Detailed Information on the
Federal Housing Finance Board Assessment

Measure: Safety and soundness of the Federal Home Loan Banks

Explanation:The Federal Home Loan Banks are evaluated through the results of safety and soundness examinations. Maintaining the safety and soundness of the Federal Home Loan Banks includes identifying the market risk, credit risk, and operational risks facing each bank, using consistent methods of evaluation to measure those risks, and determining whether the policies, systems, and processes employed by each bank enable its board of directors and senior management to manage existing and prospective levels of risk.

Measure: Capital adequacy of the Federal Home Loan Banks

Explanation:The Federal Housing Finance Board has risk-based and total capital standards that each Federal Home Loan Bank must meet. Each Bank's risk-based capital requirement is based upon the credit, market, and operational risk it assumes. The Finance Board monitors compliance with applicable capital requirements and evaluates capital management policies and procedures as part of the on-site examination of the Banks.

Measure: Resolution of principal, supervisory, and compliance examination findings

Explanation:This measure guages the FHLBanks' effectiveness in taking corrective actions in response to supervisory or compliance issues identified through the Finance Board's supervisory program. Principal examination findings are required to be addressed to the Finance Board's satisfaction prior to the start of the next annual examination. At a minimum, Banks must have developed an action plan to correct the issues identified in the findings prior to the start of the next annual examination. Where warranted, the Finance Board may enter into a supervisory agreement with an FHLBank and its board of directors.

Is the program purpose clear?

Explanation: The mission of the Federal Housing Finance Board (FHFB) is to ensure the safety and soundness of the 12 Federal Home Loan Banks (FHLBanks) so that they can serve as a reliable source of liquidity and funding for the nation's housing finance and community investment needs. The statutory duties of the FHFB are to supervise the FHLBanks, ensure that the FHLBanks carry out their housing finance mission, and ensure that the FHLBanks remain adequately capitalized and able to raise funds in the capital markets. The Federal Home Loan Bank Act authorizes the FHLBanks to provide financial products and services to members and housing associates to assist and enhance the financing of housing in the broadest sense, including single-family and multifamily housing serving customers at all income levels, and community lending, defined as financing for economic development projects for targeted beneficiaries. To do so, the FHLBanks System issues debt in the financial markets, and each of the FHLBanks makes loans known as advances to member financial institutions that are located in its district. These advances may be used to fund mortgages.

Evidence: The program purpose and objectives are clearly outlined in Sections 2S and 2B of the Federal Home Loan Bank Act of 1932, in FHFB's Strategic Plan 2003-2008, and in FHFB's 2005 Performance and Accountability Report.

Does the program address a specific and existing problem, interest, or need?

Explanation: Adverse economic conditions, such as high unemployment, decreasing house prices, sharp or prolonged changes in interest rates have the potential to significantly affect the financial condition of the FHLBanks. Within the dynamic mortgage market, a supervisory regulator is necessary to ensure that the FHLBanks operate in a safe and sound manner and have the capital required to fulfill their mission. Special matters recently reviewed by the Federal Housing Finance Board include the FHLBanks' responsibilities in response to predatory lending by their members, the potential for housing price decreases, increased foreclosure activity in areas affected by natural disasters, and consolidation of the financial services industry.

Evidence: As outlined in the Federal Home Loan Bank Act, the Federal Housing Finance Board is charged with ensuring that the Banks operate in a financially safe and sound manner. Its duties are to supervise the Federal Home Loan Banks, ensure that the Federal Home Loan Banks carry out their housing finance mission, and ensure that the Federal Home Loan Banks remain adequately capitalized and able to raise funds in the capital markets.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: The Federal Housing Finance Board exclusively supervises the safety and soundness of the 12 Federal Home Loan Banks. While the FHLBanks must report financial information to the U.S. Securities and Exchange Commission, no other programs supervise the safety and soundness of the Federal Home Loan Banks.

Evidence: The Federal Home Loan Bank Act of 1932 exclusively charges the Federal Housing Finance Board with supervisory responsibility over the Federal Home Loan Banks.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: The Federal Housing Finance Board is free of major design flaws. The Finance Board has powers similar to national bank regulators. (1) The FHFB may issue cease and desist orders against an FHLBank, any executive officer, or director; (2) may remove or suspend "for cause" a director, officer, employee, or agent of an FHLBank or joint office; (3) may impose civil money penalties with respect to violations of pertinent statutes, regulations, etc.; (4) may liquidate or reorganize an FHLBank if it finds that the efficient and economical accomplishment of the Federal Home Loan Bank Act would be aided by such action, and (5) has independent litigation authority. Although the FHFB's enabling statute does not contain provisions specifying particular supervisory actions the Board must take in response to an FHLBank's undercapitalized condition, the capital provisions of FHFB's enabling statute do place restrictions directly on the Banks that are linked to the statutorily prescribed capital requirements. The Federal Home Loan Bank Act (a) restricts an FHLBank from redeeming its capital stock if, following the redemption, the Bank would fail to satisfy any minimum capital requirements; (b) restricts a Bank from making any distribution of its retained earnings unless, following the distribution, the Bank would continue to meet all applicable requirements; and (c) requires each Bank's capital plan to provide for continuing FHFB review and adjustments of the minimum investment required to ensure that the bank remains in compliance with the minimum capital requirements.

Evidence: An analysis of the Federal Housing Finance Board's authorities is provided in the GAO Report, Financial Regulators' Enforcement Authorities. GAO-01-322R. The report concludes that the Federal Housing Finance Board has powers similar to national bank regulators.

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: The program is designed such that the Office of Supervision is responsible for the supervision and examination of the FHLBanks and the Office of Finance. The Office of Supervision performs this function through annual on-site examinations, quarterly visitations, and off-site monitoring. Office of Supervision staffing represents 69 percent of the agency's total approved staffing. Approximately 53 percent of total budgetary resources are allocated to the Office of Supervision, with funding decisions based on a detailed analysis of goals and priorities to determine how the agency can accomplish its examination and supervisory mission. The Board does not have direct beneficiaries.

Evidence: The structure of the Finance Board is available in the FY2007-2012 strategic plan. A breakdown of budgetary resources is available in the Federal Housing Finance Board's FY07 Agency Budget Request Summary-FY2007 Agency Staffing Request Summary.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The program's primary long-term performance goals are to maintain the safety, soundness, and capital adequacy of 100% of the Federal Home Loan Banks. Safety and soundness are monitored through on-site examinations, and examination findings are taken into account to develop supervisory agreements with the Banks. At the end of each examination, staff reach a conclusion of the overall condition of each FHLBank based upon the level of credit, market, and operational risk undertaken, the adequacy of the FHLBank's risk management practices, its financial condition and performance, the adequacy of its capitalization, the quality of its corporate governance, and administration of its affordable housing and community investment programs.

Evidence: The Finance Board's performance goals are outlined in the Performance and Accountability Report, FY 2006; Annual Performance Budget, FY 2007; and Strategic Plan, FY 2007-2012.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: The program has ambitious targets, with goals of 100% of the FHLBank system operating safely and soundly, 100% of FHLBanks meeting or exceeding capital requirements, and 100% of FHLBanks raising funds efficiently. However, the Federal Housing Finance Board has not reported any results related to its performance measures. As such, adequate timeframes cannot be established for the achievement of performance targets.

Evidence: Performance goals are outlined without timeframes in the Performance and Accountability Report, FY 2006 and the Strategic Plan, FY 2007-2012.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: The FHFB has several annual performance goals that are tied to the program's long-term goals. The FHFB has an annual goal that 100 percent of FHLBanks operate safely and soundly. The FHFB also has a goal that 100 percent of FHLBanks meet or exceed their capital requirements, and has performance goals addressing their ability to raise funds efficiently, maintain high credit ratings, support affordable housing, and promote community investment. In 2007, the Finance Board plans to implement a risk rating system that assigns composite ratings to the FHLBanks. These ratings are based on an evaluation of an institution's corporate governance, market, credit, and operational risk, and its overall financial condition and performance. Ratings are also assigned to the administration of an FHLBank's affordable housing and community investment program. The FHFB has elected not to report any performance data related to the ratings.

Evidence: The Finance Board's performance goals are referenced in the Performance and Accountability Report, 2006; Strategic Plan, FY 2007-2012; and Annual Performance Budget, 2007.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: The program does not have baselines for its annual performance measures. In addition, some performance results are not variable from year to year. For example, safety and soundness results often do not vary from year to year, since the FHLBanks are required to address examination findings prior to the start of the next examination. As a result, performance results often do not change from year to year, and there is no clear distinction between targets and the status quo.

Evidence: The Finance Board's performance goals are presented without baselines in the Annual Performance Budget, FY 2007 and Strategic Plan, FY 2007-2012.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: The FHFB does not have partners.

Evidence: The Federal Home Loan Bank Act of 1932.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: The Office of Inspector General (OIG) conducts a semi-annual review of the Federal Housing Finance Board, which it reports to the Congress. In recent years, the Inspector General has conducted an audit of the Quality of Guidance Provided to Examiners, an audit of the Adequacy of FHFB's Privacy and Data Protection Procedures and Policies, an audit of FHFB's Merit Promotion Pool Calculations; and a limited scope review of FHFB's compliance with OMB's circular on Management's Responsibility for Internal Control (OMB Circular A-123). The OIG contracts annually with a public accounting firm to conduct an audit of the FHFB's financial statements. The Government Accountability Office (GAO) conducted a review of FHFB Operations in 2003 to assess the FHFB's progress in enhancing its safety and soundness program. The OIG's audit of the Quality of Guidance Provided to Examiners was conducted in accordance with Generally Accepted Government Auditing Standards issued by the Comptroller General. The OIG reviewed examination policies, procedures, and guidance in effect from 1998 to 2006. The OIG also compared four examination programs withing the 1998 examination manual with the same programs in 2005. For the review of FHFB's compliance with OMB's circular on Management's Responsibility for Internal Control (A-123), the OIG reviewed FHFB's policies and procedures for implementing the requirements of the circular, reviewed FHFB's implementation of the requirements for 2006, and reviewed the risk assessment and management control questionnaire prepared by senior level managers for each office. The financial statement audits are conducted in accordance with U.S. Government auditing standards issued by the Comptroller General, and Office of Management and Budget Bulletin No. 06-03, "Audit Requirements for Federal Financial Statements." In its Review of FHFB Operations, GAO assessed whether FHFB addressed recommendations about its examination program that were made in a 1998 report. It also reviewed examination reports from 1999 to 2001 for the 12 Federal Home Loan Banks. In addition, GAO interviewed FHFB officials, as well as officials at OFHEO to compare programs.

Evidence: An outline of the Office of Inspector General's recent investigations is provided in the Semiannual Report, April 1, 2006-September 30, 2006.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: The Federal Housing Finance Board is not subject to the appropriations process, and does not submit a Budget request to the President or Congress.

Evidence: The Federal Home Loan Bank Act (12 USC 1422a, 12 USC 1422b).

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: The Federal Housing Finance Board has not taken any steps to correct its strategic planning deficiencies.

Evidence: Not applicable.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: The Finance Board conducts an annual on-site examination of the Office of Finance and further examinations of the FHLBanks. While on site, examiners: (1) follow-up on issues identified through pre-examination analysis and planning; (2) test systems, controls, and reports for adequacy and accuracy, including the internal audit function; (3) assess the risk profile and operational soundness; (4) identify issues that may affect the risk or operating profile; (5) evaluate the quality of corporate governance; and (6) test for compliance with laws, regulations, and policies. Staff supplement the on-site risk modeling assessments with an off-site risk monitoring program consisting of analysis of quarterly data and risk exposure reports prepared by the FHLBanks using their own risk modeling systems. The Finance Board also reviews proposed changes to the market risk models that FHLBanks use to calculate risk based capital requirements. At the conclusion of each examination, the Office of Supervision prepares a Report of Examination that summarizes examiners' findings and assigns a conclusion indicating the level of supervisory concern. The Office of Supervision then meets with each FHLBank's board of directors and discusses matters of concern. The Report of Examination may support written agreements with the Banks leading to remedial action. Each FHLBank is subject to the Securities Exchange Act of 1934 periodic disclosure requirements, which include the periodic preparation and filing of public disclosures relating to an institution's financial condition, results of operations, trends, or uncertainties affecting its business, and management's assessment of its business and financial condition, including supporting financial information and certifications. The FHLBanks must also report their risk-based capital, total capital, and permanent capital, at least monthly to the Finance Board.

Evidence: Descriptions of the on-site exams are provided in the FY2007 Annual Performance Budget and the 2006 Performance and Accountability Report. Disclosure requirements are listed in the Annual Performance Budget.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: Managers are held accountable for performance results through the FHFB Performance Management Program. The Performance Management Program establishes the methods used to appraise the performance of employees in a fair and consistent manner, recognize and reward quality performance based on objective measures, and identify and take appropriate action when an employee's performance needs improvement. All performance plans must include the required core critical elements, and either additional critical elements or a work plan with due dates for the appraisal period. All Executive employees are required to complete performance plans that consist of six core critical leadership elements on which all Executive employees are rated. Summary performance ratings are based on leadership components including (a) leading change (b) leading people (c) being results driven (d) administrative acumen (e) building coalitions/communications and (f) organizational interaction. Each executive performance plan includes a work plan with due dates for the Office's goals and objectives.

Evidence: Standards are available in the Federal Housing Finance Board Performance Management Program.

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: The agency determines spending priorities as part of its annual budget formulation and strategic planning process. Managers monitor the use of funds through detailed monthly and quarterly budget reports.

Evidence: Each agency office receives monthly and quarterly budget reports for review to ensure that expenditures are accurate, timely, and being spent as approved. All Finance Board offices participate in annual budget and strategic planning where priorities, resources, needs, and goals are reviewed to ensure proper funding and planning. These policies are outlined in the Federal Housing Finance Board Budget Policy.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The Finance Board has not provided sufficient information to answer this question.

Evidence: The Finance Board has not provided sufficient information to answer this question.

Does the program collaborate and coordinate effectively with related programs?

Explanation: Although agency staff consult with personnel at the other federal bank regulatory agencies on an as needed basis, the agency was not able to demonstrate collaboration leading to meaningful actions in management or decision-making.

Evidence: The agency was not able to provide evidence for this question.

Does the program use strong financial management practices?

Explanation: An independent outside audit of the Finance Board's financial statements provided an unqualified opinion and found no material weaknesses in its financial statements or internal controls over financial reporting. In compliance with OMB Circular A-123, Management's Responsibility for Internal Control, the agency conducts required evaluations and assessments to provide reasonable assurance that programs achieve their intended results; resources are used consistent with the agency's mission; programs and resources are protected from waste, fraud, and mismanagement; laws and regulations are followed; and reliable and timely information is obtained, maintained, reported, and used for decision making.

Evidence: Clean audit opinions can be found in the Federal Housing Finance Board Financial Statements and Independent Auditor's Report for the Years Ended September 30, 2006 and 2005. Report No. 06-A-06-OM

Has the program taken meaningful steps to address its management deficiencies?

Explanation: The agency has not provided sufficient information to answer this question.

Evidence: The agency has not provided sufficient information to answer this question.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: The Federal Housing Finance board does not have performance results.

Evidence: Not applicable.

Does the program (including program partners) achieve its annual performance goals?

Explanation: The Federal Housing Finance Board does not have performance results.

Evidence: Not applicable.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: The agency could not provide information to answer this question.

Evidence: The agency could not provide information to answer this question.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: The Federal Housing Finance Board supervises different types and numbers of financial institutions than do other financial regulators. As such, it would be difficult to compare their performance to other financial regulatory agencies. FHFB also does not report publicly on annual examination findings and capital adequacy determinations, making comparisons difficult.

Evidence: The Federal Home Loan Bank Act of 1932.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: Independent evaluations of the Finance Board have provided mixed results. A 2002 GAO report found that FHFB had not rectified certain limitations in its examination program that were identified in 1998. For example, the report found that FHFB examiners did not thoroughly review FHLBank internal control systems. GAO found that between 1999 and 2001, each of the 36 examinations was "limited in scope," and did not involve a comprehensive review of the entire system of controls. The report also noted that examination workpapers did not adequately document corporate governance reviews or indicate that such reviews were conducted. A 2006 Inspector General Audit Report on the Quality of Examination Guidance Provided to Examiners found that examiner guidance needed improvement. For example, prior to November 2005, there were no written policies and procedures to ensure that examiners consistently used the same guidance for similar issues. However, the report notes that written guidance for examiners has been revised and made more comprehensive to provide more detailed guidance on areas determined to be high risk. The most recent review of the Affordable Housing Program provided mixed results. A 1995 GAO study states that the program has generally met the Congress's intention that it be used as a flexible source of funding to increase the supply of affordable housing. In the program's first four years, the FHLBanks helped leverage $3 billion from public and private sources. Of 1,600 projects nationwide, 31 percent include units for the handicapped, 28 percent include units for the homeless, and 16 percent include units for the elderly. However, the Finance Board's examiners cited several FHLBanks for deficiencies in selecting projects. In addition, reporting and monitoring responsibilities were not well defined for participating banks, members, and project sponsors. Many FHLBanks also did not have adequate procedures for documenting and verifying that the projects' beneficiaries are eligible for benefits on the basis of their income.

Evidence: These findings are reported in the Federal Housing Finance Board Office of Inspector General Audit Report, "Quality of Examination Guidance Provided to Examiners," 2006; GAO Report-Housing Finance: Improving the Federal Home Loan Bank System's Affordable Housing Program, 1995; and GAO Report-"Review of Selected Operations of the Federal Housing Finance Board." 2003.