Financial Audit
Federal Housing Finance Agency's Fiscal Years 2011 and 2010 Financial Statements [Reissued on November 29, 2011] Gao ID: GAO-12-161 November 15, 2011The 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 regulation of the housing-related government-sponsored enterprises: Fannie Mae, Freddie Mac, the 12 federal home loan banks, and the Office of Finance. 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 years 2011 and 2010 financial statements to determine whether (1) the financial statements were fairly presented and (2) FHFA management maintained effective internal control over financial reporting. GAO also tested FHFA's compliance with selected laws and regulations.
In GAO's opinion, FHFA's fiscal years 2011 and 2010 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, 2011. GAO found no reportable instances of noncompliance with the laws and regulations it tested. FHFA's fiscal year 2011 financial statements include costs for the FHFA Office of Inspector General (OIG), which make up approximately 10 percent of FHFA's fiscal year 2011 costs. While the OIG was established in 2008 by the enactment of HERA, the Inspector General was not confirmed by the U.S. Senate until October 2010. Therefore, there were no OIG costs to be reported in FHFA's fiscal year 2010 financial statements. 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 years 2011 and 2010 financial statements, based on determinations by the Office of Management and Budget (OMB) and the Department of the Treasury (Treasury) that they do not meet the criteria for inclusion in the financial statements of the U.S. government or the Treasury under federal accounting concepts, though Treasury records an asset for its investments in the two entities and a liability for future payments to these entities on its financial statements. 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 conclusion would need to be revisited. From early September 2008 through September 30, 2011, Fannie Mae and Freddie Mac have received about $169 billion in direct financial support from Treasury in exchange for Treasury's purchase of the entities' senior preferred stock. Additionally, Fannie Mae and Freddie Mac are requesting $7.8 billion and $6.0 billion, respectively, in additional support from Treasury due to losses sustained for the quarter ended September 30, 2011. 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 noted matters involving FHFA's internal control that were less significant than a material weakness or significant deficiency, but which nonetheless merit management's attention. GAO will be reporting separately to FHFA management on these matters. GAO is not making any recommendations in this report. In commenting on a draft of this report, FHFA stated that it accepted GAO's audit findings and 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.
GAO-12-161, Financial Audit: Federal Housing Finance Agency's Fiscal Years 2011 and 2010 Financial Statements
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United States Government Accountability Office:
GAO:
Report to Congressional Committees:
November 2011:
Financial Audit:
Federal Housing Finance Agency's Fiscal Years 2011 and 2010 Financial
Statements:
GAO-12-161:
GAO Highlights:
Highlights of GAO-12-161, 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 regulation of the housing-
related government-sponsored enterprises: Fannie Mae, Freddie Mac, the
12 federal home loan banks, and the Office of Finance. 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 years 2011
and 2010 financial statements to determine whether (1) the financial
statements were fairly presented and (2) FHFA management maintained
effective internal control over financial reporting. GAO also tested
FHFA‘s compliance with selected laws and regulations.
What GAO Found:
In GAO‘s opinion, FHFA‘s fiscal years 2011 and 2010 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, 2011. GAO found no reportable instances
of noncompliance with the laws and regulations it tested.
FHFA's fiscal year 2011 financial statements include costs for the
FHFA Office of Inspector General (OIG), which make up approximately 10
percent of FHFA's fiscal year 2011 costs. While the OIG was
established in 2008 by the enactment of HERA, the Inspector General
was not confirmed by the U.S. Senate until October 2010. Therefore,
there were no OIG costs to be reported in FHFA's fiscal year 2010
financial statements.
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 years 2011 and 2010 financial statements, based on
determinations by the Office of Management and Budget (OMB) and the
Department of the Treasury (Treasury) that they do not meet the
criteria for inclusion in the financial statements of the U.S.
government or the Treasury under federal accounting concepts, though
Treasury records an asset for its investments in the two entities and
a liability for future payments to these entities on its financial
statements. 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 conclusion would need to be revisited.
From early September 2008 through September 30, 2011, Fannie Mae and
Freddie Mac have received about $169 billion in direct financial
support from Treasury in exchange for Treasury‘s purchase of the
entities‘ senior preferred stock. Additionally, Fannie Mae and Freddie
Mac are requesting $7.8 billion and $6.0 billion, respectively, in
additional support from Treasury due to losses sustained for the
quarter ended September 30, 2011. 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 noted matters involving FHFA‘s internal control that were less
significant than a material weakness or significant deficiency, but
which nonetheless merit management‘s attention. GAO will be reporting
separately to FHFA management on these matters.
What GAO Recommends:
GAO is not making any recommendations in this report. In commenting on
a draft of this report, FHFA stated that it accepted GAO‘s audit
findings and 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.
View [hyperlink, http://www.gao.gov/products/GAO-12-161]. For more
information, contact Steven J. Sebastian at (202) 512-3406 or
sebastians@gao.gov.
[End of section]
Contents:
Letter:
Auditor's Report4:
Opinion on Financial Statements:
Opinion on Internal Control:
Compliance with Laws and Regulations:
Consistency of Other Information:
Objectives, Scope, and Methodology:
Agency Comments:
Management's Discussion and Analysis:
Financial Statements:
Appendix I: Management's Report on Internal Control over Financial
Reporting:
Appendix II: Comments from the Federal Housing Finance Agency:
Abbreviations:
FHFA: Federal Housing Finance Agency:
FMFIA: Federal Manager's Financial Integrity Act of 1982:
HERA: Housing and Economic Recovery Act of 2008:
OIG: Office of Inspector General:
OMB: Office of Management and Budget:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 15, 2011:
The Honorable Tim Johnson:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
This report presents the results of our audits of the financial
statements of the Federal Housing Finance Agency (FHFA) as of, and for
the fiscal years ending, September 30, 2011 and 2010. These financial
statements are the responsibility of FHFA. This report contains our
(1) unqualified opinions on FHFA's financial statements, (2) opinion
that FHFA's internal control over financial reporting was effective as
of September 30, 2011, and (3) conclusion that our tests of FHFA's
compliance with selected provisions of laws and regulations disclosed
no instances of reportable noncompliance during fiscal year 2011.
The Housing and Economic Recovery Act of 2008[Footnote 1] established
FHFA as an independent agency empowered with supervisory and
regulatory oversight of the housing-related government-sponsored
enterprises: Fannie Mae, Freddie Mac, the 12 federal home loan banks,
and the Office of Finance. The Act requires FHFA to annually prepare
and submit financial statements to the Director of the Office of
Management and Budget (OMB) and requires GAO to audit the agency's
financial statements.
FHFA continues to carry out its responsibilities as conservator of
Fannie Mae and Freddie Mac to ensure that these entities continue to
meet their mission requirements of providing liquidity and stability
to the secondary market for residential mortgages, participate in
programs such as the Home Affordable Modification Program to help
borrowers at risk of foreclosures, and take actions to reduce costs to
taxpayers and attain solvency. FHFA placed both entities into
conservatorship in September 2008 in the wake of their deteriorating
financial conditions with the objective of stabilizing them. From
September 2008 through September 30, 2011, the entities have received
about $169 billion of direct financial support from the Department of
the Treasury (Treasury). Additionally, Fannie Mae and Freddie Mac are
requesting $7.8 billion and $6.0 billion, respectively, in additional
support from Treasury due to losses sustained for the quarter ended
September 30, 2011. FHFA, OMB, and Treasury maintain that the
conservatorship arrangement is not intended to be permanent. Over the
longer term, particularly with continuing uncertainty about future
economic conditions, 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 ensuring the stability of the financial markets. It will
be necessary for Congress to reevaluate the roles, structures, and
performance of Fannie Mae and Freddie Mac and to consider options to
facilitate mortgage finance while mitigating safety and soundness and
systemic risk concerns.
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 Chairperson of the
Securities and Exchange Commission, the Director of the Office of
Management and Budget, and other interested parties. In addition, this
report will be available at no charge on GAO's website at [hyperlink,
http://www.gao.gov].
If you or your staff 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, DC 20548:
To the Acting 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 audits
of FHFA's fiscal years 2011 and 2010 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, 2011; and:
* no reportable noncompliance with laws and regulations we tested.
The following sections discuss in more detail (1) these conclusions;
(2) our conclusions on FHFA's Management's Discussion and Analysis and
other accompanying information; (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, 2011 and 2010, and its net costs, changes
in net position, and budgetary resources for the fiscal years then
ended.
As discussed in note 1B of the financial statements, FHFA's fiscal
year 2011 financial statements include, for the first time, the
activities and transactions of the FHFA Office of Inspector General
(OIG). While HERA established an OIG for FHFA, the Inspector General
was not confirmed by the U.S. Senate until October 2010. Therefore,
FHFA's fiscal year 2010 financial statements do not include costs for
the OIG. The activities and transactions of the OIG represented
approximately 10 percent of FHFA's fiscal year 2011 costs.
As discussed in note 1A of the financial statements, FHFA's fiscal
years 2011 and 2010 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 FHFA's
establishment, the then 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. 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. From early September
2008 through September 30, 2011, about $169 billion in direct
financial support from the Department of the Treasury (Treasury) has
been provided to Fannie Mae and Freddie Mac. Additionally, Fannie Mae
and Freddie Mac are requesting $7.8 billion and $6.0 billion,
respectively, in additional support from Treasury due to losses
sustained for the quarter ended September 30, 2011. Shortly after
Fannie Mae and Freddie Mac were placed in conservatorship, the Office
of Management and Budget (OMB) and Treasury determined that the
assets, liabilities, and activities of these entities would not be
included in the consolidated financial statements of the federal
government or those of the Treasury, although Treasury records an
asset for its investment in Fannie Mae and Freddie Mac and a liability
for future payments to the two entities in its financial statements.
In making this determination, OMB and Treasury 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 for inclusion in the federal government's or Treasury's
financial statements.[Footnote 2] OMB reaffirmed this conclusion with
respect to fiscal years 2009, 2010 and 2011. FHFA management concurred
with this conclusion. Consequently, FHFA did not include the assets,
liabilities, and activities of Fannie Mae and Freddie Mac in its
fiscal years 2011 and 2010 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, 2011, 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).
During fiscal year 2011, FHFA made progress in addressing internal
control deficiencies that we noted during our audits of FHFA's fiscal
year 2009 and 2010 financial statements. These deficiencies involved
matters related to accounting and monitoring procedures, access
controls, and information security management that remained unresolved
at the conclusion of our fiscal year 2010 audit. Although FHFA has
made progress in addressing those deficiencies, not all actions were
completed as of the completion of our fiscal year 2011 audit. During
our fiscal year 2011 audit, we also identified additional deficiencies
in accounting procedures and controls over FHFA's information
security. We do not consider the remaining deficiencies from our
fiscal years 2009 and 2010 financial audits, and those found during
our fiscal year 2011 audit, individually or in the aggregate, to
constitute material weaknesses or significant deficiencies.[Footnote
3] 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 2011 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 and other accompanying
information contain 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, with U.S. generally
accepted accounting principles, or with 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, 2011, based on the criteria established
under FMFIA. FHFA management's assertion based on its evaluation 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, 2011. 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. § 5313 -
Positions at level II; 12 U.S.C. § 4515 - Personnel; 12 U.S.C. §
4517(h) - Appointment of accountants, economists, and examiners;
Continuing Appropriations Act, 2011, as amended by Continuing
Appropriations and Surface Transportation Extensions Act, 2011;
Presidential Memorandum on Freezing Federal Employee Pay Schedules and
Rates That Are Set by Administrative Discretion, 75 Fed. Reg. 81829
(Dec. 29, 2010); Federal Employees' Retirement System Act of 1986, as
amended; Social Security Act of 1935, as amended; Federal Employees
Health Benefits Act of 1959, as amended; 12 C.F.R. Part 1206 -
Assessments; and Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended by the 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
affected 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 testing
controls over financial reporting. Our internal control testing was
for the purpose of expressing an opinion on the effectiveness of
internal control over financial reporting and may not be sufficient
for other purposes. Consequently, our audit may not identify all
deficiencies in internal control over financial reporting that are
less severe than a material weakness. 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, 2011. 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:
In commenting on a draft of this report, the acting Director of FHFA
stated that he was pleased to accept the audit findings that FHFA's
fiscal years 2011 and 2010 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 tested. The acting Director
also commented the agency would continue to work to enhance its
internal controls and ensure the reliability of its financial
reporting, its soundness of operations, and public confidence in its
mission.
The complete text of FHFA's comments is reprinted in appendix II.
Signed by:
Steven J. Sebastian:
Director Financial Management and Assurance:
November 9, 2011:
[End of section]
Management's Discussion and Analysis:
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 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.
Integrity:
We adhere to the highest ethical and professional standards. We treat
the regulated entities, the public, policy makers, 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 cooperate, collaborate, and communicate within FHFA, 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 clearly
communicate issues, decisions, and conclusions to the regulated
entities.
Responsiveness:
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.
Independence:
We are the independent regulator of Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks. Our evaluations of the regulated entities are
unbiased and free from external influences.
[End of Mission Statement]
Strategic Goals and Resource Management Strategy:
Strategic Goal 1 - Safety And Soundness: The housing government-
sponsored enterprises (GSEs) ” Fannie Mae, Freddie Mac, and the
FHLBanks ” operate in a safe and sound manner and comply with legal
requirements.
Strategic Goal 2 - Housing Mission: The housing GSEs support a stable,
liquid, and efficient mortgage market including sustainable
homeownership and affordable housing.
Strategic Goal 3 - Conservatorship:
FHFA preserves and conserves the assets and property of the
Enterprises, ensures focus on their housing mission, and facilitates
their financial stability and emergence from conservatorship.
Resource Management Strategy:
FHFA has the personnel, resources, and infrastructure to manage
effectively and efficiently to achieve its mission and goals.
Alignment of Resource Allocation with Strategic Goals:
In FY 2010, FHFA began tracking resource allocations and program costs
according to strategic goals. Figure 1 illustrates the costs that FHFA
expended during FYs 2010 - 2011 to accomplish its three strategic
goals. Figure 2 shows the number of full-time equivalent employees
working on each goal. Resources associated with the Resource
Management Strategy were allocated across the strategic goals
proportionately.
Figure 1: Actual Dollars:
[Refer to PDF for image: vertical bar graph]
Strategic Goal 1:
2010: $95.9 million;
2011: $126 million.
Strategic Goal 2:
2010: $16 million;
2011: $17.2 million.
Strategic Goal 3:
2010: $16.7 million;
2011: $24.2 million.
Figure 2: Actual Full-Time Equivalent:
[Refer to PDF for image: vertical bar graph]
Strategic Goal 1:
2010: 326;
2011: 421.
Strategic Goal 2:
2010: 54;
2011: 69.
Strategic Goal 3:
2010: 57;
2011: 36.
Note: Full-time equivalent is the total number of hours worked (or to
be worked) divided by the number of compensable hours applicable to
each fiscal year.
[End of figure]
FHFA at a Glance:
History:
The Housing and Economic Recovery Act of 2008 (HERA) merged the Office
of Federal Housing Enterprise Oversight, the Federal Housing Finance
Board, and certain staff from the Department of Housing and Urban
Development (HUD) to create the Federal Housing Finance Agency (FHFA).
FHFA is responsible for overseeing the financial safety and soundness
and housing mission compliance of the housing government-sponsored
enterprises (GSEs). The GSEs include Fannie Mae, Freddie Mac, the 12
FHLBanks and their joint Office of Finance.
FHFA participates in a number of interagency initiatives to improve
the effectiveness of financial market oversight, including the
Financial Stability Oversight Council (FSOC) and the Financial
Stability Oversight Board. The FHFA Director is appointed by the
President, subject to Senate approval. The Director represents the
agency on the FSOC and chairs the Federal Housing Finance Oversight
Board. Currently, FHFA is headed by Acting Director Edward J. DeMarco.
Legislation:
In accordance with the Federal Housing Enterprises Financial Safety
and Soundness Act of 1992 as amended by HERA, FHFA was appointed
conservator of Fannie Mae and Freddie Mac (the Enterprises) on
September 6, 2008. Legislation authorizing conservatorship of the
Enterprises and FHFA's regulatory powers for the FHLBanks is described
below.
Federal Home Loan Bank Act:
In 1932, the conditions in the housing sector and the closely related
savings and loan industry were dire. President Herbert Hoover
responded with the first federal regulation of the housing and savings
and loan industry”the Federal Home Loan Bank Act.
The FHLBank System was created by the Act to support mortgage lending
and related community investment. The System is now composed of 12
FHLBanks, more than 8,000 member financial institutions, and the
System's fiscal agent, the Office of Finance. Each FHLBank is a
separate, government-chartered, member-owned corporation. The 12
FHLBanks are jointly and severable liable for system debt and
obligations. The Act was amended by HERA, and the System is under the
supervision of its mission and safety and soundness regulator, FHFA.
Safety and Soundness Act as amended by HERA:
The Safety and Soundness Act, as amended by HERA, specifies two
conservator powers, stating that the agency may "take such action as
may be:
(i) Necessary to put the regulated entity in a sound and solvent
condition; and;
(ii) Appropriate to carry on the business of the regulated entity and
preserve and conserve the assets and property of the regulated entity."
As conservator, FHFA holds authority over the management, boards, and
shareholders of the Enterprises. However, the Enterprises continue to
operate as business corporations. For example, they have chief
executive officers and boards of directors, and must follow the laws
and regulations governing financial disclosure, including requirements
of the Securities Exchange Commission. Like other corporate
executives, the Enterprises' executive officers have legal
responsibility to use sound and prudent business judgment in their
stewardship of their companies.
While FHFA has very broad authority, the focus of the conservatorships
is not to manage every aspect of the Enterprises' operations. Instead,
FHFA reconstituted the boards of directors and charged them with
ensuring that normal corporate governance practices and procedures are
in place. The boards are responsible for carrying out normal board
functions, but they are subject to FHFA review and approval on
critical matters. This division of responsibilities represents the
most efficient structure for carrying out FHFA's responsibilities as
conservator.
FHFA is working with management to determine the strategic direction
for each of the Enterprises. To fulfill its obligations as
conservator, the agency has final decision-making authority in areas
that have significant effects on operational, market, or credit risk;
major accounting determinations, including policy changes, significant
mergers or acquisitions; and any other matters FHFA believes are
strategic or crucial to the Enterprises.
Emergency Economic Stabilization Act of 2008:
FHFA also operates under a statutory mandate in the Emergency Economic
Stabilization Act of 2008. This legislation established the Troubled
Asset Relief Program (TARP) to maximize assistance for homeowners and
minimize foreclosures. That mandate specified loan modifications and
tenant protections, and established a monthly reporting requirement
for FHFA.
2011 Profile:
* During each calendar year (CY), FHFA completes reports of
examination for Fannie Mae, Freddie Mac, each of the 12 FHLBanks, and
the Office of Finance, and presents these reports of examination to
the respective boards of directors. The scheduling of examination
fieldwork and the reviews of the reports of examination may vary from
year to year.
* FHFA restructured its examination and policy staff in FY2011 to
enhance consistency and collaboration in the examination and
supervision of the FHLBanks and the Enterprises and to consolidate
principal policy, research, and analysis functions into the Division
of Housing Mission and Goals. Certain key positions were filled
throughout FY 2011; the new structure should be fully operational for
the next examination cycle.
* To consolidate its entire Washington, D.C.-based staff under one
roof, FHFA has signed a lease for a new headquarters building.
Currently, FHFA personnel are housed in three separate buildings.
Build-out of the new office space began in FY 2011 and will be
completed in FY 2012. FHFA plans to move to the new headquarters in
January 2012.
* The Office of Congressional Affairs and Communications handled 229
congressional inquiries, 1,602 nonconsumer general public inquiries,
and 1,200 consumer inquiries in FY 2011.
* FHFA had 453 employees in FY2010 and 519 employees at the end of FY
2011. In FY 2012, the agency is budgeted to fill approximately 100
positions.
* The total budget for FY 2011 was $167.4 million in lieu of $169.4;
the FY 2010 budget was $128.6 million.
Table: FHFA Employees (By Specialized Areas):
Examinations:
2011: Budgeted: 284;
2011: Year End: 241;
2012: Budgeted: 292.
Other Mission:
2011: Budgeted: 47;
2011: Year End: 110;
2012: Budgeted: 129.
Office of the Director:
2011: Budgeted: 23;
2011: Year End: 23;
2012: Budgeted: 30.
Legal:
2011: Budgeted: 38;
2011: Year End: 39;
2012: Budgeted: 42.
Information Technology:
2011: Budgeted: 50;
2011: Year End: 47;
2012: Budgeted: 55.
Infrastructure[A]:
2011: Budgeted: 106;
2011: Year End: 59;
2012: Budgeted: 72.
Totals:
2011: Budgeted: 548;
2011: Year End: 519;
2012: Budgeted: 620.
[A] Includes 45 positions that were allocated after the planned
reorganization of the mission areas.
[End of table]
Figure 3: FHFA Principal Organization Units:
[Refer to PDF for image: organizational chart]
Top level: Office of the Director:
* Office of the Inspector General.
Second level, reporting to Office of the Director:
* Office of Ombudsmen;
* Office of Minority & Women Inclusion.
Third level, reporting to Office of the Director:
* Division of Enterprise Regulation;
* Division of Housing Mission & Goals;
* Division of FHLBank Regulation;
* Division of Examination Programs & Support.
Fourth level, reporting to Office of the Director:
* Office of General Counsel;
* Office of Chief Operating Officer;
* Office of Conservatorship Operations;
* Office of Congressional Affairs & Communications.
[End of figure]
Organization:
FHFA is an independent government agency with a work-force that
includes highly skilled examiners, economists, financial and policy
analysts, attorneys, and subject matter experts in banking,
technology, accounting, and legal matters. In FY 2011, FHFA
restructured its examination, examination policy, and housing and
regulatory policy functions to enhance the efficiency and
effectiveness of its supervision of the regulated entities and improve
coordination and consistency in examination and policy functions
throughout the agency (see Figure 3).
The organizational changes allow FHFA to carry out a financial
institution supervision program that is more uniform and consistent
across the 14 regulated entities. The changes include the
establishment of a Division of Examination Programs and Support to
provide services (including specialized risk assessments) to the core
examination and supervision teams in the Division of Enterprise
Regulation and the Division of Federal Home Loan Bank Regulation. The
expanded Division of Housing Mission and Goals focuses on regulatory
policy matters involving the supervision of the regulated entities,
the Enterprise conservatorships, loss mitigation activities and
foreclosure alternatives, public reporting on the activities of FHFA's
regulated entities, affordable housing, the state of the secondary
mortgage market, and activities required by statutory changes,
including HERA and the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010.
These changes allow FHFA to build on the strengths of examination
programs for both the Enterprises and the FHLBanks by integrating
examination resources and standards. The changes place the agency in a
better position to monitor safety and soundness at each regulated
entity and to provide critical support to FSOG, Congress, and the
Administration on matters involving the country's housing finance
system and possible changes to that system. The Office of Inspector
General (OIG) is responsible for conducting independent and objective
audits, evaluations, and investigations to help FHFA fulfill its
mission; keeping the FHFA Director, Congress, and the American public
up-to-date and fully informed about problems and deficiencies relating
to FHFA programs and operations; and working collaboratively with FHFA
staff and program participants to ensure the success of the agency's
program goals. OIG was established by HERA and commenced operation in
October 2010.
The Office of Ombudsman is responsible for considering complaints and
appeals from any regulated entity, the Office of Finance, or any
person who has a business relationship with a regulated entity or the
Office of Finance concerning any matter relating to FHFA's regulation
and supervision of that entity or the Office of Finance. Neither FHFA
nor any of its employees may retaliate against a regulated entity, the
Office of Finance, or a person for submitting a complaint or appeal to
the ombudsman. The office was created by regulation under HERA and
commenced operation in March 2011.
The Office of Minority and Women Inclusion (OMWI) is responsible for
all matters of diversity in employment, management, and business
activities at FHFA. OMWI ensures that FHFA is in compliance with Equal
Employment Opportunity and protects against illegal work place
discrimination. OMWI ensures that minorities, women, service-disabled
veterans, and persons with disabilities are fully included in any and
all job and business opportunities created as a part of the federal
government's efforts to reform and strengthen the banking system and
the financial services industry.
The Division of Enterprise Regulation is responsible for supervising
the Enterprises to promote their safe and sound operation. The
division oversees and directs all Enterprise examination activities,
develops examination findings, and prepares the sections of the Annual
Report to Congress that describes the condition and performance of
each Enterprise. By means of annual examinations and a continuous on-
site presence, the division monitors and assesses the amount of risk
the Enterprise assume, the quality of risk management, and compliance
with regulations.
The Division of Housing Mission and Goals is responsible for FHFA
policy development and analysis, oversight of housing and regulatory
policy, and oversight of the mission and goals of the Enterprises, and
the housing finance and community and economic development mission of
the FHLBanks. In support of FHFA's mission and the Director's
responsibilities as a member of the Federal Housing Finance Oversight
Board, the Financial Stability Oversight Board, and FSOC, the division
also oversees and coordinates FHFA activities that involve data
analysis, market surveillance, systemic risk monitoring, and analysis
affecting housing finance and financial markets.
The Division of FHLBank Regulation is responsible for supervising the
FHLBanks and the Office of Finance to promote their safe and sound
operation. The division oversees and directs all FHLBank examination
activities, develops examination findings, prepares reports of
examination, and prepares portions of the annual report to Congress on
the condition and performance of the FHLBanks. The division monitors
and assesses the financial condition and performance of the FHLBanks
and the Office of Finance and tests their compliance with regulations
and the quality of their risk management through annual on-site
examinations, periodic visits, and ongoing off-site monitoring and
analysis.
The Division of Examination Programs and Support is responsible for
supporting FHFA examination activities across all its regulated
entities and for developing and maintaining a consistent examination
program that is applied by all supervision offices. The division
develops examination policy and provides management oversight and
support for the risk area exam teams (credit, market, operational
risk, and risk modeling) and the Office of the Chief Accountant. The
division also has lead responsibility for examiner training, including
development of an examiner accreditation program for FHFA examiners.
The Office of the General Counsel advises and supports the Director
and FHFA staff on legal matters related to the functions, activities,
and operations of FHFA and the regulated entities; it supports
supervision functions, regulations writing, and enforcement actions,
when warranted. The office also manages the Freedom of Information and
Privacy Act programs. The ethics official advises, counsels, and
trains FHFA employees on ethical standards and conflicts of interest,
and manages the agency's financial disclosure program.
The Office of Chief Operating Officer oversees the agency's day-to-day
operations, including facilities management, contingency planning,
continuity of operations, financial and strategic planning and
budgeting, hiring and human resources management, information
technology, quality assurance, internal and external communications,
and coordination with the FHFA Office of Inspector General. This
office is responsible for overseeing the agency's relocation to new
office space in 2012. The office leads preparation of reports on
strategic planning and accountability, and develops recommendations
for long term improvements in agency operations.
The Office of Conservatorship Operations assists the FHFA Acting
Director, as conservator, in preserving and conserving Fannie Mae's
and Freddie Mac's assets and property. The office ensures that the
Enterprises focus on their mission”providing stability, liquidity, and
affordability to the housing market.
The Office of Congressional Affairs and Communications is the liaison
and coordinator of all communications between Congress and FHFA, and
is responsible for coordinating contact and communication with all
external parties, including the public, media, trade associations and
other regulators. The office coordinates legislative analysis within
the agency, conducts outreach to congressional offices on legislative
matters, and monitors legislative activity; it coordinates some FHFA
activities with arms of Congress such as the Congressional Budget
Office and the Government Accountability Office; and it coordinates
the communications activities of Fannie Mae and Freddie Mac while they
are under conservatorship. The office also coordinates with internal
offices to draft, edit, and produce the Annual Report to Congress and
other agency publications; produces the House Price Index (HPI) report
in conjunction with the Office of Policy Analysis and Research and
handles HPI-related media and public inquiries; and maintains FHFA's
website and intranet.
The Housing Government-Sponsored Enterprises:
Fannie Mae and Freddie Mac:
In the primary mortgage market, financial institutions make mortgage
loans directly to homebuyers. This process begins when a potential
homeowner or borrower applies for a mortgage loan from a lender. Once
the loan is originated, the lender either holds the loan in its own
portfolio or sells it.
Mortgage-backed securities (MBS) are traded in the secondary mortgage
market. Fannie Mae and Freddie Mac (the Enterprises) acquire mortgages
and issue MBS in the secondary market (see Figure 4). Since 2008, the
Enterprises have operated under conservatorship. The FHFA Director is
the conservator, aided by the FHFA Office of Conservatorship
Operations. The Department of the Treasury support the Enterprises
through preferred stock purchase agreements established when the
Enterprises entered conservatorship; they are designed to ensure that
each Enterprise maintains a positive net worth. The stock purchase
agreements require a 10 percent reduction in the Enterprises' retained
portfolios each year. At the inception of the conservatorships, FHFA
made clear that the Enterprises would continue to be responsible for
normal business activities and day-to-day operations. FHFA exercise
oversight as safety and soundness regulator while serving a more
active role as conservator.
Although FHFA has very broad authority, the focus of the
conservatorships is not to manage each aspect of the Enterprises'
daily operations. Instead, FHFA reconstituted the boards of directors
at each Enterprise and charged the boards with ensuring that normal
corporate governance practices and procedures are in place. The boards
are responsible for carrying out normal board functions, subject to
FHFA review and approval on critical matters. To manage the work of
overseeing the Enterprises' conservatorships and to assist the FHFA
Director, FHFA created the Office of Conservatorship Operations in
2008.
Federal Home Loan Banks:
The FHLBanks were created by Congress in 1932. The System includes 12
district banks, each serving a designated geographic area of the
United States, and the Office of Finance, which issues consolidated
obligations to fund the banks. The FHLBanks are member-owned
cooperatives; they provide a reliable source of liquidity to member
financial institutions that demonstrate a commitment to housing
finance. FHLBanks make loans, known as advances, to member
institutions and housing associates, such as state housing agencies.
Those loans are underwritten on the basis of the borrower's ability to
repay and are collateralized by whole mortgage loans, securities, and
other real estate related collateral. Advances are the largest
category of FHLBank assets. By providing advances and other credit-
related products to their members, FHLBanks increase the availability
of credit for residential mortgages.
The FHLBanks offer members certain other services as well, such as
letters of credit, lines of credit, correspondent banking (which
includes security safekeeping, wire transfers, and settlements), cash
management, and derivative intermediation. Some FHLBanks have an
acquired member assets program to purchase mortgages from their
members. The volume of loan purchases is low relative to advances, and
acquired member assets balances have generally declined over the past
five to seven years. The FHLBanks also offer their members several
housing and community investment programs, such as the Affordable
Housing Program, under which a member receives a subsidy from an
FHLBank that is used, typically in conjunction with an affordable
housing sponsor, for the purchase, construction, or rehabilitation of
housing for low- and moderate-income households. Support is provided
under the Affordable Housing Program for both multifamily rental
properties and single-family home ownership projects.
Figure 4: FHFA Oversight and Conservatorship Roles ” Fannie Mae and
Freddie Mac:
[Refer to PDF for image: illustration]
Primary Mortgage Market:
Market in which financial institutions provide mortgage loans to
homebuyers.
Secondary Mortgage Market:
Market in which existing mortgages and mortgage-backed securities
(MBS) are traded.
Borrower:
Applies for mortgage;
Lender:
Provides loan.
Lender:
Sells Loans that Meets Underwriting and Product Standards.
Fannie Mae and Freddie Mac:
Buys mortgage.
Federal Housing Finance Agency:
Conservator; Ensures Financial Safety and Soundness of Fannie Mae and
Freddie Mac.
Fannie Mae and Freddie Mac:
Credit Guarantee Business; Portfolio Investment Business:
Issues MBS; Issues Debt: to:
Wall Street.
Wall Street:
Buys MBS; Buys Debt: from:
Fannie Mae and Freddie Mac.
Wall Street:
Sells MBS & Debt to Investors;
Buys MBS & Debt from Investors.
Investors:
* Individual;
* Institutional;
* Foreign.
[End of figure]
The FHLBanks fund their operations mainly through the sale of debt
instruments known as consolidated obligations; these are joint and
several obligations sold to the public through the Office of Finance.
Consolidated obligations are not obligations of the United States, and
the U.S. government does not explicitly guarantee them.
As a condition of membership in an FHLBank or to obtain an advance, an
institution purchases capital stock in that bank. Only member
institutions can purchase the capital stock in an FHLBank, and, with
the exception of certain housing associates, only member institutions
can borrow from an FHLBank. Membership is limited to regulated
depository institutions (banks, thrifts, and credit unions), insurance
companies, and community development financial institutions engaged in
residential housing finance (see Figure 5). Each FHLBank district
comprises whole contiguous states, including the District of Columbia
and U.S. territories; the districts range in size from two to nine
states (see Figure 6).
Figure 5: FHFA 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.
Borrower:
Applies for loan; receives loan from Lender.
Lender:
Pledges Collateral to FHLBank; Lender receives cash from FHLBank.
Federal Housing Finance Agency:
Ensures Financial Safety and Soundness of FHLBank and Office of
Finance.
FHLBank:
All Debt is Issued Through the Office of Finance.
Office of Finance:
Issues Debt to Underwriters; Receives cash from Underwriters.
Wall Street:
Sells Bonds to Investors.
Investors:
* Institutional;
* Foreign.
Investors Purchase Bonds from Underwriters.
[End of figure]
Figure 6: Federal Home Loan Bank Districts:
[Refer to PDF for image: illustrated U.S. map]
Atlanta:
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 by Strategic Goal:
Strategic Goal 1:
The housing government-sponsored enterprises (GSEs) operate in a safe
and sound manner and comply with legal requirements.
Safety and Soundness Examinations:
On-site safety and soundness examinations are the primary tool used to
assess the financial condition, performance and operations of the
regulated entities. During FY 2011, FHFA completed safety and
soundness examinations of each regulated entity and delivered a report
of examination to each entity's board of directors. The report of
examination contains the agency's examination findings, a composite
rating for the regulated entity, and component ratings for principal
areas of risk and risk management, and highlights issues that require
the board's attention.
On-site examinations are supported by off-site monitoring and analysis
conducted by FHFA financial analysts, economists, and accountants.
These analyses complement the on-site examinations through
simultaneous structured analyses across a group of entities, which
help identify trends across multiple institutions or anomalies in the
activities of one relative to the others. Off-site monitoring and
analysis help set the scope of examinations and assessments of the
entities' safety and soundness.
In FY 2011, FHFA began restructuring its examination divisions to
unify and standardize its supervisory approach. The restructuring will
result in a unified supervision program with guidelines, examination
standards, and a common rating system; this will establish a common
language to describe the risk and condition of the GSEs. FHFA also
expanded its efforts to attract and hire additional supervision staff
to increase examination resources.
Restructuring FHFA Safety and Soundness and Mission Offices:
During FY 2011, FHFA announced a restructuring of the agency's safety
and soundness and mission offices, including the establishment of an
integrated supervision structure and a revamped housing mission and
policy division.
Changes in the supervision program structure were designed to promote
greater uniformity and consistency in the examinations of Fannie Mae,
Freddie Mac, and the FHLBanks. The new housing mission team is focused
on policy matters involving the Enterprise conservator-ships,
including loss mitigation activities, public reporting on the
activities of FHFA's regulated entities, affordable housing, the state
of the secondary mortgage market, and activities related to the Dodd-
Frank Act.
With these changes, FHFA is building on the strengths of its
examination programs by integrating resources and standards. The
integration and realignment of FHFA's supervision and examination
resources including core teams headed by examiners-in-charge for the
two Enterprises, specialized risk teams for the Enterprises and the
FHLBanks, and a dedicated housing mission and policy team will enhance
FHFA's consistency in monitoring safety and soundness at each
regulated entity and will enable the agency to deploy examiners to
areas of greatest need. The changes will also provide critical policy,
research, and analytical support to FSOC, the Federal Housing Finance
Oversight Board, Congress, and the Administration on matters involving
the country's housing finance system.
Photograph: Acting Director Edward J. DeMarco addresses FHFA's full
staff at an "all hands" meeting held in April.
The new structure is designed to improve the efficiency and
effectiveness of operations agency-wide and to ensure a clear
alignment of the agency's supervisory and housing mission and its
policy responsibilities. HERA requires FHFA to have two statutorily
designated supervision positions: the Deputy Director of the Division
of Federal Home Loan Bank Regulation and the Deputy Director of the
Division of Enterprise Regulation as well as a Deputy Director for
Housing Mission and Goals. The restructuring adds another supervisory
position: Deputy Director for Examination Programs and Support. The
Supervision Committee (composed of the four deputy directors) will
coordinate and monitor implementation of FHFA's annual examination
programs and mission oversight.
FHFA has also enhanced its quality assurance programs for examination
and supervision of the Enterprises and FHLBanks. The restructuring
created an integrated Office of Quality Assurance that reports
directly to the chief operating officer. This office will provide
independent, internal review of the supervision offices' activities to
ensure compliance with FHFA's examination standards and work plans.
Creation of the Office of Ombudsman:
FHFA's Office of Ombudsman, created by regulation pursuant to
requirements in HERA, commenced operation in March 2011. The office
ensures that complaints and appeals are considered in a fair and
timely manner; conducts independent inquiries and acts as a neutral
facilitator or mediator to help resolve complaints and appeals; and
submits findings of fact and recommendations to the FHFA Director on
complaints and appeals that have not been resolved through
facilitation or mediation.
During FY2011, the Office of Ombudsman received 132 complaints, of
which 106 were individual consumer complaints referred to the Office
of Congressional Affairs and Communications. Five alleged fraud were
referred to the Inspector General. Eleven were against institutions
not regulated by FHFA; they were referred to the appropriate federal
regulators of those institutions, such as the U.S. Office of the
Comptroller of the Currency (OCC) and the Federal Deposit Insurance
Corporation (FDIC). Of the 10 remaining complaints, 6 are under review
by the ombudsman and 4 have been closed out.
Resolution Funding Corporation Obligations Completed:
In August 2011, FHFA certified that the FHLBanks had satisfied their
obligation to make payments related to the Resolution Funding
Corporation (REFCORP). The FHLBanks were paying 20 percent of their
net earnings to REFCORP for bonds issued from 1989 to 1991 to help pay
for the costs associated with an earlier resolution of failures of
savings and loan institutions.
Restricted Retained Earnings Account:
The July 2011 payment to REFCORP successfully completed the FHLBanks'
statutorily required payments ahead of the original schedule. The
completion of these payments prompted the FHLBanks to amend their
capital structure plans pursuant to a joint capital enhancement
agreement announced at the end of February. The purpose of this
agreement is to strengthen the capital position of the FHLBanks by
reallocating income to build restricted retained earnings at each
FHLBank. Under the agreement, each FHLBank will allocate 20 percent of
its net quarterly income (approximately equal to the previous REFCORP
obligation) to a separate restricted retained earnings account. Each
FHLBank will build a separate restricted retained earnings account in
this fashion until that account equals 1 percent of the outstanding
consolidated obligations for which it is the primary obligor. The
banks may not pay dividends out of these special accounts until the
accounts reach a specified level.
FHFA approved each of the FHLBanks' modified capital plans, allowing
them to implement the provisions of the agreement. These capital plans
should enhance the banks' capital by building retained earnings which
will, in turn, enhance the safety and soundness of the individual banks
and of the FHLBank system.
Photograph: Acting Deputy Director Steve Cross talks to members of
FHLBank advisory councils from around the country who attended an FHFA
outreach conference in December 2010.
Supervisory Enforcement Actions:
During FY2011, two FHLBanks were subject to formal enforcement
actions. The Chicago FHLBank addressed certain requirements in a cease
and desist order previously imposed by FHFA. The FHLBank of Seattle
agreed to a new consent order. FHFA's actions with regard to these
orders are described below.
FHLBank Of Chicago C&D Order:
On September 23, 2010, the Chicago FHLBank submitted a proposed market
risk management and hedging framework, the Income and Market Value
Risk Framework: Income Guidelines and Market Value Limits and
Guidelines. FHFA did not object to the bank's implementing this
proposed framework. FHFA's non-objection satisfied Article III - the
final article that required affirmative action by the bank -of the
October 10, 2007, consent order.
The Chicago FHLBank must satisfy the remaining outstanding operating
articles until FHFA terminates the order. These include complying with
Article II, which prohibits the bank from repurchasing or redeeming
capital stock and Article V, which prohibits the bank from declaring
or paying dividends without prior written approval. On September 30,
2011, FHFA terminated Article I of the order, which had required the
bank to maintain (1) a capital-to-asset ratio of 4.5 percent, and (2)
capital stock plus subordinated debt of at least $3.6 billion,
effective as of the date the bank implements its capital structure
plan on January 1, 2012. The bank previously satisfied Article III, as
noted above, and Article IV by submitting a capital structure plan
within 120 days of the effective date of the order.
[Photograph: Acting Deputy Director Steve Cross talks to members of
FHLBank advisory councils from around the country who attended an FHFA
outreach conference in December 2010]
FHLBank Of Seattle Consent Order:
The Seattle FHLBank has been classified as undercapitalized since
March 31, 2009, based on FHFA rules subpart A of part 1229 Capital
Classifications and Prompt Corrective Action and under authority of
section 1364(c)(1)(A) of the Safety and Soundness Act of 1992. The
Seattle FHLBank board of directors stipulated to and FHFA issued a
consent order on October 25, 2010, to resolve outstanding capital and
supervisory issues. The order prohibits the bank from paying dividends
and repurchasing or redeeming capital stock without prior FHFA
approval. It requires the bank to develop plans to mitigate risk posed
by its devalued private-label MBS portfolio; increase advances as a
percentage of bank assets; improve collateral risk management;
equitably repurchase capital stock; revise its compensation practices;
and remediate examination findings.
The consent order also prohibits the Seattle FHLBank from purchasing
loans under its acquired member asset program and requires the bank to
meet time-tables and requirements mandated by FHFA. The consent order
requires the bank to meet timetables and requirements mandated by
FHFA. The consent order and associated supervisory mandates constitute
the bank's capital restoration plan and fulfill FHFA's April 19, 2010,
requirement (imposed pursuant to the prompt corrective action rule)
that the bank develop a plan acceptable to FHFA. The requirement
called for a business plan with steps the bank would take to resume
timely repurchases and redemptions of member capital stock and to
refocus its business on advances that support housing finance and
community development. FHFA staff closely monitors and evaluates the
Seattle FHLBank's progress under the plan.
Credit Characteristics of the Enterprises' New Single-Family
Business:
The credit quality of new single-family business remained high during
FY 2011, after changes in underwriting required by FHFA as
conservator. Enterprise purchases of non-traditional and higher risk
mortgages were very low during the period, and the average Fair Isaac
Corporation (FICO) credit score remained high compared with the
preconservatorship period. For example, average FICOs for new business
in the first half of CY 2011 were 760 at Fannie Mae and 753 at Freddie
Mac; this compares favorably with average scores in CY 2007 of 716 and
718 respectively.
The percentage of new business with loan-to-value ratios greater than
90 percent increased to 9 percent in the first half of CY 2011, from 7
percent in CY 2010. Much of this increase can be attributed to
refinance activity, including refinancing of loans with loan-to-value
ratios above 100 percent as part of the Home Affordable Refinance
Program (HARP).
For details on the credit characteristics of the Enterprises' new
single-family business, see FHFA's Conservator's Report on the
Enterprises' Financial Performance.
Refinement to Executive Incentive-based Compensation:
During FY 2011, FHFA reviewed and provided feedback to the 12 FHLBanks
on their 2011 incentive compensation plans and payouts on the 2010
plans. Consistent with Advisory Bulletin 2009-AB-02, Principles for
Executive Compensation at the Federal Home Loan Banks and the
Office of Finance, and FHFA feedback on earlier ICPs, many FHLBanks
have made significant improvements to their incentive compensation
plans. These include the following:
* Increased percentage of incentive-based compensation that is
deferred and contingent on performance over several years.
* Eliminated performance measures tied directly to dividend payment.
* Reduced weight and refined performance measures related to income
and profitability.
* Increased weight on performance measures related to risk management
and mitigation.
* Increased use of outcome-oriented performance measures.
* Increased use of target performance levels that reflect a reasonable
assessment of the entity's financial condition and prospects.
* Design and implementation of separate incentive compensation
structure for staff engaged in risk management and compliance and
audit functions.
* Explicitly stated requirements for "clawback" or reduction in
incentive compensation.
HERA requires FHFA to ensure that compensation at the regulated
entities is reasonable and comparable to compensation for employment
in similar businesses involving similar duties and responsibilities.
In response to FHFA feedback in 2011, the boards of directors at two
FHLBanks lowered incentive-based payouts for their executives.
FHFA feedback also resulted in the board of directors at another
FHLBank lowering potential incentive awards for their executives.
Strategic Goal 2:
The housing GSEs support a stable, liquid, and efficient mortgage
market including sustainable homeownership and affordable housing
Loss Mitigation Efforts:
Reducing the Enterprises' losses through foreclosure prevention
activities has been an important priority for FHFA. Foreclosure
prevention activities include home retention programs and foreclosure
alternatives that allow borrowers a graceful exit when they cannot or
do not want to remain in the home. Foreclosure prevention activities
are intended to reduce the Enterprises losses resulting from borrower
defaults and minimize the effect of foreclosures on borrowers,
communities, and neighborhoods. Since the first full quarter in
conservatorship, the combined completed foreclosure prevention actions
totaled nearly 1.9 million for the Enterprises as of August 2011.
Home retention programs aimed at helping borrowers stay in their homes
include workout activities such as loan modifications, repayment
plans, and forbearance plans. During FY 2011, the majority of
foreclosure prevention activities focused on home retention solutions.
As of August 2011, loan modifications total 345,888; repayment plans,
171,898; and forbearance plans, 35,475.
Foreclosure prevention activities offer alternatives such as short
sales and deeds in lieu of foreclosure. A short sale involves the sale
of a mortgaged property at a price that nets less than the amount due
on the mortgage. A deed in lieu of foreclosure involves a loan for
which the borrower voluntarily conveys the property to the lender to
avoid a foreclosure proceeding. During FY 2011, the number of short
sales was 99,344, and deeds in lieu of foreclosure were 8,038 as of
August 2011.
FHFA has required the Enterprises to pursue the Home Affordable
Modification Program (HAMP), designed to help homeowners avoid
foreclosures by modifying loans to a level that is affordable now and
sustainable over the long term. If HAMP modifications are not
available, proprietary loan modifications that reduce interest rates,
extend mortgage terms, and provide for principal forbearance to help
borrowers who are having difficulty affording mortgage payments, can
be an option.
HARP is another home retention program. HARP focuses on mortgages that
Fannie Mae and Freddie Mac already hold in their portfolios or
guarantee through their MBS; it provides unique flexibilities around
the level of credit enhancement required on loans with loan-to-values
greater than 80 percent. Borrowers who are current on their mortgages
can refinance into a lower mortgage payment or a more sustainable
mortgage without requiring additional credit enhancement (generally
private mortgage insurance) to refinance. Without these credit
enhancement flexibilities, borrowers whose home equity has declined
and who have current loan-to-value in excess of 80 percent would be
unable to refinance. In March 2011, FHFA extended HARP from June 2011
to June 2012.
FHFA is carefully reviewing the mechanics of the program to identify
possible enhancements that would reduce barriers for borrowers already
eligible to refinance using HARP. Loan-level price adjustments,
representations and warranties, and valuation requirements are being
considered.
Since HARP's inception, the Enterprises had completed approximately
1.6 million streamlined refinances outside of HARP and 6 million
standard "rate and term" refinances as of August 2011. These efforts
represent loss mitigation efforts consistent with the goals of the
conservatorships and with helping families retain their homes.
As of August 2011, the number of HARP refinances since inception was
893,755.
FHFA Contributions to Dodd-Frank Act Implementation:
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010requires changes that, among other things, affect the oversight
and supervision of financial institutions. The Act does not directly
address broader issues associated with housing finance reform, such as
the future role of Fannie Mae and Freddie Mac. However, key provisions
affect Fannie Mae, Freddie Mac, the FHLBanks and FHFA's oversight
functions; and the structure and workings of mortgage finance and
securitization. Others add to the agency's responsibilities in other
areas.
One set of activities associated with implementing the Dodd-Frank Act
involves the Financial Stability Oversight Council. The Act created
FSOC to provide coordinated oversight of the U.S. financial system.
The council is chaired by the Secretary of the Treasury and includes
the nation's top financial regulators including the FHFA Director. As
a voting member of this key interagency regulatory and coordinating
body, the FHFA Director ensures the agency's important role in
discussions involving the workings of, and risk to, the U.S. financial
system. FSOC is organized under a committee structure and FHFA
participates on all the committees.
In FY 2011, FHFA created the Office of Systemic Risk and Market
Surveillance to help the FHFA Director carry out ongoing FSOC
responsibilities. FHFA's support to FSOC during FY 2011 included the
following:
* Assisting with the completion of FSOC's first annual report;
* Analyzing emerging threats to financial institutions and markets;
* Issuing proposed rules and further consideration of the process for
designating systemically important nonbank financial companies;
* Issuing final rules on designating systemically important financial
market utilities;
* Consulting on forthcoming heightened prudential standards;
* Consulting on FDIC and Federal Reserve Board orderly liquidation
rules; and;
* Participating in the completion of FSOC studies on the Volcker Rule,
concentration limits, and secured creditor haircuts.[Footnote 4]
[Text box: Financial Stability Oversight Council:
The Financial Stability Oversight Council (FSOC) is chaired by the
Secretary of the Treasury, and includes 10 voting members at the
forefront of financial regulation. Voting members include leaders from
the following organizations:
* U.S. Department of Treasury,
* Federal Housing Finance Agency,
* Federal Reserve Board,
* Office of the Comptroller of the Currency,
* Federal Deposit Insurance Corporation,
* National Credit Union Association,
* Securities and Exchange Commission,
* U.S. Commodity Futures Trading Commission,
* Consumer Financial Protection Bureau,
* An independent, presidentially appointed member with expertise in
insurance.
The FSOC also includes five non-voting members: the Director of the
Office of Financial Research, Director of the Federal Insurance
Office, a state banking supervisor, a state securities commissioner,
and a state insurance commissioner. End of textbox]
The Dodd-Frank Act required a number of agencies, including FHFA, to
establish an Office of Minority and Women Inclusion (OMWI) that, is
responsible for all agency matters related to diversity in management,
employment and business activities, including contracting. FHFA
established its OMWI in February 2011. The implementation of the Dodd-
Frank Act has brought about many challenges for FHFA over the past
year. However, it has also provided FHFA with a direct opportunity to
participate in many important policy issues that will shape the future
of financial regulation and has further integrated the work of FHFA
with that of the other federal financial regulators.
Joint Studies and Relationships:
FHFA has participated in the many joint studies, joint rulemakings,
and consultations required by the Dodd-Frank Act, including several
that resulted from FHFA's role as a voting member of FSOC. In
addition, FHFA has participated in joint studies focused on housing
finance reform and efforts to resolve continuing market distress
generated by the financial crisis. During FY 2011, FHFA participated
in major studies mandated by the Dodd-Frank Act and coordinated and
published by FSOC. As a voting member of FSOC, FHFA provided staff to
participate in drafting and evaluating each of these studies. In
addition, FHFA participated in the preparation of FSOC's 2011 annual
report.
Section 619 of the Dodd-Frank Act mandated a study on the 'Volcker
Rule,' which restricts the activities of federally insured financial
firms with respect to proprietary trading and ownership of hedge funds
or private equity funds. Those prohibitions are intended to reduce
conflicts of interest, exposure to high-risk assets or high-risk
trading strategies, and threats to the safety and soundness of
individual banking entities or the financial stability of the
United States. The study includes 10 recommendations to the banking
agencies for full implementation of the Volcker Rule.
Section 622 of the Dodd-Frank Act establishes a concentration limit
that generally prohibits a financial company from merging or
consolidating with or acquiring another company if the resulting
company's consolidated liabilities would exceed 10 percent of the
aggregate consolidated liabilities of all financial companies at the
end of the calendar year preceding the transaction. The study highlights
FSOC's consensus that the concentration limit will reduce the risk to
U.S. financial stability created by increased concentration arising
from mergers, consolidations, and acquisitions involving the largest
U.S. financial companies. Like the Volcker Rule study, the
concentration limit study includes recommendations for its effective
implementation. Section 215 of the Dodd-Frank Act required FSOC to
determine whether allowing regulators in a resolution proceeding to
treat a portion of fully secured creditors' claims as unsecured
("secured creditor haircuts") would promote market discipline and
taxpayer protection. The report evaluated arguments for and against
such haircuts and concluded that the combination of the orderly
liquidation authority in Title II and the new supervisory framework in
Title I of the Dodd-Frank Act can effectively be used to achieve the
goals of market discipline and taxpayer protection without instituting
secured creditor haircuts.
FHFA also helped produce FSOC's first annual report, which was
released in July 2011. The report cites real estate related exposures
among the significant risks for many financial institutions and
recommends continued efforts to strengthen and encourage the return of
private capital to the housing finance system.
FHFA worked with HUD, the Department of the Treasury, the National
Credit Union Administration, FDIC, and Fannie Mae, and Freddie Mac to
publish a study of the standardized net present value model central to
HAMP. That model was developed to identify troubled loans that would
likely gain value from payment-reducing modifications. The study
discusses the development and structure of the model; describes the
responsiveness of the model to key characteristics, such as loan-to-
value ratio and the borrower's credit score; and gives new evidence on
the relationship between HAMP modification performance and key
borrower and modification characteristics. The study concludes with a
discussion of model limitations and suggestions for further refinement
of the model.
Joint Rulemakings Associated with the Dodd-Frank Act:
FHFA participated in three joint rulemakings required by the Dodd-
Frank Act, each of which resulted in a Notice of Proposed Rulemaking
published in the Federal Register. These proposed rules are intended
to address sources of risk that contributed to the recent financial
crisis.
The agency proposed a credit risk retention rule jointly with HUD,
FDIC, the Federal Reserve System, and OCC.
Table: FHFA Regulations Published in FY 2011:
Proposed:
Proposed Voluntary FHLBank Merger:
75 FR 72751 (Nov. 26, 2010)12 CFR Part 1278, Subchapter D.
Private Transfer Fees:
76 FR 6702 (Feb. 8 2011)12 CFR Part 1228.
Incentive-Based Compensation Arrangements (joint Dodd-Frank Act
rulemaking):
76 FR 21170 (Apr. 14, 2011) 12 CFR Part 1232.
Credit Risk Retention for Asset-Backed Securities (joint Dodd-Frank
Act rulemaking):
76 FR 24090 (Apr. 29, 2011) 76 FR 34010 (Jun. 10, 2011)12 CFR Part
1234.
Margin and Capital Requirements for Covered Swap Entities (joint Dodd-
Frank Act rulemaking):
76 FR 27564 (May 11, 2011) 76 FR 37029 (Jun. 24, 2011)12 CFR Part 1221.
Prudential Management and Operations Standards:
76 FR 35791 (Jun. 20, 2011)12 CFR Part 1236.
Advance Notices of Proposed Rulemaking:
Advance Notices of Proposed Rulemaking Members of Federal Home Loan
Banks:
75 FR 81145 (Dec. 27,2010)12 CFR Part 1263.
Alternatives to Use of Credit Ratings in Regulations:
76 FR 5292 (Jan. 31, 2011) 12 CFR Parts 1220, 1266, 1267, 1269, 1270,
1273.
Final:
Use of Community Development Loans by Community Financial Institutions
To Secure Advances; Secured Lending by Federal Home Loan Banks to
Members and Their Affiliates; Transfer of Advances and New Business
Activity Regulations:
75 FR 76617 (Dec. 9, 2010)12 CFR Parts 1264, 1266, 1269, and 1272.
Federal Home Loan Bank Housing Goals:
75 FR 81096 (Dec. 27, 2010) 12 CFR Part 1281.
Minority and Women Inclusion:
75 FR 81395 (Dec. 28, 2010) 12 CFR Part 1207 116.
Portfolio Holdings:
75 FR 81405 (Dec. 28, 2010) 12 CFR Part 1252.
Office of the Ombudsman:
76 FR 7479 (Feb. 10, 2011)12 CFR Part 1213.
Minimum Capital:
76 FR 11668 (Mar. 3, 2011) 12 CFR Part 1225.
Debt Collection:
76 FR 17331 (Mar. 29, 2011)12 CFR Part 1208.
Federal Home Loan Bank Liabilities:
76 FR 18366 (Apr. 4, 2011)12 CFR Part 1270.
Federal Home Loan Bank Investments:
76 FR 29147 (May 20, 2011) 12 CFR Part 1267.
Record Retention for Regulated Entities and Office of Finance:
76 FR 33121 (Jun. 8, 2011) 12 CFR Part 1235.
Conservatorship and Receivership:
76 FR 35724 (Jun. 20, 2011)12 CFR Parts 1229 and 1237.
Freedom of Information Act Implementation (Interim final):
76 FR 29633 (May 23, 2011) 12 CFR Part 1202.
Privacy Act Implementation (Interim final):
74 FR 33907 (Jul. 14, 2011)12 CFR Part 1209.
Rules of Practice and Procedures:
76 FR 53596 (Aug. 26, 2011) 12 CFR Part 1209.
[End of table]
Among other things, the proposed rule defines a "qualified residential
mortgage." Qualified residential mortgages are exempt by law from an
otherwise mandatory requirement that sponsors of MBS retain at least 5
percent of the credit risk associated with any securitization pool.
The second proposed rule would establish margin and capital
requirements for swap dealers and major swap participants regulated by
a prudential regulator,[Footnote 5] defined as the Federal Reserve
System, OCC, FDIC, FHFA, and the Farm Credit Administration.
The third proposed rule would require the reporting of incentive-based
compensation arrangements by a covered financial institution and would
prohibit certain arrangements. A covered financial institution would
be barred from providing excessive incentive-based compensation or
incentive-based compensation that could expose the institution to
inappropriate risks and to material financial loss. FHFA proposed the
rule jointly with OCC, FDIC, the Federal Reserve System, the Office of
Thrift Supervision, the National Credit Union Administration, and the
Securities and Exchange Commission.
The Dodd-Frank Act also calls for extensive consultations among
regulatory agencies, either directly or through FSOC. FHFA has
participated in numerous consultations about proposed rules to
implement various sections of the Act. FHFA continues to consult with
HUD and Treasury on such issues as the future of the U.S. housing
finance system, conforming loan limits, and protecting taxpayers.
Strategic Goal 3:
FHA preserves and conserves the assets and property of the
Enterprises, ensuring focus on their housing mission, and facilitates
their financial stability emergence from conservatorship.
Enhancing Public Understanding of Financial Performance:
In October 2010, FHFA released projections of the financial
performance of Fannie Mae and Freddie Mac. The purpose of this report
was to alert the public to possible future Treasury draws by the
Enterprises under specified scenarios, using consistent assumptions
for both Enterprises. The projected credit losses in each scenario
reflect possible further losses on the Enterprises pre-conservatorship
mortgage business.
These projections are intended to give policymakers and the public
useful snapshots of potential outcomes for the taxpayer support of the
Enterprises. The results of these projections reflect the potential
effects of a limited set of hypothetical changes in house prices, a
key variable driving credit losses for the Enterprises. As of June
2011, the Enterprises have drawn $169 billion from the U.S.
Department of the Treasury under the terms of the preferred stock
purchase agreements, as amended, between Treasury and each of the
Enterprises. Since releasing the projections, FHFA has reported actual
performance against the projections in its quarterly conservatorship
reports. FHFA updated the projections themselves in a report released
in October 2011.
Joint Servicing Compensation Initiative:
FHFA announced a joint servicing compensation Initiative in January
2011. FHFA directed Fannie Mae and Freddie Mac, in coordination with
FHFA and HUD, to consider alternatives for future mortgage servicing
compensation for their single-family mortgage loans. The goals of the
joint initiative are to improve service for borrowers, reduce
financial risk to servicers, and provide flexibility for guarantors to
better manage nonperforming loans, while promoting continued liquidity
in the mortgage securities market. Part of the goal of this initiative
is to consider changes to the compensation structure that would
improve competition and liquidity in the market for mortgage
servicing. On September 27, 2011, FHFA released the Alternative
Mortgage Servicing Compensation Discussion Paper. The agency is
seeking public comment on two alternative mortgage servicing
compensation structures detailed in the paper.
Servicing Alignment Initiative:
FHFA announced a servicing alignment initiative in April 2011. This
initiative is designed to produce a single, consistent set of
protocols for servicing Enterprise mortgages from the moment they
first become delinquent. The initiative responds to recent problems
with the servicing of delinquent mortgages and simplifies the
procedures for mortgage servicers by giving them just one set of
procedures to follow, whether the mortgage is owned by Fannie
Mae or Freddie Mac.
Portfolio Reductions-”Preferred Stock Purchase Agreements:
In 2008, when FHFA placed Fannie Mae and Freddie Mac in
conservatorship, the agency entered into separate senior preferred
stock purchase agreements with the Department of the Treasury. Under
the agreements, the Treasury agreed to acquire preferred stock from
each Enterprise in amounts that will ensure each Enterprise maintains
a positive net worth and avoids a statutory requirement that it be put
in receivership following an extended period of negative net worth.
One of the conditions attached to Treasury's funding commitment under
the preferred stock agreement was that each Enterprise reduces its
holdings of mortgage assets, starting in 2010, by 10 percent each year
until those holdings reach a balance of $250 billion.
The preferred stock agreement originally limited Treasury's financial
commitment to the Enterprises to $100 billion each. In May 2009,
Treasury amended the agreement to increase the amount of its financial
commitment to each Enterprise to $200 billion. Later that year, the
Treasury reaffirmed its financial commitment to the Enterprises by
agreeing to provide for each Enterprise, as of any determination date,
the greater of:
* $200 billion; or:
* $200 billion plus the cumulative total of deficiency amounts
determined for calendar quarters in calendar years 2010, 2011, and
2012, less any surplus amount determined as of December 31, 2012, and,
in the case of either (a) or (b), less the aggregate amount of funding
under the commitment before this date.
The preferred stock agreement initially limited the size of each
Enterprise's mortgage asset portfolio to a maximum balance of $850
billion at year end 2009. A later amendment increased the amount to
$900 billion for that year and changed the portfolio reduction
requirement so that the 10 percent reduction is based on the maximum
allowable size of the portfolios rather than the actual size of an
Enterprise's portfolio.
HERA required FHFA to establish criteria, by regulation, governing the
portfolio holdings of the Enterprises. The regulation aims to ensure
consistent safe and sound operations of the Enterprises and to ensure
that the portfolio holdings are backed by sufficient capital. FHFA's
final regulation, issued December 28, 2010, adopted the portfolio
holdings criteria established by the preferred stock purchase
agreements, which may be amended from time to time, as the standard
that governs the Enterprises' holdings of mortgage assets.
The maximum allowable amount of mortgage assets each Enterprise could
own as of December 31, 2010, was $810 billion. Despite large purchases
of delinquent loans from their respective MBS trusts in 2010, the
portfolio balances of both Enterprises were below the maximum level.
At year end 2010, Fannie Mae had mortgage assets of $789 billion and
Freddie Mac had $697 billion. As of September 2011, Fannie Mae's
mortgage assets totaled $720 billion and Freddie Mac's totaled $685
billion. The portfolio limit for each Enterprise as of the end of CY for
2011 was $729 billion (see Figure 7).
The final regulatory criteria incorporate preferred stock agreement
portfolio limits agreed to by the U.S. Department of the Treasury and
FHFA as conservator. The Safety and Soundness Act requires the FHFA
Director to monitor the portfolio of each Enterprise and order an
Enterprise to dispose of or acquire any asset under terms and
conditions determined by the Director to be consistent with the Safety
and Soundness Act or the authorizing statute of the Enterprise. FHFA's
portfolio holdings regulation will remain in effect until it is
amended or until the Enterprises are no longer subject to the
preferred stock purchase agreements. Changes to the portfolio limits
or to criteria related to the limits can be made by amending the
agreements.
Request for Information on Real Estate Owned Properties:
In August 2011, FHFA, Treasury, and HUD issued a request for
information on ways to dispose of real estate owned properties. While
the Enterprises have considered various approaches to disposing of
these properties, the request for information represents an
opportunity to consider new approaches, including those that include
both the Enterprises and FHA. By taking this collaborative approach,
the three agencies are seeking ways to improve returns to taxpayers
and bring greater stability to local housing markets. FHFA is
currently reviewing the nearly 4,000 submissions in response to the
RFI to determine how they meet the needs and economic conditions of
local communities. FHFA is encouraged by the apparent collaboration
among for-profit and not-for-profit organizations in submitting
proposals. FHFA expects the public responses to help form the basis
for strategies that would be implemented in FY 2012.
Figure 7: Maximum Allowable Enterprise Mortgage Asset Holdings (Year-
End 2010-2021):
[Refer to PDF for image: vertical bar graph]
Mortgage Asset Holdings of Each Enterprise:
2010: $820 billion;
2011: $729 billion;
2012: $656 billion;
2013: $590 billion;
2014: $531 billion;
2015: $478 billion;
2016: $430 billion;
2017: $387 billion;
2018: $349 billion;
2019: $314 billion;
2020: $282 billion;
2021: $254 billion,
Source: FHFA.
[End of figure]
Management Challenges:
FHFA and the Enterprises are facing challenging times as the housing
market continues to struggle. FHFA will continue to work with the to
support a stable and liquid housing finance market. Implementation of
the Dodd-Frank Act presented and opportunities for FHFA during FY
agency had to reallocate staff and consider structural issues to meet
its responsibilities. The Dodd-Frank Act gave FHFA the opportunity to
participate directly in many important policy issues that will shape
the future of financial regulation, and it has more closely integrated
the work of FHFA with other federal financial regulators.
The following challenges that FHFA faced in 2011 included:
Enhancing Examinations:
Restructuring:
Since FHFA's establishment in 2008, its examination divisions had
operated under policies and practices in place in predecessor
agencies. During FY 2011, FHFA restructured its examination divisions
to unify and standardize its supervisory approach for the regulated
entities, while meeting the statutory requirements for separate
divisions of Enterprise regulation and FHLBank regulation. The
restructuring has allowed the agency to respond to the unique
characteristics of the FHLBanks and to develop a unified supervision
program, supervision guidelines, examination standards, and a common
rating system.
Standardization allows FHFA to establish consistent standards for
assessing the risk and financial performance of the Enterprises and
the FHLBanks and allows for a degree of integration among staff
responsible for examining the Enterprises and those responsible for
examining the FHLBanks. The restructuring will help FHFA meet its core
supervisory responsibilities in a consistent and efficient fashion
while supporting cross-training of staff and increased flexibility to
deploy resources in areas of greatest need.
Increased Capacity:
FHFA's examination program is the primary means by which the agency
monitors the GSE's financial condition and operations. Currently, the
program faces many challenges, particularly with respect to its
capacity to meet multiple responsibilities as the regulator of the
GSEs, conservator of the Enterprises, and a participant in efforts to
respond to the housing crisis and prepare for the future of housing
finance.
To enhance its capacity in this area, FHFA has undertaken numerous
initiatives, including restructuring its examination program and using
personnel with diverse skills and backgrounds to work collaboratively
on examinations and to bring new insights, different thought
processes, and a wider range of analytical approaches to examination
and supervision. FHFA has attracted and recruited examiners,
accountants, financial analysts, and economists to overcome any
examination capacity constraints and augmented its capacity by using
expert contractor support on two horizontal exams (the Real Estate
Owned Contractor Risk Assessment and the Home Affordable Modification
Program Operational Risk Assessment). The agency is also expanding the
use of out-stationed examiners and telework to fill critical positions
with as much hiring flexibility as possible. FHFA has advertised in
financial periodicals, posted hiring information on websites, and
conducted outreach with organizations representing minorities, women,
and veterans.
FHFA has also begun enhancements to staff training and development,
including development of an examiner accreditation program. The
agency's accreditation program will leverage other federal financial
regulatory agency programs, which consist of classroom training, on-
the-job training, and practical examination experience.
Fulfilling FHFA's Role as Conservator:
As conservator of the Enterprises, FHFA holds the powers of the
management, boards, and shareholders, while each Enterprise handles
its own day-to-day business. FHFA reconstituted the boards of
directors at each Enterprise in 2008 and charged them with ensuring
that normal corporate governance practices and procedures are in place.
The boards are responsible for carrying out normal board functions,
subject to FHFA review and approval on critical matters.
A challenge for FHFA is to minimize executive management turnover
while also recruiting new senior leadership as warranted. Key
positions are filled with competent, skilled professionals who have
the experience to help the agency meet the goal of conserving
Enterprise assets.
Reducing Losses:
As conservator, FHFA must conserve and preserve the assets of the
Enterprises; for example, by decreasing credit losses from delinquent
mortgages and expanding the pool of eligible businesses. To accomplish
this, FHFA has implemented the Making Homes Affordable (MHA) program,
which includes HAMP and HARP. These programs help borrowers refinance
into more affordable mortgages that enable them to stay in their homes
while also directly benefiting the enterprises by reducing credit
exposure.
HAMP allows a borrower's payment to be reduced to a more affordable
amount through an interest rate reduction (down to 2 percent), a term
extension (up to 480 months), or principal forbearance. In addition,
incentives are offered to borrowers, servicers, and investors for
program participation and for successful payment history.
Enterprise participation in HAMP and HARP are consistent with
conserving and preserving assets to the extent that loan refinancing
and modification (particularly on underwater or delinquent loans) can
offer lower cost alternatives to foreclosure. Foreclosure prevention
stabilizes the housing market and decreases risk for the Enterprises.
Since the first full quarter in conservatorship in 2008, the combined
completed foreclosure prevention actions total nearly 1.9 million
loans for the Enterprises as of August 2011. These programs have
provided options for families to avoid foreclosure, although not to
the extent originally anticipated.
Filing Suit To Recover Losses:
In September 2011, FHFA filed lawsuits against 17 banks after
concluding that a portion of the losses incurred by the Enterprises on
private-label MBS was attributable to misrepresentation and other
improper actions by certain named firms and individuals.
Over a period of several years before conservatorship, each
Enterprise bought hundreds of billions of dollars worth of MBS
packaged and sold by large financial institutions. FHFA has found that
the mortgages backing many of these securities had characteristics
that differ from representations in securities filings.
Under securities laws, the seller has a legal responsibility to
accurately represent the characteristics of the loans backing
securities. The Enterprises did not have access to the loans
underlying these securities and relied on the security issuer to
accurately describe the mortgages backing the security in sales
materials.
FHFA has consistently made clear its intention to seek recovery for
losses that are the legal responsibility of others, but it previously
sought informal remedies short of filing legal complaints. The agency
has now taken formal action to carry out its responsibility as
conservator under the broad authority granted by HERA. The U.S. legal
system addresses alleged securities misrepresentations through
securities laws and traditional common law. FHFA is pursing these
legal remedies. Any dollar recovery will reduce taxpayers ultimate
losses from the Enterprises' financial difficulties.
Remediating Weaknesses at the Housing GSEs in a Weak Housing Market:
FHFA continues to face challenges in remediating weaknesses at the
housing GSEs, particularly in a housing market that has yet to
stabilize. External factors such as the economy, the job market, and
consumer confidence are plaguing the housing market and impeding its
growth.
To remediate weaknesses at the GSEs, FHFA has worked with the
Enterprises to greatly strengthen their underwriting standards and
improve the risk sensitivity of their pricing. FHFA also announced a
joint servicing compensation initiative that will improve service for
borrowers and reduce financial risk to servicers and a servicing
alignment initiative that will simplify the process for mortgage
servicers by giving them just one set of procedures to follow.
(For additional information on these initiatives, see the Performance
Highlights section on page 26.) FHFA has also participated in numerous
joint studies and relationships with the Treasury, HUD, the Federal
Reserve, FDIC, and OGG to prepare rulemakings and studies to
strengthen the housing market. (For specific information on these
various joint studies, see the Performance Highlights section on page
23.)
The housing GSEs have also faced challenges in correcting identified
weaknesses and strengthening various aspects of their operations and
risk management practices. As financial institutions focused on
housing finance, each has direct and indirect exposure to a record
level of serious mortgage delinquencies. FHFA's challenge is to
promote financially safe and sound operations at the Enterprises and
the FHLBanks while overseeing activities that provide affordable
housing and sound housing finance practices.
Achieving the Agency's Housing Mission:
As supervisor of the regulated entities, FHFA is responsible for
ensuring that the Enterprises and the FHLBanks fulfill their housing
finance missions. Several issues affect the regulated entities'
ability to carry out their mission:
* Uncertainty about the future of the Enterprises in conservatorship;
* Board and management turnover at the Enterprises;
* Quarterly operating losses at the Enterprises;
* Limited private securitizations of mortgage-related securities and
the expanded role of the Federal Housing Administration;
* Investment losses among certain FHLBanks; and;
* Declining demand for advances at all FHLBanks.
Support for affordable housing is a core statutory requirement for the
Enterprises and the FHLBanks. However, this mandate should reflect the
Enterprises' current conservatorship status and the depressed state of
housing markets in much of the country. FHFA has tied affordable
housing goals to the amount of affordable housing actually produced in
the primary market. FHFA intends for the Enterprises and the FHLBanks
to reflect the overall market, not to undertake economically adverse
or high-risk activities in support of a particular housing goal.
FHFA does not intend to use the conservatorships to justify
withdrawing support from important affordable housing responsibilities
or certain housing market segments. However, the agency believes that
creating conditions conducive to a more stable and sustainable system
of housing finance will contribute to mission achievement while
supporting safety and soundness for the regulated entities.
Encouraging the Recovery of Housing and Housing Finance:
FHFA is currently constrained by law to conserve and protect
Enterprise assets. Conservatorship allows the Enterprises to continue
serving their public purpose while lawmakers determine the ultimate
resolution of the conservatorships and the future legal structure for
housing finance. After three years, there is still no clear indication
as to what institutional structures will replace the Enterprises and
their position in housing finance. This provides a challenge for FHFA
regarding the Enterprises' ongoing activities and future business
strategies.
FHFA is taking several steps to encourage the return of the private
sector to housing finance. For example, FHFA has directed the
Enterprises to work on initiatives to improve their internal
operations, mitigate credit losses, and ensure continued liquidity in
the market. FHFA has also announced several initiatives such as the
Uniform Mortgage Data Program, joint servicing compensation, and
servicing alignment. These initiatives should improve liquidity in the
housing finance market.
FHFA hopes to encourage the return of the private sector and establish
an environment for the return of deep liquid markets for borrowers,
lenders, and investors. With improved transparency, standardization,
and accountability, American families will have greater access to
simple, straightforward products that will protect them from sudden
financial shocks and help them build equity in their homes.
Housing Finance Reform:
In February 2011, the U.S. Department of the Treasury issued a white
paper that described three options for housing finance reform - they
were among the first to be widely discussed that addressed the future
structure of housing finance. The first option proposed that the
nation's housing should rely mostly on the private sector, except for
federal assistance targeted at creditworthy low-and middle-income
borrowers. The second option proposed government assistance for
certain borrowers but included a "backstop mechanism" in case
additional credit was needed during a housing crisis. The third option
proposed federal assistance for certain borrowers and federal
reinsurance for some private mortgage securities (the U.S. government
would pay shareholders of those securities if private guarantors went
bankrupt).
FHFA is continuing to contribute expertise on housing finance reform
proposals through congressional testimony, speeches, and public
documents. In addition, FHFA has collaborated with Executive Branch
departments, congressional staff, industry participants, and other
financial regulatory agencies to identify and develop ideas and
options that would redefine the structure of housing finance.
FHFA will continue to adhere to the goals of conservatorship, focusing
on programs that can promote the recovery of the housing market and
developing conditions that encourage a more stable system of housing
finance.
Pricing and Risk Sharing:
During FY 2011, FHFA submitted its third Report to Congress on the
single-family guarantee fees charged by the Enterprises. That report
noted that in recent years the Enterprises have steadily increased
guarantee fees and reduced the extent of cross-subsidization in their
pricing of credit risk. FHFA anticipates that the Enterprises will
continue the gradual process of increasing single-family guarantee
fees in FY 2012, which will place them in a more stable and sound
financial condition and move their pricing closer to levels that would
likely exist in a private, competitive market. Changes in Enterprise
pricing in FY 2012 may address issues of cross-subsidization,
geographic differences in credit costs, and pricing differentials
among lenders.
FHFA is considering ways the Enterprises can share single-family
mortgage credit risk with the private sector, in support of the goals
of reducing the Enterprises long-term risk exposure and strengthening
their financial condition. Possible approaches include expanded use of
mortgage insurance and securities structures that would allow a
portion of the credit risk of mortgages acquired by the Enterprises to
be sold off. Execution of such transactions would have the added
benefit of providing feedback on the Enterprises' guarantee fee
pricing decisions. If the market price to absorb a portion of the
Enterprises' risk exposure was greater than the guarantee fee they
charged, that would suggest how much their guarantee fees would have
to rise to attract private capital and align their pricing with the
private sector.
FY 2011 Performance Summary:
This section describes FHFA's strategic and performance planning
framework as well as the seven key performance measures that most
closely reflect the agency's achievements and desired outcomes by
strategic and performance goal. (For a comprehensive list of
performance measures, see pages 53 through 73.) FHFA's performance
measures are rated as:
* Target Met; or:
* Target Not Met.
FHFA determines performance goals to be met if targets
for all performance measures have been achieved. Goals
are counted as not met if at least one target performance
measure has not been achieved. In FY2011, FHFA had 29 performance
measures. The agency met or exceeded 25 of its measures and failed to
meet 4 performance measures. Figure 8 shows the overall results.
Figure 8 • Key Performance Indicators for FY 2011:
[Refer to PDF for image: stacked vertical bar graph]
Strategic Goal 1:
Met: 4;
Not Met: 1.
Strategic Goal 2:
Met: 7;
Not Met: 1.
Strategic Goal 3:
Met: 4;
Not Met: 2.
Strategic Goal 4:
Met: 10;
Not Met: 0.
Source: FHFA.
[End of figure]
Although the agency met over 80 percent of its performance measures,
FHFA did not meet 4 performance measures in FY 2011. Specifically,
performance measure 1.1.1, relating to safety and soundness, requires
an improvement in at least one component examination rating for each
of the two Enterprises. The objective was not satisfied at either
Fannie Mae or Freddie Mac. The stressed economy and poor performance
in the mortgage market continue to hinder the Enterprise's operations.
Additionally, because of the uncertainty regarding the future of the
Enterprise, they are faced with turnover in key areas, particularly
risk management. FHFA will continue to monitor remediation activities
but will increase examination ratings only for sustainable and
material improvements in their operations.
Performance measure 2.2.3 was not met. This target pertains to
finalizing rules that require the Enterprises to serve the
manufactured housing and rural housing segments of the market and to
preserve multi-family affordable housing. This measure was not met
because the rulemaking did not meet the target date of July 15,
2011. However, the final rule has completed the internal clearance
process and is under management review.
FHFA also did not meet performance measure 3.1.1, although it made
progress. Specifically, FHFA required the Enterprises to submit plans
to reduce the size of their mortgage portfolios. While both Fannie Mae
and Freddie Mac submitted plans, those submissions did not meet FHFA
standards. FHFA will continue to work with the Enterprises to submit
plans that target the specific requirements to FHFA's satisfaction.
FHFA continued its review of miscellaneous other assets on the
Enterprises' books, assessing quarterly asset inventory submissions.
FHFA has not yet identified specific disposition plans as a result of
these quarterly inventories. Fannie Mae did submit an acceptable plan
for assets identified for disposition owing to charter compliance
questions.
Finally, FHFA did not meet performance measure 3.1.2, which required
the agency to review Enterprise assets, partnerships, contracts, and
litigation activities. Although the measure was partially completed,
FHFA received the third quarter's inventory report this reporting
period, completed an analysis of non mission assets, and reviewed
litigation activities for the third quarter. Upon completion of the
review, FHFA determined that further procedures and analysis would be
needed to comprehensively review all aspects of this performance
measure. As a result, FHFA is beginning the process of automating
the transmission of the inventory report and performing other
procedures to analyze the inventory.
FHFA significantly improved its performance during FY
2011, despite continued disruption in the housing and financial
markets. In addition, the agency's forthcoming strategic plan for FY
2012-2016 will further refine its performance goals and measures to
better represent the organizational and legislative changes that have
affected the agency over the past few years. (See the Other
Accompanying Information section, page 104 for a list of our
performance measures that were either changed or deleted for FY2011.)
Strategic Planning Process:
FHFA sets long-term and annual goals and monitors progress throughout
the year. The agency assesses its record in meeting its performance
measures through quarterly performance tracking meetings, which
include the senior executive leadership team. These quarterly meetings
are normally chaired by the Acting Director. FHFA staff prepare
performance reports and discuss the agency's record relative to its
performance measures. The meetings highlight the agency's record to
date and the challenges for the future, with a focus on how to meet
targets and ensure successful performance in support of the mission.
FHFA's FY 2011 Annual Performance Plan was developed and released in
March 2011. It includes 29 performance measures and 14 performance
goals to support 3 strategic goals and 1 resource management strategy.
This section describes the agency's performance against its FY 2011
Annual Performance Plan, which outlined the means and strategies to
achieve the annual performance goals and related measures for the past
year.
FHFA is in the process of updating the current strategic plan for 2009-
2014. The FY 2012-2016 strategic plan aligns with FHFA's major
reorganization as well as the requirements of the Dodd-Frank Act and the
Government Performance and Results Modernization Act of 2010. The plan
sets out the agency's mission, vision, values, and strategic goals
through FY 2016. It details the outcomes the agency is seeking to
achieve, the means and strategies that will be used to accomplish
those outcomes, and the performance measures that will be used to
gauge the agency's progress.
Overview of FHFA's Seven Key Performance Measures:
HFA identified seven of the 29 FY 2011 performance measures as key
performance measures ” these are measures that are critical to the
achievement of our strategic goals and objectives. These key
performance measures represent each of the agency's three strategic
goals and the resource management strategy. The following tables
summarize FHFA's actual performance during FY 2011 as compared to
established targets for our seven key performance measures. The tables
for FHFA's seven key performance measures organized by strategic and
performance goal show FHFA's accomplishments as they relate to each
performance goal and measure. For FY 2011, FHFA met or exceeded six of
the seven key performance measures.
Strategic Goal 1:
The housing GSEs operate in a safe and sound manner and comply with
legal requirements.
The focus of Strategic Goal 1 is to promote the safety soundness of
housing government-sponsored enterprises (GSEs) through prudential
supervision and regulation. (The Performance section of this report
includes a list of all measures associated with this goal.)
Table 1 summarizes the key performance measures for safety and
soundness of the housing GSEs. During FY 2011, FHFA conducted risk-
based supervision and examinations on the housing GSEs to evaluate
condition and planning. The purpose of the examinations is to ensure
that the regulated entities operate in a financially safe and sound
manner and take appropriate steps to remediate any deficiencies. One
key performance measure was an improvement in one or more component
examination ratings at each Enterprise. This measure was not met. One
reason for the failure was that both Enterprises operated in a
mortgage market that was under profound and continued stress as a
result of earlier underwriting shortcomings that have led to mortgage
delinquencies and foreclosures performance, risk, risk management,
governance, and unprecedented in more than 75 years.
Table 1: Key Performance Measures for Safety and Soundness of the
Housing GSEs:
Performance Goal 1.1:
Fannie Mae and Freddie Mac (the Enterprises) comply with legal
requirements and operate in a safe and sound manner with adequate
capital and access to funds and capital.
Key Performance Measure 1.1.1:
Each Enterprise improves in one or more component ratings.
Target: September 30, 2011: Not Met.
Performance Goal 1.2:
The FHLBanks and the Office of Finance comply with legal requirements
and operate in a safe and sound manner with adequate capital and
access to funds and capital.
Key Performance Measure 1.2.1:
Each FHLBank is rated "2" or better or, operating under an acceptable
performance improvement plan within 180 days of a rating downgrade to
below "2".
Target: Quarterly: Met.
[End of table]
Strategic Goal 2:
The housing GSEs support a stable, liquid, and efficient mortgage
market including sustainable homeownership and affordable housing.
The focus of the second strategic goal is the housing mission of FHFA.
As the supervisor for the housing GSEs, FHFA has a critical
responsibility to foster a well-functioning, stable, and liquid
housing finance system. Only through effective supervision can FHFA
ensure that the entities serve as a source of liquidity to homeowner
and rental housing markets at an efficient and reasonable price.
See Table 2 which summarizes the key performance measures for the
housing mission. During FY 2011, the housing GSEs met or exceeded the
required liquidity levels. Fannie Mae was not in compliance at the end
of the last fiscal year, but came into compliance during the first
quarter of FY 2011 and has maintained its standing. FHFA continued to
provide information, such as the House Price Index, to promote an
efficient secondary mortgage market. The performance section of this
report includes a list of all measures associated with Strategic Goal
2.
Table 2: Key Performance Measures for the Housing Mission:
Performance Goal 2.1:
FHFA ensures the housing GSEs support a stable, liquid, and efficient
mortgage market;
Key Performance Measure 2.1.1:
Liquidity levels at Fannie Mae and Freddie Mac meet or exceeds required
levels or is brought into compliance within five business days.
Target: Quarterly: Met.
Key Performance Measure 2.1.2:
Liquidity levels at FHLBanks meet or exceeds required levels or is
brought into compliance within five business days.
Target: Quarterly: Met.
Performance Goal 2.3:
FHFA supports an efficient secondary mortgage market through research
that increases transparency of the housing GSEs' risks and activities
and improves understanding of mortgage market developments.
Key Performance Measure 2.3.1:
Each FHLBank is rated "2" or better or, operating under an acceptable
performance improvement plan within 180 days of a rating downgrade to
below "2".
Target: Quarterly: Met.
[End of table]
Strategic Goal 3:
FHFA preserves and conserves the assets and property of the
Enterprises, ensures focus on their housing mission, and facilitates
their financial stability and emergence from conservatorship.
The focus of Strategic Goal 3 is on conservatorship of the
Enterprises. As conservator, FHEA's role is to foster improvement in
the Enterprise financial condition, underwriting practices, and
operational capacity so they can fulfill their role in the nation's
housing finance system.
Table 3 summarizes the key performance measure that demonstrates
FHEA's goal to preserve and conserve the Enterprise assets while
preparing for future housing finance markets under conditions
different from those of the past. To accomplish this overall goal,
FHFA continued to pursue loan modification activities and other loss
mitigation strategies designed to reduce preventable foreclosure. The
performance section of this report include a list of all measures
associated with Strategic Goal 3.
Table 3: Key Performance Measure Demonstrating FHFA's Goal of
Preserving and Conserving Enterprise Assets:
Performance Goal 3.3:
Ensure the Enterprises have effective programs that respond to
problems in mortgage markets by reducing preventable foreclosures.
Key Performance Measure 3.3.1:
Number of loan modifications and foreclosure alternatives completed by
the Enterprises.
Target: 400,000: Met.
[End of table]
Resource Management Strategy:
FHFA has the personnel, resources and infrastructure to manage
effectively and efficiently to achieve its mission and goals.
The focus of the Resource Management Strategy is to anticipate what is
required to create and sustain an infrastructure that is responsive to
mission-critical program management. FHFA ensures effectiveness and
efficiency in this area through the recruitment, retention, and
rewarding of a diverse, highly skilled staff.
Table 4 summarizes the key performance measure that demonstrates
FHFA's use of its resources. The performance section of this report
includes a list of all measures associated with the Resource
Management Strategy.
Table 4: Key Performance Measure Demonstrating FHFA's Use of Resources:
Performance Goal 4.3:
FHFA has effective financial and risk management programs.
Key Performance Measure 4.3.2:
Total FHFA resources allocated directly to supervision of the
housing GSEs - Strategic Goals 1 and 2.
Target: 100% per quarter: Met.
[End of table]
Program Evaluations:
FHFA reviews its strategic plan annually to ensure that strategic and
outcome goals are being met. Through quarterly performance tracking
meetings with senior leadership, FHFA reviews the progress of its
performance measures and verifies and validates performance data to
ensure reliability and accuracy. FHFA did not have an independent
external evaluation conducted this fiscal year.
FHFA's OIG began operations in October 2010. OIG conducted an FY 2011
assessment addressing the Acting Director's most serious management
issues. (See the Other Accompanying Information section of this
report) As of September 2011, OTC had completed the following
evaluations of FHFA:
Table: Program Evaluations:
Evaluation: Evaluation of FHFA's Oversight of Fannie Mae's and Freddie
Mac's Executive Compensation Programs - March 2011;
Summary: FHFA coordinated with the U.S. Department of Treasury and
outside consultants to develop the Enterprises' compensation programs.
FHFA lacks key controls necessary to monitor the Enterprises' ongoing
executive compensation decisions under the approved package, and FHFA
has not been sufficiently transparent to the public on the
Enterprises' executive compensation programs, but it does report
relevant information in public securities filings;
Summary Of FHFA's Response: FHFA agreed to (1) study how federal
support for the Enterprises and their conservatorship status may
facilitate their capacity to meet certain performance goals; (2)
regularly monitor and evaluate metrics associated with recruitment and
retention of employees and consider appropriate compensation levels;
(3) establish formal approach for reviewing the Enterprises'
performance measures and self-assessment data; (4) strengthen its
executive compensation document storage systems; and (5) consider
options for improving executive compensation transparency. FHFA did
not agree to assess disparities in compensation among the Enterprises
and government personnel because private sector compensation scales
are most useful for comparison.
Evaluation: Evaluation of FHFA's Exit Strategy and Planning Process
for the Enterprises' Structural Reform - March 2011;
Summary: The Administration's February 11, 2011, proposal recommends
that FHFA implement several steps under its regulatory authority in
the short to medium term to significantly reduce the Enterprises'
dominant position in the housing finance system. OIG views FHFA's
potential implementation of its regulatory authorities under this
proposal in the short- to medium-term as an area of significant risk
if not managed effectively;
Summary Of FHFA's Response: FHFA agreed with the draft evaluation's
recommendations in its written comments. The Administration's white
paper recommends a gradual transition to greater private capital
participation in housing finance. FHFA has already begun implementing
several options to help this transition.
Evaluation: Evaluation of FHFA's Role in Negotiating Fannie Mae's and
Freddie Mac's Responsibilities in U.S. Department of Treasury's MHA
Program - August 2011;
Summary: OIG found no evidence that, in developing and implementing
MHA programs. Treasury has compromised FHFA's independence as the
Enterprises' conservator and regulator. Since FHFA did not play an
active role in reviewing and negotiating Treasury's Financial
Accounting & Advisory Services (FAAS) with the Enterprises. OIG found
that FHFA's conservatorship interests would have been better served if
FHFA had played a greater role during the negotiation and review of
the FAASs;
Summary Of FHFA's Response: FHFA agreed to engage the Enterprises and
the U.S. Department of Treasury in discussions aimed at establishing
more specific resolution procedures.
Evaluation: Evaluation of FHFA's Examination Capacity - September 2011;
Summary: OIG identified shortfalls in FHFA's examination coverage,
particularly in the areas of Real Estate Owned and default-related
legal services. FHFA has too few examiners overall to ensure the
efficiency and effectiveness of its examination program. It sometimes
has to scale back planned examination work and require additional time
to complete examinations. FHFA has sought to address these challenges;
Summary Of FHFA's Response: FHFA concurs with OIG's recommendations to
(1) assess examination shortfalls/quality; (2) monitor development/
implementation of an examiner accreditation program; (3) consider
using details; and (4) report externally on its progress/status.
FHFA does not-concur with any references to its quality of
examinations and states that the report does not provide any proof to
support OIG's comment. FHFA also does not concur with the report's
reference to the quality of its examination staff.
[End of table]
FY 2011 Financial Summary:
For FY 2010 and FY 2011, FHFA achieved an unqualified (clean) opinion
from the GAO on its annual financial statements. GAO noted no material
weaknesses or significant deficiencies in FHFA's internal controls and
cited no instances of noncompliance with laws and regulations. In
accordance with the Office of Management and Budget's (OMB) Circular
No. A-123, Management's Responsibility for Internal Control, FHFA
continued to assess the effectiveness of its internal controls
annually. FHFA received, for the third consecutive year, the
Certificate of Excellence in Accountability Reporting (GEAR) award for
its FY 2010 Performance and Accountability Report from the Association
of Government Accountants. The GEAR is awarded and presented to
agencies that have demonstrated excellence in integrating performance
and accountability reporting.
[Figure: Photograph]
FHFA received, for the third consecutive year, the Certificate of
Excellence in Accountability Reporting award for its FY 2010
Performance and Accountability Report from the Association of
Government Accountants.
[End of figure]
Source of Funds:
HERA authorizes FHFA to collect annual assessments from its regulated
entities to pay its costs and expenses and maintain a working capital
fund. Under HERA, annual assessments are levied against the
Enterprises and the FHLBanks to cover the cost and expenses of the
agency's operations for supervision of the regulated entities.
FHFA calculates the assessments for each Enterprise by determining the
proportion of each Enterprise's assets and off-balance sheet
obligations to the total for both Enterprises and then applying each
of the Enterprise's proportion (expressed as a percentage) to the
total budgeted costs for regulating the Enterprises. FHFA calculates
the assessments for each of the 12 FHLBanks by determining each
FHLBank's share of minimum required regulatory capital as a percentage
of the total minimum capital of all the FHLBanks and applying this
percentage to the total budgeted costs for regulating the banks.
Assessments are paid semiannually on October 1 and April 1. FHFA
collected assessments of $200.6 million during FY2011, which included
a $9.5 million special assessment on the Enterprises related to
conservatorship activities and a $29 million assessment for costs
related to the establishment and operations of an Office of Inspector
General.
Analysis of Financial Statements:
The principal financial statements present FHFA's financial position,
net cost of operations, changes in net position, and budgetary
resources for fiscal years 2011 and 2010. Financial statements and
notes for fiscal years 2011 and 2010 appear on pages 75-101.
Highlights of the financial information presented in the principal
financial statements follow.
Balance Sheet:
The Balance Sheet presents, as of the end of the fiscal year, the
recorded value of assets and liabilities retained or managed by FHFA.
The difference between the assets and liabilities represents FHFA's
net position. The Balance Sheet reflects total assets of $100.8
million, an 82 percent increase over FY 2010. The increase is
primarily due to a $15.4 million increase in Fund Balance With
Treasury due to the collection of assessment funds related to the
establishment and operations of an Office of Inspector General and a
$27.4 million increase in Investments due to an increase in
assessments for a larger FY2011 operating budget. FHFA's total
liabilities increased by $6.7 million, a 38 percent increase over FY
2010. The increase is primarily due to an increase in unfunded leave
and accounts payable associated with the establishment of an Office of
Inspector General. As a result, FHFA's net position as of September
30, 2011, was $76.4 million, a $38.5 million increase over the $37.9
million net position as of September 30, 2010. The increase in net
position is due to FHFA collecting funds in excess of operating costs
for the year (see Figure 9).
Figure 9: Assets and Liabilities (Dollars in Thousands):
[Refer to PDF for image: vertical bar graph]
September 2010:
Assets: $55,461;
Liabilities: $17,605.
September 2011:
Assets: $100,781;
Liabilities: $24,350.
[End of figure]
Statement Of Net Cost:
The Statement of Net Cost presents the components of FHFA's net cost,
which is the gross cost incurred less any revenues earned. FHFA's FY
2011 total program net (income)/costs, as reflected on the Statement
of Net Cost, were -$33.4 million (or net revenue) as compared to the
-$14.6 million in FY 2010. This change reflects the increase in gross
costs and earned revenue needed to carry out its mission as reflected
in its FY 2011 operating budget. The operating budget increase between
fiscal years is the result of increased mission costs and the
establishment and operations of an Office of Inspector General.
However, during the course of the year, FHFA did not fully expend its
FY 2011 earned revenue, thereby resulting in an excess of revenue over
cost. FHFA's costs for FY 2011 were less than expected and budgeted
for, resulting in a surplus. FHFA issues a credit for unobligated
funds as of September 30, 2011, against next year's assessment to the
regulated entities (see Figure 10).
Consistent with the Government Performance and Results Act of 1993,
the Statement of Net Cost is reported by FHFA's strategic goals. FHFA
tracked resource allocations and program costs to the strategic goals
(responsibility segments) developed for FHFA's strategic plan.
Strategic Goals, 1 ” Safety and Soundness; 2 ” Affordable Housing; and
3 ” Conservatorship, guide program offices to carry out FHFA's vision
and mission. FHFA has a Resource Management Strategy, which is
distributed proportionately to Strategic Goals 1-3 based on the
percentage of direct costs of each goal to the total direct costs for
FHFA. FHFA places a significant emphasis on Strategic Goal 1, Safety
and Soundness, which comprises a major portion of the total program
costs.
Figure 10: Total Net (Income from)/Cost of Operations (Dollars in
Thousands):
[Refer to PDF for image: vertical bar graph]
September 2010:
Strategic Goal 1: Safety and Soundness: $8,598;
Strategic Goal 2: Affordable Housing: -$10,788;
Strategic Goal 3: Conservatorship: -$10,448.
September 2011:
Strategic Goal 1: Safety and Soundness: -$9,355;
Strategic Goal 2: Affordable Housing: -$20,814;
Strategic Goal 3: Conservatorship: -$3,232.
[End of figure]
Statement Of Changes In Net Position:
The Statement of Changes in Net Position presents those accounting
items that caused the net position section of the Balance Sheet to
change from the beginning to the end of the reporting period.
Financing sources increase net position. FHFA's financing source is
imputed financing from costs absorbed on FHFA's behalf by other
Federal agencies. Net income from/cost of operations impacts net
position.
FHFA's net position as of September 30, 2011, was $76.4 million, a
$38.5 million increase over the $37.9 million net position as of
September 30, 2010. The increase in net position is due to FHFA
collecting funds in excess of operating costs for the year. FHFA's
cumulative results of operations for the period ending September 30,
2011, increased $38.6 million, due primarily to net income from
operations of $33.4 million (see Figure 11).
Figure 11: Statement of Changes in Net Position (Dollars in Thousands):
Cumulative Results of Operations:
September 2010: $37,856;
September 2011: $76,431.
Net (Income from)/Cost of Operations:
September 2010: -$14,638;
September 2011: -$33,382.
Total Financing Sources:
September 2010: $4,807;
September 2011: $5,193.
Beginning Balances:
September 2010: $18,411;
September 2011: $37,856.
[End of figure]
Statement Of Budgetary Resources:
This statement provides information about the provision of budgetary
resources and their status as of the end of the reporting period.
FHFA's total budgetary resources as of September 30, 2011, was $253.6
million, a $98 million increase over the $155.6 million total
budgetary resources as of September 30, 2010 The 2011 budgetary
resources were primarily comprised of $200.6 million in assessments,
$29 million in spending authority from offsetting collections, $22.7
million in unobligated balance brought forward from FY 2010, and $1
million in recoveries of prior year unpaid obligations. The increase
in budgetary resources is the result of increased mission costs and
the establishment and operations of an Office of Inspector General.
Obligations incurred increased $93.1 million to $225.9 million in
FY2011. Cross outlays increased $64 million to $186.9 million in
FY2011 (see Figure 12).
Figure 12: Statement of Budgetary Resources Comparisons (Dollars in
Thousands):
Budgetary Resources:
September 2011: approximately $250,000;
September 2010: approximately $175,000.
Obligations Incurred:
September 2011: approximately $225,000;
September 2010: approximately $125,000.
Gross Outlays:
September 2011: approximately $185,000;
September 2010: approximately $120,000.
[End of table]
Limitations of the Financial Statements:
FHFA management has prepared its fiscal years 2011 and 2010 financial
statements from the books and records of the agency in accordance with
the requirements of the Office of Management and Budget Circular A-
136, Financial Reporting Requirements, as amended. The financial
statements represent the financial position and results of operations
of the agency pursuant to the requirements of Chapter 31 of the U.S.
Code section 3515 (b). While these statements have been prepared from
the agency's books in accordance with the formats prescribed by OMB,
the statements are in addition to the financial reports used to
monitor and control budgetary resources, which are prepared from the
same books and records. These statements should be read with the
understanding that they are for a component of the U.S. government, a
sovereign entity.
Internal Controls:
During FY 2011, FHFA adhered to the internal control requirements of
the Federal Managers Financial Integrity Act of 1982 and the guidance
provided by OMB Circular A-123. FHFA's Executive Committee on Internal
Controls (ECIC) met quarterly to oversee internal controls and provide
recommendations to the FHFA Acting Director on the effectiveness of
FHFA's internal controls.
In 2011, the ECIC members were the Deputy Chief Operating Officer who
served as the Chairman, the Chief Financial Officer who served as the
Vice-Chairman, the Chief Information Officer, the Deputy Director for
Enterprise Regulation, the Deputy Director for Bank Regulation, the
Deputy Director for Examination Programs and Support, the Deputy
Director for Housing Mission and Goals, the General Counsel, and the
Associate Director Office of Quality Assurance. The Chairman and Vice
Chairman invited other FHFA executives when appropriate. ECIC also
established senior assessment teams to review specific areas when
needed.
During FY 2011, 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.
ECIC reviewed documentation from all three areas. In compliance with
the FMFIA requirements, the Acting Director, on the basis of a
recommendation from ECIC, provided reasonable assurance that internal
controls over the effectiveness and efficiency of operations,
compliance with applicable laws and regulations, and financial
reporting as of September 30, 2011 were operating effectively and that
no material weaknesses or significant deficiencies were found in the
design or operation of the internal controls. This assurance can be
found in the "Management's Discussion and Analysis" section of this
report and meets the FMFIA reporting requirement for internal controls.
The FHFA-OIG began operation in mid-October 2010 and adhered to the
internal control requirements of FMFIA and the guidance provided by
OMB Circular A-123. In order to ensure compliance, the FHFA-OIG formed
an ECIC and established a senior assessment team headed by the Chief
of Staff to assess the internal controls of the OIG. The assessment
team included participants from each office within the FHFA-OIG. Based
on its review of the internal control assessments, OIG's ECIC provided
reasonable assurance that OIG offices have developed and maintained
effective internal controls for FY 2011, and no significant
deficiencies or material weaknesses have been identified.
The Office of Counsel, under the Chief Counsel's direction, is FHFA-
OIG's principal authority on legal matters pertaining to FHFA-OIG
activities, duties, and authorities. The Office of Counsel works to
ensure that all FHFA-OIG activities are conducted in accordance with
applicable legal requirements. Starting with the creation of FHFA-OIG
in mid-October 2010, the Office of Counsel has developed rules,
policies, and procedures to ensure full FHFA-OIG compliance with such
requirements. Although these efforts continue, no FHFA-OIG office
identified substantive deviations from full compliance with those
legal authorities to which it is subject. Based on these factors and
the controls assessments performed at each OIG office, the FHFA-OIG
ECIC members determined that the FHFA-OIG's A-123 efforts provide
reasonable assurance that FHFA-OIG complies with laws and regulations
applicable to FHFA generally, and to FHFA-OIG specifically. The FHFA-
OIG ECIC recommended the Inspector General sign an assurance statement
to the FHFA Acting Director recommending an unqualified statement of
assurance relative to the two areas assessed by the OIG; effectiveness
and efficiency of operations, and compliance with laws and regulations.
Federal Management System and Strategy:
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 U.S. Government Standard General Ledger
at the transaction level. FHFA, including FHFA-OIG, uses the Bureau of
the Public Debt for its accounting services and that agency's
financial management system 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) an 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. The financial management system
includes manual and automated procedures and processes from the point
at which a transaction is initiated to issuance of financial reports.
The system 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 agency-wide information security
program. The program provides the framework to protect the agency's
information, operations, and assets. During FY 2011, OMB issued
guidance requiring federal agencies to continuously monitor the
security posture of information systems to enable timely decision
making regarding identified vulnerabilities and threats. To accomplish
this, agencies automate security-related activities and acquire tools
that correlate and analyze security-related information.
The FHFA-OIG is required to review the agency's information security
program annually and report the results to OMB as required by FISMA.
FHFA's information security program activities during FY 2011 reflect
efforts focused on enhancing the agency's continuous monitoring
compliance program. Such compliance requires FHFA to proactively
monitor the security posture of its information technology
infrastructure through the implementation of operational, management,
and technical controls, including automated security tools and
supplemental resources for monitoring activities. The tools and
activities include certifying and accrediting information systems
before they become operational, reviewing system logs and
configuration management activities, and performing periodic
vulnerability scans.
Other FY 2011 information security program activities included
implementing a new intrusion detection system, updating information
security policy with comprehensive procedures, and performing annual
security control assessments of FHFA information systems, including
EMS. FHFA maintained security certification and accreditation on 100
percent of all major systems in production and provided security
awareness training through a new automated learning management
information system to all FHFA employees and contractors. FHFA also
addressed security-related weaknesses for systems noted in the prior
year FISMA review as well as mitigating vulnerabilities identified
during certification and accreditation.
The FY 2011 FISMA review concluded that FHFA generally has a sound
risk management framework for its information security program.
Although FHFA's information security program had a number of
strengths, including but not limited to its information system
security training, system-level planning, risk assessment, access
authorization, and continuous control monitoring, the audit identified
security practices that can be improved.
Specifically, FHFA had not:
* Finalized, disseminated, and implemented an organization-wide
information security program plan that defines such key requirements
as security-related roles and responsibilities and security program
controls;
* Updated the agency's policies and procedures to address completely
all of the NIST-recommended components within the control families
applicable to FHFA information systems;
* Developed, disseminated, and implemented an information
categorization policy and methodology;
* Implemented adequate procedures for tracking and monitoring
correction of weaknesses or deficiencies through Plan of Action and
Milestones;
* Implemented adequate procedures for ensuring remediation of
weaknesses noted in network vulnerability assessments.
All of the findings have been addressed and remediation efforts are
underway.
Management Report on Final Action:
As required under amended Section 5 of the Inspector General Act of
1978, FHFA must report information on final action taken by management
on certain audit reports. FHFA-OIG has not identified any disallowed
costs or funds put to better use for FY 2011. Additionally, FHFA does
not have any audit reports without final actions but with management
decisions over one year old for FY 2011.
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. FHFA has
identified no activities susceptible to significant erroneous payments
that meet 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 2011, the dollar amount subject to prompt
payment was $44.2 million. The amount of interest penalty paid in FY
2011 was $222, or 0.00050 percent, of the total dollars disbursed.
Figure 13: Summary of Financial Statement Audit and Management
Assurances:
[Refer to PDF for image: 2 tables]
Table 1: Summary of Financial Statement Audit:
Audit Opinion: Unqualified;
Restatement: No;
Material Weaknesses:
Total Material Weaknesses:
Beginning Balance: 0;
New: 0;
Resolved: 0;
Consolidated: 0;
Ending Balance: 0.
Table 2: Summary of Management Assurances:
Effectiveness of Internal Control Over Financial Reporting (Federal
Management Financial Integrity Act Paragraph 2):
Statement of Assurance: Unqualified;
Material Weaknesses:
Total Material Weaknesses:
Beginning Balance: 0;
New: 0;
Resolved: 0;
Consolidated: 0;
Ending Balance: 0.
Effectiveness of Internal Control Over Operations (Federal Management
Financial Integrity Act Paragraph 2):
Statement of Assurance: Unqualified;
Material Weaknesses:
Total Material Weaknesses:
Beginning Balance: 0;
New: 0;
Resolved: 0;
Consolidated: 0;
Ending Balance: 0.
Conformance with Financial Management System Requirements (Federal
Management Financial Integrity Act Paragraph 4):
Statement of Assurance: Systems conform to Financial Management System
Requirements;
Material Weaknesses:
Total Material Weaknesses:
Beginning Balance: 0;
New: 0;
Resolved: 0;
Consolidated: 0;
Ending Balance: 0.
[End of figure]
[End of section]
Financial Statements:
Message From The Chief Financial Officer:
Fiscal year 2011 has been a very challenging but rewarding year. The
Federal Housing Finance Agency (FHFA) continued to grow to match its
responsibilities for regulating Housing GSEs and to manage the
conservatorship of Fannie Mae and Freddie Mac. A significant part of
FHFA's growth has been the creations and rapid growth of the Office of
the Inspector General (OIG). Since OIG is an independent entity of
FHFA with a budget of $29 million, FHFA is required to prepare a set
of consolidated financial statements for FY 2011.
Even with this added complexity, I am pleased to report that FHFA once
again received an unqualified audit opinion on its financial
statements from Government Accountability Office (GAO). In its
financial audit report, GAO concluded that 1) FHFA's Fiscal Year 2011
financial statements are fairly presented in all material respects; 2)
FHFA had effective internal control over financial reporting; and 3)
there were no reportable instances of noncompliance with the
laws and regulations it tested.
In addition to a clean audit opinion, FHFA received the Certificate
for Excellence in Accountability Reporting (CEAR) award for its Fiscal
Year 2010 Performance and Accountability Report (PAR) from the
Association of Government Accountants, the third straight year FHFA
has received this prestigious award. the CEAR award is given to
government agencies that received unqualified audit opinions on their
financial statements and produced PARs that achieved the highest
standards in communicating results and demonstrating accountability.
We are very proud of our accomplishments and are constantly striving
to improve how we communicate financial and performance information to
the public. For example, in this year's PAI2 we organize our
highlights and accomplishments by strategic goal. this will make it
easier for the public to associate our activities to the achievement
of our strategic plan. '10 make the document itself more user
friendly, we have provided hyperlinks directly to documents referred
to in the text, and a reader can go directly from the table of
contents to any section of the PAR with a simple dick of the mouse.
Finally, the commitment of senior management and staff to maintain
effective programs of internal control over agency activities provides
the solid foundation necessary for the continued successes achieved by
the agency.
Sincerely,
[Signed by:
Mark Kinsey:
Chief Financial Officer:
November 10, 2011:
[End of letter]
Federal Housing Finance Agency:
Consolidated Balance Sheets:
As of September 30, 2011 and 2010 (in Thousands):
Assets: 2011:
Intragovernmental: Fund Balance With Treasury (Note 2): $16,445;
Intragovernmental: Investments (Note 3): $78,252;
Intragovernmental: Accounts Receivable (Note 4): $19;
Prepaid Expenses: $0;
Total Intragovernmental: $94,718.
Accounts Receivable (Note 4): $5;
General Property and Equipment, Net (Note 5): $5,569;
Prepaid Expenses: $491;
Total Assets: $7100,781.
Liabilities:
Intragovernmental: Accounts Payable: $1,221;
Intragovernmental: Payroll Taxes Payable (Note 7): $1,219;
Total : $2,440.
Accounts Payable: $6,601;
Other (Note 6): $15,309;
Total Liabilities: $24,350.
Net Position:
Cumulative Results of Operations: $76,431.
Total Net Position: $76,431.
Total Liabilities and Net Position: $100,781.
Assets: 2010:
Intragovernmental: Fund Balance With Treasury (Note 2): $1,000;
Intragovernmental: Investments (Note 3): $50,878;
Intragovernmental: Accounts Receivable (Note 4): $0;
Prepaid Expenses: $307;
Total Intragovernmental: $52,185.
Accounts Receivable (Note 4): $6;
General Property and Equipment, Net (Note 5): $2,397;
Prepaid Expenses: $873;
Total Assets: $70,024.
Liabilities:
Intragovernmental: Accounts Payable: $430;
Intragovernmental: Payroll Taxes Payable (Note 7): $799;
Total Intragovernmental: $1,229.
Accounts Payable: $4,358;
Other (Note 7): $12,018;
Total Liabilities: $17,605.
Net Position:
Cumulative Results of Operations: $37,856.
Total Net Position: $37,856.
Total Liabilities and Net Position: $55,461.
[End of table]
Consolidated Statements of Net Cost/(Income):
For the Fiscal Years Ended September 30, 2011 and 2010 (in Thousands):
2011:
Program Costs by Strategic Goal:
Safety and Soundness:
Gross Costs: $125,961;
Less: Earned Revenue: ($135,297);
Net Safety and Soundness (Income from)/Cost of Operations: ($9,336).
Affordable Housing:
Gross Costs: $17,240;
Less: Earned Revenue: ($38,054);
Net Affordable Housing (Income from)/Cost of Operations: ($20,814).
Conservatorship:
Gross Costs: $24,200;
Less: Earned Revenue: ($27,432);
Net Conservatorship (Income from)/Cost of Operations: ($3,232).
Total Gross Program Costs: $167,401;
Less: Total Earned Revenue: ($200,783);
Net (Income from)/Cost of Operations: ($33,382).
2010:
Program Costs by Strategic Goal:
Safety and Soundness:
Gross Costs: $95,870;
Less: Earned Revenue: ($189,272);
Net Safety and Soundness (Income from)/Cost of Operations: ($6,598).
Affordable Housing:
Gross Costs: $16,031;
Less: Earned Revenue: ($26,819);
Net Affordable Housing (Income from)/Cost of Operations: ($10,788).
Conservatorship:
Gross Costs: $16,663;
Less: Earned Revenue: ($27,111);
Net Conservatorship (Income from)/Cost of Operations: ($10,448).
Total Gross Program Costs: $128,564;
Less: Total Earned Revenue: ($143,202);
Net (Income from)/Cost of Operations: ($14,638).
[End of table]
Federal Housing Finance Agency:
Consolidated Statements of Changes in Net Position:
For the Year Ended September 30, 2009 (in Thousands):
Cumulative Results of Operations: Beginning Balances:
2011: $37,856;
2010: $18,411.
Other Financing Sources (Non-Exchange): Imputed Financing Sources:
2011: $5,193;
2010: $4,807.
Total Financing Sources:
2011: $5,193;
2010: $4,807.
Net Income from/(Cost of) Operations:
2011: $33,382;
2010: $14,638.
Net Change:
2011: $38,575;
2010: $19,455.
Cumulative Results of Operations:
2011: $78,431;
2010: $37,856.
Net Position:
2011: $78,431;
2010: $37,856.
[End of table]
Combined Statements of Budgetary Resources:
For the Fiscal Years Ended September 30, 2011 and 2010 (in Thousands):
Budgetary Resources:
Unobligated Balance: Unobligated Balance Brought Forward, October 1:
2011: $22,743;
2010: $9,657.
Recoveries of Prior Year Unpaid Obligations:
2011: $1,033;
2010: $2,693.
Budget Authority: Appropriation - Assessments:
2011: $200,623;
2010: $143,028.
Budget Authority: Appropriation - Investment Interest:
2011: $66;
2010: $72.
Spending Authority From Offsetting Collections, Earned: Collected:
2011: $29,075;
2010: $104.
Spending Authority From Offsetting Collections, Earned: Change In
Receivables From Federal Sources:
2011: $19;
2010: ($3).
Spending Authority From Offsetting Collections: Change In Unfilled
Customer Orders: Without Advance From Federal Sources:
2011: $9;
2010: [Empty].
Subtotal:
2011: $229,792;
2010: $143,201.
Total Budgetary Resources:
2011: $253,568;
2010: $155,551.
Status of Budgetary Resources:
Obligations Incurred: Direct:
2011: $225,802;
2010: $132,707.
Obligations Incurred: Reimbursable:
2011: $94;
2010: $101.
Obligations Incurred: Subtotal:
2011: $225,802;
2010: $132,808.
Unobligated Balance: Exempt From Apportionment:
2011: $27,672;
2010: $22,743.
Total Status of Budgetary Resources:
2011: $253,568;
2010: $155,551.
Change In Obligated Balance: Obligated Balance, Net
Unpaid Obligations, Brought Forward, October 1:
2011: $29,135;
2010: $21,968.
Less: Uncollected Customer Payment From Federal Sources, Brought
Forward, October 1:
2011: [Empty];
2010: ($3).
Total Unpaid Obligated Balance, Net:
2011: $29,135;
2010: $21,965.
Obligations Incurred Net:
2011: $22,896;
2010: $132,808.
Less: Gross Outlays:
2011: ($186,945);
2010: ($122,948).
Less: Recoveries of Prior Year Unpaid Obligations, Actual:
2011: ($1,033);
2010: ($2,693).
Change In Uncollected Customer Payments From Federal Sources:
2011: ($28);
2010: $3.
Obligated Balance, Net, End of Period: Unpaid obligations:
2011: $67,053;
2010: $29,135.
Less: Uncollected Customer Payment From Federal Sources:
2011: ($28);
2010: [Empty].
Total, Unpaid Obligated Balance, Net, End of Period:
2011: $87,025;
2010: $29,135.
Net Outlays:
Gross Outlays:
2011: $185,945;
2010: $122,948.
Less: Offsetting Collections:
2011: ($29,075);
2010: ($104).
Less: Distributed Offsetting Receipts:
2011: ($200,689);
2010: ($143,100).
Net Outlays:
2011: ($42,819);
2010: ($20,256).
The accompanying not are an integral part of these financial
statements.
[End of table]
Notes to the Financial Statements:
For the Years Ended September 30, 2011 and 2010:
Note 1. Summary Of Significant Accounting Policies:
A. Reporting Entity:
The Federal Housing Finance Agency (FHFA) 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 twelve Federal Home Loan Banks (FHLBanks), Federal National
Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage
Corporation (Freddie Mac), all of which are referred to as 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 control, and carries out their housing and
community development finance missions.
HERA provided for a FHFA Office of the Inspector General (FHFA-OIG).
As of April 2011, the FHFA-OIG maintained its own Agency Location Code
and set of books. The Inspector General Act of 1978, as amended, sets
forth the functions and authorities of the FHFA-OIG. The reporting
entity for purposes of financial statements includes FHFA and FHFA-OIG.
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
(OMB) determined that the assets, liabilities and activities of the
companies would not be included in the financial statements of the
federal government. For fiscal year 2008, 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, Financial Reporting Requirements, 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. OMB continued
to hold this view in the President's fiscal year 2010, 2011 and 2012
budget submissions to Congress. Consequently, the assets, liabilities,
and activities of Fannie Mae and Freddie Mac have not been
consolidated into FHFA's financial statements. However, Treasury
records the value of the federal government's investments in Fannie
Mae and Freddie Mac in its financial statements as a General Fund
asset.
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 three times, on September 26, 2008, May 6, 2009 and
December 24, 2009. The Agreements commit Treasury to provide funding
for each Enterprise up to the greater of: (1) $200 billion; or (2)
$200 billion plus the cumulative total of draws for each calendar
quarter in 2010, 2011 and 2012 minus any amount by which the assets of
the Enterprise exceed its liabilities on December 31, 2012. This
funding is to ensure that each Enterprise maintains 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 any request for a draw and certifies that the request is
available for funding under the agreement. FHFA then sends a letter to
Treasury requesting the draw amount prior to the end of the current
quarter. Because of third quarter losses announced in early November
2011, Fannie Mae is requesting $7.8 billion and Freddie Mac is
requesting $6.0 billion in additional draws on their Agreements with
Treasury.
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. Such draws are reported
in Treasury's financial statements.
Table: Enterprise Draws on Treasury Agreements (Dollars in Billions):
Draw date: September 30, 2008;
Fannie Mae: [Empty];
Freddie Mac: $13.8.
Draw date: December 31, 2008;
Fannie Mae: $15.2;
Freddie Mac: $30.8.
Draw date: March 31, 2009;
Fannie Mae: $19.0;
Freddie Mac: $6.1.
Draw date: June 30, 2009;
Fannie Mae: $10.7;
Freddie Mac: [Empty].
Draw date: September 30, 2009;
Fannie Mae: $15.0;
Freddie Mac: [Empty].
Draw date: December 31, 2009;
Fannie Mae: $15.3;
Freddie Mac: [Empty].
Draw date: March 31, 2010;
Fannie Mae: $8.4;
Freddie Mac: $10.6.
Draw date: June 30, 2010;
Fannie Mae: $1.5;
Freddie Mac: $1.8.
Draw date: September 30, 2010;
Fannie Mae: $2.5;
Freddie Mac: $0.1.
Draw date: December 31, 2010;
Fannie Mae: $2.6;
Freddie Mac: $0.5.
Draw date: March 31, 2011;
Fannie Mae: $8.5;
Freddie Mac: [Empty].
Draw date: June 30, 2011;
Fannie Mae: $5.1;
Freddie Mac: $1.5.
Draw date: Cumulative Draws;
Fannie Mae: $103.8;
Freddie Mac: $65.2.
[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 OMB Circular A-136 "Financial Reporting
Requirements," as amended. The statements are a requirement of the
Government Management Reform Ad of 1994, the Accountability of Tax
Dollars Act of 2002, and HERA. These 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 include the activities and transactions of the FHFA-OIG.
The total columns reflect consolidated totals net of intra-entity
transactions, except for the Statement of Budgetary Resources (SBR),
which is presented on a combined basis. While HERA established the
FHFA-OIG in July 2008, the first FHFA Inspector General was appointed
in October 2010. Therefore, fiscal year 2010 does not include FHFA-OIG
activity. The financial statements have been prepared to report the
financial position, net cost of operations, changes in net position,
and the status and availability of budgetary resources of FHFA. 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's financial statements conform 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 intragovernmental
throughout the financial statements and notes. Intragovernmental is
defined as 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 acting Director approved the annual
budget in August 2011 and 2010. 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 acting Director to be necessary for maintaining a working capital
fund.
FHFA develops its annual budget using a 'bottom 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
expected costs associated with regulating Fannie Mae and Freddie Mac
and the total expected costs associated with regulating the FHLBanks.
These two totals, along with any expected collection for the working
capital fund, comprise the fiscal year budget for the agency.
Additionally, FHFA levied a special assessment for conservatorship
activities on Fannie Mae and Freddie Mac during fiscal year 2011.
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 FHLBank'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 FHLBanks'
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.
Additionally, the FHFA Inspector General was appointed in October
2010. The FHFA-OIG developed budget estimates for Fiscal Year 2011 and
FHFA assessed the Regulated Entities in January 2011 and April 2011 to
cover the costs of the OIG operations. OIG costs were allocated
between the regulated entities and were based on the same percentages
used for FHFA's assessment notifications.
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 years 2011 and 2010 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 are
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 (see Note 14. Incidental Custodial Collections).
HERA 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 consists 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. Based on historical experience, all receivables are
collectible and no allowance is provided.
J. Property, Equipment, and Software, Net:
Property, Equipment and Software is recorded at historical cost. It
consists of tangible assets and software. Based on a review of
capitalization policy thresholds of 22 other agencies, FHFA
implemented new capitalization thresholds beginning in June 2011. The
new capitalization thresholds are being applied prospectively.
Under FHFA's Oversight Procedures capitalization thresholds:
Description: Furniture and Equipment;
Threshold: $50,000.
Description: Leasehold Improvements;
Threshold: $250,000.
Description: Software Internally Developed;
Threshold: $500,000.
Description: Software Of-the-Shelf;
Threshold: $200,000.
Description: Capitalized Leases;
Threshold: $250,000.
Description: Bulk Purchases;
Threshold: $250,000.
Prior to the revision in June 2011l the capitalization thresholds were
as follows:
Description: Furniture and Equipment;
Threshold: $25,000.
Description: Leasehold Improvements;
Threshold: $25,000.
Description: Software Internally Developed;
Threshold: $25,000.
Description: Software Of-the-Shelf;
Threshold: $25,000.
Description: Capitalized Leases;
Threshold: $25,000.
Description: Bulk Purchases;
Threshold: $250,000.
Depreciation is calculated using the straight-line method over the
estimated useful life of the asset. Applicable standard governmental
guidelines regulate the disposal and convertability of agency property
and equipment. The useful life classificiations for capitalized assets
are as follows:
Description: Furniture, Fixtures, and Equipment;
Useful Life (years): 3.
Description: Automated Filing Storage Systems;
Useful Life (years): 15.
Description: Internal Use Software;
Useful Life (years): 3.
A leasehold improvement's useful life is equal to the 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
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 the result of a transaction or event that has already
occurred.
FHFA reports its liabilities under two categories, Intragovernmental
and With the Public. Intragovernmental liabilities represent funds
owed to another government federal 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 represents 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, 2011 and 2010, 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 7. Leases).
M. Employee Leave and Benefits:
All full-time FHFA employees are entitled to accrue sick leave at a
rate of four hours per pay period. Annual leave is accrued based on
years of creditable federal service and military service, with the
following exceptions: Former Office of Federal Housing Enterprise
Oversight (OFHEO) employees hired between April 25, 2005 and July 30,
2008 accrue annual leave based on years of creditable federal and
military service as well as years of relevant private sector
experience (HERA abolished OFHEO when FHFA was established in July
2008). Additionally, FHFA employees hired into mission critical
positions after May 2011 accrue annual leave under this same formula.
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. Credit is given for
sick leave balances in the computation of annuities upon the
retirement of Federal Employees Retirement System (FERS)-covered
employees effective at 50% beginning in fiscal year 2010 and 100%
beginning in fiscal year 2014.
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, CSRS - Offset, or FERS (FERS is provided under
calculations for both regular employees as well as law enforcement
employees in the Office of the Inspector General). 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. Prior to December 31, 1983,
all employees were covered under the CSRS program. From January 1,
1984 through December 31, 1986, employees had the option of remaining
under CSRS or joining FERS and Social Security. Employees hired as of
January 1, 1987 are automatically covered by the FERS program.
Both CSRS and FERS employees may participate in the federal Thrift
Savings Plan (TSP). FERS employees receive an automatic agency
contribution equal to 1% of pay and FHFA 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 CSRS - Offset 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 11.7% 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.
In addition to the TSP, FHFA offers a supplemental 401(K) plan that is
administered by T. Rowe Price. All CSRS employees are eligible to
contribute to the 401(K). Only FERS employees contributing at least 3%
to the TSP are eligible to participate in the 401(K). All eligible
employees will match contributions up to 10% of their bi-weekly 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 TSP
and/or FHFA's 401(K) Savings Plan, up to the Internal Revenue Code
limitations established for salary deferral and annual additions.
O. 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 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 years 2010 or 2011. Beginning in fiscal
year 2010, the funds in the Working Capital Fund were fully invested.
Fund Balance with Treasury (FBWF) account balances as of September 30,
2011 and 2010 were as follows:
(Dollars in Thousands):
Fund Balances:
Operating Fund:
2011: $16,455;
2010: $1,000.
Total:
2011: $16,455;
2010: $1,000.
Status of Fund Balance with Treasury:
Unobligated Balance:
Available:
2011: $27,672;
2010: $22,74.
Obligated Balance Not Yet Disbursed:
2011: $67,025;
2010: $29,135.
Investments:
2011: ($78,252);
2010: ($50,878).
Total:
2011: $16,455;
2010: $1,000.
(See Note 11. Legal Arrangements Affecting Use of Unobligated Balances)
[End of table]
Note 3. Investments:
Investments as of September 30, 2011 consist of the following:
(Dollars in Thousands):
Intragovernmental Securities:
Non-Marketable Market Based:
Cost: $78,252;
Amortized (Premium) Discount: [Empty];
Interest Receivable: [Empty];
Investments, Net: $78,252;
Market Value Disclosure: $78,252.
Investments as of September 30, 2010 consist of the following:
(Dollars in Thousands):
Intragovernmental Securities:
Non-Marketable Market Based:
Cost: $50,878;
Amortized (Premium) Discount: [Empty];
Interest Receivable: [Empty];
Investments, Net: $50,878;
Market Value Disclosure: $50,878.
Non-marketable, market-based securities are Treasury notes and bills
issued to governmental accounts that are not traded on any securities
exchange, but mirror the prices of marketable securities with similar
terms. 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, 2011 or 2010.
Interest earned on investments was $66 thousand and $72 thousand
for fiscal years 2011 and 2010, respectively.
Note 4. Accounts Receivable:
Accounts Receivable balances as of September 30, 2011 and 2010 were as
follows:
(Dollars in Thousands):
Intragovernmental: Accounts Receivable:
2011: $19;
2010: $0.
With the Public: Accounts Receivable:
2011: $5;
2010: $6.
Total Accounts Receivable:
2011: $24;
2010: $6.
There are no amounts that are deemed uncollectible as of September 30,
2011 and 2010.
[End of table]
Note 5. Property, Equipment, And Software, Net:
Schedule of Property, Equipment, and Software as of September 30, 2010
(Dollars in Thousands):
Schedule of Property and Equipment as of September 30, 2010 (In
Thousands):
Description: Equipment;
Acquisition Cost: $13,958;
Accumulated Depreciation: $10,874;
Book Value: $3,084.
Description: Leasehold Improvements;
Acquisition Cost: $6,974;
Accumulated Depreciation: $6,902;
Book Value: $72.
Description: Capital Lease;
Acquisition Cost: $22;
Accumulated Depreciation: $22;
Book Value: [Empty].
Description: Internal-Use Software;
Acquisition Cost: $30,316;
Accumulated Depreciation: $29,286;
Book Value: $1,030.
Description: Internal-Use Software In Development;
Acquisition Cost: [Empty];
Accumulated Depreciation: [Empty];
Book Value: [Empty].
Description: Construction in Progress;
Acquisition Cost: $1,383;
Accumulated Depreciation: [Empty];
Book Value: $1,383.
Description: Total;
Acquisition Cost: $52,653;
Accumulated Depreciation: $47,084;
Book Value: $5,569.
Schedule of Property, Equipment, and Software as of September 30, 2010
(Dollars in Thousands):
Description: Equipment;
Acquisition Cost: $10,844;
Accumulated Depreciation: $9,975;
Book Value: $869.
Description: Leasehold Improvements;
Acquisition Cost: $6,940;
Accumulated Depreciation: $6,674;
Book Value: $266.
Description: Capital Lease;
Acquisition Cost: $22;
Accumulated Depreciation: $22;
Book Value: [Empty].
Description: Internal-Use Software;
Acquisition Cost: $29,267;
Accumulated Depreciation: $28,521;
Book Value: $746.
Description: Internal-Use Software In Development;
Acquisition Cost: $370;
Accumulated Depreciation: [Empty];
Book Value: $370.
Description: Construction in Progress;
Acquisition Cost: $146;
Accumulated Depreciation: [Empty];
Book Value: $146.
Description: Total;
Acquisition Cost: $47,589;
Accumulated Depreciation: $45,192;
Book Value: $2,397.
The change in capitalization threshold resulted in an immaterial
change to the fiscal year 2011 financial statements.
[End of table]
Note 6. Other Liabilities:
The other liabilities for FHFA are comprised of FECA liability,
unemployment insurance liability, payroll accruals, deferred lease
liability and unfunded leave. Payroll accruals represent payroll
expenses that were incurred prior to year-end but were not paid.
Other liabilities not covered by budgetary resources consist of
unfunded annual leave, compensatory time, and deferred lease
liability. As of September 30, 2011 and 2010, other liabilities not
covered by budgetary resources were $9.5 million and $7.9
million, respectively. Intragovernmental liabilities not covered by
budgetary resources were $1,408 for unfunded Federal Employees'
Compensation Act (FECA) liabilities in Fiscal Year 2011, and $0 in
Fiscal Year 2010.
Other liabilities as of September 30, 2011 consist of the following:
(Dollars in Thousands):
Intragovernmental:
Payroll Taxes Payable:
Current: $799;
Non-Current: [Empty];
Total: $799.
Total Intragovernmental:
Current: $799;
Non-Current: [Empty];
Total: $799.
With the Public:
Accrued Funded Payroll and Unfunded Leave:
Current: $11,916;
Non-Current: [Empty];
Total: $11,916.
Deferred Lease Liabilities:
Current: $57;
Non-Current: [Empty];
Total: $57.
Total Public Other Liabilities:
Current: $12,018;
Non-Current: [Empty];
Total: $12,018.
Other liabilities as of September 30, 2010 consist of the following:
Intragovernmental:
Funded and Unfunded FECA Liability:
Current: $3;
Non-Current: [Empty];
Total: $3.
Payroll Taxes Payable:
Current: $1,216;
Non-Current: [Empty];
Total: $1,216.
Total Intragovernmental Other Liabilities:
Current: $1,219;
Non-Current: [Empty];
Total: $1,219.
With the Public:
Accrued Funded Payroll and Unfunded Leave:
Current: $15,309;
Non-Current: [Empty];
Total: $15,309.
Total Public Other Liabilities:
Current: $15,309;
Non-Current: [Empty];
Total: $15,309.
[End of table]
Note 7. Leases:
Operating Leases:
1700 G Street NW:
FHFA has an occupancy lease with the Office of the Comptroller of the
Currency (OCC) 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 dock 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 provided notification of its intent to terminate
the lease.
FHFA may terminate the lease agreement with OCC 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, neither 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
Standard Board Statement No. 13.
1750 Pennsylvania Avenue NW and 1625 Eye Street:
FHFA leases office space in Washington, DC at 1750 Pennsylvania Avenue
NW and 1625 Eye Street NW. The lease terms of 1750 Pennsylvania Avenue
NW expire on January 31, 2012. The lease terms of 1625 Eye Street
expire on June 30, 2015. FHFA-OIG also leases office space in 1625 Eye
Street NW. The FHFA-OIG lease terms at 1625 Eye Street NW expire one
year after the occupation date, January 24, 2011, with optional
renewal periods for up to two years. Leases at both locations are non
cancelable. Contingency space at an undisclosed location is also
leased, with the lease expiring on March 31, 2012. Total rental
payments for the fiscal years ended September 30, 2011 and 2010 were
$6.1 million and $4.9 million, respectively.
400 7th Street SW - Constitution Center:
FHFA entered into a lease for office space at 400 7th Street SW
Constitution Center on January 31, 2011. FHFA will take occupancy in
January 2012. FHFA does not have the right to terminate the lease for
the convenience of the government. FHFA may only exercise a one-time
early termination at the end of the 10th year, contingent upon FHFA
having less than 400 employees in the Washington DC area and
representing that it reasonably believes it will have less than 400
employees in the DC area in the future.
The minimum future payments for these leases (except for 1700 G
Street, NW and 1750 Pennsylvania Avenue) are as follows:
Fiscal year: 2012;
Amount (Dollars in Thousands): $15,286.
Fiscal year: 2013;
Amount (Dollars in Thousands): $19,462.
Fiscal year: 2014;
Amount (Dollars in Thousands): $19,852.
Fiscal year: 2015;
Amount (Dollars in Thousands): $19,260.
Fiscal year: Thereafter;
Amount (Dollars in Thousands): $93,143.
Total future payments:
Amount (Dollars in Thousands): $183,679.
[End of table]
Note 8. Commitments And Contingencies:
FHFA did not have any material commitments or contingencies that met
disclosure requirements as of September 30, 2011 and 2010.
Note 9. Program Costs:
Pursuant to HERA, FHFA was established to supervise and regulate the
fourteen regulated entities. The regulated entities include Freddie
Mac, Fannie Mae and the twelve FHLBanks. FHFA tracks resource
allocations and program costs to the strategic goals (responsibility
segments) developed for FHFA's strategic plan. Strategic Goals, 1 -
Safety and Soundness; 2 - Affordable Housing and 3 - Conservatorship,
guide program offices to carry out FHFA's vision and mission. FHFA has
a Resource Management Strategy, which is distributed proportionately
to Strategic Goals 1 - 3 based on the percentage of direct costs of
each goal to the total direct costs for FHFA. FHFA-OIG allocated their
costs to FHFA's Resource Management Strategy. FHFA's revenue was
provided by the Regulated Entities through assessments. FHFA-OIG
received their funding through a $29 million expenditure transfer from
FHFA. FHFA-OIG's revenues for fiscal year 2011 were $0 and total
expenses were $17.3 million.
Program costs are broken out into two categories - "Intragovernmental"
and "With the Public". Intragovernmental costs are costs FHFA incurs
through contracting with other federal agencies for goods and/or
services, such as rent paid to OCC, payroll processing services
received from the Department of Agriculture and imputed financing
costs for post-retirement benefits with OPM. With the Public costs are
costs FHFA incurs through contracting with the private sector for
goods or services, payments for employee salaries, depreciation,
annual leave and deferred rent expenses. Revenue is comprised of
assessments, investment interest, and miscellaneous revenue.
Intragovernmental expenses relate to the source of goods and services
purchased by the agency and not to the classification of related
revenue. Such costs and revenue are summarized as follows:
(Dollars in Thousands):
Safety and Soundness
Intragovernmental Costs:
2011: $27,364;
2010: $21,703.
Public Costs:
2011: $98,597;
2010: $74,167.
Total Program Costs:
2011: $125,961;
2010: $95,870.
Less: Intragovernmental Earned Revenue:
2011: $108;
2010: $108.
Less: Public Earned Revenue:
2011: $135,189;
2010: $89,164.
Net Safety and Soundness Program (Income)Costs:
2011: ($9,336);
2010: $6,598.
Affordable Housing:
Intragovernmental Costs:
2011: $4,216;
2010: $3,759.
Public Costs:
2011: $13,024;
2010: $12,272.
Total Program Costs:
2011: $17,240;
2010: $16,031.
Less: Intragovernmental Earned Revenue:
2011: $30;
2010: $33.
Less: Public Earned Revenue:
2011: $38,024;
2010: $26,786.
Net Affordable Housing (Income)/Costs:
2011: ($20,814);
2010: ($10,788).
Conservatorship:
Intragovernmental Costs:
2011: $2,683;
2010: $1,926.
Public Costs:
2011: $21,517;
2010: $14,737.
Total Program Costs:
2011: $24,200;
2010: $16,663.
Less: Intragovernmental Earned Revenue:
2011: $22;
2010: $33.
Less: Public Earned Revenue:
2011: $27,410;
2010: $27,078.
Net Conservatorship (Income)/Costs:
2011: ($3,232);
2010: ($10,448).
Total Intragovernmental costs:
2011: $34,263;
2010: $27,388.
Total Public costs:
2011: $133,138;
2010: $101,176.
Total Costs:
2011: $167,401
2010: $128,564.
Less: Total Intragovernmental Earned Revenue:
2011: $160;
2010: $174.
Less: Total Public Earned Revenue:
2011: $200,623;
2010: $143,028.
Total Program Net (Income)/Costs:
2011: ($33,382);
2010: ($14,638).
[End of table]
Note 10. Apportionment Categories Of Obligations Incurred:
All obligations incurred are characterized as Category C, Exempt from
apportionment (i.e. not apportioned), on the Statement of Budgetary
Resources. Obligations incurred and reported in the Statement of
Budgetary Resources in fiscal years 2011 and 2010 consisted of the
following:
(Dollars in Thousands):
Direct Obligations, Category C:
2011: $225,802;
2010: $132,707.
Reimbursable Obligations, Category C:
2011: $94;
2010: $101.
Total Obligations Incurred:
2011: $225,896;
2010: $132,808.
[End of table]
Note 11. 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, 2011 and
2010, the unobligated balance was $27.7 million and $22.7 million. The
portion of the fiscal year 2011 unobligated available balance that
will be credited against the regulated entities' April assessments is
$14.7 million with the remaining $9 million retained in the working
capital fund and $4 million retained in the FHFA-OIG account. (see
Note 2. Fund Balance With Treasury)
Note 12. 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). The President's
Budget that will include fiscal year 2011 actual budgetary execution
information has not yet been published. The President's Budget is
scheduled for publication in February 2013 and can be found at the OMB
Web site: [hyperlink, http://www.whitehouse.gov/omb/]. The 2012 Budget
of the United States Government, with the "Actual" column completed
for 2010, has been reconciled to the Statement of Budgetary Resources
and there were no material differences.
Note 13. Undelivered Orders At The End Of The Period:
For the fiscal years ended September 30, 2011 and 2010, budgetary
resources obligated for undelivered orders amounted to $52.7 million
and $20.6 million, respectively.
Note 14. Incidental Custodial Collections:
FHFA's custodial collections primarily consist of Freedom of
Information Act requests and civil penalties assessed. Custodial
collections are reflected in Fund Balance with Treasury during the
year. 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. FHFA's custodial collections
are $3,385 for the year ended September 30, 2011. Custodial
collections totaled $288 for the year ended September 30, 2010. There
were no civil penalties assessed or collected in fiscal year 2010 or
2011. Custodial collections are transferred to the Treasury General
Fund on September 30 and are not reflected in the financial statements
of the agency.
Note 15. 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.
Budgetary Resources Obligated: (Dollars in Thousands)
Obligations Incurred:
2011: $225,896;
2010: $132,808.
Less: Spending Authority From Offsetting Collections and Recoveries:
2011: ($30,136);
2010: ($2,794).
Obligations Net of Offsetting Collections and Recoveries:
2011: $195,760;
2010: $130,014.
Less: Offsetting Receipts:
2011: ($200,689);
2010: ($143,100).
Net Obligations:
2011: ()$4,929);
2010: ($13,086).
Other Resources:
Imputed Financing From Costs Absorbed by Others:
2011: $5,193;
2010: $4,807.
Net Other Resources Used to Finance Activities:
2011: $5,193;
2010: $4,807.
Total Resources Used to Finance Activities:
2011: $254;
2010: ($8,279).
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:
2011: $(32,083);
2010: ($7,729).
Resources That Fund Expenses Recognized In Prior Periods:
2011: ($55);
2010: ($84).
Resources That Finance the Acquisition of Assets:
2011: ($5,226);
2010: ($975).
Total Resources Used to Finance Items Not Part of the Net Cost of
Operations:
2011: ($37,364);
2010: ($8,788).
Total Resources Used to Finance the Net Cost of Operations:
2011: ($37,100);
2010: ($17,067).
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:
2011: $1,662;
2010: $581.
Components Requiring or Generating Resources In Future Periods Other:
2011: $2;
2010: $1.
Total Components of Net Cost of Operations That Will Require or
Generate Resources In Future Periods:
2011: $11,664;
2010: $528.
Components Not Requiring or Generating Resources: Depreciation and
Amortization:
2011: $2,164;
2010: $2,200.
Components Not Requiring or Generating Resources: Revaluation of Assets
and Liabilities:
2011: ($110);
2010: ($353).
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources:
2011: $2,054;
2010: $1,847.
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period:
2011: $3,718;
2010: $2,429.
Net Cost of Operations:
2011: ($33,382);
2010: ($14,638).
[End of table]
[End of section]
Appendix I: Management's Report on Internal Control over Financial
Reporting:
Federal Housing Finance Agency:
1625 Eye Street, N.W.
Washington, D.C. 20006-4065:
Telephone: (202) 408-2500:
Facsimile: (202) 408-1435:
[hyperlink, http://www.fhfa.gov]:
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, 2011, 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, 2011,
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:
October 12, 2011:
[End of section]
Appendix II: Comments from the Federal Housing Finance Agency:
Federal Housing Finance Agency:
Office of the Director:
1700 G Street, N.W.
Washington, D.C. 20552-0003:
202-414-3800:
202-414-3823 (fax):
November 9, 2011:
Mr. Steven J. Sebastian:
Director, Financial Management and Assurance:
U.S. 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 Years 2011 and 2010
Financial Statements, GAO-12-161. This report presents GAO's opinion
on the fiscal years 2011 and 2010 financial statements of the Federal
Housing Finance Agency (FHFA). The report also presents GAO's opinion
on the effectiveness of FHFA's internal controls as of September 30,
2011 and GAO's evaluation of FHFA's compliance with laws and
regulations.
I am pleased to accept GAO's unqualified opinion on the FHFA financial
statements and to note that there were no material weaknesses or
significant deficiencies identified during the fiscal year 2011 audit.
The GAO reported that: the statements and notes were presented fairly,
in all material respects; FHFA had effective internal controls over
financial reporting; and there were no reportable instances of
noncompliance with laws and regulations tested by GAO.
FHFA 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. In addition, we would like to acknowledge
the dedicated GAO staff that worked with FHFA to meet the reporting
deadline for our audited financial statements and notes.
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). The law gave
the Director of the FHFA authority over Fannie Mae, Freddie Mac, the
federal home loan banks, and the Office of Finance. The 12 federal
home loan banks and the Office of Finance, whose primary function is
to issue and service all debt securities for the banks, make up the
Federal Home Loan Bank System.
[2] The conclusive and indicative criteria used in deciding what to
include as part of a financial reporting entity is included in
Statement of Federal Financial Accounting Concepts No. 2, Entity and
Display.
[3] 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.
[4] In financial terms, a haircut is a discount of a percentage of the
par value of a final resolution of the institution.
[5] Section 721 of the Dodd-Frank Act provides a long, complex
definition of the term "sap" and section 712 charges the Securities
and Exchange Commission (SEC) and the Commodity Futures Trading
Commission with further refining that term and related terms.
[End of section]
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