Review of FHFA’s Tracking and 

Rating of the 2013 Scorecard 

Objective for the New Representation 

and Warranty Framework Reveals 

Opportunities to Strengthen the 

Process

Audit Report  AUD-2016-002  March 28, 2016

Federal Housing Finance Agency 

Office of Inspector General
AUD-2016-002

March 28, 2016

Executive Summary 

The Federal Housing Finance Agency (FHFA or the Agency) is responsible 

for the supervision, regulation, and housing mission oversight of the Federal 

National Mortgage Association (Fannie Mae) and the Federal Home Loan 

Mortgage Corporation (Freddie Mac). Since 2008, FHFA also has been the 

conservator of Fannie Mae and Freddie Mac (together, the Enterprises). 

During 2012, FHFA announced significant changes to the Enterprises’

representation and warranty framework. Historically, the Enterprises had 

relied on the sellers’ representations and warranties when purchasing loans 

from sellers. In the event of default of a purchased loan, the affected 

Enterprise reviewed the loan file for possible breach by the seller of its 

contractual representations and warranties. When a breach was identified, the 

affected Enterprise could exercise its contractual rights to require the seller to 

repurchase the loan, mitigating losses caused by underwriting defects. After 

the housing market collapsed and loan defaults skyrocketed, the Enterprises 

were placed into conservatorship. At the direction of FHFA, the Enterprises 

reviewed defaulted loans for evidence of breach of sellers’ representations and 

warranties and the Enterprises demanded repurchase of many such loans from 

the lenders. 

Sellers complained that the Enterprises’ open-ended ability to demand loan 

repurchases was unfair and unpredictable, and caused them to tighten lending 

standards beyond what the Enterprises required to protect themselves from 

future exposure from loan repurchases. Concerned by the limitations on the 

availability of mortgage credit, FHFA directed the Enterprises in 2012 to 

develop and implement a new representations and warranties framework (new 

Framework) to provide sellers with greater certainty about their potential 

future repurchase exposure. That new Framework, which went into effect for 

loans purchased after January 1, 2013, in many circumstances imposed a threeyear deadline after which the Enterprises could no longer demand repurchase 

of defective loans from sellers of those loans. 

FHFA issued its Strategic Plan for Enterprise Conservatorships (Strategic 

Plan) in February 2012, which identified its strategic goals. Beginning in 2013 

and for each year subsequently, FHFA has issued an annual Scorecard in 

which it sets objectives for each of the three goals in its Strategic Plan and sets 

specific targets for each objective. FHFA has a formal process to track and 

rate Enterprise performance against the Scorecard on a quarterly basis and to 

award an overall annual Scorecard performance for each Enterprise. This 

annual rating is factored into Enterprise executive compensation for the 

following year. Tracking Enterprise performance against the annual Scorecard 

is a valuable internal control to keep Enterprise activities aligned with 
AUD-2016-002

March 28, 2016

conservatorship strategic goals and to keep Enterprise executives accountable 

for the Enterprises’ performance. 

FHFA’s 2013 Scorecard, issued on April 1, 2013, and revised on May 1, 2013 

(2013 Scorecard), identified 11 measurable objectives with specific targets for 

the Enterprises to work toward meeting FHFA’s strategic goals. One of those 

11 objectives was implementation of the new Framework. That objective 

contained two quarterly targets for both Enterprises. The first target required 

development of a plan to conduct up-front quality control reviews and the 

second target required an assessment of the Enterprises’ execution of the new 

model and use of tools to identify defective loans, and an assessment of the 

effectiveness of the up-front quality control reviews. 

In this audit, OIG reviewed the effectiveness of FHFA’s efforts to track and 

rate Enterprise performance on this one objective. We found that FHFA’s 

records of the tracking and rating process were imprecise and unclear. The 

records contained internal inconsistencies and did not clearly reflect when 

targets were modified or deferred, or what actions were required to meet the 

target. We found that these records can create the misimpression that work 

had been completed when, in fact, it had been modified or delayed. We also 

found that the Agency did not consistently communicate guidance to the 

Enterprises in writing. Because of the importance of FHFA’s Scorecard 

tracking and rating process, we make several recommendations regarding 

FHFA’s tracking and rating process to improve clarity and avoid confusion and 

inconsistencies. FHFA accepted our recommendations and reported that it had 

taken steps prior to the issuance of this report to address the recommendations 

included in the report (see Appendix A). 

This audit was conducted by Cassandra Ingram, Audit Manager, with support 

from Moira T. Roberts, Special Counsel. We greatly appreciate the assistance 

and input provided by FHFA and the Enterprises. 

We distributed this report to Congress, the Office of Management and Budget, 

and others, and posted it at www.fhfaoig.gov. 

Stacey Nahrwold 

Acting Deputy Inspector General for Audits 
OIG  AUD-2016-002  March 28, 2016 4

TABLE OF CONTENTS ................................................................ 

EXECUTIVE SUMMARY .............................................................................................................2

ABBREVIATIONS .........................................................................................................................6

BACKGROUND .............................................................................................................................7

Historically, the Enterprises Demanded that Sellers Repurchase Defaulted Loans 

Found in Breach of the Sellers’ Representations and Warranties, Regardless of when 

Default Occurred ......................................................................................................................7

Uncertainty Over Future Exposure to Repurchase Demands Led Sellers to Impose 

Credit Overlays .........................................................................................................................8

FHFA Directed the Enterprises to Adopt and Implement a New Representations and 

Warranties Framework in an Effort to Reduce Credit Overlays ..............................................9

Implementation of the New Representation and Warranty Framework .................................10

The 2013 Conservatorship Scorecard Included the New Framework as an Enterprise 

Objective .................................................................................................................................10

FACTS AND ANALYSIS .............................................................................................................12

FHFA’s Scorecard Tracking and Rating Process ...................................................................12

FHFA’s Tracking and Rating of Enterprise Performance for the New Framework 

Objective in the 2013 Scorecard .............................................................................................14

Third Quarter Target: Provide a Plan for Enhancing Quality Control ..........................14

Fourth Quarter Target: Assess the Execution of Enhanced Quality Control 

Reviews and Evaluate Effectiveness ..............................................................................15

FINDING .......................................................................................................................................19

FHFA’s Records in Support of Its Quarterly and Year-End Ratings for the 

Representation and Warranty Objective in the 2013 Scorecard Are Imprecise and 

Inconsistent .............................................................................................................................19

CONCLUSIONS............................................................................................................................21

RECOMMENDATIONS ...............................................................................................................22

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................23

APPENDIX A ................................................................................................................................25
OIG  AUD-2016-002  March 28, 2016 5

FHFA’s Comments on OIG’s Finding and Recommendations ..............................................25

ADDITIONAL INFORMATION AND COPIES .........................................................................27
OIG  AUD-2016-002  March 28, 2016 6

ABBREVIATIONS ....................................................................... 

2013 Scorecard FHFA’s Scorecard issued on April 1, 2013, and revised on May 1, 2013 

DHMG Division of Housing Mission and Goals 

ECB Executive Compensation Branch 

Enterprises Fannie Mae and Freddie Mac 

Fannie Mae Federal National Mortgage Association 

FHFA or Agency Federal Housing Finance Agency 

Freddie Mac Federal Home Loan Mortgage Corporation 

New Framework New Representation and Warranty Framework effective January 1, 2013 

OHRP Office of Housing and Regulatory Policy 

OIG Federal Housing Finance Agency, Office of Inspector General 

Strategic Plan FHFA’s Strategic Plan for Enterprise Conservatorships, February 2012 
OIG  AUD-2016-002  March 28, 2016 7

BACKGROUND .......................................................................... 

FHFA is responsible for the supervision, regulation, and housing mission oversight of the 

Enterprises and the Federal Home Loan Banks and their Office of Finance. As regulator, 

FHFA’s mission is to ensure that these regulated entities operate in a safe and sound manner 

so that they serve as a reliable source of liquidity and funding for housing finance and 

community investment. Since 2008, FHFA also has acted as conservator of the Enterprises. 

FHFA issued its Strategic Plan for the conservatorship in February 2012. This Plan set three 

broad strategic goals for the conservatorship: 

 Build a new infrastructure for the secondary mortgage market; 

 Gradually contract the Enterprises’ dominant presence in the marketplace while 

simplifying and shrinking their operations; and 

 Maintain foreclosure prevention activities and credit availability for new and 

refinanced mortgages. 

Approximately seven months after adoption of its Strategic Plan, FHFA announced a new 

initiative aimed at achieving the third strategic goal—maintaining foreclosure prevention 

activities and credit availability for new and refinanced mortgages. In June 2012, FHFA 

directed the Enterprises to launch a new Framework for conventional loans sold or delivered 

on or after January 1, 2013.1

 This new Framework significantly changed when the 

Enterprises reviewed loans and the methodology they used to identify potentially defective 

loans. 

Historically, the Enterprises Demanded that Sellers Repurchase Defaulted Loans Found 

in Breach of the Sellers’ Representations and Warranties, Regardless of when Default 

Occurred 

The Enterprises provide liquidity to the U.S. housing finance system by purchasing residential 

mortgages and bundling the purchased loans into securities for which they guarantee principal 

and interest. In guaranteeing the securities, the Enterprises assume the credit risk from 

possible default of the underlying loans. To mitigate this risk, the Enterprises purchase loans 

 

1

 We are publishing today a memorandum closing a survey involving FHFA oversight of conservatorship 

directives. In that memorandum, we note that FHFA relied on the Enterprises to self-report issues with 

implementation and compliance with conservatorship directives and that the reports the Agency received from 

the Enterprises were of limited value because of inaccuracies and incomplete information. See “FHFA’s 

Oversight of the Enterprises’ Implementation of and Compliance with Conservatorship Directives during an 

18-Month Period from January 2013 through June 2014.”
OIG  AUD-2016-002  March 28, 2016 8

only from sellers that make specific contractual representations and warranties that their 

mortgages meet the specific underwriting standards set forth in the Enterprises’ selling 

guidelines and agreements. 

Historically, the Enterprises performed minimal 

quality control reviews on the loans at the time of 

purchase. In the event of default of a purchased loan, 

the affected Enterprise reviewed whether that loan 

complied with the seller’s representations and 

warranties in the lender contract. When an 

Enterprise found that a defaulted loan breached 

these representations and warranties in any way, 

the Enterprise could exercise its contractual right to 

demand that the seller repurchase the non-compliant 

loan at any time during the life of the loan, even if 

the loan defaulted years after it was made. (Many, 

but not all, repurchase demands were made for loans 

that defaulted within three years of purchase by an 

Enterprise.) This right to demand repurchase of 

defaulted loans that did not comply with any 

representation and warranty in the lender contract 

mitigated the risk of losses to the Enterprises from 

defaulted loans. 

After the housing market collapsed and loan defaults 

skyrocketed, the Enterprises were placed into 

conservatorship in September 2008 by FHFA and 

required a total investment of $187.5 billion in taxpayer funds to remain viable. At the 

direction of FHFA, the Enterprises aggressively exercised their right to demand repurchases 

from sellers of defaulted loans in breach of lenders’ representations and warranties. 

Uncertainty Over Future Exposure to Repurchase Demands Led Sellers to Impose 

Credit Overlays 

As the number of Enterprise mortgage repurchase 

demands increased steadily through 2010 and 2011, it 

was reported that several large financial institutions 

increased their reserves significantly so they would 

have sufficient funds to repurchase defaulted loans. 

Numerous sellers claimed that the Enterprises’ 

repurchase demands were unreasonable because the 

Representations and Warranties: 

A mortgage lender’s assurances 

that the mortgages it sells to the 

Enterprises comply with certain 

standards, such as underwriting 

and documentation standards. 

Violations of a representation or 

warranty entitles the Enterprise 

that purchased a loan to pursue 

certain remedies, including having 

the lender buy back, or 

repurchase, the loan.

Lender Contract: The lender’s 

obligations to comply with the 

Enterprises’ agreements (i.e., 

Selling Guides) in their entirety.

Repurchase: A remedy in lender 

contracts under which the lender 

must buy back or otherwise make 

the Enterprise whole for a 

mortgage it previously sold to the 

Enterprises.

Credit Overlay: Additional borrower 

qualification requirements that are 

more stringent than the minimum 

requirements set by the Enterprises. 

Overlays may reduce the ability of 

some borrowers to obtain loans.
OIG  AUD-2016-002  March 28, 2016 9

defaults occurred years after the mortgages were originated and were unrelated to breaches of 

the sellers’ representations and warranties. Claiming that they lacked certainty about the size 

of their future risk exposure for repurchases under the existing representation and warranty 

framework, sellers imposed more stringent loan criteria than those required by the Enterprises 

in order to reduce the risks of future defaults and repurchase demands. In May 2012, FHFA 

officials recognized that sellers had “curbed their appetite” for new risk through credit 

overlays,

2

ultimately affecting the liquidity and availability of mortgage credit. 

FHFA Directed the Enterprises to Adopt and Implement a New Representations and 

Warranties Framework in an Effort to Reduce Credit Overlays 

In June 2012, FHFA instructed the Enterprises to implement an agreed-upon representation 

and warranty framework in their seller-servicer contracts. In September 2012, FHFA Acting 

Director DeMarco publicly announced the new framework for conventional loans sold or 

delivered on or after January 1, 2013. He explained that the “objective of the new framework 

is to clarify lenders’ repurchase exposure and liability on future deliveries. Under this 

framework, lenders will be relieved of certain repurchase obligations for loans that meet 

specific payment requirements.”3 For this new Framework to be effective, FHFA recognized 

that quality control reviews would need to be improved and would need to occur soon after 

purchase of the loans. In announcing this new Framework, Acting Director DeMarco stated 

that “the focus of the Enterprises’ quality control reviews will be shifted earlier in the loan 

process, generally between 30 to 120 days after loan purchase.”4In his view, “better quality 

loan originations and underwriting, along with consistent quality control, will help maintain 

liquidity in the mortgage market while protecting the Enterprises from loans not underwritten 

to prescribed standards.”

5

In its 2012 Report to Congress, published in June 2013, FHFA reported that it had directed 

the Enterprises to adopt the new Framework in order to provide more certainty to lenders and 

to improve the Enterprises’ credit risk management practices. FHFA recognized that the 

success of the new Framework turned on the Enterprises’ ability to conduct quality control 

reviews earlier in the process and, as part of those reviews, evaluate loan files on a more 

 

2

 FHFA OHRP, Concept Approval Request [for Representations and Warranties Prospective New 

Framework], at 1 (May 25, 2012).

3

 Remarks as Delivered by Edward J. DeMarco, FHFA Acting Director, The Conservatorships of Fannie Mae 

and Freddie Mac: An Update on Current and Future Operations, at 5 (Sept. 10, 2012), online at 

www.fhfa.gov/Media/PublicAffairs/Pages/Remarks-as-Delivered-Edward-J-DeMarco-Acting-Director-FHFAAmerican-Mortgage-Conference.aspx. 

4

Id.

5

Id.
OIG  AUD-2016-002  March 28, 2016 10

comprehensive basis to identify significant deficiencies. FHFA did not quantify the 

additional credit risk associated with the new Framework.6

Implementation of the New Representation and Warranty Framework 

On January 1, 2013, the Enterprises launched the new Framework for loans purchased on or 

after that date. Under the new Framework, the time period for repurchase demands for one 

kind of loan concludes one year after purchase by the Enterprise, assuming an acceptable 

12-month payment history, and subject to certain exceptions. For most other loans, 

repurchase was unavailable upon completion of 36 months of acceptable payment history, 

also subject to certain exceptions.7 Because the new Framework limited the time periods 

in which the Enterprises could make repurchase demands, it compelled the Enterprises to 

conduct quality control reviews soon after the loans were delivered to the Enterprises. 

The 2013 Conservatorship Scorecard Included the New Framework as an Enterprise Objective 

FHFA issues annual guidance to the Enterprises about specific actions expected from them to 

achieve the goals of the Strategic Plan for the conservatorships. The annual guidance, called

the Scorecard, sets objectives for each of the three goals in the plan and specific targets for 

each objective. The targets are actions or deliverables with due dates and provide metrics 

used by FHFA to rate each Enterprise’s performance to determine whether it has achieved the 

objective during the year. The Enterprise’s annual performance rating factors into Enterprise 

executive compensation levels for the following year. 

 

6

 OIG recommended in a 2014 audit that FHFA perform an analysis of the risks and benefits of the new 

Framework. FHFA disagreed with the recommendation and declined to do the analysis. See OIG, FHFA’s 

Representation and Warranty Framework, at 28, 32-37 (Sept. 17, 2014) (AUD-2014-016). 

7

 Certain loan defects, such as those involving fraud, were exempt from repurchase deadlines. Beginning in 

mid-2014, the time period for making a repurchase demand expired immediately after a loan successfully 

passed an Enterprise’s quality control review. See FHFA, A Progress Report on the Implementation of 

FHFA’s Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, at 4-5 (Mar. 16, 2015). 
OIG  AUD-2016-002  March 28, 2016 11

The 2013 Scorecard listed 11 objectives for the Enterprises in 2013. One objective addressed 

implementation of the new Framework and included two specific targets, as follows: 

2013 New Framework 

Objective

First Quarter 

Target

Second Quarter 

Target

Third Quarter 

Target

Fourth Quarter 

Target

Enhance Post Delivery 

Quality Control—

Enhance post-delivery 

quality control practices 

and transparency 

associated with new 

representation and 

warranty framework

None None Provide a plan 

to FHFA that 

outlines how we 

will meet the 

objective.

Assess GSE 

execution of 

the new model, 

including upfront quality 

control reviews 

and use of tools 

to identify 

defective loans. 

Evaluate 

effectiveness.

We conducted this audit to assess FHFA’s tracking and rating of the Enterprises’ performance 

under this Scorecard objective. 
OIG  AUD-2016-002  March 28, 2016 12

FACTS AND ANALYSIS ............................................................... 

FHFA’s Scorecard Tracking and Rating Process

FHFA’s annual Scorecard sets objectives for each of the three goals in FHFA’s Strategic Plan

and sets specific targets for each objective. FHFA tracks Enterprise performance against the 

Scorecard and gives each Enterprise an annual performance rating score, which becomes a 

factor in setting compensation levels for Enterprise executives. 

FHFA’s Executive Compensation Branch (ECB) and Office of Strategic Initiatives manage 

FHFA’s Scorecard tracking and rating process. The process is set out in an internal 

procedures document, augmented by written instructions from ECB’s manager of Executive 

Compensation. FHFA’s procedure to track and rate Enterprise performance against the 

Scorecard includes the following steps: 

 Quarterly Tracking on Rating Sheets 

Every objective in the annual Scorecard is assigned to a “Project Lead” in a specific 

FHFA office or division who is charged with responsibility for tracking Enterprise 

performance against the targets of that objective. Each objective and its targets are 

identified on an FHFA rating sheet for each Enterprise. At the end of every quarter, 

each Enterprise assesses its performance against that quarter’s target(s), using the 

standard rating terms “Complete,” “On Schedule,” “Off Track,” “Ahead of Schedule,” 

or “At Risk,” and enters its self-rating and any further comments on the rating sheet. 

The Project Lead reviews the entries of the Enterprises and enters his or her own 

quarterly rating and comments. 

FHFA’s rating sheet template defines the standard rating terms. It states: 

[U]se the following ratings to describe progress toward quarterly 

metrics: 

o OS – “On Schedule” – Met quarterly milestones and on 

schedule to meet the annual goal. 

o OT – “Off Track” – Did not meet quarterly milestones, but 

will meet the annual goal. 

o AoS – “Ahead of Schedule” – Met quarterly milestones, 

began working next quarter milestones, and will meet the 

annual goal. 
OIG  AUD-2016-002  March 28, 2016 13

o At Risk – Expect that the annual goal will not be met. 

 If assessment is considered at risk, provide an 

addendum explaining the factors contributing to the 

metric not being met and steps to alleviate the risk. 

o Complete – Enterprise has completed the measure. 

[FHFA] Quarterly Scorecard Assessment Instructions, Aug. 2, 2013 (emphasis in 

original). 

If an Enterprise misses a target, the Project Lead is tasked with establishing a revised 

target date and a process for tracking Enterprise performance against that date. As 

needed, the Project Lead confers with each Enterprise during the year to assess its 

progress against the Scorecard. 

At year-end, the Enterprises may submit self-assessments for the entire year, in 

addition to their fourth-quarter rating sheet entries. After reviewing the Enterprises’ 

rating sheet entries and other submissions, the Project Lead enters final ratings and 

comments on the rating sheets. 

 Senior Level Review and Year-End Analysis Memo 

Senior officials in the same office or division as the Project Lead are responsible for 

submitting a year-end written analysis of Enterprise performance in meeting the 

specified objective identified in the Scorecard guidance. Using the rating sheets 

completed by the Enterprises and Project Lead, these officials compile a written 

narrative and analysis of Enterprise performance on the objective to which the relevant 

rating sheet is attached. The officials send the year-end analysis and attachments to 

ECB.

 ECB Review, Summary, and Recommendation 

ECB receives and reviews a year-end analysis of Enterprise performance for every 

Scorecard objective. After its review and discussions as needed with the drafting 

offices, ECB proposes numerical ratings for each Enterprise—a rating on each 

objective. ECB prepares a summary chart of ratings for the Enterprises and forwards 

it to the FHFA Director, along with all of the year-end written analysis memos and 

ratings sheets. 
OIG  AUD-2016-002  March 28, 2016 14

 Final Scorecard Rating Submission by the FHFA Director 

As needed, the Director meets with ECB and other FHFA officials to discuss the ECB 

summary memorandum and attached material, including the proposed ratings. The 

FHFA Director reviews and submits the final Scorecard rating to each Enterprise. 

FHFA’s Tracking and Rating of Enterprise Performance for the New Framework 

Objective in the 2013 Scorecard

FHFA’s Division of Housing Mission and Goals (DHMG), Office of Housing and Regulatory 

Policy (OHRP), was charged with responsibility for tracking and rating the Enterprises’ 

performance against the new Framework objective in the 2013 Scorecard Guidance. 

DHMG’s ratings sheets (one for each Enterprise) contain ratings and comments for each 

quarter containing a target. 

Third Quarter Target: Provide a Plan for Enhancing Quality Control 

Freddie Mac. Freddie Mac rated its performance for the third quarter as “On Schedule.” It 

explained that it had presented a plan to FHFA in August 2013 and would continue to update 

the plan as it continued to implement the new Framework. The Project Lead concurred and 

rated Freddie’s Mac’s performance as “On Schedule.”

Fannie Mae. Fannie Mae rated its own performance for the third quarter as “Complete”, 

reporting that it submitted to FHFA a comprehensive plan to meet the objective on July 3,

2013. The Project Lead entered “Disagree; not complete” on the rating sheet. In rating sheet 

comments, the lead wrote that Fannie Mae had submitted a PowerPoint presentation and an 

attached spreadsheet, but that “the project continues at this stage.” The Project Lead went 

on to request that Fannie Mae submit a “comprehensive project plan,” if available, “that 

provides in narrative form the scope of the overall project plan, describes all planned activities 

and deliverables, etc.” Notwithstanding these written entries, the Project Lead rated Fannie 

Mae’s third quarter performance as “On Schedule,” without any explanation. The rating sheet 

instructions state that the rating “On Schedule” means that the Enterprise has met quarterly 

milestones, and the rating “Off Track” should be used when quarterly milestones are missed. 

The reason for the inconsistency between the Project Lead’s comments and the Project Lead’s 

rating cannot be determined from the Scorecard rating and tracking records. During this 

audit, DHMG reported to us that Fannie Mae met the third quarter 2013 target at some point 

in time because the totality of its submissions constituted an adequate plan. DHMG produced 

two Fannie Mae Power Point presentations, from August and November 2013, which updated 

the July 2013 presentation figures on sampling reports and reviews issued in 2013. Because 

the third quarter rating sheet entries were undated, it is possible that the “On Schedule” rating 
OIG  AUD-2016-002  March 28, 2016 15

was entered sometime later, after Fannie Mae had submitted an adequate plan, but on its face 

the document is inconsistent in that it claims that the status is both “not complete” yet “On 

Schedule.”

Fourth Quarter Target: Assess the Execution of Enhanced Quality Control Reviews 

and Evaluate Effectiveness 

According to FHFA, the Agency informed both Enterprises in November 2013 what would be 

required of them for a fourth quarter deliverable.8

 FHFA told us that the Agency delivered 

this guidance in writing to Fannie Mae and in phone conversations with Freddie Mac 

personnel. 

In a November 2013 email to Fannie Mae, DHMG provided guidance on what FHFA 

expected from it to satisfy the fourth quarter target. The email began by repeating the initial 

Scorecard target: 

[P]lease assess your execution of the new model, including upfront quality 

control reviews and use of tools to identify defective loans, and evaluate 

effectiveness. 

The email then added additional guidance: 

What we would like to see is a summary narrative report that discusses the 

extent to which the objectives were met for this scorecard item, as well as 

the factors that hindered and facilitated in meeting them. We’d like to see 

impacts, key findings and how they will inform future changes or 

modifications to your quality control practices and transparency associated 

with the new framework. 

During this audit, FHFA stated that this guidance set the expectations of what would be 

required of the Enterprises. Under this guidance, the Enterprises were required to give a 

narrative report on what work had been done toward meeting the target, including hindering 

and facilitating factors, impacts, key findings, and implications for future changes to quality 

control practices. However, neither the rating sheets nor the 2013 Scorecard Guidance 

reflects any modification of the fourth quarter target.

Freddie Mac. Freddie Mac rated its fourth quarter performance as “Complete,” and described 

its efforts to implement the new Framework, including improvements to its quality control 

reviews and tools. Freddie Mac submitted a separate year-end self-assessment memo in 

 

8

 As discussed further below, a later FHFA document states that quality control effectiveness could not yet be 

determined in 2013 due to insufficient data. 
OIG  AUD-2016-002  March 28, 2016 16

which it provided greater detail about its implementation activities. The memo summarized 

its efforts to put into place up-front quality control reviews for the new Framework, its tools 

to identify defective loans, lessons learned, and implications for further implementation. This 

memo also discussed Freddie Mac’s efforts to update existing quality control practices and 

principles, develop marketing tactics to support the Framework execution activities, update 

systems, and monitor loan performance. The memo reported that Freddie Mac’s 

implementation activities, including loan performance monitoring, was ongoing. The Project 

Lead rated Freddie Mac’s fourth quarter performance as “Complete” and supported the rating 

with broad statements about attitude and effort. 

The Agency reported to us that it determined that Freddie Mac met its fourth quarter target 

from information provided by Freddie Mac in its periodic status reports, and that the 

Enterprise provided summaries of the evaluations it had been able to conduct with the limited 

data available. However, in reviewing the Enterprise submission, it is difficult to identify 

information that could be construed as a meaningful assessment of the effectiveness of the 

new quality control reviews. 

Fannie Mae. Fannie Mae rated its fourth quarter performance as “Complete” and supported 

that rating by referring to a year-end self-assessment memo to FHFA in December 2013. The 

memo summarized its efforts to put into place up-front quality control reviews for the new 

Framework, its tools to identify defective loans, lessons learned, and implications for further 

implementation. This memo discussed Fannie Mae’s efforts to assess up-front quality control 

effectiveness and stated that this assessment was ongoing. The Project Lead rated Fannie 

Mae’s performance for this quarter as “Complete,” and supported the rating with the same 

broad statements about attitude and effort, without specifically addressing the elements of the 

target. The Project Lead reported: 

[Fannie Mae/Freddie Mac] successfully completed the 2013 Scorecard 

objectives related to the implementation of the new Representation and 

Warranty framework. 

[Fannie Mae/Freddie Mac] staff was engaged in and devoted significant 

resources to implementing the new Representation and Warranty framework 

and enhancing their respective quality control practices and tools to support it. 

Although both Fannie Mae and Freddie Mac reported that their assessments were ongoing and 

the Agency reported that there was insufficient data available at the time, the 2013 Scorecard 

rating records show no action to establish a revised target date for the original objective 
OIG  AUD-2016-002  March 28, 2016 17

requirements and a means for tracking Enterprise performance against a revised date.9 We 

note that the 2015 Scorecard Guidance, issued on March 31, 2015, instructs the Enterprises to 

“[b]egin an analysis of the effectiveness of the current quality control process” during the first 

quarter.

 Senior Level Review and Year-End Analysis Memo 

DHMG prepared a 2013 year-end analysis memo discussing both Enterprises’ performances 

on the new Framework objective in the Scorecard. That memo rated the performance of 

each Enterprise as “Complete” and described each Enterprise’s relevant activities and 

achievements. In language that echoed the Project Lead’s comments, the year-end memo 

reported: 

Fannie Mae and Freddie Mac were engaged in and devoted significant 

resources to implementing the new Representation and Warranty framework 

and enhancing their respective quality control practices and tools to support it. 

This year-end analysis memo, which attached the completed rating sheets, did not explain the 

inconsistency between the Project Lead’s comments and the rating for Fannie Mae’s third 

quarter performance. For the fourth quarter target, the memo recognized that quality control 

effectiveness could not yet be determined for either Enterprise and attributed the delay to 

insufficient data – which is inconsistent with the fourth quarter stated target of assessing the 

effectiveness of the execution of the new model, including up-front quality control reviews. 

 ECB Review, Summary, and Recommendation 

ECB received a year-end memo for each of the eleven objectives in the 2013 Scorecard, 

including the DHMG memo for the new Framework objective, and developed its overall 

rating recommendation for the 2013 Scorecard and ratings for each of the Scorecard’s 11 

objectives. For the new Framework objective, ECB concluded that the third and fourth 

quarter ratings for each Enterprise were “Complete.” ECB’s comments on the two targets 

were high-level and brief: “Both achieved. Good feedback for [Enterprise].”

ECB sent its rating recommendation to the Director on January 24, 2014, with a cover memo 

in which it reported that its scoring was “based not only on ultimate accomplishment of 

results but cooperation, relative contribution, and collaboration with the board, FHFA, the 

other Enterprise, and market participants, as appropriate to the particular measure.” Attached 

to ECB’s recommendations memo were supporting materials, including the year-end analysis 

 

9 ECB’s guidance to FHFA states, “[f]or objectives assessed as incomplete, Project Leads must describe how 

and when the Enterprises will meet the objectives and the process for tracking progress.” However, the fourth 

quarter target was deemed “Complete” and DHMG thus apparently did not conduct the procedures to ensure 

that “incomplete” objectives are met and tracked in the future. 
OIG  AUD-2016-002  March 28, 2016 18

memo prepared by DHMG and a summary table showing year-end ratings by both the FHFA 

offices and the Enterprises against each objective. 

At the time of ECB’s review, the fourth quarter target for FHFA’s 2013 Scorecard continued 

to state that the fourth quarter target required the Enterprises to assess its execution of upfront quality control reviews and tools to identify defective loans, and evaluate effectiveness. 

Nothing in ECB’s cover memo or summary chart reflected that DHMG had revised or 

rescheduled a component of the representations and warranties objective. 
OIG  AUD-2016-002  March 28, 2016 19

FINDING ................................................................................... 

FHFA’s Records in Support of Its Quarterly and Year-End Ratings for the 

Representation and Warranty Objective in the 2013 Scorecard Are Imprecise 

and Inconsistent 

One of the 11 objectives in FHFA’s 2013 Scorecard was implementation of the new 

Framework. Pursuant to established FHFA procedure, each Enterprise assessed its 

performance in meeting the quarterly targets for that objective, as did the assigned 

Project Lead, and the Enterprises and the Project Lead awarded a quarterly rating for that 

performance. We found that one third-quarter rating assigned by the Project Lead for one of 

the Enterprises was inconsistent with the Project Lead’s written performance assessment. The 

written comments describe the Enterprise’s performance as “not complete” yet the Enterprise 

performance was rated as “On Schedule,” indicating it had met the milestones for the quarter. 

In addition, we found that the Scorecard target defined in the tracking and rating records was

inconsistent with other documentation indicating that the target could not be met at that time 

due to insufficient data. The Enterprises’ performance for that quarter was rated “Complete.” 

FHFA told OIG that DHMG’s subsequent guidance to the Enterprises set the expectations 

for a summary narrative and the guidance did not set specific requirements to include data 

analysis or metrics. According to the 2013 Scorecard guidance, the fourth quarter target 

requires the Enterprises to assess the execution of their up-front quality control reviews and 

use of tools to identify defective loans and evaluate effectiveness. We found that FHFA did 

not revise the original 2013 Scorecard document to reflect that the Enterprises were unable 

to assess the effectiveness of their quality control reviews because of insufficient data. The 

Scorecard did not state that the target had been suspended or modified. Instead, the quarterly 

rating sheet declared that both Enterprises completed the original target of: 

Assess[ing] GSE execution of new model, including up-front quality control reviews 

and use of tools to identify defective loans. Evaluat[ing] effectiveness. 

Moreover, FHFA was not consistent in providing written guidance to the Enterprises, alerting 

them of the expectations for the fourth quarter target. FHFA explained to OIG that the 

Agency provided additional guidance on the fourth quarter target near the end of the quarter. 

DHMG sent an email to one Enterprise and conducted oral discussions with the other 

Enterprise. Because DHMG did not provide guidance in writing, we are unable to confirm 

whether DHMG provided consistent guidance to both Enterprises. 

In this audit, we identified internal inconsistencies in Agency documentation regarding the 

Scorecard ratings and requirements and found that they did not clearly reflect when targets 
OIG  AUD-2016-002  March 28, 2016 20

were modified or deferred. These inconsistencies and gaps, if not confined to this one 

instance, have the potential to create the misimpression that Scorecard objectives have been 

met when, in fact, they have been modified or delayed by staff. 
OIG  AUD-2016-002  March 28, 2016 21

CONCLUSIONS .......................................................................... 

FHFA issued its Strategic Plan in 2012 for the Enterprises. Beginning in 2013 and for each 

year subsequently, FHFA has issued an annual Scorecard in which it sets objectives for each 

goal in its Strategic Plan and sets specific targets for each objective. FHFA has a formal 

process to track and rate Enterprise performance against the Scorecard on a quarterly basis 

and to award an overall annual Scorecard performance for each Enterprise. This annual 

rating is factored into Enterprise executive compensation for the following year. Tracking 

Enterprise performance against each Scorecard is a valuable internal control to keep 

Enterprise activities aligned with conservatorship strategic goals and to keep Enterprise 

executives accountable for Enterprise performance. 

During 2012, FHFA announced significant changes to the Enterprises’ representation and 

warranty framework. Historically, the Enterprises relied on the sellers’ representations and 

warranties when purchasing loans from sellers. In the event of default of a purchased loan, 

the affected Enterprise reviewed the loan file for possible breach by the seller of its 

contractual representations and warranties and could exercise its contractual rights to require 

the seller to repurchase the loan upon a breach of a representation or warranty. In the wake 

of the collapse of the housing market and soaring loan defaults, Enterprise repurchase 

demands on sellers mounted. In response, sellers tightened lending standards beyond what 

the Enterprises required to protect themselves from future uncertain exposure from loan 

repurchase demands. In an effort to ease these restrictions on the availability of mortgage 

credit, FHFA directed the Enterprises in 2012 to develop and implement a new Framework. 

That new Framework, which went into effect for loans purchased after January 1, 2013, in 

many circumstances imposed a three-year deadline after which the Enterprises could no 

longer demand repurchase of defective loans from sellers of those loans. One objective in 

FHFA’s 2013 Scorecard was implementation of the new Framework. 

In this audit, we reviewed FHFA’s efforts to track and rate Enterprise performance on this 

one objective in the 2013 Scorecard. We found that the fourth quarter target – deemed 

“Complete” by the Agency – was inconsistent with other documentation indicating that the 

deliverables for the target had been revised and that the original target could not be met due to 

insufficient data. We also found that the Agency did not always communicate its expectations 

to the Enterprises in writing. Because of the importance of FHFA’s Scorecard tracking and 

rating process, we recommend enhancements to require greater clarity and minimize the risk 

of misimpressions. 
OIG  AUD-2016-002  March 28, 2016 22

RECOMMENDATIONS ............................................................... 

OIG recommends that FHFA: 

1. Establish standards requiring that modifications or suspensions of Scorecard targets 

must be documented in writing; 

2. Require that FHFA comments and ratings on quarterly rating sheets be dated; and 

3. Establish standards to address missed or partially missed quarterly targets, including 

requiring that every quarterly rating sheet record when any target was missed and the 

reset target date.

On March 2, 2016, FHFA provided comments to a draft of this report, agreeing with all 

recommendations and identifying FHFA actions which it believes have addressed each 

recommendation. OIG has not yet assessed the Agency’s actions and will hold open its 

recommendations until it determines that the corrective actions reported by FHFA are 

completed and responsive to the recommendations. 
OIG  AUD-2016-002  March 28, 2016 23

OBJECTIVE, SCOPE, AND METHODOLOGY ................................. 

The objective of this performance audit was to assess FHFA’s oversight of the Enterprises’ 

implementation of the new representation and warranty framework through the conservator’s 

Scorecard tracking system. Specifically, we assessed FHFA’s tracking and reporting of the 

Enterprises’ performance against the 2013 Scorecard targets related to implementation of the 

new Framework. 

OIG conducted this performance audit from April 2015 through November 2015. OIG 

conducted this audit in Washington, D.C. at FHFA and Fannie Mae headquarters, and in 

McLean, VA at Freddie Mac headquarters. 

The scope of OIG’s audit involved FHFA’s process for, and record of, tracking and rating 

the Enterprises’ targeted deliverables under the 2013 Scorecard objective relating to the new 

Framework. For purposes of this audit, OIG did not assess controls over computer-processed 

data. To achieve the audit objective, OIG: 

 Reviewed FHFA’s directives, guidelines, announcements, Scorecards, analyses, and 

other internal and external communications and documents concerning the new 

Framework that became effective in January 2013; 

 Interviewed some of the FHFA officials responsible for tracking Enterprise 

performance against the 2013 Scorecard new Framework deliverables, for giving 

guidance to the Enterprises on those deliverables, for rating Enterprise performance on 

those deliverables, and for reporting Enterprise Scorecard performance and ratings to 

the conservator; 

 Interviewed some of the Fannie Mae and Freddie Mac officials responsible for 

implementing changes in their quality control processes to comply with the new 

Framework; and 

 Reviewed Enterprise guidelines, announcements, annual reports, analyses, internal and 

external reports, and documents associated with their new Framework quality control 

processes. 

OIG also assessed the internal controls related to the audit objective. Internal controls are an 

integral component of an organization’s management that provide reasonable assurance the 

following objectives are achieved: 

 Effectiveness and efficiency of operations; 

 Reliability of financial reporting; and 
OIG  AUD-2016-002  March 28, 2016 24

 Compliance with applicable laws and regulations. 

Internal controls relate to management’s plans, methods, and procedures used to meet its 

mission, goals, and objectives, and include the processes and procedures for planning, 

organizing, directing, and controlling program operations as well as the systems for 

evaluating, reporting, and monitoring program performance. 

OIG conducted this performance audit in accordance with Generally Accepted Government 

Auditing Standards. Those standards require that audits be planned and performed to obtain 

sufficient, appropriate evidence to provide a reasonable basis for OIG’s findings and 

conclusions based on the audit objective. OIG believes that the evidence obtained provides 

a reasonable basis for the findings and conclusions included herein, based on the audit 

objective. 
APPENDIX A

FHFA's Comments on OIG's Finding and Recommendations

Federal Housing Finance Agency

MEMORANDUM

TO:

FROM:

Stacey Nahrwold, Senior Attorney Advisor, Acting Deputy Inspector General for 

Audits

Bob Ryan, Acting Deputy Director, Division of Conservatorship

SUBJECT: Audit Report: Review o f FHFA’s Tracking and Rating o f the 2013 Scorecard

Objective for the New Representation and Warranty Framework Reveals

Opportunities to Strengthen the Process

DATE: March 2, 2016

This memorandum transmits the Federal Housing Finance Agency’s (FHFA) management 

response to the recommendations in the draft report prepared by FHFA OIG, Review o f FHFA's

Tracking and Rating o f the 2013 Scorecard Objective for the New Representation and Warranty

Framework Reveals Opportunities to Strengthen the Process (Report).

FHFA reviewed the Report and accepts the recommendations. However, FHFA had already 

taken steps prior to the issuance of this report to address the recommendations included in the 

report. These steps are described below.

Recommendation 1:

Establish standards requiring that modifications or suspensions o f Scorecard targets must be

documented in writing.

FHFA updated its Scorecard guidance process in 2014 in light of lessons learned in 2013 to 

include several new processes and standards, including the establishment of standards requiring 

that modifications or suspensions of Scorecard targets must be documented in writing. FHFA 

leads1 must propose in writing any suggested modifications to Scorecard targets, including 

suspending those targets, as the year progresses. Memos justifying changes to Scorecard targets 

must include an explanation of the proposed change(s), recommended action(s), as well as a redlined document to capture specific wording adjustments. Written justifications are then cleared 

through an executive review process that includes approval by executive FHFA stakeholders.

1 Every objective in the annual Scorecard is assigned to an FHFA “lead” that is charged with the responsibility for 

tracking Enterprise performance against the targets of that objective.

OIG • AUD-2016-002 • March 28, 2016
Recommendation 2:

Require that FHFA comments and ratings on quarterly rating sheets be dated.

An additional standard implemented in 2014 requires that FHFA comments and ratings on 

quarterly rating sheets be dated. Currently, all written comments in the Scorecard assessment 

quarterly files are finalized on a date certain (at an internal working group meeting) and 

approved on a date certain (at a governance committee2 meeting). Additionally, all Scorecard 

assessment entries (comments) are date stamped through an FHFA collaboration site.

Recommendation 3:

Establish standards to address missed or partially missed quarterly targets, including

requiring that every quarterly rating sheet record when any target was missed and the reset

target date.

FHFA has implemented standards by which quarterly targets missed and partially missed are 

documented in FHFA’s quarterly rating sheet, in year-end Scorecard assessment memos, and in 

meeting minutes that record verbal discussions among FHFA stakeholders on Scorecard targets 

and describe feedback provided to the Enterprises. Also, as noted in Management Response to 

Recommendation 1, FHFA has a process for recording the reset dates for quarterly targets.

In light of actions taken by FHFA as outlined above to address the recommendations of this 

report, we request that the Inspector General close these recommendations.

CC: Larry Stauffer, Acting Chief Operating Officer

John Major, Internal Controls and Audit Follow-Up Manager

2 FHFA’s Conservatorship Committee, which provides senior executive review, direction and oversight of the 

exercise of FHFA's conservatorship authority.

2

OIG • AUD-2016-002 March 28, 2016 0
OIG  AUD-2016-002  March 28, 2016 27

ADDITIONAL INFORMATION AND COPIES ................................. 

For additional copies of this report: 

 Call: 202-730-0880 

 Fax: 202-318-0239 

 Visit: www.fhfaoig.gov

To report potential fraud, waste, abuse, mismanagement, or any other kind of criminal or 

noncriminal misconduct relative to FHFA’s programs or operations: 

 Call: 1-800-793-7724 

 Fax: 202-318-0358 

 Visit: www.fhfaoig.gov/ReportFraud 

 Write: 

FHFA Office of Inspector General 

Attn: Office of Investigations – Hotline 

400 Seventh Street SW 

Washington, DC 20219