    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                        OVERSIGHT OF THE FEDERAL HOUSING

    			    FINANCE AGENCY

    =======================================================================

                                    HEARING

                                   BEFORE THE

                           SUBCOMMITTEE ON OVERSIGHT
                               AND INVESTIGATIONS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 APRIL 12, 2018

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-84

                    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                      	       __________

    	   	U.S. GOVERNMENT PUBLISHING OFFICE

    31-418 PDF 		WASHINGTON : 2018

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                         Shannon McGahn, Staff Director
                  Subcommittee on Oversight and Investigations

                        ANN WAGNER, Missouri, Chairwoman

    SCOTT TIPTON, Colorado, Vice         AL GREEN, Texas, Ranking Member
        Chairman                         KEITH ELLISON, Minnesota
    PETER T. KING, New York              EMANUEL CLEAVER, Missouri
    PATRICK T. McHENRY, North Carolina   JOYCE BEATTY, Ohio
    DENNIS A. ROSS, Florida              MICHAEL E. CAPUANO, Massachusetts
    LUKE MESSER, Indiana                 GWEN MOORE, Wisconsin
    LEE M. ZELDIN, New York              JOSH GOTTHEIMER, New Jersey
    DAVID A. TROTT, Michigan             VICENTE GONZALEZ, Texas
    BARRY LOUDERMILK, Georgia            CHARLIE CRIST, Florida
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        April 12, 2018...............................................     1
    Appendix:
        April 12, 2018...............................................    27

                                   WITNESSES
                            Thursday, April 12, 2018

    Wertheimer, Hon. Laura, Inspector General, Federal Housing
      Finance
      Agency.........................................................     4

                                    APPENDIX

    Prepared statements:
        Wertheimer, Hon. Laura.......................................    28

                  Additional Material Submitted for the Record

    Green, Hon. Al:
        MarketWatch article entitled, ``CFPB May Fine Wells Fargo as
          Much as $1 Billion: Report''...............................    44
        American Banker article entitled, ``CFPB's Mulvaney Strips
          His Fair-lending Office of Enforcement Powers''............    45
        Reuters article entitled, ``Exclusive: U.S. Watchdog Seeks
          Record Fine against Wells Fargo for Abuses''...............    50
    Wertheimer, Hon. Laura:
        Written responses to questions for the record submitted to
          Representative Messer......................................    52

                        OVERSIGHT OF THE FEDERAL HOUSING

                                 FINANCE AGENCY

                                  ----------

                            Thursday, April 12, 2018

                         U.S. House of Representatives,
                                      Subcommittee on Oversight
                                            and Investigations,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10 a.m., in
    room 2128, Rayburn House Office Building, Hon. Ann Wagner
    [chairwoman of the subcommittee] presiding.
        Members present: Representatives Wagner, Tipton, Zeldin,
    Trott, Loudermilk, Kustoff, Tenney, Hollingsworth, Green,
    Cleaver, Beatty, Gottheimer, and Crist.
        Mrs. Wagner. The Subcommittee on Oversight and
    Investigation will come to order.
        Today's hearing is entitled, ``Oversight of the Federal
    Housing Finance Agency.''
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time.
        Without objection, all members will have 5 legislative days
    within which to submit extraneous materials to the Chair for
    inclusion in the record.
        Without objection, members of the full committee who are
    not members of this subcommittee may participate in today's
    hearing for the purpose of making an opening statement and
    questioning our witness.
        The Chair now recognizes herself for 4 minutes for an
    opening statement.
        The Federal Housing Finance Agency--FHFA--was established
    as an independent regulatory body tasked with supervision and
    regulatory authority of the Government-sponsored enterprises--
    GSE--which include Fannie Mae and Freddie Mac.
        In recent years, FHFA has taken on an additional, somewhat
    unique role, acting as the conservator of Fannie and Freddie.
        As conservator, FHFA is tasked with decreasing taxpayer
    risk, which, roughly, stands at $5.3 trillion, while promoting
    the role of private capital in the mortgage market.
        Unfortunately, acting as both the regulator and conservator
    of Fannie and Freddie creates an obvious conflict.
        FHFA should be shrinking, not expanding, its powers outside
    the scope of its Congressional mandate. Today's hearing will
    highlight the need for Congress to build a consensus on a more
    balanced approach to home ownership that relies less on
    taxpayer subsidies and more on private capital and free market
    incentives.
        Since 2008, U.S. taxpayers have invested nearly $193.5
    billion into Fannie and Freddie alone, leaving serious concerns
    about their future.
        As to FHFA's role as regulator combined the GSEs represent
    one of the largest financial institutions in the world with
    trillions of dollars in assets.
        In recent testimony before this committee, FHFA Director
    Mel Watt noted that absent a conservatorship, both Fannie and
    Freddie would be considered systemically important financial
    institutions--SIFIs.
        While other SIFIs are supervised and regulated by the
    Federal Reserve, Fannie and Freddie are not. Unfortunately, it
    appears that the FHFA regulators are not up to snuff.
        FHFA is a young regulator and the IG (inspector general)
    has identified repeated flaws in supervision. Even more
    concerning, in my view, is the fact that FHFA has failed to
    accept and implement all of the IG recommendations designed to
    fix this issue, as the IG put it in a 2016 report titled,
    ``Safe and Sound Operation of the Enterprises Cannot be Assumed
    Because of Significant Shortcomings in FHFA's Supervision
    Program for the Enterprises.''
        In this regard, the subcommittee is particularly concerned
    about the GSE's cybersecurity infrastructure. The increase of
    cyber threats targeting our financial system has increased
    dramatically over the last decade.
        A number of attacks targeting financial services companies
    rose by more than 80 percent last year alone. The inspector
    general has previously reported that FHFA did not complete any
    of its supervisory activities planned for the 2016 examination
    cycle relating to Fannie Mae's cybersecurity risks.
        Ultimately, ensuring that the GSEs are protected from all
    cyber threats falls to Director Watt, and the members of this
    subcommittee should be concerned where an entity controlling
    highly sensitive data, controlling trillions of dollars in
    assets lacks proper oversight.
        In addition to the reports on safety and soundness, the
    IG's reports raise serious questions as to whether FHFA is
    appropriately exercising its authority as conservator to ensure
    that they are good stewards of taxpayer money.
        In particular, under conservatorship Fannie Mae elected to
    relocate a number of its facilities including its headquarters
    in Washington, D.C.
        According to a report from September 2017, the Office of
    Inspector General questioned upgrades and finishes that push
    the total renovation cost to $32 million.
        Again, I want to thank the inspector general for her time
    this morning and I look forward to her testimony.
        I now have the privilege of recognizing the gentleman from
    Texas, Mr. Green, the Ranking Member, for 5 minutes.
        Mr. Green. Thank you very much, Madam Chair. I thank the IG
    for appearing and I'd also like to just briefly recognize the
    presence of a former member of the committee, Mr. Garrett. He
    and I rarely agreed on anything but we remain friends, and
    welcome to the committee again, Mr. Garrett.
        I'd like to also, if I may, compliment Mr. Watt for his
    impeccable service, his stellar character. He is a person who
    has been on this committee, served with a--with distinction on
    the committee and is someone that is highly respected in the
    industry, and I am pleased to call him a person that I have
    great confidence in as the director of FHFA.
        I would in no way diminish the value of this hearing. I
    believe that it is an important hearing. But I also contend
    that there are some other things that we should look into and
    I'd like to cite just a few.
        Wells Fargo may be fined a billion dollars for auto
    insurance and mortgage lending. I've got several articles here,
    one from MarketWatch that's styled, ``CFPB May Fine Wells Fargo
    as Much as a Billion Dollars,'' another that I won't cite
    presently but I'll place in the record at a later time.
        I'd like to at some point visit with HUD (U.S. Department
    of Housing and Urban Development) about the disaster relief--
    that recovery effort in Florida, Texas, Virgin Islands, Puerto
    Rico. They are much concerned about this.
        We had a field hearing in Houston just last week on this
    issue and there are many housing issues that--of concern to
    persons in these various areas. We need to at least find out
    how the money will get to some of the recipients.
        For example, will there be a direct funding to a city like
    Houston that has received funds directly before or will the
    funds go through another layer of the bureaucracy such that it
    may take additional time, which means that people will continue
    to suffer?
        Also concerned about the stripping of the CFPB's (Consumer
    Financial Protection Bureau) Office of Fair Lending's
    enforcement powers. I think that it was very good, Madam Chair,
    to hear from Mr. Mulvaney yesterday. But I do believe that
    there are two sides to these stories and the advocacy groups
    have a voice.
        That voice ought to be heard such that we can better
    understand what's happening over at the CFPB. Are we really
    about to restructure it such that it will no longer be the
    watch dog that we intended and perhaps become some sort of lap
    dog? The CFPB is there for the consumer.
        It is the Consumer Financial Protection Bureau, not the
    financial system's protection bureau, and I think we need to
    look into this.
        I would also mention to you that invidious discrimination
    is still afoot in this country. Mr. Mulvaney said as much
    yesterday, and we know that Bancorp South has been fined more
    than $10 million for discrimination and that the finding was
    based in part on testing where there were persons who were
    actually sent into the bank, had an experience with the bank
    officers in attempting to get loans, and it was determined that
    persons of color were treated differently when they went into
    the bank.
        They didn't have the same access to capital. Access to
    capital is important in this country. Invidious discrimination
    in banking is something that we can deal with.
        We can mitigate and eliminate this type of behavior in
    banking if we would use the tools that are available to us to
    acquire the empirical evidence and testing is one of those
    tools. The CFPB has already engaged in testing as early as
    2016.
        So these are some issues of concern, too. Advocacy groups
    have a voice. We should hear from them as well. I appreciate
    what we will hear today.
        I've had the opportunity to peruse the testimony and I look
    forward to hearing more and saying more about some of these
    other things as well.
        I will yield back the 2 seconds I have.
        Mrs. Wagner. The gentleman yields back.
        The Chair now recognizes the Vice Chair of the Oversight
    and Investigations Committee, the gentleman from Colorado, Mr.
    Tipton, for 1 minute for an opening statement.
        Mr. Tipton. Thank you, Chairwoman Wagner, and thank you,
    Ms. Wertheimer, for appearing before the committee today. The
    work of the inspector general at the FHFA is of crucial
    importance.
        With the charge to oversee high valuation of assets backed
    by taxpayer dollars and broad discretion to exercise authority,
    FHFA has the potential to cause serious harm to the American
    financial system if it derails.
        As such, the work of the inspector general to ensure that
    the FHFA is functioning properly and serves as a shrewd steward
    of taxpayer dollars comes into focus as essential.
        The witness before the committee today, Ms. Wertheimer, has
    worked diligently to study the practices of the FHFA and make
    recommendations to keep the agency in check.
        I look forward to her testimony and to hearing her thoughts
    on whether or not the agency has adhered to her recommendations
    and, again, I would like to thank the Chairwoman for holding
    the hearing and the witness for appearing.
        I yield back.
        Mrs. Wagner. The gentleman from Colorado yields back.
        We now welcome our witness, Laura Wertheimer. Today's
    witness, Laura Wertheimer, was confirmed as inspector general
    of the Federal Housing Finance Agency by the U.S. Senate in
    2014.
        Ms. Wertheimer oversees a staff of 135 professionals who
    are dedicated to promoting economy, efficiency, and
    effectiveness in all FHFA programs and operations.
        Before arriving at the FHFA, she worked in private
    practice, receiving her law degree from Columbia University.
        Once the witness has finished presenting her testimony,
    each member of the subcommittee will have 5 minutes in which to
    ask questions.
        With that, the witness will now be recognized for 5 minutes
    to give an oral presentation of her testimony.

               STATEMENT OF THE HONORABLE LAURA WERTHEIMER

        Ms. Wertheimer. Chairman Wagner, Ranking Member Green,
    members of the subcommittee, thank you for inviting me today to
    testify regarding the work of the Office of Inspector General
    of the Federal Housing Finance Agency.
        Effective oversight makes Government better and fosters
    effective change. Healthy skepticism through independent
    reviews, both by inspectors general and by Congress, acts as
    the disinfectant of sunlight to ensure more efficient and
    effective Government and to identify problems, abuses, and
    deficiencies.
        Because FHFA has unique responsibilities in its dual role
    as supervisor and conservator of Fannie Mae and Freddie Mac and
    as supervisor of the Federal Home Loan Banks, FHFA OIG's
    (Office of Inspector General) responsibilities are broader.
        Making the right choices about what we audit, evaluate, and
    investigate is critical. Our work plan is risk based. It
    focuses on four major management and performances challenges
    facing FHFA. My oral remarks this morning focus on one portion
    of those challenges--FHFA's supervision of Fannie Mae and
    Freddie Mac.
        During my tenure, FHFA OIG has issued 29 reports involving
    FHFA's supervision program for the enterprises and 56
    recommendations to address shortcomings and deficiencies that
    we found.
        FHFA agreed in full to 38 of them, or 68 percent. We found
    that the design and execution shortcomings burdened FHFA's
    supervision program and we identified four recurrent themes:
    First, many FHFA supervisory standards and guidance lack the
    rigor of those issued by other Federal financial regulators;
    second, the flexible and prescriptive nature of many FHFA
    standards and guidance has resulted in inconsistent supervisory
    practices; third, where FHFA issued clear standards and
    guidance, examiners have not consistently followed them; and
    fourth, FHFA lacks adequate assurance that its supervisory
    resources are devoted to examining the highest risks of the
    enterprises.
        Based on our work, we have cautioned stakeholders that the
    safe and sound operation of Fannie Mae and Freddie Mac cannot
    be assumed because of the significant shortcomings in FHFA's
    supervision program.
        While the deputy inspectors general of our audit and
    evaluation offices have recently observed some signs indicating
    improvements in the supervision program, it is too early to
    assess whether these improvements are significant and
    sustainable.
        Clearer standards, guidance, training, responsibility, and
    accountability are necessary to remediate the shortcomings and
    deficiencies we have identified. At this juncture, we have not
    identified sufficient sustained improvements to warrant removal
    of our caution.
        During my tenure as inspector general, we have issued a
    total of 85 reports to alert FHFA leadership and our
    stakeholders to significant issues, which include 117
    recommendations to address identified shortcomings and
    deficiencies.
        Of those 117, FHFA fully agreed to 95 or, roughly, 81
    percent. During the same period, we questioned costs of more
    than $104 million. Our civil investigations during this period
    resulted in more than $22 billion in judgments and settlements
    for the Federal Government and our criminal investigations
    resulted in more than $784 million in fines, penalties, and the
    like.
        I thank this subcommittee for the opportunity to testify
    today. I am happy to answer any questions that you may have.
        Thank you.
        [Prepared statement of Ms. Wertheimer can be found on page
    28 of the Appendix.]
        Mrs. Wagner. The Chair thanks the witness for her opening
    statements and the Chair now recognizes herself for 5 minutes
    for questioning.
        Ms. Wertheimer, are FHFA's statutory supervisory
    obligations similar to the obligations of the Office of
    Comptroller of the Currency--the OCC--the Board of Governors of
    the Federal Reserve system--the Federal Reserve--or the Federal
    Deposit Insurance Corporation--FDIC?
        Ms. Wertheimer. We have compared--the answer is short--yes,
    they are.
        Mrs. Wagner. If it's fair to compare these agencies'
    requirements and guidance, how would you assess FHFA's
    standards against the other Federal financial regulators?
        Ms. Wertheimer. We have reported on this in a number of our
    reports. Based on those reports, I would provide you this--with
    this assessment.
        They are far more flexible and far less prescriptive than
    the guidance and requirements issued by the OCC, the Federal
    Reserve, and the FDIC.
        Mrs. Wagner. Is there--is there a reason why FHFA's
    standards differ so greatly from the other Federal financial
    regulators?
        Ms. Wertheimer. FHFA maintains that the--that Fannie Mae
    and Freddie Mac--and when I--when I talk about supervisory
    standards here and the differences, I am talking largely about
    the supervisory program for the enterprises, not for the
    Federal Home Loan Banks, because the Federal Home Loan Banks--
    FHFA does have far more prescriptive guidance that is far
    closer to the OCC and the Federal Reserve.
        The guidance is different when it comes to the enterprises
    and the position of the FHFA has been that Fannie Mae and
    Freddie Mac are not depository institutions and so much of the
    guidance and requirements that the OCC and the Federal Reserve
    have issued are not applicable.
        As you know from our reports, we don't agree with that
    assessment.
        Mrs. Wagner. Nor do I. Have you--have you asked FHFA to
    improve its requirements and guidance?
        Ms. Wertheimer. In multiple reports we have recommended
    that FHFA compare its flexible requirements and standards to
    those of the OCC, the Federal Reserve, and the FDIC.
        Some of those recommendations they've accepted, some they
    have not.
        Mrs. Wagner. Reading your reports, it appears FHFA has
    consistently rejected your recommendations to revise its
    requirements and guidance to align them with those adopted by
    other Federal financial regulators.
        What basis did FHFA give to reject your recommendations?
        Ms. Wertheimer. That it has the authority to issue its own
    requirements, standards, and guidance and that's what it's
    done.
        Mrs. Wagner. Together, Fannie Mae and Freddie Mac--
    collectively, the enterprises--owned or guarantee about $5
    trillion in mortgages and are among the largest financial
    institutions in this country.
        Should either enterprise sustain losses that exceed their
    decreasing capital reserves, the Treasury and thus the American
    taxpayer will be on the hook for those losses.
        FHFA is statutorily required to ensure the safety and
    soundness of the enterprises without prompt and robust
    attention to address the shortcomings that you have identified.
        Can safety and soundness of the enterprises be assumed from
    FHFA's supervisory program?
        Ms. Wertheimer. Well, as we cautioned, as you noted in your
    opening statement, in our December 2016 report, which was a
    roll-up of 12 prior reports, we cautioned our stakeholders that
    safety and soundness could not be assumed because of the--just
    because there was a supervisory program unless the deficiencies
    in that program were corrected.
        Now, we are not the backup regulator for FHFA and safety--a
    decision of safety and soundness, which HERA (Housing and
    Economic Recovery Act) vests solely in the FHFA director, is
    based on factors other than a supervision program.
        So I have no opinion on whether they are operating in a
    safe and sound manner. I can only tell you that the supervision
    program should not allow anyone--the existence of a supervision
    program should not allow anyone to assume the enterprises are
    being operated in a safe and sound manner.
        Mrs. Wagner. There you have it. I thank you.
        The Chair now recognizes the gentleman from Florida, Mr.
    Crist, for 5 minutes.
        Mr. Crist. Thank you. I yield my time to the Ranking
    Member.
        Thank you, Madam Chair.
        Mr. Green. I thank--I thank the gentleman very much and
    appreciate his fine service on this committee and his sharing
    the time with me today.
        For edification purposes, I did mention Florida earlier and
    our need to engage in some sort of oversight as it relates to
    HUD's transference of funds to the various States that have had
    some difficulties with the hurricanes.
        Let me please start where you were ending in terms of
    safety and soundness. You indicated that we should not assume
    that there is safety and soundness. Is that a fair statement?
        Ms. Wertheimer. No, I don't think it is, sir.
        Mr. Green. All right. Would you correct it then? Because
    it's been misunderstood.
        Ms. Wertheimer. What I have tried to convey in our reports
    and in my prior answer to Chairman Wagner is that the existence
    of a supervision program should not lead stakeholders to the
    conclusion that the enterprises are safe and sound because--
        Mr. Green. Excuse me, if I may intercede. Thank you.
        Should we assume that they are not safe and sound?
        Ms. Wertheimer. As I said before, we have not done
    sufficient--
        Mr. Green. Well, but here's what you're doing. By
    emphasizing it the way you are using the language, you're
    leading to believe that they may not be safe and sound and that
    is not what you intend to do. Am I correct?
        Ms. Wertheimer. I respectfully disagree with you, sir.
        Mr. Green. You do intend to cause the public to believe
    that they are not safe and sound?
        Ms. Wertheimer. No, sir. I--
        Mr. Green. Well, then you and I agree they are--that the
    public should not conclude from your testimony that they are
    not safe and sound.
        Ms. Wertheimer. That decision is vested by statute solely
    in the FHFA.
        Mr. Green. I do agree with you. But I don't agree that you
    should allow the verbiage to cause conclusions that are
    erroneous. Let's move on.
        Mr. Watt has indicated that they are not depository
    institutions, which is correct, and that does make a
    difference, does it not?
        Ms. Wertheimer. For some of the requirements and guidance
    you wouldn't need--wouldn't need guidance or standards that
    apply to the taking of deposits.
        Mr. Green. But for others you would. You said for some, but
    for others you would.
        Ms. Wertheimer. Right.
        Mr. Green. What about the others? Are they in
    conservatorship--the Fed, FDIC, OCC? They are not.
        Ms. Wertheimer. They are not.
        Mr. Green. They are not. So Mr. Watt has a dual purpose, if
    you will. He has more than the other agencies have as a
    responsibility and, as a result, comparing them can be
    difficult. But I appreciate your attempt at doing so.
        Now, you indicated that he accepted or--excuse me, FHFA
    accepted 95 of 118 recommendations?
        Ms. Wertheimer. Seventeen.
        Mr. Green. One hundred and seventeen recommendations--95 of
    117. Has it been your experience that the other regulators
    always accept 100 percent of your recommendations?
        Ms. Wertheimer. I don't have experience in that, sir. I've
    only been the inspector general of the--for the FHFA.
        Mr. Green. Well, based upon your reading--you're widely
    read--based upon your understanding of what happens at the
    other regulators from other intelligence that you have
    acquired, do the other regulators accept 100 percent of the
    recommendations all the time?
        Ms. Wertheimer. I don't have a factual basis to answer
    that. Ninety-five percent is a high percentage of agreement
    with our recommendations. There is no question about that and
    it is why I wanted to make that point to this subcommittee.
        Mr. Green. Well, I greatly appreciate you making that point
    and I will welcome my visit with you a little bit later.
        I'll yield back the balance of my time for now.
        Mrs. Wagner. Ranking Member yields back.
        The Chair now recognizes the gentleman from Colorado, the
    Vice Chair of the Oversight and Investigations Committee, Mr.
    Tipton, for 5 minutes.
        Mr. Tipton. Thank you, Chairman.
        Ms. Wertheimer, Section 1123 of the 2008 Housing Economic
    Recovery Act establishes that any new product offered by one of
    the enterprises must be examined and approved by the director
    of the FHFA and each request to offer a new product must be
    subject to a 30-day public comment period.
        Recently, Freddie Mac announced a new pilot program
    referred to as the Integrated Mortgage Insurance, or IMAGIN,
    that did not comply with HERA's statutorily required public
    comment period nor was it publicly approved by the FHFA.
        Have you heard any explanations from the director or other
    relevant employees as to why this process was not adhered to
    for the IMAGIN program?
        Ms. Wertheimer. That is not a program that we have examined
    and I don't lack--I lack any basis in which to answer that
    question.
        Mr. Tipton. OK. Well, thank you.
        Your office recently issued a report in March about another
    program, ``Single Family Mortgage Underwriting Standards and
    Variances,'' where you report that the FHFA has continuously
    failed to implement your office's best practices,
    recommendations for full visibility into the program, Single
    Family Underwriting Standards and Risks.
        FHFA has repeatedly laid out the courses of action to your
    office and failed to follow through on these plans. Why hasn't
    FHFA adopted those standards and what can be done about their
    lack of adherence?
        Ms. Wertheimer. As you know, we--that recommendation
    stemmed from a 2012 audit in which FHFA agreed that it needed
    greater visibility into the single family mortgage underwriting
    policies and variances because that is the foundation on which
    mortgages are written for single family buildings.
        And the agreement--FHA proposed to issue and did issue in
    2013 a single family process in which that review is--by which
    that review would be accomplished.
        In 2015, our Office of Compliance and Special Projects, and
    let me just say that is an office that was created during my
    tenure because my view, based on my experience in private
    practice, is that you need to hold an entity's feet to the
    fire.
        It's not enough for them to say they are going to do
    something. You have to go back and test whether in fact they
    have done it and whether in fact it remediates the deficiency
    that gave rise to the recommendation.
        In 2015, we went back and looked and we found that their
    process was not complied with by either enterprise. One
    enterprise submitted everything and one enterprise submitted, I
    believe, only five, and the head of the office claimed to us
    that she lacked visibility into the mortgage--single family
    mortgage underwriting standards for that enterprise.
        The FHFA agreed to reopen our prior recommendation and we
    were told that they would remediate it. There was a 2016
    process that was issued. It was not followed by either
    enterprise.
        The FHFA then began another effort to come up with a
    process they would follow. They've now committed that they will
    fix this by March 31, 2018.
        I won't know about that until we go back and fix it. It has
    been 6 years since we recommended that they improve their
    process and they have not.
        Is there a reason for that? As you know from our report,
    sir, there was a--the woman who was running the program had
    escalated her concerns within FHFA.
        FHFA had the authority as conservator to revise the letters
    of instruction and direct the enterprises to follow the
    process. It did not.
        Mr. Tipton. You just described 6 years of failure to
    comply. You talked about the importance of holding their feet
    to the fire, as you noted. What are the repercussions if the
    enterprises are not in compliance with the recommendations from
    your office?
        Ms. Wertheimer. Well, Congress has chosen to give
    inspectors general the power of the bully pulpit and that's
    about it. I have no, neither do any of my fellow inspectors
    general, have any authority to require agencies to do anything.
        We can recommend items that we think are practical ways to
    fix deficiencies but we are at the mercy, if you will, of the
    entity we oversee to make those changes.
        All we can do, or I believe all we can do, is to go back,
    as we have done here and call out the failure to follow those
    recommendations.
        Mr. Tipton. I thank you for that. And Chairman, I would
    think it would be appropriate for us on this IMAGIN program,
    given what we have just heard, to be able to request that you
    would look into, Ms. Wertheimer, into the practices surrounding
    that IMAGIN program and the processes that led to its
    implementation because we seem to be seeing a failure to comply
    statutorily and to sound recommendations coming out as well.
        Thank you, and I yield back.
        Mrs. Wagner. Absolutely we will make that a formal request
    to the IG. The gentleman yields back.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Trott, for 5 minutes of questioning.
        Mr. Trott. I want to thank the Chair for setting up this
    hearing this morning and thank Ms. Wertheimer for her time and
    for her work in what I am sure is a difficult job.
        The summary you gave of your written testimony was
    troubling, perhaps even shocking when you consider that we are
    talking about $5 trillion of exposure to the taxpayers.
        I want to ask a few questions about some things you said.
    The $484 million of fines and penalties--can you elaborate and
    give us some examples of what some of those penalties might
    have involved?
        Ms. Wertheimer. I misspoke, I believe, and tried to correct
    myself. I believe we are talking about the criminal fines and
    penalties.
        Mr. Trott. Right.
        Ms. Wertheimer. The number was $784 since October--million
    since October 2014. Those arise--you know, we have an Office of
    Investigations. We are the law enforcement arm of FHFA.
        Unlike some agencies that have--like the Department of
    Homeland Security has its own law enforcement branch, FHFA does
    not and so we act as the law enforcement agent for FHFA.
        Those are criminal matters that our agents investigated,
    brought to the attention of U.S. attorneys and the Department
    of Justice. Indictments were handed down and claims were either
    tried and brought to verdict or were pled out.
        Mr. Trott. OK.
        Ms. Wertheimer. So those are just--I think what your
    question is, is the $784 million related to misconduct of any
    kind by FHFA--
        Mr. Trott. Right.
        Ms. Wertheimer. --and the answer is it is not.
        Mr. Trott. OK. Thank you for clarifying that.
        So when you talked about the flexible supervisory standards
    and how they are inconsistent with the private sector and some
    of the oversight of the Fed and the OCC, what's the
    justification for that difference?
        Ms. Wertheimer. As our reports make clear, in any number of
    areas we have compared FHFA's standards to those of the Federal
    Reserve for the OCC or the FDIC.
        Apart from the assertion that they are not depository
    institutions, the response has been we make our own rules.
        Mr. Trott. Right.
        Ms. Wertheimer. We do it the way we want to do it.
        Mr. Trott. You said that earlier in response to a
    question--
        Ms. Wertheimer. Yes.
        Mr. Trott. --and do you think any of the reasoning is
    perhaps motivated by a political agenda, which is basically we
    need differential treatment for the GSEs because some believe--
    I am not among them--that the Federal Government needs to be
    involved to whatever extent necessary to make sure every
    American should own a home? Is there a political motivation
    behind this disparity?
        Ms. Wertheimer. I have not seen any evidence of that.
        Mr. Trott. OK.
        Ms. Wertheimer. I think, under HERA, the agency has dual
    responsibilities. They may be in conflict but they are dual--
        Mr. Trott. OK.
        Ms. Wertheimer. --and to ensure the safety and soundness of
    these enterprises is a requirement of HERA.
        Mr. Trott. I was thinking a good argument could be made
    that an entity that's in conservatorship should be subject to
    more rigorous standards.
        Ms. Wertheimer. I think it should be subject to at least
    the same standards that the Federal Reserve applies to SIFIs.
        Mr. Trott. Right. Let's talk about your 117
    recommendations, 95 of which you said they agree with. How many
    have they actually implemented?
        It's one thing to agree with the recommendation and concept
    but then to take action to implement the change or
    recommendation is another thing.
        Ms. Wertheimer. It is. Let me give you those numbers
    because I have them. Give me a moment.
        Of the 117 recommendations we made in which they've agreed
    to 95, we have 74 of them are closed, meaning they have
    submitted to us in this situation evidence of compliance or
    implementation, and we have determined, based on what we have
    received there is evidence of some implementation. There are 43
    that remain open.
        Mr. Trott. Great. That's helpful. Thank you.
        Now, my friend from Texas took issue with your testimony
    insofar as you suggested that because of the inconsistent
    application of standards and oversight we really can't properly
    assess the risk profile of the GSEs and whether they do pose a
    systemic threat.
        I think that on its face is significant just whether
    you're--whether you're suggesting they are at risk or not,
    isn't that something that should give us pause--that we can't
    properly assess where the GSEs are today because the standards
    are either unclear or not applied consistently?
        Ms. Wertheimer. We chose our words carefully when we wrote
    the roll-up report and with the title of safety and soundness
    should not be assumed.
        It is typical, I think, for stakeholders to believe that
    with a supervision program that is robust that everything is
    fine--that there is no problem with the regulated entity.
        Our point here was the supervision program exists. There
    are deficiencies. They haven't been corrected.
        There may be fine reasons for Director Watt to conclude
    that they are safe and sound and that is his mandate and we
    have not gone out of our lane and rendered any opinion on that.
    But the supervision program, based on the 29 reports we have
    issued, has significant deficiencies.
        Mr. Trott. Thank you so much. I am out of time.
        I sure hope they are safe and sound because some day
    Freddie Mac is going to need $100 million to build out its
    offices like Fannie Mae.
        Thank you for your time this morning.
        Mrs. Wagner. The gentleman's time has expired.
        The Chair now recognizes the gentlewoman from New York, Ms.
    Tenney, for 5 minutes.
        Ms. Tenney. Thank you, Chairwoman Wagner, and thank you,
    Ms. Wertheimer, for coming here today. I just have a couple of
    quick concerns and one of mine is, obviously, we're--your
    entity is--either stores, processes, or has control over $5
    trillion in secondary mortgage assets.
        When it comes to personal information and the storage of
    that, especially dealing with the mortgage--the confidential
    information that you hold for people all across the Nation, it
    indicated that you have not done any supervisory activities
    dealing with cybersecurity in the 2016 examination cycle.
        Can you comment on that and tell me if that's something in
    the works in light of Equifax and so many of the breaches we
    have had and the constant attempts on Government to breach into
    our sensitive security measures?
        Ms. Wertheimer. Look, since I've--cybersecurity for me has
    been a top priority. It was a top priority when I was in the
    private practice of law. It remains a top priority.
        As the inspector general and the Office of the Inspector
    General, we do not have personal information regarding the
    mortgages that are purchased or guaranteed by Fannie Mae and
    Freddie Mac. That data resides with them and FHFA is the--
        Ms. Tenney. Can I reclaim my time? Resides with them
    meaning the banking institution or the individual holders?
        Ms. Wertheimer. Resides first with the originator of the
    loan and it--
        Ms. Tenney. Right. OK. The banking institutions.
        Ms. Wertheimer. Then if--to the extent those mortgages are
    purchased by Fannie Mae or Freddie Mac, it resides with those
    two enterprises.
        FHFA, as conservator, can access because it has the right
    title and interest under HERA as conservator to obtain it, we
    do not because we are the inspector general.
        If we are looking at a particular loan program as we did
    recently with respect to the 97 percent loan programs that were
    begun in December 2014, we can ask for specific data on
    specific mortgages.
        We don't have that data in our database. Now, your
    question, I think, as I understood it, went to why--FHFA's
    supervisory plan for the 2016 supervisory cycle planned a
    number of supervisory activities to examine Fannie Mae's cyber
    risk management practices.
        As our audit found, it concluded none of those activities.
    Does that concern me? You bet. Does it keep me up at night? You
    bet.
        Ms. Tenney. Let me ask you something further on that
    because I appreciate that it is a very--it's a big concern and
    I did a lot of mortgages in my past life as a bank attorney.
        So many of--much of this information, and we did a lot of
    GSE-type loans backed either by numerous organizations--a lot
    of this information actually is in the public domain registered
    with banking requirements by State law and Federal law where
    these loans are actually being recorded with clerks across the
    country, accounting clerks, particularly in New York State,
    where I reside. And so my concern is that those are
    requirements coming from the FHA and from your side as well.
        So all these documents are in the public domain with county
    clerks. Is there anything that you do to guard the consumers
    against the type--these filings that could be--provide exposure
    to cyber--to cyber or personal theft of whether it's Social
    Security numbers, addresses, banking information that end up in
    a county clerk's--is that something that you would guard
    against when you're actually approving a loan or providing a
    secondary mortgage market to them?
        Ms. Wertheimer. Yes. So, again, we don't do any of that. We
    are here to look at what FHFA has decided to do with that
    information as conservatory and--
        Ms. Tenney. But wouldn't that be an oversight function you
    would have when you go to--to make sure that these things
    aren't disclosed and part of your whole package of providing
    some kind of protection for consumers when their personal data
    could end up online when they actually go to seek some kind of
    loan with a secondary mortgage loan?
        Ms. Wertheimer. So let me try to explain that.
        FHFA has delegated as conservator to the enterprises the
    responsibility for cybersecurity protection. It is up to the
    enterprises to put into place rigorous controls to either
    prevent the inappropriate disclosure or at least mitigate that
    risk.
        Ms. Tenney. Right. If they don't take that, what is your
    action if that's not done? Because you've indicated that this--
    there was no protection in place under the 2016 guidance.
        So what would you do to protect the consumer, going
    forward, as something you would do proactively now in light of
    what the 2016 showed that you didn't do?
        Ms. Wertheimer. OK. So we didn't--it's not that we didn't
    do it. FHFA develops a supervisory plan every year what it's
    going to examine.
        What we do is go back through our audit and evaluation
    function and determine whether they were--they in fact effected
    their supervisory plan.
        We had two audits we issued in 2015.
        Ms. Tenney. I think my time has expired. Can you quickly
    get to--so it covers cybersecurity risks?
        Ms. Wertheimer. Absolutely.
        Ms. Tenney. OK.
        Ms. Wertheimer. And that's what our 2016 audit found that
    in fact, notwithstanding the plan, they had not covered--they
    had not conducted any of the planned activities.
        We wrote about it to call it out to our stakeholders, yes,
    we are concerned. We think it is an unsafe and unsound
    supervisory strategy and that is what we reported.
        Ms. Tenney. Thank you for your testimony. Thank you.
        Mrs. Wagner. The gentlelady's time has expired.
        The Chair now recognizes my friend and colleague, the
    gentleman from Missouri, for 5 minutes.
        Mr. Cleaver. Thank you, Madam Chair.
        Ms. Wertheimer, thank you for being here.
        I work a lot with Federal Home Loan Banks and--of Des
    Moines and one of my concerns is Federal home loans and FHFA--
    their connection.
        I don't understand--you have the--as the IG you have the
    responsibility, I am assuming, for both.
        If you had your druthers, would you say that--would you
    want to disconnect between the two?
        Ms. Wertheimer. As you know, until 2008 they were
    disconnected.
        Mr. Cleaver. Yes.
        Ms. Wertheimer. The Federal home loan bank board
    supervised, and its predecessor, supervised the Federal Home
    Loan Banks and OFHEO supervised Fannie and Freddie.
        A decision was made by Congress to put them together. Our
    experience in--as the inspector general overseeing the
    supervision of the Federal Home Loan Banks by FHFA has been--
    that supervision has been pretty good for a number--I mean,
    there were a number of factors you can draw from our reports as
    to why that is.
        The guidance is different. I mentioned previously that the
    guidance and requirements that are in place for the enterprises
    are very flexible.
        That isn't the case with the Federal Home Loan Banks. Their
    guidance and requirements tend to be far more prescriptive and
    much more similar to that of the OCC and the Federal Reserve,
    number one.
        Number two, by statute, they regulate--pardon me, the
    supervisors are required to examine the Federal Home Loan Banks
    every year. But our experience is, in fact, they complete that
    mission and issue reports of exam on time.
        They issue them to the boards of directors as their
    requirements provide and they get a certification from each
    board, and we have looked at this in our reports that normally
    the board has reviewed it but has agreed to remediate any
    deficiencies identified.
        In the 10 reports we have issued of the 85 that involve the
    Federal Home Loan Banks and many--I think it's fair to say 6 of
    them compare Federal home loan bank examination practice to the
    supervision practice for the enterprises.
        We found it far more rigorous. They adhere to their
    standards and we have only had two recommendations to address
    deficiencies or shortcomings we identified, both of which were
    adopted by the FHFA and implemented.
        Mr. Cleaver. Well--
        Ms. Wertheimer. So at this point in time, there's--this is
    a Congressional decision but I would say to you the supervision
    of the Federal Home Loan Banks seems to be working quite well.
        Mr. Cleaver. Well, that's good news to me and probably
    Congressman Green because we were a part of putting them
    together, and as we move further and further away from the
    economic collapse of 2008, I think it's worth exploring and
    examining many of the decisions we made that we believed, too,
    at that time to have been extremely important in dealing with
    what was going on in the country as in relation to housing.
        So I appreciate your--for me, that was feedback and some
    confirmation that the decision we made was the correct one.
        Madam Chair, I yield back the balance of my time.
        Mrs. Wagner. The gentleman yields back.
        The Chair now recognizes the gentleman from Georgia, Mr.
    Loudermilk, for 5 minutes.
        Mr. Loudermilk. Thank you, Madam Chair, and thank you for
    being here, and I can--I can assure you that I am very
    interested in what you have to say and you will have time to
    answer the questions.
        I want to continue on with the thing that Ms. Tenney was
    asking about and predominantly I want to talk about the
    cybersecurity at the GSEs.
        As you know, they store an enormous amount of data and that
    is a big concern of mine, and I've said this over and over
    again--when I was in the military, worked in intelligence, and
    in the IT field, we had the principle of you don't have to
    keep--you don't to protect what you don't have.
        In other words, if you don't absolutely need the
    information, you need to get rid of it. Otherwise, you're
    responsible for protecting it and you become more vulnerable.
        And I know that the GSEs have a tremendous amount of data
    and especially with more than $5 trillion in assets, and I was
    wondering if you could tell me what cybersecurity controls at
    the FHFA are in existence that maybe your office has identified
    as problematic?
        Ms. Wertheimer. I don't think we have done the work that
    would lead me to have a basis for an opinion, to answer your
    question.
        Mr. Loudermilk. OK.
        Ms. Wertheimer. It is--what we have identified in reports
    we have issued is that FHFA itself has identified deficiencies
    in the systems.
        There were legacy systems. There was unsupported software.
    There were--there has been, as you know, a change in philosophy
    between Acting Director DeMarco and Director Watt.
        Director Watt has repeatedly stated that his intention is
    to run the conservatorships until Congress develops a solution
    to housing finance.
        So if you're going to run the enterprises as opposed to
    wind them down, you need to have some kind of cybersecurity
    infrastructure that major financial institutions, others
    outside the conservatorship have, and given that money was not
    spent on cybersecurity--that's a misstatement.
        Given that the systems were not upgraded on a repeated
    basis prior to Director Watt's tenure, it is fair to say there
    has been an enormous emphasis on upgrading those systems and
    the software, and our reports talk about FHFA's issuance, if
    you will, of--they are called matters requiring attention.
        They are the most significant supervisory deficiencies and
    FHFA's oversight of the enterprise's efforts to remediate those
    deficiencies.
        But to your question, I have--I am not able to answer the
    precise systems that would fully respond to your question.
        Mr. Loudermilk. Maybe you can answer this. Did the GSEs
    collect and store personally identifiable information (PII)?
        Ms. Wertheimer. Absolutely.
        Mr. Loudermilk. And that brings--a level of concern is the
    PII and the amount and the data, and do you know what type of
    PII that is included? Is it Social Security numbers, birth
    dates, names? Is it the entire gamut?
        Ms. Wertheimer. I think it's all of that and more. When I
    first joined FHFA OIG as inspector general, we issued a white
    paper talking about kinds of information as well as the
    different ways that that information was vulnerable to attack
    and, you know, it's--we just saw, I think, last weekend that
    two major retailers had more than 5 million of their charge
    card holders hacked.
        I mean, hacking is a fact of life today.
        Mr. Loudermilk. Yes.
        Ms. Wertheimer. So to your answer, yes, they--
        Mr. Loudermilk. Yes, and I--
        Ms. Wertheimer. --they do have a lot of PII and they retain
    it in connection with their business.
        Mr. Loudermilk. And just shift directions for the last few
    seconds we have here. Are you aware of any type of lobbying
    activities being done by Fannie and Freddie?
        Ms. Wertheimer. I am aware that HERA has prohibited that
    activity. It has not come to my attention that they are engaged
    in any lobbying on the Hill.
        Mr. Loudermilk. OK. Thank you.
        I yield back.
        Mrs. Wagner. The gentleman yields back.
        The Chair now recognizes the gentlelady from Ohio, Mrs.
    Beatty, for 5 minutes.
        Mrs. Beatty. Thank you, Madam Chairwoman, and to our
    Ranking Member, and thank you, Madam Inspector General, for
    your testimony and for your work and for being here today.
        In your report--one of your reports you talked about the
    spending of the $171 million by Fannie Mae in its Washington,
    D.C. headquarters.
        I can remember when Director Watt was here. Many of my
    colleagues also talked about that and asked questions about it,
    and as I recall there was a lot of time spent comparing it to
    reports of health and wellness for staff to be able to feel
    secure, to be able to walk, to not have to go outside and
    around to use the pathway.
        And since then, I did do some reviewing of other--whether
    it was private sector facilities to see how employees felt
    about it and, certainly, I think it is not only the quantity of
    what we expand or put in something but it is the quality of the
    outcome as well.
        So I just wanted to interject that. Additionally, you
    questioned the comps, I believe, used by the FHFA to justify
    its spending. I was really fortunate enough to be speaking at
    an event with the Ohio Association of Realtors at their annual
    legislative conference in Columbus because we are celebrating
    the 50th anniversary of the Fair Housing Act.
        And while I was there to speak about the passage of that
    historic bill that was passed in 1968, it made me think about
    how realtors use comps in real estate business when I read your
    report and your testimony.
        In your testimony, you question the cost associated with
    Fannie Mae's new office spaces in Washington and in Dallas,
    Texas.
        You also questioned the standards or the comps used by the
    FHFA to justify some of these costs, and certainly, the
    standards or the comps used by FHFA for justification of some
    of those costs was against the upgrades at major financial
    institutions and larger public sector agencies.
        To me, this seems to be a reasonable comparison, and while
    we have heard that Fannie Mae--I'll get this out of the way--is
    in conservatorship, it seems to me that it is a reasonable
    comparison because Fannie Mae is a large financial institution
    with $110 billion revenue in 2017 and it's controlled by a
    large public sector agency, FHFA.
        So could you share with me why did your report question the
    standards used?
        Ms. Wertheimer. Our report--all inspectors general reports
    should, according to our own professional standards, contain
    four elements: Condition, criteria, cause, and effect.
        Here, the condition was the build-out--what was being spent
    on the build-out and the criteria was not a criteria that what
    JPMorgan Chase or Bank of America would spend.
        The criteria set by this Congress and HERA, when an
    entity--a regulated entity by the FHFA is put into
    conservatorship, the conservator has an obligation to preserve
    and conserve.
        Now, what does that mean? In our first report in May 2016,
    we set out our view of what that meant--what are the upgrades,
    if you will, that Fannie Mae has sought, what are their
    efficiencies, do the efficiencies warrant the cost, and is the
    cost appropriate for an entity in conservatorship with an
    uncertain future in a building it does not own. That is how we
    understood preserve and conserve.
        It its response, FHFA didn't take issue with that standard.
    In fact, Director Watt in his response explained, well, there
    may be short-term costs to the spiral staircases but, over
    time, there are greater efficiencies.
        He offered the same with the walkways and said, yes, of
    course we are going to consider cost efficiencies and whether
    it's warranted for an entity in conservatorship.
        We went back a year later to see what had happened and what
    we found was we spoke to the oversight committee within FHFA--a
    committee that was put together in response to a
    recommendation, as well as the expert--and what we were told
    was by each person we interviewed--and we report that in our
    September 2017 report--they didn't consider cost efficiencies.
        They didn't consider whether it was warranted for an entity
    in conservatorship with an uncertain future in a rental
    building to spend that kind of money.
        And for that reason, we came to the view that the standard
    wasn't met and we heard something different, and FHFA's
    response was, well, that we did consider cost efficiencies.
    That was not what our field work showed and that's what we
    reported.
        Mrs. Beatty. Thank you.
        Madam Chairman, in light of us not having enough members
    here, may I have an additional minute to--
        Mrs. Wagner. Without objection.
        Mrs. Beatty. Thank you. Let me just say thank you for that
    and we will continue probably to have discussions on that and
    the quality of it and how narrowly focused sometimes we are
    when we are trying to make those determinations and we know
    that there is not another building or entity like this. So it
    does make it very difficult from where I sit.
        But last, I want to thank you and I also want to thank you
    for sharing with us the number of responses that Director Watt
    did provide and am pleased that you stated that that is the
    majority of being able to meet the standards and to meet 95 out
    of 100 and some.
        I want to thank both of you, and I'd also, Madam Chair,
    would just like to conclude, because we do spend a lot of time
    here and we are fortunate to have a Chairwoman of Oversight
    that allows us to get engaged.
        So maybe one of the things that we can continue to work on
    is for Congress to be more engaged in the actual housing
    finance reform, and I think that's one of the things that
    Director Watt and his just maintaining it--I think he was
    waiting on Congress to be more engaged.
        So I think I'd like to say to Director Watt, who was one of
    us and served admirably here on this committee, that for the
    things he's been able to accomplish over there has been short
    of miraculous. It's a new entity. You, being relatively new,
    the only second director there, I can imagine to have to always
    find things that are thought wrong can be very challenging. So
    I'd like to thank you for your service and thank you, Madam
    Chairwoman.
        Mrs. Wagner. I thank you.
        Ms. Wertheimer. Might I respond to one thing? We don't
    start our work with an objective that says prove that FHFA
    failed to do X. We identify risk areas. We get input from our
    stakeholders.
        Whether it's FHFA employees, Members of Congress, reading
    reports issued by think tanks, we come up with project ideas.
    We then do the field work.
        We report what we find. I would only direct your attention
    to, for example, the two audits we recently issued on the 97
    percent loan to value program.
        When that program was tried as a pilot program under
    Director Watt's leadership there was a lot of criticism about
    that program, that it was opening the credit box unduly, that
    it was going to cause--that it was putting taxpayers at risk
    because of the opening of the credit box.
        What we found and what we reported was a well over 97
    percent rate of compliance by the originating banks with the
    requirements that FHFA established in December 2014.
        So we are not only here to find and report bad news. We are
    here to examine risk areas and report what we find, good or
    bad.
        Mrs. Beatty. Thank you. That's a good note to end on, that
    there were some very good things found and I really appreciate
    your adding that.
        Thank you.
        Mrs. Wagner. The gentlelady from Ohio's time has expired
    and I thank her for her comments, and I will say that I plan
    on, in my close, talking about perhaps more ways, as you well
    put, Mrs. Beatty, for this committee to be more and Congress to
    be more involved in the process.
        Moving on, the Chair now recognizes the gentleman from
    Indiana, Mr. Hollingsworth, for 5 minutes.
        Mr. Hollingsworth. Well, happy Thursday. I appreciate you
    being here and have to say that I've heard from so many people,
    both sides of the aisle, both staffs, how great, how diligent,
    how thoughtful you are at every turn and really appreciate
    that.
        And I can assure you my constituents, Hoosiers back home,
    rest well at night knowing that someone is watching all aspects
    of at least one area of Government for them.
        I did want to talk about new products and some of the new
    products that are currently being offered and some real
    concerns about those from two aspects.
        The first aspect is the potential for them to transition
    from secondary market focus, secondary market activity, to
    primary market activity.
        I know that the IMAGIN product has been brought up and I
    know that you don't want to address that directly. But I just
    want to talk about the general big concept here of making sure
    that what I think is if not written into the specific language
    of the charter, certainly the spirit of the charter, that these
    two entities would operate in the secondary market and are
    responsible for developing a robust secondary market and that
    these products may be transitioning to the primary market.
        And I think the history of Government-conferred advantaged
    companies entering into environments where others don't have
    those same advantages is one wrought with failure and problems.
        When you drop a lion onto the Serengeti with a bunch of
    antelope you don't get more antelope and more diverse species.
    You get a fatter lion.
        And so I wanted to make sure that some oversight was being
    provided to--that they are not transitioning from secondary to
    primary market, and some of the newer products that are being
    offered are an attempt to do so or, in your mind, aren't
    beginning that process of crossing that bright line that we
    have had for the last 50 years?
        Ms. Wertheimer. We haven't done the work for me to render
    an opinion on that. I certainly have heard concerns from two
    members of the committee about that and we will factor that
    into our work plan.
        Mr. Hollingsworth. OK. But it is something, I guess, from a
    broader perspective that is worth watching, would you say?
        Ms. Wertheimer. Absolutely.
        Mr. Hollingsworth. Great. Thank you.
        Ms. Wertheimer. You know, we have a lot of--we do a lot of
    watching at the--
        Mr. Hollingsworth. I have no doubt. I have no doubt. It is
    a big purview to watch.
        But there are a lot of things that you could watch in small
    ways in making sure that every taxpayer dollar is spent as
    effectively, as efficiently as possible.
        But this could be a really large problem down the road. It
    could create really catastrophic results for taxpayer losses in
    companies having these advantages and operating in an
    environment where others don't, especially when that same
    company gets to set the standards for others that might compete
    with that primary--in that primary market. I think that's
    really important.
        Ms. Wertheimer. No, and I hear that. We have established an
    Office of Risk Analysis--
        Mr. Hollingsworth. Great.
        Ms. Wertheimer. --precisely to monitor emerging risks
    because the first inspector general, Steven Linick, who was
    very helpful in sharing his information about the FHFA and
    about the OIG with me, said, this IG is unlike many IGs.
        You're not doing autopsies on contracts that have already
    been led and figuring out whether there is any waste, fraud, or
    abuse. You're operating on a live patient without a lot of
    anesthetic.
        Mr. Hollingsworth. Yes.
        Ms. Wertheimer. So they are open institutions. When we
    speak, we have to be measured in what we say.
        Mr. Hollingsworth. Yes.
        Ms. Wertheimer. But we cannot close our eyes to emerging
    risks and just, oh my goodness, this catastrophe is upon us.
    And so we have, in the last semi-annual period, issued three
    white papers talking about adjustable rate mortgages, which are
    on the rise at custodial institutions and the like and we
    continue to--I mean, this is an area of emerging risk. We need
    to look at it.
        Mr. Hollingsworth. And I love that you're focused on it
    because, ultimately, we do have the economic tailwinds today,
    and that is the moment when risk gets built, that risk comes to
    fruition, and comes to losses at times of economic recession.
        Ms. Wertheimer. Absolutely.
        Mr. Hollingsworth. The last thing I wanted to talk about--
    the second point with regard to this--is you said an open
    institution and one of the concerns that many have raised about
    some of the new products that are being offered is that they
    are being offered without appropriate public comment period
    beforehand and there is not the same level of transparency that
    we had come to expect or that taxpayers demand or are written
    into the previous act.
        Do you have any comment? I think there are four new
    products that are now being offered without having gone through
    that 30-day public comment period that's required.
        Ms. Wertheimer. I don't. I am sorry.
        Mr. Hollingsworth. Well, that you were watching is
    important in making sure that taxpayers not only are being
    looked out for on present and current expenses but also for
    risk that may be building or--
        Ms. Wertheimer. Absolutely.
        Mr. Hollingsworth. --the emergence of risk in the system or
    just the gradual grabbing of more and more purview by these
    institutions. That's what got us into the problem before and I
    want to make sure that we don't have that same problem 10, 15,
    5 years from now.
        Ms. Wertheimer. I do, too, and it's why this Office of Risk
    Analysis is critical for us as well as the fact that we have--
    there have been many changes we have put into place because my
    view is financial crisis--if you were a student of housing
    finance you may have been predicting it in 2004 and 2005. Most
    Americans, including myself, were sort of hit upside the head
    when it started and how fast it escalated.
        We don't have the luxury of taking 18 to 20 months to do an
    audit or an evaluation. We have to look at something quickly,
    thoroughly, and report our findings, because if there are
    problems we need to identify them, propose recommendations, and
    alert our stakeholders.
        Mr. Hollingsworth. Well, this is an important area that
    certainly I and, as you alluded to, several other members are
    very concerned about and would love to have your continued
    watchful eye on that.
        And as I started with, I've heard from everybody just how
    diligent and thoughtful you are. You have certainly
    resoundingly reinforced that opinion today, and I appreciate
    you being here.
        Ms. Wertheimer. Thank you very much.
        Mrs. Wagner. The gentleman's time has expired.
        The Chair now recognizes the Ranking Member, the gentleman
    from Texas, Mr. Green, for 5 minutes.
        Mr. Green. Thank you, Madam Chair.
        As I indicated earlier, I have some news articles that I'd
    like to place into the record, one styled, ``CFPB May Fine
    Wells Fargo as Much as a Billion Dollars''--that's from
    MarketWatch--another from Reuters Exclusive--``U.S. Watchdog
    Seeks Record Find Against Wells Fargo for Abuses''--another--
    this is from the American Banker--``CFPB's Mulvaney Strips His
    Fair Lending Office of Enforcement Powers.''
        Mrs. Wagner. Without objection.
        Mr. Green. Thank you, Madam Chair.
        Let's quickly go to the fines--the criminal fines. Who were
    these fines levied against, please, ma'am--Madam?
        Ms. Wertheimer. So they are all over the place. Some were
    against institutions. Some are against individuals.
        Mr. Green. Were any levied against FHFA?
        Ms. Wertheimer. Not--to the best of my knowledge, they were
    not.
        Mr. Green. OK. When you say to the best of your knowledge,
    based on the empirical evidence that you have, in other words.
    Is that correct?
        Ms. Wertheimer. I am not aware of any that were levied on--
    criminal fines levied on FHFA. I am just not aware of any
    during my tenure.
        Mr. Green. Well, if there were some, you would be aware,
    wouldn't you?
        Ms. Wertheimer. I surely would hope so.
        Mr. Green. OK. Well, why do you--why do you choose to
    engage in this sophistry to the extent that you leave the
    notion that there may be something shady there but I don't know
    about it?
        FHFA hasn't had criminal fines levied against it, has it?
    It has not. Let's move on.
        You indicate on page 11 of your statement to the
    committee--the full statement--page 11, first paragraph, last
    sentence. You indicate that, ``The work that we do does not
    provide us with a sufficient basis on which to make such a
    safety and soundness assessment for either enterprise.''
        You're talking about safety and soundness, and you indicate
    that your work doesn't provide you a basis for making an
    assessment of safety and soundness.
        Is that a fair statement of what you stated?
        Ms. Wertheimer. That is correct.
        Mr. Green. OK. So if this is a fair statement of what you
    stated, why would you go on to make the statement that safety
    and soundness should not be assumed?
        Now, let me tell you why I am pursuing this. In this area,
    your diction has to be superb and it has to be superb because
    markets move on safety and soundness.
        We would not want the public to conclude that there may be
    a safety and soundness issue that you are aware of but you're
    not reporting.
        You have no evidence of there not being--of there being
    something other than safety and soundness at FHFA. So I want to
    clarify this with you because you've stated it two ways--this
    language two ways in your report.
        In one, you use the language safety and soundness should
    not be assumed. But then in another, you indicate that your
    caution, however, should not be understood as our having
    concluded that the enterprises are not being operated in a safe
    and sound manner.
        Both of those are your statements.
        Ms. Wertheimer. Correct.
        Mr. Green. OK. So can we say to the public, the public that
    can cause markets to move based upon words that you
    articulate--can we say to the public that you are not here
    today to imply that FHFA is something other than safe and
    sound?
        Ms. Wertheimer. Well, FHFA is the conservator of these
    enterprises. It is also the supervisor. It's charged under HERA
    with making the safety and soundness decision for these
    enterprises and for the Federal Home Loan Banks.
        It's also charged with reporting that to the Congress every
    year. What we are saying is the public often assumes that the
    existence of a supervision program, that someone's on the beat,
    means the entities are safe and sound.
        Mr. Green. Are you--are you concluding that the safety and
    soundness report from the authorized agent to produce such a
    report is incorrect?
        Ms. Wertheimer. I think I am clear that we are not saying
    that.
        Mr. Green. OK. So then you walked into this when you
    decided you were going to make a commentary about the safety
    and soundness when that really is not within the purview of
    your responsibilities. You don't make safety and soundness
    decisions about FHFA.
        Ms. Wertheimer. And we did--sir, we never said we did.
        Mr. Green. All right. Well, I appreciate your being here
    today and thank you for your testimony.
        Mrs. Wagner. The Ranking Member's time has expired.
        The Chair now recognizes the gentleman from Tennessee, Mr.
    Kustoff, for 5 minutes.
        Mr. Kustoff. Thank you, Madam Chair, and I thank the
    witness for appearing this morning. We appreciate it.
        Your office prepared a number of reports describing the
    cost of building renovations for Fannie Mae. If you could,
    could you walk us through some of the improvements your office
    identified that you thought were noteworthy where there are
    costs and expenditures?
        Ms. Wertheimer. I'd be happy to do that.
        We, as our first report indicated, received a whistleblower
    complaint on this. We set out, as we do with all whistleblower
    complaints--we triage them because we can't--we don't have the
    bandwidth to look at each and every complaint.
        We decided that this complaint merited an administrative
    inquiry and we went about looking to figure this out. What we
    learned was that the landlord, Carr Properties, had given
    Fannie Mae a very generous tenant improvement allowance by the
    terms of this area--$120 a square foot.
        And so what we were looking to see was OK, are they
    spending within the tenant improvement allowance, which would
    cost them nothing, or were they in excess of the tenant
    improvement allowance.
        At that time, FHFA did not have an expert. Fannie Mae had
    retained an expert. Fannie Mae's expert told us that in his or
    its, pardon me, experience $164 a square foot was what you
    could--what a--Class A is the best space you can get, and this
    is new space, but what a--what you would expect a tenant moving
    into Class A space to spend on improvements and the like.
        We then looked at what the projections were, and to be
    clear, they were only projections at the time, of what Fannie
    Mae planned to spend.
        At that time, they were roughly $252 a square foot, which
    was well in excess of what Fannie Mae's own expert said was
    customary--not necessary but customary.
        We began asking questions. The gentleman at FHFA who was in
    charge of the oversight had told our investigators, golly, we
    have no exposure here--we are capped at $120 a square foot, and
    if Fannie Mae was going to exceed that, why, they would have
    told us that.
        Well, at that point, their own budget showed $252. I
    believe it may be $253 a square foot. We, in the course of our
    looking over 8 weeks, the budget went down to $235 a square
    foot.
        We issued the management alert in June 2016 in which we
    said, look, you're in conservatorship, Fannie Mae. You, FHFA,
    while you delegated the build-out costs to Fannie Mae, you--
    they are your agent.
        You're ultimately, as conservator, responsible for that.
    The statutory standards set by Congress is preserve and
    conserve. Whatever that means it cannot mean $252 a square foot
    when law firms, lobbying shops, et cetera, are paying $164 a
    square foot.
        And we identified what our view of what conserve and
    preserve meant, and I identified that earlier--what are the
    efficiencies, do they warrant the cost, are they appropriate
    for an entity in conservatorship in a space it does not own and
    it may not be existence for 15 years.
        So while I certainly appreciate employees enjoying open
    spaces and crystal walkways, et cetera, I can tell you I
    practiced law in a firm where the carpet was coming up, where
    the mail chute was jammed, and I had the best time of my life
    there. We didn't need to have luxuries in order to practice law
    well.
        But be that as it may, Director Watt agreed that our
    recommendations and standard would enhance the oversight. And
    so we came back a year later because the last thing I wanted or
    anyone in my office wanted was for the building to open and for
    the Congress to say, well, where was that IG.
        So we went back--what's gone on. Well, we interviewed the
    committee that was responsible. We interviewed the expert who
    was retained.
        What did we find? Well, we have a cafeteria that's being
    put in which the experts said would be underutilized. We have a
    third generator which was put in. The experts said, well,
    Fannie wanted it.
        We have a broadcast studio--Fannie wanted it. We have
    finishes, lunch huts, pergolas. It is a--it is, as the expert
    wrote in the report, it felt that the standard for the--for the
    baseline, if you will, for Washington, D.C., had gone up from
    $164 to $175. I am leaving out the change.
        So it only looked at improvements and upgrades above $175
    and that's where that $32 million comes from. It's above and
    beyond the $175 a square foot.
        Mr. Kustoff. Thank you very much. My time has expired.
        Mrs. Wagner. The gentleman's time has expired.
        Without seeing any further members to question, let me
    close by saying that today's hearing has raised important
    questions that are extremely concerning.
        It appears that statutory discretion under HERA has led to
    a lack of oversight at the FHFA, which, in turn, has led to
    objectively bad performance as measured by the independent and
    nonpartisan IG.
        I hope my friends on the other side of the aisle see this
    and will work with us on reforming HERA. I also have to note
    that our concerns are exacerbated by the fact that Director
    Watt recently failed to substantially comply with the committee
    records request seeking to further explore the important issues
    raised by the IG--Director Watt's statutory discretion and
    perhaps, more importantly, Director Watt's failure to fully
    implement many of Ms. Wertheimer's common sense
    recommendations. Simply put, I will not allow failure to comply
    with many records requests to stand.
        Again, I want to thank Ms. Wertheimer for her testimony
    today and without objection, all members--
        Mr. Green. Ms.--Madam Chair, objection. I have a question.
        I would like unanimous consent to place a response to your
    statement in the record, if that can be done without objection.
        Mrs. Wagner. Without objection.
        Mr. Green. Thank you.
        Mrs. Wagner. Again, I want to thank Ms. Wertheimer for her
    testimony today. The Chair notes that some Members may have
    additional questions for this panel, which they may wish to
    submit in writing. Without objection, the hearing record will
    remain open for 5 legislative days for Members to submit
    written questions to these witnesses and to place their
    responses in the record. Also, without objection, Members will
    have 5 legislative days to submit extraneous materials to the
    Chair for inclusion in the record.
        This hearing is now adjourned.
        [Whereupon, at 11:25 a.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 April 12, 2018

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