The Federal Housing Finance Agency only began certifying Fannie Mae and Freddie Mac financial statements and bailout compliance this summer, according to an agency inspector general report released Thursday.
Before then, the FHFA simply took the government-sponsored enterprises' word for it.
The conservatorship agreements between the Treasury Department and the GSEs struck in 2008 require the FHFA to legally certify the two mortgage giants are adhering to certain "covenants", providing no misleading statements or false information in their quarterly financial statements, and that the draws from the taxpayer are not more than needed.
Until June, the FHFA inspector general found the agency was only certifying that the quarterly draws – which total more than $187 billion – are correct.
The FHFA, instead, wrote in its draw requests from the Treasury that it received self-certifications from Fannie and Freddie that they were adhering to the covenants, which include winding down the retained portfolios, setting compensation for executives and disposing of high-valued assets as appropriate.
It was not independently certifying the financial statements either. It regarded receiving certifications from the GSEs themselves as complying with the bailout terms. The Treasury, according to the FHFA inspector general report, raised no objections.
At a meeting with the inspectors in April, the FHFA said it was implementing procedures to certify compliance with the covenants and the financial statements.
"For example, agency officials [only then] had begun attending enterprise certification meetings and proposed engaging external auditors to test covenant compliance," according to the inspector general report.
In its June 11 letter to the Treasury requesting quarterly draws for Freddie Mac, the FHFA for the first time certified the financial statements and covenant compliance for the GSEs.
Ensuring the GSEs financial statements are a clean as possible became even more important after the Treasury amended the bailout terms last week. Beginning next year, all GSE profits will be swept to the Treasury to pay back the bailouts. The 10% quarterly dividend payment will end, and if a GSE reports a loss, it will not be required to pay the Treasury during that period.
"FHFA believes that the observations and recommendations made by the OIG and subsequently implemented by FHFA will improve the oversight of the PSPA process," wrote Jeffrey Spohn, senior associate director for conservatorship operations, in a letter to the inspector general.