Taking the Bait

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Th e M Rep o RT | 59 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest audit Finds room for improvement in insurer Oversight A report says FhFA could be doing a better job in its responsibilities. T he Federal Housing Finance Agency (FHFA) Office of the Inspector General (OIG) performed an audit on the financial conditions of mortgage insurers used for loans purchased by Fannie Mae and Freddie Mac to assess their exposure to risk. FHFA, as the regulator for Fannie and Freddie, provides oversight of the GSEs and contracted CohnReznick LLP to perform the audit. The OIG commented, "The en- terprises typically require mortgage insurance underwritten by private mortgage insurers as a credit en- hancement to reduce the amount of losses in the event of borrower default." The GSEs currently hold more than $587 billion in single-family residential mortgage loans insured by private mortgage insurance com- panies. CohnReznick found that FHFA has "opportunities to further strengthen its oversight of the enterprises' monitoring of the financial condition of mortgage insurers and their related risk exposure." Specifically, the company reports FHFA could better coordinate the oversight of risk by issuing a formal oversight plan that defines roles and responsibilities. FHFAOIG also reports distressed insurers were potentially responsible for up to $49 billion in the event of borrower defaults, represent- ing more than a third of coverage for both Fannie and Freddie. Furthermore, the audit found the FHFA can provide better oversight when approving new mortgage insurers. CohnReznick said the FHFA delegated the approval decisions for a new mortgage insurer to the GSEs. "FHFA does not have a formal process for evaluating new mort- gage insurers, including enterprise risk assessments and justification for conditional approval requirements," the company's audit found. The group suggests that the FHFA be directly involved in the review and approval process for new mortgage insurers, which would strengthen gov- ernance over new approval decisions. CohnReznick also suggests the FHFA establish policies, procedures, and processes to help execute its oversight of the GSEs' business with mortgage insurers, as well as to devel- op specific criteria and methodology for reviewing new mortgage insurers. "FHFA generally agreed with the first recommendation but did not provide responsive comments to the second and third recommendations, which OIG considers unresolved," the report said. The audit was performed from September 2008 through May 2013. Fieldwork was performed from April 2013 through January 2014 at FHFA's and Fannie Mae's headquarters in Washington, D.C., as well as Freddie Mac's headquarters in McLean, Virginia. senators sour on reform Bill Without their support, Johnson-Crapo seems unlikely to pass the Senate. a recently unveiled plan to phase out Fan- nie Mae and Freddie Mac and overhaul the secondary mortgage market may have hit another snag, with six key senators reportedly deciding not to give their support. According to a report from Bloomberg, in a private meeting, Sens. Elizabeth Warren (Massachusetts), Charles Schumer (New York), Sherrod Brown (Ohio), Jeff Merkley (Oregon), Robert Menendez (New Jersey), and Jack Reed (Rhode Island)— all six of them Democrats— agreed they won't support a bill proposed by Senate Banking Committee chairman Tim Johnson (D-South Dakota) and ranking member Mike Crapo (R-Idaho) unless they're able to make major changes during markup. Taking cues from another piece of legislation authored last year by Bob Corker (R-Tennessee) and Mike Warner (D-Virginia), the Johnson-Crapo proposal would wind down and eventually eliminate Fannie and Freddie, transferring their functions to a newly created government corporation intended to provide insurance for mortgage-backed securities when losses exceed a 10 percent barrier put up by private investors. Citing reports from "three people familiar with the meeting," Bloomberg said the six committee members agreed that the planned structure for the new corporation "seemed unworkable" and that the proposal lacked adequate support for affordable housing goals. A committee vote on the bill was already postponed in late April after two senators indicated they would be opposed to pushing the proposal forward, with the other four saying they were undecided. With so many Democrats opposed to the bill in its current iteration, its chances of passing in a narrowly Democratic Senate seem unlikely. Nevertheless, the proposal's creators remain optimistic. In an email to, Johnson spokesman Sean Oblack issued the following statement: "Housing finance reform is going to pass out of the Banking Committee next week with bipartisan support, which is a landmark achievement for such a complicated and controversial issue. We have made significant progress bridging the divide among those previously undecided, and the committee vote is just a first step. Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favorably reporting out the bill next week." With so many Democrats opposed to the bill in its current iteration, its chances of passing in a narrowly Democratic Senate seem unlikely.

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