[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
                             
                   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]