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TH E M R EP O RT | 61 SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T FHFA's Oversight Challenges FHFA Inspector General lists four main concerns in regulating Fannie Mae and Freddie Mac. T he Federal Housing Fi- nance Agency's Inspec- tor General released a memo listing four crucial challenges she believes the agency faces in its role as regulator over Fannie Mae and Freddie Mac. Laura S. Wertheimer, Inspector General at the FHFA, has released a memo that identifies "four serious management and perfor- mance challenges" that the agency faces in its role as a regulator and supervisor of the government- sponsored enterprises (GSEs). The memo was addressed to Melvin L. Watt, Director of the FHFA. The first challenge Wertheimer draws focus to is the agency's inability to improve oversight of both GSEs while strengthening internal review processes for non- delegated matters. Wertheimer's memo expresses concern about the FHFA's "limited" oversight, which she states is largely limited to attending internal management and board meetings with the GSEs. She believes FHFA has not considered "the reasonableness of Enterprise actions pursuant to delegated authority, including actions taken by the Enterprises to implement conservatorship directives." Part of the issue, she claims, is that FHFA has not "clearly defined" its expectations, nor established any standard to which Fannie Mae or Freddie Mac must be held accountable. The second concern enumer- ated by Wertheimer follows logically on her first: upgrading supervision of the GSEs and Federal Home Loan (FHL) banks. The FHFA splits the responsibil- ity of supervising the GSEs and FHL banks between the Division of Enterprise Regulation (DER) and the Division of Federal Home Loan Bank Regulation (DBR), respectively. She places particu- lar emphasis on DER's lack of resources in ensuring the GSEs are not engaging in risky behav- ior, as well as the FHFA's lack of consistency in enforcing supervi- sory practices. The third challenge Wertheimer lays out involves oversight in cy- bersecurity, ensuring an effective information-security system will protect the highly sensitive data gathered by the GSEs on borrow- ers. Wertheimer calls for greater cybersecurity oversight to reduce operational risk and ensure the GSEs update their systems. Lastly, Wertheimer states that oversight must be enhanced not only over the GSEs, but also the GSEs' "Relationships with Counterparties and Third Parties." She discusses how both Fannie Mae and Freddie Mac are in no small part reliant on third parties for "a wide array of professional services, including mortgage origi- nation and servicing." Stating that the FHFA has mostly delegated the management of these third parties to the GSEs themselves, she believes this exposes them to additional risks such as fraudu- lent conduct or a failure to meet contractual obligations. Wertheimer believes they can be addressed via "the develop- ment and implementation of, and compliance with, effective internal controls within the Agency." Editor's Note: FHFA has been contacted for further comment but has not responded as of press time.

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