U.S. Senator Richard Shelby, ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs, today made the following statement at a Committee hearing with the Inspector General of the Federal Housing Finance Agency.
Statement of Senator Richard C. Shelby
Committee on Banking, Housing and Urban Affairs
December 13, 2011
“Thank you, Mr. Chairman.
“Today, the Committee will hear the testimony of the Inspector General of the Federal Housing Finance Agency, Mr. Steve Linick. The Office of the Inspector General oversees FHFA’s regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
“This is the first time Mr. Linick has appeared before the Committee since his confirmation hearing last year. I look forward to hearing today from the Inspector General about the status of Fannie, Freddie and FHFA, as well as how he plans to carry out his duties. In particular, I am interested to hear how his office can help FHFA oversee the conservatorship of Fannie and Freddie.
“Unfortunately, before Mr. Linick was confirmed, the post of FHFA Inspector General was vacant for two years – a period when the need for oversight was critical. During that time, Fannie and Freddie were placed into conservatorship, and taxpayers began paying for their losses. So far, Fannie and Freddie have cost almost $183 billion.
“Despite their financial problems, however, Fannie and Freddie’s dominant role in the housing market persists as they currently back 71 percent of new mortgage-backed securities. Accordingly, the delay in filling the IG post means that Mr. Linick has a lot of important work to catch up on.
“First and foremost, he must provide oversight of FHFA’s conservatorship of Fannie and Freddie to ensure that taxpayer dollars are spent wisely. During its short existence, the Office of the Inspector General has already identified several ways in which FHFA can do a better job of protecting taxpayers. For example, in its semiannual report, the Inspector General noted that FHFA did not effectively oversee Fannie and Freddie’s negotiations with Treasury on the Administration’s “Home Affordable Modification Program,” known as HAMP.
“According to the report, this contributed to the GSEs entering into a poorly-drafted agreement. As a result, there have been “significant disputes” between FHFA and Treasury about how the GSEs should run HAMP. The report also notes that HAMP has undermined the ability of the GSEs to perform their core functions. Indeed, FHFA Acting Director Ed DeMarco, concluded in a letter that “HAMP created operational risks for the Enterprises and diverted staff and resources from other critical priorities.” This report recommends that FHFA better engage with Treasury and the GSEs to clarify certain aspects of the HAMP agreements, including establishing a dispute resolution mechanism.
“Another issue that the IG mentions in its semiannual report is FHFA’s lack of analysis on compensation for Fannie and Freddie executives. According to the OIG, “FHFA had not considered factors that might have resulted in reduced executive compensation costs.” To improve FHFA’s framework for making executive pay decisions, the OIG recommended that FHFA use performance data and independent verification of compensation levels. Taxpayers should never be put in the position of paying millions to executives of any company. Yet, as long as we have had the GSEs, this has been the case. The OIG recommendations are intended to ensure that taxpayers spend only what is required.
“The OIG’s work also shines a light on the larger issue of the costs arising from the Administration’s failure to propose a detailed plan to end the conservatorship of Fannie and Freddie. It has been 3 years and 98 days since the conservatorship began. The conservatorship was never intended to last this long. Nor was FHFA designed to handle the “conservatorship to nowhere” that we face today.
“It should not be surprising, therefore, that the OIG has found “significant shortfalls” in FHFA’s examination program, including having “too few examiners overall to ensure the efficiency and effectiveness” of FHFA’s oversight of the GSEs. This is no small finding, since examination is the primary means by which FHFA supervises and regulates the GSEs. This serious problem exists in large measure because the perceived short-term nature of the conservatorship makes it difficult for FHFA to hire enough qualified examiners.
“This is just one of many problems created by the GSEs’ prolonged conservatorship. And the longer we wait to reform our housing finance system, the larger these problems will grow and the solutions will become more expensive for the taxpayer. Nevertheless, the Majority decided not to tackle housing finance reform in Dodd-Frank. At some point, however, the Majority is going to find that it can no longer kick the can down the road.
“Thank you, Mr. Chairman.”