CFR Part 1231);
* Federal Home Loan Bank Membership for Community Development Financial
Institutions (74 FR 22848, May 15, 2009, 12 CFR Part 1263);
* Executive Compensation (Regulated Entities) (74 FR 26989, Jun. 5,
2009, 12 CFR Part 1230);
* Reporting of Fraudulent Financial Instruments (74 R428636, Jun. 17,
2009, 12 CFR Part 1233);
* Board of Directors of FHLBank System Office of Finance (74 FR 38564,
Aug. 4, 2009, 12 CFR Part 1273 and 12 CFR Part 1274);
Interim:
* Portfolio Holdings (74 FR 5609, Jan. 20, 2009, 12 CFR Part 1252);
* Prior Approval for Enterprise Products (74 FR 31602, Jul. 2, 2009, 12
CFR Part 1253);
* Federal Home Loan Bank Boards of Directors: Eligibility and Elections
(73 FR 55710, Sep. 26, 2009, 12 CFR Part 1261, Subpart A);
* Affordable Housing Program Amendments: FHLBank Mortgage Refinancing
Authority (74 FR 38514, Aug. 4, 2009, 12 CFR part 1291).
Final:
* Golden Parachute Payments (74 FR 33907, Jul. 14, 2009, 12 CFR Part
1231);
* Capital Classifications and Prompt Corrective Action (74 FR 38508,
Aug. 4, 2009, 12 CFR Part 1229);
* 2009 Enterprise Transition Affordable Housing Goals (74 FR 39873,
Aug. 10, 2009, 12 CFR Part 1282).
Adopted with Appropriate Revisions, OFHEO or FHFB Regulations:
* Assessments (73 FR 56712, Sep. 20, 2008, 12 CFR Part 1206);
* Freedom of Information Act Implementation (74 FR 2342, Jan. 15, 2009;
74 FR 18623, Feb. 17, 2009, 12 CFR Part 1202);
* Flood Insurance (74 FR 7304, Feb. 17, 2009, 12 CFR 125.1);
* Privacy Act Implementation (74 FR 33907, Jul. 14, 2009, 12 CFR Part
1204).
[End of figure]
Establishing Affordable Housing Goals:
FHFA analyzed detailed loan-level data on the 4.7 million single-family
mortgages and 8,900 multifamily mortgages the Enterprises purchased to
determine official goal performance for 2008. The agency also analyzed
the feasibility of the 2008 housing goals, which were established long
before the mortgage market collapse. FHFA determined that in light of
market conditions, the 2008 housing goals and home purchase subgoals
previously established in the regulation were not feasible and should
be adjusted.
Under HERA, the housing goals established for the Enterprises by HUD
for 2008 carried over to 2009. In FY 2009, FHFA began evaluating these
existing housing goals. Restrictions on the availability of private
mortgage insurance for borrowers with lower down payments; a surge in
refinancing, particularly by higher income borrowers, the increasingly
important role of FHA in the mortgage marketplace; and a slowdown in
the multifamily market, among other factors, meant fewer loans in 2009
that qualified under housing goals. Consequently, FHFA proposed
adjusting the overall 2009 Enterprise housing goals to lower levels.
The final rule was published August 10, 2009.
Developing Duty to Serve Standard for the Enterprises:
HERA amended the Safety and Soundness Act of 1992, establishing a duty
for the Enterprises to serve three underserved markets”manufactured
housing, affordable housing preservation, and rural areas”to increase
the liquidity of mortgage investments and improve the distribution of
investment capital available for mortgage financing in those markets.
Congress explicitly required the Enterprises to provide leadership in
developing loan products and flexible underwriting guidelines to
facilitate the secondary market for these underserved areas.
FHFA published an Advance Notice of Proposed Rulemaking to begin the
process of establishing a manner for evaluating and rating whether and
to what extent the Enterprises have complied with their duty to serve.
The Enterprises must provide leadership to the market in developing
loan products and flexible underwriting guidelines to facilitate a
secondary market for mortgages on housing for very low, low-, and
moderate-income families with respect to the three underserved markets.
FHFA issued the advance notice in August 2009, seeking the broadest
possible public comment for its rulemaking. FHFA also sent
representatives to Texas, Tennessee, and Wisconsin to learn more about
manufactured housing needs. FHFA will report annually to Congress on
what the Enterprises have done pursuant to their duty to serve.
Reviewing Executive Compensation at the Regulated Entities:
Under HERA, the FHFA Director has the power to approve, disapprove, or
modify the executive compensation of the Enterprises and the FHLBanks.
The FHFA Director has authority to withhold the compensation of an
executive officer during a review for "reasonableness and
comparability." It also grants the Director authority to prohibit or
limit any golden parachute or indemnification payment.
On January 29, 2009, FHFA published a Golden Parachute Payments final
rule that sets forth factors for the FHFA Director's consideration in
limiting golden parachute payments to entity-affiliated parties in
connection with the Enterprises and the FHLBanks. On June 29, 2009,
FHFA published a Golden Parachute and Indemnification Payments Proposed
Rule. The proposal amended the Golden Parachute Payments Final Rule to
address in more detail prohibited and permissible golden parachute
payments. In addition, on June 5, 2009, FHFA published an Executive
Compensation Proposed Rule. The proposed regulation sets forth
requirements and processes with respect to compensation provided to
executive officers by the Enterprises, the FHLBanks, and the Office of
Finance, consistent with FHFA's safety and soundness responsibilities
under HERA.
Working with the U.S. Treasury, FHFA designed a forward-looking
incentive-based retention plan for the Enterprises. The plan focuses on
retention rather than past performance. The retention plan is designed
to:
* Retain key officers at a time of increased personnel demands;
* Preserve critical institutional knowledge; and;
* Maintain optimal performance levels until capital levels are restored
and credit losses are returned to a normal state.
As conservator, FHFA did not allow bonuses for 2008 in light of the
performance of the two Enterprises.
Management Challenges:
The Future of the Secondary Mortgage Market:
Conservatorship is not a long-term solution to financial distress at
the Enterprises. The Administration, Government Accountability Office
(GAO), trade associations, academics, and others have identified a
variety of approaches related to the future structure and functions of
the Enterprises or their successors. The Administration has announced
that it will propose a plan for the long-term future of the Enterprises
in February 2010. FHFA personnel are participating in internal and
multi-agency efforts to review and evaluate the strengths, weaknesses,
and risks of the various options.
FHFA's experience with, and understanding of, secondary mortgage
markets and institutions will be valuable to Congress and the
Administration as they consider restructuring housing finance and
financial regulation and address the secondary mortgage market and the
role of the Enterprises. Critical decisions have to be made about the
future of the primary mortgage market and the FHLBanks and the
appropriate role of the secondary mortgage market, including the roles
of government regulation and programs, and what guiding principles will
shape the future of the secondary mortgage market.
Though much of the debate will focus on the Enterprises, FHFA expects
the discussion to include the future of the FHLBanks. The FHLBanks
played a critical role in providing financing to large and small member
financial institutions during the second half of 2007, 2008, and the
first part of 2009. The FHLBanks residential mortgage portfolios are
small compared to those of the Enterprises and have suffered little in
the way of delinquencies or credit losses. FHFA is prepared to discuss
the role of the FHLBanks in sustaining the mortgage market.
If Congress restructures the secondary mortgage markets or secondary
market institutions, maintaining investor confidence and liquidity in
existing and new mortgage products and markets and ensuring the safety
and soundness of both old and new institutions will be the most
significant challenges. Beyond those challenges are broader issues,
such as retaining key employees, identifying valuable elements of the
existing Enterprises, and determining the need for certain systems and
processes. To prepare for future policy decisions, FHFA is closely
monitoring markets and holding discussions with various stakeholders.
Mortgage Delinquencies and Defaults:
Rapidly rising levels of serious delinquencies and defaults, further
aggravated by high levels of unemployment and severe declines in home
prices, continue to stress the Enterprises. As of June 30, 2009,
Enterprise serious delinquencies had increased nearly 200 percent year-
over-year to 2.89 percent for Freddie Mac and 3.94 percent for Fannie
Mae. Real estate owned (REO) acquisitions for the first three quarters
of FY 2009 at Fannie Mae were 57,469, an approximate 30 percent
increase year-over-year. Freddie Mac had 35,987 REO acquisitions,
approximately 60 percent higher than the year before.
To mitigate the impact of continued serious delinquencies and defaults,
the Enterprises expanded loan modification efforts and took leadership
roles in the MHA Program. The FHLBanks that participate in mortgage
purchase programs developed borrower assistance programs that enhance
the foreclosure prevention efforts for mortgage loans owned by the
FHLBanks.
The Enterprises are recording historic levels of modifications and
refinances. For borrowers unable to continue homeownership, the
Enterprises offer foreclosure alternatives, including short sales,
deeds in lieu of foreclosure, and REO rental programs. The impact of
the HAMP and HARP elements remains uncertain as unemployment and house
prices continue to deteriorate, interest rates rise from historic lows,
other initiatives are set to expire, and operational difficulties in
implementing foreclosure prevention programs arise.
Operational Challenges Facing the Enterprises:
FHFA placed both Enterprises into conservatorship in September 2008
because deteriorating market conditions threatened the companies'
ability to fulfill their mission. The Enterprises continue to be
challenged by operational constraints both internally and by
counterparties. To handle high numbers of loan modifications, loan
servicers are malting significant changes in their operational systems.
In addition, servicers are increasing personnel to meet the intensive
labor demands needed to manage and reduce foreclosures. The Enterprises
are working with the government and servicers to accelerate loan
modifications and refinancing, but they also must improve systems
within their own operations and coordinate changes with servicers.
In 2008 Treasury established three finance facilities (GSE Credit
Facility, MBS Purchase Program, and Senior Preferred Stock Purchase
Agreement) to support the ongoing business operations of the
Enterprises and meet conservatorship objectives. These facilities
support the Enterprises capital and liquidity to provide confidence to
investors in the Enterprises' debt and MBS. Some of these facilities
expire at the end of this year, so the Enterprises and FHFA are working
with Treasury to ensure investor confidence is maintained through
appropriate government support coupled with strengthened liquidity and
asset liability management within the Enterprises.
Continuing Weaknesses in PLMBS Quality:
PLMBS illiquidity and extremely poor collateral performance have
challenged investors, including the Enterprises and the FHLBanks, in
bonds originally rated triple-A. Credit and pricing weaknesses have
demonstrated the need for resources to manage assets backed by riskier
collateral and to properly account for current performance and the
potential for future disruption to contractual cash flows. The
regulated entities, like many other investors, have reallocated staff
to assist with loss mitigation efforts on these bonds.
Throughout FY 2009, and likely continuing in FY 2010, earnings have
been affected at the Enterprises and some FHLBanks by OTTI of certain
securities. For the Enterprises, the actual and expected PLMBS and
guarantee fee losses resulted in Department of the Treasury purchases
of senior preferred stock. Impairments also have prompted certain
FHLBanks to reduce or eliminate dividends and curtail or cease the
repurchase or redemption of FHLBank stock.
Housing Goals for 2010:
HERA for the first time added affordable housing and mission
enforcement to the responsibilities of the safety and soundness
regulator. As a result, enforcement of the affordable housing goals
established for the Enterprises by Congress, once HUD's responsibility,
is now up to FHFA. FHFA must ensure that the Enterprises meet their
critical responsibility of malting it possible for low- and moderate-
income persons and underserved areas to have access to affordable
mortgage loans while also ensuring that more prudent lending standards
are restored.
HERA requires, beginning in 2010, a wholesale restructuring of the
affordable housing goals. The Enterprises will have four single-family
goals and one multifamily special affordable goal. For single-family
purchase money mortgages, there will be goals for households in two
income categories: low-income (income no greater than 80 percent of
area median income) and very low income (income no greater than 50
percent of area median income). There will be a goal for refinanced
mortgages for low-income families. In the multifamily area, there will
be a separate special affordable (low-income) housing goal. FHFA must
also finalize standards for the evaluation of the Enterprises duty to
serve certain underserved markets.
Beginning in 2011, HERA also requires FHFA to establish affordable
housing goals for the FHLBanks for the first time. The affordable
housing goals for the FHLBanks must be consistent with those for the
Enterprises and take into consideration the unique mission and
ownership structure of the FHLBanks. Prior to the passage of HERA, the
FHLBanks principally supported the provision of affordable housing for
low- and moderate-income households through their affordable housing
programs.
HERA established a two-year transition period and mandated that FHFA
establish interim target affordable housing goals for the FHLBanks
during calendar years 2009 and 2010. FHFA will soon propose interim
target goals consistent with the low- and moderate-income housing goals
and the underserved area housing goal applied to the Enterprises'
mortgage purchase activities in 2009 and prior years.
An Economic Capital Model for the Future:
FHFA is pursuing the development of a new economic capital model to
determine the risk-based capital requirement for the Enterprises. The
model would address market, credit, and operational risks as before,
but would be different from the prior OFHEO approach. In particular, it
would incorporate substantially more stress test scenarios than the
previous model did. It could also include a counter-cyclical adjustment
to the credit risk component, designed to require a buildup of capital
during an expansion or housing boom well prior to a recession or
housing crisis when the capital would be needed to absorb losses.
FHFA Leadership:
Figure: Photograph of Acting Director Edward DeMarco addresses FHFA
staff at the farewell reception for former Director James Lockhart.
[End of figure]
On August 31, 2009, FHFA Director James B. Lockhart III resigned, and
FHFA's Chief Operating Officer and Senior Deputy Director for Housing
Mission and Goals Edward DeMarco became Acting Director
of the agency. Over the past year, DeMarco played an integral role in
setting up FHFA, so the President's appointment of DeMarco as Acting
Director should provide a measure of stability to the agency. However,
the agency continues to face uncertainty about selection of a
presidentially appointed and Senate-confirmed Director, the future
structure of the Enterprises, the future form of regulation for the
Enterprises and the FHLBanks, and the role of FHFA following
decisions on the future structure of secondary mortgage markets.
In addition, HERA calls for additional changes, including establishment
of an Office of the Inspector General (OIG). FHFA will not have an
inspector general, however, until one is approved by the President and
confirmed by the Senate. Once an inspector general is appointed by the
President and confirmed by the Senate, the agency will need to
establish an OIG and provide appropriate staff and infrastructure to
support it.
FY 2009 Performance Summary:
Strategic Planning at FHFA:
FHFA sets long-term and annual goals and monitors progress throughout
the year to produce results using strategic and performance planning.
The second section of this report describes in greater detail FHFA's
results and efforts to achieve its FY 2009 performance goals.
FHFA's 2009 Annual Performance Plan was developed and released in
December 2008 and consists of a combination of OFHEO and FHFB strategic
goals and performance measures. For FY 2009, FHFA set 17 annual
performance goals to reach its strategic goals, 5 annual performance
goals to support its resource management strategy, and a total of 60
performance measures. After the release of the 2009 Annual Performance
Plan, FHFA revised its performance measures to reflect the new
administration's policies. As a result FHFA added one measure and
deleted five measures. This report shows the 61 measures, noting the
five that are no longer applicable. This section describes agency
performance based on FHFA's FY 2009 Annual Performance Plan, which
outlined the means and strategies to achieve the annual performance
goals and related measures for the past year.
While FHFA analyzed the allocation of resources, the merging of two
accounting systems prevented the agency from tracking FY 2009
obligations by strategic goal. Beginning in FY 2010, FHFA will track
resource allocations by strategic goals developed in FHFA's FY 2010
strategic plan, which was published in the last quarter of FY 2009.
FHFA's Strategic Goals:
To achieve FHFA's mission, the agency established three strategic
goals:
1. Enhance supervision to ensure that Fannie Mac Freddie Mac and the
FHLBanks operate in a safe and sound manner, are adequately
capitalized, and comply with legal requirements.
2. Promote homeownership and affordable housing and support an
efficient secondary mortgage market.
3. Through conservatorship, preserve and conserve the assets and
property of Fannie Mae and Freddie Mac (the Enterprises) and enhance
their ability to fulfill their mission.
FHFA also has set a resource management strategy to manage effectively
FHFA's human capital and resources.
FHFA Met or Exceeded Most of Its Performance Measures:
FHFA reported on 61 performance measures in its FY 2009 Performance
Plan. The agency exceeded, achieved, or substantially achieved 66
percent of the performance measures in the plan. The performance
section outlines in detail the agency's performance goals for each
strategic goal and FHFA's accomplishments related to each performance
goal and its associated performance measures. Performance goals are
counted as "achieved' when targets for all performance measures have
been met. "Substantially achieved" indicates that at least one
performance measure has not been achieved, although a substantial
majority of the measures related to the performance goal were met. In
FY 2009, FHFA achieved 63 percent, substantially achieved three
percent, and did not achieve 26 percent of its performance measures.
Eight percent of the performance measures were not applicable.
FY 2009 was a year of nearly unprecedented disruption in housing and
financial markets. In response, the agency had to allocate resources to
the conservatorships and to housing stabilization initiatives that it
had not envisioned when it developed the FY 2009 Performance Plan was
developed. In cases in which FHFA did not achieve performance measures
in FY 2009, the reasons stemmed principally from turbulent housing and
financial market conditions and challenges encountered in integrating
the new agency.
FHFA identified 12 of the 61 FY 2009 performance measures as key
performance indicators critical to its achievement of its strategic
goals and objectives. Those key performance indicators represent each
of the agency's three strategic goals and its resource management
strategy and represent the highest priority measures for the agency.
The following table summarizes FHFA's achievement of key performance
indicators.
Key FHFA Performance Indicators for FY2009:
Strategic Goal:
Strategic Goal 1: Enhance supervision to ensure that Fannie Mae and
Freddie Mac and the Federal Home Loan Banks operate in a safe and sound
manner, are adequately capitalized, and comply with legal requirements.
Performance Goal:
Performance Goal 1.1: Fannie Mae and Freddie Mac (the Enterprises)
comply with safety and soundness standards.
Key Performance Indicator:
Performance Measure 1.1.1: The percentage of Enterprises with a
composite GSE enterprise risk safety and soundness rating of "Limited
Concerns" or better.
Not Achieved: Both Enterprises were rated "Critical Concerns" and were
in conservatorship.
Performance Measure 1.1.2: For both Enterprises, the percentage of GSE
enterprise risk categories (governance, solvency, earnings, market,
credit, and operational risk) with a safety and soundness rating of
limited Concerns" or better (1 or 2).
Not Achieved: Ratings for the Enterprises were "Critical Concerns" for
earnings, credit risk, and market risk and "Significant Concerns" for
governance and operational risk. In conservatorship, the rating for
capital was suspended.
Performance Goal 1:
The FHLBanks comply with safety and soundness standards.
Performance Measure 1.2.1: Percentage of FHLBanks with a composite
rating of "1" or "2".
Not Achieved: Sixty-two percent of the FHLBanks (and the Office of
Finance) had a composite safety and soundness rating of "1" or '2" at
the end of the fiscal year. Heightened concerns about credit risk and
governance associated with private-label MBS holdings contributed to
the decline in ratings.
Performance Goal 1.4:
The FHLBanks are adequately capitalized.
Performance Measure 1.4.1: The FHLBanks meet FHFA's determination of
capital adequacy.
Substantially Achieved: FHLBanks met all capital requirements at year-
end. One FHLBank, failed private-label risk-based capital
requirement for part of the year.
Performance Goal 1.5:
Fannie Mae and Freddie Mac comply with applicable laws, regulations,
directives, and agreements, including executive compensation, corporate
responsibility, and disclosure.
Performance Measure 1.5.1: Any identified instances of noncompliance
with laws and regulations are resolved to FHFA's satisfaction.
Achieved: Enterprises resolved, or are on schedule to resolve,
outstanding supervisory issues arising from laws, regulations,
directives, and agreements.
Performance Goal 1.6:
The FHLBanks comply with applicable laws, regulations, directives, and
agreements, including those regarding executive compensation, corporate
responsibility, and disclosure.
Performance Measure 1.6.3: Establish a matters requiring attention-like
measure for tracking follow-up recommendations from annual exams.
Achieved: An MRA tracking tool was developed in 2009 and is being used
for FHLBank examinations that commenced in 2009. Tracking tools for
each FHLBank were backfilled with outstanding 2008 MRAs to log and
document remediation efforts in a consistent manner.
Strategic Goal 2:
Promote homeownership and affordable housing and support an efficient
secondary mortgage market.
Performance Goal 2.1:
Develop proposed and final regulations to implement statutory changes
in Fannie Mae and Freddie Mac affordable housing goals effective
January 1, 2010, while enforcing existing goals.
Performance Measure 2.1.4: Enforce Fannie Mae and Freddie Mac 2009
affordable housing goals.
Achieved: Met monthly with each Enterprise to track progress in meeting
housing goals.
Performance Goal 2.2:
The FHLBanks foster the development of affordable owner-occupied and
rental housing for eligible very low-, low-, and moderate-income
households.
Performance Measure 2.2.2: The FHLBanks address principal affordable
housing program examination findings to FHFA's satisfaction prior to
the next examination.
Achieved: Conducted all scheduled affordable housing program exams and
visitations, assessed status of principal affordable housing program
examination findings from prior exam, and obtained management
commitment to correct findings from 2009 examinations.
Performance Goal 2.5:
Cooperate with other federal agencies on mortgage markets and the
nation's housing.
Performance Measure 2.5.1: Respond to requests from other Federal
agencies for information about housing finance markets and the
Enterprises.
Achieved: Thirty-day standard met on requests related to mortgage
market conditions, debt issuance, Malting Home Affordable, and Housing
Finance Agency assistance.
Strategic Goal 3:
Through conservatorship, FHFA will preserve and conserve the assets and
property of Fannie Mae and Freddie Mac and enhance their ability to
fulfill their mission.
Performance Goal 3.1:
Preserve and conserve each Enterprise's assets and property.
Performance Measure 3.1.1: Financial condition of each enterprise
remains liquid and they maintain positive GAAP net worth including
Senior Preferred Stock.
Achieved: The Treasury Preferred Stock Agreement continues to support
the Enterprises positive net worth and sufficient capacity remains.
Performance Goal 3.2:
Continue to delegate appropriate authorities to each Enterprise's
management to move forward with the business operations.
Performance Measure 3.2.2: Establish new Boards of Directors at each
Enterprise.
Achieved: Both Enterprises reconstituted their Boards of Directors in
December, 2008.
Resource Management Strategy:
Manage effectively FHFA's human capital and resources to support our
mission.
Performance Goal 4.1:
Maintain a diverse workforce that is skilled, flexible, and performance-
oriented to fulfill the goals of the agency.
Performance Measure 4.1.3: Percentage of vacancies filled within Office
of Personnel Management's 45-day time-to-hire standard.
Achieved: FHFA met the 45-day time-to-hire standard in 73 percent of
FY2009 hires.
[End of table]
FY 2009 Financial Summary:
Year of Transition:
HERA abolished FHFB and OFHEO effective at the end of a one-year period
beginning with the signing of the legislation, on July 30, 2008. FHFB
and OFHEO existed until then solely for the purpose of winding up their
affairs. From a financial standpoint, FHFA changed from three Treasury
funds to on from two accounting systems to on and from two payroll
systems to on effective July 2009.
Fiscal Year 2009 Financial Results:
HERA authorized FHFA to collect annual assessments from the regulated
entities to pay its costs and expenses and maintain a working capital
fund. Under HERA, annual assessments are allocated based on the cost
and expenses of the agency's operations for supervision of the
Enterprises and the FHLBanks.
FHFA calculates the assessments for each Enterprise by determining a
percentage ratio of each one's assets and off-balance-sheet obligations
to the total of both Enterprises. FHFA calculates the assessments for
each of the 12 FHLBanks by determining each Bank's share of minimum
required regulatory capital as a percentage of the total minimum
capital of all the FHLBanks. Assessments are paid semiannually on
October 1 and April 1.
In FY 2009, FHFA's operating budget was $120.8 million. During FY 2009,
FHFA recovered $6 million in unspent prior year obligations and had a
$900,000 reduction in the costs of reimbursable agreements from the
legacy agencies. Total budget resources were $125.9 million as a result
FHFA obligated all but $9.7 million of that amount. The $9.7 million
unobligated amount included $3 million for the working capital fund.
Net cost represents the gross cost incurred less any revenue earned
from activities. For FY 2009, net cost of FHFA operations was $7.1
million. Gross costs include expenses paid and depreciation expense for
the year but exclude money paid for capitalized assets. Gross costs
also include year-end accruals and unfunded expenses for retirement
plans, health benefits, and life insurance paid by the Office of
Personnel Management (OPM) for FHFA. Earned revenue consists of
assessment, investment, reimbursable, and other miscellaneous revenues.
The agencies highest cost outlay was for payroll expenses. Funded
payroll expenses were $77.4 million for FY 2009. This included the full-
year cost of 414 full-time equivalents. During FY 2009, FHFA focused on
hiring and retaining staff to ensure effective oversight of the
regulated entities.
Unqualified Audit Opinion for Fiscal Year 2009:
For FY 2009, FHFA received an unqualified audit opinion on its
financial statements. The auditor noted no material weaknesses in
internal controls and cited no instances of noncompliance with laws and
regulations.
Internal Controls:
Figure: Deputy Director of Enterprise Regulation Chris Dickerson meets
with management planning staff.
[End of figure]
Management Assurances:
During FY 2009, FHFA adhered to the internal control requirements of
the Federal Managers Financial Integrity Act of 1982 (FMFIA) and the
guidance provided by OMB Circular A-123. FHFA's Executive Committee on
Internal Controls met quarterly to oversee internal controls and
provide recommendations to the Director on the effectiveness of FHFA's
internal controls.
In 2009, the executive committee comprised the Senior Deputy
Director/Chief Operating Officer who served as the chairman, the Chief
Administrative Officer who served as the Vice-Chairman, the Chief
Information Officer, the Chief Financial Officer, the Deputy Director
for Enterprise Regulation, the Deputy Director for FHLBank Regulation,
the Performance Improvement Officer, the General Counsel, and the
Associate Director, Office of Supervision Infrastructure. The Chairman
and Vice-Chairman invited other FHFA executives when appropriate The
executive committee also established senior assessment teams to review
specific areas when needed.
During FY 2009, pursuant to its obligations under OMB Circular A-123,
FHFA monitored and assessed the following three areas:
Reliability over financial reporting.
FHFA's Office of Budget and Financial Management assessed the agency's
financial reporting controls according to the requirements outlined in
OMB Circular A-123, Appendix A.
Compliance with laws and regulations.
Assessment teams from FHFA divisions and offices identified the
significant laws and regulations that relate to the operations for
their respective offices. Assessment teams documented the actions that
demonstrated compliance, and the agency's Office of General Counsel
reviewed all submissions.
Effectiveness and efficiency of operations.
Assessment teams from FHFA divisions and offices reviewed controls over
operations using the criteria outlined in the GAO Internal Control
Management and Evaluation Tool. Division and office managers and the
Office of Budget and Financial Management reviewed the reports of the
assessment teams.
The Executive Committee on Internal Controls reviewed documentation
from all three areas. In compliance with the FMFIA requirements, the
Director, on the basis of a recommendation from the executive
committee, issued an unqualified opinion on internal controls over
financial reporting as of September 30, 2009. This assurance can be
found in the Financial Section of this report and meets the FMFIA
reporting requirement for internal controls.
Section 1106(g)(3) of HERA requires FHFA to implement and maintain
financial management systems that comply substantially with federal
financial management systems requirements, applicable federal
accounting standards, and the United States Government Standard General
Ledger at the transaction level. FHFA moved its accounting services to
the Bureau of the Public Debt during its first year of operation and
now uses that agency's financial management system (FMS) which includes
(1) a core accounting system”Oracle Federal Financials; (2) three
feeder systems”PRISM (procurement), GovTrip (travel), and Citidirect
(charge card); (3) a reporting system”Discoverer; and (4) a manual
inventory tracking system. FHFA is responsible for overseeing the
Bureau of the Public Debt's performance of accounting services for the
agency A financial oversight document outlines the assignment of
activities between FHFA and the Bureau of the Public Debt. FMS includes
manual and automatic procedures and processes from the point at which a
transaction is initiated to issuance of financial reports. FMS meets
the requirements of HERA Section 1106(g)(3). FHFA also uses the
National Finance Center, a service provider within the Department of
Agriculture, for its payroll and personnel processing. FHFA has
streamlined accounting processes by electronically interfacing data
from charge cards, investment activities, the GovTrip travel system,
the PRISM procurement system, and the National Finance Center payroll
system to FMS.
Federal Information Security Management Act:
Title III of the Electronic Government Act of 2002, titled the Federal
Information Security Management Act (FISMA), requires all federal
agencies to develop and implement an agencywide information security
program. The program provides the framework to protect the government's
information, operations, and assets. FHFA annually reviews the agency's
information security program through its internal audit function and
reports the results to OMB. The FY 2009 FISMA report is currently in
progress.
Significant information security program activities completed during FY
2009 included the development and issuance of the Agency's Breach
Notification Policy and Plan for reporting personally identifiable
information security incidents. FHFA also published a comprehensive
Information Technology Security Policy Handbook in FY 2009. The agency
has begun putting procedures from the handbook in place and will
continue this effort into FY 2010. FHFA also addressed security-related
weaknesses for systems noted in the prior year OFHEO and FHFB FISMA
reviews and completed a review to validate and document system
configurations.
FHFA maintained security certification and accreditation on 100 percent
of all major systems in production. During the year, FHFA expanded and
improved security awareness training, providing a required automated
training program to all FHFA employees and contractors. FHFA also
upgraded its Security Log Management System to monitor production
servers and network device logs and security events. In addition, FHFA
implemented comprehensive scanning of production systems on a monthly
basis to identify and correct system vulnerabilities as part of a risk
management approach to manage IT assets.
Erroneous Payments:
The Improper Payments Information Act of 2002 requires that agencies
(1) review activities susceptible to significant erroneous payments (2)
estimate the amount of annual erroneous payments (3) implement a plan
to reduce erroneous payments and (4) report the estimated amount of
erroneous payments and the progress to reduce them. The Act defines
significant erroneous payments as the greater of 2.5 percent of program
activities or $10 million.
FHFA has implemented and maintains internal control procedures that
ensure disbursement of federal funds for valid obligations. No
erroneous payments were issued by FHFA in FY 2009 that met the Act's
thresholds.
Prompt Pay:
The Prompt Payment Act requires federal agencies to make timely
payments to vendors and improve the cash management practices of the
government by encouraging the use of discounts when they are justified.
This also means that FHFA must pay its bills within a narrow window of
time. In FY 2009, the dollar amount subject to prompt payment was $28.3
million. The amount of interest penalty paid in FY 2009 was $482 or
0.0017 percent of the total dollars disbursed.
Financial Statement Requirements:
FHFA prepares financial statements and submits those statements for
annual audit. FHFA has prepared principal financial statements to
report the financial position and results of its operations, pursuant
to the requirements of 31 U.S.C. 3515(b). FHFA prepared the statements
from the books and records of FHFA in accordance with GAAP for federal
entities and the formats prescribed by OMB. The statements are also
used to monitor and control budget resources that are prepared from the
same books and records.
[End of section]
Financial Statements:
FHFA Financial Section:
Federal Housing Finance Agency:
Message From The Chief Financial Officer:
I am pleased to report that the Federal Housing Finance Agency (FHFA)
has received an unqualified "clean' audit opinion from the Government
Accountability Office (GAO) in FHFA's first full year of operations.
This accomplishment is particularly noteworthy in light of the
tremendous amount of change that occurred during the year: The
infrastructure for the new agency was developed and brought online and
the operations of the Office of Federal Housing Enterprise Oversight
(OFHEO) and the Federal Housing Finance Board (FHFB) were wound down.
All of the personnel, property, and program activities of OFHEO and
FHFB, and certain employees and activities from the Department of
Housing and Urban Development, were transferred to FHFA during FY 2009.
M the same time, FHFA worked on developing new accounting personnel,
and information technology systems to operationally unify the new
agency. One significant achievement this past year was the successful
development and transition to a new, single, integrated accounting
system on July 1, 2009. This transition included the decision to
outsource the agency's accounting travel, and charge card management
services to an Office of Management and Budget approved service
provider. Prior to July 1, 2009, FHFA had been using the legacy
accounting systems and processes from OFHEO and FHFB.
Despite the operational challenges of creating a new agency, FHFA
remained focused on maintaining a strong internal control environment
that helped the agency receive an unqualified audit opinion on its
initial financial statements. Senior management set the tone for the
agency, continually reinforcing the need to maintain strong internal
controls throughout the transition.
During the transition year, FHFA prepared a combined Performance and
Accountability Report for FHFA, OFHEO, and FHFB, which received the
Certificate for Excellence in Accountability Reporting (CEAR) award for
FY 2008 from the Association of Government Accountants. This CEAR award
is given for achieving the highest standard of federal fiscal
accountability reporting.
I am very proud to work with a highly dedicated group of professionals
whose efforts made it possible to successfully stand up the new agency
while simultaneously maintaining effective controls over the agency's
financial systems and processes. I am confident that FHFA will continue
its success in the years to come.
Sincerely,
Signed by:
Mark Kinsey:
Chief Financial Officer:
November 10, 009:
[End of letter]
Federal Housing Finance Agency:
1700 G Street, N.W.
Washington, D.C. 20552-0003:
Telephone: (202) 414-3800:
Facsimile: (202) 414-3823:
[hyperlink, http://www.fhfa.gov]
October 28, 2009:
Federal Managers' Financial Integrity Act:
Statement of Assurance:
Fiscal Year 2009:
The Federal Housing Finance Agency (FHFA) management is responsible for
establishing and maintaining effective internal control and financial
management systems that meet the objectives of the Federal Managers'
Financial Integrity Act (FMFIA).
FHFA conducted its assessment of the effectiveness of internal control
over the effectiveness and efficiency of operations and compliance with
applicable laws and regulations in accordance with OMB Circular A-123,
Management's Responsibility for Internal Control. Based on the results
of this evaluation, FHFA can provide reasonable assurance that its
internal control over the effectiveness and efficiency of operations
and compliance with applicable laws and regulations as of September 30,
2009 was operating effectively and that no material weaknesses were
found in the design or operation of the internal controls.
In addition, FHFA conducted its assessment of the effectiveness of
internal control over financial reporting, which includes safeguarding
of assets and compliance with applicable laws and regulations, in
accordance with the requirements of Appendix A of OMB Circular A-123.
Based on the results of this evaluation, FHFA can provide reasonable
assurance that its internal controls over financial reporting as of
September 30, 2009 were operating effectively and no material
weaknesses were found in the design or operation of the internal
controls over financial reporting.
In accordance with the requirements of FMFIA, FHFA's financial
management systems are substantially in compliance with the
requirements for federal financial management systems as presented in A-
127, Financial Management Systems as of September 30, 2009.
Signed by:
Edward J. DeMarco:
Acting Director
Date: October 25, 2009:
[End of letter]
Federal Housing Finance Agency:
Balance Sheet:
As of September 30, 2009 (in Thousands):
Assets: 2009:
Intragovernmental: Fund Balance With Treasury (Note 2): $29,076;
Intragovernmental: Investments (Note 3): $37,668;
Intragovernmental: Accounts Receivable (Note 4): $3.
Total Intragovemmental: $66,747.
Accounts Receivable (Note 4): $3;
General Property and Equipment, Net (Note 5): $3,273;
Prepaid Expenses: $1;
Total Assets: $70,024.
Liabilities:
Intragovernmental: Accounts Payable: $758;
Intragovernmental: Payroll Taxes Payable (Note 7): $652;
Total Intragovemmental: $1,410.
Accounts Payable: $4,268;
Deferred Revenue (Note 6): $35,122;
Other (Note 7): $10,813;
Total Liabilities: $51,613.
Net Position:
Cumulative Results of Operations: $18,411.
Total Net Position: $18,411.
Total Liabilities and Net Position: $70,024.
The accompanying notes are an integral part of these financial
statements.
[End of table]
Federal Housing Finance Agency:
Statement of Net Cost:
for the Year Ended September 30, 2009 (in Thousands):
Program Costs: (Note 10): 2009:
Gross Costs: $122,816;
Less: Earned Revenue: $115,709;
Net Program Costs: $7,107.
Net Cost of Operations: $7,107.
The accompanying notes am an integral part of these financial
statements.
[End of table]
Federal Housing Finance Agency: :
for the Year Ended September 30, 2009 (in Thousands):
2009:
Cumulative Results of Operations: Beginning Balances: $9,544.
Budgetary Financing Sources: Appropriations Used: $12,896.
Other Financing Sources (Non-Exchange): Imputed Financing Sources:
$3,078.
Total Financing Sources: $15,974.
Net Cost of Operations: $7,107.
Net Change: $8,867.
Cumulative Results of Operations: $18,411.
Unexpended Appropriations: Beginning Balances: $12,896.
Budgetary Financing Sources: Appropriations Used: $12,896.
Total Budgetary Financing Sources: $12,896.
Total Unexpended Appropriations: [Empty].
Net Position: $18,411.
The accompanying notes are an integral part of these financial
statements.
[End of table]
Federal Housing Finance Agency:
Statement of Budgetary Resources:
for the Year Ended September 30, 2009 (in Thousands):
2009:
Budgetary Resources:
Unobligated Balance: Unobligated Balance Brought Forward, October 1:
$5,132.
Recoveries of Prior Year Unpaid Obligations: $6,002;
Budget Authority: Appropriation - Assessments: $115,669;
Budget Authority: Appropriation - Investment Interest: $30;
Spending Authority From Offsetting Collections, Earned: Collected:
$4,572;
Spending Authority From Offsetting Collections, Earned: Change In
Receivables From Federal Sources: ($1,459);
Spending Authority From Offsetting Collections: Change In Unfilled
Customer Orders: Without Advance From Federal Sources: ($4,038);
Subtotal: $114,774.
Total Budgetary Resources: $125,908.
Status of Budgetary Resources:
Obligations Incurred: Direct: $111,682;
Obligations Incurred: Reimbursable: $4,569;
Obligations Incurred: Subtotal: $116,251.
Unobligated Balance: Exempt From Apportionment: $9,657.
Total Status of Budgetary Resources: $125,908.
Change In Obligated Balance: Obligated Balance, Net
Unpaid Obligations, Brought Forward, October 1: $29,146;
Less: Uncollected Customer Payment From Federal Sources, Brought
Forward, October 1: $5,500;
Total Unpaid Obligated Balance, Net: $23,646.
Obligations Incurred Net: $116,251;
Less: Gross Outlays: $117,427;
Less: Recoveries of Prior Year Unpaid Obligations, Actual: $6,002;
Change In Uncollected Customer Payments From Federal Sources: $5,497;
Obligated Balance, Net, End of Period: Unpaid obligations: $21,968;
Less: Uncollected Customer Payment From Federal Sources: $3;
Total, Unpaid Obligated Balance, Net, End of Period: $21,965.
Net Outlays:
Gross Outlays: $117,427; $4,572
Less: Offsetting Collections: $4,572;
Less: Distributed Offsetting Receipts: $115,699;
Net Outlays: ($2,844).
The accompanying not are an integral part of these financial
statements.
[End of table]
Federal Housing Finance Agency
Notes to the Financial Statements:
Note 1: Summary Of Significant Accounting Policies:
A. Reporting Entity:
The Federal Housing Finance Agency was established on July 30, 2008,
when the President signed into law the Housing and Economic Recovery
Act of 2008 (HERA). FHFA is an independent agency in the Executive
branch empowered with supervisory and regulatory oversight of the 12
Federal Home Loan Banks, Fannie Mae, and Freddie Mac (Regulated
Entities) FHFA is responsible for ensuring that each regulated entity
operates in a safe and sound manner, including maintenance of adequate
capital and internal controls, and carries out their housing and
community development finance missions. FHFA had minimal activity
during the agency's two months of existence in fiscal year 2008.
HERA abolished the Federal Housing Finance Board (FHFB) and Office of
Federal Housing Enterprise Oversight (OFHEO) effective at the end of
the 1-year period beginning on July 30, 2008. FHFB and OFHEO existed
until then solely for the purpose of winding up their affairs. During
fiscal year 2009, in accordance with HERA, the transfer of personnel,
property, and program activities of FHFB, OFHEO, and certain employees
and activities of the Department of Housing and Urban Development
related to the regulation of the mission of Fannie Mae and Freddie Mac
were made to FHFA.
Under the authority of the Federal Housing Enterprises Financial Safety
and Soundness Act of 1992, as amended by HERA, FHFA placed Fannie Mae
and Freddie Mac under conservatorship on September 6, 2008, to
stabilize the two entities with the objective of maintaining normal
business operations and restoring safety and soundness. FHFA, as
conservator, assumed the power of stockholders, boards, and management
FHFA delegated to Fannie Mae and Freddie Mac certain business and
operational authority. FHFA personnel monitor the operations of the
enterprises.
In September 2008, after Fannie Mae and Freddie Mac were placed in
conservatorship under the FHFA, the Office of Management and Budget
determined that the finances of the companies would not be included in
financial statements of the federal government For fiscal year 2008,
the Office of Management and Budget (OMB) and the Department of the
Treasury (Treasury) concluded that Fannie Mae and Freddie Mac did not
meet the conclusive or indicative criteria for a federal entity
contained in OMB Circular A-136 and Statement of Federal Financial
Accounting Concepts No. 2, Entity and Display because they are not
listed in the section of the federal government's budget entitled
"Federal Programs by Agency and Account,' and because the nature of
FHFA's conservatorships over Fannie Mae and Freddie Mac and the federal
government's ownership and control of the entities is considered to be
temporary. Treasury reaffirmed this position for fiscal year 2009, with
which FHFA concurs. Consequently, the assets and liabilities of Fannie
Mae and Freddie Mac have not been consolidated into FHFA's financial
statements.
Both Fannie Mae and Freddie Mac, as represented by FHFA as their
Conservator, entered into separate agreements with Treasury known as
the Senior Preferred Stock Purchase Agreements (Agreements) on
September 7, 2008. These two Agreements are identical and have since
been amended twice, on September 26, 2008 and May 6, 2009. The
Agreements provide for each Enterprise to draw up to $200 billion from
Treasury to ensure that they maintain a non-negative Net Worth, thereby
avoiding a statutory requirement that an Enterprise be put in
receivership following an extended period of negative Net Worth. Under
the Agreements, each Enterprise submits a request for any needed draw
amount once their financials (to be published in their 10-K or 10-Q)
are finalized. The Enterprise also submits a statement certifying
compliance with Agreement covenants, which include limits on portfolio
size and indebtedness. FHFA, in its role as Conservator, reviews the
request for a draw and certifies that the request is within the
available amount remaining under the limit contained in the Agreement
FHFA then sends a letter to Treasury requesting the draw amount prior
to the end of the current quartet. FHFA as Conservator also issues an
order to the Enterprises each quarter requiring each Enterprise to pay
dividends to Treasury as required by the Agreements. Additionally, the
Agreements require each Enterprise to obtain Treasury approval for the
disposition of assets, except under certain circumstances. FHFA as
Conservator reviews these requests. Fannie Mae and Freddie Mac draws on
their Agreements with Treasury are summarized below (dollars in
billions).
Senior Preferred Draws: September 30, 2008
Fannie Mae: $0.0
Freddie Mac: $13.8
Senior Preferred Draws: December 31, 2008
Fannie Mae: $15.2
Freddie Mac: $30.8
Senior Preferred Draws: March 31, 2009
Fannie Mae: $19.0
Freddie Mac: $6.1
Senior Preferred Draws: June 30, 2009
Fannie Mae: $10.7
Freddie Mac: $0.0
Senior Preferred Draws: Cumulative Draws
Fannie Mae: $44.9
Freddie Mac: $50.7
[End of table]
B. Basis of Presentation:
FHFA's principal statements were prepared from its official financial
records and general ledger in conformity with accounting principles
generally accepted in the United States and follow the presentation
guidance established by the Office of Management and Budget (OMB)
Circular A-136 "Financial Reporting Requirements," revised June 10,
2009. The statements are a requirement of the Government Management
Reform Act of 1994, the Accountability of Tax Dollars Act of 2002, and
HERA. The financial statements are in addition to the financial reports
prepared by FHFA, pursuant to OMB directives, which are used to monitor
and control budgetary resources. As required by HERA, the financial
statements of FHFA are audited by the U.S. Government Accountability
Office (GAO). The financial statements and associated not for FHFA for
fiscal year 2009 will not be comparative, as this is the agency's first
full fiscal year of existence The balance sheet, statement of net cost,
and statement of changes in net position are consolidated statements,
whereas the statement of budgetary resources is a combined statement
The statements include consolidated and combined balances for FHFA,
FHFB, and OFHEO. Financial transactions were captured in the legacy
FHFB and OFHEO systems until the conversion to one system was complete
on July 1, 2009. Unless specified otherwise, all amounts are presented
in thousands.
C. Basis of Accounting:
Transactions are recorded on both an accrual accounting basis, and a
budgetary basis. Under the accrual basis of accounting revenues are
recognized when earned, and expenses are recognized when a liability is
incurred, without regard to receipt or payment of cash. Budgetary
accounting facilitates compliance with legal requirements and controls
over the use of federal funds. FHFA conforms to accounting principles
generally accepted in the United States for Federal entities as
prescribed by the standards set forth by the Federal Accounting
Standards Advisory Board (FASAB). FASAB is recognized by the American
Institute of Certified Public Accountants as the body designated to
establish generally accepted accounting principles for Federal
entities. Certain assets, liabilities, earned revenues, and costs have
been classified as intragovemmental throughout the financial statements
and notes. Intragovernmental is defined as exchange transactions made
between two reporting entities within the Federal government.
D. Revenues, Imputed & Other Financing Sources:
Operating revenues of FHFA are obtained through assessments of the
regulated entities. The agency's Director, in September 2008 approved
the annual budget By law, FHFA is required to charge semi-annual
assessments to the entities. Assessments collected shall not exceed the
amount sufficient to provide for the reasonable costs associated with
overseeing the entities, plus amounts determined by the Director to be
necessary for maintaining a working capital fund.
FHFA develops its annual budget using a 'bottoms up' approach. Each
office within the agency is asked to bifurcate their budget request
between the amount of resources needed for the regulation of Fannie Mae
and Freddie Mac and the resources needed for the regulation of the
twelve FHLBanks. The office requests are then aggregated (with overhead
costs distributed proportionately) to determine the total costs
associated with regulating Fannie Mae and Freddie Mac and the total
costs associated with regulating the FHLBanks. These two totals, along
with any collection for the working capital fund, equal the fiscal year
budget for the agency.
Fannie Mae and Freddie Mac pay a pro rata share of their portion of the
total assessment based on the combined assets and off-balance sheet
obligations of each enterprise Each Federal Home Loan Bank's share of
their portion of the total assessment is based on the dollar value of
its capital stock relative to the combined dollar value of all Federal
Home Loan Banks' capital stock Assessment letters are sent to the
entities 30 days prior to the assessment due dates of October 1st and
April 1st. Assessments received prior to due dates are available for
investment but are unavailable for obligation. These assessments are
recorded as deferred revenue.
Federal government entities often receive goods and services from other
federal government entities without reimbursing the providing entity
for all the related costs. In addition, federal government entities
also incur costs that are paid in total or in part by other entities.
An imputed financing source is recognized by the receiving entity for
costs that are paid by other entities. FHFA recognized imputed costs
and financing sources in fiscal year 2009 as prescribed by accounting
standards. FHFA recognizes as an imputed financing source the amount of
pension and post-retirement benefit expenses for current employees
accrued on FHFA's behalf by the Office of Personnel Management (OPM).
E. Use of Estimates:
The preparation of the accompanying financial statements in accordance
with U.S. generally accepted accounting principles requires management
to make certain estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses. Actual results
could differ from those estimates.
F. Earmarked Funds:
FASAB's Statement of Federal Financial Accounting Standards (SFFAS) No.
27 "Identifying and Reporting Earmarked Funds' established certain
disclosure requirements for funds defined as "earmarked.' SFFAS No. 27
states that "earmarked funds are financed by specifically identified
revenues, often supplemented by other financing sources, which remain
available over time These specifically identified revenues and other
financing sources are required by statute to be used for designated
activities, benefits or purposes and must be accounted for separately
from the Government's general revenues.' The standard also presents
three required criteria for an earmarked fund. Based on the standard's
criteria, FHFA determined that it has no earmarked funds.
G. Fund Balance with Treasury:
The U.S. Treasury (Treasury) processes cash receipts and disbursements
on FHFA's behalf. Funds held at the Treasury are available to pay
agency liabilities and finance authorized purchase obligations. FHFA
does not maintain cash in commercial bank accounts or foreign currency
balances.
During the year, increases to FHFA's Fund Balance with Treasury is
comprised of semi-annual assessments, investment interest, collections
on reimbursable agreements, civil penalty monies, and Freedom of
Information Act (FOIA) request fees. FHFA is not authorized to retain
civil penalty monies or FOIA fees, and as such, records these as
custodial liabilities.
The Housing and Economic Recovery Act of 2008 provides authority for
FHFA to maintain a working capital fund. The working capital fund is
defined in FHFA's Assessment Regulation as an account for amounts
collected from the regulated entities to establish an operating reserve
that is intended to provide for the payment of large or multiyear
capital and operating expenditures, as well as unanticipated Expenses.
The balance in the working capital fund will be evaluated annually.
H. Investments:
FHFA has the authority to invest in U.S. Treasury securities with
maturities suitable to FHFA's needs. FHFA invests solely in U.S.
Treasury securities, which are normally held to maturity and carried at
cost Investments are adjusted for unamortized premiums or discounts.
Premiums and discounts are amortized and interest is accrued using the
level-yield, scientific method of effective interest amortization over
the term of the respective issues.
I. Accounts Receivable:
Accounts receivable consist of amounts owed to FHFA by other federal
agencies and the public. Amounts due from federal agencies are
considered fully collectible and consist of interagency agreements.
Accounts receivable from the public include reimbursements from
employees, civil penalty assessments and FOIA request fees. An
allowance for uncollectible accounts receivable from the public is
established when either (1) management determines that collection is
unlikely to occur after a review of outstanding accounts and the
failure of all collection efforts, or (2) an account for which no
allowance has been established is submitted to the Department of the
Treasury for collection, which takes place when it becomes 180 days
delinquent Historical experience has indicated that the majority of the
receivables are collectible.
J. Property and Equipment, Net:
Pursuant to HERA legislation, all Property and Equipment of FHFB and
OFHEO were transferred to FHFA at the existing net book value of those
assets. Net book value was determined by the capitalization policies in
effect at the legacy agencies.
Property and Equipment is recorded at historical cost It consists of
tangible assets and software As of May 2009, FHFA has adopted a
property management policy. Under FHFA's property management policy,
equipment acquisitions greater than or equal to $25 thousand are
capitalized and depreciated using the straight-line method over the
estimated useful life of the asset Additionally, for bulk purchases of
similar items, which individually do not meet the test for
capitalization, the acquisition is capitalized and depreciated if the
depreciated basis of the bulk purchase is $250 thousand or more
Applicable standard governmental guidelines regulate the disposal and
convertibility of agency property and equipment The useful life
classifications for capitalized assets are as follows:
Description: Furniture, Fixtures, and Equipment;
Useful Life (years): 3.
Description: Automated Fling Storage Systems;
Useful Life (years): 15.
Description: Internal Use Software;
Useful Life (years): 3.
[End of table]
A leasehold improvements useful life is equal to the remaining lease
term or the estimated useful life of the improvement, whichever is
shorter. FHFA has no real property holdings or stewardship or heritage
assets. Other property items, normal repairs and maintenance are
charged to expense as incurred.
K. Advances and Prepaid Charges:
Advance payments are generally prohibited by law. There are some
exceptions, such as reimbursable agreements, subscriptions and payments
to contractors and employees. Payments made in advance of the receipt
of goods and services are recorded as advances or prepaid charges at
the time of prepayment and recognized as expenses when the related
goods and services are received.
L. Liabilities:
Liabilities represent the amount of funds that are likely to be paid by
FHFA as a result of a transaction or event that has already occurred.
FHFA reports its liabilities under two categories, Intragovemmental and
With the Public Intragovemmental liabilities represent funds owed to
another government agency. Liabilities With the Public represent funds
owed to any entity or person that is not a Federal agency, including
private sector firms and federal employees. Each of these categories
may include liabilities that are covered by budgetary resources and
liabilities not covered by budgetary resources.
Liabilities covered by budgetary resources are liabilities funded by a
current appropriation or other funding source. These consist of
accounts payable and accrued payroll and benefits. Accounts payable
represent amounts owed to another entity for goods ordered and received
and for services rendered except for employees. Accrued payroll and
benefits represent payroll costs earned by employees during the fiscal
year which are not paid until the next fiscal year.
Liabilities not covered by budgetary resources are liabilities that are
not funded by any current appropriation or other funding source. These
liabilities consist of accrued annual leave, deferred rent, and the
amounts due to Treasury for collection and accounts receivable of civil
penalties and FOIA request fees. Annual leave is earned throughout the
fiscal year and is paid when leave is taken by the employee the accrued
liability for annual leave represent the balance earned but not yet
taken. The Department of labor (DOL) is the central paying agent for
all workman compensation claims filed under the Federal Employees
Compensation Act (FECA). Accrued FECA represents the amount FHFA is to
reimburse DOL for claims paid to FHFA employees. No liability is
recorded for future workman compensation as of September 30, 2009, as
FHFA's methodology for estimating the future workman compensation as
prescribed by DOL determined that the liability would be negligible
Deferred rent is the difference at year-end between the sum of monthly
cash disbursements paid to date for rent and the sum of the average
monthly rent calculated based on the term of the lease This
determination and recording of deferred rent is applicable only to the
lease agreement on the property at 1750 Pennsylvania Avenue that
commenced in 2005 (See Note 8. Leases).
M. Employee Leave and Benefits:
FHFA employees are entitled to accrue annual leave and sick leave at a
rate based on years of federal service For most employees, annual leave
may be accrued up to 240 hours each year. The FHFA executive employees
equivalent to the Senior Executive Service (SES) employees may accrue
annual leave consistent with the rules for SES level employees. Accrued
annual leave is treated as an unfunded expense with an offsetting
liability when earned. The accrued liability is reduced when the annual
leave is taken. Any unused annual leave balance is paid to the employee
upon leaving federal service, based on the employee's earnings per
hour. There is no maximum limit on the amount of sick leave that may be
accrued. Upon separation, any unused sick leave of Civil Service
Retirement System (CSRS) plan employees is creditable as additional
time in service for the purpose of calculating an employee's retirement
annuity. For Federal Employees Retirement System (FERS) plan employees,
unused sick leave is held indefinitely and may be used if rehired.
Health Benefits and Life Insurance: FHFA, through programs established
for all agencies by the federal government, offers its employees health
and life insurance coverage through the Federal Employees Health
Benefits Program and Federal Employees Group Life Insurance Program.
The cost of each is shared by FHFA and its employees. In addition, all
employees have 1.45% of gross earnings withheld to pay for future
Medicare coverage.
N. Retirement Plans:
FHFA employees participate in the retirement plans offered by OPM,
which consist of CSRS or FERS. The employees who participate in CSRS
are beneficiaries of FHFA's contribution, equal to 7% of pay,
distributed to the employee's annuity account in the Civil Service
Retirement and Disability Fund. FERS went into effect on January 1,
1987. FERS and Social Security automatically cover most employees hired
after December 31, 1983. Employees hired prior to January 1, 1984
elected to join either FERS and Social Security or remain in CSRS. FERS
offers a Thrift Savings Plan to which FHFA automatically contributes 1%
of pay and matches any employee contribution up to an additional 4% of
pay. For FERS participants, FHFA also contributes the employer's
matching share of Social Security.
FERS employees and certain CSRS reinstatement employees are eligible to
participate in the Social Security program after retirement In these
instances, FHFA remits the employer's share of the required
contribution, which is 11.2% for FERS and 7% for CSRS.
FHFA expenses its contributions to the retirement plans of covered
employees as the expenses are incurred. FHFA reports imputed (unfunded)
costs with respect to retirement plans, health benefits and life
insurance pursuant to guidance received from OPM. These costs are paid
by OPM and not by FHFA. Disclosure is intended to provide information
regarding the full cost of FHFA's program in conformity with generally
accepted accounting principles.
FHFA does not report on its financial statements information pertaining
to the retirement plans covering its employees. Reporting amounts such
as plan assets, accumulated plan benefits, and related unfunded
liabilities, if any, is the responsibility of OPM as the administrator.
FHFA's 401(K) is administered by T. Rowe Price Eligible employees that
participate may contribute up to 10% of salary on a pre-tax basis while
FHFA will match contributions up to 3% of the employee's salary.
Qualified employees may participate in the Federal Thrift Savings Plan
and/or FHFA's 401(K) Savings Plan, up to the Internal Revenue Code
limitations established for salary deferral and annual additions.
0. Contingencies:
Liabilities are deemed contingent when the existence or amount of the
liability cannot be determined with certainty pending the outcome of
future events. FHFA recognizes contingent liabilities, in the
accompanying balance sheet and statement of net cost, when they are
both probable and can be reasonably estimated. FHFA discloses
contingent liabilities in the notes to the financial statements when a
loss from the outcome of future events is more than remote but less
than probable or when the liability is probable but cannot be
reasonably estimated.
Note 2: Fund Balance With Treasury:
Fund Balance with Treasury consists of an Operating Fund and a Working
Capital Fund. FHFA did not use the funds in the Working Capital Fund
during fiscal year 2009. Fund Balance with Treasury (FBWT) account
balances as of September 30, 2009 were as follows:
2009 (In Thousands):
Fund Balances:
Operating Fund: $26,076;
Working Capital Fund: $3,000;
Total: $29,076.
Status of Fund Balance with Treasury:
Unobligated Balance:
Available: $9,657;
Unavailable ” Deferred Revenue (See Note 6): $35,122;
Total Unobligated Balance: $44,779.
Obligated Balance Not Yet Disbursed: $21,968.
Investments: ($37,668).
Uncollected Customer Payment Earned: ($3).
Total: $29,076.
(See Note 12 Legal Arrangements Affecting Use of Unobligated Balances)
[End of table]
Note 3: Investments:
Intragovernmental Securities:
As of September 30, 2009 (In Thousands):
Non-Marketable Market Based:
Cost: $37,668;
Amortized (Premium) Discount: [Empty];
Interest Receivable: [Empty];
Investments, Net: $37,668;
Other Adjustments: [Empty];
Market Value Disclosure: $37,668.
[End of table]
FHFA is currently investing in one-day certificates issued by the U.S.
Treasury. There were no amortized premiums/discounts or interest
receivable on investments as of September 30, 2009. Interest earned on
investments was $30 thousand for fiscal year 2009.
Note 4: Accounts Receivable:
Accounts Receivable balances as of September 30, 2009 were as follows:
2009 (In Thousands):
Accounts Receivable due from the Public: $3;
Intragovemmental Receivables: $3;
Total Accounts Receivable: $6.
As of September 30, 2009 there are no amounts that are deemed
uncollectible.
[End of table]
Note 5: General Property And Equipment:
Property and equipment account balances as of September 30, 2009 were
as follows:
Schedule of Property and Equipment as of September 30, 2009 (In
Thousands):
Description: Equipment;
Acquisition Cost: $10,303;
Accumulated Depreciation: $9,526;
Book Value: $777.
Description: Leasehold Improvements;
Acquisition Cost: $6,881;
Accumulated Depreciation: $6,270;
Book Value: $611.
Description: Capital Lease;
Acquisition Cost: $22;
Accumulated Depreciation: $22;
Book Value: [Empty].
Description: Internal-Use Software;
Acquisition Cost: $29,093;
Accumulated Depreciation: $27,280;
Book Value: $1,813.
Description: Internal-Use Software In Development;
Acquisition Cost: $61;
Accumulated Depreciation: [Empty];
Book Value: $61.
Description: Construction in Progress;
Acquisition Cost: $11;
Accumulated Depreciation: [Empty];
Book Value: $11.
Description: Total;
Acquisition Cost: $46,371;
Accumulated Depreciation: $43,098;
Book Value: $3,273.
[End of table]
Note 6: Deferred Revenue:
Deferred revenue consists of $35.1 million classified as with the
public for assessments received from the regulated entities prior to
the due date of October 1st These assessments are available for
investment but unavailable for obligation. (See Note 2 Fund Balance
With Treasury)
Note 7: Other Liabilities:
The other liabilities are comprised of payroll accruals, deferred rent
and unfunded leave. Other liabilities not covered by budgetary
resources consist of unfunded annual leave which also includes
compensation time and deferred rent for a total of $7.4 million. FHFA's
other liabilities are classified as current.
2009 (In Thousands):
Intragovernmental:
Payroll Taxes Payable: $652;
Total Intragovemmental: $652.
With the Public:
Accrued Payroll: $3,417;
Annual Leave: $7,256;
Deferred Rent: $140;
Total Public: $10,813.
[End of table]
Note 8: Leases:
Operating Leases:
FHFA has an occupancy lease with the Office of Thrift Supervision (OTS)
at 1700 G Street NW, Washington, DC, that covers office space and
building services, including utilities, security guards, janitorial
services, mail delivery, use of the loading doily garage parking and
building operation and maintenance The initial term of the lease was
for five years beginning in 1993, with the option to renew for three 5-
year terms with OFHEO. This lease was transferred to FHFA with its
creation. FHFA has exercised the third of the three option terms.
FHFA may terminate the lease agreement with GIS in whole or in part. In
the event of termination at FHFA's discretion, FHFA would be required
to pay two months' rent. If either party ceases to Exist or merges with
another entity by operation of law, either party may terminate the
rental agreement In the event of termination under this provision,
either party is liable for further costs, fee, damages or other monies
due to the termination, except for payments through the date of the
termination. Because of this termination clause, no deferred rent is
established for this lease, nor is disclosure of minimum future lease
payments required under Financial Accounting Standards Board Statement
No. 13.
1750 Pennsylvania Avenue NW and 1625 Eye Street:
FHFA leases office space in Washington, DC at 1750 Pennsylvania
Avenundisclosed1625 Eye Street NW. The lease terms of 1750 Pennsylvania
Avenue NW expire on March 20, 2011. The lease terms of 1625 Eye Street
expire on June 30, 2015. Contingency space at an undisclosed location
is also leased, with the lease expiring on October 31, 2009. Total
rental payments for the fiscal year ended September 30, 2009 were $4.78
million. The minimum future payments for these leases are as follows:
Fiscal Year: 2010;
Amount (In Thousands): $4,467.
Fiscal Year: 2011;
Amount (In Thousands): $4,107.
Fiscal Year: 2012;
Amount (In Thousands): $3,674.
Fiscal Year: 2013;
Amount (In Thousands): $3,748.
Fiscal Year: 2014;
Amount (In Thousands): $3,823.
Fiscal Year: Thereafter;
Amount (In Thousands): $2,910;
Total:
Amount (In Thousands): $ 22,729.
Note 9: Commitments And Contingencies:
FHFA does not have any material commitments or contingencies that meet
disclosure requirements as of September 30, 2009.
Note 10: Program Costs:
Pursuant to the Housing and Economic Recovery Act of 2008, FHFA was
established to supervise and regulate the 14 regulated entities. The
regulated entities include Freddie Mac, Fannie Mae and the 12 Federal
Home Loan Banks. FHFA's Program Costs are reflected as one program as
defined by HERA Section 1311(b)(1). Fiscal year 2009 resource
allocation estimates and actual costs were not tracked by strategic
goal due to the priority placed on integrating staff from three
agencies; integrating and developing administrative and infrastructure
and systems; and establishing a new strategic plan, goals, and
objectives. Beginning in fiscal year 2010, FHFA will track resource
allocations to the strategic goals developed for FHFA's new strategic
plan, which was published in the last quarter of fiscal year 2009.
Program costs are distributed into two categories: Intragovernmental
and With the Public. Intragovenmental costs are a result of FHFA
contracting with other federal agencies for goods and/or services, such
as rent paid to OTS, payroll processing services received from the
Department of Agriculture and imputed financing costs for post-
retirement benefits with the Office of Personnel Management With the
Public costs include expenditures for contracts with the private sector
for goods or services, payments for employee salaries, depreciation,
annual leave and deferred rent expenses. Revenue is comprised of semi-
annual assessments, investment interest, and miscellaneous revenue
Intragovernmental expenses relate to the source of goods and services
purchased by the revenues for the year ended September 30, 2009 were:
agency and not to the classification of related revenue The costs and
revenues for the year ended September 30, 2009 were:
2009 (In Thousands):
Costs:
Intragovernmental: $24,048;
With the Public: $98,768;
Gross Costs: $122,816.
Less Earned Revenue:
Assessment Revenue: $115,669;
Interest Revenue: $30;
Miscellaneous Revenue: $10;
Total Revenue: $115,709.
Net Program Costs: $7,107.
[End of table]
Note 11: Apportionment Categories Of Obligations Incurred:
All obligations incurred are characterized as Exempt from apportionment
(i.e not apportioned) on the Statement of Budgetary Resources.
Obligations incurred for the year ended September 30, 2009 are:
2009 (In Thousands):
Direct Obligations ” Exempt from Apportionment: $111,682;
Reimbursable Obligations - Exempt from Apportionment: $4,569;
Total Obligations ” Exempt from Apportionment: $116,251.
[End of table]
Note 12: Legal Arrangements Affecting Use Of Unobligated Balances:
HERA requires that any balance that remains unobligated at the end of
the fiscal year, except for amounts assessed for contribution to FHFA's
working capital fund, must be credited against the next year's
assessment to the regulated entities. As of September 30, 2009, the
unobligated balance was $44.8 million, of which $35.1 million is
deferred revenue which is unavailable The unobligated available balance
of $9.7 million will be credited against the regulated entities' April
assessments. (See Note 2. Fund Balance With Treasury)
Note 13: Budgetary Resource Comparisons To The Budget Of The United
States Government:
Statement of Federal Financial Accounting Standards No. 7, "Accounting
for Revenue and Other Financing Sources and Concepts for Reconciling
Budgetary and Financial Accounting", calls for explanations of material
differences between amounts reported in the Statement of Budgetary
Resources and the actual balances published in the Budget of the United
States Government (President's Budget). However, the President's Budget
that will include fiscal year 09 actual budgetary execution information
has not yet been published. The President's Budget is scheduled for
publication in February 2010 and can be found at the OMB Web site:
[hyperlink, http://www.whitehousegov/omb[.
With FHFA being established on July 30, 2008 and FHFB and OFHEO
operating as separate agencies for 10 months of the fiscal year,
separate financial statements were prepared for FHFB and OFHEO in
fiscal year 2008. FHFA had minimal activity during fiscal year 2008 and
therefore, did not prepare a Statement of Budgetary Resources or other
required financial statements. As a result, the reconciliation of the
2010 Budget of the United States Government, with the Actual column
completed for 2008, to the Statement of Budgetary Resources for fiscal
year 2008 has not been performed.
Note 14: Undelivered Orders At The End Of The Period:
Statement of Federal Financial Accounting Standards No. 7, "Accounting
for Revenue and Other Financing Sources and Concepts for Reconciling
Budgetary and Financial Accounting", states that the amount of
budgetary resources obligated for undelivered orders at the end of the
period should be disclosed. For the fiscal year ended September 30,
2009 undelivered orders amounted to $12.87 million.
Note 15: Custodial Revenues:
FHFA's custodial collections primarily consist of Freedom of
Information Act requests and civil penalties assessed. While these
collections are considered custodial, they are neither primary to the
mission of the agency nor material to the overall financial statements.
FHFA also collects civil penalties assessed against the regulated
entities. A penalty was collected in the amount of $500 thousand from a
former executive of Fannie Mae FHFA's total custodial collections were
$500 thousand for the year ended September 30, 2009, all of which were
transferred to the Treasury General Fund on September 30, 2009.
Note 16: Reconciliation Of Net Cost Of Operations To Budget:
FHFA has reconciled its budgetary obligations and non-budgetary
resources available to its net cost of operations.
2009 (In Thousands):
Resources Used to Finance Activities:
Budgetary Resources Obligated:
Obligations Incurred: $116,251;
Less: Spending Authority From Offsetting Collections and Recoveries:
$5,077;
Obligations Net of Offsetting Collections and Recoveries: $111,174;
Less: Offsetting Receipts: $115,699;
Net Obligations: ($4,525).
Other Resources:
Imputed Financing From Costs Absorbed by Others: $3,078;
Total Resources Used to Finance Activities: ($1,447).
Resources Used to Finance Items Not Part of the Net Cost of Operations:
Change in Budgetary Resources Obligated for Goods, Services and Benefits
Ordered But Not Yet Provided: ($2,524);
Resources That Fund Expenses Recognized In Prior Periods: $46;
Resources That Finance the Acquisition of Assets: $974;
Total Resources Used to Finance Items Not Part of the Net Cost of
Operations: ($1,504);
Total Resources Used to Finance the Net Cost of Operations: $57.
Components of Net Cost of Operations That Will Not Require or Generate
Resources in the Current Period:
Components Requiring or Generating Resources In Future Periods Increase
In Annual Leave Liability: $3,349;
Total Components of Net Cost of Operations That Will Require or
Generate Resources In Future Periods: $3,349;
Components Not Requiring or Generating Resources: Depreciation and
Amortization: $3,697;
Components Not Requiring or Generating Resources: Revaluation of Assets
and Liabilities: $4;
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources: $3,701;
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period: $7,050.
Net Cost of Operations: $7,107.
[End of table]
[End of section]
Appendix I: Management‘s Report on Internal Control over Financial
Reporting:
Federal Housing Finance Agency:
Management's Report on Internal Control over Financial Reporting:
The Federal Housing Finance Agency's (FHFA) internal control over
financial reporting is a process effected by those charged with
governance, management, and other personnel, the objectives of which
are to provide reasonable assurance that (1) transactions are properly
recorded, processed and summarized to permit the preparation of
financial statements in accordance with U.S. generally accepted
accounting principles and assets are safeguarded against loss from
unauthorized acquisition, use, or disposition; and (2) transactions are
executed in accordance with the laws governing the use of budget
authority and other laws and regulations that could have a direct and
material effect on the financial statements.
FHFA management is responsible for establishing and maintaining
effective internal control over financial reporting. FHFA management
evaluated the effectiveness of the agency's internal control over
financial reporting as of September 30, 2009, based on the criteria
established under 31 U.S.C. sec. 3512 (c),(d) (commonly known as the
Federal Managers' Financial Integrity Act).
Based on that evaluation, we conclude that, as of September 30, 2009,
FHFA's internal control over financial reporting was effective.
Federal Housing Finance Agency:
Signed by:
Edward J. DeMarco:
Acting Director:
Signed by:
Mark A. Kinsey:
Chief Financial Officer:
November 9, 2009:
[End of section]
Appendix II: Comments from the Federal Housing Finance Agency:
Federal Housing Finance Agency:
November 9, 2009:
Mr. Steven J. Sebastian:
Director, Financial Management and Assurance:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Sebastian:
Thank you for the opportunity to respond to the Government
Accountability Office's (GAO) draft audit report titled, "Financial
Audit: Federal Housing Finance Agency's Fiscal YGAO-10-218inancial
Statements (GA0-10-218)". I would like to personally thank you and the
GAO staff for all of your efforts in working with FHFA to meet the
reporting deadline for our audited financial statements.
I am pleased that the audit found that the financial statements are
presented fairly, in all material respects, and in conformity with U.S.
generally accepted accounting principles; that FHFA maintained, in all
material respects, effective internal control over financial reporting;
and that there were no instances of reportable noncompliance with laws
and regulations tested by GAO.
Fiscal year 2009 was a tremendously challenging year for FHFA. In
addition to our focus on stabilizing the housing market in the midst of
financial market turmoil, FHFA was also busy building a new agency,
with a new financial accounting system, policies and controls. An
unqualified audit opinion is testimony to the hard work and dedication
of FHFA management and staff in building a solid foundation for the
agency.
As FHFA begins its second year of operations, we will continue to work
to enhance our internal controls and ensure the reliability of our
financial reporting, soundness of operations, and public confidence in
the agency's mission. We appreciate your support of these efforts.
If you have any questions relating to our response, please contact Mark
Kinsey, Chief Financial Officer, at (202) 414-3811.
Sincerely,
Signed by:
Edward J. DeMarco:
Acting Director:
[End of section]
Footnotes:
[1] Pub. L. No. 110-289, 122 Stat. 2654 (July 30, 2008).
[2] GAO, Fannie Mae and Freddie Mac: Analysis of Options for Revising
the Housing Enterprises' Long-term Structures, [hyperlink,
http://www.gao.gov/products/GAO-09-782] (Washington, D.C.: Sept. 10,
2009).
[3] Pub. L. No. 110-289, 122 Stat. 2654 (July 30, 2008).
[4] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented or detected and corrected on a timely
basis. A significant deficiency is a deficiency, or combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with
governance. A deficiency in internal control exists when the design or
operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent, or
detect and correct misstatements on a timely basis.
[End of section]
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