A government watchdog on Wednesday criticized the regulator of the Federal Home Loan Bank system, a collection of 12 government-chartered cooperatives that provide a source of mortgage funding, for not doing enough to monitor risks.
The inspector general for the Federal Housing Finance Agency (FHFA), which regulates the home loan banks, suggested FHFA had not been aggressive enough in reviewing "supervisory concerns."
In a report, it said the regulator, which also oversees Fannie Mae and Freddie Mac, needed to take more formal actions against financially troubled members of the 12 bank cooperative.
"It is especially important that these banks receive strong oversight and early intervention at signs of financial or operational difficulties," said Inspector General Steve Linick.
As private cooperatives, the 12 banks bring in profits and pay dividends to their members, which are more than 8,000 financial institutions. They also buy and hold mortgage-related assets as part of their role in supporting the housing finance system.
"While FHFA has taken positive steps to improve oversight of the troubled Federal Home Loan Banks, the agency has not established policies, systems, and documentation standards that could strengthen its oversight. It should do so in the near term," Linick said.
Similar to Fannie Mae and Freddie Mac, the home loan bank system has the ability to borrow cheaply because of a perception that the federal government won’t let the cooperatives fail.
But their housing-related investments have been weighing on the financial health of the system. Collectively, the Federal Home Loan Banks lost nearly $2 billion on private-label mortgage backed securities in 2009 and 2010, according to the inspector general.
FHFA has said four of them – Boston, Pittsburgh, Chicago and Seattle – pose "supervisory concerns" but the inspector general noted that only two had faced regulatory enforcement actions during examinations between 2007-2010.
A senior FHFA official told the inspector general that weak finances had led home loan banks to take on more risk in an effort to drive up returns on investments, the report said.
As a result, the inspector general suggested FHFA establish clearer enforcement policies, and seek to make the banks’ investment practices and business strategies more transparent.
FHFA also needs to rely on more up to date automation as a regulatory tool, the report said. The regulator often follows up on a case-by-case basis when it comes to enforcement polices and uses manual processes, according to the watchdog.
The inspector general faulted the lack of consistent and transparent enforcement polices as limiting FHFA’s oversight ability, including a consistent lack of documentation when it comes to the actions it takes against the 12 cooperatives.
In a written response to the report, FHFA said all four of the federal home loan banks that were identified as supervisory concerns had received heightened regulatory scrutiny and that their business activities had been restricted.
Still, it said it would move ahead with the inspector general’s recommendations.
(Reuters)
