FHFA must improve Fannie, Freddie risk exams, OIG says

January 7, 2016

WASHINGTON (1/7/16)--The Federal Housing Finance Administration must enhance its risk assessment framework for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, according to a report from the agency’s Office of the Inspector General.

The report makes three recommendations, all of which the FHFA has agreed with.

Fannie and Freddie have virtually identical federal charters, substantially comparable business models and similar risk profiles, but there are significant variations in the risk assessments used by the FHFA in its side-by-side analyses of the GSEs.

According to the report, this “limits the utility of these risk assessments to compare risk exposures between the enterprises, even though the enterprises share the same types of risk and those risks lend themselves to standard measures.”

The report recommends the FHFA implement detailed risk assessment guidance that provides:

  • Minimum requirements for risk assessments that facilitate comparable analyses for each enterprise’s risk positions, including common criteria for determining whether risk levels are high, medium, or low, year over year; and 
  • Standard requirements for format and the documentation necessary to support conclusions in order to facilitate comparisons between Enterprises and reduce variability among the FHFA’s Division of Enterprise Regulation’s (DER) risk assessments for each enterprise and between the enterprises.

The report also recommends the FHFA direct DER to train its examiners-in-charge and exam managers in the preparation of semi-annual risk assessments. These assessments would use guidance consistent with the above two recommendations.

In response to the report, DER will amend its existing internal guidance on the performance of risk assessments by May 25. DER will also provide training to all program staff (which includes examiners-in-charge and examination managers) on the changes to internal guidance by Oct. 14.