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» LIBOR SCANDAL MAY HAVE COST GSES MORE THAN $3B Fannie Mae and Freddie Mac may have lost billions of dollars as a result of borrowing rate manipulation, according to a report from the Office of the Inspector General of the Federal Housing Finance Agency (FHFA-OIG). The banking world was rocked last June when it was revealed that traders at Barclays spent years rigging the London Interbank Offered Rate (Libor), a global interest rate at which banks lend money to each other. Investigations have been under way since that time to uncover what roles other banks played in the scandal—so far, only Barclays and UBS AG have struck settlements to resolve investigations of their practices. As those probes continue, evidence uncovered suggests the nation's two largest mortgage companies may have been hit especially hard by the international rate engineering. The Wall Street Journal (WSJ) is now reporting Fannie Mae and Freddie Mac may have sustained more than $3 billion in losses from the rigged rates in place over the last few years. The WSJ uncovered an internal memorandum from FHFA inspector general Steve Linick to acting director Edward DeMarco examining the extent of financial damage resulting from the rate manipulation. The team that prepared the report—which was reportedly given to Linick October 26 and forwarded to DeMarco November 2—came up with their loss figures based on an analysis of historical Libor data and the GSEs' balance sheets. In the report, FHFA-OIG calls for the enterprises to conduct their own analyses of the potential losses they faced from Libor rigging and to consider options for legal action. In a response letter dated November 15, deputy director for enterprise regulation Jon Greenlee notes the enterprises both engaged an outside law firm to help conduct such assessments. FHFA issued a statement after the publishing of the WSJ article in late December, saying the agency "has not substantiated any particular Libor-related losses for Fannie Mae and Freddie Mac" and "has not made any determination regarding legal action" as of yet. VERBOSITY "Given the differences of opinion on the future of the mortgage market and the fact that the GSEs are currently profitable, we believe that there is little impetus for GSE reform in 2013." —Keefe, Bruyette & Woods VISIT US ONLINE @ DSNEWS.COM FHFA WATCHDOG SAYS AGENCY SHOULD STEP UP EFFORTS TO MONITOR PAY The Federal Housing Finance Agency (FHFA) isn't doing enough to monitor compensation for senior professionals at Fannie Mae and Freddie Mac, the Office of the Inspector General (FHFA-OIG) suggests in a new report. At the end of 2010, the FHFA enacted a pay freeze on all general merit pay increases and cost of living adjustments for all Fannie and Freddie employees through 2011; that freeze was extended to cover 2012 but allows an exception for raises accompanying a promotion or additional responsibilities. The agency also worked to strengthen its oversight of executive compensation, including scaling back CEOs' salaries to the tune of nearly 90 percent. While FHFA increased its monitoring of executive pay, its oversight of non-executive compensation—which encompasses some 11,900 employees, including 2,000 senior professionals—has been relatively limited. According to the inspector general's report, senior professionals classified as VPs and directors earned a collective $455 million in 2011. The median cash compensation for the enterprises' total 333 VPs was $388,000 while the median pay among the 1,650 director positions was $205,300. Additionally, while payment for executives was brought down from 2010 to 2011, FHFAOIG found that compensation for senior professionals actually increased in those years. According to the report, "one enterprise official told FHFA-OIG that promotions and changes in responsibility also may have played a role in the increase in median compensation from 2010 to 2011." "FHFA has not conducted any reviews or examinations to gain assurance that the enterprises' non-executive compensation costs are reasonable and justified … [a]s the enterprises' conservator, FHFA has a responsibility to preserve and conserve effectively their assets and limit taxpayer costs. To help do so, FHFA-OIG believes that the agency should gain reasonable assurance that the enterprises' compensation controls are effective," the report states. FHFA-OIG specifically urges an assessment of the GSEs' processes and cost controls for compensation, an evaluation of pay offered to new hires, and the companies' compliance with the mandated freeze on increased compensation. Responding to the report, FHFA officials agreed to take action, noting that "it would be prudent and feasible for FHFA to improve our monitoring of the promotions and new hires at the vice president and director levels." However, they did point out that FHFA-OIG's "takehome pay" figures include long-term incentives and deferred payments from prior years that FHFA and the GSEs have since adjusted. FHFA AND GSES WORKING TOWARD SERVICING DATA STANDARDS The Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to work together to develop industrywide servicing data standards, according to bulletins issued to servicers by both GSEs. The new standards are a component of the Uniform Mortgage Data Program (UMDP) and will go by the name Uniform Mortgage Servicing Dataset (UMSD). UMSD will define a uniform dataset with standardized definitions and formats, the update stated. The update went on to list benefits, which were improved operational efficiency, increased data quality and consistency, enhanced disclosure for investors and regulators, and reduced miscommunication between stakeholders by decreasing the use of codes and derived fields. The development of UMSD was described as a "natural next step" following the "success" of UMDP; the implementation will occur in phases over several years and the GSEs plan to work closely with servicers and other stakeholders throughout the process to better understand challenges posed related to data collection adoption. The program includes other components, which are Uniform Loan Delivery Dataset, Uniform Appraisal Dataset, and Uniform Collateral Data Portal. 25

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