In a wide-ranging report released Thursday, the Federal Housing Finance Agency Office of Inspector General seemingly questioned the motives of Fannie Mae surrounding the construction of its new headquarters in Washington, D.C.
The project, which is expected to cost somewhere in the neighborhood of $700 million, would see Fannie Mae consolidate several office locations in the D.C. area into one main location.
The OIG’s report cites several issues related to the FHFA’s oversight of the project (for more on the OIG report, click here), but one of the OIG reports most alarming bullet points is the OIG’s hedged suggestion that Fannie Mae may have alternative motivation for spending as much as it plans to spend on its new headquarters.
“Pursuant to the terms of the Third Amendment to the Senior Preferred Stock Purchase Agreement, Fannie Mae’s net worth less the amount of its capital reserve, is swept into the U.S. Treasury each quarter,” the OIG report notes.
“Fannie Mae arguably has little incentive to cabin its costs for the build-out of its new headquarters because any positive net worth it does not spend on itself will be swept into the Treasury as a dividend,” the OIG report continues. “Excessive or unnecessary spending by Fannie Mae may be seen as monies that ought to have been swept to the U.S. Treasury as a dividend for the $116.1 billion investment by U.S. taxpayers.”
In a response to the OIG report, FHFA Director Mel Watt balks at the veiled questioning of Fannie Mae’s motives, saying he “strongly disagrees” with the assertion that Fannie Mae (or Freddie Mac for that matter) have “little incentive” to hang on their money.
“This assertion is bases on a faulty assumption, for which no substantiation has been provided, that the enterprises lack motivation to control their expenses (or to maximize their income) because the terms of the Senior Preferred Stock Purchase Agreements require all profits to be swept to the taxpayers,” Watt writes.
“To the contrary, the members of the boards and management teams of both enterprises (almost all of whom were appointed to their positions after the enterprises were placed into conservatorship) have demonstrated consistent commitments to their legal conservatorship obligations to ‘conserve and preserve’ the assets of the enterprises, as well as their commitments under the law and under their charters to both ‘operate in a safe and sound manner’ and to ‘foster liquid, efficient, competitive, and resilient housing finance markets,’” Watt says in his letter of response.
Watt adds that those legal obligations, in addition to the expectation of returns being provided to taxpayers for their investments in the GSEs, the “undesirability” of another draw, and exposure to “continuous public scrutiny,” mean that the GSEs have more incentives to fiscal responsibility than “virtually any other corporate enterprise.”
Watt also notes that the decision to move Fannie Mae into the building at the Washington Post site represents a cost savings of approximately $400 million from what the cost of staying in Fannie Mae’s current offices and renovating them.
Additionally, Watt notes the sale of the properties that Fannie Mae currently owns and occupies will also result in “substantial additional financial benefits.”
Watt closes his response letter by acknowledging that the FHFA is aware of the “significant financial and reputational risks” associated with this project.
Watt said that the FHFA respectfully seeks to ensure that the OIG’s report and the “inferences” that may be drawn from it will not add to the “inherent risks” of the project.
“Despite these responses and context, FHFA believes that the recommendations contained in the (OIG report) are constructive and warranted, and that they suggest additional means and provide additional incentive for FHFA to provide more rigorous and appropriate oversight throughout the construction process,” Watt states. “We accept them and will implement them to the extent that we are not already doing so.”
For the full report from the FHFA-OIG, click here.