[Update 2: Adds that the FHFA has taken measures to improve the financial condition of all four troubled banks. Adds FHFA formal response to OIG recommendations.] The Office of the Inspector General released a report Wednesday contending Federal Housing Finance Agency supervision of troubled Federal Home Loan Banks is unclear and inconsistent. The FHFA, which in September was deemed by the inspector general as unable to effectively monitor Fannie Mae and Freddie Mac, rejects the characterization. In the report, the inspector general claims instances in which the agency did not hold those banks and their officers sufficiently accountable for failing to mitigate risks while engaging in questionable risk-taking. There are a dozen Federal Home Loan Banks across the country. Four — Boston, Chicago, Pittsburgh and Seattle — were labeled troubled by the inspector general after experiencing significant financial and operational deterioration because of investments in private-label mortgage-backed securities during the height of the housing boom. "Without vigorous FHFA oversight, the potential exists that the troubled FHLBanks will engage in risky financial strategies that could further endanger their financial safety and soundness and the capacity to serve their housing missions," according to the inspector general report. Many of the 12 banks are embroiled in lawsuits with dealers, underwriters, issuers and credit ratings agencies that the banks say gave untrue or misleading information in the sale of the securities. For example, in April, the Federal Home Loan Bank of Boston sued several entities in the securitization chain, seeking relief for $5.8 billion of soured private-label MBS. The allegation is that the bonds were sold on the basis of containing very little risk, when in fact the extent that the collateral would underperform was wrongly quantified. As a way to remedy safety and soundness concerns, the FHFA initiates a enforcement action on a bank when it classifies it as having significant “supervisory concerns.” The watchdog report takes issue with the fact the FHFA took enforcement action on only two — Seattle and Chicago — of the four troubled banks. The agency agrees with the inspector general that the other two banks require special attention as well. In addition to restricting dividend payments from the troubled banks, the FHFA has expressed a lack of confidence in senior bank officers that led the boards of directors of the those FHLBanks to remove officers deemed responsible for their institutions’ financial and operational deterioration. The Seattle and Chicago banks are under FHFA consent orders requiring them to meet certain minimum financial requirements for asset composition, capital management and other operational and risk management objectives. Stephen Cross, FHFA deputy director for FHLB regulation, told HousingWire the agency felt the financial conditions at the Seattle and Chicago banks were the most serious, causing it to impose orders against the two banks and "will keep those orders on them until it's time to move on." Cross, in response to the inspector general's findings, pointed out that all 12 banks were profitable in 2010 and 2011, and there's more to bank supervision than enforcement policies. He cited annual examinations of the banks and evaluations of capital, assets, management, earnings, liquidity and sensitivity to market risks as other ways of monitoring and enforcement. "The OIG wants us to have a written transparent enforcement policy — we will do that," Cross said. The report states that the FHFA's manual reporting processes limit management’s ability to identify trends in examination findings and as well as progress made by particular FHLBanks in correcting deficiencies. The inspector general recommended an automated management information system that provides ready access to current information. Cross said the manual process is extensive and transparent. FHFA officials told the inspector general that the agency doesn't need an automated system because its examiners have all the necessary information, Cross said, while noting the inspector general never had problems obtaining information from the examiners. Still, the agency will concede. "They want that to be automated — I agree, we'll go ahead and make it automated, but not because I think it will materially affect how we do our business," Cross said. Although the FHFA disagreed with a number of statements, characterizations and inferences in the report, it said it "generally agrees with the substance of the report's recommendations," according to its formal comments submitted to the OIG. The FHFA, however, contends it's not wise to mandate formal action simply because an FHLBank has been classified as troubled and said doing so would take away important discretionary authority from the FHFA. The agency said it achieved the results it sought involving one unnamed bank without a formal enforcement letter. The inspector general did, however, report that the FHFA has taken several positive actions regarding its oversight of the troubled banks, including "encouraging fiscally conservative dividend and investment practices, and closely monitoring them through examinations and ongoing communications." The FHFA plans to develop and implement a written enforcement policy by June 30 and implement an automated information system for agency managers by the end of 2012. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.