Over the last two years, the Obama administration has approved a whopping $34.4 million in compensation to the top six executives of the financially troubled Fannie Mae and Freddie Mac mortgage giants while lacking basic protections to ensure such compensation is warranted, a federal watchdog found.
The largesse flowed to the six executives even though the two companies they run struggle to staunch billions of dollars in losses, remain in government conservatorship, and are required to repay taxpayers for assuming the companies’ liabilities during the mortgage crisis. Fannie and Freddie are tapping Treasury Department funds each quarter to help pay 10 percent dividends owed to the U.S. government.
“The need for effectiveness, integrity, and transparency in FHFA’s programs and operations cannot be overstated,” said Inspector General Steve Linick, a former Justice Department prosecutor confirmed by Senate last year to watch over federal housing programs. “Fannie Mae and Freddie Mac have received almost $154 billion in taxpayer funding to support the still-fragile housing market. In addition, they own or guarantee about $5.4 trillion in residential mortgage obligations.”
Fannie and Freddie, which support the housing market by buying mortgages from banks, were on the brink of collapse in September 2008 when they were taken over by the government. As conservator, the Federal Housing Finance Agency (FHFA) oversees operations at Fannie and Freddie as Congress works on a new housing finance blueprint that will decide the fate of the two companies.
Linick, FHFA’s inspector general, is the government’s newest watchdog for federal fraud, waste and abuse. The job was created last year by Congress. The office's first semiannual report to Congress included some details of executive compensation at Fannie and Freddie.
Linick said the FHFA rejected his recommendation that it test and independently verify the annual pay packages, which are set by the boards of Fannie and Freddie and approved by the agency in consultation with the Treasury Department.
The FHFA “lacks key controls necessary to monitor the enterprises’ ongoing executive compensation decisions under the approved packages,” the inspector general wrote. “FHFA has neither developed written procedures to evaluate the enterprises’ recommended compensation levels each year, nor required FHFA staff to verify and test independently the means by which the Enterprises calculate their recommended compensation levels.”
Further, the agency "lacks independent testing and verification of the Enterprises' submissions in support of executive compensation packages," the report said.
An FHFA spokeswoman told iWatch News the agency had no immediate comment. A Treasury Department spokeswoman did not respond to a request for comment.
The FHFA has defended executive pay at Fannie and Freddie in the past by saying the salaries were necessary to recruit and retain talented executives who can run big, complex companies.
The high pay is also important to offset the short-term nature of the jobs at Fannie and Freddie, which would be phased out of business under proposals from both Republicans and Democrats, the FHFA told the inspector general earlier this year. In a March 29 letter to the inspector general, the FHFA said under its management, Fannie and Freddie are paying an average of 40 percent less to employees than before 2008.
"We continue to review the comparability estimates of consultants hired by the Enterprises and their compensation committees. And we also review comparability data that we have purchased independently," FHFA Chief Economist Patrick Lawler said in the letter.
GOP wants to curb pay
Republicans said the new report added to their concerns about Fannie and Freddie.
“Fannie and Freddie are government sponsored enterprises, not government sponsored enrichment programs. As long as they are backstopped by U.S. taxpayers, executives should be compensated on par with government officials. If these executives want to earn Wall Street paychecks they should work on Wall Street,” Darrell Issa, chairman of the House Oversight and government Reform Committee, said in an email to iWatchNews.
Charles Grassley of Iowa, the top Republican on the Senate Judiciary Committee, said there was no attempt by FHFA to justify the high pay. "It makes you wonder whether the conservatorship is accomplishing anything on behalf of taxpayers," Grassley said in an email.
Another senior Republican, House Financial Services Committee Chairman Spencer Bachus of Alabama, recently introduced legislation that would suspend existing compensation packages for top executives at Fannie and Freddie. The bill, which was approved by a subcommittee on a 27-6 vote, would also put all Fannie and Freddie executives on the much lower federal payscale used by Ginnie Mae, the government-owned corporation that guarantees payments on mortgage-backed securities.
The current head of Fannie Mae, while still highly-paid by most Americans' standards, is earning significantly less than the $14.4 million package Daniel Mudd had as chief executive in 2006 during the peak of the housing market.
Fannie Mae’s chief financial officer, David M. Johnson, was paid $4.6 million in 2009 and 2010. The company’s general counsel, Timothy Mayopoulos, had a compensation package of $4.5 million for the two years, the inspector general said.
At Freddie Mac, Chief Executive Charles Haldeman had a two-year compensation package totaling $7.8 million in salary, incentive awards and deferred pay. Freddie’s chief financial officer, Ross Kari, was paid $4 million and its general counsel, Robert Bostrom, took home $5.2 million, according to the inspector general.
Although none of the men were named in the report, the compensation packages were identified by each executive’s title.
Legal costs, quarterly dividends
Fannie and Freddie have long been criticized by Republican lawmakers, who blame the mortgage giants for the financial crisis.
An iWatch News story in January, however, found that Fannie and Freddie didn’t take as many risks and played a secondary role to Wall Street in the mortgage meltdown. Government data shows mortgages financed by Wall Street from 2001 to 2008 were more than four times more likely to be seriously delinquent than mortgages backed by Fannie and Freddie.
Another source of complaints about the two companies – known as “government-sponsored enterprises” although they once traded on the New York Stock Exchange – is the soaring legal expenses of their former executives.
In February, the Republican-led House Oversight and Government Reform Committee questioned some $160 million in legal fees that taxpayers have footed since 2008 for former executives of Fannie and Freddie. The FHFA’s acting director, Edward DeMarco, told lawmakers then that the government was obligated to pay legal fees to defend the former officers in lawsuits, but blamed court delays and a large amount of litigation for running up the bills.
Fannie itself is still losing money, although losses have narrowed in recent quarters. But to pay the required dividends to the U.S. government, it must borrow additional money each quarter from the Treasury Department. For the first quarter of 2011, Fannie reported a net loss of $6.5 billion, and said it will have to pay about $10 billion in dividends this year to the U.S. government.
Freddie, meanwhile, managed to report positive net income of $676 million for the first quarter, a big improvement from its $6.7 billion loss in the year-ago period.
Freddie paid a quarterly dividend of $1.6 billion to the U.S. government in the first quarter of 2011, and said it will owe $6.5 billion in dividends to the government for all of 2011. Freddie also said it “expects to request additional draws” from the Treasury Department in the future, mostly to pay dividends owed to the government.
On Wednesday, DeMarco told a House subcommittee that he would not ask for a cut in the hefty 10 percent dividend rate the two companies are required to pay. “Even if the dividend rate were reduced, the Enterprises would have to overcome a significant number of hurdles to exit from conservatorship without further legislative action,” DeMarco testified.
Before nominated by President Barack Obama to the FHFA inspector general job, Linick was a respected career federal prosecutor who oversaw the Justice Department’s National Procurement Fraud Task Force and also was involved in pursuing contract fraud cases related to the wars in Iraq and Afghanistan.
Correction: At 0915 ET on 5/26/11, this story was updated to correct the spelling of Charles Haldeman's surname.